Regal Ware, Inc. v. Fidelity Corp.

• Decision Date: 11 January 1977
• Docket Number: No. 75-1219,75-1219
• Citation: 550 F.2d 934
• Parties: REGAL WARE, INC., Appellant, v. FIDELITY CORPORATION and American Foresight, Inc., Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 934

550 F.2d 934

REGAL WARE, INC., Appellant, v. FIDELITY CORPORATION and American Foresight, Inc., Appellees.

No. 75-1219.

United States Court of Appeals Fourth Circuit.

Argued Nov. 12, 1975.

Decided Jan. 11, 1977.

Israel Steingold, Richmond, Va. (Jeffrey M. Steingold, Richmond, Va., on brief), for appellant.

Richard A. Repp, Richmond, Va. (Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., on brief), for appellees.

Before WINTER, CRAVEN and WIDENER, Circuit Judges.

WIDENER, Circuit Judge:

In this diversity case, appellant, Regal Ware, Inc., a Wisconsin corporation, sued Fidelity Corporation (hereafter Fidelity) and American Foresight, Inc., both Virginia corporations, in the United States District Court for the Eastern District of Virginia. The district court entered judgment against American Foresight in the amount of $210,571.96, with interest from July 3, 1973 until paid, but dismissed Regal Ware's suit against Fidelity Corporation. American Foresight, an insolvent and largely liquidated corporation, has not appealed from the judgment against it. The amount owing is not in dispute. Regal Ware has appealed from the dismissal of its suit against Fidelity Corporation. We vacate and remand.

I(A)

Appellant, Regal Ware, is engaged in the business of manufacturing kitchen ware. American Foresight was engaged in the business of selling kitchen ware and similar items, at retail, primarily on credit. The present suit is for goods purchased for resale on open account by American Foresight from Regal Ware, largely during the months of June, July, and August 1972, and is for the amount still owing to Regal Ware on account of said purchases.

(B)

From around 1965 until June of 1970, Regal Ware did business with a predecessor of American Foresight, a Delaware corporation, also known as American Foresight (hereafter Delaware American Foresight). Its principal place of business was in Philadelphia. The two principal stockholders and officers of Delaware American Foresight were Edward M. Satell, President, and William C. Beery, Chairman of the Board of Directors. Satell was the principal manager of the corporation, and Beery was, in actual practice, subordinate to Satell.

By 1969 or 1970, Delaware American Foresight, on account of purchases of goods for resale, was indebted to Regal Ware in an amount around $145,000. Because of the amount of this indebtedness, Regal Ware limited the credit of Delaware American Foresight to $50,000 and worked out an arrangement under which the debt would be liquidated over a period extending through 1971.

In May and June of 1970, a radical reorganization occurred. All of the assets and liabilities of Delaware American Foresight were transferred to American Foresight, a Virginia corporation ¹ (hereafter Virginia American Foresight), one of the defendants in this case. The sole owner of all the capital stock of Virginia American Foresight was Fidelity Corporation, ² the appellee herein.

Fidelity Corporation (Fidelity) is a Virginia corporation with headquarters in Richmond, Virginia. It is strictly a holding company, which owns the stock of around 30 operating companies, such as Virginia Foresight, and several other subordinate holding companies. Most, but not all, of the companies owned by Fidelity are financial or insurance institutions.

The reason Fidelity desired to acquire Delaware American Foresight ³ was to avail itself of a distinctive method of marketing. Delaware American Foresight had been in the practice of marketing its product primarily by the use of college students during the summer months. It had an arrangement with the students which was very attractive from their point of view. Since a number of the subsidiaries of Fidelity were in the insurance field, and since a number of the customers of these subsidiary insurance companies were college students, Fidelity believed that the Foresight sales personnel could be trained and worked into the sale of insurance. Especially, it was hoped that some of these summertime salesmen would accept regular sales assignments with various of Fidelity's insurance subsidiaries when they completed college. The district court judicially noticed, and it was stipulated, that Fidelity knew of the financial condition of Delaware American Foresight at the time of the acquisition. In payment for the assets of Delaware American Foresight, Fidelity delivered to the stockholders of that company, principally Edward M. Satell and William C. Beery, 18,000 shares of Fidelity stock. An additional 190,000 shares were placed in escrow to be delivered to the same parties over a period of five years as specified earning standards were attained. The operation and management of Virginia American Foresight was placed by Fidelity, for the time being, in the hands of Satell and Beery, ⁴ thus remaining as it had been under the Delaware corporation.

After the events of May and June 1970, the fact that Delaware American Foresight had been acquired by Fidelity was made known to Regal Ware by Satell. As a result of that acquisition, the credit limitation which Regal Ware had previously placed upon Delaware American Foresight was removed. Regal Ware admitted, however, that Fidelity did not guarantee the accounts of Virginia American Foresight, and it is not contested that Fidelity did nothing to justify a belief that it would be responsible for those accounts as a guarantor or security or the like.

Prior to its acquisition by Fidelity, Delaware American Foresight had created a subsidiary by the name of East Coast Associates (hereafter East Coast). ⁵ East Coast was incorporated in Massachusetts and its principal place of business was in Boston. Later, the office of East Coast was moved to Philadelphia, and still later to a part of the same building which housed the head office of Foresight (both Delaware and later Virginia American Foresight) and adjacent thereto. After Virginia American Foresight acquired the property of Delaware American Foresight, East Coast continued as a wholly owned subsidiary of Virginia American Foresight.

East Coast was, in effect, a financing and collecting agency for Virginia American Foresight (references to Foresight after this point are to Virginia American Foresight unless otherwise indicated). Most of Foresight's sales were on a credit basis, and the paper generated by that company was sold to East Coast. The capitalization of both Foresight and East Coast was nominal. In order that East Coast would have money to buy the paper produced by Foresight, Fidelity arranged for a loan of $800,000 from Fidelity Bankers Life Insurance Company, another subsidiary of Fidelity. ⁶ Later Fidelity arranged additional credit of $1,500,000 with two New York banks ⁷ which Fidelity guaranteed. Also, the $800,000 loan from Fidelity Bankers Life Insurance Company was subordinated to the loans by the two New York banks.

Immediately following the acquisition by Fidelity, the former management remained in control of Foresight and East Coast. ⁸ The board of directors of Foresight consisted of six: Edward M. Satell, William C. Beery and Albert W. Schiffrin (who had acted as attorney for Satell and Beery), Albert L. Hobbs, Richard H. Guilford and Edward D. Simon. The three latter named directors were representatives of Fidelity. Satell was President and Beery was Chairman of the Board and Secretary-Treasurer. The directors of East Coast were Satell, Beery and Schiffrin; Satell was President and Beery was Clerk and Treasurer. Joseph M. Mizelle, an employee of Fidelity, acted as liaison officer between Fidelity and Foresight.

By December 1971, Foresight had liquidated its former debt to Regal Ware.

II

By February 1972, tension had developed between Satell and Beery, and the management of Fidelity. ⁹ On February 10, 1972, Fidelity, as sole stockholder of Foresight, amended the bylaws to increase the size of the board of directors of Foresight from six to eight. Alan G. Fleischer and Joseph M. Mizelle ¹⁰ were added as directors, thereby giving Fidelity at least a five to three control on the board of Foresight. On March 3, 1972, the new board of Foresight increased the board of directors of East Coast from three to nine, adding six Fidelity oriented directors. ¹¹ Also, Richard J. Maccarone ¹² replaced Satell as President and chief executive officer of East Coast and Charles D. Robinson replaced Beery as clerk.

On April 3, 1972, the board of directors of Foresight met and enacted the following resolution:

"RESOLVED: That a dividend of $53.942 per share consisting of advances receivable from Edward M. Satell amounting to $36,536 and William C. Beery in the amount of $17,406, a total of $53,942, is hereby declared out of capital surplus on the Common Stock of this Company payable on April 7, 1972 to stockholders of record at the close of business on April 3, 1972."

Satell, Beery and Schiffrin did not participate in the meeting of April 3rd, but Schiffrin wrote a letter on behalf of Satell, Beery and himself objecting to the legality of said action. As requested, the letter was attached to the minutes.

The explanation given for this dividend, or assignment, as stated by Charles D. Robinson, Senior Vice-President and Secretary of Fidelity, follows:

"It (the dividend) was largely on the advice of counsel in that it was an assessment of American Foresight representing money due it by Messrs. Satell and Beery, an amount that had been due at the time the business was acquired almost two years previously. It had been unchanged in amount. We were beginning to get concerned about these two gentlemen and whether in some manner the assets might be satisfied in an improper manner. We felt that to preserve this asset, that it should be passed up through Drum International to Fidelity Corporation. . . . The dividend consisted specifically of this asset."

The district court made no finding as to the business judgment of the action taken by...