Guth v. Loft, Inc.

• Decision Date: 11 April 1939
• Citation: 5 A.2d 503,23 Del.Ch. 255
• Court: Supreme Court of Delaware
• Parties: CHARLES G. GUTH and THE GRACE COMPANY, INC., OF DELAWARE, a corporation of the State of Delaware, Defendants Below, Appellants, v. LOFT, INCORPORATED, Complainant Below, Appellee, and Pepsi-Cola Company, a corporation of the State of Delaware, Defendant Below, Appellee

5 A.2d 503

23 Del.Ch. 255

CHARLES G. GUTH and THE GRACE COMPANY, INC., OF DELAWARE, a corporation of the State of Delaware, Defendants Below, Appellants, v. LOFT, INCORPORATED, Complainant Below, Appellee, and Pepsi-Cola Company, a corporation of the State of Delaware, Defendant Below, Appellee

Supreme Court of Delaware

April 11, 1939

APPEAL from interlocutory decree of the Chancellor, requiring an accounting by the defendants below, appellants.

For convenience, Loft Incorporated, will be referred to as Loft the Grace Company, Inc., of Delaware, as Grace; and Pepsi-Cola Company, a corporation of Delaware, as Pepsi.

Loft filed a bill in the Court of Chancery against Charles G Guth, Grace and Pepsi seeking to impress a trust in favor of the complainant upon all shares of the capital stock of Pepsi registered in the name of Guth and in the name of Grace (approximately ninety-one per cent of the capital stock), to secure a transfer of those shares to the complainant, and for an accounting.

The cause was heard at great length by the Chancellor who, on September 17, 1938, rendered a decision in favor of the complainant in accordance with the prayers of the bill. Loft Inc., v. Guth, ante page 138, 2 A.2d 225. An interlocutory decree, and an interlocutory order fixing terms of stay and amounts of supersedeas bonds, were entered on October 4 1938; and thereafter, an appeal was duly prosecuted to this court.

The essential facts, admitted or found by the Chancellor, briefly stated, are these: Loft was, and is, a corporation engaged in the manufacturing and selling of candies, syrups, beverages and foodstuffs, having its executive offices and main plant at Long Island City, New York. In 1931 Loft operated one hundred and fifteen stores largely located in the congested centers of population along the Middle Atlantic seaboard. While its operations chiefly were of a retail nature, its wholesale activities were not unimportant, amounting in 1931 to over $ 800,000. It had the equipment and the personnel to carry on syrup making operations, and was engaged in manufacturing fountain syrups to supply its own extensive needs. It had assets exceeding $ 9,000,000 in value excluding goodwill; and from 1931 to 1935, it had sufficient working capital for its own cash requirements.

Guth, a man of long experience in the candy, chocolate and soft drink business, became vice-president of Loft in August, 1929, and its president in March, 1930.

Grace was owned by Guth and his family. It owned a plant in Baltimore, Maryland, where it was engaged in the manufacture of syrups for soft drinks, and it had been supplying Loft with "Lady Grace Chocolate Syrup."

In 1931, Coca-Cola was dispensed at all of the Loft stores, and of the Coca-Cola syrup Loft made large purchases, averaging over 30,000 gallons annually. The cost of the syrup was $ 1.48 per gallon. Guth requested the Coca-Cola Company to give Loft a jobber's discount in view of its large requirements of syrups which exceeded greatly the purchases of some other users of the syrup to whom such discount had been granted. After many conferences, the Coca-Cola Company refused to give the discount. Guth became incensed, and contemplated the replacement of the Coca-Cola beverage with some other cola drink. On May 19, 1931, he addressed a memorandum to V. O. Robertson, Loft's vice-president, asking "Why are we paying a full price for Coca-Cola? Can you handle this, or would you suggest our buying Pebsaco (Pepsi-Cola) at about $ 1.00 per gallon?" To this Robertson replied that Loft was not paying quite full price for Coca-Cola, it paying $ 1.48 per gallon instead of $ 1.60, but that it was too much, and that he was investigating as to Pepsi-Cola.

Pepsi-Cola was a syrup compounded and marketed by National Pepsi-Cola Company, controlled by one Megargel. The Pepsi-Cola beverage had been on the market for upwards of twenty-five years, but chiefly in southern territory. It was possessed of a secret formula and trademark. This company, as it happened, was adjudicated a bankrupt on May 26, 1931, upon a petition filed on May 18, the day before the date of Guth's memorandum to Robertson suggesting a trial of Pepsi-Cola syrup by Loft.

Megargel was not unknown to Guth. In 1928, when Guth had no connection with Loft, Megargel had tried unsuccessfully to interest Guth and one Hoodless, vice-president and general manager of a sugar company, in National Pepsi-Cola Company. Upon the bankruptcy of this company Hoodless, who apparently had had some communication with Megargel, informed Guth that Megargel would communicate with him, and Megargel did inform Guth of his company's bankruptcy and that he was in a position to acquire from the trustee in bankruptcy, the secret formula and trademark for the manufacture and sale of Pepsi-Cola.

In July, 1931, Megargel and Guth entered into an agreement whereby Megargel would acquire the Pepsi-Cola formula and trademark; would form a new corporation with an authorized capital of 300,000 shares of the par value of five dollars to which corporation Megargel would transfer the formula and trademark; would keep 100,000 shares for himself, transfer a like number to Guth, and turn back 100,000 shares to the company as treasury stock, all or a part thereof to be sold to provide working capital. By the agreement between the two, Megargel was to receive $ 25,000 annually for the first six years, and, thereafter, a royalty of two and one-half cents on each gallon of syrup.

Megargel had no money. The price of the formula and trademark was $ 10,000. Guth loaned Megargel $ 12,000 upon his agreement to repay him out of the first $ 25,000 coming to him under the agreement between the two, and Megargel made a formal assignment to Guth to that effect. The $ 12,000 was paid to Megargel in this way: $ 5,000 directly to Megargel by Guth, and $ 7,000 by Loft's certified check, Guth delivering to Loft simultaneously his two checks aggregating $ 7,000. Guth also advanced $ 426.40 to defray the cost of incorporating the company. This amount and the sum of $ 12,000 were afterwards repaid to Guth.

Pepsi-Cola Company was organized under the laws of Delaware in August, 1931. The formula and trademark were acquired from the trustee in bankruptcy of National Pepsi-Cola Company, and its capital stock was distributed as agreed, except that 100,000 shares were placed in the name of Grace.

At this time Megargel could give no financial assistance to the venture directly or indirectly. Grace, upon a comparison of its assets with its liabilities, was insolvent. Only $ 13,000 of Pepsi's treasury stock was ever sold. Guth was heavily indebted to Loft, and, generally, he was in most serious financial straits, and was entirely unable to finance the enterprise. On the other hand, Loft was well able to finance it.

Guth, during the years 1931 to 1935 dominated Loft through his control of the board of directors. He has completely controlled Pepsi. Without the knowledge or consent of Loft's board of directors he drew upon Loft without limit to further the Pepsi enterprise having at one time almost the entire working capital of Loft engaged therein. He used Loft's plant facilities, materials, credit, executives and employees as he willed. Pepsi's payroll sheets were a part of Loft's and a single Loft check was drawn for both.

An attempt was made to keep an account of the time spent by Loft's workmen on Pepsi's enterprises, and in 1935, when Pepsi had available profits, the account was paid; but no charge was made by Loft as against Pepsi for the services rendered by Loft's executives, higher ranking office employees or chemist, nor for the use of its plant and facilities.

The course of dealing between Loft, Grace and Pepsi was this: Loft, under the direction of its chemist, made the concentrate for the syrup and prepared the directions for its mixing. It was sent to Grace in Baltimore, and Grace was charged with the cost plus ten percent. Grace added the necessary sugar and water. Grace billed the syrup to Pepsi at an undoubted profit, but shipped the syrup direct to Pepsi's customers, of whom Loft was the chief, at a profit. Whether Loft made or lost money on its dealings with Grace was disputed. It profited to little or no extent, and probably lost money. As between Loft and Grace, the latter was extended credit for three and one-half years during which time nothing was paid, and it was heavily indebted to Loft. As between Grace and Pepsi, the latter paid for the syrup on account, owing always, however, a substantial balance. But, as between Loft and Pepsi, Loft paid, generally, on delivery, in one instance in advance, and never longer than thirty days. By June, 1934, Loft's total cash and credit advances to Grace and Pepsi were in excess of $ 100,000.

All the while Guth was carrying forward his plan to replace Coca-Cola with Pepsi-Cola at all of the Loft stores. Loft spent at least $ 20,000 in advertising the beverage, whereas it never had to advertise Coca-Cola. Loft, also, suffered large losses of profits at its stores resulting from the discarding of Coca-Cola. These losses were estimated at $ 300,000. They undoubtedly were large.

When Pepsi was organized in 1931, 100,000 shares of its stock were transferred to Grace. At that time Guth, in his own name, had no shares at all. Sometime in or after August, 1933, a settlement was made of Megargel's claim against Pepsi for arrearages due him under the contract hereinbefore mentioned. That settlement called for the payment of $ 35,000 in cash by Pepsi. Guth provided $ 500, Loft $ 34,500. In the settlement 97,500 shares of Pepsi stock owned by Megargel were received by Pepsi and left with Loft as security for the advance, as the defendants claimed. These shares...