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Fried v. Kelly

June 26, 2007


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge


On February 24, 2006, Ishak Fried, ("Fried") and Brooklyn Closeout Company ("BCC") (collectively "Plaintiffs"), filed a complaint against Ronald Kelly ("Kelly"), Kelly Company World Group, Inc. ("KWG"), and all subsidiaries, affiliates, and related companies (collectively "Defendants") that alleged breach of contract and securities fraud, and sought monetary damages for breach of contract in the amount of $1.5 million, no less than $10 million for securities fraud, and a declaration that Plaintiff Fried is a fifty percent shareholder in every company in which Defendant Kelly has an interest. A bench trial was held on April 11, 2007 and post-trial findings of fact and law were received from the parties on April 19, 2007.*fn1 The Court heard summations on April 27, 2007.


In the late 1980s, both Fried and Kelly were actively engaged in the closeout business.*fn2

Fried Decl. ¶ 4; Kelly Decl. ¶ 4. At that time, the cellular phone business was in its early stages. Kelly Decl. ¶ 5. Mr. Fried was the principal of BCC, which specialized in the wholesale purchase and sale of electronic merchandise. Fried Decl. ¶ 4. In 1988, Mr. Kelly and his wife incorporated Kelly Company International (later renamed "KWG") to engage in the purchase and sale of wholesale commercial goods such as clothing and electronics from Taiwan. Kelly Decl. ¶ 4.

A. The Sale/Purchase of Philips' PCA Phones

In 1989, KWG began to deal in cellular phones manufactured by Eriksson, Motorola, Nokia, and Philips North America. Kelly Decl. ¶ 5. Around that time, Philips North America requested that Kelly attempt to locate buyers for telephones that had been manufactured for a company that went bankrupt. Between 1989 and 1990, Kelly purchased phones from Philips at a discounted price and resold more than a thousand phones to retailers (who, in turn, sold them to customers) for a substantial profit. By 1990 or 1991, Philips decided to exit the cellular phone business, wanted to dispose of its remaining inventory-including some unassembled parts-, and asked Kelly to assist them in finding a buyer for the inventory. Tr. 113:9-13.

Fried and Kelly were introduced to one another by a mutual contact in the closeout business sometime in 1990.*fn3 Fried expressed an interest in buying the discounted phones, and Kelly invited Fried to Philip's warehouse in Florida to see the inventory. Kelly Decl. ¶¶ 7, 8; Fried Decl. ¶ 5. Shortly after their meeting in Florida, Fried agreed to purchase Philips' entire inventory, or 5,000 model P832T cellular phones, from Kelly at a discounted price of $200 per phone. DX-C, Kelly Decl. ¶ 8. Thereafter, Kelly notified Fried that there were only 4,700 assembled phones, but component parts were also available. The parties renegotiated a total purchase price of $1,150,000 for the available phones and component parts. Fried took out a letter of credit for $1,150,000 from Merchant Bank (DX-D), but ultimately, paid Kelly with a wire transfer for the purchase of the PCA phones. Kelly Decl. ¶ 12.

Kelly sold Fried the PCA phone inventory for a profit of $250,000. The sale of PCS phones was an arms-length transaction between the parties,*fn4 as explained in Kelly's deposition:

Q: After that purchase was consummated, what, if anything, did you or Mr. Fried do with respect to the marketing of those telephones?

A: Well, at that point we had consummated our responsibility. We had completed our share of responsibility. We had facilitated the sale of the product and the product was moved to Mr. Fried; as far as we were concerned, the deal was over.

Q: What was your fiduciary responsibility?

A: To make sure the transaction took place, the phones got delivered to Mr. Fried and they did.

Kelly Deposition (Oct. 19, 2006) Tr. 30:2-13.

Despite Fried's assertions to the contrary,*fn5 the record reflects that the phones were transferred directly from the PCA warehouse in Florida, to Mr. Fried's warehouse in Brooklyn. See Tr. 40:18-44:13; DX-S (indicating that the customer name and location is Brooklyn Closeout, 167 Clymer Street, Brooklyn, New York); DX-B (indicating that "per instructions from the buyer" FOB/TAMPA, FLORDIA to 167 Clymer St., Brooklyn, and stating requirement of a "clean truckers bill of lading cosigned to Brooklyn Closeout Corp."); Tr. 123:21-22 ("All the phones were delivered to Brooklyn.").

B. Resale of PCA Phones

In 1991, a few months after the sale of the PCA phones, Kelly received a call from Fried requesting his assistance in the resale of those phones. Kelly Decl. ¶ 13. Although Fried had experience in the closeout business (Fried Decl. ¶ 4), he did not have experience in the cellular phone business, which was a different market than the closeouts he was accustomed to. Tr. 130:14-131:22. Fried and Kelly orally agreed that Kelly would contribute his experience in the cellular phone business to locate buyers for the PCA phones and provide customer support, Fried would provide his financial investment in the phones, and they would equally share profits from the sale of the PCA phones. Kelly Decl. ¶¶ 13, 14. The agreement was never reduced to writing. Id. ¶ 14. For approximately one year, Kelly (or his companies) sold ...

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