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March 20, 1974

EON CORPORATION et al., Defendants

Bauman, District Judge.

The opinion of the court was delivered by: BAUMAN

BAUMAN, District Judge.

This is a diversity action brought by Teledyne Industries, Inc., a California corporation with its principal place of business in Los Angeles against Eon Corporation, a New York corporation with its principal place of business in Brooklyn, and four of its officers and/or directors, Podell, Srybnik, Anton and Waller. *fn1" Before the court are two motions, one by the plaintiff and one by the four individual defendants. *fn2" Plaintiff moves pursuant to Rule 37(a) (2) of the Federal Rules of Civil Procedure for an order compelling production of certain documents previously requested under Rule 34. Defendants move, pursuant to Rule 56, for partial summary judgment dismissing plaintiff's action as against them. I shall first consider defendants' motion, for it requires an exposition of the underlying facts necessary for an understanding of the discovery motion as well.


 As an introduction to the discussion of the summary judgment motion, it will be useful to set forth those facts which are undisputed. What follows, then, is drawn from defendants' 9(g) statement, the pleadings, and the transcripts of the various depositions submitted by the parties.

 The Eon Corporation, founded in 1961, is engaged in the development and manufacture of "medical, nuclear, electronic and optical devices." *fn3" In December, 1968 it acquired what became its American Marc Division, which was located in Inglewood, California and was engaged in the manufacture of diesel engines and electric generators. Of the individual defendants, Anton is president of Eon, Podell chairman of the board, Waller secretary, and Srybnik, both individually and through corporations he controls, the largest single shareholder. All are directors of Eon, and were at the time of the events in question.

 On or about June 20, 1969, Eon, through American Marc, was awarded a contract by the United States Army, No. DAAKO1-69-C-A359, for the manufacture, production and delivery of 1.5 KW generator sets. At some point in 1970, the Eon board decided to find a subcontractor to fulfill its remaining commitments thereunder. This decision had been reached pursuant to its earlier determination to terminate the operations of the unprofitable American Marc Division. Eon's interest in locating such a subcontractor had been communicated to one Eugene Wolper by M. J. Leonard, an Eon director and head of the American Marc Division. Wolper in turn contacted Harold Rouse, a Teledyne vice president, during the week of May 3, 1971. When Rouse expressed interest, a meeting was arranged in Los Angeles between Teledyne and Eon representatives for May 10, 1971.

 The negotiations were completed in the brief span of three days, and culminated in the signing of contracts on May 12, 1971. Present during all or part of the negotiations were Leonard, Wolper, Rouse, and Homer Coleman, another Teledyne executive. Anton arrived in Los Angeles on May 12, and participated in the final discussions and execution of the agreement.

 Two documents were executed on that day. One was Purchase Order No. M-1257, wherein Teledyne agreed to manufacture 4,372 generator sets at a unit price of $360, *fn4" or a total cost of $1,573,920, and to deliver them as specified in the original Army contract. The other was an inventory agreement which provided, in essence, that Teledyne would purchase from Eon all of the generator set parts and material which Eon possessed in good condition on August 31, 1971, at a price equal to 75% of the inventory value of such equipment as well as the tooling, gauges, and other equipment necessary to perform the contract.

 In addition, the parties also made certain arrangements for payment from Eon to Teledyne. A letter from Rouse to Leonard dated May 13, endorsed with Leonard's acceptance on May 25, set out the essential terms:

"Eon will arrange with Bank of America to hold funds received from 1.5 KW generator sales, covered on Eon Purchase Order No. M-1257 in a special account, which will be used to pay TCM [Teledyne] invoices. Mr. Leonard to confirm this, in writing, to exact arrangements, etc."

 The arrangements were spelled out in a letter dated May 25, 1971, from Leonard to the Palos Verdes branch of the Bank of America. *fn5" The letter, which is set out in full in the margin, *fn6" provided for the deposit of all funds received by Eon from the sale of the generator sets to the government "in our special account which we have opened at the Bank of America for this purpose." Payments to Teledyne were to be made by cashier's check after Eon received the Teledyne invoices for generator sets produced and shipped, and after the government had paid Eon. The letter also provided that "the balance in the account will be dispursed (sic) according to the direction of American Marc Division of Eon Corporation." The meaning of this phrase, as will be noted below, is very much in doubt.

 Teledyne commenced production and delivery of the generator sets later in 1971, and for a time the arrangement worked as planned. However, in April or May of 1972, Eon informed Teledyne that it would no longer make payments under the subcontract. According to Anton, Eon's president, Eon was compelled to use the money received from the government for other corporate purposes. Had Eon paid Teledyne instead, he asserted, "the company would have stopped existing." *fn7" This lawsuit was commenced by Teledyne on July 27, 1972.

 In its complaint, Teledyne sets forth two causes of action. In the first, it alleges that the defendants embarked upon a scheme to defraud Teledyne by inducing it to enter into a contract which they knew Eon lacked the means to perform. In pursuance of this scheme, it is charged that two fraudulent representations were made to Teledyne: (a) that the amount remaining to be paid Eon by the Army under the contract exceeded the subcontract price, and (b) that Eon had clear and unencumbered title to the inventory, tooling, and other equipment which Teledyne had agreed to purchase. The second cause of action alleges, in essence, a breach of fiduciary duty owed by Eon to Teledyne. It is claimed that Eon undertook to establish a special account for the payment of Teledyne's invoices, and further undertook not to withdraw any funds from this account until Teledyne had been paid in full. The funds received by Eon from the Army were "held in trust" in this account, it is alleged, and the subsequent diversion of such funds to other purposes constituted a breach of trust and an act of conversion.


 In support of its motion for summary judgment with regard to the first cause of action, defendants argue that the facts as developed in the numerous depositions taken demonstrate beyond cavil that they made no fraudulent representations to Teledyne, and did nothing to induce it to enter into the subcontract. Plaintiff, of course, argues that there is a more than adequate basis in the record thus far developed for concluding that the defendants participated in the allegedly fraudulent scheme.

 At this juncture, then, it will be useful to review the familiar standards that govern motions for summary judgment. I must at the outset acknowledge the pertinence of Professor Moore's observation that "summary judgment is apt to be inappropriate in an action based on a complex scheme of fraud where the court is asked to decide the motion on lengthy affidavits and documents and voluminous depositions." *fn8" Moore adds the obvious caveat that the ...

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