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Docket Number

No. 471.

Attorney(S)

Roy S. Drennan, of Atlanta, Ga., for plaintiff. Spence Spence, of Atlanta, Ga., for defendants.

Judges

Samuel Hale Sibley

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Smart Summary

Lane Cotton Mills Co. v. Brown et al. — Summary of District Court Opinion (Sibley, D. J.)

Factual and Procedural Background

This equity action concerns the proper disposition, after deductions for expenses, of about $8,000 that arose from the sale and operation of a business known as W.E. Floding Co. The business had been purchased by Dr. Paul F. Brown from the Lane Cotton Mills Company, with Mr. Floding and his daughter having "some connection with the purchase." The parties had various agreements and disagreements prior to April 15, 1927, when they executed a written contract that ended the earlier arrangements.

The fund before the court represents profits derived from the successful operation of the business both before and after the appointment of a receiver and from the eventual sale under court supervision. All indebtedness of the business has been paid, including the purchase price owed to the Lane Cotton Mills Company. The dispute presented is who is entitled to the surplus profit on liquidation.

Procedurally, the court announced a decree "in accordance with opinion," and the opinion notes that the decree was later affirmed on appeal (28 F.2d 911). A related decision is cited as Real Estate Loan Co. v. Brown (D.C.) 23 F.2d 329.

Legal Issues Presented

What is the proper disposition of the fund (approximately $8,000) arising from the operation and sale of W.E. Floding Co. — i.e., who is entitled to the profit on liquidation?
How should the parties' written contract (executed April 15, 1927) be construed to determine their respective interests in the surplus assets?
What effect do assignments (and the absence of additional cash contributions by defendants) have on the distribution of the surplus?

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
28 F.2d 911	Affirmance of the district court's decree on appeal (citation provided by the opinion).	The opinion records that the district court's decree was affirmed, identifying the appellate disposition of the case.
Real Estate Loan Co. v. Brown, 23 F.2d 329 (D.C.)	Referenced as a related decision (the opinion provides a "See, also" citation).	The court listed this decision as related authority; the opinion does not elaborate on any substantive rule drawn from that case.

Court's Reasoning and Analysis

The court framed the dispute as essentially one of contract construction and equitable disposition of surplus assets. The judge identified the fund as profits arising from the business's operation and sale after payment of all debts, including the purchase price due the Lane Cotton Mills Company.

Key factual observations relied upon in the analysis:

Neither of the defendants had contributed cash to the business; Dr. Brown contributed his credit, while the Flodings contributed experience and services compensated weekly.
The parties had entered into a written contract on April 15, 1927, which superseded earlier agreements.

On construction of the written contract, the court focused on the clause reciting the consideration as "One dollar in hand paid and other valuable considerations, receipt whereof is hereby acknowledged." The court interpreted those words as referring to past consideration rather than to future performance or future consideration. Because of that reading, the court declined to entertain any claim of failure of consideration and confined its inquiry to the rights the contract actually conferred.

The court then applied an equitable principle explicitly invoked in the opinion: "equity regards that as done which should have been done." Using that maxim, the court treated as effective the corporate formation and stock issuance contemplated by the contract. Concretely, the court considered that:

The company was to be regarded as incorporated and the stock as having been issued in Dr. Brown's name and placed in escrow until payment of debts (which has now occurred).
The stock should be treated as reissued in the proportions specified by the contract among Dr. Brown, Mr. Floding, Miss Mary Floding, and James J. Keiley.
Accordingly, the parties who would have held the stock if the contract had been fully executed are to be treated as entitled to the surplus assets in the same proportions.

As to assignments, the court observed that assignments are primarily of concern to assignors and that "all personal services are out of the contract now, and it amounts to nothing more than a disposition of money which is to be received under the contract." The court therefore elected to honor assignments and to pay the money to assignees.

Holding and Implications

Holding: The court directed that the surplus fund (after expenses) be distributed according to the written contract by treating the contemplated corporate stock as having been issued and reissued in the proportions set out in the contract. The court ordered that the surplus assets be allocated in the same proportions as the contract's stock reissuance and that assignments be recognized so that money is paid to assignees.

Implications:

The immediate practical effect is a decree distributing the approximately $8,000 surplus to the parties (or their assignees) in the proportions the contract would have produced if its corporate formation and stock reissuance had been carried out.
The opinion explicitly relies on the equitable maxim that courts will treat as done what should have been done to give effect to a contract's intended economic allocation; it confines its inquiry to the contract's terms and does not reach issues of failure of consideration given its interpretation of the consideration clause.
No broader rule or novel precedent is announced beyond the court's application of established equitable principles to the contractual allocation of surplus assets. The opinion notes that the district court's decree was later affirmed (28 F.2d 911), but the opinion itself does not claim to establish new law.

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LANE COTTON MILLS CO. v. BROWN et al. (ATLANTA TRUST CO. et al., Inter

In Equity. Proceedings by the Lane Cotton Mills Company against Dr. Paul F. Brown and others, in which the Atlanta Trust Company and W.E. Floding and others intervened. Decree in accordance with opinion.

Decree affirmed, 28 F.2d 911.

See, also, Real Estate Loan Co. v. Brown (D.C.) 23 F.2d 329.

SIBLEY, District Judge.

The question here is the proper disposition of the fund, subject to deductions for expenses, of about $8,000, which arose from the sale of a business called W.E. Floding Co. This business was bought by Dr. Paul F. Brown, from Lane Cotton Mills Company; Mr. Floding and his daughter having some connection with the purchase. They had agreements, or disagreements, touching it prior to the 15th day of April, 1927, when they made a written contract, which put an end to both. The fund now before the court is in reality profits that have been derived from this business in the operation of it successfully before receivership and after receivership, and in the sale of it through the processes of the court. All indebtedness against it has been paid, including that due for its purchase to the Lane Cotton Mills Company. The question is, who is entitled to this profit thus arising on the liquidation of the business. Neither of the defendants has put any cash into it. Dr. Brown put up his credit, and the Flodings have put up their experience and their services at a compensation per week. I think that this profit should be disposed of under the written contract that they made, and that the case turns upon the construction of it. The considerations because of which Dr. Brown agreed to give an interest in the business to the Flodings and to Keiley are recited as "One dollar in hand paid and other valuable considerations, receipt whereof is hereby acknowledged." These words seem to me to apply only to some past consideration, and not to the future operation of the contract. For that reason I see no cause to consider any possible failure of consideration, and there is nothing left except to see what rights the contract gave to the parties entering into it.

The contract provides for the formation of a company and certain dispositions to be made of the capital stock, of course, representing the interests of those who were concerned in the company to be formed. I think the proper disposition of this case is to apply the equitable principle that equity regards that as done which should have been done, and to consider that the company was incorporated, that its stock had been issued in the name of Dr. Brown and had been put in escrow until the Lane Cotton Mills Company and other debts had been paid. This has all been accomplished. The contract then provides that the stock is to be reissued in certain proportions to Dr. Brown, Mr. Floding, Miss Mary Floding, and James J. Keiley. I think equity should regard that stock as having been so reissued, and that the parties who would have the stock had the contract been carried out should be considered as having the surplus assets in the same proportions. So far as assignments are concerned, I do not see that it is of any concern to anybody except the assignors as to whether they should or should not have been made. All personal services are out of the contract now, and it amounts to nothing more than a disposition of money which is to be received under the contract. The assignments therefore will be regarded and the money paid to the assignee.

The Court: You are standing on the assignment you have made?

Mr. Floding: Yes, sir.

The Court: And the Lane Cotton Mills Company is standing by its agreement?

Mr. Spence: Yes, sir.

The Court: You can take a decree, then, according to this little opinion.

LANE COTTON MILLS CO. v. BROWN, (N.D.Ga. 1928)