Gregg v. U.S. Industries, Inc.

• Decision Date: 30 September 1983
• Docket Number: 81-5956,Nos. 76-2107,s. 76-2107
• Parties: F. Browne GREGG, Plaintiff-Appellee, Cross-Appellant, v. U.S. INDUSTRIES, INC., a Delaware Corporation, Defendant-Appellant, Cross- Appellee. F. Browne GREGG, Plaintiff-Appellant, Cross-Appellee, v. U.S. INDUSTRIES, INC., a Delaware Corporation, Defendant-Appellee, Cross- Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1522

715 F.2d 1522

F. Browne GREGG, Plaintiff-Appellee, Cross-Appellant, v. U.S. INDUSTRIES, INC., a Delaware Corporation,

Defendant-Appellant, Cross- Appellee.

F. Browne GREGG, Plaintiff-Appellant, Cross-Appellee, v. U.S. INDUSTRIES, INC., a Delaware Corporation,

Defendant-Appellee, Cross- Appellant.

Nos. 76-2107, 81-5956.

United States Court of Appeals Eleventh Circuit.

Sept. 30, 1983.

Bedell, Bedell, Dittmar & Zehmer, C. Harris Dittmar, E. Earle Zehmer,William R. Dorsey, Jr.,Jacksonville, Fla., for Gregg.

Olwin, Connelly, Chase, O'Donnell & Weyher, William F. Sondericker, Mary C. Mone, Gary D. Hoppe, New York City, Mathews, Osborne, Ehrlich, McNatt, Gobelman & Cobb, Raymond Ehrlich, John M. McNatt, Jr., Jacksonville, Fla., for U.S. Industries, Inc.

Appeals from the United States District Court for the Middle District of Florida.

Before GODBOLD, Chief Judge, HENDERSON and CLARK, Circuit Judges.

GODBOLD, Chief Judge:

In 1969 Gregg owned corporate businesses in Florida engaged in construction, sand mining, and design of dredging equipment. The businesses were hard pressed for working capital. August 27, 1969 Gregg entered into an "Agreement and Plan of Reorganization" with U.S. Industries, Inc., a conglomerate, providing for a tax-free transfer of his companies to USI, for which Gregg would receive for the stock of his companies $3.5 million in common and preferred USI stock. Also, under the Agreement, as "further consideration," Gregg could receive up to $6.5 million more in USI stock if the former Gregg companies met specified profitability levels over the next five years.

As part of the Agreement, to strengthen the net worth of his companies, Gregg contributed $1 million in capital and, in addition, gave a promissory note from him and his wife for $500,000, which USI acquired along with other assets of the Gregg companies.

A separate "Employment Agreement" was signed October 1, 1969, the date of closing, under which Gregg was employed to stay on for five years as president and chief operating officer of the former Gregg companies. As part of this agreement Gregg agreed not to compete with USI.

During the five years after the acquisition, USI put some $12 million-$14 million into the former Gregg companies and guaranteed some $2 million in loans. Initially the operations were successful. Gregg received one distribution of USI stock (called by the parties "earnout stock"), valued at $871,484 and based upon 1969 profits. However, relations between Gregg and USI began to sour soon after the transaction was closed. The former Gregg businesses became less and less successful. USI began cutting back on Gregg's authority, and both parties began thinking of litigation.

During 1971 Gregg paid the first installment, $100,000 plus interest, on the $500,000 note. In May 1971 USI proposed that Gregg be removed as president and chief operating officer and be appointed a consultant, and it would continue his salary plus an expense account. Gregg agreed under protest but was given little work to perform.

In April 1970 USI considered acquiring Camp Concrete Rock Company, a Florida company, to expand the sand mining operation it had acquired from Gregg. Gregg told USI that Camp Concrete was an excellent company and that it would complement the USI sand mining operation. USI told Gregg it was not interested in acquiring Camp Concrete at the time. Later, in 1971, shortly after Gregg had been removed as president and operating officer, he learned that Camp Concrete was for sale, and he bid on it without informing USI of his decision. USI learned of the proposed sale through other sources and it too bid. Gregg was high bidder. He acquired Camp Concrete and engaged in production competitive with the USI-acquired operation.

On April 20, 1972 Gregg failed to pay the second installment on the $500,000 note and told USI he was not going to pay the note but instead would set it off against obligations USI had to him. USI stopped paying his salary. On May 24 USI requested Chemical Bank in New York, its stock transfer and dividend disbursing agent, to stop payment on Gregg's USI dividends. Under instructions from USI to the bank, described more fully in Part V below, Chemical Bank delivered to USI Gregg's dividend checks. USI ended up holding six dividend checks totaling around $65,000. These events led to two of Gregg's claims, a claim sounding in contract for the dividends and a tort claim for conversion.

Gregg called USI on June 15, 1972 and inquired about his missing June 1 dividend check but was given no information. The same day he borrowed $135,000 from the First National Bank of Leesburg, Florida, and as security assigned all dividends from his USI stock. Both Gregg and the Leesburg bank mailed to USI notice of the assignment. Earlier, in 1971, Gregg had obtained another loan from the same bank and pledged his USI stock as collateral; it is not clear whether USI knew of this pledge before June 1972, though for purposes of this case the court assumed that it did.

On June 19 USI sued Gregg in Delaware state court on the $500,000 note, also charging him with common law deceit and breaches of contract, of warranty, of the covenant not to compete, and of fiduciary duty. On USI's motion the Delaware court entered a sequestration order, pursuant to Del.Code Ann. title 8, Sec. 169, and title 10, Sec. 366 (1975), which authorized seizure of Gregg's USI stock by a court-appointed sequestrator as a means of securing Gregg's appearance in court. Three days later USI notified Chemical Bank of the order and asked the bank to make appropriate entries in its stock transfer books.

Under Delaware sequestration procedures, Gregg could appear in court and contest the claim against him, thereby subjecting himself to in personam jurisdiction, or he could default and the sequestered property then could be used to satisfy any default judgment entered. He could appear specially only to contest the sequestration.

On June 19, the same day that USI sued Gregg in Delaware, it received notice that he had assigned his USI dividends to the Leesburg bank. USI notified the bank of the suit and the sequestration order and notified the court of the bank's interest. The bank moved to intervene and to quash the sequestration order. Gregg removed the case to the federal district court in Delaware, which denied the motion to quash the sequestration order but noted that dividends were not included in the sequestration. The court declined to order USI to send the Leesburg bank the dividends withheld from Gregg. The district court also held that the Leesburg bank could register the stock in its name or a street name and sell the stock, apply the proceeds to Gregg's indebtedness as provided by the agreement pledging the stock to the bank, and pay any excess to the sequestrator. The Leesburg bank did eventually register the stock in a street name and sell substantial amounts of the stock because its value had fallen below the margin requirements for securing the loan. ¹ A small amount of money left over from these sales was turned over to the sequestrator by the Leesburg bank.

On three occasions Gregg appeared in the Delaware court. He contested the validity and constitutionalty of the Delaware sequestration procedures. Each time the court, relying on a long line of authority, upheld the validity of the Delaware procedures. U.S. Industries, Inc. v. Gregg (D.Del., April 24, 1975) (memorandum opinion and order), U.S. Industries, Inc. v. Gregg, 58 F.R.D. 469, 478-81 (D.Del.1973); U.S. Industries, Inc. v. Gregg, 348 F.Supp. 1004, 1018-23 (D.Del.1972).

In June 1973 Gregg demanded of Chemical Bank that it reissue his checks for June, September, and December 1972 dividends. On USI's instruction Chemical Bank refused. At one point Chemical Bank was told that the Leesburg bank would postpone selling Gregg's stock if Chemical would send to Leesburg Gregg's withheld dividends. Chemical, on USI's instruction, refused. At some point Chemical Bank was given a letter from USI indemnifying the bank from any loss it might suffer as a result of withholding the dividends.

The district court in Delaware eventually entered a default judgment against Gregg on the note and directed that the rest of the sequestered stock be sold. After the sequestrator's fees and costs were paid, USI was paid the balance, some $18,000. Gregg appealed from this judgment to the United States Court of Appeals for the Third Circuit, which held Delaware's sequestration statute unconstitutional. U.S. Industries, Inc. v. Gregg, 540 F.2d 142 (3d Cir.1976), cert. denied, 433 U.S. 908, 97 S.Ct. 2972, 53 L.Ed.2d 1091 (1977). USI filed in the Supreme Court for certiorari. Shortly afterwards the Supreme Court held in another case that the Delaware sequestration procedures were unconstitutional, overruling its prior decisions. The Court denied certiorari on the Third Circuit case, and the district court dismissed the USI proceedings against Gregg for want of jurisdiction over the person.

Gregg then moved in federal court in Delaware for restitution for not only the amount USI had received but also the value of his stock at the time it was seized, less its value at sale. The court held that the only relief Gregg was entitled to as restitution was the amount USI had realized plus costs. Also it held that Gregg could have avoided loss by selling the sequestered stock and depositing the proceeds in its place, as permitted by the sequestration order. The Third Circuit affirmed. U.S. Industries, Inc. v. Gregg, 605 F.2d 1199 (3d Cir.1979), cert. denied, 444 U.S. 1076, 100 S.Ct. 1023, 62 L.Ed.2d 758 (1980).

The present suit was filed in Florida by Gregg in July 1972, soon after USI filed its suit in Delaware. The case first went to trial in 1974. After Gregg completed his case in chief, the court directed verdicts in favor of USI on several of Gregg's claims. The judge became ill, however, and a...