Leatherman v. Leatherman , 297 N.C. 618 ( 1979 )

Chief Justice SHARP

dissenting.

In brief summary, the material facts in this case are the following:

Plaintiff-wife and defendant-husband were married on 17 August 1947. At that time he was “hauling lumber” and she was working at Carolina Mills in Newton. She continued to work at the mill until July 1950, about three months before their first child was born. At that time the parties had saved no money and “did good to live.” In 1956 a second child was born; the third came in 1958.

In 1951 defendant bought a bulldozer from his father and for nearly ten years, with plaintiff’s help, defendant operated a one-man, one-machine grading business under the name of Leather-man Clearing and Grading. In 1959, for the first time, the business hired outside help. By 1960 it also owned a scraper, employed from four to six men, and rented additional equipment. Beginning in 1963 the business increased steadily and more jobs required additional equipment. After “joint discussion” the párties purchased the necessary equipment. She and defendant both signed every purchase contract and the security instrument, and each piece of equipment was paid for with a check which plaintiff wrote on the parties’ joint bank account. When a performance bond was required plaintiff also signed it along with defendant. They filed a joint federal tax return which included the business. No separate business return of any kind was filed.

From the beginning plaintiff handled the money and did the bookwork. She made deposits, paid the bills, answered the telephone, kept up with defendant’s whereabouts on the various jobs, and kept in touch with callers. All money from the business, which was the parties’ sole source of income, was deposited in. one checking account in the names of “Mr. or Mrs. Floyd Leatherman.” Neither took a salary but all bills, business and personal, were paid from this account. Plaintiff testified that “the business came first”; that other money was used only for “the necessary things because we were struggling to build this business.”

In 1963 the business employed 28 men and had begun to do work out of the State. In consequence of the increased payroll and other expenses, quarterly reports, “federal forms,” individual work sheets, tax record-keeping, etc., plaintiff was then working more than 40 hours a week and continued to do so during 1964 and 1965. When defendant was working out of town plaintiff’s responsibilities were increased. The job foreman reported to her every afternoon, and she took care of various problems, including, those caused by broken machinery. On occasion, she would take parts and payroll to defendant on jobs in South Carolina.

The headquarters of the business were at the parties’ residence, where they used the kitchen and a corner of the bedroom as an office. This arrangement continued until 1964 when they built a new home which included an office with appropriate facilities on the main floor. In addition to her business duties plaintiff did her own housekeeping, took care of the children, and cooked the meals. At no time did she have any household help. In 1963 two of the parties’ children were in school; the youngest, about 5 years old, was at home.

In 1965 the parties were still using the same joint checking account from which all personal and business bills were paid, and neither received a salary. At that time the business had grown to such an extent that plaintiff sought the advice of A. M. Pullen Company, certified public accountants, “about a change in the organization of the business.” As a result the business was incorporated in January 1966, and the money in the parties’ joint checking and savings accounts, $32,382.02, was transferred to the corporation. This money and the equipment which the business of Leatherman Clearing and Grading had purchased from time to time constituted “the capitalization of the corporation.” When defendant informed plaintiff he had put all the stock in his name she said, “Well, why?” His reply was that “it would be better this way for tax purposes.” Plaintiff could not understand this explanation and was not satisfied by it. When she continued to protest, defendant said, “Well, look, after all you are going to get it anyway. We will make out a will and leave it to you.” Thereafter the parties made joint wills in which the survivor took all, and an entry was made on the corporate minutes that in the event of his death plaintiff was to receive his salary until the estate was settled.

According to plaintiff, the net worth of “the going business” at the time of the incorporation was $93,000.00. After the incorporation plaintiff, along with defendant, continued to sign personally the performance bonds and notes of the corporation. Their practice was to borrow the money from the bank and then lend it to the corporation. In 1972 the parties bought a house in Wilmington to be used as a dormitory for their employees working in that area, and the title to this property was taken in their joint names.

Although plaintiff continued to manage the office and “handle the financing” until 1971 only defendant drew a salary from the corporation. He explained to her that the $20,000.00 he drew from 1966 to 1970 represented “joint compensation for both of us”; that the corporation was paying only one salary in order “to cut down on taxes — to save social security and other withholdings.” When she inquired what she would do for social security in her old age, he said, “You can always draw on Floyd’s.” In 1971, however, she insisted that she too be put on a salary and defendant agreed to it.

About 1972 the parties “had some domestic problems” and in January 1974 they separated. She said when defendant told her sometime in 1975 that she would not get anything from the business, “That was my first true realization that I was not going to realize any of the ownership in Leatherman, Inc.”

Defendant testified that plaintiff had never demanded payment for any services she rendered the business; that all the money from the business was either put in joint checking or savings accounts; and that she “was not restricted as to using those funds for her own personal purposes if she so desired.” He also testified that plaintiff never claimed any part of the money in the joint accounts which were transferred to the corporation, but “she complained about the manner in which the stock was issued from the time it was issued, and from then on.”

Throughout his testimony defendant insisted that all the money in the joint accounts was his because he “did the work in the sense that [he] set out on the back of the tractor in the sun and did the grading work.” He conceded, however, that from the beginning plaintiff did all “the office work — taking care of the bills, bookwork, and that sort of thing” — and that, at the same time, she took care of the home and the three children. On cross-examination defendant said that in 1965 the business was grossing half a million dollars and he “was running that with a one-woman office staff, and Bessie Leatherman was doing all of the work for the. business in the office.” With reference to salaries after the incorporation defendant testified, “From 1966 to 1970 my individual salary from the business was $20,000. The agreement between Mrs. Leatherman and me . . . was it was salary for both of us. . . . It was my understanding that the $20,000 was for the work both of us did in the business.” In 1971 he told her to put herself on the payroll and she did.

After the parties separated they entered into a separation agreement which provided that the consideration in the Separation Agreement was without prejudice to plaintiff’s claim to a part of the stock in Leatherman, Inc. The parties were divorced on 20 May 1975 and plaintiff brought this action on 31 October 1975 for a judgment declaring her to be the owner of one-half of the capital stock of Leatherman, Inc.

Judge Lewis heard the case without a jury. At the conclusion of the evidence he found the facts to be substantially as testified to by both plaintiff and defendant. In brief summary he specifically found the following pertinent facts (enumeration ours):

1. From the inception of “the bulldozer business” until 1966 (when the business was incorporated) the earnings of the business were allowed to accumulate in the joint personal checking account of the plaintiff and defendant — the only checking account either maintained. Plaintiff drew, no salary from the business. [All the evidence tends to show that neither plaintiff nor defendant drew any salary.] Between 1966 and. 1971 there was an understanding between the plaintiff and defendant that the “salary paid by the corporation to the defendant was for the work of both the plaintiff and defendant.”

2. From its inception “until 1970 plaintiff was the sole office staff for the business operated by the plaintiff and the defendant”; that in 1965 the business generated gross income of about $500,000.00 and continued to grow through 1970 “during which time plaintiff remained the sole office staff.”

3. From its inception plaintiff “frequently exercised partial managerial control of the. business in tbe Catawba County area while the defendant was handling out-of-State business. ...”

4. When the business was incorporated in December 1965 and all of its stock, 930 shares, were issued to defendant, its net worth was approximately $94,000.00.

In January and February 1966 funds totaling $32,382.02 were transferred from the joint checking and savings account of plaintiff and defendant to the corporation. These funds “were the property of the plaintiff and defendant, either of whom could have withdrawn any or all of the funds at any time.” These funds represented about one-third of the net assets of the corporation.

5. That at the time all of the stock of the corporation was issued to defendant and the funds in the joint account transferred to the corporation, defendant told plaintiff that the reason for this was the auditor’s feeling that “it was more appropriate from a tax point of view to have the stock so titled”; that she would get it all. anyway eventually; and that both then made a will cross-conveying to the other all of their individual property.

6. There existed in January 1966 a confidential and fiduciary relationship between the plaintiff and defendant arising out of their marriage.

7. After the business was incorporated plaintiff continued to take care of the office affairs of the corporation but drew no salary and the expenses of the marriage were paid out of the salary of the corporation paid the defendant.

8. Plaintiff and defendant separated on 4 January 1974 and were divorced on 20 May 1975. When plaintiff told defendant she ought to be compensated for her ownership in the business and paid for what she had done, defendant refused and this action was commenced.

Upon the foregoing findings the court concluded that defendant holds title to the 930 outstanding shares of stock in Leather-man, Inc., but that he holds the stock subject to a constructive trust in the amount of $16,191.01 in favor of the plaintiff. He entered judgment accordingly and defendant appealed to the Court of Appeals. Plaintiff did not appeal.

The Court of Appeals held that (1) plaintiff had failed to overcome the presumption that her services to her husband’s business were rendered gratuitously and that there was no showing that defendant intended to make a gift to his wife of the funds derived from his business which he placed in the joint accounts; (2) that there was no showing of any wrongdoing on defendant’s part; and (3) that therefore the trial court erred in imposing a constructive trust on the stock of the business corporation which had been capitalized with funds from the joint accounts. This Court affirms.

From the majority’s decision and the rationale which produced it, I dissent. In my view, the trial judge’s findings of fact are supported by all the evidence in the case and the majority decision cannot be supported either by the evidence or the authorities cited therein.

As I read the Court’s opinion the majority reasons as follows:

1. Before the Court can impose a trust upon the stock in Leatherman, Inc., to which defendant holds the legal title, plaintiff must prove she owned a portion of the funds in the plaintiff’s and defendant’s joint checking and savings accounts which were transferred to the corporation.

2. Services rendered by a wife in connection with a business in which her husband is engaged are all presumed to be gratuitous “absent a special agreement to the contrary.” Plaintiff has neither alleged nor proved a special agreement for compensation for services performed. Nor has she proved a gift from her husband of any funds deposited in the joint account.

3. “The facts and circumstances may, of course, give rise to an implied promise that the wife will be paid,” but the evidence in this case reveals neither.

4. Defendant did not breach the confidential relationship existing between himself and his wife when he had all the stock in the corporation issued to himself alone because he told her at the time he had done so.

As I see this controversy the majority of the Court of Appeals and this Court have misconstrued plaintiff’s pleadings and the theory of her case. She did not bring this suit upon the theory of quantum meruit for wages withheld for “supportive work.” It is quite true that she neither alleged nor attempted to prove that her husband promised to pay her wages or a salary for the more than 20 years she worked with him in the “bulldozer business.” On the contrary, she brought this action upon the theory that she was a full partner with her husband in the business at the time of the incorporation; that her labors in behalf of the business had helped produce the funds which provided the corporate capital and entitled her to half the capital stock. It is quite clear that under our present rules of civil procedure the complaint is adequate to support this theory. G.S.1A-1, Rule 8(a); Sutton v. Duke, 277 N.C. 94, 176 S.E. 2d 161 (1970); Roberts v. Reynolds, 281 N.C. 48, 187 S.E. 2d 721 (1972).

Decisions of this Court have long recognized that “[t]here are instances where there is not only a matrimonial partnership between a husband and wife, but a financial or business partnership; . . . but in all such cases the business partnership . . . must arise out of an agreement, not out of the marital relation, ex jure marito, which if extended to business matters, would make each responsible for the debts of the other.” Dorsett v. Dorsett, 183 N.C. 354, 358, 111 S.E. 541, 543 (1922). In Eggleston v. Eggleston, 228 N.C. 668, 47 S.E. 2d 243 (1948), a case strikingly similar to this one, the plaintiff-wife sought to show the existence of a partnership between herself and her husband by evidence of dealings inter partes for a long period of time (15 years) and her contributions in services to the joint undertaking. In reviewing the law with reference to interspousal partnerships, this Court said:

“ ‘A contract, express or implied, is essential to the formation of a partnership.’ . . . But we see no reason why a course of dealing. between the parties of sufficient significance and duration may not, along with other proof of the fact, be admitted as evidence tending to establish the fact of partnership provided it has sufficient substance and definiteness to evince the essentials of the legal concept, including, of course, the necessary intent. . . . ‘Partnership is a legal concept but the determination of the existence or not of a partnership, as in the case of a trust, involves inferences drawn from an analysis of all the circumstances attendant on its creation and operation.’

“Not only may a partnership be formed orally, but ‘it may be created by the agreement or conduct of the parties, either express or implied.’ ... ‘A voluntary association of partners may be shown without proving an express agreement to form a partnership; and a finding of its existence may be based upon a rational consideration of the acts and declarations of the parties, warranting the inference that the parties understood that they were partners and acted as such.’ ” (Citations omitted.) Id. at 674, 47 S.E. 2d at 247.

Certainly plaintiff and defendant neither orally nor in writing entered into a formal partnership agreement. However, the course of dealing between them from 1951 until the business was incorporated in 1969 was consistent only with a business partnership, and their conduct for several years thereafter corroborated its existence. The law does not contemplate that a husband and wife living together in harmony, struggling to rear three children and to get ahead in business, will deal at arms length and speak in formal terms. It looks at their conduct to divine their intent.

Looking at their conduct, we see that plaintiff’s “supportive work” was not just occasional help. From the inception of the business she did all the office work, many outside chores, and handled the money. During the last ten years before the parties separated she worked in the office more than 40 hours a week and acted as manager in her husband’s absence from the local job in addition to doing her kitchen and household work and caring for her children. Under these circumstances it is hard to understand the majority’s view that “plaintiff did not furnish any of the consideration used by defendant to acquire the stock of the corporation.” It is quite impossible to believe that defendant, who knew plaintiff’s full contribution and devotion to the business could have thought for a minute that she did not believe she shared his interest in the business. Certainly his conduct prior to the incorporation led her to believe that she was a partner in a joint enterprise. All the money was deposited in the account of “Mr. or Mrs. Floyd Leatherman” — not Mr. Leatherman with authority to Mrs. Leatherman to draw upon it. Further, it is of considerable significance that prior to the incorporation neither plaintiff nor defendant ever drew a salary from the business. It is partners who divide profits or reinvest their money in the business as plaintiff and defendant did. Their money went first to pay the expenses of the business, then to living expenses, and the balance remained in the joint checking account or was transferred to a joint savings account. Both were industrious and conservative. It was not until the incorporation that either drew a salary. The' defendant then began to draw a salary of $20,000.00 a year but he specifically stated that it was compensation the corporation was paying for the work they both did. This post-incorporation arrangement is also significant in that it rebuts any presumption that defendant considered plaintiff’s services to the bulldozer business gratuitous.

Finally we note that plaintiff assumed liability along with defendant for all the debts of the bulldozer business. From its inception, along with defendant, she signed every note for a loan from the bank, the purchase money, note and mortgage for each piece of equipment, every performance bond and, when they bought business property in Wilmington, the title to it was taken in both their names and she also signed the note and mortgage. Indubitably there is sufficient evidence in the record to support the trial judge’s findings and conclusions that “the business was operated by the plaintiff and defendant” and that “the funds transferred from joint accounts to the corporate account in 1966 were the property of the plaintiff and defendant.”

I would hold, therefore, that the trial judge was correct when he subjected defendant’s stock in the corporation to plaintiff’s claim to the extent of $16,191.01, one half of the joint checking and savings accounts. Although the trial judge ruled that defendant held the stock “subject to a constructive trust,” in my view defendant holds it subject to both a resulting and constructive trust. See Cline v. Cline, 297 N.C. 336, 255 S.E. 2d 399 (1979). A resulting trust commensurate with plaintiff’s interest arose in her favor because she furnished a part of the consideration. A constructive trust arose because the defendant breached the confidential relation, which the majority concedes existed between him and his wife, when he took title to all the stock in his name alone and told her he did so because “it would be better that way for tax purposes.” Defendant’s explanation — patently “a snow job” — deceived her at the time and kept her from taking any action to protect her interests in 1966. At that time relations between the partners were still amicable and she was lulled into a false sense of security by his suggestion that “some day it would all belong to her” and they would make joint wills.

Since plaintiff accepted the rulings of the trial judge which were in favor of defendant and did not appeal them, this appeal involves only plaintiff’s right to one-half of the parties’ joint checking and savings accounts. My vote is to reverse the Court of Appeals and affirm the judgment of the trial judge.

Justice HUSKINS joins in this dissent.