Campbell v. American Fabrics Co. , 168 F.2d 959 ( 1948 )

FRANK, Circuit Judge.

1. Plaintiff argues that we should reverse for error in granting the summary judgment on the ground that there was a triable issue of fact. We would agree, if Sirrine were available as a witness at a trial. For then it would have been error to deny plaintiff the opportunity to examine Sirrine in open court, with his demeanor observable by the trial judge.¹ But as Sirrine died before the entry of the summary judgment, such examination is now impossible. There is no showing that, on the issue of the deficiency of Sirrine’s award, the testimony of any other witness for either party is needed. Accordingly, we will not reverse for failure to permit a trial of that issue.

2. We think that the record evidence clearly shows that the appraiser very substantially deviated from the standards of the submissions and that the award must therefore he set aside. Whether we consider paragraph (5) of the contract of May 23, 1943, as establishing a formula, or merely as binding instructions, it is plain that, if Sirrine’s award did not comply with the language of the contract, it is not binding.² The gist of that paragraph is the provision that Woodstock must he valued “as a going concern in the light of the past, present and prospective future earnings and the net worth of said business.”

We have commented before on the difficulty involved in giving a precise meaning to the ambiguous word “value.”³ Methods of valuation vary with the legal contexts in which the valuation problems arise.⁴ But this, at least, is clear: When an enterprise is to he valued “as a going concern,” the valuer must consider whether it has a “going concern” value, and that value is something other than what results from the mere appraisal value of its assets ⁵ “The commercial value of property

consists in the expectation of income from it,” Galveston, H. & S. A. Ry. Co. v. Texas, 210 U.S. 217, 226, 28 S.Ct. 638, 639, 52 L. Ed. 1031. “The Supreme Court has several times said that the best test of the value of a going commercial enterprise is its earning capacity.” Dudley v. Mealey, 2 Cir., 147 F.2d 268, 270. Where the valuation of a going concern was required for the purposes of a corporate reorganization, the Supreme Court said that the expectation of income was the proper criterion, and added: “Since its application requires a prediction as to what will occur in the future, an estimate, as distinguished from mathematical certitude, is all that can be made. But that estimate must be based on an informed judgment which embraces all facts relevant to future earning capacity and hence to present worth, including, of course, the nature and condition of the properties, the past earnings record, and all circumstances which indicate whether or not that record is a reliable criterion of future performance.” Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 526, 61 S.Ct. 675, 685, 85 L.Ed. 982.⁶

The appraiser here, in his answers to the interrogatories, maintained that he had estimated the value of Woodstock as a going concern, and had based that value on “what it could be sold for if you had a willing buyer and a willing seller.” This latter basis, it might be noted, is the usual test when an appraisal is made of property seized in a condemnation case.⁷ We do not hold that here the test was wrong as such. But it should have been qualified: it should have been “what a willing buyer would pay a willing seller of a going concern” Obviously, a willing-buyer would be unlikely to purchase an operating cotton mill without considering its operating costs and profits. But Sirrine’s answers show that he came to his conclusion without considering the operating profits or net earnings of Woodstock for the five years of that corporation’s operations under its then management, despite the express language of the contract that the value should be “in the light of past, present and prospective future earnings.” Whether, in the light of war conditions, Sirrine, if he had considered the operating profits, would have adhered to his conclusion that the enterprise had no prospective earnings, we are not in a position to determine. We can say, however, that, without such consideration, he could not have come to “an informed judgment which embraces all facts relevant to future earning capacity and hence to present worth.”⁸ We hold, therefore, that he did not value Woodstock as a going concern, and thus departed from the requirements of the contract.

We conclude, then, that the summary judgment must be reversed because, from what appears on this record, the appraisal was not in accordance with the agreement. Since we base that conclusion on the failure of the appraiser adequately to consider earning figures, we need not consider the following: (1) his alleged failure to make an adequate, examination of the mill; (2) his alleged improper consideration of losses suffered by former operators of the mill; (3) his alleged improper use of the accountants’ report.⁹

3. As the designated appraiser is dead, we think the district court should hear evidence and itself determine the price, applying the standards of clause (5) which were to govern the appraiser.¹⁰ For here the contract, which constituted a settlement of vexatious litigation, has been fully performed by the plaintiff, who cannot be restored to status quo ante, and the appraisal clause related to but one item of the settlement contract. On those facts the court should “substitute itself” for the deceased appraiser. Gunton v. Carroll, 101 U.S. 426, 430, 432, 25 L.Ed. 985; Texas Co. v. Z. & M. Independent Oil Co., 2 Cir., 156 F.2d 862, 867, 167 A.L.R. 719; Annotation, 167 A.L.R. 727, 743, 759; Cold Metal Process Co. v. United Eng. & Foundry Co., 3 Cir., 107 F.2d 27, 31, 32; Williams v. Cow Gulch Oil Co., 8 Cir., 270 F. 9, 12; Castle Creek Water Co. v. City of Aspen, 8 Cir., 146 F. 8, 11-13, 8 Ann.Cas. 660; Williston, Contracts (Rev. ed.) § 1421; Pomeroy, Specific Performance (3d ed.) 387-389.

Reversed.

1 Bozant v. Bank of New York, 2 Cir., 156 F.2d 787, 790; Dixon v. American Telephone and Telegraph Co., 2 Cir., 159 F.2d 863, 864; Boro Hall Corp. v. General Motors Corp., 2 Cir., 164 F.2d 770, 772; Sarnoff v. Ciaglia, 3 Cir., 165 F.2d 167, 168; Avrick v. Rockmont Envelope Co., 10 Cir., 155 F.2d 568, 571, 573; Krug v. Santa Fe Pac. R. Co., 81 U.S. App.D.C. 288, 158 F.2d 317, 319, 320; cf. Kennedy v. Silas Mason Co., 68 S.Ct. 1031.

2 See Mutual Benefit Health & Acc. Ass’n v. United Casualty Co., 1 Cir., 142 F.2d 390, 393; Tabor v. Craft, 217 Ala. 276, 116 So. 132, 133, 134.

3 See Commissioner of Internal Revenue v. Marshall, 2 Cir., 125 F.2d 943, 946, 141 A.L.R. 445; Andrews v. Commissioner, 2 Cir., 135 F.2d 314, 317; Westchester County Park Commission v. United States, 2 Cir., 143 F.2d 688, 692.

4 The problems are different, for example, in cases of rate-making, taxation, reorganization, or condemnation. See Bonbright, Valuation of Property (1937) 4.

5 Omaha v. Omaha Water Co., 218 U. S. 180, 202, 203, 30 S.Ct. 615, 54 L.Ed. 991, 48 L.R.A.,N.S., 1084; Los Angeles Gas & Electric Corp. v. Railroad Commission, 289 U.S. 287, 313, 53 S.Ct. 637, 77 L.Ed. 1180; cf. Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 589, 62 S.Ct. 736, 86 L.Ed. 1037.

6 Cf. Group of Institutional Investors v. Chicago, Milwaukee St. P. & P. Railroad Co., 318 U.S. 523, 540, 541, 63 S.Ct. 727, 87 L.Ed. 959; Temmer v. Denver Tramway Co., 8 Cir., 18 F.2d 226, 229; In re Chicago & N. W. Ry. Co., 7 Cir., 126 F.2d 351, 363, 364; Badenhausen v. Guaranty Trust Co. of New York, 4 Cir., 145 F.2d 40, 47; In re Associated Gas & Electric Corp., 2 Cir., 149 F.2d 996, 1009; Trinity Buildings Corp. etc., v. O’Connell, 2 Cir., 155 F.2d 327, 329.

7 United States v. Miller 317 U.S. 369, 375, 63 S.Ct. 276, 87 L.Ed. 336, 147 A. L.R. 55.

8 Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 525, 61 S.Ct. 675, 685.

9 Defendant asserts that plaintiff, in the course of the appraisal, waived certain features of the submission. But we need not consider whether there was any such waiver since, at most, they did not waive Sirrine’s failure properly to consider earnings.

10 In arriving at a correct figure, the district court should not be affected by plaintiff’s alleged waivers referred to above, since, if any there were, they were made in order to induce the selected appraiser to continue with his activities, and he is now no longer able to function.