Stern & Co. v. State Loan and Finance Corporation

• Decision Date: 10 February 1965
• Docket Number: Civ. A. No. 2429.
• Citation: 238 F. Supp. 901
• Parties: STERN & CO., Plaintiff, v. STATE LOAN AND FINANCE CORPORATION, Defendant.
• Court: U.S. District Court — District of Delaware

238 F. Supp. 901

STERN & CO., Plaintiff, v. STATE LOAN AND FINANCE CORPORATION, Defendant.

Civ. A. No. 2429.

United States District Court D. Delaware.

February 10, 1965.

E. N. Carpenter, II, Richards, Layton & Finger, Wilmington, Del., William R. Hudson and Bernard V. Lentz, White & Williams, Philadelphia, Pa., of counsel, for plaintiff.

Carl Bauersfeld, Washington, D. C., Howard L. Williams, Wilmington, Del., of counsel, for defendant.

STEEL, District Judge.

This is a civil action to recover damages in the amount of $28,675.77, plus punitive damages, for breach of contract.

FINDINGS OF FACT

1. Plaintiff is a Pennsylvania corporation with its principal place of business in Philadelphia, Pennsylvania.

2. Defendant is a Delaware corporation with its principal place of business in Washington, D. C.

3. The plaintiff, prior to September 20, 1956, operated a chain of department stores in Pennsylvania, New Jersey and Delaware engaged in the business of selling home furnishings and clothing at retail. In each of plaintiff's stores, or very close to them, plaintiff's wholly owned subsidiaries operated a loan and finance business. The loan and finance businesses were operated by the following wholly owned subsidiaries of plaintiff; Interstate Loan Company, a Pennsylvania corporation; Interstate Consumer Discount Company, a Pennsylvania corporation; Interstate Finance Company, a New Jersey corporation, and Interstate Finance Company, a Delaware corporation.

4. The defendant, State Loan and Finance Corporation, is a holding company that owns the stock of a number of small loan companies. Defendant is not an operating company. Its business consists of raising capital and loaning the money to its subsidiary corporations to conduct their operations.

5. Prior to August 23, 1956, plaintiff had a loan agreement with a number of banks in Philadelphia. Following the death of Harry I. Stern, President of plaintiff, in May 1956, the banks called upon plaintiff to pay the loans within a year. The banks suggested that the plaintiff sell its wholly owned loan and finance companies. Plaintiff first attempted to sell the business of its loan and finance companies to Ritter Finance Company in August 1956 for $2,500,000, but Ritter Finance Company was unable to finance the purchase.

6. On August 23, 1956, officers of the defendant met with officers of the plaintiff for purposes of discussing the possibility of purchasing the loan and finance business operated by plaintiff's subsidiaries. At that meeting, defendant's officers advised plaintiff's officers that defendant was primarily interested in acquiring the loans receivable of plaintiff's subsidiaries. Plaintiff advised that it wanted $2,500,000 for the business and, in addition, the purchaser was to pay off the liabilities of plaintiff's subsidiaries. The purchase price, together with the assumption of liabilities, totalled approximately $7,000,000. Plaintiff advised that it would take $1,250,000 in cash and $1,250,000 in notes in payment of the purchase price, but that it would not simply sell the assets of the business but would only sell the corporate stock of its subsidiaries because of the time element involved.

7. At the meeting of August 23, 1956, defendant advised plaintiff that because of its policy of having each of its loan offices a separate corporation, it could not make the transaction unless it could work out a method of having each office a separate corporation. In addition, defendant advised plaintiff that because the loan offices operated by plaintiff's subsidiaries were located in its stores, and the customers of the stores were the same persons who were customers or borrowers of the loan companies, it desired plaintiff to agree not to compete for a period of time. Defendant advised that it was going to discuss with its tax counsel a method whereby each loan office could be operated as a separate corporation. Maurice Fierman, President of the plaintiff, then requested defendant's officers to inquire of their tax counsel what the tax consequences of the transaction would be to plaintiff and to write him a general summary of the discussion and basis of the proposed sale, and include in the letter what tax counsel had advised about plaintiff's tax situation.

8. Pursuant to the request of plaintiff's President, defendant, by its Executive Vice President, on August 30, 1956, sent the plaintiff a letter which states:

"This letter will confirm our recent discussion with respect to the acquisition of your loan and finance subsidiaries, providing we are successful in arranging the necessary additional financing to complete the transaction. The basis of sale is to be the purchase of the outstanding capital stock of the subsidiaries for a total purchase price of $2,500,000 of which at least one half will be paid in cash at the time the transaction is completed and the balance to be represented by a promissory note payable in four equal quarterly installments and bearing interest at the rate of 4½% per annum on the unpaid balance. As you probably know, the money market is about the tightest in history, but we feel we are making progress, and as previously agreed, will give you a definite answer on or before September 7, 1956.

"As you know, we are interested primarily in acquiring the loans receivable of your subsidiaries, and the acquisition procedure set forth below is proposed because you have advised us you will not simply sell the assets consisting of loans receivable and furniture and fixtures, but will only sell the corporate stock of your loan and finance subsidiaries.

"With this consideration in mind, State Loan and Finance Corporation will form a subsidiary in the state of Pennsylvania which will enter into a contract with your company to purchase the issued and outstanding capital stock of Interstate Loan Company of Pennsylvania. An additional Pennsylvania subsidiary will be formed which will purchase the outstanding capital stock of Interstate Consumer Discount Company. The same procedure will be followed by forming a New Jersey subsidiary to purchase the capital stock of Interstate Finance Company of New Jersey, and a Delaware subsidiary will be formed to purchase the capital stock of Interstate Finance Company of Delaware.

"The acquisitions will be handled under separate contracts between our subsidiaries and your company. Under the terms of these contracts, your company will convey to our subsidiaries, all of the outstanding stock of one of your subsidiaries for a proportionate part of the purchase price set out herein. In addition, certain covenants and warranties will be required with respect to the validity and authenticity of the corporate existence of your subsidiaries as well as their assets and liabilities, with particular reference to the validity of the loan contracts and a guarantee against undisclosed liabilities.

"We are enclosing herewith a form of contract which we propose to use in completing this transaction. This contract is the standard form we have used in a great number of acquisitions of corporate stock.

"From your standpoint, the transaction will simply entail your sale of all of the stock of your subsidiaries for the purchase price set out in the first paragraph of this letter. We are advised by counsel this sale will constitute a taxable transaction for federal income tax purposes, and you will be required to report the gain or profit on each of the sales. By definition of Section 1221 of the 1954 Internal Revenue Code, corporate stock constitutes the capital asset so that the gain or profit on the sales will be taxable at capital gain rates, which at present is a maximum of 25% of the gain.

"While we realize your company is not concerned with our procedures after completion of the purchase of this stock, we felt you might be interested in knowing that after the purchase, our subsidiaries will liquidate and dissolve the corporations which they have acquired under the provisions of Section 334(b) (2) of the Internal Revenue Code. This procedure is necessary since our purpose in this purchase is to acquire the loan contract of your subsidiaries rather than their stock. Following this liquidation and in line with our corporate policy of having each office a separate corporation, we will form additional subsidiaries in Pennsylvania and New Jersey, each of which will acquire the assets of one office."

The letter was mailed from Washington, D. C. and was received in Philadelphia.

9. The form of contract submitted with defendant's letter of August 30, 1956, contained the following paragraph:

"7. As a material part of the consideration for this contract, Seller specifically agrees that it will not, for a period of three (3) years from and after the date of this Agreement, either directly or indirectly, individually or in association with others, engage in the business of making loans in the amount of six hundred dollars ($600.00) or less under the provisions of the Pennsylvania Small Loan Act, nor under the provisions of any other of the laws of the States of Pennsylvania or New Jersey, in the Cities or Communities of Philadelphia, Chester, West Philadelphia, Norristown, Kensington, Upper Darby, Allentown, Easton, Reading, Germantown, Mayfair, South Philadelphia, Woodland, Hatboro, Lansdale, West Chester and Lancaster, Pennsylvania or within fifteen (15) miles of the city limits thereof.

"Seller further warrants and covenants that neither it nor any other person, including the employees of the INTERSTATE LOAN COMPANY, have a list, record or document containing the names and addresses of its present and/or former borrowers, and Seller hereby covenants and agrees that it will keep secret from every person, firm or corporation whatsoever, the names of any of the past, present or prospective borrowers of the INTERSTATE LOAN COMPANY."

10. Joseph Shanis, Vice President of the plaintiff and a lawyer, participated in the...