In re Domestic Fuel Corp., Bankruptcy No. 87 B 20003
| Decision Date | 28 October 1987 |
| Docket Number | Bankruptcy No. 87 B 20003,87 B 20004,87 Adv. 6002.,Adv. P. No. 87 Adv. 6020 |
| Citation | 79 BR 184 |
| Parties | In re DOMESTIC FUEL CORP. and Henry F. Raab, Inc., Debtors. DOMESTIC FUEL CORP., Plaintiff, v. MARINE MIDLAND BANK, N.A. and Angelo Rainaldi, Defendants, Philip Rainaldi and A & P Rainaldi, Inc., Additional Defendants. DOMESTIC FUEL CORP., Plaintiff, v. Angelo RAINALDI, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Aronwald & Pykett, White Plains, N.Y., for Angelo Rainaldi.
Gary J. Langer, New York City, for debtor.
DECISION ON MOTION TO RESCIND STOCK PURCHASE AGREEMENT AND CROSS MOTION TO RECLAIM STOCK
The debtor, Domestic Fuel Corp., has commenced an adversary proceeding against the defendant, Angelo P. Rainaldi, to rescind a stock purchase agreement under which the debtor purchased from Rainaldi all of the stock of Henry F. Raab, Inc. and Henry F. Raab Connecticut, Inc., (collectively referred to as "Raab"), for $1,600,000. Rescission is sought by the debtor on the ground that the stock purchase agreement was entered into as a result of a mutual mistake or as a result of the debtor's mistake and Rainaldi's fraud. Alternatively, the debtor seeks damages in the amount of $1,600,000 because of Rainaldi's alleged breach of warranties.
The defendant, Rainaldi, has counter-claimed for a reclamation of the Raab stock which was pledged by the debtor with Marine Midland Bank to secure the debtor's obligation to Rainaldi under two notes, totalling $1,000,000.00 payable to Rainaldi in equal monthly payments. The debtor has not made payments in accordance with the terms of the notes.
1. The debtor, is a New York corporation engaged in the business of selling fuel oil for heating purposes and installing heating units. The debtor's president, Richard W. Smyth, is a licensed plumber who has been the head of a plumbing and heating business for many years.
2. On January 5, 1987, the debtor filed with this court a voluntary petition under Chapter 11 of the Bankruptcy Code and continues to operate its business and manage its property interests as a debtor in possession in accordance with 11 U.S.C. §§ 1107 and 1108.
3. The defendant, Angelo P. Rainaldi, is a licensed plumber and was the president and sole shareholder of Henry F. Raab, Inc., a New York corporation and Henry F. Raab Connecticut, Inc., a Connecticut corporation. Both Raab companies were engaged in the business of the installation of heating and air conditioning units for industrial construction projects and for home and business purposes.
4. In the Spring of 1985, Richard W. Smyth, the debtor's president, learned from Angelo P. Rainaldi's brother, Frank Rainaldi, that Angelo was not well and wanted to sell his interest in the Raab companies which he owned and operated. After negotiations between the defendant, Angelo P. Rainaldi and Richard W. Smyth, a purchase price of $1,600,000 was arrived at with respect to the Raab stock, of which $1,500,000 was attributable to Henry F. Raab, Inc. and $100,000 to Henry F. Raab Connecticut, Inc.
5. On June 25, 1985, plaintiff, Domestic Fuel Corp., and the defendant, Angelo P. Rainaldi, entered into a stock purchase agreement which was prepared by Rainaldi's attorney and reviewed by the debtor's attorney. Ex. # 4. On July 11, 1985, the parties entered into a Rider "A" which was then annexed to the stock purchase agreement. The agreement provides that Rainaldi would sell 9200 common voting shares of Henry F. Raab, Inc. for the total sum of $1,500,000 and 100 shares of the common voting shares of Henry P. Raab Connecticut, Inc. for the sum of $100,000.
6. Pursuant to the stock purchase agreement the debtor was to pay $600,000 at the closing. The balance of $1,000,000 was to be paid in 120 equal monthly principal payments, with interest at prime paid on the unpaid balances. Each note was to be endorsed and guaranteed as to payment by Richard W. Smyth.
7. As security for the payment of the unpaid part of the purchase price, Rainaldi was given a lien upon the 9200 common voting shares of Henry F. Raab, Inc. and 100 shares of Henry F. Raab Connecticut, Inc. The shares were ultimately pledged with Marine Midland Bank. In the event of a default under the notes paragraph 17 of the Rider provides that following 45 days after notice given by Rainaldi, he was entitled to demand possession of the pledged Raab stock and to sell them at public or private sale on ten days' notice to the debtor. Rainaldi was given the right to bid and purchase the stock at any such sale.
8. Paragraph 9 of the stock purchase agreement provides that approximately fourteen days prior to the closing, Rainaldi would deliver to the debtor a statement of the assets and liabilities of the Raab companies, including accounts receivable and accounts payable. This paragraph also provides that Rainaldi warrants the accuracy of such statement but does not guarantee the collectibility of the accounts receivable.
9. Paragraph 15 provides that the closing was scheduled to take place during the month of July on a day agreed to between the parties. However, the parties agreed to a delay for the closing and ultimately set August 15, 1985 as the closing date.
10. In paragraph 4 of the Rider, certain amendments are made with respect to paragraph 2 of the stock purchase agreement. The relevant amendments state:
11. Paragraph 5 of the Rider, provides in relevant part as follows:
12. Prior to the closing, the debtor had complete access to all of the Raab books and records. The debtor's president, Richard W. Smyth, inspected the Raab billings and job requisitions. He spoke to the employees of the Raab companies and visited four job sites where some of Raab's major construction projects were in progress. Rainaldi showed Smyth the Raab accounts receivable records and the printout of accounts payable. Smyth also inspected cost records. Raab did not keep a general ledger. Smyth was given full disclosure as to the figures with respect to Raab's bank balances.
13. The debtor's president, Richard W. Smyth, had his company's accounting firm inspect and review copies of the Raab financial statements for previous years. Rainaldi furnished copies of the Raab financial statements for the years ending December 31, 1980, 1982, 1983 and 1984. (The financial statements for the year 1981 were missing).
14. At the closing on August 15, 1985, Rainaldi informed Smyth of the percentage of completion of the three major pending Raab jobs, namely CTI, Gateway and Pepsico were 99% completed. Rainaldi provided Smyth with Raab statements of assets and liabilities for periods prior to the middle of July, 1985, the originally contemplated closing date. Rainaldi did not provide Smyth with a statement of assets and liabilities during the period from mid-July 1985 until the actual closing date on August 15, 1985. There was no proof that such statement was ever requested by Smyth or the debtor for any period after mid-July, 1985.
15. Rainaldi discontinued keeping job cost records for the Raab companies after May of 1985 when his daughter, who usually kept these records, left the employ of Raab. Rainaldi told Smyth to have one of the debtor's employees perform this work. Smyth replied he was going to put in a computer instead of having someone like Rainaldi's daughter compile this information. In any event, when Rainaldi informed Smyth at the closing that the Raab business was running smoothly and that the job contracts were 90% plus completed, he based this statement on his thirty years of experience and on "feel", inasmuch as he had discontinued maintaining job cost records after May of 1985.
16. Smyth testified that because he was informed by Rainaldi that the work on Raab's major job projects was mostly completed, he assumed that there would be sufficient receivables due from these jobs for the debtor to collect so as to enable the debtor to apply the job proceeds towards the payment of the money that the debtor borrowed from Marine Midland Bank in order to come up with the $600,000.00 down payment due at the closing on the debtor's purchase of the Raab stock. However, after the closing, the debtor had to perform additional work to complete those major projects with the result that the debtor allegedly expended approximately as much money to complete the job projects as the amounts received under the job contracts. Hence, the cash flow was a wash; no additional funds were available from these major Raab jobs to repay the $600,000.00 which the debtor borrowed from Marine Midland Bank.
17. The three major Raab jobs which Smyth claims Rainaldi informed him were 99% completed and that the debtor only had to collect the balances due, were CTI, Pepsico and Gateway. Smyth said that the debtor did collect about $600,000 as the...
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