McLean v. Hill

Eggleston, J., delivered the opinion of the court. In 1941, Percival Hall and Forrest H. Hill formed the Hydraulic & Gas Engineering Corporation which was chartered and organized under the laws of Delaware and later domesticated in Virginia. There was a paid-up capital stock of ten shares, of $100 each, of which Hall originally owned eight shares, Hill one share, and Mrs. Hazel W. Rudisill (now Mrs. Percival Hall) one share. Later, Hall transferred — 348 — four of his shares to Hill who thus became the owner of 50% of the stock, while Mr. and Mrs. Hall owned the other 50%. Llall was president, Hill vice-president, and subsequently Semmes Chapman, a member of the Norfolk Bar, was elected “secretary-treasurer, office and credit manager, director of finance and general accountant.” Hall, Hill, Mrs. Hall, and Chapman constituted the board of directors. In June, 1942, the corporation was awarded a contract by the United States. Government to install a liquefied petroleum gas system in a housing project then under construction near Newport News, for the sum of approximately $352,000, subject, however, to the execution of a completion bond in the sum of $176,000. Since the corporation had little assets it was unable to procure this bond and carry out the contract without financial help. For this purpose it sought and. obtained the assistance of George T. McLean and Nicholas C. Wright who agreed to lend their credit to the corporation upon the consideration that they be paid 33% of the net pirofits derived from the contract. That McLean and Wright fully performed their obligation under, this contract is conceded by all parties. They indemnified the surety company which executed the performance bond, and from time to time loaned their credit to the corporation for the purpose of obtaining the necessary funds to carry out the contract. In order to protect their interests McLean and Wright required the corporation to deposit all moneys to its credit in a special account in the Seaboard Citizens National Bank of Norfolk, and to disburse the same by checks countersigned by one of them or their designated agents. About May 1, 1943, the construction, contract was completed, by which time a serious controversy had arisen between Hill and Chapman, on the one hand, and Hall on the other, as to the payment of certain claims which each had against the corporation. Moreover, Hill and Chapman contended that Hall had made certain unauthorized withdrawals from the corporation’s funds. On May 20, 1943, Hill filed a bill in equity against Hall, McLean, Wright, and the corporation for an accounting of — 349 — the moneys received and disbursed on account of the contract. Although the bill disclaimed any purpose of the complainant to try out in his suit any controversy as to the amount due McLean and Wright, and although the auditors employed by the corporation had tentatively ascertained and fixed the net profits derived from the construction contract, Hill obtained an injunction enjoining the further withdrawal of any of the corporation’s funds from the bank pending the settlement of the controversy between himself, Hall, and Chapman. The effect of this injunction was, of course, to prevent the payment to McLean and Wright of their share of the profits derived from the construction project. On June 9, 1943, McLean and Wright filed their answer and cross-bill in which they alleged that the construction contract had been completed, and that but for the payment of some small bills and the disposal of certain surplus property, the profits derived from the project could be aseen tained and divided. They prayed for an accounting of the moneys received from the project, and that their share of the profits, which they alleged was “in excess of $20,000,” be ascertained and paid to them. When the necessary pleadings had been completed the matter was referred to a special master, who, after a lengthy hearing, filed a comprehensive report settling the various claims presented by the several parties. With the adjustment of a minor item, which is not here material, the court confirmed this report in toto, and its disposition of the merits of the controversy is not here assailed. Indeed, except for the retention in the registry of the court of a small amount, deducted from Hill’s distributive share, to cover the items involved in this appeal, the fund in controversy has been disbursed. The lower court held that the costs of the suit, amounting to $5,398.70, should be charged against the respective parties in the following proportions: 33 1/3% against McLean and Wright, 33 1/3% against Hall, and 33 1/3% against Hill. McLean and Wright, in their petition for appeal, and Hall, — 350 — in his assignment of cross-error, contend that they substantially prevailed in the lower court both in the prosecution of their respective claims and in their efforts to reduce the amounts asserted by Hill and Chapman, and for that reason should not have been required to pay any part of the costs of the litigation. An analysis of the claims presented by the several parties and the lower court’s disposition of each clearly demonstrates the soundness of this contention. As has been said, McLean and Wright alleged in their cross-bill that.their 33% of the profits was “in excess of $20,000.” Hall did not contest this figure, but Hill and Chapman vigorously assailed it, claiming that the amount due was only $7,256.85. The master found that McLean and Wright were entitled to $21,036.76, which was substantially what they claimed. The lower court confirmed this finding. Hall presented a claim against the corporation for the balance of accrued salary due him and for certain advances made by him for the benefit of the corporation. Hill and Chapman claimed that Hall should be charged with certain items to cover what they said were unauthorized disbursements by Hall from the corporation’s funds, and which would have reduced the amount due him to $4,101.69. These disputed items were decided by the special master in favor of Hall, with the result that he received under the report and final decree $10,318.94. Before the master, Hill contended that he was entitled to $34,939.69. Included in his claim was a promotion fee of $17,931.87, representing 5% of the amount of the government contract, which was disallowed in toto. He was finally allowed the sum of $14,947.70. Chapman presented a claim against the corporation of $12,066.50 for services rendered. Against this he was allowed by the master and lower court the sum of $5,348.88. This is not the ordinary case where the costs should have come out of the fund in controversy and thus been divided among the litigants in proportion to the amounts recovered — 351 — by each. In effect, the respective litigants made cross-claims against each other. McLean and Wright contended that their share of the profits from the government contract was a certain amount. Hill was interested in reducing the amount of this claim, because as the holder of one-half of the capital stock of the corporation he was entitled to one-half of the surplus. For the same reason Hill was interested in reducing the claim which Hall had against the corporation. The less expense the corporation had to pay, the larger was the surplus in which Hill would share. On the other hand, since McLean’s and Wright’s 33% of the net profits derived from the project depended upon what items of expense were properly chargeable to the project, they were naturally interested in reducing the claims of both Hill and Chapman. In this contest, in which Hall seems to have made common cause with McLean and Wright, while Hill sided with Chapman, the first three turned out to be the winners, and the latter two the losers. It is true that generally speaking a court of equity has discretion “over the subject of costs.” Code, sec. 3527. But such discretion must be exercised soundly and in the light of the result obtained in the litigation by the respective parties. We have several times said that in the exercise of this discretion the chancellor should award costs in favor of the party or parties “substantially prevailing.” Adkins v. Edwards, 83 Va. 300, 307, 2 S. E. 435; Harman v. Moss, 121 Va. 399, 411,412, 93 S. E. 609. See also, Peters v. Waverly Water-Front Improv., etc., Co., 113 Va. 318, 325, 74 S. E. 168; Williams v. Bond, 120 Va. 678, 689, 91 S. E. 627; Morison v. Dominion Nat. Bank, 172 Va. 293, 303, 1 S. E. (2d) 292, 295, in which decrees of the lower court were modified or reversed because costs had not been awarded in accordance with this principle. For these reasons we are of opinion that the lower court erred in requiring either McLean and Wright, or Hall, to pay any part of the costs. — 352 — McLean and Wright and Hall next contend that they should have been allowed interest on their respective claims from September 7, 1943, the date of the receipt by the corporation of the final payment under the government contract, to March 30, 1945, the date of the decree of distribution. The argument is that but for the institution of the original suit by Hill, and the immobilization of the fund in bank by the injunction granted at his request, the money would have been distributed at an earlier date. We cannot agree with this contention. It is true that the injunction granted at the request of Hill tied up the fund and prevented its distribution at that time. But the liquidation of the claim of McLean and Wright was the main purpose of their own cross-bill. They sought and obtained an accounting of the amount due them. Moreover, the amount of the net profits derived from the project, and their portion thereof, could not be fixed until after the court had ascertained wljat amounts were deductible as legitimate expenses on the respective claims of Hill, Hall, and Chapman. Not until the entry of the decree which confirmed the master’s report and distributed the fund was the amount due McLean and Wright fixed. We also agree with the holding of the lower court that Hall was not entitled to interest on his claim. A determination of his share in the corporation’s assets was one of the main questions involved in the original suit filed by Hill. This, too, was not settled until the entry of the decree of distribution. Furthermore, pending the settlement of these various claims, the money was in bank to the credit of the corporation and Hill had no use of it. Why, then, should he be required to pay interest on it? For the reasons stated the decree appealed from will be reversed in part and affirmed in part. The cause will be remanded to the lower court for the payment of costs out of the fund reserved in the registry of the court for that purpose. — 353 — McLean and Wright and Hall having substantially prevailed on this appeal will recover their costs of the appellee, Forrest H. Hill. Reversed in part. Affirmed in part.