First National Bank of Cincinnati v. Pepper

Citation454 F.2d 626
Decision Date03 January 1972
Docket Number173,Dockets 71-1449,71-1469.,No. 172,172
PartiesThe FIRST NATIONAL BANK OF CINCINNATI, Plaintiff, v. Sidney PEPPER, Defendant-Appellee, Elsie W. COX et al., Defendants-Cross-Claimants-Appellants, Modern Talking Picture Service, Inc., et al., Defendants.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

COPYRIGHT MATERIAL OMITTED

Preben Jensen, New York City (Casey, Lane & Mittendorf, David H. Kohl, New York City, on the brief), for defendants-cross-claimants-appellants.

Ben A. Matthews, New York City (Harper & Matthews, Harold Harper, Vincent P. Uihlein, New York City, on the brief), for defendant-appellee.

Before MEDINA, MANSFIELD and MULLIGAN, Circuit Judges.

MANSFIELD, Circuit Judge:

This is a statutory interpleader action pursuant to 28 U.S.C. § 13351 originally instituted in the District Court for the Southern District of Ohio by the First National Bank of Cincinnati to settle conflicting claims to a fund of $75,000 held by the bank. The fund has been paid into court, the bank discharged, and the action transferred to the District Court for the Southern District of New York, which is a more convenient forum for the claimants.

The adverse claimants to the fund are, on the one hand, Sidney Pepper ("Pepper"), a New York attorney, and, on the other, eight former stockholders ("stockholders") of Modern Talking Picture Service, Inc. ("Modern"), a closely held corporation.2 The stockholders appeal from an order of the district court granting summary judgment in favor of Pepper and dismissing three cross-claims asserted by them. For the reasons stated below we reverse.

Pepper, as the party moving for summary judgment, "had the burden of showing the absence of a genuine issue as to any material fact, and for these purposes the material he lodged must be viewed in the light most favorable to the opposing party." Adickes v. S. H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); see also Shinabarger v. United Aircraft Corp., 381 F.2d 808, 810 (2d Cir. 1967). Furthermore, when the factual allegations in the pleadings of the party opposing summary judgment are supported by affidavits or other evidentiary material, they must be taken as true in ruling on the motion. See 3 Barron & Holtzoff, Federal Practice and Procedure § 1235, at 140-41 (Wright ed. 1958); Furton v. City of Menasha, 149 F.2d 945, 947 (7th Cir.), cert. denied, 326 U.S. 771, 66 S.Ct. 176, 90 L.Ed. 466 (1945).

Applying these standards, the facts as we must assume them for the purposes of this appeal appear to be as follows. The dispute between the parties arose out of a series of machinations in connection with the sale of the stock of Modern. Some time in the first few months of 1968 Pepper, who was general counsel of Modern at a yearly retainer of $12,000, negotiated with Sonderling Broadcasting Company ("Sonderling") for the sale to it of the assets and/or stock of Modern. On April 8, 1968, Modern's Board of Directors approved the sale of Modern to Sonderling for $2,800,000 and provided for payment of a $300,000 finder's fee in connection therewith to the Commonwealth Development Corporation. After this meeting it was discovered by the Board that Sonderling had sent a letter to the Board on March 20, 1968, outlining the terms of the offer, which Pepper had withheld from it. The Board also found out that Pepper had failed to keep it currently informed of an offer by a group headed by Sherman Unger of Cincinnati, Ohio ("Unger") to buy Modern's stock and had failed to inform Unger of the Sonderling offer in order to give him the opportunity to better it.

On May 13, 1968, Richard M. Hough, a minority shareholder in Modern and a claimant herein, brought suit in the Delaware Chancery Court for New Castle County (Modern being a Delaware corporation) to enjoin the sale of Modern to Sonderling. At a hearing on the motion for a preliminary injunction, Pepper admitted under oath that he had failed to show the Sonderling letter of March 20 to the Board and disclosed that he was to receive one-third of the $300,000 finder's fee authorized by the Board to be paid to the Commonwealth Development Corporation. He also disclosed that his wife had a substantial financial interest in Sonderling.3 It is not surprising to find that upon the testimony at the hearing the Chancellor preliminarily enjoined the sale of Modern to Sonderling.

Advised of these disclosures Mrs. Rosalie M. Arlinghaus ("Mrs. Arlinghaus"), who controlled a majority of Modern's stock, dismissed Pepper as her counsel on May 22, 1968. Two days later Modern's Board of Directors rescinded their resolution approving the sale of the corporation to Sonderling and dismissed Pepper as its general counsel.

Meanwhile, the Board of Modern had received a firm purchase offer from Unger. The terms of the offer specified that it had to be acted upon by May 24;4 all stockholders of Modern agreed to the sale. Pepper, however, immediately threatened to use his strategic position as the custodian of certain essential records to prevent the consummation of the sale unless he was first paid money to which he was not entitled.

As general counsel for Modern and counsel for several of its stockholders, Pepper had in his possession certain papers of Modern which had to be surrendered to Unger at the closing, including Modern's minute book, stock certificate book, by-laws, and stock certificates owned by the Arlinghaus group. On May 21 the Secretary-Treasurer of Modern and, on May 22 both the Secretary-Treasurer and Mrs. Arlinghaus, requested Pepper at his law office to surrender these crucial materials. Pepper refused, asserting that he had the right to retain the materials under a common law attorney's retaining lien5 until he was paid $100,000 legal fees plus $10,000 expenses he alleged were owed him by Modern and several of its stockholders in connection with the aborted Sonderling deal. The stockholders and Modern denied any legal fees were due Pepper in this regard. Confronted with Pepper's refusal to turn over their records, they obtained an extension of the final closing date until June 7.

On May 29, after Pepper had stated that he would accept a bond in the principal amount of $110,000 as substitute security for the materials withheld, Modern obtained a bond from Globe Indemnity Co. in that amount in an effort to discharge Pepper's purported lien. The bond was presented to Pepper the same day, but he refused to accept it, to discuss its terms, or to accept any bond in lieu of his lien. This effort failing, on June 3, 1968, Modern, Mrs. Arlinghaus, and another stockholder, Howard H. Eberle ("Eberle"), commenced a summary proceeding in the New York Supreme Court, New York County, to force Pepper to give up the required materials. Substituted service proved necessary because Pepper, who had theretofore always been available, suddenly could not be located. After some jurisdictional jousting Pepper was ordered on June 5 by Justice Riccobono of the New York Supreme Court to surrender the materials in return for a suitable bond in the amount of $115,000 to be negotiated forthwith. Pepper, however, did not negotiate about the terms of the bond as ordered but rather wrote to Justice Riccobono through his attorney, Jack A. Rosen ("Rosen"), claiming that Eberle was in fact still represented by Pepper and had "specifically directed Mr. Pepper not to deliver up the stock and papers." On June 6 Mr. William E. Kelly ("Kelly"), attorney for Modern and the two stockholders in that action, sent to Justice Riccobono a telegram from Eberle in Florida authorizing the pick-up of his shares, contrary to Rosen's representations.

On the closing date, which was the next day (Friday, June 7) no order had been signed by Justice Riccobono and further legal action to compel turnover of the materials would have been futile. Through an intermediary Pepper communicated to Unger that for a price of $75,000 he would release the materials essential to Modern's sale of its stock to Unger and compromise his claim for legal fees, further stating that he intended to leave the country on June 10 (Monday), which would render the materials unavailable for two months. In the face of this pressure Kelly negotiated with Rosen a compromise settlement which satisfied Pepper's ultimatum. This settlement contract was drafted by Rosen and signed late in the day on June 7.6 It stated that Pepper had performed legal services, claiming $116,000 in legal fees and disbursements for which he had impressed a lien, that the validity of his claim and lien was denied by the stockholders, that the proceeding in the New York Supreme Court for recovery of the materials was pending, that the parties had agreed to settle Pepper's claim for $75,000, exchanging general releases, and that the stockholders, in executing the agreement and a separate assignment to Pepper of $75,000 of the proceeds due from Unger upon sale of their Modern stock, acted of their own free will. Upon execution of the agreement Pepper released the materials and the closing went through on the same day as scheduled. Within a few days the stockholders who had signed the settlement contract renounced it, claiming that it had been extracted through duress. On June 10 they requested the purchasers to withhold $75,000 from the purchase price and on June 12 Kelly sent a telegram to Unger informing him of the renunciation. Thereupon the $75,000 was placed in escrow in the First National Bank of Cincinnati, which subsequently brought this action and deposited the fund with the court.

The foregoing statement does not represent any findings by the court but merely our acceptance as true, for purposes of our review of the grant of summary judgment, of the stockholders' factual allegations and averments and inferences therefrom that are most favorable to them. In summary, so viewing the...

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