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SKYLON CORP. v. GUILFORD MILLS

September 29, 1994

SKYLON CORPORATION, Plaintiff,
v.
GUILFORD MILLS, INC and GEORGE GREENBERG, Defendants.


PRESKA


The opinion of the court was delivered by: LORETTA A. PRESKA

LORETTA A. PRESKA, District Judge:

 Plaintiff brings this action alleging two instances of fraud on the part of the defendants and seeking rescission or invalidation of a release which otherwise bars certain of its claims. Defendants have moved for summary judgment on the basis of the release, which I find to be enforceable. Accordingly, defendants' motion is granted with respect to the claims falling within the scope of the release and denied with respect to those falling without.

 Background1

 In June 1985, Guilford Mills, Inc. ("Guilford"), a well-established textile company, entered into a contract with Northfield Creations and Designs Ltd., Inc ("Northfield"), a company owned and controlled by Seymour and Richard Schlam. Under the agreement, Northfield undertook, inter alia, to manufacture finished garments using Guilford fabrics. Northfield would sell the garments to various retail customers, and profits would be shared equally by Northfield and Guilford.

 In order to provide financing for the arrangement, Northfield entered into a factoring agreement with Rosenthal & Rosenthal, Inc. ("Rosenthal"). Factoring is a type of financial arrangement whereby a business sells or transfers title to its accounts receivable to a factoring company which then acts as principal. The receivables are sold without recourse, so the factoring company cannot turn to the seller if they prove uncollectible. In light of this fact, Rosenthal insisted that Guilford guarantee Northfield's obligations under the factoring agreement.

 Having no desire to cut off its proverbial nose to spite its proverbial face, Guilford decided not to bring Northfield down. At the same time, however, it was unwilling to risk further damage by pouring more money into the company. Instead, Guilford began working with Northfield to find another entity to take over Guilford's role in the Guilford-Northfield arrangement. If another company could be found to provide fabric and financing to Northfield, Northfield would be able to remain in business, and more importantly, would be able to continue generating income to pay its debt to Guilford. *fn2"

 In the fall of 1988, Guilford and Northfield found their "patsy." Defendant Greenberg, then President and a director of Guilford, approached Irving Schuyler of Skylon Corporation about having Skylon replace Guilford in the Guilford-Northfield arrangement. In order to induce Skylon to make such a move, Greenberg made no mention of Northfield's recent fraudulent conduct. In addition, Greenberg made the following fraudulent representations:

 
. Guilford would provide continuous financing to Northfield subsequent to Skylon's involvement.
 
. Greenberg would participate personally in the Skylon-Northfield arrangement and would invest $ 500,000.
 
. Greenberg would obtain additional financing for the Skylon-Northfield arrangement from other sources.
 
. Guilford and Rosenthal had been carefully monitoring Northfield's financial affairs and such affairs were in order.
 
. There was no risk that Northfield could misappropriate funds paid by retailers for finished garments because all such funds were paid directly to Rosenthal.

 In reliance upon Greenberg's pitch, Skylon agreed to commence a relationship with Northfield and began providing that company fabric and financing.

 As with the Guilford-Northfield arrangement, the Skylon-Northfield arrangement required a factoring company. Irving Schuyler requested Guilford to assist in arranging for Rosenthal to play that part. In view of Northfield's recent fraud, Rosenthal conditioned its involvement on Guilford's willingness to guarantee the Skylon-Northfield accounts. Guilford agreed to do so after securing Skylon's agreement to indemnify it for any losses sustained as a ...


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