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Finazzo v. Mid-states Finance Co.

SEPTEMBER 14, 1965.




Appeal from the Circuit Court, Third Circuit (Madison County); the Hon. I.H. STREEPER, III, Judge, presiding. Judgment entered in Appellate Court in favor of plaintiff, Louis F. Finazzo, and against the defendants, Mid-States Finance Company (now, by change of name, Luken Finance Company), a Corporation, and Ralph Luken, in the amount of $9,545.10 and for costs. Execution to issue.


On March 8, 1956, plaintiff filed suit in the City Court of Alton (now the Circuit Court of Madison County), against the defendants Mid-States Finance Company, a corporation, and Ralph Luken. Although the record shows the name of the corporate defendant has been changed to Luken Finance Company, it shall be referred to herein as Mid-States, and the individual defendant shall be called Luken.

The complaint as amended, alleges that on April 7, 1952, plaintiff and Mid-States entered into a written contract of employment, that pursuant thereto, plaintiff became manager of Mid-States and performed all duties required of him thereunder; that commencing on February 1, 1953, in addition to his salary, he was to be paid a percentage of the net earnings of Mid-States during each fiscal year. The contract defines "net earnings" as the net income of Mid-States, before all federal corporate income taxes. The contract further provides that any additional compensation due plaintiff shall be paid 60 days after the close of each fiscal year. The contract provides that either party may terminate the employment by giving 30 days' notice in writing, and in the event of such termination, at a time other than the end of a fiscal year, the additional compensation due plaintiff shall be based upon the net earnings of Mid-States during that portion of its fiscal year that shall have elapsed at the effective date of such termination. Mid-States' fiscal year commenced on February 1st and terminated on January 31st.

The complaint further charges that Mid-States failed to pay plaintiff the additional compensation due him for the fiscal years terminating on January 31, 1954, and January 31, 1955. It further alleged a change in accounting methods which reduced the corporate net income, the taking of improper deductions, and other practices violative of the contract, all of which served to distort the net earnings and deprive plaintiff of additional compensation to which he was entitled. These charges are hereinafter discussed with greater specificity, and in such detail as may be required for an understanding of the issues.

In a second count, plaintiff alleges that the defendant, Luken, was the controlling shareholder, and an officer and director of Mid-States and seven other corporations, that he manipulated the assets, income, and expenses of Mid-States and the other corporations for his own benefit and in violation of plaintiff's rights, that said corporate entities were a cloak or screen for Luken's financial manipulations, and prayed that the court disregard the corporate entity, or entities, and enter judgment against Luken for any sum found to be due plaintiff from Mid-States.

In a third count, plaintiff prays an accounting from the defendants, Mid-States and Luken.

Defendant answered, plaintiff replied, and the cause was referred to a master in chancery, to hear evidence and report findings of fact and conclusions of law. After hearings covering 7 trial days, the master filed his report, objections were filed, and sustained in part, a supplemental report was filed, and on January 23, 1964, a decree was filed wherein the court found the issues for plaintiff, found no accounting was necessary as prayed in Count III, since the sums due plaintiff could be determined from the exhibits offered and admitted in evidence, that the defendant Luken had woven an interrelated network of corporate affairs which showed that Luken profited personally from the purportedly corporate transactions, and that subsequent to the termination of plaintiff's employment with Mid-States, defendant Luken had stripped Mid-States of most of its assets. Judgment was entered in favor of plaintiff, and against both defendants, in the sum of $24,332.66 and costs. A motion for rehearing was filed, argued, denied by the trial court on November 20, 1964, and this appeal followed.

The defendant, Mid-States, was organized in 1945. Its principal business was the purchase, from automobile dealers, of negotiable promissory notes secured by conditional sales contracts or chattel mortgages on automobiles. Early in its operations it had obtained funds by borrowing from a bank in Alton, securing those loans by pledging the negotiable paper which it purchased from auto dealers. As its volume of business expanded, it commenced the practice of selling notes to the Alton bank. The notes were sold without recourse, but the bank required Mid-States to maintain a bank deposit based on a percentage of the total face amount of the notes held by the bank.

Defendant's volume expanded to the point where it required additional banking connections, and it entered into an arrangement with Mississippi Valley Bank in St. Louis, whereby it sold notes to that bank. These were handled on an individual basis, with the bank buying certain notes, and rejecting others. Since these notes were sold outright and without recourse, this bank did not require Mid-States to maintain any reserve or guarantee account. Mississippi Valley Bank was merged into Mercantile Trust Company and will hereinafter be referred to as Mercantile.

When plaintiff entered defendant, Mid-States' employ, on April 15, 1952, defendant was selling its notes on the two bases above described. In its accounting, Mid-States used the following procedures: the profits on sales to Mercantile were recognized as interest income immediately upon receipt of the funds; in connection with its sales to the Alton bank, it created an account designated "unearned income," and thereupon did not recognize any of its receipts from sales of notes to the Alton bank as income until the "unearned income" account equaled 15% of the face amount of the notes then held by the Alton bank. Thereafter it transferred from "unearned income," to "interest income," the amount by which the unearned income account exceeded 15% of the aggregate amount of notes held by the Alton bank.

Plaintiff admits he has been paid all sums due him for services rendered during the fiscal year ended on January 31, 1953. Commencing with February 1, 1953, in addition to his salary, he was to receive a bonus computed on a graduated percentage of Mid-States' "net earnings." At the beginning of that fiscal year on February 1, 1953, Mid-States' balance sheet shows a balance in its "unearned income" account of $74,024.73, all of which arose from its transactions with the Alton bank.

Ralph Welch testified that he was treasurer of Mid-States from July 20, 1953 until April 1, 1956, and during that period was in charge of its books. He stated that in December, 1953, the defendant, Luken, instructed him to create an account designated "unearned income — MT." This account was built up to equal 15% of the total of the notes sold to Mercantile. At the close of Mid-States' fiscal year on January 31, 1954, the balance in that account was $18,341.78. Welch further testified that sums were transferred from the "unearned income — MT" account to earned interest income at various times, dependent upon the volume of business done with Mercantile and the size of the "unearned income — MT" balance. He stated that Luken gave orders for the management of Mid-States and prescribed its accounting procedures. He stated that the employees of Mid-States, including plaintiff, received their instructions from Luken. As of November 30, 1954, the date on which plaintiff's employment terminated, the balance in the "unearned income — MT" account was $69,889.36.

Plaintiff testified that when he and Luken discussed the terms of his employment prior to and at the time the contract was executed, Luken explained to him the methods then in use in Mid-States' dealings with the banks. He stated that Luken told him that in the transactions with Mercantile, the profit on the sales of notes was "chalked up" as soon as received, as distinguished from the transactions with the Alton bank, for which Mid-States maintained the "unearned income" account above described.

Plaintiff contends that the change in the accounting method distorted the earnings of Mid-States, the effect of which was to understate its earnings by $18,341.78 for the fiscal year ended January 31, 1954, and by $51,547.58 for the period between February 1, 1954 and November 30, 1954.

Defendants contend that the accounting change was necessary to reflect the time when Mid-States actually received its earnings, that losses, repossessions, and collection expenses, served to reduce the profits derived from the transactions, and that sound accounting practice required the changed method of keeping this account.

In addition to the reduction of Mid-States' net earnings in the manner above described, plaintiff complains of other transactions and practices which served to further reduce its earnings, and therefore, his bonus. He charges that Luken, in the manipulation of his corporate enterprises, caused Mid-States to make interest free loans to various of Luken's companies, and it was therefore deprived of interest income on these sums. He contends that in computing his bonus, Mid-States' earnings should be surcharged with reasonable interest which Luken's corporations should have paid for the use of these funds. The evidence shows that on February 1, 1953, various affiliates of Mid-States, all owned and controlled by Luken, owed Mid-States $105,000. At the close of Mid-States' fiscal year on January 31, 1954, these affiliates owed Mid-States $128,477. The sums owed on November 30, 1954, are not shown, but at the close of the fiscal year on January 31, 1955, these affiliated corporations owed Mid-States $115,239.51. As ...

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