First Hartford Realty Corp. v. Ellis

• Decision Date: 27 May 1980
• Citation: 181 Conn. 25,434 A.2d 314
• Court: Connecticut Supreme Court
• Parties: FIRST HARTFORD REALTY CORPORATION et al. v. Sidney ELLIS. MANCHESTER MODES, INC., et al. v. Sidney ELLIS.

Page 314

434 A.2d 314

181 Conn. 25

FIRST HARTFORD REALTY CORPORATION et al. v. Sidney ELLIS.

MANCHESTER MODES, INC., et al. v. Sidney ELLIS.

Supreme Court of Connecticut.

Argued Feb. 6, 1980.

Decided May 27, 1980.

Peter W. Benner, Hartford, with whom were Robert Ewing, Hartford, and, on the brief, Thomas B. Mooney, Hartford, for appellant (defendant in each case).

Frank J. Silvestri, Jr., Bridgeport, with whom were Lawrence W. Kanaga, Bridgeport, and, on the brief, Milton Sorokin, Ethel Sorokin and Alfred F. Wechsler, Hartford, for appellees (plaintiffs in each case).

Before LOISELLE, BOGDANSKI, PETERS, HEALEY and ARMENTANO, JJ.

LOISELLE, Associate Justice.

This appeal arose from a dispute over a stock purchase agreement and its subsequent modifications, a loan, and the defendant's claim for salary and an injunction to preserve his status as a director and officer in one of the plaintiff corporations. The actions initiated by the plaintiff corporations against the defendant were combined for trial to the court. The facts detailed in the briefs can be summarized as follows: The plaintiffs in both actions are corporations related under the umbrella of the parent First Hartford Corporation. Neil Ellis is now president and chief executive officer of First Hartford, and has been an officer and director of First Hartford and its predecessor corporations since 1962. The defendant Sidney Ellis, Neil's father, founded Manchester Modes, Inc., which for more than forty years has been engaged in the manufacture and sale of women's suits and coats. Sidney Ellis owned or controlled all of the outstanding stock in Manchester Modes until 1969. In 1969 he was president and chief executive officer of the corporation, responsible for all matters relating to finance, sales and production.

On January 21, 1969, the parties entered into a written agreement by which a predecessor of First Hartford Realty Corporation, one of First Hartford's subsidiaries, agreed to purchase, through a subsidiary created for that purpose, all of the outstanding stock in Manchester Modes from Sidney Ellis for $6,000,000. The acquisition agreement called for payment at the May 31, 1969 closing of $450,000 in cash ¹ and $4,200,000 in a promissory note payable to Sidney Ellis in installments through January 31, 1974. ² To assure Sidney Ellis a voice in the management of Manchester Modes until the debt was paid, the agreement also provided that as long as part of the "principal amount of the note remains outstanding," First Hartford would take whatever steps necessary to assure that Neil Ellis, Seymour Kaplan and Sidney Ellis would comprise Manchester Modes' board of directors. Finally, in accordance with the agreement, the parties executed a custody agreement with the Connecticut Bank and Trust Company (CBT) pursuant to which all shares in Manchester Modes were placed in escrow with CBT to secure payment to Sidney Ellis of the $4,200,000 purchase price debt.

Through written modifications to the acquisition agreement which are not in dispute, the purchase price debt was reduced to $2,900,000 in October, 1970, to reflect the diminution in value of one of Manchester Modes' assets. By November 20, 1972, First Hartford's prepayments on the debt had reduced the outstanding principal balance to $1,300,000.

Thereafter the parties executed two written agreements purporting to modify the payment schedule to the purchase price debt, one on November 20, 1972, the other on June 6, 1973. The November 20, 1972 agreement rendered the entire balance due and payable on January 2, 1974, by postponing the payment dates of installments totalling $700,000 and accelerating the payment dates of installments totalling $600,000. ³ The June 6, 1973 agreement modified the payment schedule such that Sidney Ellis would and did in fact receive $300,000 in payments by July 31, 1973, the remaining $1,000,000 to be paid in twenty annual installments of $50,000 each commencing June 15, 1978. First Hartford retained the right to prepay the debt.

The last agreement modifying repayment of the purchase price debt was oral. Although Sidney Ellis continues to deny the existence of such an agreement, the trial court found in accordance with the plaintiffs' allegations that during the summer of 1974 Sidney Ellis agreed to cancel the outstanding balance of $1,000,000 in exchange for an advance payment of $300,000. As a result, the court concluded that Sidney Ellis had been legally removed as a director of Manchester Modes because no part of the principal balance remained outstanding. The original acquisition agreement secured his position on the board of directors only until the principal was paid in full.

The dispute over repayment of the debt incurred by the plaintiffs to purchase Manchester Modes is further complicated by what the parties refer to as the "Valley Bank loan transaction." In September, 1975, Sidney Ellis executed a $1,000,000 note payable to the Valley Bank of Springfield, Massachusetts. The funds he obtained were then loaned to First Hartford which executed, by Neil Ellis, a demand note payable to Sidney Ellis for $1,000,000 on September 22, 1975, hereinafter referred to as "the September 22 note" or "the note." Shortly thereafter, the previously mentioned dispute arose as to whether Sidney Ellis had agreed to cancel the $1,000,000 balance of the debt on the Manchester Modes purchase. When Sidney Ellis demanded payment on the note in December, 1975, Neil Ellis told him that he was fired. When Sidney Ellis told him that First Hartford still owed him approximately $2,000,000 on the purchase price debt and the note, Neil Ellis responded that Sidney Ellis had forgiven $700,000 of the $1,000,000 balance due on the debt in exchange for the advance payment of $300,000. On December 30, 1975, Neil Ellis purportedly acted to remove his father as a director and as president of Manchester Modes, terminating his employment effective January 27, 1976. When Sidney Ellis attempted to exercise his authority as chief executive officer of the company after January 1, 1976, he was prohibited from entering the plant.

On January 15, 1976, First Hartford tendered payment of the full amount due on the September 22 note in the form of a $400,000 check, prior advance payments on the Manchester Modes purchase and application of funds belonging to its subsidiaries but believed to be in the possession of Sidney Ellis. Ellis accepted the check but insisted that the advance payments could only be applied against the purchase price debt and not against the September 22 note, and claimed that the funds belonging to the subsidiaries had been returned. He subsequently admitted receipt of an additional $150,000 after January 15, 1976, on account of the note. According to the plaintiffs' calculations, the Manchester Modes purchase price debt had been paid in full and the balance due Sidney Ellis on the Valley Bank loan transaction was $350,000. According to the defendant's calculations, $600,000 remained due on the purchase price debt and $450,000 on the September 22 note.

The remaining money dispute between Sidney Ellis and the plaintiff corporations concerned Ellis' salary for services rendered to Manchester Modes as of January 1, 1975. Ellis contends that prior to this time he had been receiving approximately $40,000 per year in salary, but has been denied his annual salary for each year since 1975 when the dispute between the parties arose in December, 1975.

Two actions were initiated in 1976. In the first action, the plaintiff corporations sought a declaratory judgment as to what, if anything, was owed by them on the purchase price debt and the September 22 note. Sidney Ellis filed a counterclaim requesting declaratory relief for the money owed him and injunctive relief to assure his position as a director and president of Manchester Modes. In the second action, Manchester Modes, Ellis Textile Sales Associates, Inc., and F.H.C.-D. Corporation, the corporation which had been created to purchase the stock of Manchester Modes, sought an accounting by Sidney Ellis of all funds taken, paid, distributed, transferred or disbursed to him by Manchester Modes or Textile Associates, and all profits derived by him therefrom. The defendant's counterclaim sought recovery of his salary from Manchester Modes from January 1, 1975, to the present.

The actions were consolidated and tried to the court which rendered judgments substantially in agreement with the plaintiffs' claims. The declaratory judgment entered in the first action held that no amount remained outstanding on the Manchester Modes purchase price debt because the debt had been cancelled, and that $350,000 remained due and payable to Sidney Ellis by First Hartford on the September 22 note, with six percent interest from the date of demand, December 29, 1975. Judgment on the second action denied both the plaintiffs' claim for an accounting and the defendant's counterclaim for salary. The parties stipulated pursuant to Practice Book, 1978, § 3002, to combine the two cases on appeal.

The defendant raises three issues on appeal. He claims that the trial court erred: (1) in finding an enforceable cancellation of the purchase price debt; (2) in failing to find that the September 22 debt was secured by the Manchester Modes stock held in escrow by CBT pursuant to the custody agreement executed with the original acquisition agreement; and (3) in holding that Sidney Ellis was not entitled to compensation from Manchester Modes for services rendered in 1975. ⁴ The first issue is of greatest importance to the parties.

The defendant argues that the trial court's conclusion that the debt had been cancelled is erroneous because the facts found are logically inconsistent with the evidence and do not support the conclusion, and the burden of proving an oral modification to the contract was erroneously placed on the defendant when it was the plaintiffs...