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Schumann v. Samuels

Supreme Court of Wisconsin
Jun 7, 1966
31 Wis. 2d 373 (Wis. 1966)

Summary

In Schumann v. Samuels, 31 Wis. 2d 373, 142 N.W2d 777 (1966), the parties had a partnership agreement that addressed buyouts upon retirement.

Summary of this case from Ehlinger v. Hauser

Opinion

May 13, 1966. —

June 7, 1966.

APPEAL from an order and a judgment of the circuit court for Milwaukee county: HARVEY L. NEELEN, Circuit Judge. Affirmed.

For the appellant there were briefs by Wright Mueller of Milwaukee, and oral argument by Donald H. Mueller.

For the respondent there was a brief by Schwemer Schwemer of Milwaukee, and oral argument by Paul E. Schwemer.



Erwin C. Schumann and Max C. Samuels were partners in a sheet metal fabrication business for some time prior to October 24, 1957. On that date, they entered into a formal partnership agreement. On June 19, 1964, Schumann gave written notice of his intention to retire from the business. The relevant portions of the partnership agreement provide:

"6. Books of account shall be maintained at the principal office of the partnership and shall be open to the inspection of either of the partners at any time. The books shall be kept on the basis of the calendar year and a cash receipts and disbursements method of accounting, with use of inventories. However, this result is to be achieved by making the daily entries on the accrual system and adjusting them on any valuation date to the cash receipts and disbursements method, with use inventories.

"7. Either partner shall have the right to retire the partnership at any time upon thirty (30) days notice in writing, served upon the other partner. The remaining partner, as of the effective date of such notice, shall have the right either to purchase the retiring partner's interest in the partnership at its then book value and continue the business, or to terminate and liquidate the partnership business. . . ."

Samuels elected to purchase Schumann's interest in the partnership and to continue in the sheet metal business; and, on the basis of a financial statement prepared by Samuels' accountants, he offered Schumann, the retiring partner, the sum of $10,998.30. The purchase price was based upon a financial statement dated July 20, 1964, which excluded the value of work in process totaling $13,179.95, accounts receivable in the sum of $31,876.60, and made no allowance for bad debts or accounts payable.

Schumann refused to sell his share of the partnership at the offered price and commenced an action for an accounting. Schumann claimed that he was entitled not only to the price offered, but, in addition, his partnership share of one half of the work in process on July 20th and one half of the value of the outstanding accounts receivable. He also made a claim for overtime pay which he alleged the defendant had withdrawn from the partnership.

The defendant answered, claiming that the plaintiff was entitled only to the "book value" of his partnership share and, in effect, contending that, since the books of the partnership were kept on a cash-receipts-and-disbursements basis, the only assets to be distributed under the agreement were the cash on hand and the value of the inventories of raw materials and supplies on hand.

The balance sheet upon which the defendant based his offer is not in the record, and, accordingly, the precise items constituting the offered sum are not clear.

Both parties moved for summary judgment and submitted affidavits. The affidavits presented no disputed facts, and the trial court judge denied summary judgment to the defendant and granted summary judgment to the plaintiff on the basis of the interpretation of the partnership agreement. The defendant has appealed from the judgment and order granting summary judgment to the plaintiff.


Both parties agree that plaintiff's share is to be valued at "book value." The plaintiff contends, however, that accrued items, both receivable and payable, as well as work-in-process inventories, must be included in determining valuation. The defendant takes the position that the contract is to be interpreted not only on the basis of the written agreement between the parties but also on the manner in which the agreement was in fact carried out by them. It appears to be without substantial dispute that the cash method of accounting was used. However, we do not consider this to be determinative of "book value." "Book value" is a term of ambiguous meaning. The certified public accountant who submitted an affidavit on behalf of the defendant gave as his opinion that "the term `book value' is generally such that this phraseology should be avoided as a valuation measure unless it is specifically and explicitly defined in the agreement concerned." The author of the A.L.R. Annotations concluded, "the phrase `book value' is best avoided unless its meaning as used is clearly and unmistakably defined." Anno. 51 A.L.R.2d 606, 608, Meaning of "book value" of corporate stock.

There is no doubt that "book value" can be almost anything that the parties to a contract clearly define it to be, nor would we disagree with the position of the defendant when he contends that a contract for purchase of a partnership share is valid although the purchase price is less than its actual value.

Unfortunately, the agreement of partnership here does not so define "book value" that we are able to find precise meaning in the terms of the agreement. However, in the absence of a definition agreed upon by the parties, the term has a well-defined meaning in Wisconsin law:

"The book value is not any arbitrary value that may be entered upon the books of the company but the value as predicated upon the market value of the assets of the company after deducting its liabilities." Townsend v. La Crosse Trailer Corp. (1948), 254 Wis. 31, 36, 35 N.W.2d 325.

We conclude that that definition is applicable here.

The appellant in applying his definition of "book value" saw fit to exclude the work-in-process inventories. We find no basis in the agreement or in the facts of the record for such exclusion. Clearly, all of the items excluded by the defendant must be considered in applying the above definition. The agreement itself, although directing a cash-receipts-and-disbursements method of accounting, provided for the use of inventories. The "work in process" should be considered in determining the inventories the business. It represents raw materials to which labor has been applied and constitutes an asset of the business and should, under the terms of the agreement, be included in making a determination of "book value."

Faris, Accounting for Lawyers (rev. ed.), p. 118; Ferst and Ferst, Basic Accounting for Lawyers, American Law Institute (2d ed.), pp. 37, 38.

The agreement also provided that there were to be daily entries on the accrual system. Surely, this envisaged consideration of accounts receivable as assets of the company as they were accrued, and, of course, accounts payable would become liabilities of the company in the same fashion. While there is no doubt that the parties could be bound by an agreement that sets "book value" at a figure different than that dictated by usual accounting principles, we cannot, where there is ambiguity, hold one party to an agreement that is manifestly unreasonable and contrary to usual business practices. We cannot conclude that the agreement contemplates the purchase of the retiring partner's interest without the necessity of paying for all of his interest in the partnership, including "accounts receivable" and "work-in-process" inventories.

See Faris, Accounting for Lawyers (rev. ed.), pp. 73, 286.

Summary judgment was properly granted on the motion of the plaintiff.

By the Court. — The order and judgment are affirmed.


Summaries of

Schumann v. Samuels

Supreme Court of Wisconsin
Jun 7, 1966
31 Wis. 2d 373 (Wis. 1966)

In Schumann v. Samuels, 31 Wis. 2d 373, 142 N.W2d 777 (1966), the parties had a partnership agreement that addressed buyouts upon retirement.

Summary of this case from Ehlinger v. Hauser

In Schumann, the court concluded that in the absence of a contractual definition, "book value" referred to the "market value of the assets of the company after deducting its liabilities."

Summary of this case from Ehlinger v. Hauser

In Schumann v. Samuels, 31 Wis. 2d 373, 142 N.W.2d 778 (1966), the court held that "book value" in the relevant buyout provision was ambiguous.

Summary of this case from Estate of Cohen v. Booth Comp
Case details for

Schumann v. Samuels

Case Details

Full title:SCHUMANN, Respondent, v. SAMUELS, Appellant

Court:Supreme Court of Wisconsin

Date published: Jun 7, 1966

Citations

31 Wis. 2d 373 (Wis. 1966)
142 N.W.2d 777

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