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Farris v. Farris Engineering Corp.

Decided: May 8, 1950.

LOUISE M. FARRIS, PLAINTIFF,
v.
FARRIS ENGINEERING CORPORATION, ET AL., DEFENDANTS



Stanton, J.s.c.

Stanton

This is essentially a controversy between a husband and a wife as to their respective interests in a partnership and two corporations. Each instituted an action against the other, and by appropriate order, these were consolidated into one action under the title set forth above. Farris Engineering Company is the partnership and Farris Engineering Corporation and Farris Industrial Corporation are the corporations in question, and for ease, they will be referred to respectively as the partnership, the corporation and the industrial corporation.

Plaintiff, asserting that she and her husband were equal partners, demands that the stock of each corporation be issued to him and her in equal shares and that he account for excessive salaries received from the corporations. Farris seeks an

adjudication that his wife has no interest in either corporation; that she convey to the corporation such interest as she may have in the partnership; that she transfer to him the share of stock of the corporation standing in her name, and to the corporation the fourteen shares of stock of the industrial corporation standing in her name; that she account for certain moneys deposited in bank accounts in her name as well as for certain postage stamps and Macy bonds or certificates.

It is the husband's contenton that his wife had no ownership interest in the partnership, and as a consequence, no such interest in the stock of the corporations or in the other property which were acquired with partnership assets. The determination of the respective interests of the husband and wife in the partnership will be dispositive of their rights in the stock of the corporations.

There was voluminous testimony regarding this couple, their activities and affairs from their marriage to the time the partnership commenced business, but little of it need be repeated here. They were married in December, 1931, when he was 21 and she 19 years of age; he was a traveling salesman, without a home; they traveled together from place to place taking their few possessions with them in an automobile; later they settled in Chicago where he was employed; she helped him in a small way, doing some clerical work at home for him; they were both money-minded and tried in various ways to get ahead financially but they had no more than enough for a mere existence until 1939, when he got employment in New York with the firm of Kieley & Mueller, Inc.; he continued with this concern for about four years on a salary and profit sharing arrangement; apparently there was not much profit in the beginning because as late as January, 1942, they had only about $1,500 in funds; in June, 1942, this rose to approximately $8,500 and during the period from September, 1942, to April, 1943, he received almost $25,000 under the profit sharing arrangement; in fact he was paid $15,000 in settlement, after his employment had terminated; his savings were deposited in a joint account

in the name of him and his wife in a Chicago bank until June, 1942; thereafter deposits were made in several accounts in banks in this State; there were accounts, in his sole name, in her sole name, in a joint account from which either might draw and in a further account in her name from which he was authorized to make withdrawals; on February 25, 1943, a certificate, dated February 20, 1943, to the effect that they were trading as Farris Engineering Company, was filed; and on March 2, 1943, the certificate of incorporation of Farris Engineering Corporation was filed; the industrial corporation was formed later to take and hold title to real estate and it was financed out of partnership funds; on November 30, 1946, the partnership assets were transferred to the corporation in consideration of the assumption by the latter of all the liabilities of the former; from the early part of 1943 to May, 1948, Mrs. Farris participated with her husband on a full-time basis in the business of these concerns; from the time of their marriage until May 13, 1948, there was, so far as the evidence discloses not even a suggestion of any domestic or financial discord or dissension between them, but on the latter day they parted under sudden and dramatic circumstances; they have since lived apart and she has not participated in the conduct of the business of either corporation.

In early 1943, Farris, who was then 32 years old, decided to go into the business of manufacturing valves for sale to the United States for war use; his work with Kieley & Mueller had been in the same line. On February 18, 1943, he opened an account in the Hudson Trust Company in his sole name, trading as Farris Engineering Company, indicating that he intended to do business as an individual. Then he decided to form the corporation, which his attorney caused to be done, through the Corporation Trust Company. At about the same time he was advised by his accountant, who had assisted him in negotiating the settlement with Kieley & Mueller, that it would be "income tax wise" to form a partnership with his wife. And so it happened that the partnership commenced manufacturing operations while the corporation

remained dormant, so to speak, until the end of December, 1943, when it was decided to utilize it as a tax saving device. On December 29, 1943, Farris as president of the corporation wrote a letter to the partnership regarding charges to be made against the latter for engineering services rendered by the former "during the past year and to be rendered in the future" and fixing such charges as a percentage of the net sales of the partnership. As requested in the letter, on January 2, 1944, Farris and his wife endorsed thereon the approval of the partnership. The corporation was paid, retroactively and thereafter, substantial sums of money for services which, in my view of the evidence were not performed. In the meantime the industrial company was formed, and with funds furnished by the partnership, acquired title to real property which was used by the latter in its business.

The proofs are clear that the funds, $28,298.51, that were used to start the Farris enterprises had their origin in his earnings, but they reposed for some time in bank accounts which were in her name alone or jointly with his. It is difficult to understand the movement of these funds from one account to another without the aid of the graph which is D 7 in evidence, and more difficult to understand the reason therefor. It will be noted that $10,000 passed from the joint account of Mr. and Mrs. Farris to the partnership account on February 25, 1943; also that Farris opened an individual account in the Hudson Trust Company on December 1, 1942, with a deposit of $6,000 drawn from a savings account in the name of Mrs. Farris, and that on February 18, 1943, the partnership account was opened with a deposit of $5,875 drawn from his said individual account.

The third paragraph of the pretrial order is as follows:

"3. The defendant Farris admits that the plaintiff had a half interest in the partnership, but contends that the entire business of the partnership was on war work which came to an end with the cessation of hostilities in 1945; that in 1946 the Government renegotiated the contracts with the partnership and made a substantial claim against the partnership and this claim was paid later by the Farris Engineering Corporation; that the Farris Industrial Corporation

was formed from funds of the partnership and that by agreement with the plaintiff the stock of that company was distributed as follows: 14 shares to the plaintiff; 14 shares to the defendant Farris and 2 shares to the latter's nominee. The defendant Farris also contends that 10 shares of the Farris Engineering Corporation were issued; 9 of them to the defendant Farris and one to plaintiff and that this was done with her consent. The defendant states that plaintiff after the partnership assets were turned over to the corporation continued as an officer of the corporation and received a salary of $20,000 a year from that time for about one year, until May 1948 when she separated from her husband. From that date she rendered no service to the Engineering Corporation and had received no compensation or dividends from it. The defendant in its counterclaim asks that plaintiff execute proper instruments to transfer her interest in the partnership and in the two defendant corporations to the Farris Engineering Corporation and that she account to the defendant for certain moneys, bonds and a certain stamp collection."

Farris now argues that the admission in the pretrial order that his wife had a half interest in the partnership referred only to the income but not to the ownership thereof, and in support of his contention relies heavily on the following letter, which is exhibit D 2:

"March 10th 1943

Mrs. Louise M. ...


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