Court Opinion

ID: 9884959
Source: CourtListenerOpinion
Date Created: 2023-10-06 03:26:18.710154+00
Date Added: 2024-06-11T07:48:42.860592
License: Public Domain

MR. JUSTICE WARD delivered the opinion of the court: Herbert Sher brought an action in the circuit court of Cook County to rescind a contract executed in June 1966, under which he had purchased North Shore Speed and Auto, Inc. (hereafter, North Shore), a solely-owned corporation engaged in the business of selling automotive speed equipment. The contract price was $47,000 plus approximately $9,000 to cover prepaid advertising and inventory. The plaintiff, who had conducted the business for several months after the sale, also sought actual and punitive damages, alleging that he had been induced to enter into the contract by fraudulent misrepresentations of the defendant Stephen H. Robin. The defendant, the former sole owner and president of North Shore, counterclaimed for moneys he had paid for advertising contracted for by North Shore after the plaintiff had become its sole owner and officer. Following a bench trial, the court entered judgment for the defendant on the plaintiff’s action for rescission and damages, and also entered a judgment for $6,555.13 for the defendant on his counterclaim. The appellate court reversed both judgments. (Sher v. Robin, 131 Ill.App.2d 404.) It reversed the judgment for the defendant on the plaintiff’s fraud action on the ground that it was against the manifest weight of the evidence. The court considered that the evidence established that the defendant had misrepresented the gross margin of profit of the business in a financial statement furnished the plaintiff during the sale negotiations. The court reversed the defendant’s judgment on his counterclaim, judging, it would appear, that he had been a volunteer in paying the claims against North Shore. We granted leave to appeal. The financial statement given to the plaintiff, which purported to reflect the operations of the business from April 1, 1965, to March 31, 1966, indicated a gross margin of profit of approximately 40%. Gross margin of profit is the ratio between gross profit and gross sales, gross profit being defined as gross sales less the gross cost of goods sold. The “cost of goods sold,” according to the statement, was $110,211.24, gross sales were indicated to be $186,125.26, and the gross profit was $75,914.02. At trial and thereafter the defendant has maintained that these figures were accurate and that North Shore’s gross margin or profit was in fact around 40%. The appellate court held that the evidence established that the cost of goods sold was higher than had been represented and that therefore the gross margin of profit was lower than had been indicated. The court grounded its reversal of the trial court on several factors. It found that the testimony of the defendant that the gross margin of profit was in fact 40% was unsatisfactory and that his testimony had been impeached by an earlier inconsistent statement. It noted the opinion of an accountant appointed by the trial court that the gross margin of profit was lower than 40%; and it observed that the Federal corporate income tax return which had been signed by the defendant, and which reflected the same period as the financial statement, indicated a substantially lower gross margin of profit. The corporate return had been filed in September, 1966, approximately three months after the sale of the business. The tax return indicated the same figure as the financial statement for gross sales ($186,125.26) but the cost of goods was stated to be $134,820.89, approximately $24,000 greater than the $110,211.74 shown on the financial statement. The resulting gross margin of profit was, according to the return, 27.56%, or approximately 12.5% less than the 40% represented by the defendant as the true gross margin. The net income of the corporation before taxes according to the corporate return was $286.15, or 15/100 of 1% of sales, while the net income of the corporation before taxes according to the financial statement was $24,895, or 13% of sales. The defendant argues that the higher cost of goods sold reflected on the corporate return should not of itself be viewed as showing that the gross margin of profit and net income were lower than represented on the financial statement, since the record contains evidence which would contradict this conclusion. The additional $24,000 shown for cost of goods sold on the corporate return, the defendant says, actually reflected money paid as an officer’s (the defendant’s) salary and an extraordinary burglary loss. The defendant acknowledged in oral argument that classification of this additional $24,000 under “cost of goods sold” on the return was not accurate, but he denies that this inaccurate classifying establishes that the “cost of goods sold” item appearing in the financial statement was false. If the additional $24,000 reported under “cost of goods sold” on the return are moneys attributable to an extraordinary burglary loss and additional officer’s salary, then, the defendant says, there was no misrepresentation of either the cost of goods sold or the income from the business available to the owner. He points out that North Shore was a small corporation with a single owner and officer. The income available to the sole owner and officer of a small corporation is from the salary he pays himself and from the earnings of the business after other expenses. Money taken as a salary is a deductible corporate expense, so that an election to take out all business earnings as salary reduces the income of the corporation but has no substantial effect, apart from Federal tax factors not relevant here, on the actual income from the business available to the sole owner and officer. On the financial statement, officer’s salary was listed as approximately $13,000, the net income of the corporation before taxes as approximately $24,000, and the net income of the corporation after taxes as about $19,000. Thus, the moneys available to the sole owner and officer were represented to be about $32,000 after Federal taxes and $37,000 before Federal taxes. There was no indication on the financial statement that the defendant had withdrawn additional amounts as salary. But the defendant argues that the question is whether the financial statement accurately represented that there were $32,000 to $37,000 in earnings available to the owner, not whether amounts listed as net corporate profit had been in fact withdrawn as salary. This is so, he says, because under the sales agreement, the plaintiff was to acquire only the corporate shell, so to speak, and the defendant would retain all corporate earnings to the date of sale, whether in the form of corporate income or officer’s salary. We need not address ourselves to this argument, for we judge that on another basis the appellate court correctly held that the trial court’s ruling was contrary to the manifest weight of the evidence. North Shore’s margin of profit was obviously a factor of great importance to a would-be purchaser of - the business. The financial statement reflected a gross margin of profit of 40%. The statement had been prepared by the defendant’s accountant, who noted on the statement that it had been prepared from books and records without audit or verification and that it was presented without opinion. The accountant appointed by the court to examine North Shore’s books and records described them as incomplete. In a pretrial deposition, the defendant acknowledged that the average mark-up on sales of equipment listed in the business catalog of North Shore was 30%. At trial, after the defendant had testified that the gross margin of profit of North Shore from April 1, 1965, to March 31, 1966, was 40%, as the financial statement represented, the plaintiff’s attorney attempted to impeach the testimony by the defendant’s prior testimony on deposition, which was that an average mark-up was 30%. The trial judge noted that the defendant’s statement in his deposition related to the average mark-up, and was not necessarily inconsistent with the defendant’s 40% representation in the financial statement and with his testimony at trial. However, when questioned by his attorney on direct examination as to North Shore’s having a margin of 40% the defendant attributed the 40% margin to volume purchases at discount and at substantial savings of closeouts of speed equipment from manufacturers wishing to dispose of large quantities of such merchandise. When asked on cross-examination to show these special purchases in his or North Shore’s books and records he was unable to do so, and he did not otherwise establish the purchases. Considering the entire record, the appellate court did not err in reversing the judgment in favor of the defendant on the suit for rescission. The appellate court also acted properly in reversing the judgment for the defendant for $6,555.13 on his counterclaim. The record shows the defendant’s testimony that when he owned North Shore he advertised in various automotive magazines through an advertising agency. Robert Schoenbrod, a member of the agency, because of friendship with the defendant and the defendant’s father, the defendant said, waived the agency’s 15% commission for advertising placed for North Shore. The defendant in return assumed personal responsibility for the liability for advertising to be incurred by North Shore, and promised to notify Schoenbrod if he ever sold the business. The defendant testified that he neglected to notify Schoenbrod of the change of ownership, apparently because of his impression that the plaintiff would place advertising through another agency. About a month after the sale, the defendant said, he was notified by Schoenbrod that the plaintiff had continued to place North Shore advertising through the agency, and that the plaintiff refused to pay for it. The defendant then undertook to have payment made to the agency, but he did not first request the plaintiff to make payment nor did he communicate with him regarding his reason for refusing to pay the bills. The defendant was short of funds, and he arranged to have the Harbor Management Co., which was owned by his father, make the payment in his behalf, and he later reimbursed Harbor Management. The plaintiff admitted having placed advertising and having refused to pay for it. The trial court held that the evidence established the payment by the defendant of $6,555.13 to cover the advertising expenses incurred by North Shore and rejected the plaintiff’s argument that the defendant had acted as a volunteer and was therefore barred from recovering. We consider that under the circumstances the defendant was a volunteer in paying the agency for North Shore’s advertising. This court has said: “It is well settled that a mere stranger or volunteer cannot, by paying a debt for which another is bound, be subrogated to the creditor’s rights in respect to the security given by the real debtor. But if the person who pays the debt is compelled to pay for the protection of his own interest and rights, then the substitution should be made. (Bennet v. Chandler, 199 Ill. 97; Hough v. Aetna Life Ins. Co., 57 Ill. 318.) In the Chandler case it was said that ‘a stranger within the meaning of this rule is not necessarily one who has had nothing to do with the transaction out of which the debt grew. Any one, who is under no legal obligation or liability to pay the debt, is a stranger, and, if he pays the debt, a mere volunteer’.” Ohio National Life Ins. Co. v. Board of Education, 387 Ill. 159, 178. The defendant had no legal obligation to pay the liabilities incurred by North Shore after the plaintiff became its owner. He had no interest in the corporation. Before making payment, he did not discuss the question with the plaintiff; no question of the defendant’s having been authorized to pay was involved. For the reasons given, the judgment of the appellate court is affirmed. Judgment affirmed. MR. JUSTICE KLUGZYNSKI took no part in the consideration or decision of this case.