Ferris v. Polycast Technology Corp.

• Decision Date: 01 April 1980
• Citation: 180 Conn. 199,429 A.2d 850
• Parties: James J. FERRIS v. POLYCAST TECHNOLOGY CORPORATION.
• Court: Connecticut Supreme Court

Page 850

429 A.2d 850

180 Conn. 199

James J. FERRIS v. POLYCAST TECHNOLOGY CORPORATION.

Supreme Court of Connecticut.

Argued Jan. 18, 1980.

Decided April 1, 1980.

Emanuel Margolis, Stamford, with whom were Steven Berglass and Guy Farina, Stamford, for the appellant (defendant).

Richard Greenwald, East Norwalk, with whom was James P. Driscoll, East Norwalk, for the appellee (plaintiff).

Before COTTER, C. J., and LOISELLE, BOGDANSKI, PETERS and HEALEY, JJ.

PETERS, Associate Justice.

This case concerns the relationship between a small corporation and one of its directors and officers. James J. Ferris, the plaintiff, brought an action to recover moneys lent as advances to and for the defendant, Polycast Technology Corporation. The defendant filed an answer denying liability and a counterclaim seeking damages for misuse of insider information, breach of fiduciary duty and misappropriation of corporate opportunity. After a trial to the court, Saden, J., the issues on both the complaint and the counterclaim were found for the plaintiff, and judgment was rendered accordingly. The defendant has appealed.

The issues on this appeal are threefold: (1) did the plaintiff establish the amount of the defendant's outstanding indebtedness to the plaintiff, (2) did the defendant establish any of the various counts of its counterclaim, and (3) did the trial court conduct the trial in a manner prejudicial to the defendant's right to a fair trial?

The underlying facts of the relationship between the plaintiff Ferris and the defendant Polycast Technology Corporation (hereinafter Polycast) are not in serious dispute. Polycast is a manufacturing corporation which became involved in bankruptcy proceedings in the late 1960s. Ferris, an engineer, first became affiliated with Polycast while it was in bankruptcy, as a representative of and then as an employee of the trustee in bankruptcy. In 1968, the corporation was successfully reorganized and Ferris became an officer and a shareholder, purchasing 76,500 shares at a cash price of thirty cents per share and contributing as well machinery and equipment and other rights. Later than year, he purchased 5000 additional shares at one dollar per share, pursuant to a stock option. Shortly thereafter he transferred 35,000 shares to his wife, leaving him with ownership of the remaining 46,500 shares. ¹ Ferris became a director and secretary of the corporation in 1969. In 1971 and 1972, Ferris sold his remaining shares for $525,000. He left the corporation in 1972.

The indebtedness that gave rise to the case in chief arose in 1971 when Ferris lent money to Polycast and, at Polycast's request, paid moneys to creditors of Polycast. Sums totaling $112,889 were advanced to or on behalf of Polycast, and a substantial part of the outstanding indebtedness and interest was repaid by Polycast.

I

The first issue on this appeal challenges the sufficiency of the evidence to support the trial court's finding that the outstanding balance of the loans owed to Ferris was $42,150. This finding, and the correlative finding that the defendant had agreed to repay these loans with interest at 9 percent per annum, led the court to enter judgment in the principal amount of $42,150 and $24,782.64 for interest to December 31, 1977 plus interest at 9 percent on $42,150 from January 1, 1974 to the date of judgment. Only the amount of the outstanding balance on the principal has been contested.

The defendant's attack on the court's finding is not sustainable. The plaintiff established the amount of his claim by four different sources. The plaintiff himself testified about the amount of the loans that had not been repaid. Kenneth J. Doyle, a certified public accountant in the firm of Price Waterhouse & Company, which audited the defendant's books for 1970 and 1971, confirmed the same amount. The plaintiff's attorney at the time of the transaction testified to the receipt of a letter acknowledging the same amount of the indebtedness, a letter that purported to be signed by Henry P. Von Keyserling, then Polycast vice-president of finance, on what purported to be Polycast stationery. The defendant's current treasurer, Richard Schneider, produced Polycast ledger sheets which were admitted into evidence and which substantiated the plaintiff's claim.

The defendant challenges the admissibility of this documentary evidence, the Von Keyserling letter and the Polycast ledger sheets. Their receipt into evidence was clearly within the discretion of the trial court. American Oil Co. v. Valenti, 179 Conn. 349, 361, 426 A.2d 305 (1979); Doran v. Wolk, 170 Conn. 226, 232, 365 A.2d 1190 (1976). The letter from Von Keyserling was a reply to an earlier letter from the plaintiff's attorney asking Polycast's controller for an accounting. Garland v. Gaines, 73 Conn. 662, 665, 49 A. 19 (1901); Deep River National Bank's Appeal, 73 Conn. 341, 347, 47 A. 675 (1900). With regard to the admissibility of a reply letter, it is immaterial that the letter of inquiry was addressed to one financial officer and that the reply came from another, when the answering letter on its face indicates its relationship to the earlier inquiry. The defendant's corporate ledger sheets acknowledging indebtedness are admissible as admissions by a party opponent whether or not they qualify under the business entry exception to the hearsay rule. ² In any case, all of the challenged documentary evidence was cumulative to other testimonial evidence directly offered by the plaintiff to substantiate the sums due and owing to him. There is therefore no error in the judgment on the plaintiff's claim.

II

The second issue on this appeal concerns the trial court's determination that the defendant failed to prove by competent evidence the various allegations contained in its three-part counterclaim. Having found the evidence insufficient, the court made no findings of fact relating thereto and concluded only that the plaintiff did not commit any breach of duty or engage in any conduct detrimental to the defendant.

The counterclaim's allegations of breach of fiduciary duty were supported by evidence which could have established the following facts. The plaintiff, while an officer and a director of the defendant corporation, sold his stock holdings in the corporation for a nominal cash gain of $525,000. At the time of the sale, to which the corporation formally consented, the plaintiff had actual knowledge that the corporation was in financial difficulties. The moneys received from the sale of the stock were in large part used to provide short term working capital, to make loans to, and pay creditors of, the defendant corporation. A subsequent audit of the corporate financial records of this time period by Price Waterhouse & Company concluded that the records were inadequately maintained. The plaintiff, as the defendant's director, secretary, and vice-president of engineering, might have insisted upon access to the financial records, but in fact relied upon others to supervise financial planning and record-keeping.

The first count in the defendant's counterclaim relates to insider trading. We have recognized, in Katz Corporation v. T.H. Canty & Co., 168 Conn. 201, 210-11, 362 A.2d 975, 980 (1975), that "inside trading by a corporate fiduciary may be a violation of the common-law duty which he owes to his corporation." That principle is not at issue. The question is only whether the defendant proved that the plaintiff improperly profited from material, undisclosed information obtained in his position as officer or director. The plaintiff's alleged wrongful gain relates to his receipt of a nominal cash gain of $525,000 upon his sale of the corporate stock; the alleged inside information relates to his knowledge of the defendant's precarious financial position and his notice of inadequate financial records. These allegations are unsustainable in light of the evidence presented at trial. The proceeds received upon sale of the defendant's stock, while demonstrating a cash gain, do not reveal whether the plaintiff in fact made a profit or suffered a loss. As the defendant's own counterclaim asserts and the transcript substantiates, the plaintiff was issued stock in return for a contribution which consisted not only of cash but also of machinery, equipment and other rights. In the absence of evidence about the value of the plaintiff's non-cash contributions, it is not possible to charge the plaintiff with illicit gains. Further, despite the counterclaim's allegation that the plaintiff's sale depressed the market in the defendant corporation's stock, no evidence was offered of the market price of other contemporaneous stock transactions or of the fair value of the stock. Finally, it is difficult to characterize as material the failure to disclose the uncertain financial posture of a corporation only recently emerged from corporate reorganization in bankruptcy. Certainly this information was not unknown to the other corporate directors who asked the plaintiff to provide working capital. Nor was the plaintiff's intent to sell his stock unknown to them, for the plaintiff needed and received the corporation's consent for the sale. Whatever the common law of insider trading may encompass; Henn, Law of Corporations § 239 (1970); Lattin, Law of Corporations § 81 (1971); it does not reach this case.

The second count of the defendant's counterclaim maintains that the plaintiff is liable for failure to exercise the fiduciary care required of corporate officers and directors. Again, the principle of fiduciary obligation is not at stake. See Cross, Corporation Law in Connecticut § 6.8 (1972). The defendant argues that the plaintiff, although a vice-president of engineering, was, as director and secretary of a small corporation having only three...