Eastern Inv. & Development Corp. v. Franks

• Decision Date: 26 May 1959
• Citation: 339 Mass. 280,158 N.E.2d 881
• Parties: EASTERN INVESTMENT & DEVELOPMENT CORP. et al. v. A. A. FRANKS et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 881

158 N.E.2d 881

339 Mass. 280

EASTERN INVESTMENT & DEVELOPMENT CORP. et al. v. A. A. FRANKS et al.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Feb. 2, 1959.

Decided May 26, 1959.

Richard Wait, Boston, for plaintiffs.

Meyer H. Gildman and Charles M. Goldman, Boston, Gerald Gillerman, Cambridge, and Marshall L. Tutun, Chelsea, for defendants.

Before WILKINS, C. J., and RONAN, SPALDING, WILLIAMS and CUTTER, JJ.

SPALDING, Justice.

This case comes here by an appeal and a report. The appeal is by the plaintiffs from a final decree of the Superior Court denying an injunction against the enforcement of a promissory note and the dissolution of a voting trust. The report is by a single justice of this court of the questions presented by six matters heard by him in proceedings pending the determination of the appeal.

The Appeal.

The nature of the case brought here by the appeal can best be described by summarizing the pleadings. The plaintiffs in this suit in equity are Eastern Investment & Development Corp. (hereinafter called Eastern), a Pennsylvania corporation, Earl Belle, and Edward, Burton and Murray Talenfeld. The individual plaintiffs were officers and directors of Eastern and were its sole stockholders at the time (November 13, 1957) the bill was filed. In substance it was alleged that Eastern entered into a written agreement, dated April 26, 1957, with the defendant A. A. Franks for the purchase from Franks of one million shares of the common stock of Cornucopia Gold Mines (hereinafter called Cornucopia), a Washington corporation, for the sum of $240,000, of which $150,000 was to be paid in cash and the balance of $90,000 by a promissory note. The agreement provided that Eastern would place six hundred thousand shares in escrow until the note was paid. The Pilgrim Trust Company of Boston (hereinafter called Pilgrim) was named as escrow agent. As part of this agreement Franks was to transfer another one million shares of Cornucopia to a voting trust, of which he and the individual plaintiffs were to be trustees. These shares were also to be held by Pilgrim as escrow agent. Under the terms of the agreement the $90,000 promissory note was to be noninterest bearing and was to mature on May 14, 1958, or one year from its date, whichever should be later.

It was alleged that Franks orally represented Eastern that he had certain obligations to Pilgrim which he was having difficulty in meeting and that in order to alleviate this difficulty the note should be made payable as follows: $45,000 on November 14, 1957, and $45,000 on May 14, 1958, with provision for acceleration of maturity if the maker defaulted on the first payment; that Franks informed Eastern that he would not seek to enforce payment on November 14, 1957, and that if Pilgrim, which was to be the holder of the note, insisted on payment on that date, he, Franks, would pay it and look to Eastern for reimbursement on or after May 14, 1958; that Pilgrim was informed by Franks of this supplementary agreement; that the representations made by Franks were false and made with the intent to deceive the plaintiffs, since he knew that Pilgrim would seek to enforce payment of the instalment due on November 14, 1957, and he had no intention of making any payment for Eastern on that date; that Eastern signed the promissory note in the form suggested by Franks in reliance upon his misrepresentations; and that Franks, on November 1, 1957, notified Eastern that a payment of $45,000 would be due on November 14. It was further alleged that if Eastern did not pay $45,000 on November 14, 1957, it would be considered in default on the note, and Franks would withdraw the one million shares of Cornucopia stock from the voting trust and Pilgrim would sell the collateral for the note. The bill prayed that Franks be restrained from enforcing the note prior to May 14, 1958, and from withdrawing any shares from the voting trust, and that Pilgrim be restrained from delivering any shares to Franks and from selling the collateral for the note.

A temporary restraining order conforming to the prayers of the plaintiffs was granted, conditioned on the filing by the plaintiffs of surety bonds totaling $71,000.

Franks in his answer admitted the execution of the written agreement but denied the existence of any agreement not to enforce the payment of the November instalment due on the note. Included in Franks's answer was a counterclaim alleging that Eastern had wilfully defaulted on the note, and asking that the plaintiffs be adjudged to have forfeited any rights to the shares in the voting trust. Pilgrim by its answer denied any knowledge of any arrangement between Eastern and Franks concerning the November instalment, and alleged that it was the holder in due course of the note. In a counterclaim Pilgrim asked that judgment be entered in its favor against Eastern in the full amount of the note, with interest, and that it be allowed to sell the stock held by it as collateral and to apply the proceeds toward the satisfaction of Eastern's indebtedness.

The evidence is reported and the judge made findings of material facts. Facts found by us and by the judge include the following. The contents of the basic contract of sale dated as of April 26, 1957, are substantially as alleged in the bill. It appears from this contract that the two million shares of Cornucopia stock held by Franks prior to the sale constituted a majority of the common stock issued and outstanding. At the closing of negotiations, held in Boston on May 15, 1957, the promissory note was drafted in its final form and signed by Belle for Eastern. It contained a promise to pay the principal amount of $90,000 in instalments of $45,000 on November 14, 1957, and $45,000 on May 14, 1958. There was a provision for acceleration of maturity if Eastern should fail to pay 'any installment.' The note was accompanied by a certificate signed by the secretary of Eastern to the effect that a vote of its board of directors had authorized Belle to sign a note containing those terms. On the same day Franks indorsed the note and delivered it to Pilgrim.

An agreement establishing the voting trust was also executed at the time of the closing. The voting trust was to continue for ten years, subject to Frank's option to tender the shares held by the voting trustees to Eastern between May 14, 1960, and June 14, 1960, at a price of $250,000. Eastern was obligated to accept and pay for the stock if such a tender was made, in which event the voting trust would terminate. This agreement contained no provision for the termination of the voting trust upon a default on the $90,000 note.

Frank's rights upon a default in the two blocks of stock to be placed in escrow became a matter of concern during the closing negotiations and, as a result, the basic contract was amended. With respect to the six hundred thousand shares to be held as collateral for payment of the note the amendment provided that: 'In the event * * * [Eastern] defaults in the payment of either installment due under said note * * * [Franks], and the escrow agent at the request of * * * [Franks], shall notify * * * [Eastern] of such default by registered mail and the escrow agent, subsequent to the expiration of a period of 10 days following the mailing of such notice shall sell the shares then held in escrow * * * unless said default is cured by * * * [Eastern] within said 10 day period.' The letter of instructions to Pilgrim as escrow agent executed at the same time contained an identical provision.

With respect to the one million shares to be placed in the voting trust, the amendment provided that upon a default in the payment of either instalment Franks, 'in addition to his right to have the escrow agent sell the stock then held in escrow [as collateral] as above provided, shall have the further right to withdraw his certificates representing the * * * [one million shares] from the voting trustees and the voting trust agreement * * * thereafter shall be void and of no further effect.' However, there is a discrepancy between this provision and those contained in the letter of instructions to Pilgrim as escrow agent for the voting trust shares. These instructions included a notification procedure prior to termination upon default similar in all respects to the one specified as a condition precedent to the sale of the shares held as collateral.

Considerable testimony was introduced in support of the case stated in the plaintiffs' bill. In his report of material facts the judge found that 'the plaintiffs failed to prove to me that any * * * collateral or dominating oral agreement was entered into between the defendant and Eastern' to the effect that payment of the November 14, 1957, instalment required by the note would not be sought. The judge then found that the first instalment was due and not paid, and that as a consequence Eastern was in default, and that the entire principal amount of the note was due. He ordered a final decree entered dismissing the bill. There was ample evidence to support these findings and they cannot be said to be plainly wrong. Indeed the note has been paid during the pendency of this appeal, and the plaintiffs do not now attack that part of the final decree ordering the payment of the $90,000.

In passing upon the counterclaim of Franks, the judge found that Eastern, by reason of its having 'wilfully defaulted in its agreement' had forfeited any rights it may have had in the continuation of the voting trust, and that under the terms of the contract, as amended, Franks had the right to withdraw the one million shares held by the trustees. He also ruled that in so far as any requirement of notification had been created by the escrow letter, Eastern's conduct after November 1, 1957, relieved Franks and Pilgrim from giving such notice. The plaintiffs' attack is directed at these rulings and at that portion of the decree...