Summary
In Reliable Pharmacy, the court held that the execution of an employment contract by a partner that was consistent with the historical practices of the partnership bound the partnership under Wis.Stat. § 178.06(1).
Summary of this case from U.S. Leather, Inc. v. H W PartnershipOpinion
No. 254.
Argued February 2, 1972. —
Decided February 29, 1972.
APPEAL from a judgment of the county court of Rock county: EDWIN C. DAHLBERG, Judge. Reversed.
For the appellant there were briefs by Herro, McAndrews Porter, S.C., and oral argument by Jack R. DeWitt, all of Madison.
For the respondents there were briefs by Leo H. Hansen, William T. Henderson, and Hansen, Eggers, Berres Kelley, all of Beloit, and oral argument by Leo H. Hansen.
The action is one for declaratory judgment pursuant to sec. 269.56, Stats., to declare an employment contract null and void. The action was commenced in October 1968, alleging two causes of action: (1) That the contract was void, and (2) in the alternative, that were the contract valid, the employee, John R. Hall, had failed to perform his duties and obligations under the contract.
The employee Hall counterclaimed, alleging a wrongful discharge and damages in the sum of $150,000 for loss of salary and commissions.
It was stipulated that only the first cause of action was to be tried. Trial was had to the court, and on August 6, 1970, the trial judge filed a written memorandum decision in which he held that the contract was null and void. Findings of fact and conclusions of law were made on September 18, 1970, and judgment was entered for the plaintiff on October 1, 1970.
There is no substantial dispute about the historical facts which led to this lawsuit. At the time the litigation commenced, the Reliable Pharmacy was a partnership consisting of two individuals, Hazel L. Pember and Aubrey H. Pember, and partnership interests consisting of the Thomas W. Nuzum Trust, the Thomas J. Snodgrass Trust, and the Nettie Mae Snodgrass Trust. The trustee of the trusts was the Merchants Savings Bank of Janesville.
The manager of the Reliable Pharmacy was John R. Hall. It is alleged that an employment contract entered into between John R. Hall, as the manager and as a pharmacist of the Reliable Pharmacy, and Dr. Aubrey H. Pember, one of the partners of the Reliable Pharmacy, is null and void. This contract was signed on May 11, 1963, and provided that Hall's employment was to run for a period of ten years from January 1, 1963, and that, with certain exceptions, Hall's salary would be $50 a week plus 15 percent of the gross amount on the sale of all prescriptions.
The trial judge's memorandum decision and findings of fact present a concise chronological resume of the relevant history of the relationship between the partnership and John R. Hall.
The Reliable Pharmacy was founded by the elder Dr. Pember, the father of Aubrey H. Pember, in the early 1900's. Shortly thereafter, Dr. T. W. Nuzum became a partner. When the eider Dr. Pember died, his daughter, Constance Pember Nuzum, and Aubrey H. Pember acquired his interest. A portion of their interests was conveyed to Dr. Thomas J. Snodgrass and his wife, Nettie Mae Snodgrass. These doctors were associated in the practice of medicine in the Pember-Nuzum Clinic. The pharmacy apparently was at all times conducted on the clinic premises. These physicians shared in the profits in proportion to their partnership interest.
In 1945 John R. Hall was operating his own place of business in Janesville. He was hired by Dr. Aubrey Pember to be the manager of the Reliable Pharmacy. An oral agreement was reached whereby Hall was to be paid $60 a week, plus 10 percent commission on the sale of prescriptions. Before a year had expired, a written employment agreement was entered into by Hall and by Pember on behalf of the partnership.
The trial court found that, at this time and at all times subsequent thereto, Dr. Aubrey Pember acted as the managing partner on behalf of the partnership and that, in such capacity, Dr. Pember continued to negotiate and enter into employment contracts with Hall. These contracts followed a pattern in that each of them specified a salary per week plus a commission on the prescriptions sold. The initial arrangement continued until February 28, 1955. During that first ten-year period, one of the original partners died, and a partnership agreement was executed to administer the deceased partner's share of the partnership through a trust.
In 1955 a letter from Dr. Pember to Hall initiated a new employment contract for another five years. In this contract Hall's salary was to be $60 a week, plus 15 percent of the sale of prescriptions.
Although the employment contract of Hall consummated in 1955 had more than two years to run, Dr. Pember in December of 1957 entered into a written ten-year contract to employ Hall for another ten years. The percentage of the sales remained the same, but the salary guaranteed by the contract was reduced to $50 per week.
In each of the contracts executed through 1957, Dr. Pember conducted the negotiations on behalf of the partnership, and only his signature appears on the contracts.
Dr. Pember moved to Florida in 1957, and shortly thereafter he and his wife, Hazel, were divorced. Sometime thereafter, Hazel, who was a one-sixth-interest partner, gave notice that she was revoking the authority of others to act for her in partnership affairs. Prior to that time, Dr. Pember had received the checks representing her share of the partnership income. This notice was properly construed by the court to merely revoke the authority of Dr. Pember or anyone else to receive her share of the profits. It should be pointed out that the record reflects great doubt whether Hazel Pember was a "partner" despite the fact her interest accounting-wise was described as a partnership account. The trial judge indicated that her "partnership" was limited to taking a share of the profits for whatever tax advantages would result. Her exact status is immaterial inasmuch as she had never purported to exercise any of the managerial prerogatives of a partner. When she purported to revoke the authority of Dr. Pember to act for her, the revocation of authority was communicated to Dr. Pember only to the extent that he was no longer to receive her checks. The course of dealings of all concerned would indicate, therefore, that none of the partners treated Hazel Pember as having any authority to exercise any managerial partnership powers.
Following the death of Dr. Snodgrass in 1958, the bank became the trustee of two thirds of the interest in the pharmacy. The trust officer of the bank took a more active interest in the financial affairs of the pharmacy, but the record fails to reveal that the trustee attempted to exercise the authority of the partners whose interest the bank represented, except in matters of accounting and auditing procedures. For example, the trust officer thought that certain charges made against the pharmacy by John Hall were not properly business expenses of the pharmacy.
There is evidence that, at the time the 1957 employment contract was entered into, the partners other than Dr. Pember were dissatisfied with Hall's employment contract. Dr. Pember, however, was never informed of any dissatisfaction with the terms of the employment agreement.
In 1963 John Hall attended a pharmacy convention in Florida. He took with him a draft of a new employment contract. He presented this to Dr. Pember in Florida, and a new contract was executed. The new contract was identical to the 1957 agreement and ran for a ten-year period commencing on January 1, 1963. This contract was not shown to the other partners until the 1957 agreement was due to expire and an attempt was made to negotiate a new contract with Hall. The trial court found that no partner other than Dr. Pember was aware of this contract and that all the other partners objected to it when they learned of its existence. The other partners brought this action to declare the 1963 contract invalid.
The facts show that under Hall's management the gross sales rose from $83,000 in 1949 to more than $285,000 in 1963. The profit in 1963 was in excess of $34,000, and the percentage of profit on sales was over 12 percent. During the period from 1945, Hall's income paid as salary rose from $80 per week in 1945 to in excess of $29,000 in 1963. Although total sales increased to $301,000 in 1968, the net profit for the partners fell to approximately $13,000.
The trial judge found that the salary received by Hall as managing pharmacist was two and one-half times the salary paid to other full-time pharmacists employed by Reliable. The trial judge concluded:
"That arrangement for John R. Hall's compensation, which was under the earliest circumstances fair and equitable, became unduly favorable to Hall as the gross receipts of the partnership increased."
The court also considered the execution of the employment contract in 1963, four and one-half years prior to the termination of the existing contract, to be unreasonable. The court also stated that Hall knew, or at least should have known, that the partners other than Dr. Pember would not agree to a new contract on the existing terms.
After reviewing these facts, the trial judge concluded that the contract was not one entered into in the usual and ordinary course of business and was therefore void. Judgment was entered accordingly, and the appeal has been taken from that judgment.
We are satisfied, on the basis of the facts revealed in this record, that Dr. Pember had full and actual authority to bind the partnership when he executed the 1963 employment agreement with Hall. The result to be reached in this case is governed by secs. 178.06 (1) and (2), Stats, of the Uniform Partnership Act:
" Partners are agents of partnership. (1) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.
"(2) An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners."
The Uniform Partnership Act was adopted in this state in 1915. It codifies the common law of partnership. As early as 1883 in Seaman v. Ascherman (1883), 57 Wis. 547, 553, 554, 15 N.W. 788, this court said:
"The rule of law is that a firm is liable prima facie for the act of one partner in its behalf, necessarily done for carrying on the partnership business in the ordinary way, although such act was not authorized by the other partners. [Citation] In such matters each partner is the general agent of the firm, and the above rule has its foundation in the law of agency."
Under sub. (1) of the statute and the common law, each partner is the agent for the partnership and he may bind the partnership by his acts if they are "for apparently carrying on in the usual way the business of the partnership. . . ." On the other hand, sub. (2) provides that an act of the partner "not apparently for the carrying on of the business of the partnership in the usual way" does not bind the partnership unless the other partners authorize the act.
The trial court found as a matter of fact that at all times Dr. Pember was "the managing partner." He also found, however, that from the time Dr. Pember left Wisconsin, John R. Hall managed the pharmacy with little direction from any of the partners and that even Dr. Pember's participation was minimal. He also found that the other partners, with the exception of the trustee, did not participate at all. As a matter of law, the trial judge found that Dr. Pember was a general partner and was the general agent for the partnership and he had the power to employ third persons in the ordinary course of the business of the partnership. Despite these conclusions of law and the findings of fact which support that conclusion, he found the 1963 contract unreasonable and therefore void.
We are constrained to disagree with the trial judge's conclusion that the contract was a nullity. We are satisfied that the outcome of this case is ruled by ordinary principles of partnership law. Dr. Pember was a full partner to whom had been delegated the role as managing partner. He had, without exception, been the only partner to enter into negotiations or to contract with John Hall. It was not unusual for Dr. Pember to enter into a contract with Hall at a time considerably in advance of the expiration of the then-existing contract. In fact, that is the way the prior employment contracts were always entered into. It was apparent that Dr. Pember felt that the financial success of the pharmacy was the result of John R. Hall's good management of the business. While there is some evidence in the record which would tend to indicate that the other partners were dissatisfied with the arrangements between Dr. Pember and Hall, this dissatisfaction was not voiced to Dr. Pember and no effort was made at any time to limit his authority in respect to the further hiring of Hall.
The execution of the contract comports with the historical practices consistently followed by the partnership and, as found by the trial judge, the authority of Dr. Pember was actual authority. That being the case, the respondents' discussion of the rules applying to apparent authority is immaterial.
The trial judge and the respondents make much of the fact that the agreement was unreasonable in that a disproportionate share of the gross receipts went to Hall and his salary increased markedly in comparison with the other pharmacists employed.
We are not convinced from the record that the arrangement was unreasonable. It is certainly not within the prerogative of a court to set aside a business agreement for that reason alone, even if it were to unduly favor one party — and we are not satisfied that this is the case here — when the contract has been entered into with full authorization and without even an intimation of fraud. We see no relevancy in the fact that Hall's salary as the manager was two and one-half times that of other full-time-employed pharmacists. If any unreasonableness exists in this entire transaction, it would appear that the other partners, if they were dissatisfied with Dr. Pember's actions, were unreasonable in not timely withdrawing Dr. Pember's authority to act as the managing partner. This was never done.
Considerable reliance is placed by the trial court upon the case of Warren v. Mosher (1926), 31 Ariz. 33, 250 P. 354, 49 A.L.R. 1311. While we have no quarrel with the law of that case, its application is inappropriate to the one before us. In that case, a partner in the firm authorized substantial bonuses to his in-laws and two other employees of the firm. The court stated that the other partner had felt this was "a policy of unjustified nepotism." She protested "in the strongest possible manner" and specifically disapproved of the payment of bonuses. That position was persistently and consistently voiced. The Arizona court affirmed the finding and judgment voiding the bonus contracts and pointed out that a contracting partner does not have the same liberty in disposing of partnership property as he would with his own and an agreement which he makes "must be a reasonable one, and such as would be considered by the ordinary businessman to be natural and proper and within the scope of the business involved."
In the instant case the contract was the usual one and, unlike the situation in Mosher, no protest in reference to the preceding contracts was communicated to Dr. Pember. The 1963 agreement was identical to the 1957 agreement, and the 1957 agreement comported with the 1955 agreement except that the guaranteed salary was reduced by $10 per week.
The rule of law upon which the respondents would rely is appropriate, however, under some circumstances. That rule was relied upon by this court in Remington v. Eastern Railway Co. (1901), 109 Wis. 154, 84 N.W. 898, 85 N.W. 321. In that case an attorney by the name of Murphy had performed work for the Eastern Railway Company. The amount due for the work performed was found to be of a value of $2,262.50. Murphy entered into an agreement with the railway company whereby he released his law partnership's claim for payment of the legal services in exchange for an employment agreement whereby the railroad agreed to personally pay Murphy $200 a month thereafter in settlement of the claim. Murphy's partner, Remington, brought an action to set aside the partnership contract on the ground of fraud. The court therein concluded that the law firm was not bound by Murphy's agreement, because Murphy surrendered the rights of the partnership for a benefit moving exclusively to himself and not for the general benefit of the firm. It was pointed out that Murphy could have terminated the partnership at will and reaped the benefit of the bargain and his partner would have been defrauded of his share of the fees. It was held, in those circumstances, that the agreement was unreasonable and that the other partner was not bound by the settlement. In effect, Murphy was dealing with a claim of the partnership for his own benefit. The agreement was clearly unreasonable, because with a terminable partnership, the other partner had no right to collect the sum that was found to be due for the services rendered.
In the instant case, Dr. Pember did not benefit personally by the contract with John R. Hall any more than the other partners would benefit. There is ample testimony, substantially undisputed, that it was Hall's business acumen that resulted in the prosperity of the pharmacy. No rights of the remaining partners were foreclosed by the 1963 agreement to the benefit of Dr. Pember. The contract sought to insure the continued application of Hall's talents for the purpose of continuing the success of the pharmacy. Dr. Pember had unrestricted authority to enter into the contract. He did precisely what he had done before. In view of the past history of the entire course of dealings of the Reliable Pharmacy what he did was eminently reasonable. If, in the business judgment of the other partners, the contracts entered into in the past were unreasonable, either in respect to their terms or the mode of contracting, they could have manifested their displeasure and specifically withdrawn the authority of Dr. Pember to make further contracts. Had such notice been given, the contract entered into would have been without actual authority and, under some circumstances, could have been declared void. Such circumstances do not arise here. Dr. Pember dealt with the contractual rights of Reliable Pharmacy as he had in the past, and his conduct was within the scope of the authority that had been given him.
The briefs of the respondents make much of the issue that there was no lease agreement executed contemporaneously with Dr. Pember's contract with Hall in 1963. It should be pointed out that, at or about the time the 1963 agreement was entered into, Dr. Pember was specifically advised not to renew the lease. All that can really be gleaned from the record is that the business future of the pharmacy and its relationship with the clinic itself were somewhat uncertain, but we see nothing in the record that indicates that either the execution of a lease at that time or a decision not to execute a further lease would necessarily affect the patent authority of Dr. Pember to execute the employment agreement. It was within the authority of Dr. Pember to execute the employment agreement and the partnership was bound by it.'
We do not in this appeal consider the question of whether there was a subsequent breach of the contract or whether John R. Hall is entitled to damages for an unlawful discharge. The determination of those questions must abide further proceedings in the case.
By the Court. — Judgment reversed and cause remanded for further proceedings.