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First National Bank of Cincinnati v. Pepper

decided as amended.: November 16, 1976.


Appeal by claimant Pepper from so much of a judgment of the District Court for the Southern District of New York, Marvin E. Frankel, Judge, in an interpleader action by the First National Bank of Cincinnati, as disallowed his claim for $75,000 based upon a settlement agreement. Cross-appeal by claimant Rosalie M. Arlinghaus as executrix of the will of Frank H. Arlinghaus from so much of the judgment as dismissed her claim to enforce a judgment of the Probate Division of the County Court for Monmouth County, New Jersey, requiring Pepper to return fees received as attorney for the estate of Mr. Arlinghaus, on the basis of lack of personal jurisdiction by the New Jersey court. On the appeal from the portion of the judgment dismissing the claim, the judgment is modified and the cause remanded for determination of a reasonable attorney's fee owing to Pepper; on the cross-appeal the judgment is reversed.

Friendly, Hays and Timbers, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge.


This interpleader action, 28 U.S.C. ยง 1335, wherein the claimants are of diverse citizenship, has been pending in the District Court for the Southern District of New York since 1968, where it has accumulated seven closely typed pages of docket entries. The issue which led to the bringing of the action was whether an agreement between Sidney Pepper - who had been attorney for Modern Talking Picture Service, Inc. (Modern), Frank Arlinghaus, its founder and controlling stockholder, and his estate - and Mrs. Arlinghaus and other stockholders of Modern settling Pepper's claims for attorney's fees at $75,000, was voidable for duress of property. The case has been in this court before, First National Bank of Cincinnati v. Pepper, 454 F.2d 626 (2 Cir. 1972), on appeal from an order of the late Judge McLean granting Pepper's motion for summary judgment and dismissing the stockholders' related cross-claims. We there held that the action presented triable issues of fact and reversed the summary judgment order, remanding for trial. This was held before Judge Frankel and resulted in a judgment against Pepper voiding the settlement agreement and disallowing his claim.

In view of the terms of the agreement, which are set out in the margin,*fn1 and especially paragraph 6, it is understandable that Judge McLean thought summary judgment for Pepper was appropriate and that, in reversing his decision, this court said "the burden assumed by the stockholders is a heavy one." 454 F.2d at 634. Judge Frankel concluded that this burden, outlined in more detail in a passage from the majority opinion by Judge Mansfield, 454 F.2d at 633-34, quoted in the margin,*fn2 had been met.

If the stockholders could avoid the settlement only by proving that, as said in our previous opinion, see fn. 2, "Pepper had no right to legal fees in connection with the Sonderling deal" (emphasis supplied), we would be constrained not simply to reverse but to direct judgment in favor of Pepper for the amount provided in the settlement. We disagree, respectfully but nonetheless firmly, with the district court's conclusion that Pepper was not entitled to any legal fees above his monthly retainer, either from Modern or from the stockholders. This conclusion is not a "finding of fact" protected by the "unless clearly erroneous" rule, F.R.Civ.P. 52(a), but rather a mixed question of law and fact open to full review. In re Hygrade Envelope Corp., 366 F.2d 584, 587-89 (2 Cir. 1966); James Talcott, Inc. v. Wharton, 543 F.2d 986 (2 Cir. 1976), slip op. at 5670.

It is common ground that consideration must begin with the retainer agreement embodied in a letter dated January 4, 1966, from Pepper to Carl Lenz, who had become president of Modern on Frank Arlinghaus' death in 1964. This read:

Pursuant to the request at the last directors' meeting we are setting forth our understanding of the retainer of this firm by the corporation.

The retainer includes all legal services for the corporation of the character and amount heretofore performed which can be performed in the City of New York during customary business hours, but not litigation and special services such as trademark services. No charge shall be made by us for any legal services not covered by the retainer except with your prior approval.

If the character of the corporation's business should change substantially by reason of the entry into new activities, we shall have the right to ask for a reconsideration of the amount of the retainer.

We suggest that the retainer be for a calendar year with automatic renewal for consecutive like periods unless either of us shall request a change before October 1st of the current year. For the first year hereunder the amount of the retainer is to be considered and fixed at the next Board of Directors meeting.

If there is anything in the foregoing which is not entirely clear or which you may wish to add, I will be glad to discuss it with you at your convenience.

According to handwritten notes on Modern's copy of the letter, the retainer agreement was amended on March 15, 1966 so that the retainer should run over the fiscal year rather than calendar year, and notice of nonrenewal had to be given by April 1 of the current year rather than October 1. (Arlinghaus exhibit 1-A; trial transcript at 197-98).

There is uncontroverted proof that, beginning in the fall of 1967, Pepper, at the request both of Mrs. Arlinghaus and of the management, approached a number of companies with a view to their acquiring the stock or assets of Modern.*fn3 This effort was due in part to Mrs. Arlinghaus' need for cash to pay the federal tax on her husband's estate. The efforts included the usual jockeying with respect to price (including whether the price would be paid in cash or in securities issued by the purchaser), the furnishing of data about Modern, and some consideration of legal matters, particularly the relative advantages of the sale of stock or of assets. Mrs. Arlinghaus and Lenz were kept apprised of the various communications. Ultimately these efforts led to a letter dated March 20, 1968, addressed to the board of directors but delivered to Pepper, from Sonderling Broadcasting Corporation which already was acquiring a sister company, Modern Teleservice, Inc. (Teleservice). Sonderling made a firm offer of $2,800,000 for all of Modern's stock or assets. This prospective purchaser had been found by a Philadelphia firm, Commonwealth Corporate Development Co., Inc. (Commonwealth), which was headed by Harris Shapiro and with which Steven Weil of Corporate Finders and Consultants, Inc. was cooperating. Under date of March 21, 1968, Commonwealth addressed a letter to Pepper stating that in the event of consummation of the sale it was to receive the excess paid by Sonderling over and above $2,500,000. Pepper was to receive half of this, subject to a maximum of $100,000. Pepper agreed to this and procured the consent of Mrs. Arlinghaus and of Howard H. Eberle (who was, as trustee under an inter vivos trust, the second largest stockholder). On March 22 Pepper wrote the president of Sonderling accepting its offer on behalf of Mrs. Arlinghaus and Eberle.

Modern's board of directors met on April 8, 1968. By this time the Sonderling proposal had become one for the purchase of assets. The minutes recite that Pepper proposed "on behalf of Mrs. Arlinghaus and Mr. Eberle" a resolution authorizing such a sale for $2,800,000. The resolution provided for payment of a $300,000 fee to Commonwealth on completion of the sale; this was "with the understanding that Sidney Pepper, counsel and a director for the corporation, is to make no charge to the corporation for his services in connection with the said sale, but is to receive $100,000 from Commonwealth Corporate Development Co., Inc." The resolution was carried by a divided vote, with Pepper not voting and three directors, all of them officers but two of them not stockholders, voting against it. Another resolution terminated the employment of all officers and employees, with three exceptions ...

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