PATROSSO, J. pro tem.
This is an appeal from an order appointing a receiver ex parte and from an order confirming the appointment and continuing it pendente lite. The action is against Albert E. Killeen, Jack R. Killeen, individually, and also as copartners doing business under the name of Killeen and Son Production Engineering Company, and Herbert C. Manuel, a bookkeeper employed by the Killeens. The action is for an accounting and damages for fraud. It was alleged in the complaint that on October 1, 1951, Sachs and Killeen and Son (hereinafter called Killeen), entered into a written agreement whereby the latter undertook to manufacture a device for regulating the speed of electric motors which had been invented by Sachs; the agreement was for an initial five-year term, renewable for a further five years unless terminated by notice. The agreement provided that Sachs was to do all experimental and design work and to market the device, but he was not to contribute any capital or to be charged with any losses from the venture. Killeen agreed to divide the net profits of the enterprise equally with Sachs, to furnish him with quarterly statements, to remit with the statements any sums due him, and to permit him to inspect the books and records pertaining to the project. Net profits were defined
It was also alleged in the complaint that defendants formed a conspiracy to defraud Sachs of his rightful share of the profits from the enterprise. Plaintiff alleged that from 1951 through June 30, 1957, he received from Killeen what purported to be correct quarterly statements of the profits and losses from the sale of the speed control device, showing his 50 per cent share of the net profits to be $58,270, of which $5,074 remained unpaid. It was alleged that the statements submitted by Killeen were false and fraudulent, that defendants withheld $121,229 in profits actually earned by plaintiff, and that by charging unauthorized expenses against the gross receipts of the venture, they defrauded Sachs of an additional $80,000. Plaintiff also alleged that he received statements from defendants showing a loss of $1,112 for the first six months of 1957, that defendants have wrongfully withheld the statement for the third quarter of 1957, and that said statement shows a net profit of $43,047 from the manufacture and sale of the speed control device for the first nine months of 1957.
It was further alleged on information and belief that defendants have defrauded Sachs of sums in excess of $201,229, that defendants are insolvent and without funds except for the sums they have wrongfully withheld from plaintiff, and that unless a receiver is appointed, defendants will conceal their property, remove it from the jurisdiction of the court and alter or destroy their records. Plaintiff also alleged on information and belief that all the property owned by the Killeens, to wit: a home, the Killeen factory building and equipment, two automobiles, securities, and cash on deposit in two banks and a savings and loan association, was acquired with money wrongfully withheld from plaintiff and that all such property is held by the Killeens as trustees for Sachs. The
An affidavit of plaintiff was filed in support of the application for appointment of a receiver, which stated that to his personal knowledge the Killeens were engaged full time in the production of the speed control device and had no other business or source of income, that the balance sheets of the Killeens showed that their net worth did not exceed $5,000 in 1951, and that their assets were acquired almost entirely from the sale of the device. It was alleged that plaintiff had examined the books of Killeen and Son and discovered duplicate sets of records in the handwriting of Manuel, that he had seen reports made by Manuel for submission to the Killeens and compared them with the quarterly statements furnished to him, and that he had found discrepancies in such reports showing an understatement of net income of not less than $121,229. Photostatic copies of two balance sheets allegedly in Manuel's handwriting were attached to the affidavit. One, marked "H. Sachs Copy," was the report submitted to plaintiff for the quarter ending December 31, 1954; it stated the net profits for the year at $40,172. According to the other balance sheet, marked "A. Killeen Copy" and allegedly submitted by Manuel to Killeen and Son, the net profit for the year was $60,523. There were numerous discrepancies between the two summaries: i.e., purchases were stated as $75,141 in the Killeen summary and as $77,141 in the Sachs summary; the inventory of raw materials was stated as $15,184 in the Killeen summary and as $6,184 in the Sachs summary; the inventory of work in process was stated as $2,569 in the Killeen summary and as $1,569 in the Sachs summary; the manufacturing expenses indicated in the summary furnished plaintiff exceeded those in the Killeen summary by $998; the selling expenses referred to in the Sachs summary exceeded those in the Killeen summary by $1,000; administrative expenses were stated in the Killeen summary as $3,771 and in the Sachs summary as $10,124. It was alleged that the additional costs and lessened inventory in the Killeen summary totalled $20,351, an amount equal to the difference between
Defendants filed an answer to the complaint. The Killeens admitted the execution of the contract and admitted owing $5,074 to Sachs. Defendants denied having defrauded plaintiff and denied rendering him any false statements. They alleged that their quarterly statements were correct "except for adjustments made at plaintiff's request" and that the system of accounting under the contract was "modified in certain particulars from time to time by executed oral agreements whereby plaintiff consented and agreed to accept performance differing in certain respects from that specified in the written agreement, waived any right to demand performance strictly in accordance with the terms of said written agreement and became, was and is estopped to deny such oral modifications...." The Killeens denied that any of their assets were acquired with funds wrongfully withheld from Sachs; they alleged that they owned property consisting of $40,500 on deposit in banks and a savings and loan association, securities worth $5,500, real property of a value of $85,000 over and above encumbrances, and two automobiles worth $2,200. The answer contains a counterclaim for $60,000 damages allegedly sustained by reason of plaintiff's surreptitious removal of personal property and business records from the business offices of Killeen.
Three affidavits in opposition to confirmation of the appointment of a receiver were filed on behalf of defendants. The affidavit of Albert E. Killeen stated that Killeen and Son has been engaged in manufacturing tools, dies and metal products since 1942 and that a receivership would cause irreparable damage to the business. Killeen denied that Sachs invented the speed control device, alleging that it was merely an improvement upon a device owned by Utility Appliance Corporation, Sachs' employer. It was also alleged that Sachs failed to perform his obligations under the 1951 agreement in that he did not do the experimental and design work and that he did not handle the sales and marketing of the device as his employer forbade him to engage in selling activities on behalf of any other company. It was also alleged that Killeen and Son kept a separate set of books in connection with the speed control project for the reason that the company continued to operate its other business, as plaintiff well knew. Killeen denied that Manuel had prepared a report showing
At the hearing for confirmation of the appointment, reply affidavits were filed by plaintiff, plaintiff's attorney, and one Alford, a certified public accountant. The affidavit of Sachs stated that the written agreement was never modified by the parties, that he did not request deferment of any profits earned in 1954 until the following year, and that he did the experimental and design work for the speed control device and procured most of the sales. It was alleged in the affidavit of the attorney that he had taken the depositions of Manuel and Albert E. Killeen. (The depositions had not been signed on the hearing date and were marked for identification only.) Manuel assertedly testified in his deposition that he had been working in his spare time as the Killeens' bookkeeper since 1942, that he received as much as $2,750 a year from the Killeens but did not report this compensation in his income tax returns, that he prepared the quarterly statements furnished to Sachs from information provided by Albert E. Killeen, that Killeen told him to add fictitious items of expense to those legitimately incurred, and that these fictitious items consisted of expenditures relating to purchases, administration, manufacturing and sales. Killeen assertedly testified in his deposition
Alford stated in his affidavit that he had examined the books and records of Killeen and Son, including copies of the company's tax returns, profit and loss statements and balance sheets. He alleged that none of the reports submitted to Sachs agreed with the books of the company, that costs and expenses were charged to the venture without any support in the records, and that from 96 per cent to 99.9 per cent of the company's expenses were attributed to the venture. Alford also alleged that the amount wrongfully withheld from Sachs exceeded $174,000. His affidavit gave a detailed statement of discrepancies between the sales and net profits reported to Sachs from 1951 to 1957 and those reflected in the books of the company: e.g., in 1955 the company reported in its federal income tax return a net profit of $117,466 upon sales of $319,644, whereas it reported to plaintiff a net profit of $39,301 on sales totalling $308,833; in 1956 the company reported to the tax authorities a net profit of $66,260 upon sales totalling $248,352, while it reported to Sachs a net profit of $20,473 upon sales of $244,193. Alford also stated that a profit and loss statement prepared by Manuel for the first 10 months of 1957 reflected sales of $101,682 and a profit of $44,824, while the report submitted to plaintiff for the identical period reflected sales of $91,863 and a net loss of $6,187. Three charts prepared by Alford from the records of Killeen and Son were attached to his affidavit as exhibits. The charts showed that the Killeens had reported $112,578 in profits upon gross receipts of $1,013,707 in their quarterly statements to plaintiff from 1951 to 1957, and that Sachs' actual share of the profits was not $56,288, as represented to him by the Killeens, but $185,453.
The ex parte order appointing a receiver, and which was later confirmed, authorized the receiver to take, care for and keep possession of all property of the Killeens, as described in the complaint, namely, their real property, their automobiles, bank accounts and securities and to manage their business.
We think that upon the showing made by plaintiff the court was warranted in confirming the appointment of a receiver of the property of the Killeens.
Section 564, subdivision 1 of the Code of Civil Procedure authorizes the court to appoint a receiver "[I]n an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject any property or fund to his claim, or
Shinn, P.J., and Vallée, J., concurred.