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June 24, 1959

Robert E. MORRIS, Defendant

The opinion of the court was delivered by: WEINFELD

This is an action by the plaintiff, a New York corporation, against its former President and Director, *fn1" charging him with breach of fiduciary duty. The basic charge is that the defendant, while still an officer of the plaintiff, induced the cancellation of a profitable sales distributorship enjoyed by plaintiff for thirteen years, which thereupon was awarded to a corporation controlled by the defendant.

Plaintiff was organized in April 1943 by the defendant, Robert E. Morris, and his then close friend, Max J. Bloch, to act as sales representative for manufacturers of factory equipment. Each purchased 50 per cent of the corporation's capital stock for $ 15,000.

The plaintiff, upon its formation, was designated by the W. H. Nichols Company as its sole distributor, on a national and world-wide basis, of milling machines manufactured by it and known in the trade as 'Nichols Millers'. For some years previously, the defendant had acted as the New England sales representative of W. H. Nichols Company, and it was largely because of the esteem in which he was held by officials of the latter company that plaintiff corporation was designated. As national sales representative, plaintiff served as the sales and credit department of the W. H. Nichols Company; appointed retail dealers throughout the United States; passed upon the credit to be extended to them; furnished them with technical assistance; carried on promotional and advertising campaigns; and generally did whatever was required to promote the sale of the machines.

 Plaintiff continued to act in this capacity without interruption until May 4, 1956 when the Nichols Company terminated plaintiff's appointment as its national distributor. The Robert E. Morris Company, a corporation of which the defendant was President and controlling stockholder, was named as plaintiff's successor. The plaintiff charges that the loss of the national distributorship of 'Nichols Millers' was induced by the defendant in breach of his duty to it and in violation of its rights. It also charges that the defendant, in furtherance of his design to displace the plaintiff, enticed one of its employees, who had been engaged specifically to further sales and to service local 'Nichols Millers' dealers, to resign, and to enter into the employ of the Robert E. Morris Company.

 Upon the organization of the plaintiff corporation, Morris was elected President and Bloch Vice-President; each was also elected a Director. They were the sole stockholders and both entered into employment agreements with the corporation. These did not restrict participation in the affairs of other corporations in which each was interested. Thus, Morris was permitted to continue his activities with the Robert E. Morris Company which, under appointment by the plaintiff, thereafter continued to function as the exclusive New England retail agency for 'Nichols Millers'. The plaintiff, as the national distributor of the product, received an overriding commission on all sales made by local or territorial agencies, including the Robert E. Morris Company.

 The affairs of the plaintiff, at least as they touch upon issues presented by this case, fall into three periods. The first is from its incorporation in April 1943 through the first half of 1946. During this period it met with moderate success. In this initial stage, Bloch and the defendant, although permitted by their respective employment contracts to serve other corporations in which they held interests, devoted substantially all their time to promoting plaintiff's welfare. The defendant, who was designated General Manager, was the contact man. He called upon local dealers; advised with them on technical matters; prepared promotional and advertising material and engaged in sales promotion. Bloch, who was designated the Sales and Export Manager, generally functioned as the inside man. Each attended Trade shows at which the 'Nichols Millers' were exhibited.

 During the second period, from the latter half of 1946 to the spring of 1949, the plaintiff operated at a loss or a nominal profit. Morris gave less of his time to plaintiff than previously; he divided his activities in 1946 and 1947 about equally between it and the Robert E. Morris Company. Early in 1949 the defendant sold to the plaintiff 140 shares of his stock at par value ($ 14,000) which were held as Treasury stock. He retained 10 shares of his original holdings. Some months before the sale of his stock, commencing in the latter part of 1948 and continuing until May 11, 1956, the defendant concentrated the major portion of his time and efforts on the affairs of the Robert E. Morris Company, and gave less time to plaintiff than in any previous period. As of April 1, 1949, he resigned as General Manager of plaintiff, but continued to serve as its President and Director, to which offices he was regularly elected until he resigned on May 11, 1956. The defendant, commencing in the early part of 1949, waived any compensation as an officer or director, or for any other services rendered by him.

 The third chapter extends from 1950 to May 11, 1956. Beginning in 1950, the plaintiff's fortunes improved considerably, and its activities as national sales distributor for the 'Nichols Millers' became increasingly profitable -- much beyond the initial era of 1943 to 1946. This was also a prosperous period for the Robert E. Morris Company, which was the most successful of all the local dealers in 'Nichols Millers'. Bloch and Morris, during the era of 1950 to 1956, remained fast and close friends -- at least, until the events hereinafter described commencing on February 6, 1956.

 Following the defendant's resignation as General Manager in 1949, Bloch necessarily took on added functions and expanded his activities in managing the affairs of the plaintiff. However, Morris, who as already noted continued as President, was not without his duties. He was consulted on all major and basic problems pertaining to the plaintiff; he called on 'Nichols Millers' local dealers; he represented the plaintiff on annual trips in the United States and abroad (while also acting for the Robert E. Morris Company, there being no incompatibility in such representation); he edited letters involving major policy considerations; he prepared advertising copy and promotional literature; he advised on personnel matters; he rendered technical advice and assistance.

 Toward the end of 1955, it was decided that plaintiff's sales and field service contacts should be expanded. Through the defendant's efforts, the services of one John H. Bashforth, who had been with one firm for thirty-two years, were secured. It was intended that Bashforth would play an important role in plaintiff's affairs as a skilled sales and service engineer. The need for such a person had been stressed by the W. H. Nichols Company. Bashforth entered into the employ of the plaintiff on February 1, 1956, under a written contract.

 On February 6, 1956, shortly after Bashforth's employment, the defendant advised Block that he desired to repurchase the 140 shares of Treasury stock at par value, the price at which he had sold them in 1949. Bloch did not take kindly to this proposal, since the book value of the outstanding shares greatly exceeded their par value. Morris, however, felt that his proposal was fair since he had given of his time and effort to the corporation and had remained as President and Director, all without compensation, since the early part of 1949. Their first discussion was inconclusive. During the course of the conversation, Morris stated that he was principally responsible for plaintiff having the Nichols account, and that he had power to take the account from plaintiff. The defendant concedes that he intended a threat to take the account unless some agreement were reached.

 Following the February 6th proposal, the relationship between Bloch and Morris was a guarded one, with attempts -- not too successful -- to resolve their differences. In the weeks that followed, the defendant taxed plaintiff for evading a decision. Impatient because of the delay, the defendant on March 27, 1956, sent Bloch a letter in which he summarized their business and personal relationship through the years, and pressed for a definite answer as to the repurchase of the stock. In general, the defendant emphasized his, and denigrated Bloch's contribution to the plaintiff. Before Bloch could reply and without his knowledge, Morris, on March 28 and 29, called on Hart Nichols, a principal executive officer of the Nichols Company. He showed Nichols his March 27th letter to Bloch, and discussed its contents with him. Nichols was on terms of close friendship with both men, but it is stating the fact that he regarded Morris as the one most responsible for plaintiff's success in the sale of 'Nichols Millers'. At the two-day meeting, Morris complained of Bloch's failure to come to terms on the resale of the stock; he disparaged Bloch's capacity to meet and fraternize with 'Nichols Millers' dealers, and emphasized the importance of his own contacts with them. He underscored Bashforth's recent employment by plaintiff and the role he was expected to play with dealers in the servicing and sales of the 'Nichols Millers' line, and that it was he, Morris, who had been responsible for Bashforth joining the plaintiff. Other matters of a kindred nature were presented by Morris. In sum, he undermined both plaintiff's and Bloch's position as effective forces for Nichols products without the benefit of his association.

 There can be no doubt that the purpose of the defendant's call on Hart Nichols was to lay the groundwork for the transfer of the distributorship to him in the event he failed in his purpose to repurchase the stock.

 The week following, Bloch called upon Hart Nichols and suggested that the defendant was using his friendship with the latter to enforce his demands with respect to the stock. Nichols, in an effort to compose the differences between the two erstwhile friends, pointed out that they had made a well-balanced team. While Nichols testified that at the conferences on March 28 and March 29, Morris did not specifically say he was prepared to set up his own organization in the event the parties failed to reach an accommodation, it was patent that this was clearly implied. Indeed thereafter an ...

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