Weiss v. Smith (106 F. Supp. 53, 1952)

SMITH, District Judge.

This is an action for specific performance of defendant’s contract granting plaintiff an option to purchase one-third of defendant’s 50% stock interest in two corporations : Biggs Boiler Works Company, and Central Management.

Biggs and Central Management were,' in November, 1950, in financial difficulties. In this situation, Allied Commonwealth Corporation, a New Jersey corporation, was interested in taking over the financing of Biggs. Plaintiff Weiss and one Garfinkel controlled 75% of Allied Commonwealth and Dorison, its president, 25%.

Weiss and Dorison came to Cleveland and, on November 6, 1950, arrived at a final agreement with Krizanek and Smith on terms for financing Biggs’ operations. The agreement was in four parts: (1) a written agreement on financing of receivables; (2) a written agreement on financing of inventory; (3) a written agreement granting the Allied interests an option to purchase one-third of the stock held by Krizanek and Smith at the price they had paid for it, $2,600, to be paid $100 at the giving of the option, $2,500 at its exercise; (4) an oral agreement that Krizanek, Smith and Allied each share equally in Biggs’ profits and that “consultants’ fees” be paid the Allied interests by Biggs at the rate of $1,000 a month, equal to the salary to be drawn by Smith and by Krizanek, and that two of four directors be Allied’s nominees.

Allied advanced $65,000 immediately to clean up pressing bills and pay off the old factor, and continued to advance funds against assignment of accounts receivable and against inventory. The interest rate was approximately 18%, with an agreement to reduce it to 15% when the amount outstanding reached a certain figure. The option agreement was delivered to Allied only after the $65,000 was advanced.

There were squabbles and sevei al changes in arrangements caused by a requirement for Allied’s countersigning of Biggs’ checks. There was also a dispute in January, 1951, over the assignment of a receivable from West Virginia Pulp and Paper Company on which a down payment had already been made to Biggs. Biggs, on the other hand, complained because the amounts, advanced were lower than the percentages agreed to be advanced by Allied.

There was less than complete trust of the other party exhibited by each side, 'but, on the whole, substantial performance or at least performance reasonably acceptable to both was had until late March, 1951. At that point, Allied had made substantial advances and Biggs’ condition had materially improved. The monthly losses were still being incurred, but had lessened. A large backlog of orders was on the books. Prospects for future profits, and for meeting the terms of the mortgage-extension agreement were brighter.

At this point, on March 22, 1951, Allied, from which Dorison had meanwhile departed after warning Smith of trouble ahead, shut down on financing for Biggs and required drastic economies, in large part at the expense of Smith’s receipts from Biggs, as well as the creation of a definite limiting ratio between loans for receivables and loans for inventory, and investment by Krizanek and Smith in Biggs, as the price of renewal of the financing.

Frantic but unsuccessful efforts were made by Smith to find other financing, terminated by his removal as president and director of Biggs.

The removal of Smith was attempted to be accomplished first through a voting trust which had been set up in late November, 1950, by Krizanek and Smith, constituting Steadman, Biggs’ attorney, Krizanek, and Smith trustees to vote all the stock. Stead-man and Krizanek voted all the stock, including Smith’s, to remove Smith, close the New York office, and stop Smith’s pay and expenses. The Delaware court, however, invalidated the action. Meanwhile, the board of directors, by the votes