Chromalloy Am. Corp. v. Universal Housing Systems

• Decision Date: 15 July 1980
• Docket Number: 78 Civ. 395 (VLB).
• Citation: 495 F. Supp. 544
• Parties: CHROMALLOY AMERICAN CORPORATION and Arrow Group Industries, Inc., Plaintiffs, v. UNIVERSAL HOUSING SYSTEMS OF AMERICA, INC. and Irwin Tobman, Defendants.
• Court: U.S. District Court — Southern District of New York

495 F. Supp. 544

CHROMALLOY AMERICAN CORPORATION and Arrow Group Industries, Inc., Plaintiffs, v. UNIVERSAL HOUSING SYSTEMS OF AMERICA, INC. and Irwin Tobman, Defendants.

78 Civ. 395 (VLB).

United States District Court, S. D. New York.

July 15, 1980.

COPYRIGHT MATERIAL OMITTED

Whitman & Ransom, New York City, for plaintiffs, Chromalloy American Corp. and Arrow Group Industries, Inc.

Louis Strassberg, Strassberg & Strassberg, New York City, for defendants.

MEMORANDUM ORDER

VINCENT L. BRODERICK, District Judge.

I.

Plaintiffs Chromalloy American Corporation ("Chromalloy") and Arrow Group Industries ("Arrow") seek to recover from defendants Universal Housing Systems ("Universal") and Irwin Tobman on unpaid invoices and a promissory note. Defendants have counterclaimed for damages for breach of a joint venture agreement.

Plaintiffs have moved for summary judgment under Rule 56, Fed.R.Civ.P., 28 U.S.C.

For the reasons which follow, I find that the defendants have failed to establish the existence of any genuine issue of material fact as to all but one of plaintiffs' claims and as to all of the defendants' counterclaims. Summary judgment is granted to plaintiffs as to Counts I, III and IV of the complaint and as to all of the defendants' counterclaims. Summary judgment is denied as to Count II of the complaint.

II.

The following facts are not in dispute:

Plaintiff Chromalloy is a Delaware corporation, engaged in manufacturing and shipping activities. Plaintiff Arrow, a wholly owned subsidiary of Chromalloy when this action was commenced,¹ is a New Jersey corporation engaged in the manufacture of low-cost metal structures. Defendant Universal is a New York corporation engaged in the sale of prefabricated plastic housing units and defendant Tobman is its president, director, and major shareholder.

In January, 1976 a finder introduced Tobman to Chromalloy, which was interested in entering the housing market. In February, 1976 the parties began discussion of the possible acquisition of Universal by Chromalloy, and on May 7, 1976 William McGavock, Chromalloy's executive vice president, sent Tobman a letter of intent setting forth conditions precedent to consummating the acquisition. The letter made it clear that the contemplated transaction was subject to the execution and delivery of a definitive agreement. It set forth that "neither party shall have any liability nor in any way be committed to the other on account of the proposed transaction unless a definitive Agreement is executed. . . ., and thereafter any liability shall be only under the terms of the definitive Agreement." This letter of intent was never confirmed and approved on behalf of Universal.

Chromalloy abandoned the idea of acquiring Universal because Universal was a start-up company with no established earnings record. Chromalloy instead considered the possible formation of a Chromalloy-Universal joint venture in the manufacture and sale of plastic housing. This prospective joint venture was to be for a period of four or five years, at the end of which Chromalloy would have the option to buy out Universal's interest in the joint venture at a price based on the joint venture's earnings. McGavock sent to Tobman a letter of intent dated June 25, 1976, setting forth a proposal to form a joint venture corporation in which each party would own 50%. The letter of intent by its terms disclaimed any intention by the parties to bind themselves contractually, and set forth conditions precedent to the formation of a joint venture. It clearly stated that neither party would be committed until a joint venture agreement was executed. This proposed letter of intent was never confirmed and approved on behalf of Universal.

Negotiations continued concerning the form of the prospective joint venture and the amount of capital contribution. Tobman prepared projections of Universal sales and profits. Chromalloy began to assist Universal in developing advertising, and authorized the use of Chromalloy's logo on Universal stationery and purchase orders.

On October 11, 1976 Universal and Chromalloy executed a loan agreement, under which Chromalloy agreed to loan Universal $100,000. By the terms of the loan agreement, the $100,000 was to be used by Universal as working capital, or to acquire the assets of Extrudyne, Inc., a public corporation which manufactured plastic extrusion forms.² The loan agreement contained a specific disclaimer of any present intention on the part of Chromalloy to make a capital contribution to the prospective joint venture, although it did provide that Chromalloy, in its sole discretion, could apply the principal amount of the loan as a capital contribution to the joint venture upon the consummation of a joint venture agreement, at which time the note would be cancelled. The loan agreement further provided that it did not constitute a letter of intent binding the parties to the formation of a joint venture.

On October 22, 1976 Chromalloy loaned $100,000 to Universal under the loan agreement, and Universal executed and delivered to Chromalloy its promissory note for $100,000, personally guaranteed by Tobman and payable upon demand after January 1, 1977. The note obligated Universal to pay attorney's fees and costs incurred in the event collection became necessary. Tobman obtained from the other shareholders of Universal a signed agreement to indemnify him against any claims against him by Chromalloy arising out of the $100,000 loan. The $100,000 loan was reflected as an indebtedness to Chromalloy on Universal's tax returns and on its financial statements. On February 24, 1977 Tobman sent McGavock a letter enclosing payment of interest for the months of October, 1976 to February, 1977 in the amount of $3,030.

A revised proposed letter of intent dated October 25, 1976, with respect to the prospective joint venture, was sent by Chromalloy on November 8, 1976 to Universal. It contained provisions similar to those in the June 25, 1976 letter, disclaiming any intention by the parties to bind themselves contractually, and clearly stating that neither party would be committed until a joint venture agreement was executed. While this proposed letter of intent was not confirmed and approved on behalf of Universal, Tobman on December 9, 1976 returned to Chromalloy a letter of intent (dated November 21, 1976) which had been confirmed and approved on behalf of Universal and which contained the same disclaimers.

During this period and thereafter, up to September 6, 1977, Chromalloy and Universal continued to negotiate concerning the terms and conditions of various drafts of a joint venture agreement. Certain of the drafts provided that "for accounting purposes" the joint venture would be deemed to have come into existence on January 1, 1977.

In the meantime Chromalloy and Universal had various business relationships. Chromalloy agreed to assist Universal in fulfilling its obligation under a contract to produce housing for a project for Leon DeMatteis & Sons, Inc. in Saudi Arabia, since Universal did not have the necessary resources for this contract. Beginning on January 1, 1977, Arrow started to provide Universal with various services such as accounting, purchase order processing, engineering, and financial planning. The accounting and financial services were rendered at a monthly charge of $3,000. An Arrow employee, Jerry Paner, joined Universal on a full-time basis as its sales manager to promote Tobman's concept of plastic housing. When the DeMatteis project encountered difficulties, Arrow sent an engineer to the project site. Chromalloy, after being indemnified by Tobman and other Universal directors, guaranteed a $300,000 line of credit granted Universal by the Chemical Bank to finance purchase orders and the shipment of goods so that Universal could fulfill its contract with DeMatteis. Chromalloy agreed to confirm Universal's credit to vendors of Universal, and informed them that Chromalloy and Universal were in the process of forming a joint venture.

Universal and Chromalloy maintained separate bank accounts; throughout the period of their negotiations Universal controlled its own finances; and Chromalloy had no control over Universal's bidding for jobs. No profits or losses were shared by Chromalloy and Universal, although Universal made almost $600,000 in net profits from the DeMatteis contract.

One obstacle to the successful conclusion of negotiations over the proposed joint venture was Universal's acquisition of the outstanding stock of Extrudyne, Inc. in 1976. On February 18, 1977, Chromalloy's counsel wrote Tobman indicating that possible violations of the disclosure provisions of the securities laws might have been entailed in connection with the acquisition by Universal of Extrudyne, and that this created an impediment to the proposed joint venture. Chromalloy agreed to assist Universal in rectifying any problems which might exist in connection with the acquisition of Extrudyne.

Numerous revisions and redrafts of proposed joint venture agreements were exchanged in May, June, July, and August, 1977, but the parties were unable to reach a final agreement. In August Chromalloy proposed to Tobman that Chromalloy would invest $100,000 in the joint venture, and that the $100,000 loan outstanding would be converted into and would constitute that capital contribution. Chromalloy would then make a new loan to the joint venture of $100,000 which would be repaid from the first $100,000 of profit. This arrangement was not satisfactory to Tobman.

On September 6, 1977, with a variety of issues in addition to the question of capital contribution still unresolved, negotiations were terminated by Chromalloy.³ McGavock wrote to Tobman making formal demand upon Universal for repayment of the loan of $100,000. In November, 1977 Anthony Dato, financial vice president of Arrow, sent letters to Universal vendors to the effect that the joint...