JACOBSON v. WIKHOLM (1945)

Prior to February 13, 1944, Alex Jacobson and defendant were copartners in a construction business. Mr. Jacobson having deceased on that day, Mr. Wikholm retained possession of the partnership assets and proceeded with the completion of their enterprise and the winding up of the partnership affairs. There was but one construction job then in progress, to wit, the erection at Blythe, California, of an army air base consisting of a squadron hangar, a sub-depot hangar and ammunition building for the federal government. The work had been commenced January 6, 1944, and it was finished after the passing of decedent.

The court found as follows: At the time of the death of Mr. Jacobson the assets of the firm were of the value of $82,627.31 in addition to the value of the unfinished contract; thereafter defendant continued in possession of the property and business of the partnership for the purpose of winding up its business and has settled up its affairs; all moneys due the partnership have been collected by defendant; but he refused to render plaintiff an adequate accounting or to pay her one half of the net assets; it was not necessary for defendant to carry on the partnership business after the death of his partner and he did not do so with the consent of plaintiff; but he did in fact wind up the affairs of the partnership; all of the work done at Blythe in completing the government contract was necessary in winding up the partnership affairs; the partnership's contract for the construction of the army air base at first called for the payment of $225,532.15 but by modifications of the contract it was reduced to $171,091.83; the net sum realized therefrom was $115,300.14; after distributing $66,013.16 to himself and plaintiff in equal shares he has left for equal division $49,286.98. From such facts the court concluded that defendant, having assumed the responsibility of winding up the partnership affairs, was obligated to complete his task successfully and is not entitled to any compensation for his work out of the share of plaintiff. Plaintiff was awarded judgment in the sum of $24,643.49 with interest at 7 per cent from October 31, 1944, the date of plaintiff's delivery to defendant of the balance sheet showing the result of an audit of the books.

Appellant's Contentions

Defendant contends (1) that the judgment unjustly deprived him of compensation for his services to the partnership in winding up its affairs and that such service was reasonably worth 50 per cent of the profits, and (2) that material evidence was erroneously rejected. He argues with some show of reason that since he did 80 per cent of the work he is entitled to 80 per cent of the profits; that the time he spent on the job after February 13 was worth $20,000 to that venture; that he spent a total of 175 days as against 19 by decedent; that if paid according to his customary earnings he should receive for his service there $23,920; that the achievement of the immense profit was due solely to his service and skill.

Winding Up—Defined

In view of the statute providing for reasonable compensation for the services of a surviving partner in winding up the partnership affairs after the decease of a partner (Civil Code, sec. 2412(f); Sec. 18(f), Uniform Partnership Act) we are first to determine the significance of the phrase ‘winding up the affairs.’ Bouvier defines it as ‘the process of liquidating the assets of a partnership or a corporation for the purposes of distribution.’ 2 Bouv.Law Dict., Rawle's Third Revision, p. 3471. It is the administration of the assets for the purpose of terminating the business and discharging the obligations of the partnership or corporation to its creditors and members. Rest.Conflict of Laws. The phrase embraces the entire process of settling the accounts and liquidating the assets. State v. Norman, 86 Okl. 36, 206 P. 522; State v. Quigley, 93 Okl. 296, 220 P. 918. In the case of an active partnership, ordinarily there is business to be conducted in order fairly to discharge its obligations. The conduct of such business to a conclusion is quite a different matter from that of liquidating the assets preparatory to a distribution. If A and B as partners own securities and lands worth $100,000 and A dies, B may liquidate the assets and distribute them and receive for his labors a reasonable compensation. If they have in addition to such assets a contract for the construction of three edifices which are half completed at the death of A, the survivor has something more to do than under the first suppositious situation, namely, he must supervise the completion of the building contract, collect the amounts due and pay the charges for labor, materials and subcontracts and deliver one half of the net profits to the administrator of the decedent's estate.

Defendant in Two Capacities

Thus it is clear that defendant in retaining possession of the partnership assets and in proceeding to execute the partnership contract for the construction of the Blythe Air Base acted in two separate capacities, namely, (1) quasi administrator for the deceased partner and (2) manager of the works in the execution of the construction which he was obliged to carry on to completion. In deriving its findings and conclusions the trial court apparently conceived a unity of the two capacities and erroneously determined that all of defendant's services constituted a winding up of the partnership affairs, and concluded that in view of his obligation to complete the work or of the handsome profits realized in a short time he should receive no compensation for his ‘winding up’ services.

A fair construction of the findings, however, impels the conclusion that the court intended to deny compensation to defendant for his services in supervising the construction in its final stages. That the court was not in error in such denial appears from the following facts: The work commenced on January 6 and was completed April 28. The general superintendent of construction at its commencement was continuously present to the date of completion and for two weeks thereafter. Defendant visited the air base not to exceed seven times after February 13. The last subcontract was completed April 28. The general superintendent left the job on May 12 after bringing the trucks and other equipment into the yard. On the day of Mr. Jacobson's decease the contract for the squadron hangar had been canceled; 40 per cent of the mechanical work on the sub-depot hangar had been completed and the construction of the ammunition building was half done. These facts having been established it must be held that the trial court was not arbitrary in deriving the conclusion that having assumed the task of completing the construction at Blythe defendant was obligated to do so successfully and should receive no compensation therefor.

Upon that question we are in agreement with the court below. Respondent's difficulty, however, in sustaining the judgment arises out of the court's second conclusion, towit, that defendant is not entitled to any compensation besides his share of the profits on the government contract. With respect to such work as defendant did in liquidating the partnership apart from his supervision of the construction work the parties were entitled to a finding as to the character and extent of his services and the value thereof in order that such sum might be deducted from the plaintiff's share of the net profits of the contract.

Moreover, the finding that ‘defendant did not carry on said partnership business and that it was not necessary for him to do so’ is not borne out by the record. He performed services of value both in completing the contract and in winding up the partnership. The testimony is without contradiction that defendant was daily consulted by the general superintendent over the telephone; he visited the scene of operations seven times; he made computations for the cancellation of the contract for the squadron hangar. In addition thereto he sold assets of the partnership, paid bills and collected and disbursed moneys due and owing. Such services were essentially a winding up of the firm's business and their value, if any, should be awarded to defendant. Although he was entitled to nothing for his supervision of the construction work, yet under the statute he is entitled to be paid for all services rendered strictly for plaintiff in winding up the partnership affairs.

Prior to 1929 the common-law rule still prevailed, namely, that the services of a surviving partner in winding up the partnership are not compensable. But in that year the Uniform Partnership Act was enacted (Statutes 1929, p. 1902, Civil Code, sec. 2412(f) providing that ‘a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.’ This principle has been supported by the courts of other states which hold that for such services to the partnership estate a survivor is entitled to special compensation for completing the partnership business (Losch v. Marcin, 251 N.Y. 402, 167 N.E. 514), to special compensation for collecting, paying, dividing the surplus and for expending time, skill and labor in carrying on the business (Bracht v. Connell, 313 Pa. 397, 170 A. 297, 300), and to reasonable compensation for his services in winding up partnership affairs. Murdock v. Murdock, 300 Pa. 280, 150 A. 599, 603. It has likewise been approved by our Supreme Court in the case of law partnerships in which the surviving partner was allowed an extra portion of fees contracted by the firm for the work he performed after his partner's decease. Griggs v. Clark, 23 Cal. 427; Little v. Caldwell, 101 Cal. 553, 36 P. 107, 40 Am.St.Rep. 89; McNutt v. Hannon, 183 Cal. 537, 191 P. 1108. It must be conceded, however, that a law partnership is so dissimilar to the ordinary commercial partnership that the rationale of those decisions may be applied only by analogy to the case of building contractors.

While the court erred in not making a finding as to the value of defendant's services in ‘winding up the partnership affairs' as that phrase is herein defined, it is a fair interpretation of the findings and conclusions that it was the intention of the court to deny an allowance to defendant for his services in supervising and managing the construction work at Blythe after February 13 and until the completion of the government contract. Such conclusion is reasonably derived from the proof of defendant's limited activities, the superintendent's attention to the work, the use of the partnership's assets and from the fact that not to exceed 50 per cent of the construction remained for completion at the time of Mr. Jacobson's decease. It is true that the relationship of a surviving partner to the administrator of his deceased partner is fiduciary (Josephberg v. Cavallero, 262 App.Div. 1, 27 N.Y.S.2d 361), and that as such trustee he must exercise his talents and industry honestly and in the highest good faith (Grigg v. Hanna, 283 Mich. 443, 278 N.W. 125), yet that is no reason for refusing compensation to a survivor where he honestly and efficiently winds up the partnership affairs.

No Errors in Allowing Interest

The contention that it was error to allow plaintiff interest on the judgment is ill-founded. Such allowance is based upon statute. Civil Code, sec. 3287. Having presented to defendant an intelligible balance sheet on October 31, 1944, disclosing the amount of his debt to plaintiff with her demand for payment thereof, she was entitled to interest from that date.

No Prejudicial Errors in Rejecting Offers of Proof

Defendant assigns as prejudicial error 15 rulings of the court excluding evidence offered. They are as follows:

(1) Objection was made to the partnership's records of ‘Blythe Estimates' used in bidding for the original contract to show that defendant had done a skillful job, by comparing estimated cost prices and profit with actual results. The objection that they were irrelevant and self-serving was properly sustained. It was the defendant's constant duty to obtain prices on materials and subcontracts more favorable than those used in estimating the job.

(2) The partnership books of account to prove the amount of work done by defendant in connection with the numerous entries to which he had given his personal attention were irrelevant. The records of partnership transactions done in the conduct of the business would not be proof of service performed in winding up the partnership.

(3) For the same reason defendant's original estimate on end walls and facilities used in bidding $25,800 on this post-death extra was properly rejected. Such work was a detail in the execution of the contract undertaken by defendant.

(4) The breakdown of Schedule A was offered to show defendant's computations of the costs and losses that might have been suffered by the partnership on account of the cancellation of that schedule which related to the construction of the squadron hangar. It was irrelevant. Such work was also necessarily a part of the conduct of the partnership business and not of its settlement.

(5) Parol proof of the partnership agreement by the testimony of defendant was properly rejected as hearsay and in violation of the spirit of section 1880, Code Civil Procedure. The practice of the partners during partnership is immaterial. After its dissolution the rights of the partners is governed by law.

(6) Defendant's offer of proof that his work at Blythe after the decease of Mr. Jacobson was the same as that done by him in 1942 and 1943 when his average monthly earnings were $4,560 was irrelevant. Whatever his ability it was his duty to the government and to himself, as well as to decedent, generously to exercise both his talents and his industry to achieve the purposes of the contract.

(7) The offer to prove that the Blythe job had no good-will and was a detriment rather than an asset at the time of Mr. Jacobson's decease was irrelevant to the only issue, namely, whether defendant was entitled to compensation for conducting the construction operations to a successful conclusion, and for winding up the partnership affairs.

(8) The offer to prove that plaintiff's only interest in the partnership was decedent's share in the equipment of the reasonable value of $7,000 was correctly rejected. The equipment had been sold and the proceeds distributed. Neither the value of the equipment nor the money received from its sale was relevant to the issue.

(9) For the same reason the court properly rejected defendant's offer to prove that in the execution of the supplemental agreement for the modification of the sub-depot hangar he used two trucks, a vibrator and tools of the partnership and that their rental value was $1,615. It was his duty to use the equipment in the conduct of partnership business.

(10) Defendant's offer to prove the net profits of $7,911.23 earned by the modification of the schedule for the construction of the sub-depot hangar was properly rejected. Modification of a government contract in time of war, and especially one relating to housing for airplanes, might reasonably be calculated at the time of their execution to be subject to modification during the course of construction. With such knowledge defendant as survivor took possession of the equipment and continued with the construction work as he had the right to do (Probate Code, § 571), instead of having the value of decedent's interest ascertained (Civil Code, sec. 2436) and the partnership's interests segregated.

(11) Defendant's offer of proof of the net profits earned by the construction of the three units comprising the Blythe air base was properly rejected as irrelevant. The evidence would have proved the exact source of some of the partnership moneys but would have shed no light upon the issue of defendant's right to compensation for conducting the construction to completion or of the value of his services for winding up the partnership affairs.

(12) Proof of the burden to defendant in caring for the partnership's bulky files and records was appropriately rejected as irrelevant. Such burden like many others was essentially a part of his duty in conducting the business of completing the contract.

(13) Proof that decedent was ill for 4 1/212 months in 1943 while defendant worked steadily was properly excluded as immaterial. Defendant's grievances against decedent for illness or inattention were proper subjects for contract or litigation between the two partners. In the event of a partner's death, in the absence of a valid contract between members of the firm providing special compensation to a surviving partner the latter is not entitled thereto but is obligated by his fiduciary relationship to serve the interests of the decedent in good faith.

(14) That defendant may have worked steadily 5 1/212 days per week was irrelevant. The successful consummation of a vast enterprise is not to be achieved save by the expenditure of much time and energy. Diligence and perseverance are indispensable to success in any field of endeavor and they are not to be abbreviated by a builder because he has lost a partner.

(15) Proof of the breakdown of the $82,015.17 of assets on hand at death was immaterial. After defendant's administration of the affairs he had on hand $49,000 of partnership funds less such deductions for his post-death service as the court might determine to be just.

It may here be observed that defendant's aim and effort to induce the court so to apportion the earnings of the government contract that plaintiff would receive only her share of the amount proportionately attributed to the ‘tangible asset’ owned by the firm on February 13, 1944, towit, $7,293.09, cannot be ascribed to a holy concept of justice. Standing in a fiduciary relationship to decedent and to plaintiff it was his obligation to be faithful to a superlative degree in protecting decedent's interest the same as though the latter had been alive and supervising the firm's activities. Bracht v. Connell, 313 Pa. 397, 170 A. 297. He became a mere trustee and his right to possession of the partnership assets was merely to enable him to complete the contract and wind up the partnership's affairs. Ruppe v. Utter, 76 Cal.App. 19, 243 P. 715. The profits earned on the Blythe contract were liberal, and for his services in supervising the operations he gained a generous reward in his half of such profits.

It is ordered that the judgment be and it is reversed with instructions to the trial court to ascertain the value of defendant's services to decedent's estate in winding up the partnership affairs according to the rules herein defined, and thereafter to modify the judgment for $24,643.49 by deducting therefrom the sum fixed as the value of such services.

MOORE, Presiding Justice.

McCOMB and WILSON, JJ., concur.