Doyle v. Northrop Corp.

• Decision Date: 20 June 1978
• Docket Number: Civ. A. No. 76-2472.
• Citation: 455 F. Supp. 1318
• Parties: M. J. DOYLE and General Energy Resources, Inc., Plaintiffs, v. NORTHROP CORPORATION, Defendant.
• Court: U.S. District Court — District of New Jersey

455 F. Supp. 1318

M. J. DOYLE and General Energy Resources, Inc., Plaintiffs, v. NORTHROP CORPORATION, Defendant.

Civ. A. No. 76-2472.

United States District Court, D. New Jersey.

May 5, 1978.

As Amended June 20, 1978.

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Wolf, Block, Schorr & Solis-Cohen by Leonard J. Bucki, Philadelphia, Pa., Hartman, Schlesinger, Schlosser & Faxon by Jan M. Schlesinger, Mount Holly, N. J., for plaintiffs.

Archer, Greiner & Read by George F. Kugler, Jr., Haddonfield, N. J., for defendant.

FINDINGS OF FACT and CONCLUSIONS OF LAW

CLARKSON S. FISHER, District Judge.

This action was instituted by the plaintiffs M. J. Doyle and General Energy Resources Inc. (hereinafter GERI) in the New Jersey Superior Court, Chancery Division, wherein they sought to enjoin and restrain the defendant, Northrop, from enforcing a security agreement. Further they sought an order adjudging the defendant as having no interest in the notes, monies, etc., received by plaintiffs to the extent of taxes due and statutory liens pursuant to N.J.S.A. 2A:102-10 & 11.

The defendant removed the action to this Court and moved for summary judgment on its first seven counterclaims. The basis of those counterclaims being the money allegedly due the defendant from plaintiff as a result of various notes, guarantees, and a revolving loan agreement. The motion was denied without prejudice.

The defendant then moved for an injunction pendente lite:

A. Compelling plaintiffs to account for all funds received under 17 enumerated contracts.

B. Compelling plaintiffs to account for all funds received or to which plaintiffs are entitled.

C. Compelling the opening of an interest bearing account and depositing all monies hereinafter received with weekly reports thereon.

D. Directing that there be no withdrawal from the above mentioned account except upon order of the Court.

Parts A and B of the motion were granted and parts C and D were denied.

The defendant then moved for summary judgment on the 9th Count of its counterclaim. By that, defendant demanded that the security interest be found valid; that all demands for payment on notes be complied with; that there be a foreclosure of the liens held against the plaintiffs' collateral with proceeds to go to pay off the debt. At the hearing on that motion it was determined that further discovery was necessary in order to conclude the matter. The motion was adjourned pending discovery, at which time there was a consolidated hearing on the motion and a bench trial.

The Court finds the following relevant and credible facts pursuant to F.R.Civ.P. 52.

(1) The initial involvement of Northrop with the plaintiffs began in 1972. At that time the defendant desired to diversify its interests. To that end it purchased a 23% interest in the common stock of GERI and also agreed to make a loan of 1.5 million dollars to GERI.

(2) At that time GERI was a moderate size company with sales in the range of twenty to thirty million dollars.

(3) It was the desire of GERI to expand its operations into the field of nuclear power. This was to be accomplished through the purchase of small regional companies around the country. These small companies would then bid on jobs which, if the bids were accepted, would then be worked on by those companies with the aid and assistance of GERI.

(4) GERI was successful in expanding its operations with the result that there was a work backlog in the vicinity of 100 million dollars. As a result of this increase large sums of cash were required for the company to operate.

(5) As a result of plaintiffs' restricted cash flow and in furtherance of their relationship, plaintiffs and defendant entered into a series of agreements, the first of which was the March 5, 1976 agreement. By that agreement GERI and its subsidiaries granted the defendant a security interest in the following items: All accounts receivable, notes, drafts, contract rights, claims, retainages, choses in action, machinery, equipment, inventory and general intangibles now or hereafter existing, wherever located, together with the proceeds of any and all of the foregoing. P-4 in evidence — March 5, 1976 security agreement.

(6) Plaintiffs contend that paragraph 1 in that first agreement required the consent of third parties before a valid security agreement could have been created. The defendant states that this is not so, a position with which I agree. The language in that paragraph does not mandate consent from third parties, rather it states that if such consent is needed, it must be obtained. Thus consent is not a prerequisite to the creation of a valid security agreement. Further, in their answer to paragraph one of the defendant's ninth counterclaim, the plaintiffs specifically admit that they entered into a security agreement. No mention is made in that answer to its alleged invalidity. The fact that letters were sent out by GERI seeking consent in no way controverts this finding, as the basis of their contention is incorrect. It was not necessary to have received consent in order for there to have been a valid security agreement.

(7) The security agreement was duly perfected by the filing of a financing statement in various states including New Jersey, filed March 28, 1976 re M. J. Doyle and GERI. P-14, ¶ 7.

(8) In the March 5, 1976 agreement the plaintiffs warranted that no other security interest had been granted in the collateral named therein except as was granted to Northrop. Further that there were no liens against any of the property and that plaintiffs would have good and clear title to any after-acquired property. P-4, ¶ 3(a).

(9) The plaintiffs attempt to counter this fact by stating that their projects were bonded by the Maryland Casualty Company and that Northrop was cognizant of a blanket indemnity agreement between Maryland Casualty and GERI. Additionally they contend that the indemnity agreement made certain assignments of collateral to Maryland as security and that the blanket indemnity agreement was to constitute a security agreement and financing statement. P-7, ¶¶ 3 and 5 respectively. This in no way controverts my finding in paragraph 8 above. There has been no showing that the so-called "financing statement" was ever filed, and even if it had been, that merely goes to the matter of priorities, which is not directly at issue in this case.

(10) Plaintiffs also represented in the March 5, 1976 agreement that they would not grant a security interest to any others in the collateral, nor allow any liens to be incurred, that the collateral would not be levied upon, that the collateral would not be disposed of, other than in the normal course of business, without defendant's consent, and that they would not allow the value of the collateral to be impaired. P-4, ¶ 4(b).

(11) After entering into the March 5th agreement, certain events occurred including, but not limited to, the termination of a contract by a customer which caused Northrop to revaluate its position. What resulted was a business plan calculating the needs of the Company and the direction it would take. This was memorialized in the second agreement of the parties dated April 22, 1976. P-8.

(12) Portions of the April 1, 1975 agreement were terminated or amended by the April 22, 1976 agreement, as noted therein. The validity of the March 5, 1976 agreement, however, was in no way diminished by the execution of the April 22, 1976 agreement.

(13) The April 22 agreement granted a security interest in those items mentioned in Exhibit C appended thereto and referred to in the agreement as collateral. D-8 Article IV, ¶ 4.5(a); ¶ 4 of the Complaint.

(14) With regard to that collateral the plaintiffs warranted and made representations similar to those referred to in my findings numbered 8 and 10 regarding the March 5, 1976 agreement. D-8 Article VI, ¶ 6.21(a)-(c) and Article IV, ¶ 4.5(e).

(15) Some three weeks after signing the April 22 agreement, certain facts came to light which made Northrop aware that even under this newly signed agreement, GERI's financial position was not improved, nor did it appear that it would be.

(16) Rather than exercise its rights against the collateral, or exercise full control over GERI, both of which Northrop believed to have been within its rights, Northrop decided to place four of its officers on the GERI Board of Directors. This was felt to have been the best approach in that it would allow Northrop to evaluate the position of GERI, especially in light of the fact that Northrop had twice before believed they had placed GERI in a sound economic position only to learn later that this was not the case.

(17) To this end the parties entered into their third agreement in this series. This being the agreement of June 8, 1976.

(18) This agreement was the culmination of a series of meetings which took place on June 7th and 8th, 1976. These meetings were, in fact, a group of presentations by GERI of a new business plan regarding the various aspects of the business so as to inform the Northrop people of what was going on, what was planned and to seek to get more money, somewhere in the vicinity of six million dollars.

(19) After these meetings the attorney for Northrop, McCabe, and the attorney for GERI, McConomy, drafted the June 8th agreement which was executed that same day by Doyle on behalf of the plaintiffs.

(20) The Northrop people who were placed on the GERI Board were Stevens, Lewis, Gibney and McCabe.

(21) It was Northrop's intent to have their people remain on the GERI Board only for as long as it was necessary for GERI to get into a healthy financial condition.

The plaintiffs allege that on the evening of June 7, 1976 a meeting occurred between Doyle and Stevens and that the outcome of this meeting was an agreement by Stevens, on behalf of Northrop to commit more funds to GERI and to forbear foreclosure on any debts due to Northrop in...