Giblin v. Murphy

• Decision Date: 27 October 1983
• Parties: John W. GIBLIN, Respondent, v. Stephen G. MURPHY et al., Appellants.
• Court: New York Supreme Court — Appellate Division

Page 211

469 N.Y.S.2d 211

97 A.D.2d 668

John W. GIBLIN, Respondent, v. Stephen G. MURPHY et al., Appellants.

Supreme Court, Appellate Division,

Third Department.

Oct. 27, 1983.

Melvin J. Evans, New York City (George H. Barber, Albany, of counsel), for appellants.

Joseph M. Meehan, Garden City, for respondent.

Before MAHONEY, P.J., and SWEENEY, MAIN, MIKOLL and YESAWICH, JJ.

MEMORANDUM DECISION.

Appeal from a judgment of the Supreme Court in favor of plaintiff, entered September 20, 1982 in Schoharie County, upon a decision of the court at Trial Term, without a jury.

Plaintiff was the majority owner and president of defendant Westwood Paper & Hardware Company, Inc. (Westwood), a corporation engaged in the sale and distribution of hardware and paper products since 1955 with its place of business located in Manhattan. The only other shareholder of Westwood was Edward K. Sarraf.

On or about April 20, 1979, plaintiff and Sarraf closed a deal for the sale of their shares in Westwood to defendant Sinclair Distributors, Inc. (Sinclair). Sinclair never conducted any business prior to its purchase of Westwood and never owned any assets other than Westwood's. Defendants Stephen G. Murphy, Salvatore F. Quagliata and Steven Hoffenberg were the officers and directors of Sinclair and each owned one third of its stock.

The terms of the sale were contained in a purchase agreement, promissory note and pledge agreement. Sinclair promised to pay $200,000 for the Westwood shares; $40,000 down and $160,000 plus interest in monthly installments. The installment payments were secured by a pledge to the sellers of Westwood stock. The sellers also received the right to inspect Westwood's premises, property and financial and corporate records at any time. They were to be advised of all Westwood's shareholders' meetings and given a written account of all corporate action taken by Westwood's directors or shareholders. Among the rights and remedies granted the sellers in the event of a default in making the monthly installment payments or in abiding by the terms of the purchase and pledge agreements were the rights to accelerate the amounts due under the promissory note, to reassume control of Westwood by voting their pledged shares, and to sell their shares. Upon a default, Westwood was prohibited from making any wage or other payments to Quagliata, Murphy or any other Sinclair shareholder.

By April, 1980, the installment payments due plaintiff and Sarraf were no longer being paid in full and plaintiff, through his attorney, accelerated the balance due. Checks tendered in payment of the balance due had been drawn on Westwood's account, not Sinclair's. During the summer of 1980, an involuntary bankruptcy petition was filed against Westwood and Westwood filed a chapter 11 bankruptcy petition.

In its approximate one year of operating under Sinclair, Westwood showed a net loss of $168,000; had accumulated extensive bad debts (mainly in its new retail outlets); had paid commissions in the sum of about $72,000 to Hoffenberg, Quagliata, plaintiff, Sarraf and Larry Lowy, who ran one of the retail outlets; and had paid salaries to Hoffenberg of approximately $18,000 at $500 per week, to Murphy of $12,600 at $350 per week, and to Quagliata of about $12,600 at $350 per week, which salary payments apparently continued beyond the time of the default in installment payments in violation of the pledge agreement. Plaintiff did not draw salary or wages in 1980. In June, 1980, the instant action was commenced alleging eight causes of action. Cause of action number one against Sinclair claimed failure to comply with the promissory note, alleging $110,268.60 due. The second cause of action against Sinclair alleged breach of the purchase agreement by failure to pay installments due. The third cause of action against Westwood alleged that it assumed the debts and liabilities of Sinclair and, therefore, was liable to plaintiff for installments due. Cause of action number four against Murphy, Quagliata and Hoffenberg alleged that they made fraudulent misrepresentations to plaintiff that they were competent to and would manage Westwood profitably. Plaintiff alleged damages for such conduct of $110,268.60 plus punitive damages of $250,000. Cause of action number five against the individual defendants alleged diversion of Westwood's assets to themselves, thereby interfering with plaintiff's contracts with Westwood and Sinclair, and requested the same damages. Cause of action number six against both the corporate and individual defendants claimed violation of the pledge agreement; not allowing plaintiff to view corporate records; not properly advising plaintiff of corporate actions and meetings; and distribution of salary and wages to the individual defendants in violation of the pledge agreement. Plaintiff stated it was damaged thereby in the sum of $110,268.60. The seventh cause of action against all defendants alleged that defendants fraudulently induced plaintiff to sell Westwood to them, and claimed damages of $110,268.60 plus punitive damages of $250,000. Finally, cause of action number eight against all defendants sought reasonable attorney's fees.

Following a five-day nonjury trial in October, 1981, the court, inter alia, found due and owing on the promissory note $110,268.60; that each of the individual defendants breached the pledge agreement by refusing plaintiff access to Westwood's corporate and financial records and in failing to notify plaintiff of corporate meetings and by receiving payments beyond the time of the default in installment payments; that losses due to the operation of the retail outlets totalled $119,919.84; that the Westwood-retail outlet relationship was formed and conducted without corporate meetings; that the move of Westwood to Long Island City was a violation of the pledge agreement because of lack of notification to plaintiff, as was the establishment of the Westwood 14th Street operation; that the individual defendants made material misrepresentations to plaintiff, influencing his decision to sell; that attorney's fees were warranted under the terms of the promissory note; and that, " * * * the actions taken were in gross and callous disregard of the rights and remedies of the plaintiff * * * that the conduct of the defendants is shocking to the conscience of the Court, particularly for attorneys and experienced businessmen, and * * * an award of punitive damages is appropriate * * * ".

The trial court granted plaintiff judgment of $110,268.60 against the corporate defendants. On causes of action number four, five, six and seven, the court ruled that the individual defendants had fraudulently induced plaintiff to sell Westwood, entitling plaintiff to damages of $110,268.60 plus punitive damages of $250,000. The court also found that the individual defendants breached the pledge agreement and interfered with and impaired Sinclair's obligation to make installment payments to plaintiff; that defendants' operation of the business established the fraud and misrepresentations of the individual defendants; that the individual defendants fraudulently diverted Westwood's assets to themselves, and concealed their actions from plaintiff, entitling plaintiff to $110,268.60 in damages plus punitive damages of $250,000. The court also held that plaintiff was entitled to 20% attorney's fees. Following entry of judgment for plaintiff against all defendants severally and jointly for $313,885.72, consisting of damages of $110,268.60, punitive damages of $150,000, attorney's...