Ellis Canning Company v. Bernstein

• Decision Date: 29 September 1972
• Docket Number: Civ. A. No. C-3125.
• Citation: 348 F. Supp. 1212
• Parties: ELLIS CANNING COMPANY, a Colorado corporation, Plaintiff, v. Arthur J. BERNSTEIN et al., Defendants.
• Court: U.S. District Court — District of Colorado

348 F. Supp. 1212

ELLIS CANNING COMPANY, a Colorado corporation, Plaintiff, v. Arthur J. BERNSTEIN et al., Defendants.

Civ. A. No. C-3125.

United States District Court, D. Colorado.

September 29, 1972.

COPYRIGHT MATERIAL OMITTED

William Robinson Fishman, Isaacson, Rosenbaum & Goldberg, by Sheldon E. Friedman, Denver, Colo., for plaintiff.

Sterling & Simon, by Harry M. Sterling, Denver, Colo., and Samuel M. Gilman, Rock Island, Ill., for defendants.

MEMORANDUM OPINION

WINNER, District Judge:

United Packers, Inc., is a food packaging company which, in 1970, had its main plant in Opelousas, Louisiana, and which maintained its managerial offices in Chicago, Illinois. It was run by the defendant Bernstein, a lawyer turned meat packer. One of its principal products was vienna sausage, and Ellis Canning, which is owned by N. L. Koin, is a large buyer and marketer of vienna sausage. Defendants Tunick and Stone were stockholders in and directors of United who acquired their interests in 1969 for an investment by Tunick of $75,000 and an investment by Stone of $25,000, but at all times material to this case, United was operated and controlled by Bernstein.

United was losing money, and by 1970, it was teetering on the brink of bankruptcy. Early in that year, Ellis started to purchase large quantities of vienna sausage from United, but these purchases were accomplished under unconventional financing arrangements. When Ellis decided to place an order, one-half of the purchase price would be advanced to United to finance production of the order. Then, when the vienna sausage was manufactured and shipped, Ellis would pay the second half of the purchase price upon receipt of shipping documents. By mid-1970, all of the defendants had become convinced that United was a poor investment, and with the knowledge and approval of Tunick and Stone, Bernstein was trying desperately to sell the company, and he made several unsuccessful efforts to sell it to various of the large meat packers. Finally, with a bankruptcy proceeding under active study, and again with the knowledge and approval of Tunick and Stone, Bernstein contacted Koin to see if he could be interested in bailing out the three defendants. He assured Koin that United's problems were solvable, and he wrote that if United could build a reasonable volume, United should net at least $100,000 per year. The volume Ellis was in a position to furnish United would have gone a long way towards providing the sales Bernstein said were needed to make up the "reasonable volume." He also assured Koin that the values of physical assets shown on United's books were far below actual values.

There were many conversations, both telephonic and face to face, between Bernstein and Koin during the period of approximately July 1, 1970, to early October of that year. On October 6, 1970, Bernstein and United's vice-president, James Pitrie, came to Denver to try to finalize the sale. By this time, a purchase arrangement keyed to a Chapter XI Bankruptcy proceeding had been generally agreed to. The concept of this plan was that United would apply to the Bankruptcy Court for a Chapter XI arrangement; Ellis would advance operating capital to the Chapter XI, but the identity of Ellis would not be disclosed to United's creditors; United would be operated under Chapter XI with funds advanced by Ellis and a compromise arrangement would be worked out with the creditors. Ellis would then pay the defendants for their stock in United, and it would be transferred to Ellis; and, of course, at this point Ellis would own the company debt free for a total investment of its advances to the Chapter XI and its payment to defendants for their stock. This neat arrangement would permit United to operate under court protection while settlements with United's creditors were being effected, and, in the meantime, the advances by Ellis to the Chapter XI operation occupied in preferential position.

At the October 6, 1970, meeting, Bernstein and Pitrie met with Koin and Louis Isaacson, Koin's attorney, at Isaacson's office in Denver. Most of the discussion at this meeting had to do with the intricacies and mechanics of the Chapter XI purchase arrangement and its financing. It was agreed at this meeting that Ellis would provide $200,000 to the Chapter XI, $130,000 of which would be used for operating capital, and $70,000 to take care of the creditors' arrangement. Of course, this was contingent upon working out a satisfactory agreement for the purchase of defendants' stock in United, the purchase to be made, according to an earlier letter from United's Opelousas attorney, "independent of the Chapter XI proceedings," but the Chapter XI financing and the stock acquisition were always tied together as part of an overall plan.

The next day, Bernstein and Koin met at Koin's office to thrash out the stock purchase agreement and other remaining details of the deal. Following this meeting, Bernstein telephoned Isaacson and advised him that agreement had been reached between Bernstein and Koin encompassing the procedures to be followed and the advances to be made to the Chapter XI as well as the purchase of defendants' stock in United. Defendants were to receive $100,000 for their stock, but this amount was to be paid out of profits. Isaacson advised Bernstein that since time would not permit them to get together, he wanted Bernstein to summarize the agreement with Koin and that he wanted to tape record the summarization. Bernstein approved the tape recording of the remainder of the conversation, and, at time of trial, he acknowledged its accuracy. A transcript of that full conversation was received in evidence, and during the taped portion of that conversation, this is what was said:¹

"Telephone Conversation taped by consent of Art Benstein and N. L. Koin pertaining to Ellis Foods—United Packers, October 7, 1970.

"Isaacson: Just go ahead and tell me what it is because this is on the tape right now.

"Bernstein: Allright. The deal takes whatever form of documentation you consider necessary for proper protection obviously. But essentially it is this: That we are filing the Petition tomorrow morning when James gets into Apaloosa, Chapter 11. Nate is going to put up the operating capital within the range we talked about and possibly, if it's necessary, the money for settlement with general creditors which we are not now talking about in terms probably of around one-third and he is making a deal with the stockholders — of course, any money he puts up will be put up as we discussed through the receiver so he has the protection and before it's put up that will be your dealings with the receiver to be sure it's okay; and the only thing coming to the stockholders for stock will be on the following basis: After there is a profit for the year the first $20,000 off of that profit goes to Ellis or whoever it is that acquires the stock for putting up the money — you may decide it's Nate personally or one of his corporations. The first $20,000 goes back — this represents, in effect, a return of 10% on somewhere between $130,000 and $200,000 but it's a fixed first $20,000 of profit goes to Ellis. Any profit above that is split 50-50 — half of it to Ellis and half of it to the stockholders against a purchase price for the stock of $100,000 which is only payable out of this 50% of profit, and in outline that's the whole situation.

"Isaacson: Okay. You have a list of stockholders, have you? Or will send to me?

"Bernstein: Yes I can very easily do that — he has it here but if you would want to drop me a line tomorrow and tell me anything that you want I can be glad to give you that, in addition to the names of the stockholders.

"Isaacson: I see.

"Bernstein: I would give you names and addresses of the stockholders. There are only three of us involved.

"Isaacson: Oh well why don't you just put them on this — tell me who they are right now, then?

"Bernstein: Fine. There's Al Tunick of Moline, Illinois.

"Isaacson: How many shares?

"Bernstein: Uh, 2,250 shares. There's Sam J. Stone of Peoria, Illinois, 750 shares; and there's Arthur J. Bernstein of Chicago, 5,000 shares; total of the three, 8,000 shares; and that's the only issued and outstanding stock.

"Isaacson: Okay, fine, and the name of the corporation is —

"Bernstein: I'll give you two things about that. It's United Packers, Inc., a Nevada corporation authorized to do business both in Louisiana and Illinois. That gives you the whole story and that stock is all common stock. There is no preferred. There are 2,000 of additional shares authorized but unissued.

"Isaacson: The total number issued are — "Bernstein: The total number issued is 8,000, and total number authorized is 10,000.

"Isaacson: I see, okay, that's all we need right now.

"Koin: I want to say one little thing that he made at his very beginning of where he's talking about a settlement with these people of a third which I am not in accord with the third. It would be less than a third to start negotiating after they go into Chapter 11 and I think you should know that now.

"Bernstein: I don't disagree with that, I think that at a later date we can develop a proposed arrangement and then discuss it with both you, Lou and Nate before anything is submitted to the court obviously.

"Isaacson: Allright, let me just add one thing, Nate. Did you discuss with Art the question of indemnity against any undisclosed liabilities?

"Koin: To the extent that I do need something legal set up.

"Isaacson: Well, there would an agreement (sic) by these shareholders, but I mean, this is the thing —

"Bernstein: My suggestion on that is that I would propose to send you a Xerox copy of the list of creditors which is being furnished to the Court and the Trustee.

"Isaacson: I think you should send that, but additionally, Art Samelson has mentioned in the past and I think, Nate, you should discuss with him the possibility of some kind of pre-acquisition audit

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