The opinion of the court was delivered by: KNAPP
This complicated diversity action was tried without a jury over a twelve-day period in part during July, 1974, and in part during January, 1975. The plaintiff, Teledyne Industries, Inc. (Teledyne), is a California corporation with its principal place of business in Los Angeles. It is seeking to impose liability on four individual defendants who are all directors and/or officers of Eon Corporation, a New York corporation with its principal place of business in Brooklyn. The reason behind this attempt to impose personal liability upon these defendants is that the corporation has become bankrupt.
The factual background to this action is fully set forth in District Judge Bauman's opinion denying the defendants' motion for summary judgment. Teledyne Industries, Inc. v. Eon Corporation (S.D.N.Y. 1974) 373 F. Supp. 191. For reasons of clarity, however, as well as to comply with the mandate of Rule 52(a) of the Federal Rules of Civil Procedure, it seems necessary again to set forth the general factual framework underlying this dispute.
The Eon Corporation, founded in 1961, is engaged in the research, development and marketing of medical, nuclear, electronic and optical devices.
In December, 1968, the company acquired what was called the American Marc Division, located in Inglewood, California. The division was engaged in the manufacture of diesel engines and electric generators. The head of the American Marc Division, and a significant participant in the dispute involved here, was M. James Leonard, who was also a vice president and director of Eon. Of the four defendants, Anton is president of Eon, Podell chairman of the board, Waller secretary, and Srybnik, both individually and through corporations under his control, the largest single shareholder. All are, and at the time of the events in question were, directors of Eon.
On June 20, 1969, Eon, through its American Marc Division was awarded a contract by the United States Army, No. DAA K01-69-C-A359, for the manufacture, production and delivery of 1.5 KW generator sets.
The American Marc Division, however, had been unprofitable and the contract was insufficient to save it. Shortly after the contract's award Eon's board of directors decided to terminate manufacturing operations at the plant. Pursuant to this decision, Eon began to look for a subcontractor to fulfill its remaining commitments under the Army contract. Eon's interest in locating such a subcontrator was communicated by Leonard to one Eugene Wolper who, in turn, contacted Harold Rouse, a Teledyne vice president sometime in early May. Since Teledyne had submitted an unsuccessful bid to the government in March, 1971 to manufacture the same type of generator being manufactured by American Marc, it was not extraordinary that Rouse expressed interest in the deal. A meeting was arranged in Los Angeles between Teledyne and Eon representatives for May 10, 1971.
The negotiations proceeded rapidly, and culminated three days later on May 12, with the signing of two contracts. Present during all or part of the negotiations was 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 agreements. The extent of Anton's participation in, and knowledge of, the negotiations is a critical issue in this lawsuit.
Two documents were executed by the parties on May 12. One was Purchase Order No. M-1257, the subcontract arrangement whereon Teledyne agreed to manufacture 4,372 generator sets at a unit price of $360, or a total contract cost of $1,573,920, and to deliver them according to the provisions in the original Army contract.
The other was an inventory agreement
which provided, in part, that Teledyne would purchase from Eon all of the generator set parts and material in Eon's possession as of August 31, 1971 which was in "reasonably good condition". Teledyne agreed to pay a price equal to 75 percent of the value of the inventory. In addition, Teledyne purchased tooling, gauges and other equipment needed to perform the subcontract from Eon for a price of $25,000.
As part of the contractual agreement, the parties also made certain arrangements for payment from Eon to Teledyne. A letter
from Rouse to Leonard dated May 13, 1971, acknowledged and accepted by Leonard on May 25, 1971, speaks of the understanding in general 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 invoices. Mr. Leonard to confirm this, in writing, to exact arrangements, etc."
The arrangements were spelled out in a letter dated May 25, 1975 from Leonard to the Palos Verdes branch of the Bank of America.
The letter which is set out in full below,
provided that all funds received by American Marc from the sale of the generators would be held on deposit in a "special account." When the funds were received, the Bank would be directed to use those funds to pay the amounts of Teledyne's invoices. The remainder in the account was to "be dispursed according to the direction of American Marc Division of EON Corporation." A copy of this letter was sent to both Rouse and Coleman, the latter to whom Leonard wrote on May 25, 1971:
". . . [I have] arranged for the Bank of America to hold funds received from [the] generator sales in a special account which will be used to pay TCM [Teledyne] invoices. (See letter attached)"
Teledyne commenced production and delivery of the generator sets in late 1971, and for a while the arrangement worked as planned. In the Spring of 1972, however, Eon ceased making its payments under the subcontract. The money received from the government from the sale of the generators was not paid to Teledyne but was used for other corporate purposes. On July 29, 1972 Teledyne commenced this action.
At trial, Teledyne sought to prove two separate theories of liability. First, it alleged that the four defendants had embarked upon a scheme to defraud Teledyne by inducing it to enter into a contract which they knew Eon lacked the means to perform. Specifically, it charged that two fraudulent representations were made to Teledyne: (a) that the amount remaining to be paid to Eon from the government under the original contract was greater than the subcontract price; and (b) that Eon had clear and unencumbered title to the inventory, tooling and other equipment which Teledyne agreed to purchase. Secondly, Teledyne argued that the four defendants participated with Eon in breaching a fiduciary duty, allegedly owed by Eon to Teledyne. Plaintiff's claim in this connection was that the Bank of America special account had been established as part of the contract, that its purpose had been to insure the payment of Teledyne invoices, and that Eon had consented not to withdraw any funds from this account until Teledyne had been paid in full. It would follow, according to plaintiff's contention, that the subsequent diversion of these funds by the four defendants for other corporate purposes constituted a breach of trust and an act of conversion.
The defendants, of course, vigorously contest these allegations. They maintain that no fraudulent misrepresentations were made in the negotiation of the Eon-Teledyne contract, and that the parties never intended to create any sort of fiduciary or trust relationship. Although the defendants acknowledge, as they must, that Eon did breach its contract with Teledyne, they deny personally engaging in any sort of conduct that would lead to the imposition of individual liability upon them for the breaches or torts of Eon.
As a preliminary matter, the defendants maintain that this court lacks jurisdiction to resolve the dispute between the parties. The defendants argue that the exclusive jurisdiction to determine the factual issues involved here exists solely with the bankruptcy court in the Eastern District of New York, the place where Eon has filed a petition for arrangement pursuant to Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. This argument is, however, completely without merit.
The plaintiff commenced this action in July, 1972 against the four individual defendants, Eon Corporation, and another corporation, not here relevant, who was subsequently discontinued as a party. In January, 1973, Eon filed a petition for arrangement in the Bankruptcy Court. On January 12, 1973 Bankruptcy Judge Price in the Eastern District signed an order staying all proceedings against Eon. Since that date, therefore, this action has involved only the plaintiff and the four individual defendants.
On March 13, 1974, Teledyne filed a proof of claim against Eon in the bankruptcy proceeding for the sum of $713,572.65. The proof of claim, which explicitly revealed Teledyne's intention to pursue the instant action here, indicated that the claimed indebtedness was for "goods, wares and merchandise sold and delivered to the Debtor [Eon] at the special instance and request of the Debtor." Subsequently, Teledyne was listed as an unsecured creditor of Eon and took part in the arrangement. Judge Price confirmed the amended plan of arrangement in an order dated April 30, 1975.
Based on the foregoing undisputed chronology, the defendants contend that this court is foreclosed from resolving the issues involved in this litigation. They rely on the exclusive jurisdiction of the bankruptcy court over Eon, and, in the alternative, on the doctrines of res judicata or collateral estoppel. Both contentions must be rejected.
First of all, under the bankruptcy statute, the exclusive jurisdiction of the bankruptcy court extends only to the debtor, in this case Eon, and its property. 11 U.S.C. § 711.
In this action, the plaintiff is seeking to impose liability on the individual defendants personally. The subject matter of this lawsuit is clearly not property in the actual or constructive possession of Eon. A judgment in favor of plaintiff will in no way affect Eon or its property, and obviously will not interfere with the bankruptcy court's order of arrangement.
Secondly, the stay issued by the bankruptcy judge with respect to Eon does not in the least affect these proceedings. The power to enjoin lawsuits pursuant to 11 U.S.C. § 714
is confined to actions in which the debtor is a party or in which the debtor's property is directly affected. Evarts v. Eloy Gin Corp. (9th Cir. 1953) 204 F.2d 712, cert. denied 346 U.S. 876, 98 L. Ed. 384, 74 S. Ct. 129; 8 Collier on Bankruptcy, § 3.21 (14th Ed. 1971). As noted above, the instant action involves neither the debtor nor its property. Indeed, the bankruptcy judge himself in this case specifically refused to enjoin Teledyne's suit against the individual defendants.
The defendants' claim of res judicata or collateral estoppel must likewise be rejected. They argue that since Teledyne filed a proof of claim and proceeded as an unsecured general creditor in the bankruptcy proceeding, it should be estopped from now proving that the transaction between Teledyne and Eon was fraudulent or that a fiduciary relationship between the corporations existed. The defendants lay great stress on the fact that Teledyne did not seek to have Eon's debt declared non-dischargeable pursuant to 11 U.S.C. § 35(a),
a provision which releases a bankrupt from all of his provable debts except for eight specified categories of liabilities, one of which is a liability "for obtaining money or property by false pretenses or false representations, . . . or for willful and malicious conversion of the property of another." 11 ...