Frey v. Frankel

• Decision Date: 17 June 1966
• Docket Number: No. 8087.,8087.
• Parties: L. E. FREY, Appellant, v. Gerald FRANKEL and Duo-Bed Corporation, a corporation, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

361 F.2d 437 (1966)

L. E. FREY, Appellant, v. Gerald FRANKEL and Duo-Bed Corporation, a corporation, Appellees.

No. 8087.

United States Court of Appeals Tenth Circuit.

April 15, 1966.

Rehearing Denied June 17, 1966.

COPYRIGHT MATERIAL OMITTED

Robert Martin, Wichita, Kan. (George B. Collins, Oliver H. Hughes, K. W. Pringle, Jr., W. F. Schell, Robert M. Collins, William L. Oliver, Jr., William V. Crank, and Tom C. Triplett, Wichita, Kan., Thomas M. Burns and Peter J. Wall, Denver, Colo., on the brief), for appellant.

George C. Spradling, Wichita, Kan. (W. F. Lilleston, Henry V. Gott, George Stallwitz, Ralph M. Hope, Ronald M. Gott, Glenn D. Young, Jr., and Edward H. Graham, Wichita, Kan., on the brief), for appellees.

Before MURRAH, Chief Judge, PICKETT, Circuit Judge, and LANGLEY, District Judge.

PICKETT, Circuit Judge.

This action followed a reorganization of defendant Duo-Bed Corporation under the provisions of Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701, et seq. Plaintiff Frey, former president and principal stockholder of the corporation, seeks to recover damages for failure of the reorganized corporation and the defendant Frankel to comply with the terms of an alleged employment and option-to-purchase stock contract after confirmation of a proposed plan of reorganization. This is an appeal from a summary judgment in favor of the defendants on the four causes of action of the complaint, and from a summary judgment in favor of the defendants on a counterclaim.

Duo-Bed was engaged in the manufacture and sale of a patented line of bedding and other furnishings used principally by hotels and motels. In 1960 it moved its operations to Wichita, Kansas, and there it continued in business. Early in 1962 it was hopelessly insolvent,¹ and on June 9, 1962, filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, but no plan was then submitted. At the first meeting of the creditors, Frey stated that in case of liquidation, available assets would be sufficient only to pay the costs of the bankruptcy proceedings. At this meeting it was agreed that the corporation could not continue in business unless outside capital were found. A creditors' committee, with the help of Frey, decided to explore the possibility of securing sufficient capital to finance a feasible arrangement.

Thereafter, Frey, while in Chicago, discussed the situation with Joseph D. Shane and defendant Frankel, who expressed an interest. Following an investigation, including an inspection of the corporation facilities, Frankel indicated that he and his associates were willing to finance an arrangement to be submitted to the court and creditors.² During the preliminary discussions between Frey and Frankel, it was understood that any suggested plan would require a change in the controlling stock of the corporation. It was also understood that the plan to be submitted would provide that Frey should be given an option to purchase one-third of the new stock which was to be issued, together with a 5-year contract of employment with the corporation at a salary of $2,000 per month. Attorneys were instructed to prepare the employment agreement and stock purchase option. In a letter of intent,³ Frankel submitted to the creditors a tentative proposal which included these provisions relating to Frey.⁴ The creditors, however, were not satisfied and notified Frankel that they would not approve a plan which did not provide (1) working capital of $250,000 to $350,000; (2) new management for the corporation, in which Frey was not to participate; and (3) that corporation debentures should be issued to all unsecured creditors in the amount of 35% of their approved claims which could be redeemed in cash for not less than 10% of their claims.

Thereafter Frankel consulted all interested parties, including Frey, and attorneys representing the corporation and Frey, in an attempt to arrive at an acceptable proposal. On August 28, 1962, Frey, as president of the corporation, submitted to the court a plan differing materially from that of the original letter of intent, but generally in conformity with the suggestions of the creditors' committee. This plan required Frankel and his associates to purchase 250,000 shares of a new issue of Class A Common stock at $1.00 par, and to furnish additional funds in the amount of $100,000 as working capital. The Class A stockholders would have all voting rights in the corporation, except that the existing stockholders could collectively elect one director. Upon approval of the plan, Frankel was to be the chief managing officer. Each common creditor was to receive, in satisfaction of his claim, a corporation debenture in an amount equal to 35% of his allowable claim, and provision was made for all creditors desiring to sell such debentures to be paid in cash 12% of their original claims. Prior to the hearing on the proposal, Frey, as president of the corporation, filed an affidavit wherein it was stated:

"(S)aid corporation has not directly or indirectly paid or promised any consideration to any attorneys, trustee, receiver, creditor, or other person in connection with the proceedings, herein, except as provided by the arrangement proposed herein. * * *"

Attached to this affidavit was an instrument executed by Frey wherein it was stated that as an inducement to Frankel and his associates to provide the necessary funds to implement the proposed plan, Frey agreed to assign and transfer to the corporation his interest in described patents and to assign his stock in Duo-Bed Corporation to Frankel and his associates, or their nominees. Defendants' counterclaim seeks enforcement of this instrument.

The plan was confirmed by the court. The corporation charter was amended to provide for the issuance of one million shares of $1.00 par value Class A Common stock which would control the company. The existing stock was subordinated as Class B stock and collectively could elect one corporate director. The corporation was authorized to issue debentures as required by the plan. Frankel and his associates assumed control of the corporation, purchased 250,000 shares of Class A stock, advanced $100,000, and arranged for the purchase of the debentures, in accordance with the plan, on their personal credit Frey was employed as a salesman and designer at $2,000 per month. After the reorganization, there were continuous negotiations between Frey and Frankel in an attempt to agree upon a 5-year employment contract and an option to purchase 125,000 shares of Class A stock at par value. The parties were unable to reach an agreement, and difficulty arose between Frankel and Frey which resulted in Frey's discharge in May, 1963, after approximately six months of employment.

In his first cause of action, Frey alleges that he is entitled to damages for the failure to employ him for a period of five years at $2,000 per month, and the failure to execute and deliver to him a fair and reasonable option to secure one-third of the Class A stock issued by the corporation. The second cause of action seeks damages resulting from fraud on the part of Frankel in inducing him to surrender his rights to the Class B Common stock of the corporation, and patent rights. The third cause of action is in the nature of a stockholder's derivative suit seeking to require Frankel and his...