Goodridge v. Harvey Group Inc., 82 Civ. 8691 (MEL)

• Citation: 728 F. Supp. 275
• Decision Date: 12 January 1990
• Docket Number: No. 82 Civ. 8691 (MEL),82 Civ. 8692 (MEL).,82 Civ. 8691 (MEL)
• Parties: Arnold D. GOODRIDGE, Plaintiff, v. The HARVEY GROUP INC. and Components Plus, Inc., Defendants-Counterclaimants, v. Frank FERNANDEZ and Alfonse Daula, Additional Defendants on the Counterclaims. Arnold D. GOODRIDGE and New Wave Electronics, Inc., Plaintiffs, v. The HARVEY GROUP INC. and Components Plus, Inc., Defendants-Counterclaimants, v. Frank FERNANDEZ and Alfonse Daula, Additional Defendants on the Counterclaims.
• Court: U.S. District Court — Southern District of New York

728 F. Supp. 275

Arnold D. GOODRIDGE, Plaintiff, v. The HARVEY GROUP INC. and Components Plus, Inc., Defendants-Counterclaimants, v. Frank FERNANDEZ and Alfonse Daula, Additional Defendants on the Counterclaims.

Arnold D. GOODRIDGE and New Wave Electronics, Inc., Plaintiffs, v. The HARVEY GROUP INC. and Components Plus, Inc., Defendants-Counterclaimants, v. Frank FERNANDEZ and Alfonse Daula, Additional Defendants on the Counterclaims.

No. 82 Civ. 8691 (MEL), 82 Civ. 8692 (MEL).

United States District Court, S.D. New York.

January 12, 1990.

Bickford, Hahn & Hayes, New York City (Richard E. Hahn, of counsel), for plaintiffs.

Seyfarth, Shaw, Fairweather & Geraldson, New York City (Michael L. Hirschfeld, James E. Brandt, Timothy McInnis, of counsel), for defendants-counterclaimants.

Ferber, Greilsheimer, Chan & Essner, New York City (Robert N. Chan, Robert M. Kaplan, of counsel), for additional defendants on the counterclaims.

LASKER, District Judge.

The Harvey Group, Inc. ("HGI") and Components Plus, Inc. ("CPI") (collectively "Harvey") move for summary judgment against Plaintiffs Arnold D. Goodridge and his wholly-owned company New Wave, Inc. ("New Wave") and Third-Party Defendant Frank Fernandez. Fernandez and Goodridge cross-move for summary judgment against each other. The grounds for these motions are set forth following a brief summary of the complicated series of events surrounding this litigation. For the reasons discussed below Harvey's motion is denied; Fernandez's cross-motion against Goodridge is denied, and Goodridge's cross-motion against Fernandez is granted.

I. BACKGROUND

In October 1980 Goodridge and Fernandez were each 50% shareholders and officers of Components Plus, Inc. ("Old CPI"), a New Jersey electronics corporation which distributed semiconductors and other electronic components for military use. Although the company had experienced substantial growth, Fernandez sought to merge with a large public company and told Goodridge that another company had expressed interest in such a merger provided Goodridge would sell his interest in Old CPI. Goodridge agreed and entered into a Stock Purchase Agreement dated October 22, 1980 (the "Stock Purchase Agreement") by which Fernandez and Old CPI purchased Goodridge's interest in the company for $1,444,000. As part of the transaction Goodridge and Old CPI also entered into an agreement (the "Employment Agreement") by which Old CPI would employ Goodridge for ten years at a salary of $20,000 per year and provide him with health insurance and the use of two leased automobiles in exchange for unspecified business services. Old CPI also agreed to maintain an employee stock option plan ("ESOP") for Goodridge during his employment and to pay him his share upon termination of the plan. Under a third agreement (the "Consulting Agreement") Goodridge's company, New Wave, was to receive $65,000 per year through 1986 and $40,000 per year from 1987 until December 31, 1990 for consulting services. In exchange for "value received" Old CPI gave Goodridge a promissory note in the sum of $141,108 (the "Note"), made payable in monthly installments of $6,520. Finally, Fernandez executed a personal guarantee (the "Guarantee") of "prompt and unconditional payment" of any debts or obligations due under the Note, the Employment Agreement, the Consulting Agreement and the Stock Purchase Agreement.¹

On June 26, 1981 Old CPI, Fernandez and Alfonse Daula, Old CPI's president, entered into a merger agreement (the "Merger Agreement") with another electronics company, Neboc, Inc. ("Neboc"), and its parent, HGI, pursuant to which a new company was formed, CPI. Fernandez and Daula exchanged their Old CPI stock for shares of CPI and received five-year employment contracts. On August 5, 1981 CPI entered into an agreement (the "Assumption Agreement") to assume the liabilities and obligations which Old CPI had incurred under the agreements with Goodridge. Goodridge received compensation pursuant to the Employment Agreement, the Consulting Agreement and the Note until CPI terminated payments to him in August 1982.

In March and again in May 1982 a federal grand jury (in St. Louis, Missouri) investigating corruption in the military contracting industry served CPI with subpoenas duces tecum to testify and produce business and financial records of Old CPI for the period 1975-1980. Old CPI had been a subcontractor to two targets of the investigation, the McDonnell-Douglas Corporation ("McDonnell-Douglas") and the Emerson Electric Company, Inc. ("Emerson Electric"). In reviewing the records requested by the grand jury, counsel for CPI became aware of irregularities and improprieties in Old CPI's operations. By August 1982 Harvey suspected that Old CPI's records had been falsified to conceal payments made to individual officers and employees of Old CPI and that the concealed funds had been used in part to bribe purchasing agents at McDonnell-Douglas and Emerson. CPI officers also believed that invoices for parts testing necessary to show compliance with military specifications had been falsified by Old CPI officials. CPI suspected that Goodridge was involved in the alleged wrongdoing, and suspended payments which were due to him under the obligations it had assumed from Old CPI.

Goodridge instituted two actions in state court on December 3, 1982 to recover money allegedly owed him by Harvey under the Note, the Employment Agreement and the Consulting Agreement. The actions were removed to this court and consolidated. Harvey counterclaimed against Fernandez and Daula. Fernandez and Daula in turn counterclaimed against Harvey, asserting securities and common law fraud arising out of two allegedly false promises made by Harvey in connection with the Merger Agreement: 1) that Fernandez and Daula would have complete control over CPI following the merger and 2) that the combined sales of HGI and CPI would exceed $100,000,000. Goodridge's complaint against Harvey was dismissed by endorsement dated June 24, 1983.

In January 1986 the United States Attorney's Office for the Eastern District of New York indicted Goodridge, Fernandez and Roslyn Frank, the former bookkeeper for Old CPI, on several counts charging their participation in a criminal conspiracy to defraud the United States through tax fraud and bribery. On April 11, 1986 Goodridge pled guilty to one count of conspiracy to commit tax evasion and one count of conspiracy to commit tax fraud. Fernandez pled guilty on June 20th of that year to one count of conspiracy to defraud the United States through the payment of unlawful bribes and kickbacks and to one count of tax evasion.

On May 8, 1987 Goodridge and New Wave filed an amended complaint against Harvey seeking recovery of funds due under the Note and damages for breach of the Employment Agreement and the Consulting Agreement. Goodridge also sought to enforce the Guarantee signed by Fernandez of payments due under the Assumed Obligations. Harvey filed an answer and counterclaimed against Goodridge, New Wave and additional defendants Fernandez and Daula. In his answer to plaintiffs' amended complaint, Fernandez asserted additional counterclaims against Goodridge and three new counterclaims against Harvey 1) for indemnification by HGI pursuant to section 6.7 of the Merger Agreement 2) for indemnification by HGI pursuant to the Assumption Agreement and 3) for breach of HGI's agreement to obtain Fernandez's release from his Guarantee of the CPI obligations to Goodridge.

Harvey now moves for summary judgment on all claims asserted against it by Goodridge and New Wave in the amended complaint and by Fernandez in the original and amended complaints. Harvey argues that Fernandez and Goodridge are collaterally estopped from asserting their claims because their pleas of guilty, allocutions and convictions establish that each of them committed federal securities law violations which render the Merger Agreement and all ancillary agreements unenforceable. Goodridge cross-moves for summary judgment against Fernandez for payment under the Guarantee. Fernandez cross-moves to dismiss Goodridge's claim on the Guarantee.

II. THE COLLATERAL ESTOPPEL EFFECT OF A GUILTY PLEA

Harvey argues that a criminal conviction, whether by jury verdict or by guilty plea, estops the convicted defendant from contesting in a subsequent civil proceeding those matters determined by the conviction. While for some years it has been established in this Circuit that guilty pleas "constitute estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case," United States v. Podell, 572 F.2d 31, 35 (2d Cir.1978) (emphasis added), only recently, in Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 43 (2d Cir.1986), cert. denied, 480 U.S. 948, 107 S.Ct. 1608, 94 L.Ed.2d 794 (1987), did the Court of Appeals hold that a criminal conviction could also have estoppel effect in a civil case in which the Government was not a party. The Gelb court held:

Because mutuality of estoppel is no longer an absolute requirement under federal law, Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979); Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), a party other than the Government may assert collateral estoppel based on a criminal conviction. See United States v. Frank, 494 F.2d 145, 160 (2d Cir.), cert. denied, 419 U.S. 828 95 S.Ct. 48, 42 L.Ed.2d 52 (1974). The criminal defendant is barred from relitigating any issue determined adversely to him in the criminal proceeding, provided that he had a full and fair opportunity to litigate the issue.

798 F.2d at 43. See State of New York v. Hendrickson Bros., Inc., 840 F.2d 1065, 1080 (2d Cir.1988) (district court had authority to accord criminal convictions estoppel effect in subsequent civil suit); Dorman v. Higgins, 821 F.2d...