McGaffee v. McGaffee

56 N.W.2d 36 (1952)

McGAFFEE
v.
McGAFFEE et al.

No. 48070.

Supreme Court of Iowa.

December 16, 1952. Rehearing Granted as to Division VI of Opinion March 13, 1953.

Lorna L. Williams and Emmert, James, Lindgren & Eller, of Des Moines, for appellant.

Eskil C. Carlson, of Des Moines, for appellees.

SMITH, Justice.

Plaintiff was 86 years old and his son, defendant Loren McGaffee 47, at the time of trial. Defendant Gretchen McGaffee is wife of her co-defendant. Long prior to the events involved here plaintiff was engaged in the sheet metal business in Des Moines under the trade name J. F. McGaffee Co. That business was never incorporated.

About 1930 (both parties are indefinite as to the date) plaintiff took his son into the business. "I told Loren he could come and work for me. * * * I would teach him about pipe work and when we had a chance for a plumbing job he would work under the plumber and learn that trade. * * * and whenever he got the plumbing business so he could do the plumbing work * * * and get a plumber's license * * I would take him in as a partner."

Loren testified: "* * * my father approached me about going into business with him. I organized a corporation with Mr. Landis (1934) and called it Des Moines Plumbing and Heating Co. I received a salary from my father up to the time of the corporation but not afterwards. I drew some money from J. F. McGaffee Co. since the organization of the corporation but I never received a check for wages."

He further said the corporation was later dissolved (1941) and "we put the two businesses together" about the same time. "From then on, I would say that I received earnings * * * the business divided on earnings. * * * The businesses operated together for a number of years and my source of income * * * was whatever the company could afford to pay. * * * I received wages from the two companies up to July, 1946."

Plaintiff testified he furnished the money for organizing the plumbing corporation. "Plumbing supplies were charged on the credit of the J. F. McGaffee Co. I paid the wages for the plumbers * * * including Mr. Landis' wages. I furnished the shop."

Rev. Henry W. Landis was a minister of the gospel but thriftily claimed also the more worldly title of plumber, with both a master plumber's and a journeyman plumber's license. He testified: "I suggested we incorporate * * *. There were no shares of stock issued * * *. Loren was to be the president and I was to be secretary-treasurer. We never had any directors or members meetings officially." Apparently no stock ever issued (authorized capitalization was for $10,000) and there was no actual capital except "I had quite a few tools * * * there was no direct moneys exchanged because it was in the depression and we had none and I had this materials and I had some customers and so did Mr. McGaffee have some customers. Mr. H. F. McGaffee Company's credit was used to obtain materials at first and after we incorporated * * * materials were bought under both names." Plaintiff testified: "I furnished all the money for the plumbing business. * * * Loren McGaffee had no money and neither did Henry Landis." Loren did not testify on the subject.

Some time after Loren came into the business his wife became bookkeeper for both the sheet metal company and the plumbing corporation at $50 per month from each. Plaintiff said "From that time on I turned the money from the business and collecting matters over to Gretchen to take care of and to pay the bills and make out the statements and trusted her with everything." She wrote checks on plaintiff's personal account, made deposits and "so far as I know * * * balanced the bank statement with the checkbook and picked up the bank statement each month and the cancelled checks."

Gretchen herself thinks this employment started about 1934 "when it was necessary to pay sales tax to the state of Iowa." Her testimony substantially corroborates plaintiff's but goes into greater detail. It explains that prior to the dissolution of the plumbing corporation the two businesses kept separate books. "I wrote the checks for the (plumbing) company but * * * they were signed by Henry Landis and Loren McGaffee until the corporation was dissolved in June, 1941. * * * they had their own books and since then operated on a partnership basis" with "but one set of books."

The various exhibits in the record added some explanatory details to the picture. April 30, 1934, plaintiff, on behalf of J. F. McGaffee Co., applied to the State Board of Assessment and Review (Sales Tax Division) for a permit to engage in the plumbing, sheet metal and furnace business, under "sole ownership." The Des Moines Plumbing & Heating Company, Inc., certificate of incorporation issued July 16, 1934. The articles of incorporation show plaintiff had no part in its formation though he financed it except for the "few tools," plumber's licenses and customers, contributed by Mr. Landis. The articles show only Loren and Landis as incorporators and they only join in the notice of dissolution published June 5, 12, 19, and 26, 1941.

The situation after the plumbing corporation dissolved was not materially different except for a closer merging of the two businesses. Mr. Landis testified he did not think the corporate assets were sufficient to off-set the liabilities. He never received any profits from the corporation ("just the wages I received at different times I worked") and he did not receive any profit and loss statement on dissolution. On April 23, 1942, he in writing assigned to Loren ("operating the Des Moines Plumbing and Heating Co.") a cash deposit of $100 in the hands of the city treasurer registered "in the name of H. W. Landis (Des Moines Plumbing and Heating Co.)".

The name of the plumbing company was retained after dissolution of the corporation, the names of both concerns being used as before. In 1944, 1945, and 1946, "Inspection Reports" to the Iowa State Tax Commission, Division of Retail Sales and Use Tax, were made in the name of the plumbing company by L. E. McGaffee (in 1944 and 1946) and by J. F. McGaffee (in 1945). Each of these gave J. F. McGaffee as individual owner and each said there had been no "change in ownership since permit was issued." There are three "Employer's Reports of Taxable Wages" dated respectively "12-31-45," "9-30-46," and "3-31-47." All are in the name of J. F. McGaffee Co. and all say no "change of ownership, or other transfer, of the business."

The real controversy here involves a written "Assignment and Transfer," dated July, 1946, and signed in duplicate with the name of both companies "by James Frank McGaffee"; and signed by James Frank McGaffee, Nina McGaffee, and Loren E. McGaffee, individually. (Nina McGaffee is plaintiff's second wife. His first wife, Loren's mother, died in 1944.) The text of said document is as follows:

"I, James Frank McGaffee, for valuable consideration in hand paid and in compliance with a promise and understanding had and made by me, I do hereby transfer, sell, set over, assign and convey to my son, Loren E. McGaffee all of the shop, stock tools, materials, equipment and all accounts and all rights of every kind and character in and to the business commonly known as J. F. McGaffee Company and Des Moines Plumbing and Heating Company, being a business operated at 1408 Harding Road, Des Moines, Iowa; and

"This conveyance includes all of the tools, equipment, materials and stock stored in the garage at 708 East Sheridan, Des Moines, Iowa, my home;

"This assignment does not convey any real estate but does convey all of the personal property and the good will, et cetera of the said J. F. McGaffee Company and Des Moines Plumbing and Heating Company;

"The assignee, Loren E. McGaffee is the sole and only partner that I have had in said business and I am transferring all of my rights in said businesses and all of my rights as a partner of the partnership to Loren McGaffee. The assignee, Loren E. McGaffee in consideraion of this transfer assumes all the obligations and debts of the partnership and James Frank McGaffee represents that there are no debts or obligations created by him personally in said partnership.

"I, Nina McGaffee, the wife of James Frank McGaffee hereby joins in and consents to the hereinbefore assignment and transfer.

"Des Moines, Iowa, July, 1946."

Notwithstanding this transaction defendant Loren McGaffee, under date April 28, 1947, signing as "partner," made an "Employer's Contribution and Summary Report" to the Iowa Employment Security Commission on behalf of "J.F. & Loren E. McGaffee d/b/a J. F. McGaffee Co. & Des Moines Plg. & Htg. Co." It purported to cover January, February and March, 1947, and to give payroll and wage details for those months. It answered "no" to an inquiry as to any sale of business.

A similar report, similarly signed, dated July 22, 1947, covered April, May and June, 1947. The one dated 10/24/47, for July, August and September, 1947, however, was signed by Loren as "owner," but it still listed both men as doing business under the company names.

A partnership Income Tax Return for "J. F. McGaffee Co. & Des Moines Plbg. & Htg." for 1946, was signed "Loren E. McGaffee." But April 5, 1948, he filed with Iowa Employment Security Commission a "Report of Employer on acquiring a Business" signed "Des Moines Plbg. & Htg. Co. and J. F. McGaffee Co. by Loren E. McGaffee" under the title "owner." And December 31, 1948, he signed and filed two trade name certificates, one for each company, listing himself only as the one "owning or having any interest in the business."

A large number of exhibits was produced in contemplation of an accounting in event plaintiff's prayer for cancellation of the so-called assignment and transfer was sustained. The trial court however refused cancellation and upheld the validity of the instrument in question. Plaintiff has appealed from the decree dismissing his petition.

I. From the mass of testimony which we have condensed we must conclude plaintiff and his son, in July, 1946, were partners, or at least joint adventurers—it is immaterial which—(see Goss v. Lanin, 170 Iowa 57, 61, 152 N.W. 43; 48 C.J.S., Joint Adventures, § 5b; 30 Am.Jur., Joint Adventures, § 34) in the operation of the combined businesses. There is no evidence however that Loren owned any interest in the physical property or had ever contributed to the capital of the business except possibly labor in excess of his withdrawals as wages or profits. Of this latter possibility there is no tangible showing.

Just when the actual partnership or joint adventure relation began, as a matter of law, is also immaterial. It is sufficient that the mutual association, confidence and reliance did exist and had for some time existed when the "Assignment and Transfer" was executed. The evidence is ample to establish both a confidential and a fiduciary relationship between the father and son who were so intimately associated in business.

In the Restatement of the Law of Trusts, Ch. 1, § 2b, it is said "Each member of a partnership is in a fiduciary relation to the other partners." And later under the same comment: "A confidential relation may exist although there is no fiduciary relation; it is particularly likely to exist where there is a family relationship * * *. If one person is in a confidential, but not a fiduciary relation to another, a transaction between them will not be set aside at the instance of one of them unless in fact he placed confidence in the other and the other, by fraud or undue influence or otherwise, abused the confidence placed in him." See Merritt v. Easterly, 226 Iowa 514, 517, 284 N.W. 397, citing Thomas v. Whitney, 186 Ill. 225, 57 N.E. 808, 810.

The distinction between confidential and fiduciary is unimportant here since by any standard of fair dealing we think plaintiff is entitled to have the so-called "Assignment and Transfer" set aside.

II. The business relationship began when plaintiff was in his middle sixties, his son considerably under thirty. When the transaction here complained of took place sixteen years of association had passed, plaintiff was past eighty, Loren about forty-one. That some reversal of the father's original dominance and the son's subservience took place during the intervening years hardly requires proof. It would be normal if not indeed inevitable.

We must conclude under this record that plaintiff was dominated by defendant and that the latter took advantage of the relationship. There is no claim plaintiff had the benefit of disinterested advice, legal or otherwise. Loren arranged the meeting in the office on Saturday when no one but himself and his father and stepmother (Nina) would be present. He had had the instrument prepared in advance by his own lawyer and without plaintiff's knowledge. The momentous transaction was hurried through. Loren testified they "talked for about an hour" and that he explained the instrument to both of them. But Nina McGaffee said: "We weren't in the office over ten minutes." Plaintiff confirms her estimate of the time. Under either version the time was too short for an aged father and business associate, without preliminary warning or advice, to decide whether to give away his entire business to his son.

Even were there no showing of actual fraud we would conclude there was here such an exercise of influence under confidential and fiduciary relationship as to cast on defendants the difficult burden of showing the transaction was free from taint. Curtis v. Armagast, 158 Iowa 507, 520-522, 138 N.W. 873; Marron v. Bowen, 235 Iowa 108, 112, 16 N.W.2d 14. This burden they have not carried.

III. Loren testified he had previously talked with plaintiff about the condition of the business, the inadequacy of their quarters for any expansion and the necessity of moving to another location. But he does not say they ever discussed the subject matter of this "Assignment and Transfer." He says his father would not sign a new lease and "nothing ever came" of their talk of moving or building. But he does not say he ever had previously suggested that plaintiff give the business to him until that Saturday afternoon when no one was present to advise his father as to the proposed step.

Loren testified he had concluded that "in order for me to get some additional cash from the source I was going to get it, I would have to take over the company myself." He testified he called his father and Nina over to the office and "I told Dad if he would turn the company over to me I would take the obligations and debts * * which were in a great amount * * * and by doing so * * * I could obtain money, but I could not obtain it if Dad and the other side of the family was still interested." (We find no explanation of the words "the other side of the family.")

Plaintiff's version is not materially different: "Q. (on cross-examination) At the time you signed * * * do you recall that you intended that contract to be used so that Mr. Loren McGaffee could borrow money? A. I recall doing that in the office, yes." And on re-direct examination he said: "I had confidence and faith in him. He was a nice boy and wouldn't do anything to beat his Dad out of anything and that is one reason I signed it without even reading * * * when he told me that it had nothing to do with the business whatever, but just to get a loan * * that I couldn't get on account of my age."

Nina said Loren wanted plaintiff to sign "so he could get a loan. * * * He said his father was too old to get a loan * *. My husband asked him something about the business before he signed and he said it made no difference in the business."

Loren testified that after the two copies of the "Assignment and Transfer" were signed he had to turn them over to Mr. Reed "where I was borrowing the money." But Reed flatly contradicted this: "I did not have any conversation with Loren McGaffee about having his father assign and transfer the business before I would lend him this money." Shown the two signed copies of the "Assignment and Transfer" Mr. Reed said "I have never seen them before. * * * To my best knowledge Loren McGaffee at no time told me he had any such papers."

Loren testified the company was of little value (he first said it was worth "nothing"). But subsequent undisputed testimony of disinterested witnesses showed that stuck away in boxes there were uncollected accounts in large amounts covering work done prior to July, 1946. One witness told of such bills due from her own firm amounting to $13,000; another told of invoices amounting to $2,968.14 for work from July 26, 1940, to June 21, 1947. Both said in effect that Loren said he and his wife were too busy to get the bills out. An attorney testified to accounts turned over to him for collection for services performed prior to July, 1946, amounting to $8,769.12 in one group and $8,858.12 in another.

There was ample evidence to explain why the business was short of cash but none to support Loren's expressed opinion that in July, 1946, "we was broke."

IV. The documentary evidence already summarized, consisting of reports to state agencies, confirms our conclusion that plaintiff was not well advised of the conclusive nature of the document he signed. There is some indication even that Loren himself did not fully understand its full significance or was unwilling to disclose the real transaction. We have already pointed out that as late as April, 1947, he reported to the Employment Security Commission as ``partyer' on behalf of "J. F. & Loren E. McGaffee d/b/a J. F. McGaffee Co. & Des Moines Plg. & Htg. Co." for the first three months of that year, and again for the second quarter of the year under date July 22, 1947.

Further discussion would serve no purpose. The entire transaction is indefensible in a court of equity. Whether the case be viewed as one of actual or construtive fraud, the so-called "Assignment and Transfer" should be set aside.

V. On October 31, 1950, plaintiff wrote his son: "Loren—Not so long ago you and Gretshen were going to make arrangements at the bank to pay me a thousand dollars which I lent you from that inheritance to me. this did not pay interest at the rate you should have paid but if you will get it for me quickly I shall accept the one thousand dollars as principal and interest of this money lent. I need it badly as you know. Dad." Defendant, Gretchen McGaffee explained this referred to a loan to the business before 1946. Whether that be true or not it was unconnected with the transaction in question here. The trial court rendered judgment on it in favor of plaintiff and against Loren and the latter has not appealed. That part of the trial court's decree will not be disturbed by our decision here. Otherwise, the decree will be reversed and the "Assignment and Transfer" of July, 1946, cancelled.

VI. It is clear however the parties cannot now be restored to their condition as it existed prior to July, 1946. We can only grant plaintiff relief by money judgment. The power of equity to do this where the original status quo cannot be reinstated is undoubted. 12 C.J.S., Cancellation of Instruments, §§ 77a, 79a, 79b; 9 Am.Jur., Cancellation of Instruments, § 65, note 1; Cahill v. Readon, 85 Colo. 9, 273 P. 653, 656(12).

An accounting will be necessary before the amount of such judgment can be determined. We cannot make such accounting here and the case will have to be remanded for that purpose in order that the value of the property taken over by defendants may be ascertained.

The decision of the trial court (with the exception noted in division V above) will be reversed and the case remanded for accounting and final judgment

Reversed and remanded.

MULRONEY, C. J., and BLISS, GARFIELD, MANTZ, WENNERSTRUM, HAYS, and THOMPSON, JJ., concur.