Arnold vs. Willits & Patterson, Ltd.

A corporation with full knowledge of an unauthorized act of its officer that accepts and retains the benefits thereof impliedly ratifies the act and becomes bound, including liability for services rendered under an unauthorized employment-compensation agreement. Applied here, Exhibit B became binding upon the defendant through Willits' ownership and control and the corporations' continued acceptance of Arnold's services and profits credited under its terms.

G. C. Arnold was an experienced businessman then in the employ of the International Banking Corporation of Manila. C. D. Willits and I. L. Patterson were partners doing business in San Francisco, California, under the name Willits & Patterson, with Philippine business operated through an agent.

N/A

On July 31, 1916, while in San Francisco, Arnold entered into a written contract, Exhibit A, with the firm of Willits & Patterson by which he was employed for five years as its agent in the Philippine Islands to operate a coconut oil mill and to do such other business as might be deemed advisable. In return he was to receive the travelling expenses of his wife and himself to Manila, a minimum salary of $200 per month plus travelling expenses, a brokerage of 1 per cent upon all purchases and sales of merchandise except for the account of the coconut oil mill, and one-half of the profits on any transaction in the name of the firm or himself not otherwise provided for, with provision for a $400 monthly salary if the business was operated at a loss. Arnold returned to Manila and discharged his duties, and under wartime conditions the Philippine business rapidly increased beyond expectation.

A dispute thereafter arose over the construction of Exhibit A and the amount due for services. Meanwhile Patterson retired and Willits became sole owner of the firm's assets. For convenience Willits organized a California corporation using the firm name, subscribing for all capital stock except nominal organization shares, and then caused a Manila corporation, Willits & Patterson, Ltd., to be organized, again subscribing in legal effect for all stock except qualifying directors' shares. In legal effect the San Francisco corporation took over the firm's California assets and acquired the assets and liabilities of the Manila corporation. While in Manila as the owner in substance of all stock in both corporations, Willits conferred with Arnold, resulting in the November 10, 1919 letter, Exhibit B, addressed by Arnold to Willits defining commissions of one per cent on purchases and sales on f.o.b. or c.i.f. basis credited in San Francisco, non-participation in profits on business between San Francisco and Manila, and equal division of profits on all other business, including agency or management accounts, confirmed by Willits signing as Willits & Patterson, By Chas. D. Willits. No corporate minutes showed formal ratification by either corporation.

After organization the Manila corporation employed a regular accountant, Mr. Larkin, who in the ordinary course prepared financial statements for local banks and both corporations, all founded on the assumption that Exhibit B as modifying Exhibit A was in force. In early 1920 Arnold as manager sold 500 tons of oil for future delivery at P740 per ton and, after a market break, was able to purchase at P380 per ton, yielding a claimed profit of P180,000. The purchasers, Cruz & Tan Chong Say, paid P105,000 in cash and gave notes for P75,000, with all oil held as security for full payment; the defendant received the cash and notes and retained the oil. The semi-annual statement for the period ending December 31, 1920 credited Arnold with P90,737.88 as half the profit under Exhibit B, and prior statements had credited smaller items on the same basis without objection. The San Francisco corporation then fell into financial trouble and turned its assets over to a creditors' committee, which upon receipt of the July 31, 1921 statement showing P106,277.50 due Arnold under Exhibit B protested by cable on March 23, 1921, the first objection by anyone. Friendly adjustment failed.

On January 10, 1922, Arnold sued to recover P106,277.50 with legal interest and costs. The defendant admitted Exhibit A and Arnold's faithful performance of duties from July 31, 1916 to July 31, 1921, but disputed his interpretation of remuneration, denied authority for Exhibit B, and counterclaimed that only P8,741.05 was due June 30, 1920 plus P10,400 salary at $400 per month from June 30, 1920 to July 31, 1921 during a loss period, less Arnold's July 6, 1921 withdrawal of P30,000, leaving P10,858.95 due defendant. Arnold admitted the P30,000 withdrawal but asserted consent and authority. Upon trial the lower court sustained the counterclaim.

• Governing Contract: Petitioner argued that his five-year services ending July 31, 1921 were rendered under Exhibits A and B together, Exhibit B having more clearly defined the compensation due under Exhibit A.
• Assumption and Ratification: Petitioner maintained that the defendant assumed all partnership obligations under Exhibit A and, through the signing of Exhibit B by Willits as sole owner and the subsequent acts and conduct of the parties, ratified Exhibit B so that it became binding upon the defendant.
• Amount Due: Petitioner argued that under Exhibit B as shown by the accountant's July 31, 1921 statement, P106,277.50 was due and owing, and that judgment should have been rendered accordingly rather than dismissing the complaint.

• Authority for Exhibit B: Respondent argued that Exhibit B was signed by Willits without authority of the defendant corporation or the firm and was never an agreement entered into with plaintiff by either.
• Measure Under Exhibit A: Respondent maintained that compensation was measured and limited by Exhibit A, under which the business was operated at a loss from June 30, 1920 to July 31, 1921 so that plaintiff was entitled only to $400 per month for that period.
• Counterclaim Balance: Respondent argued that adding P10,400 salary for June 30, 1920 to July 31, 1921 to the admitted P8,741.05 due June 30, 1920, less plaintiff's wrongful July 6, 1921 taking of P30,000, left plaintiff indebted in the sum of P10,858.95 with interest and costs.

• Governing Contract: Whether the contract under which plaintiff rendered services for five years ending July 31, 1921 was Exhibit A alone or Exhibit A as modified by Exhibit B.
• Corporate Liability and Ratification: Whether the defendant corporation was bound by Exhibit B signed by Willits without formal corporate approval, including whether it assumed partnership obligations and ratified the agreement.
• Amount Recoverable: Whether plaintiff was entitled to recover P106,277.50 under Exhibit B, and what sum was presently due considering the cash, notes, and retained oil in the 500-ton transaction.

• Governing Contract: Yes. Services were governed by Exhibit A as modified by Exhibit B, the latter having settled disputed compensation provisions and having been thereafter followed without dispute between plaintiff and Willits.
• Corporate Liability and Ratification: Yes. Defendant was bound, having taken over partnership assets and liabilities and having ratified Exhibit B by knowing acceptance of services and profits credited under its terms.
• Amount Recoverable: Partly. Recovery was allowed but reduced, since the P75,000 in uncollected notes could not yet be treated as realized profits; judgment was for P68,527.50 plus a one-half interest in the notes.

• Governing Contract: Exhibit A entitled plaintiff, among others, to one-half of net coconut-oil profits, 1 per cent brokerage except on coconut-mill business, and one-half of other net profits, which on the then-large volume could support a claim exceeding P160,000 according to the accountant. Exhibit B was prepared after personal conferences to settle that disputed construction, providing defined commissions and equal profit-sharing on business with third persons and agency accounts while excluding inter-company business and earnings on owned corporate stock. As between plaintiff and Willits it was approved, followed, and never disputed after November 10, 1919, and financial statements consistently credited compensation on that basis.
• Corporate Liability and Ratification: After the partnership dissolved and its assets merged into the corporations, plaintiff necessarily continued working for the corporate successor, which recognized and accepted his services exactly as before. At signing, Willits was in legal effect owner of all stock in both one-man corporations and approved Exhibit B in their interest to limit exposure under Exhibit A, without any fraud or collusion. The separate corporate fiction was disregarded to treat the corporation and sole owner as the same for this purpose, and ratification was inferred because the Manila corporation through its accountant rendered statements showing liability under Exhibit B, forwarded them to the home office, and retained the benefits, including P105,000 cash, P75,000 in notes, and the oil security. A creditors' committee acquired no higher right than the corporation and could not assert a defense unavailable to Willits, who had never objected.
• Amount Recoverable: The Larkin statement for P106,277.50 assumed a realized net profit of P180,000 on the 500 tons, crediting one-half to plaintiff. Only P105,000 cash had actually been received, with P75,000 represented by purchasers' notes that had been collected and may never be paid, while defendant held the oil as security. Profits were therefore measured by the difference between purchase cost and amounts actually received at sale, excluding the notes until paid. The award was accordingly fixed at P68,527.50 with 6 per cent from January 10, 1922, plus ownership of an undivided one-half interest in the P75,000 notes and one-half of their proceeds.

• Disregard of separate corporate personality for one-man corporation — Where corporate stock is owned by one person so that the corporation functions only for that individual's benefit, corporation and individual are deemed the same when necessary to protect rights or prevent the fiction from being used to a subversive end. Applied here to treat Willits' signing and approval of Exhibit B as the act binding both the San Francisco and Manila corporations controlled by him.
• Ratification by acceptance of benefits with knowledge — A corporation may render binding an unauthorized contract of its officer or agent by ratification, which need not be by vote, formal resolution, or seal and may be inferred from acquiescence with full knowledge, especially where prejudice to a third person would result or benefits are retained. Applied here because financial statements disclosing credits under Exhibit B were prepared, sent to the home office, and left unobjected to until the creditors' committee intervened, while services and oil-deal profits were retained.
• Attribution of notice and inferred managerial authority — Notice to corporate officers or agents within the scope or apparent scope of authority is attributed to the corporation, and authority to represent the corporation may be inferred from the manner in which an officer has been permitted to manage its affairs in the usual course. Applied here to charge the defendant with knowledge of Exhibit B and the accounting treatment through Willits and its accountant and manager.

• "Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed to be the same." — States the one-man corporation rule relied upon to bind the defendant to Willits' approval of Exhibit B.
• "So long as a proper use is made of the fiction that a corporation is an entity apart from its shareholders, it is harmless, and, because convenient, should not be called in question; but where it is urged to an end subversive of its policy, or such is the issue, the fiction must be ignored" — Defines the limitation on separate corporate existence quoted to justify looking through the corporate form to Willits as sole owner.
• "As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon the defendant corporation, and the plaintiff is entitled to recover for his services on that writing as it modified the original contract Exhibit A." — Announces the central ratio on ratification and the governing compensation agreement.
• "It is elementary law that if Exhibit B is a binding contract between the plaintiff and Willits and the corporations, it is equally binding upon the creditors' committee." — Establishes that the successor creditors' committee acquired no greater defense than the corporation itself.

• U.S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249 — Cited as authority for the proposition that a corporation owned by one person functioning for that owner's benefit is deemed the same as the individual.
• State ex rel. vs. Standard Oil Co., 49 Ohio State, 137; 15 L.R.A., 145 — Quoted through Thompson on Corporations for the rule that the fiction of separate corporate entity must be ignored when urged to a subversive end and the shareholder's dual capacity examined.

Araullo, C.J., Street, Malcolm, Avanceña, Ostrand, and Romualdez, JJ., concur.