Bell Bakeries, Inc. v. Jefferson Standard Life Ins. Co.

• Decision Date: 01 February 1957
• Docket Number: No. 461,461
• Citation: Bell Bakeries, Inc. v. Jefferson Standard Life Ins. Co., 245 N.C. 408, 96 S.E.2d 408 (N.C. 1957)
• Court: North Carolina Supreme Court
• Parties: BELL BAKERIES, Inc. v. JEFFERSON STANDARD LIFE INSURANCE COMPANY.

Page 408

96 S.E.2d 408

245 N.C. 408

BELL BAKERIES, Inc. v. JEFFERSON STANDARD LIFE INSURANCE COMPANY.

No. 461.

Supreme Court of North Carolina.

Feb. 1, 1957.

Smith, Leach, Anderson & Dorsett, Raleigh, for plaintiff appellant.

Arendell & Green, Raleigh, and Charles G. Powell, Jr., Greensboro, for defendant appellee.

RODMAN, Justice.

Plaintiff's assertion that the evidence supports its allegations that it was unlawfully forced to make the premium payment to save itself from great financial loss necessitates a review of the evidence. The evidence is very largely documentary, consisting principally of the deed of trust and correspondence between the president of plaintiff and the assistant treasurer of defendant.

E. L. Farris, president of plaintiff and of Liberty, testified that in the fall of 1951 defendant made a complaint about the loan. On 30 November 1951 Farris wrote M. H. Crocker, assistant treasurer of defendant, replying to a letter from Crocker dated 16 November. In that letter Farris stated that plaintiff's operation had not shown the result hoped. He attributed this to problems created by the Office of Price Stabilization. On 5 December 1951 Crocker wrote Farris referring to a conversation had on 3 December. Crocker's letter stated:

'We feel that before we can reach a definite decision, we should have the following additional information:

'1. How do you justify payment of interest on the debentures of Liberty Baking Corporation by its subsidiary, Bell Bakeries Inc.? We have noted the reason given by your auditors but that is an inadequate explanation.'

The letter requested copies of operating and financial statements. On 10 December Farris replied and enclosed financial and operating statemints through 24 November 1951. These statements showed an excess of disbursements over receipts of $101,617.21 for 47 weeks, a loss incurred in the operation of seven of plaintiff's plants, but a net profit of $69,647.58 which was transferred to surplus; net working capital of $58,414. In response to the inquiry as to payment of Liberty's obligations by Bell, the letter said: 'You have requested also that we justify payment on interest of Liberty Baking Corporation debenture bonds by its subsidiary, Bell Bakeries, Inc. Liberty Baking Corporation has no other source of income except through its subsidiary, Bell Bakeries, Inc., of which it, Liberty Baking Corporation, is the sole owner. It has long been the considered opinion of management and our auditors that the operating company, Bell Bakeries, Inc., should be required to pay to Liberty Baking Corporation interest on its invested capital for use of operating facilities enjoyed by the subsidiary. It was therefore determined, at the time the Liberty Baking Corporation preferred stock was exchanged for Liberty Baking Corporation debenture bonds, that this expense would be an obligation of the operating company, Bell Bakeries, Inc. and this expense has been absorbed since 1948, at which time the debenture plan became operative. We therefore feel that this charge for interest expense against the subsidiary is justifiable and in order.' On 19 December 1951 Crocker replied to Farris' letter of 5 December. He stated that the company's working capital on 10 March 1951 was $173,000; 19 May 1951 it had been reduced to $112,000; 23 June 1951 it had been reduced to $81,000. He then said:

'Your working capital at November 24, 1951 amounted to $53,400, which is a violation of the Indenture requirement that it be maintained at $75,000.

'The dual violation of this contract justifies an immediate declaration of default and calling the issue. We are disposed to take that action unless you will assure us at once:

'1. That working capital has been restored to $75,000 or more.

'2. That your Company will enter into a supplemental indenture duly authorized by your directors and if necessary, your stockholders, providing among other things that Bell will pay no dividends on its stock, will make no interest or principal payments on its long-term debt other than the bonds of this issue, or that of Liberty Baking Corporation, and will make no disbursements to Liberty Baking Corporation, or loans or advances to any person, firm or corporation except in the due course of business, unless after such payment or disbursement working capital amounts to $200,000 or more.'

On 27 December 1951 Farris acknowledged receipt of this letter and stated that working capital was then in excess of $75,000. He stated further: 'Regarding the paragraph numbered 2 of your letter, it is our interpretation that interest and principal payments on the debentures of Liberty Baking Corporation are excepted from the $200,000. working capital requirement. With this understanding our Directors have authorized the making of a supplemental Indenture in substance as set forth by you.' He further stated that he would exercise his best efforts to maintain a working capital in excess of $200,000 and expressed appreciation for cooperation which has been given by Jefferson.

On 28 December Crocker, by telegram, replied to Farris' letter of the 27th. The telegram read: 'Paragraph Two My Letter December 19 Does Not Except Interest Or Principal Payments On the Debentures Of Liberty Baking Corporation From The $200,000 Working Capital Requirement.' Farris testified that upon receipt of this telegram he discussed it with counsel for Bell Bakeries. Farris testified: 'The wire from Jefferson Standard indicating that they had made an exception to their letter which threw an entirely different light on the interpretation or pertaining to the paying of interest to Liberty on the bonds, naturally it was the most serious thing that had confronted us in quite some time. We didn't see how we could fail to pay the interest on those bonds, and they had agreed in their letter originally to accept it.' Notwithstanding the insistence by Jefferson that Bell should not make any payments to Liberty except in the ordinary course of business, Bell, on 1 January 1952, paid the interest accrued on Liberty's debentures.

On 7 January Farris conferred in Greensboro with Crocker about the loan and the position of their respective companies. On 8 January 1952 Crocker wrote Farris. In that letter he said:

'We construe payment by Bell Bakeries, Inc. of interest or principal on the obligations of Liberty Baking Corporation, owner of the common stock of Bell Bakeries, Inc., to be a dividend on that common stock. Any other payment from Bell to Liberty, except in the due course of business, would bear the same classification. Therefore, such payments violate the agreement of May 16, 1950 unless after they have been made Bell Bakeries, Inc. has net working capital of $200,000 or more.

'We do not intend to protest interest payments already made by Bell on the Debentures of Liberty, but we will not permit such payments in the future in violation of the Indenture of November 1, 1947 and the letter agreement of May 16, 1950. If your Company will not be able to abide by those restrictions, I suggest that you arrange to refinance and retire the bonds we own.'

The letters and telegrams quoted above are the evidence on which plaintiff relies to show that it acted under duress. Farris testified that after his conference in Greensboro on 7 January and receipt of the letter of 8 January he began to make arrangements to refinance the loan. Farris testified that on 2 April he went to Greensboro, expecting to see Mr. Crocker to discuss the preliminaries as to what would be required of Bell Bakeries in order to pay off the loan, that he indicated to Mr. Crocker that he felt the payment of the interest to date of retirement and the principal amount would be the amount required by the insurance company to which Crocker replied: '* * * he wasn't sure of that, that he would have to discuss the matter with his committee, and that he would give me an answer later.' On 10 April 1952 Crocker wrote Farris: '* * we will accept full payment of this loan at 105 and accrued interest at any time on or before August 1, 1952.'

On 15 April 1952 counsel for Bell wrote counsel for defendant reciting the relationship between Liberty and Bell and stated that Liberty had no source of income except such payments as might be made by Bell, that Bell obligated itself to service Liberty's debentures on 1 January 1948, that: 'The consideration for this was the large amount of money which Liberty Baking Corporation had already invested in Bell and for which it did not exact or receive any return except as stated.' He stated that the amount necessary to meet Liberty's obligations on its debentures was $62,000 per year and that these payments had been made since 1948 without protest until December 1951. Speaking with respect to the amendment of May 1950 to the deed of trust, the letter said: 'As Bell had no intention of paying any dividends to its stockholders unless its working capital was at least $200,000 we agreed to this request. It was not then stated by Mr. Crocker, and we did not have the faintest inkling, that this provision was intended to prevent the payment of the amount which had been paid for Bell to Liberty to service the Liberty indentures since January 1948. * * * As we have no intention of bringing about a default in the Liberty Baking Corporation debenture issue, and as the management would expose itself to severe criticism if not legal liability for such action, we are endeavoring to follow Mr. Crocker's demand to replace the loan although we deny any violation of any provision of the indenture by our action. We have sought to make arrangements to refinance the loan and we are confldent that we can effect such an arrangement were it not for the fact that in his letter of April 10, 1952, Mr. Crocker informs us that Jefferson will insist on a premium of 5% in payment of the balance of this loan.'

The response to this letter is not in the record, but on 29 May...