Bercaw v. Allied Paper Corp.

Kelly, J. Plaintiff herein, prior to October 15, 1957, was president of Mercury Envelope Company. Allied Paper Corporation purchased all the stock of Mercury Envelope Company and as a part of such sale plaintiff and Allied 'entered into an agreement that plaintiff Bercaw’s employment would be continued from October 15, 1957 to October 14, 1962, at the rate of $28,000 per annum, either party to have the right to terminate the agreement with compensation payable at $12,000 per annum thereafter to October 14,1962. In August, 1958, Allied Paper Corporation sold and transferred all the capital stock of Mercury Envelope Company to Allied-Albany Paper Corporation and Allied-Albany promised and agreed to perform the terms and provisions of the agreement entered into between plaintiff and Allied Paper Corporation. Sometime prior to December 29, 1958, Allied-Albany sold and transferred to Western Tablet & Stationery Corporation, appellant herein, all of the assets of Mercury Envelope Company. Western Tablet & Stationery Corporation, on the same date, — 503 — entered into an agreement whereby Western agreed to indemnify and save harmless Allied-Albany Paper Corporation and Allied Paper Corporation from liability by reason of plaintiff’s employment contract. Plaintiff continued in the employ of Western Tablet & Stationery Corporation until March 1, 1959, at which time he exercised the termination provision of the agreement, While employed by Western, plaintiff was paid at the rate of $28,000 per annum. After March, 1959, when plaintiff left appellant’s employment, he was paid at the rate of $1,000 per month. In March, 1960, plaintiff accepted employment with Allied Paper Corporation at the rate of $40,000 per annum. Western Tablet & Stationery Corporation terminated payment of compensation to plaintiff on July 1, 1960. Allied Paper Corporation also refused to make such compensation payments. Plaintiff brought suit under the 1957 agreement with Allied Paper Corporation to recover against both Allied Paper and Western Tablet & Stationery Corporation, seeking damages at the rate of $1,000 per month from July 1, 1960 to October 14, 1962, the expiration date of the employment contract. Trial was had before a jury. At the conclusion of proofs all parties asked for directed verdicts. The trial judge was of the opinion that such motions removed the case from the jury and he, therefore, discharged the jury. In a written opinion, the court said: “This court finds itself in agreement with the contention of the defendant Western, that as an assignee of the defendant Allied it did not accept the responsibilities and obligations of the contract with the plaintiff; rather, defendant Western agreed to hold defendant Allied harmless from any liability to the plaintiff arising under the terms of its contract with plaintiff. Plaintiff was entitled to receive $1,000 — 504 — per month from the time that snch payments ceased until the end of the term of the contract, to-wit: October 11,1962.” Judgments were accordingly entered: One on March 25, 1963, in favor of Bercaw against Allied Paper Corporation in the amount of $27,500, and another on April 17, 1963, in favor of Allied Paper Corporation against Western Tablet & Stationery Corporation for a like amount. 'Western Tablet & Stationery Corporation (hereinafter referred to as Western) entitled its appeal: “Wiliam R. Bercaw, plaintiff and appellee, v. Allied Paper Corporation, a corporation and Western Tablet & Stationery Corporation, a corporation, defendants and appellants.” The brief of Allied Paper Corporation (hereinafter referred to as Allied) carries the title: “William R. Bercaw, plaintiff and appellee, v. Allied Paper Corporation, a corporation, defendant and appellee, and Western Tablet & Stationery Corporation, a corporation, defendant and appellant.” Plaintiff Bercaw filed a “statement of the plaintiff, William R. Bercaw, as to reply of appellant, Western Tablet & Stationery Corporation,” and entitled it: “William R. Bercaw, plaintiff v. Allied Paper Corporation, a corporation, defendant and appellee, and Western Tablet & Stationery Corporation, a 'corporation, defendant and appellant.” We quote from the “statement of the plaintiff,” as follows: “The plaintiff, Bercaw, had merely sold a small envelope company (Mercury Envelope Company) to the appellee, Allied Paper Corporation, and incident thereto had entered into an employment agreement with Allied, with the payments under this agreement, - rather than involving tax evasion being taxed at the .highest tax level. He in no way participated in any — 505 — of the subsequent negotiations involving the sale of the Mercury Envelope Company as between Allied and Allied-Albany or between these parties and Western Tablet & Stationery Corporation. “Although the appellant has injected into the case a set-off or counter-claim based on certain payments made by it to the plaintiff, Bercaw, it has throughout taken the position that these payments were made under its indemnity agreement with Allied and made direct to the plaintiff rather than paid to Allied only as a ‘convenience to avoid circuity of payment.’ See page 24 of the appellant’s brief, where it stated: # % * “ ‘Appellee continued to make payments under exhibit 31 directly to the plaintiff since this method had been decided upon between the appellant and Allied-Albany Corporation as a matter of convenience to avoid circuity of payment.’ “As Allied has admitted its liability to plaintiff, it follows that all payments as made by the appellant under its own contention were necessarily payments on account for Allied and for its benefit. “As the appellant did not appeal the judgment in which the plaintiff was involved but confined its appeal solely to the judgment entered for appellee, Allied, against it on its indemnity agreement and confined the relief as requested to a request for reversal or a new trial as to this judgment, and as appellant in its brief took the position that its payments to plaintiff were on account for Allied and made direct to plaintiff solely for convenience, which necessarily related any claims thereunder solely to the contract relations of these parties, the plaintiff did not file a brief in answer to appellant’s brief or participate in the appeal other than to sign such stipulations as were requested by the appellant and appellee. “In the reply brief of appellant as filed in reply to the brief of appellee, Allied Paper Corporation, — 506 — the appellant in its argument continues to assert its counterclaim against the appellee, Allied, stating under point 5 on page 24 as follows: * * * “ ‘Appellant should not be held liable to the appellee, but, rather, judgment should be rendered in appellant’s favor against appellee and its damages assessed at $3,600 and costs of both courts.’ * * * but in the relief prayed for under its reply brief, appellant goes beyond the relief as originally prayed on appeal and asks for judgment against the plaintiff for $3,600. “The plaintiff, therefore, requests that the claim against him as made in appellant’s reply brief be denied.” We are denying appellant Western’s request that we enter “judgment for appellant against the plaintiff (Bercaw) for $3,600 and costs of both courts,” and in this appeal we shall decide the issue presented by appellant Western’s request “that the judgment of the court below be reversed and that the case be referred back to Kalamazoo for a new trial by a jury, or if this court agrees exhibit 3 is unenforceable, a reversal without a new trial with costs to appellant,” or appellee Allied’s request “that the decision of the circuit court be in all respects affirmed.” Appellant presents the question: “Was the plaintiff’s restraining covenant against engaging in a business activity competitive with Allied Paper, its subsidiaries and assigns, unreasonable and void?” and contends that “the plaintiff was not entitled to receive payments under appellant’s indemnity agreement (exhibit 3) after he was rehired by Allied.” The covenant under question between appellee Allied and plaintiff Bercaw provided: “Under such circumstances, Bercaw shall have the right to accept employment with any person, firm or corporation whatsoever, except only that prior to — 507 — October 14, 1962, Bercaw shall not engage in any business activity or work for any person, firm or corporation which is competitive with the business of Allied or any of its subsidiaries.” Appellee Allied claims that Bercaw’s noncompetition covenant by its own terms is not enforceable as appellant seeks to enforce it, because “the covenant did not require that Bercaw refrain from competitive activity in any particular area of the paper business, or in any geographical area, or in the paper business generally, or in any other business or industry. Bercaw’s only promise was that he would not engage in any business, whatever its nature, which was competitive with the Allied Paper Corporation. His performance of the covenant could be measured only with reference to the activities of Allied.” In Stoia v. Miskinis, 298 Mich 105, 118, we quoted from 5 Williston on Contracts (Rev ed), § 1636, p 4583, and held as follows: “ ‘The courts strictly interpret bargains or contracts restricting competition and are inclined to find that the particular act complained of does not constitute a breach of the restrictive agreement.’ ” The trial court we believe correctly and ably disposed of this question by calling attention to CL 1948, § 445.761 (Stat Ann 1962 Rev § 28.61), which contains the following statutory prohibition: “All agreements and contracts by which any person, copartnership, or corporation promises or agrees not to engage in any avocation, employment, pursuit, trade, profession or business, whether reasonable or unreasonable, partial or general, limited or unlimited, are hereby declared to be against public policy and illegal and void.” — 508 — The lower court then stated: “In construing this provision of the statute our Supreme Court has held that not all such contracts are illegal and void, but that if such a contract appears to have been made for a just and honest purpose and for the protection of legitimate interests, and is reasonable and not specially injurious to the public, it may be valid and binding. We find many cases wherein a vendor of a business contracts not to compete for a stipulated time thereafter and/or within a stipulated territory, and where found to be reasonable such contracts have been held to be valid and binding. Reasonableness seems to be the determinative factor, assuming an honest dealing, and in this case there is no claim of fraud or deceit. “It is the contention of the defendant Western that by reason of the assignment of the contract to it, the plaintiff, under his covenant not to compete, thereupon became obligated not to accept employment with any person, firm, or corporation which was competitive with defendant Western. It is the further contention of the defendant Western that plaintiff breached this covenant when he accepted employment with defendant Allied in March of 1960 and continued to work for Allied thereafter. “If, indeed, the plaintiff’s covenant not to work for a competitor should be construed to apply to competitors of any individual, copartnership, or corporation to whom or to which Allied, or its assignee, might assign the contract, the plaintiff might find himself in a most unreasonable and impossible situation. Such an assignee might be a person or firm engaged in a multitude of activities and enterprises, and the plaintiff might then be faced with a situation where he could not seek employment in any field for which he might be fitted or in which he might be skilled. Indeed, a conceivable situation might exist wherein plaintiff would find it impossible to accept any employment whatsoever. “Should this court place such an interpretation upon the restrictive covenant of the contract, when — 509 — coupled with, the assignment clause therein provided this court would he saying to the plaintiff that ‘Under certain circumstances you have submitted yourself to voluntary servitude and have foreclosed yourself from seeking employment with any person or any firm other than the current and latest assignee of the other party to your contract.’ Certainly it-cannot reasonably be argued that either party to the contract intended such a result. Such an interpretation would render the contract unreasonable and in violation of the statute above cited and therefore illegal and void. Such an interpretation would not be in accord with common sense. “It is the conclusion and decision of this court that under the terms of the contract the restrictive covenant prevented, and only prevented, the plaintiff from engaging in any business activity or work for any person, firm or corporation which would be competitive with the business of the defendant Allied, or any of its subsidiaries.” Appellant Western in its second reply brief, brings to our attention under the heading “Restated Issues,” the following: “In their reply brief Appellee, Allied Paper Corporation, sets out two questions it calls ‘issues restated for the sake of clarity.’ These questions are misleading and not the issue on this point. The real question is as follows: “Where the appellant unknowingly and innocently agreed to indemnify the appellee from liability incurred in a contract ivith plaintiff Bercaiv, ivithout knowledge that the contract was for a capital expenditure and in furtherance of a scheme to commit a felony, will the indemnitor appellant be protected upon discovery thereof and relieved from its indemnity obligationf “The trial court did not answer this question except by inference. “Appellant contends a positive answer should be made and it should be ¥es.” — 510 — Appellant states it “did not learn of the BereawAllied Paper Company scheme to commit a felony until after this suit and then amended its answer to ask relief as an innocent victim of the conspiracy” as follows: “This defendant, by way of further affirmative defense, alleges that said employment agreement in form of exhibit A to the declaration, was an illegal contract and void and enforcement thereof was against public policy in that agreement purported to be a contract of employment but was in fact an agreement for purchase of property from the plaintiff which agreement was in the form of an employment contract for the purpose of Federal tax evasion and this defendant’s agreement to indemnify defendant, Allied Paper Corporation from liability thereunder is void and unenforceable.” To sustain appellant’s claim that the contract and agreement between Allied and Bercaw was drawn “for the illegal purpose of permitting appellee to evade Federal taxes by expensing off as a full deduction amounts it contracted to pay plaintiff as additional purchase price of plaintiff’s property,” appellant calls attention to the testimony of appellee’s board chairman, Arnold Maremont, as follows: “Q. Was this salary of $28,000 agreed upon between you and Mr. Bercaw! “A. He was receiving $16,000 per year, from the company at that time and we agreed we would continue to pay him $16,000 a year, plus $12,000 a year as additional compensation on the purchase price which had nothing to do with services at all.” By this tax evasion scheme, appellant claims appellee “worked a deliberate fraud on the innocent appellant, not discovered by it until after discovery proceedings in this suit.” Appellee cites Beals’ Estate v. Commissioner of Internal Revenue (CA 2, 1936), 82 F2d 268; Ull — 511 — man v. Commissioner of Internal Revenue (CA 2, 1959), 264 F2d 305; Carboloy Company, Inc., v. Commissioner of Internal Revenue, 2 Tax Court Manual 413; Commissioner of Internal Revenue v. Gazette Telegraph Co. (CA 10, 1954), 209 F2d 926, and contends that: ■ “The above cases and others cited therein dealing with similar covenants establish the rule that where the parties to a noncompetition covenant allocated by contract a specified value to the covenant, the amount allocated is income to the covenantor and deductible or amortizable expense to the covenantee unless there is a clear showing that the covenant not to compete is of no economic value whatsoever. “In the present case, William Bercaw was shown by the evidence to be a vigorous and enterprising man with a strong background in the paper business. The Allied Paper Corporation recognized this and the economic threat that Bercaw would pose as a free agent when it insisted upon the noncompetition covenant. In spite of the fact that the Allied Paper Corporation could have, under the cases, paid Bercaw a lump sum for the covenant and amortized the lump sum payment over the life of the covenant for tax purposes, it strengthened its protection by requiring Bercaw’s refraining from competition as a condition precedent to payment, thus making Bercaw steadily ‘earn’ his money.” Appellant was represented by counsel who considered the agreement and advised appellant. Appellant refused to accept an assignment or become a party to the contract, but instead gave its separate agreement to hold appellee Allied harmless. (See footnote 1, supra.) We agree with appellee that “as a stranger to the contract between Bercaw and the Allied Paper Corporation, appellant is in no position to assert — 512 — its illegality. Newcomb v. Ingram (1933), 211 Wis 88 (248 NW 171).” The trial court did not err in failing to rule in favor of appellant’s contention that because of the tax evasion issue appellant’s written guarantee to hold appellee harmless was illegal. Appellant claims the trial court erred “to the prejudice of appellant in taking the case from the jury after all parties moved for a directed verdict at the close of all the evidence.” In support of this claim, appellant calls attention to the following from the transcript: “The Court: Gentlemen, in view of the motions that all of you have made, I think this removes the case entirely from further consideration by the jury, ás I understand the rule. “Mr. Howard: I reserve the right to go to the jury,— “The Court: I am sorry; you didn’t reserve the right. # * * “Mr. Howard: — on any question of fact. I have requests to charge filed with the court which reserve the right. * * * “The Court: It is my feeling this reservation comes too late; that upon the motions being made the court has no recourse hut to take the case from the jury, and such is the ruling of the court.” Appellee argues that, even if the court was wrong in taking the case from the jury, appellant was not prejudiced, because the court found in appellant’s favor that appellant and appellee were competitors and that plaintiff’s last employment by the appellee placed him actually in a position of competing with the appellant. ■ - Appellant answers this point of appellee by stating that, while that may he true in regard to the competition question, the more fundamental question, vis., tax evasion, should have been submitted to — 513 — the jury. We disagree with appellant’s contentions in this regard and have disposed of the tax evasion question previously in this opinion. Appellee has satisfied plaintiff’s judgment. The court did not err in holding that, under the agreement entered into between appellant and appellee, appellant must reimburse appellee for the moneys appellee paid plaintiff. Affirmed, costs to appellee. Dethmees and O’Hara, JJ., concurred with Kelly, J. Footnotes [1] Letter of indemnification dated December 29, 1958, from Western to Allied-Albany Paper Company.