KOVACIK v. REED

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District Court of Appeal, First District, Division 2, California.

Stephen M. KOVACIK, Plaintiff, Cross-Defendant, and Respondent, v. Henry E. REED, Defendant, Cross-Complainant and Appellant.

Civ. 17151.*

Decided: March 22, 1957

John W. Broad, John A. Busterud, San Francisco, for appellant. Ralph Leon Isaacs, San Francisco, Albert J. McGuire, San Francisco, of counsel, for respondent.

This is an appeal from a judgment in favor of plaintiff, cross-defendant and respondent and against defendant, cross-complainant and appellant in an action seeking dissolution of a joint venture and an accounting of joint venture losses. Appellant's amended cross-complaint alleged an employment contract and sought damages for breach of contract. On December 31, 1954, the trial court's interlocutory judgment declared that a joint venture existed, ordered its dissolution and appointed a referee to take an accounting. On July 23, 1955, the final judgment was filed in favor of respondent and against appellant in the sum of $4,339.41, representing half of the net loss of the joint venture plus interest and the referee's fee.

The appeal comes before this court on an engrossed Settled Statement. The record shows that respondent is a building contractor in San Francisco, operating a contracting business as a sole proprietorship under the fictitious name ‘Asbestos Siding Company’. Appellant had worked for some time in San Francisco as a job superintendent and estimator.

Respondent, on or about November 1, 1952, asked appellant to become his job superintendent and estimator in certain kitchen remodeling work for Sears Roebuck Company. Respondent said that he had about $10,000 to invest in the venture, and that if appellant would superintend and estimate the jobs, respondent would share the profits on a 50–50 basis. Respondent did not ask appellant to share losses. The subject of a possible loss was not discussed. Appellant accepted the proposal, commencing work shortly thereafter.

Appellant never was asked to make a capital contribution. Appellant's sole contribution to the venture was his labor. The enterprise was conducted under the name of ‘Asbestos Siding Company’. No fictitious name certificate was ever filed showing that appellant had any interest in the aforesaid company. Respondent held a general contractor's license throughout this time. Appellant had never held a general contractor's license. The venture of Kovacik and Reed never applied for nor held a license of any kind.

The venture bid on several remodeling jobs in San Francisco and appellant actually participated in the management and control of these projects. During August, 1953, respondent who had at all times had possession of the financial records of the venture, informed appellant that it had been unprofitable and demanded contribution from him for his share of the losses. Appellant had at no time promised or agreed that he was liable for any of the venture's losses, and he refused to make any contribution. Respondent then filed this action on October 8, 1953, asking dissolution and an accounting of the losses.

The trial court found that the joint venture was terminated on August 31, 1953; that respondent supplied labor and materials, paid all debts of the venture, and advanced large sums of money therefor; that neither party was to receive compensation for services rendered but were to share equally in the profits and losses; that appellant actually participated in the conduct of the business and agreed to share equally in the profits and losses. All the pertinent allegations of the First and Second Amended Cross-Complaints and of the Affirmative Defense were found to be untrue, and respondent was found to be entitled to an accounting of profits and/or losses of the venture.

Appellant maintains that a party supplying only personal services to a joint venture is not liable for its losses in the absence of an express agreement to that effect. It is true, as appellant states, that the Settled Statement shows that there was no express agreement to share losses. In Dugan v. Pettijohn, 134 Cal.App.2d 133, 285 P.2d 339, 342, it was said that the rule is settled that in the absence of an express agreement, ‘the one who contributed only services cannot upon dissolution recover from the co-venturor any compensation for same and that the one who has contributed capital must bear his own loss if the assets are insufficient to return his investment in full.’ The court there relied upon a statement in 48 C.J.S., Joint Adventures, § 11, p. 839 that where ‘one member has supplied money and the other labor, it has been held that neither member is liable to the other for contribution for any loss sustained.’ In support of that statement the text cites two Kentucky cases. Bowling v. Duvall, 270 Ky. 494, 109 S.W.2d 1200; Heran v. Hall, 1 B.Mon., Ky., 159. The sentence just preceding that quoted, in the same paragraph of 48 C.J.S., Joint Adventures, § 11, p. 839, states: ‘In the absence of an express limitation in the agreement between them, every party to a joint adventure is bound by the nature of his relation to his associates to share with them the losses sustained in the enterprise.’ Authorities cited in reference to this proposition are Campagna v. Market Street Ry. Co., 24 Cal.2d 304, 149 P.2d 281; Universal Sales Corporation v. California Press Mfg. Co., 20 Cal.2d 751, 128 P.2d 665. Later, in the same section of the text it is said that the members of a joint venture will be presumed to have intended that the losses be shared in the same proportions as the profits unless the agreement fixes a different ratio. In Irer v. Gawn, 99 Cal.App. 17, 24, 277 P. 1053, 1056, the court cited section 2404 of the Civil Code now section 15018(a), Corporations Code, providing that “an agreement to divide the profits of a business implies an agreement for a corresponding division of its losses, unless it is otherwise expressly stipulated.” The court then stated that this section, and section 2403 of the Civil Code were in accord with the common law rule applicable to the relationship of joint venture where the contract is silent as to losses. The trial court's finding that the parties to the joint venture were bound to participate in the losses was upheld. The Supreme Court denied a hearing in this case, whereas in the Dugan case, supra, relied on by appellant no petition for hearing was filed. And see, Kirkpatrick v. Smith, 113 Cal.App.2d 409, 248 P.2d 534; Parker v. Trefry, 58 Cal.App.2d 69, 136 P.2d 55. The latter rule based on the Corporations Code, § 15018(a) above cited, is therefore controlling. It may also be noted that the Dugan case was a suit against an estate and not concerned with losses of a joint venture. It was an action on a promissory note which was given as security for advances made and to be made to the venture and the trial court found that plaintiff had not filed any claim for an indebtedness of deceased arising out of such enterprise.

It is settled that a provision to share losses may be implied in a joint venture agreement. Fitzgerald v. Provines, 102 Cal.App.2d 529, 227 P.2d 860; Martter v. Byers, 75 Cal.App.2d 375, 171 P.2d 101. The finding that losses were to be shared equally is therefore supported

Appellant also contends that since the joint venture never procured the general contractor's license required by the Business and Professions Code, Division 3, Chapter 9 (See §§ 7025, 7029, Business & Professions Code), the trial court may not lend its aid to enforce the illegal agreement. Appellant relies upon the decision in Wise v. Radis, 74 Cal.App. 765, 242 P. 90, a case in which a real estate salesman sought to recover his share of a commission from his partner. No real estate broker's license had been obtained by the partnership. The court held that he could not recover since he must necessarily disclose the illegal contract as the basis of the claim. Appellant admits that the District Courts of Appeal have somewhat limited the scope of this decision in subsequent cases, but that it still stands as authority for the proposition that one joint venture cannot obtain an accounting against the other for contribution to partnership losses where the partnership, or both partners individually are without licenses required by law. It is admitted that it has been held in subsequent decisions that a share of illegal partnership profits may be obtained on the theory of unjust enrichment where the dissolution of the partnership is complete and the illegality has spent itself. Matchett v. Gould, 131 Cal.App.2d 821, 281 P.2d 524; Norwood v. Judd, 93 Cal.App.2d 276, 209 P.2d 24. Appellant would distinguish these cases because they are all based on profits of an illegal enterprise and the theory of unjust enrichment.

Respondent contends that the later cases in this state have followed Norwood v. Judd, supra. Galich v. Brkich, 103 Cal.App.2d 187, 229 P.2d 89, relief upon the Norwood case, and permitted recovery of a share of the profits where one of the partners held a general contractor's license but the partnership was unlicensed. Here, as hereinbefore noted, respondent at all times held a valid general contractor's license. And in Wilson v. Stearns, 123 Cal.App.2d 472, 482, 267 P.2d 59, 66, the following language of the Norwood case was again relied on: “Where, by applying the rule, the public cannot be protected because the transaction has been completed, where no serious moral turpitude is involved, where the defendant is the one guilty of the greatest moral fault, and where to apply the rule will be to permit the defendant to be unjustly enriched at the expense of the plaintiff, the rule should not be applied.” Petitions for hearing were denied by the Supreme Court in these cases, as well as in the Norwood case. The language quoted above appears to have been unnecessary to the decision in the Norwood case, for the court found in that case that plaintiff after disassociating himself from the business, could have his suit for an accounting on the express agreement to divide the assets and profits which was made by the parties after the termination of the partnership. In Denning v. Taber, 70 Cal.App.2d 253, 160 P.2d 900, it was also held that equity will grant relief where the court is not required to base such relief on the illegal partnership agreement, but can predicate it on a new promise arising out of the executed partnership agreement.

We do not have a promise made subsequent to the termination of the venture in the present case. Of course that element was lacking in the Galich v. Brkich and Wilson v. Stearns cases, supra. But all of the cases above involved assets or profits. None of them dealt with losses of an unlicensed partnership.

In Norwood v. Judd, supra, the court referred to Wise v. Radis, 74 Cal.App. 765, 242 P. 90, and stated that if that case was still the law in California it would require an affirmance in the case then before the court, and that the Denning case, supra, had in effect overruled the Wise case.

In the present case appellant holds no profits of the venture, but is being sued for half of the losses. To enforce this liability, there can be do doubt that the joint venture contract must be made the basis of the suit for any right to recover such loss must be based squarely on the contract out of which the implied agreement to share losses on a 50–50 basis arises. In this case there was no agreement subsequent to dissolution as in the Denning and Norwood cases which might be said to be free of the illegality of the joint venture contract.

In Tiedje v. Aluminum Taper Milling Co., 46 Cal.2d 450, 296 P.2d 554, the court reiterates the rule that a contract made contrary to public policy or against the express mandate of a statute may not be the basis of an action in law or in equity, because the higher interest of the public demands that such transactions be discouraged. An exception is recognized where the illegality is due to facts of which one party is justifiably ignorant and the other party is not, and it is a matter of proof whether the parties are equally guilty. In the cited case, which was an appeal from a decision sustaining a demurrer without leave to amend, the court said that the plaintiff, while he was chargeable with knowledge of the law prohibiting the transaction, having pleaded lack of knowledge of the facts which would bring that law into operation, and issue of fact was presented to be determined by the trial court. The cited case is not factually here in point and is not inconsistent with Norwood v. Judd, supra.

The Tiedje case, supra, recognizes that there are exceptions to the rule in favor of a party who is not in pari delicto with the other party to the contract, but discussed but one of those exceptions, the one on which appellant in that case relied. That case implies, therefore, that other exceptions are recognized. In view of the denial of petitioner's hearing by the Supreme Court in the Norwood and Stearns cases, supra, it may be said that the situations in those cases fall within another recognized exception to the general rule. In the present case, as in those, the statute violated was enacted to protect the public against unlicensed contractors, and the venture having terminated the public interest is no longer involved. The business engaged in was not prohibited by statute or against public policy. Here, too, one of the partners was individually licensed and, as noted in Sautter v. Contractors' State License Bd., 124 Cal.App.2d 149, 157, 268 P.2d 139, a partnership license may be secured if one of the partners meets the qualifications.

Appellant's affirmative defense in paragraph I alleged the requirements of §§ 7026, 7028 and 7029, Bus. and Prof.Code, that the joint adventure of appellant and respondent engaged in the business of a contractor without such license, that it was thereby engaging in such business contrary to the provisions of Chapter 9, Division 3 of the Bus. and Prof.Code, and that respondent is therefore no entitled to relief. The trial court found the allegations of the paragraph to be untrue, despite the fact that the Settled Statement shows, and the briefs of the parties admit, that it was at times an unlicensed joint venture. While it may be said that in this sense this finding is unsupported by the evidence, if the finding is considered as a whole, it essentially finds that recovery between the joint venturers is not prevented by the fact that such venture is unlicensed.

It is our view that the public interest is not involved under the facts disclosed in the record before us and accordingly the judgment of the trial court is supported by the facts and the law. Appellant would be unjustly enriched under the facts of this case if judgment that he share the losses were not entered. Norwood v. Judd, supra; Galich v. Brkich, supra.

Judgment affirmed.

KAUFMAN, Presiding Justice.

DOOLING, J., and STONE, J. pro tem., concur.