In re Dr. Voorhees Awning Hood Co.

ARCHBALD, District Judge.

A claim has been- proved by Dr. S. H. Voorhees, which the referee, on exceptions by the trustee, has allowed in part, but refused as to the rest, and the case is brought here by the claimant to review this action.

[1] The bankrupt corporation was organized fpr the purpose of manufacturing and selling the awnings and awning hoods invented by Dr. Voorhees, for which he held United States letters patent By agreement, December 9, 1905, the company was given the exclusive license to manufacture and sell these awnings within the limits of the United States, under this or any other patent that might be granted, for the term of such patent; in payment for which it was agreed to give Dr. Voorhees 51 per cent, of the capital stock of the company, make him the general manager, at a salary of 1 per cent, of the gross earnings; and in addition to pay him a bonus of one cent, per running foot on all the sheet metal work, and one-eighth of a cent on all metal parts and fixtures. Statements were to be rendered by the company and payments made at the end of each month, and the minimum bonus was to be calculated on 10,000 feet of sheet metal the first year, with an increase of at least 10,000 feet on the preceding year for each year thereafter, for the life of the patent. The company, under this license, entered on the manufacture of hoods and awnings, and did some considerable business, paying Dr. Voorhees the accrued bonuses up to December 9, 1906, which covered the first year of the contract. No salary however seems to have been paid him up to that time; and on December 4, 1906, at a meeting of the directors, in which he participated, he waived all prior claims to salary ' and commissions, in lieu of which his salary, beginning with November 1, 1906, was fixed at $60 a month, and was paid to him at that rate until the 1st of April following.

On April 12, 1907, the first agreeinent was modified by another by which an exclusive license for the life of the patent was given to the company, the same as before, and in payment for it the claimant was to have 51 per cent, of the stock and a bonus of 1 cent a running foot on all hoods ready for erection and sold, and one-eighth of a cent on all additional parts, the minimum of which bonus was to be 10,000 feet of sheet metal the first year, with an increase of 10,000 feet on the preceding year, for each year of the patent, settlements for which were to be made monthly; and the claimant, as president, was to have a salary as before, of one per cent, on the gross sales of hoods and parts, with the proviso that, if this did not amount to $720 per annum, the difference should be made up to him out of the gross earnings. With the exception of this guarantee, there is no substantial difference between the two agreements. And it is out of them that the principal controversy in the case arises.

A claim is made, under the first agreement, for a percentage on gross earnings by way of salary as general manager, from December 4, 1906, to April 12, 1907, when the second agreement went into operation. The claimant served in that capacity for the period named, and the gross earnings being $3,178.06, he was entitled to $31.78, which the referee has allowed him. He has also been allowed $24 for 12 days’ salary, at the rate of $60 a month, from April 1 to April ‘ 12, 1907; which clears up everything of that kind under the first contract. The bonuses under this contract, however, remain, and claim is'made on account of them. These, as already stated, were paid up to December 9, 1906, covering the first year of the contract; but they are claimed for the intermediate period to April 12, 1907, four months and three days, which, at the minimum rate for the second year, would amount to $67. Dr. Voorhees was, of course, entitled to the stipulated percentage on actual sales of sheet metal and metal parts, made in this interval, but what these were is not shown. And without regard to it, the claim is figured on the minimum rate for the proportionate part of the year, so far as it had gone. This item has been disallowed by the referee, on the ground that the provision for, a minimum applied to the year as a whole, and had only to be made good at the end oí it, to the extent that there was then found to be a deficiency. There can be no question as to the correctness of this view under the circumstances. The case is not like Consolidated Coal Company v. Peers, 150 Ill. 344, 37 N. E. 937, where the guaranteed yearly minimum was made payable in equal monthly installments proportionate to the whole amount; and the distinction made in that case goes to' prove the rule. The only undertaking on the pa t of tiie bankrupt company was to pay a minimum amount, year by year, and this took in the whole year, and was not distributed around over it. If there was a brisk trade in one part of the year, the corapany had the right to rely on this to help out another part of the year, when trade was slack. It was only the quantity which was lacking, when the entire year had run around, that had to he made up. But this would he prevented, if the minimum was apportioned, and was required to he forthcoming, ratably, month by month. Nor is this overcome hv the provision that monthly statements were to be rendered and monthly settlements made. All that is so provided for is the monthly business clone. It did not have the effect of dividing up the minimum. The year being broken into, therefore, by the making of the new agreement, the claimant must take things as they stood at the time, and as they were left by it. If he had rights which he wanted to save, lie should have provided for it in the new agreement.

[2J This brings us to the second contract, under which two claims are made. The first is for salary as president from April 12, 1907, on. There can be no question as to the right to this up to January 15, 1908, when bankruptcy intervened. And this, at the rate of $720, amounts to $546, which the referee has allowed. The rest: of the claim for salary, however, he has correctly refused. With the institution of bankruptcy proceedings, the assets of the company became devoted 'to the payment of its debts, which themselves ended at that time, and could not go on increasingly to come in later. This is not to say that the claimant might not he entitled to damages for breach of the agreement, including the salary which he was to be paid, which enters along with the rest into the consideration for the license to use the patent. But the question of damages is not now involved, although it will be taken up later. The claimant was not entitled to salary as such after his duties as president ceased, which is all that we are concerned with at present.

[3] The other claim, under the second contract, is for bonuses on sheet metal, which, as we have seen, were to be calculated on a minimum of 10,000 feet the first year, and 10,000 feet additional each year thereafter for the life of the patent. There are two heads to this claim: First, the proportionate part of the minimum from April 12, 1907, the date of the contract, to January 15, 1908, when the proceedings in bankruptcy were instituted; and second, for the full minimum after that. The first year of the contract had not been completed at the time of bankruptcy, and the right to anything beyond that event was thereby necessarily interrupted. The claimant had the right, as observed above, with regard to the first contract, to the stipulated percentage on the metal work actually sold in the intermediate period, but how much it was has not been shown, and so nothing can be allowed on account of it. But claim is also made, the same as under the other contract, for a proportionate part of the guaranteed minimum, as to which the situation is somewhat different. The first contract • was terminated, by mutual consent, by the adoption of a new one, without saving anything under it, and the minimum was therefore left just as it stood without any provision with regard to it. The parties simply dropped the old arrangement for the new one, and no arrangement having been made for an ápportionment of the minimum, and the company having otherwise the whole year before becoming liable, there was no basis for liability for a proportionate part of it. But the second contract was brought to an end by bankruptcy before the year was out, and the company, in the meantime, had had the benefit of it for nine months. And it being worth $100 a year to the company to practice the invention, according to the figures stipulated for, and bankruptcy having brought the arrangement to an end, it must be taken to have been worth proportionately as much for the time that it was enjoyed short of that. It is like rent reserved on a lease for a year, which is sometimes apportioned under such circumstances. Morgan v. Moody, 6 Watts. & S. (Pa.) 333, 335.

[4] But the claim for anything beyond the date of bankruptcy stands on an entirely different footing. The claimant asks for the allowance of the minimum bonus .year by year for the life of the patent. He does not even take into account that, if the arrangement went on, he would have to wait for the greater part of it a number of years, with all the consequent contingencies. He asks to be allowed a sum in hand equal to the aggregate minimum until 1922. It is difficult to see on what reasonable theory he hopes to get this. The license was personal to the bankrupt, and there was no provision for passing it 'on to others. It is not, in this respect, like a lease or other continuing contract, as to which this may be done, and which, if valuable, may be sold, and the benefit obtained of it. Here bankruptcy put an end, not indeed to the obligation, but to further liability under it beyond the damages due to the breach which necessarily resulted. To these damages, such as they are, the claimant is entitled. But they are not made up of future annual bonuses, calculated to the end of the agreement. The license granted by the claimant to the bankrupt having fallen in, he is at liberty to repossess himself of it and again dispose of it. And if he could now get the bonuses stipulated for, so long as the patent has to run, in a lump, he would get paid twice over for the same thing, without having contributed anything reciprocally. Accepting bankruptcy as an enforced breach of the agreement, entitling the claimant to damages (In re Swift, 7 Am. Bankr. Rep. 374, 112 Fed. 315, 50 C. C. A. 264; In re Neff, 19 Am. Bankr. Rep. 23, 157 Fed. 57, 84 C. C. A. 561, 28 L. R. A. [N. S.] 349), the only question is what should be allowed on account of it. It is to be assumed that such a license as this is of value, present as well as prospective, and. that the claimant could make substantially as good an arrangement with others as he did in this instance. If this is not the case, it is for him to show it. No doubt it would take time to organize a new company and build up a business, but if the device has merit, the preceding effort is not likely to be wholly lost. The claimant can ask to be compensated for the intermediate delay. But that is all. At the time of bankruptcy the existing arrangement was some two years old; and it would probably take a like period to get into the same shape as the business was at that time; in addition to which it might require something more to get new persons interested and make a start. There has therefore, in all likelihood, been some two or three years lost; after which, it is fair io assume, with proper effort, the claimant would be in as good a position as he was before. It is true that three years have now in fact elapsed, without this having been realized. But it does not appear what effort has been made, and the claimant was not entitled to lie by and do nothing, as he seems to have done, on the mistaken theory that he was to get full compensation in these proceedings. It is necessarily, more or less, a matter of speculation as to the damages which the claimant lias sustained, by reason of the breaking up, by bankruptcy, of the existing arrangement. But having regard to the increasing annual bonuses stipulated for, and the time that must be expected to elapse before an equally good arrangement could be perfected, $1,000 does not seem to be out of the wav, and this will be accordingly allowed him. He is not debarred of this, because he was one of the petitioning creditors. Bankruptcy was imminent, and there are no doubt others who would have taken advantage of it if he had not, nor was he alone responsible for the proceedings, the other petitioning creditors being necessary parties. This amount, it is to be noted, is exclusive of anything which may hereafter lie awarded for the use of the invention by the receiver or the trustee, under the license, which of course must be paid for, but as to which there are other considerations. The claim against the estate on this latter account is also an administrative charge, and does not therefore come up for allowance at this time. It is in the interest of the claimant, indeed, that it should not, as he will be entitled to payment in full for anything that is due on that score, instead of only getting a fraction of it. It forms no part, however, of the present claim, and the referee was therefore right in disallowing it.

[5] The other matters were correctly disposed of except one, and require no extended consideration. The claimant, being president of the company, had no right to a commission on sales either of stock 01-material, except as there was a distinct agreement to that effect, which has not been shown. Althouse v. Cobaugh Colliery Co., 227 Pa. 580, 76 Atl. 316. It affords no basis for such a claim that they were allowed to others. Nor' is it of any consequence that $138 was actually paid him by the company on this account. Just how this came about does not appear. The directors may have felt that he ought to be remunerated to that extent for his services in this connection without thereby establishing his rights as a legal claim to the remaining $62 contended for.

[ 6 j As to the so-called protection notes of $2,000 and $5,000, respectively, which were given by the company to secure Dr. Voorhees and others against liability on their guarantee and indorsements of the company’s obligations, it is sufficient to say that these obligations do not appear to nave been taken care of by Dr. Voorhees, and only to the extent that they have been, has he any standing to make claim in his own name with regard to them. Philips v. Dreher Shoe Co. (D. C.) 7 Am. Bankr. Rep. 326, 112 Fed. 404.

[7] The claim for maintaining an office for the company at Scranton, some 18 months at $5 a month, was also correctly disposed of. It may be that by its charter the company was required to keep an office at that place, and for a time it no doubt did so, using a part of Dr. Voorhees’ office for the purpose. But the continuance of this arrangement was a matter for the directors and not for Dr. Voorhees by himself, either as president or general manager. He could not insist on his own office serving this purpose, and much less, if he considered it necessary that the company should have such an office in that city, and chose to furnish it, could he .make a charge for it. If he gave a space in his office, in order to comply with the charter, and save any question, so far as compensation is concerned, it must lie regarded as voluntary.

The claimant is entitled, however, to the $10 which he paid out in change, in collecting the bill of Dr. Lindabury. Dr. Lindabury owed the company $10 and paid it to Dr. Voorhees with 'a $20 check, which he happened to have with him, getting back $10 by way of change from Dr. Voorhees. This $20 check was then turned over to the treasurer of the company, and a check drawn to the order of Dr. Voorhees for the $10 that was due him. By mistake however this check was charged up to Dr. Voorhees on the books of the company, and was paid back by him without noticing it, when he came to settle his account. It is clear that, the company owes him this $10, and it should therefore be allowed him.

This disposes of the several items of the claim as proved. The referee has carefully reviewed the case, and made an excellent and exhaustive report. I do not agree with him in everything that he has said, but I do in the most of it.

The aggregate amount allowed by the referee is................... $ 625 58

This should be increased by nine months’ bonus from

April 12, 1907, to January, 1908....................... $ 75 00

Damages for breach of the license agreement............ 1,000 00

Paid out in change to Dr. Lindabury.................... 10 00

-■ 1,085 00

Total claim as allowed.................................... $1,710 58

* For other oases see same topic & § number in Dec. & Am. Digs. 1907 to date, & Rep’r Indexes