Brown v. Lockwood

• Decision Date: 22 September 1980
• Citation: Brown v. Lockwood, 432 N.Y.S.2d 186, 76 A.D.2d 721 (N.Y. App. Div. 1980)
• Parties: James BROWN, Respondent-Appellant, v. Frederick LOCKWOOD, Appellant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 186

432 N.Y.S.2d 186

76 A.D.2d 721

James BROWN, Respondent-Appellant, v.Frederick LOCKWOOD, Appellant-Respondent.

Supreme Court, Appellate Division, Second Department.

Sept. 22, 1980.

Andrew J. Fiore, Pleasantville, for appellant-respondent.

Irving Nitzberg, Tarrytown, for respondent-appellant.

Before HOPKINS, J. P., and DAMIANI, GULOTTA and O'CONNOR, JJ.

DAMIANI, Justice.

In an action to recover damages for fraud and deceit, the defendant appeals from a judgment of the Supreme Court, Westchester County, in favor of the plaintiff.In a second action to recover damages for breach of contract, the defendant appeals from so much of an order of the same court, as denied that part of his motion which was for summary judgment dismissing the first cause of action and plaintiff cross-appeals from so much of the order as granted that part of the motion which was for summary judgment dismissing the second cause of action.

The appeals presently before us are taken in two separate actions between the same parties which arise out of the same set of operative facts.In the first action the plaintiff sought to recover damages for fraud and deceit in the inducement to enter into certain contracts.The principal issue raised in that action involves the proof required to establish constructive fraud where the alleged misrepresentation involves a promise of future performance required by the contracts.In the second action plaintiff sought to recover for breach of the contracts which underlie the claim of fraud in the first action.The appeal and cross appeal in the second action present interesting problems of claim and issue preclusion.

THE FACTS

The plaintiff in both actions, James Brown, was engaged in the electrical contracting business in Westchester County from 1946 to 1969.In the latter year he sold his stock in his firm, J. B. Brown Electrical Contractors, Inc., and retired to Florida.The contract of sale contained a noncompetition covenant in which plaintiff promised not to own, operate or manage another electrical contracting business in Westchester County for a period of five years, expiring August 31, 1974.In March, 1971plaintiff returned from Florida and went to work for his old firm.After about a year, negotiations with the new owners to buy back into the business fell through and plaintiff left their employ.

In the spring of 1972plaintiff met defendant, Frederick Lockwood, the president and sole stockholder of Lockwood Conditionaire Corporation.The corporation was engaged in the electrical, air conditioning, plumbing, and heating business in Westchester County.Plaintiff and defendant met in April, 1972 and discussed going into business together.According to plaintiff, defendant stated that he desired to expand the electrical division of Lockwood Conditionaire and to eventually sell or eliminate its air conditioning, plumbing and heating branches.Plaintiff disclosed the existence of the noncompetition clause in the contract by which he had sold his own corporation.After a series of meetings it was agreed that plaintiff would be employed on a salary basis by Lockwood Conditionaire as an estimator.Defendant would draw the same salary.After examination and discussion they arrived at values for the inventory and equipment on the premises.Defendant allegedly promised to have separate quarters and separate accounts for the electrical division until the elimination of the other divisions.

Plaintiff and defendant went to the office of Sidney H. Reich, the attorney for defendant and Lockwood Conditionaire.Plaintiff was not represented by counsel.Mr. Reich's opinion was that plaintiff could be employed by the corporation without violating the noncompetition covenant so long as he did not become a partner or actually run the business.As a result of the discussions of the parties Reich prepared three agreements which were executed on June 27, 1972 by plaintiff and by defendant on his own behalf and on behalf of the corporation.

The first agreement provided in substance that Lockwood Conditionaire would employ plaintiff in its electrical contracting division until August 31, 1974, that plaintiff and defendant would receive identical salaries, that they would share equally in the net profits from the electrical contracting division and that in order to ascertain such net profits the corporation would establish and maintain separate bookkeeping records for the electrical contracting division.Plaintiff was not to share in the profits from the other divisions of Lockwood Conditionaire.This agreement also provided that within one week both plaintiff and defendant would lend the sum of $20,000 to the corporation to be used exclusively for the operating costs and expenses of its electrical contracting division.The loans were to be repaid by the corporation on September 1, 1974, without interest.

The second agreement established the value of the tools, equipment, trucks and inventory of the electrical contracting division of Lockwood Conditionaire at $15,000 and established the value of the good will of that division at $10,000.Plaintiff agreed to pay defendant $12,500 for a one-half interest in the electrical contracting division, payable $7,500 immediately and the balance of $5,000 on or before August 31, 1974.In consideration of these payments defendant agreed to transfer a one-half ownership interest in the electrical contracting division no later than September 1, 1974.This second agreement further provided that defendant retained ownership and control of the remaining divisions of the corporation.

The third agreement provided that plaintiff would hold defendant and Lockwood Conditionaire harmless from claims arising out of any alleged breach of the noncompetition clause in the contract by which plaintiff had previously sold his own business.

Apparently the reason for this complicated arrangement was to avoid an open breach of the noncompetition clause by making plaintiff a mere employee of Lockwood Conditionaire until the expiration of the five-year period on August 31, 1974.Thereafter plaintiff would become a one-half owner.Soon after the signings, the performance tendered by the parties materially differed from the terms of the agreements.Plaintiff testified that he had the $20,000 available to lend the corporation but that on the day after the contracts were signed defendant informed him that he did not have the $20,000 to lend at that time and defendant suggested that they both start off by making a loan of $10,000.Defendant testified to the contrary, that it was plaintiff who had indicated that he was unable to make the required contribution since he was buying a new house and wanted to lend only $10,000.In any event, it is clear that the parties orally agreed to limit the initial loans which they were each required to make to the corporation to $10,000 rather than $20,000.

Plaintiff had his wife draw two checks on their joint account.One for $10,000 payable to the corporation represented plaintiff's required loan and the other for $7,500 payable to defendant represented the down payment upon plaintiff's purchase of a one-half interest in the electrical division.On June 28, 1972plaintiff gave these two checks to defendant at the latter's office.Defendant did not simultaneously make a $10,000 personal loan to the corporation.Rather, it appears that the corporation borrowed $10,000 from a bank and that defendant personally guaranteed the loan, the proceeds of which were deposited to the credit of the corporation.The bank loan was renewed on several occasions and was eventually paid by the corporation.Defendant testified that he personally loaned $5,000 in September, 1972 and another $3,500 in January, 1973 for the general use of the corporation because it was in need of money.

Plaintiff was employed by the corporation until August, 1973.In October, 1973he demanded the return of the $17,500 he had advanced and in November, 1974he commenced two actions.One sought recovery of the $10,000 loan from the corporation.That action went to trial and on April 12, 1978plaintiff recovered a judgment against Lockwood Conditionaire for $10,000 with interest.The judgment against the corporation remains unsatisfied because on May 15, 1978 it filed a petition in bankruptcy.The other action sought to recover the $17,500 from defendant Lockwood upon the theory that in order to induce plaintiff to enter into the loan, purchase and indemnity agreements, defendant had made fraudulent representations, inter alia, as to the value of the assets and good will of the electrical division, his promise to terminate the operations of the other divisions of Lockwood Conditionaire, his promise to make a personal loan to the corporation, his promise to keep separate books and accounts for the electrical division and his promise to devote all of his time to the business of that division.

In June, 1978plaintiff commenced yet another action against defendant Lockwood.The gravamen of this action was breach of contract.The first cause of action sought recovery of plaintiff's $7,500 down payment upon the theory that defendant did not own the electrical division, that it was the property of Lockwood Conditionaire and that defendant had failed to perform the agreement to sell a one-half interest in that electrical division.The second cause of action sought to recover $10,000 damages from defendant for his failure to personally make a $10,000 loan to the corporation in accordance with the loan agreement.

In November, 1978 the fraud action went to trial before Mr. Justice JONES in the Supreme Court, Westchester County.The court found that defendant had been guilty of constructive fraud only with respect to his promise to make a loan to the corporation and in all other respects it found that fraud had not been proven.By judgment dated December 18, 1978 the fraud action was decided in favor...