Court Opinion

ID: 3737363
Source: CourtListenerOpinion
Date Created: 2016-07-06 07:02:35.788386+00
Date Added: 2024-06-11T14:11:14.918012
License: Public Domain

This is an appeal by the plaintiff, appellant herein, from a judgment of the Court of Common Pleas on questions of law. It is an action for a declaratory judgment, wherein the plaintiff sought to have the trial court determine its rights under a contract for the purchase of the business and assets of the newspaper known as The Cincinnati Enquirer as a going concern. Because of the fact that reference thereto will be hereafter made in this opinion, it is necessary to set out a brief history of the newspaper itself.
John R. McLean was the owner and publisher of the Enquirer until his death on June 9, 1916. By his will, he provided that the American Security  Trust Company was to act as a trustee in the operation of the newspaper. On February 14, 1952, the Cincinnati Times Star, an afternoon newspaper, was interested in acquiring a morning newspaper, and made an offer of $7,500,000 for the purchase of the Enquirer. Before this offer was approved by the District Court of the District of Columbia, which court was administering the John R. McLean Trust, the employees of the Enquirer, through a duly authorized committee known as the "Employees' Committee, for Employee Ownership of The Cincinnati Enquirer," made an offer of $7,600,000 for the purchase of the paper. The trustee was willing to recommend to the court that this offer be accepted, provided the entire amount would be paid in cash within three days. On June 6, 1952, the Portsmouth Steel Corporation, which had been importuned therefor, put up the cash and nominated the plaintiff to receive the assets of the Enquirer. By way of protection of itself and the plaintiff, it was agreed that $200,000 of the sale price should be held in escrow by the defendant until *Page 538 
defendant had "fully performed and carried out (its) obligations under such offer." The sole dispute in the case, it seems to me, is whether the defendant, as the seller of the newspaper business known as The Cincinnati Enquirer, as a going concern, has fully performed its obligations under the agreement, all according to the terms of the contract of purchase.
Paragraph 2 of the agreement sets forth the assets to be purchased as follows:
"The assets sought to be purchased by this offer consist of the newspaper business known as The Cincinnati Enquirer, as a going concern, including * * * all the assets owned by thetrustee and used by it in the operation of said business at the closing date, * * * with such changes in said business and assets and only such changes therein as shall have occurred in the ordinary course of business in the operation of the Enquirer after December 31, 1951, excluding, however, the sum equal to the undistributed earnings derived from the operation of the Enquirer at the close of business on closing date, such earnings to be subject to the liabilities of the Enquirer not assumed by Portsmouth under the provisions of Paragraph 3 hereof." (Emphasis added.)
Supplementing the purchase contract, it was provided by Paragraph 6 (c) that a bill of sale covering the assets and business to be purchased be delivered to the purchaser, and further:
"(c) That the trustee deliver to Portsmouth or its nominee the balance sheet of the Enquirer as of the close of business December 31, 1951, and as of the date of acceptance of the offer, and a statement of the operations and earnings of the Enquirer during the period from December 31, 1951, to closing date, which statement shall be prepared by the Enquirer's independent accountants, or other independent public accountants selected by it, and shall be prepared in accordance with the same accounting principles as were used in preparing the balance sheet as of the close of business December 31, 1951."
Under Paragraph 9 (c) of the contract of purchase the defendant warranted as follows:
"(c) The balance sheets of the Enquirer delivered and to be delivered to Portsmouth [plaintiff] have been and will be *Page 539 
prepared by Messrs. Peat, Marwick, Mitchell  Co., independent public accountants, in accordance with sound accountingprinciples and principles used in the past in Enquirer auditreports and to the best of the trustee's knowledge and belief,
the balance sheet as of December 31, 1951, fully discloses the trustee's assets and liabilities relating to the Enquirer at the closing of business December 31, 1951, and since such date there has been and until the closing there will be no substantial change in such assets or liabilities other than in the ordinary course of business, or as approved by Portsmouth." (Emphasis added.)
Thereafter, on June 6, 1952, the bill of sale was delivered to plaintiff accompanied by financial statements as of December 31, 1951.
When the June 6, 1952, financial statements were delivered, they disclosed undistributed earnings of $85,999.27; and the defendant thereupon demanded remission of this sum and a release of the $200,000, held in escrow. Plaintiff disputed defendant's position, and claimed a violation of the contract on the part of defendant. This resulted in the present law suit.
Defendant filed a cross-petition, which by reason of stipulation is not before the court, and another stipulation identifies certain exhibits and states the background of certain claims and the amounts involved.
The appellant, plaintiff below, claims generally that the judgment of the trial court is against the weight of the evidence, is contrary to law, and, therefore, should have been in its favor.
I have read the contract over and over again. After all the talk about the situation being unique factually and the relation of the parties being unusual, it seems to me that we must gather the intention of the parties from the language of the contract. The trust laws of the District of Columbus have nothing to do with this case. The sole question is whether the defendant has performed its contract. The parties agreed that the contract "shall be construed and enforced and governed by the laws of the state of Ohio." What did they mean when they agreed that all assets and liabilities were to be determined by the application of "sound accounting principles?" Let us examine the record.
The first question in dispute is the so-called "depreciation *Page 540 
issue." Under this heading two situations are presented: (1) the so-called 1952 short year, covering the period January 1, 1952, to June 6, 1952. Charges for depreciation against earnings amounted to $47,824.19; however, all of this amount was remitted to defendant prior to the date of the contract, June 6, 1952, but after December 31, 1951. The contract does not permit changes after December 31, 1951, except in the ordinary course of business; and just because the balance sheet of June 6, 1952 omits this item, does not deprive it of its character as an asset, according to my concept of sound accounting.
The same is true with reference to the depreciation for 1951 in the amount of $115,647.17. In my opinion, the past practices of the defendant in this regard mean nothing in the light of the warranties of the defendant with respect to financial statements and the obligations of defendant at the closing of the deal. It is my judgment that the trial court was in error in holding that plaintiff has no claim to the 1952 short-year depreciation and in limiting plaintiff to a credit of only $1,838.52 for depreciation from January 1 to June 6, 1952. Comment is made as to footnotes at the end of financial statements, explaining the practice of monthly remittance for depreciation, but this does not bind plaintiff. The trustee could do anything it wanted in the operation of the newspaper, providing, of course, that it satisfied the court, under whose supervision the paper was being operated. But, after December 31, 1951, it was bound by the contract of June 6, 1952. Was it just partly bound by the contract? No, it was bound not only by the warranties, but also, in the determination of the assets, it was bound to employ sound accounting policies. I agree with plaintiff that it did not buy the December 31, 1951, balance sheet. In my opinion, the December 31, 1951, balance sheet was not complete according to sound accounting principles, as testified to by the accountants, and the plaintiff should not be bound thereby.
The next point for decision is the vacation pay issue. I can not agree with the trial court's conclusions on this issue. If I am correct in my judgment on the depreciation issue, then I must find against defendant on this issue. According to the terms of the contract, the past practices of the defendant have no bearing on this point; those practices can not bind plaintiff, *Page 541 
if those practices are not in conformity with sound accounting. Sound accounting is what plaintiff bargained for and paid for, the notes at the bottom of the statement to the contrary notwithstanding. According to the record, as I see it, all other debts and liabilities of the Enquirer were considered on an accrued basis. Why was vacation pay omitted, except for reference to it in a footnote? To say that it was done consistently in the past, is not binding on plaintiff. It might have been done to determine income payable to the beneficiaries of the trust, but is this sound accounting under the circumstances of this case? There is no dispute that when vacation pay was referred to in the June 6, 1952, statement it was not reflected on the balance sheet. Why? Mere reference to such an item by footnote does not reflect it in the balance sheet, and, therefore, plaintiff did not assume this item under the contract. Again, the trial court excuses performance by defendant on this issue on the ground that defendant could "not legally have accrued vacation pay" under laws of the District of Columbia. Again, I say, the law of the District of Columbia has nothing to do with this contract. The court of the District of Columbia authorized the defendant to enter into a contract which provided: "10. Law Governing: Any contract that may result, either express or implied, by reason of the trustee's acceptance of this offer, shall be construed and enforced and governed by the laws of the state of Ohio." In my opinion, even the court of the District of Columbia should be bound by this provision, unless, perchance, there has been a fraud on the court, which nobody is claiming.
I now come to a consideration of the executive bonuses issue. In order to understand the respective claims of the parties on this subject, it is necessary to consider the contracts which the executives had with the Enquirer. The commissions payable to them were based, among other things, on "miscellaneous net income." According to the evidence a "Black  White Press" was sold by defendant in January 1952, at a profit of some $34,429.29. The question is whether the executives are entitled to their respective commissions on this profit as "miscellaneous net income." It appears further that the exclusion of the gain on the sale of the press in the earnings was expressly ordered by defendant, although the accountants believed that *Page 542 
sound accounting dictated its inclusion. Their explanation is that the net result to executives' bonuses would be so small that they agreed to omit the gain on the press. In view of this evidence, about which there is no dispute, sound accounting would require that executive bonuses should be reflected as an annual expense and prorated as of the closing date. Accordingly, judgment should be rendered for plaintiff on this issue in the amount claimed in its petition.
Finally, we come to a consideration of the Associated Press bond issue.
Prior to his death in 1916, John R. McLean owned a $1,000 bond of the Associated Press, which became part of the trust estate at his death. This bond was subsequently exchanged or sold by the trustee, and the defendant bought in its place a $1,000 debenture bond of the Associated Press. Under the charter and bylaws of the Associated Press Association, only members could own such a bond. In other words, McLean's ownership of the Enquirer entitled him to purchase the bond. However, there is no evidence that a member was required to buy a bond in order to receive the news service of the Associated Press, or that the ownership of the bond entitled its owner to any additional services from the Associated Press. Therefore, it is evident that the bond was not an asset used by the trustee in the operation of the newspaper, and, under the contract of sale, did not pass to plaintiff as an asset.
It is urged that those people who were interested in buying the newspaper had knowledge, over the years, of the manner of operation of the Enquirer; that they knew the customs of accounting between the operators of the newspaper and the trustee, and, for that reason, the purchasers in some mysterious way are estopped from complaining about what they ought to get under their contract of purchase. On the other hand, it may be their knowledge of what was going on that induced them to insist that the assets which they were to receive were not only in accordance with "principles used in the past in Enquirer audit reports" but also "in accordance with sound accounting principles." It is to be noted in this respect that the contract uses the conjunctive. Balance sheets were to be prepared in accordance with "sound accounting principles and principles *Page 543 
used in the past." It is no excuse to say that the past performance of the Enquirer did not accrue vacation pay, and that, therefore, the purchasers cannot receive a credit for this item. But the contract says that such a performance must be "in accordance with sound accounting principles" even though it has been otherwise for ten years.
And then we come to testing the so-called expert testimony. It is argued that the court should not be concerned except to accept the testimony of the expert. In the first place, there is no dispute that the independent experts excluded "executive bonuses" as an item in their certificate because it was suggested that the amount was so small that it would not be material in the over-all report. But they admit that it should be included. Again, under the issue of "vacation pay" the firm of accountants which reviewed the books of the Enquirer over the years stated in its June 6, 1952, statement that "vacation pay" should be accrued. "In our opinion," says the statement, "subject to the qualification in regard to the omission of anaccrual for vacation pay, the balance sheet presents fairly, the financial position of the Enquirer * * *." (Accountant's Report.)
Then, again, in the certificate attached to the December 31, 1951, statements, these same accountants report as follows: "All liabilities of which we obtained knowledge in the course of our examination have, with the exception of accrual vacation pay,
received appropriate recognition."
Testing further the testimony of the experts, upon which it is urged that the court rely, I have examined the record for a definition of "sound accounting principles." I do this for the reason that there is no dispute that the purchasers of this newspaper contracted to buy assets which were to be determined by "sound accounting principles." And, yet, by way of example, we find this testimony in the cross-examination of Bernard W. Cochran, called by defendant, who is in charge of the Washington Office of Peat, Marwick, Mitchell  Co., the accountants who represented the defendant in its management of the Enquirer up to the time of its sale to plaintiff. The witness was asked if he didn't testify that "it was not good accounting practice at that time to accrue vacation pay." The witness answered in the affirmative. Then he was asked whether he, or the auditor who *Page 544 
made the audit, would be in a better position to testify as to good accounting practices. His answer was: "Well, I might have been in a better position.
"Q. You would rather express the opinion without making the audit? A. I might have been in a very good position to state whether that was good accounting practice. I am not saying.
"Q. You mean you don't want to answer the question? A. I see no reason why I should make a statement here that what they did was wrong. That was their opinion."
Thereupon, the court undertook to get an opinion from the witness as to whether, being in Washington, he could better judge the soundness of the accounting.
"A. Your Honor, I couldn't answer that yes or no because I have been working with these people, looking at these reports, knowing everything about the accounts, seeing all of these contracts that have been made on these bonuses, advising the Trustee, accounting-wise, of what should be done in the Enquirerlots of times, and I know the background of this whole thing and I am not taking any responsibility of saying what they shouldhave done."
In my opinion, this witness, better than all others, could have said, if he so believed, that everything done was according to sound accounting, but he was "not taking any responsibility." It is, therefore, obvious that this witness contributed nothing to the quest of the court to ascertain what is, and what is not, sound accounting; nor, on this same issue, is the witness Peloubet, who has a yen for consistency as one of the three attributes of good accounting, any assistance to the court.
As I view this case, the only question to be determined is whether the plaintiff is getting what it purchased, to wit, all the assets of The Cincinnati Enquirer; those assets to be determined not only according to the "principles used in the past in Enquirer audit reports" but also "in accordance with sound accounting principles."
In my opinion, with the exception of the Associated Press bond, there is no evidence in this record which justifies the judgment of the lower court. That judgment should be reversed, and, with the exception of the Associated Press bond, final judgment should be rendered in favor of plaintiff on all other issues. *Page 545