Livesay Industries, Inc. v. Livesay Window Company

• Decision Date: 01 August 1962
• Docket Number: No. 19147.,19147.
• Parties: LIVESAY INDUSTRIES, INC., and Everett G. Livesay Window Company, Inc., Appellants, v. LIVESAY WINDOW COMPANY, Inc., et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

305 F.2d 934 (1962)

LIVESAY INDUSTRIES, INC., and Everett G. Livesay Window Company, Inc., Appellants, v. LIVESAY WINDOW COMPANY, Inc., et al., Appellees.

No. 19147.

United States Court of Appeals Fifth Circuit.

August 1, 1962.

J. M. Flowers, Henry M. Sinclair, Miami, Fla., for appellants.

George L. Knight, Walter Humkey, Harold L. Ward, Miami, Fla., for appellees, Fowler, White, Gillen, Humkey & Trenam, Miami, Fla., of counsel.

Before CAMERON and BELL, Circuit Judges and CARSWELL, District Judge.

GRIFFIN B. BELL, Circuit Judge.

This case involves legal fraud. It was accomplished through bold, open and even bald action. Despite sophisticated means it was nonetheless fraud, and in end result — plain and simple fraud. This case is also a classic example of justice long delayed.

The beginning was in 1949 when appellants brought suit for patent infringement. One was the owner and the other the licensee of a patent on a precast monolithic concrete window frame with Venetian blind guides. The District Court entered judgment in 1951 finding infringement of a valid patent but denied damages. The finding of validity and infringement was affirmed by this court, with the cause being remanded for assessment of damages. Livesay Industries, Inc. v. Livesay Window Company, Inc., 5 Cir., 1953, 202 F.2d 378, Cert. Den., 346 U.S. 855, 74 S.Ct. 70, 98 L.Ed. 369.

We affirmed the entry of judgment by the District Court for damages sustained by reason of the infringement prior to October 8, 1951, the day the District Court entered an injunction against further infringement, in the amount of $731,440 as well as the award of $110,000 as fees for counsel for appellants here. Livesay Window Company, Inc. v. Livesay Industries, Inc., 5 Cir., 1958, 251 F.2d 469, Cert. Den., 346 U.S. 855, 74 S.Ct. 70, 98 L.Ed. 369.

The matter was again before this court in Livesay Industries Inc. v. Livesay Window Company, Inc., 5 Cir., 1958, 256 F.2d 1, Cert. Den., 358 U.S. 882, 79 S.Ct. 121, 3 L.Ed.2d 111. We affirmed the judgment of the District Court refusing to hold Livesay Window Company or the individuals in control of it in contempt for violation of the injunction against infringement.

This proceeding in the nature of a creditor's Bill was filed ancillary to the complaint for infringement and damages. It lies under § 62.37, Florida Statutes, F.S.A., which permits the filing of a suit in equity before the common law judgment is obtained but provides that no final decree shall be entered upon the Bill until the claims have been reduced to judgment.¹ Rule 64, Fed.R.Civ.P., 28 U.S.C.A., provides that remedies available under the law of the state for the purpose of securing satisfaction of a judgment ultimately to be entered are also available in an action in the federal court. Rule 69 provides that proceedings in aid of execution shall be in accordance with the practice and procedure of the state. Appellants premise their case on violations of §§ 608.55 and 726.01, Florida Statutes, F.S.A.²

The natural defendants here were the directors of Livesay Window Company, Inc., owning over eighty five per cent of the shares of stock therein. These defendants plus all of the other stockholders with the exception of Rinehart are related by blood or marriage to Carlotta Lewis, the prime mover and stockholder.³ Rinehart was the lawyer for the corporation. On March 4, 1953, five days after this court had affirmed the judgment of infringement and ordered the accounting which resulted in the money judgment, the directors met and Rinehart advised them that a substantial judgment would ultimately be entered against the corporation. The settlement of a claim for damages arising out of a personal injury case was also discussed and it was necessary to raise $75,000 for this purpose. The minutes of the meeting make it clear that the directors decided to raise the necessary money to settle the damage claim through the sale of the real property upon which the corporation plant was situated.

The issue as to the status of this property will be disposed of first so as not to confuse it, as was apparently the case in the trial court, with the real issues here. The property, including some of the plant machinery, was sold to Addison Packing Company, a Maine Corporation for $130,000, payable $100,000 in cash with the balance due being represented by two notes due in one and two years from date in the amount of $15,000 each, bearing five per cent interest and secured by a purchase money mortgage on the property. It was simultaneously leased back from Addison. Neither the principal nor interest had been paid at the time of trial. Appellants contended that the transaction should be treated as a mortgage rather than a sale. The trial court held the transaction to be a bona fide sale, a holding not clearly erroneous under Rule 52(a), Fed.R.Civ.P., and we affirm. The present status of the unpaid notes and mortgage and the ruling of the court with respect to the payment of the principal and interest due will be dealt with under our discussion of remedy. The trial court retained jurisdiction of the cause for the purpose of taxing such costs of Addison as to the court seemed just. We do not know just what the court had in mind by this broad statement but the action against Addison was not without foundation because of the manner, not necessary to be detailed here, in which the transaction was handled and we construe this order to mean that costs are to be limited to ordinary court costs, exclusive of attorney's fees.

On March 27, 1953, the board met and was advised of the settlement of the personal injury claim and the sale and lease back of the land and equipment. Mr. Rinehart then recommended that the company be split into separate corporations for sales, operations, and ownership of equipment in order to limit liability in case of accidents. Mr. Rinehart and the company accountant were directed to formulate such a plan and report back. The only claim outstanding at this time was the potential judgment of appellant.⁴ Mr. Rinehart advised the board at a meeting on April 1, 1953 that two corporations had been formed, South-West Equipment, Inc. and Pre-Cast Corporation. South-West would purchase the automotive and other equipment of Livesay Window Company, Inc. for stock in South-West and lease it back to Livesay, while Pre-Cast would purchase the accounts receivable of Livesay for stock in Pre-Cast and also enter into an exclusive sales agreement by which it would handle all sales of products of Livesay Window Company.

On April 9, 1953 the directors met again and defendant John T. Lewis, president of Livesay Window Company, Inc. was authorized to transfer to South-West all of the furniture, fixtures, automotive and other equipment of Livesay Window Company, Inc. and to execute a lease agreement between South-West as lessor and Livesay as lessee of said equipment. He was authorized to transfer all accounts receivable, which aggregated $97,230 to Pre-Cast and to enter into an exclusive sales contract with Pre-Cast on behalf of Livesay Window Company. These transactions were accomplished for a consideration in stock only of the two new corporations. Each had an authorized capital stock or twenty shares of Class "A" stock of a par value of $100 per share and 50,000 shares of Class "B" stock of a par value of $1.00 per share, all of which was transferred to Livesay Window Company, Inc.

South-West received for the stock $5,507.04 in cash, the Addison notes in the amount of $30,000 plus accrued interest, and the machinery, furnishings, automotive and other equipment of Livesay at depreciated book value, together totaling $118,560. The 50,000 shares of $1.00 par value Class "B" stock was given a valuation of $2.3312 per share to balance out with this amount.

Pre-Cast received all accounts receivable having a book value, less bad debt write-off of $97,230, as well as an exclusive sales contract whereby Pre-Cast was to receive four per cent per month of the total sales made, plus $6,000 per annum and free office rent. It was necessary to value the Class "B" stock having a par value of $1.00 at $1.9046 per share to equal the value of the accounts receivable.

This left Livesay Window Company with the stock. It was the lessee of the real property and plant from Addison, and lessee of the equipment with which to manufacture from South-West. The office furnishings and equipment were leased to Pre-Cast by South-West. Nothing was paid for good will, know-how, or the take over of a going organization.

The key to the scheme to defraud appellants was the stock structure of the new corporation. The Class "A" stock was to receive fixed cumulative dividends and had exclusive voting power. The Class "B" stock represented merely the pro rata ownership interest in the assets of the corporation in the event of voluntary or involuntary litigation, with the directors having the discretion to declare dividends on it. It could be redeemed at the option of the board at par in spite of giving it a value of $2.3312 in the South-West transaction and $1.9046 in the Pre-Cast transaction. The Class "B" stock could not participate in the management or control of the corporation, and it was from the beginning watered in value.

The final stroke in this phase came on May 18, 1953 when the directors of Livesay Window Company declared a dividend of all of the Class "A" stock, the voting stock, in South-West and Pre-Cast pro rata to the stockholders of Livesay Window Company. Thereby the only assets of real value owned by Livesay, the judgment debtor, were vested in the stockholders of the judgment debtor.

Livesay Window Company continued to operate until the directors met on November 9, 1953, heard a report that the Supreme Court had denied certiorari on the decision of this court that appellants were entitled to damages, and agreed on the advice of Mr. Rinehart and newly employed counsel to discontinue...