Kiess v. Eason

• Decision Date: 10 May 1971
• Docket Number: No. 18533.,18533.
• Citation: 442 F.2d 712
• Parties: Raymond W. KIESS, Plaintiff-Appellant, v. Willard D. EASON, Frederick Kavanagh and Bio-Dynamics, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

442 F.2d 712 (1971)

Raymond W. KIESS, Plaintiff-Appellant, v. Willard D. EASON, Frederick Kavanagh and Bio-Dynamics, Inc., Defendants-Appellees.

No. 18533.

United States Court of Appeals, Seventh Circuit.

May 10, 1971.

Hamilton Smith, William G. Migely, Chicago, Ill., Melvin M. Belli, San Francisco, Cal., Henry E. Bradshaw, Indianapolis, Ind., Robert L. Lieff, San Francisco, Cal., James E. Betke, Chicago, Ill., for appellant; Belli, Ashe, Ellison, Choulos & Lieff, San Francisco, Cal., Bingham, Summers, Welsh & Spilman, Indianapolis, Ind., McDermott, Will & Emery, Chicago, Ill., of counsel.

James L. Beattey, Indianapolis, Ind., Howard Neitzert, George A. Platz, Chicago, Ill., for appellees, Willard D. Eason and Frederick Kavanagh; Martz, Beattey, Hinds & Wallace, Indianapolis, Ind., Sidley & Austin, Chicago, Ill., of counsel.

Before SWYGERT, Chief Judge, and KERNER and STEVENS, Circuit Judges.

STEVENS, Circuit Judge.

Appellant is a former shareholder of Bio-Dynamics, Inc. He contends (1) that he was entitled to more stock than he received, and (2) that he was injured by selling the shares he did receive. Federal jurisdiction is predicated on diversity of citizenship. If his claims are valid as a matter of Indiana law, in view of the extraordinary growth of Bio-Dynamics he should recover approximately sixteen million dollars.

After filing an amended complaint, plaintiff conducted extensive discovery and testified at length in a deposition taken by defendants. On the basis of the voluminous record thus developed, the district court concluded that the undisputed facts foreclosed recovery, and entered summary judgment in favor of defendants.

Inevitably in a record of this magnitude the parties' versions of the facts will differ. The same events will be described or recalled differently by different witnesses. What is innocuous to one may appear sinister to another. Such differences do not preclude summary judgment, however, unless they are material to the outcome. See Ashwell & Company v. Transamerica Insurance Co., 407 F.2d 762 (7th Cir. 1969); cf., First National Bank v. Cities Service Co., 391 U.S. 253, 288, 290, 88 S.Ct. 1575, 20 L. Ed.2d 569. We have read the portions of the record to which plaintiff has directed our attention and, accepting his version of the evidence as we must, United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176, we have concluded that summary judgment was properly entered.

I.

There are two chapters to the story. The first relates to plaintiff's acquisition of Bio-Dynamics stock; the second to his disposition of those shares. In each chapter we state only the essential facts. As stated, they are either uncontradicted or, if disputed, we relate plaintiff's version.

A.

Plaintiff is a person of superior intellectual ability. He conceived and developed a simplified system for making blood tests. His "Unitest System,"¹ when marketed, received prompt nationwide commercial acceptance.

After the system was substantially developed, but before it was placed on the market, plaintiff received some assistance from defendants Eason and Kavanagh. In the summer of 1962 plaintiff told Eason about the system he had been working on for several years, but Eason did no work on it until February 12, 1963. His contribution to the system was relatively minor. Plaintiff and Eason never entered into an agreement with each other relating either to the Unitest System or to sharing the fruits of its development.²

In May, 1963, at plaintiff's request, defendant Kavanagh began work on a colorimeter to be used in conjunction with the system. Compared to plaintiff's contribution to the system, the importance of Kavanagh's work was relatively minor. There was no agreement between plaintiff and Kavanagh concerning the compensation Kavanagh would receive for his efforts.

Prior to June 19, 1963, plaintiff furnished materials to counsel in connection with the preparation of an application for a patent on the Unitest process. The application was filed on December 18, 1963; plaintiff was represented to be the sole inventor of the system.

Plaintiff arranged for the organization of Bio-Dynamics, Inc. on February 28, 1964, to manufacture and market devices incorporating the Unitest System. The incorporators were plaintiff, Eason and Kavanagh; the original paid-in capital was represented by certain test equipment and prototypes owned by the incorporators on which the directors placed a valuation of $1,350. Plaintiff testified that everyone understood "that as an inducement to investing, the patent application would be assigned to the corporation."

The first board of directors included plaintiff, Eason, and Kavanagh, and two outside directors. Plaintiff was elected president, Eason secretary, and Kavanagh vice president. No formal action with respect to the issuance of stock to the incorporators was taken prior to July 18, 1964. There were, however, discussions in which plaintiff stated that 8,000 of the 10,000 authorized shares should be issued to him; he offered 5% of that amount to Kavanagh, who said "the offer was generous." By July 18, 472 shares had been sold to investors for $47,200.

At a board meeting attended by all five directors and corporate counsel on July 18, 1964, the issuance of stock was discussed at length. Plaintiff, who presided, requested counsel "to discuss his views concerning the issuance and distribution of corporate stock to officers as payment for services rendered in the organization, promotion and development of the corporation and its products." Counsel expressed the opinion that additional financing was absolutely necessary; that such financing would require registration under the Indiana Securities Law; and that "a public registration would be refused if the organizers, promoters and developers were issued and paid stock in excess of 35% of authorized corporate stock."

Counsel then recommended that 2,000 shares be issued to plaintiff and 1500 shares be divided between Eason and Kavanagh. Plaintiff objected that 2,000 shares did not adequately reflect his contribution to the Unitest System and made a presentation to the board. During the discussion which followed, Eason asserted that he had a right to receive the same number of shares as plaintiff. He stated that he had an agreement with plaintiff providing that their interests in the corporation should be equal; Eason's statement was not true and plaintiff so advised the directors who were present. Ultimately a motion was made by one of the independent directors that 1,500 shares each be issued to plaintiff and Eason and 500 shares be issued to Kavanagh "for services heretofore rendered in the organization, promotion and development of the corporation and its products." The motion was adopted by a vote of 4 to 1, with plaintiff opposing the motion.

Immediately after the meeting, plaintiff expressed his dissatisfaction to corporate counsel, stating that he did not believe his interests had been adequately considered. Counsel replied simply, "It's been done," and added that nothing could be done to reverse the decision.

In due course, stock certificates in the amounts voted by the directors were issued to the incorporators and signed by plaintiff as president of the company. Subsequently plaintiff commented to others about the unfairness of the allocation.

On September 26, 1964, plaintiff assigned the patent application on the Unitest System to the corporation. The assignment represented that he was the owner of the entire right, title and interest in the application and the invention covered thereby; the transfer to the corporation was unconditional.

In October, 1964, the shareholders amended the Articles of Incorporation to authorize the issuance of 200,000 shares in order to effect a 20 for 1 stock split. Fifty thousand additional shares were issued, registered, and offered to the public. In connection with these transactions, in his capacity as president of the corporation plaintiff signed various documents which described the number of shares owned respectively by Eason, Kavanagh, and himself. In addition, he filed an individual statement with the Indiana Securities Commission in which he was required to describe fully his interest in stock or other securities of the corporation. He then stated under oath that he owned 1500 shares, that he had no written contract for additional stock or other securities of the issuer, nor any contract or agreement for additional compensation.

Pursuant to the stock split, the number of shares which he owned was increased from 1,500 to 30,000; comparable increases were, of course, realized by Eason and Kavanagh. The annual report to the stockholders which was distributed in early 1965 and signed by plaintiff accurately described their respective stock ownerships.

B.

The company's prosperity was prodigious. Nevertheless, friction developed between plaintiff and Kavanagh, and also between plaintiff and Eason.

In January, 1965, Kavanagh called an informal meeting of all directors except plaintiff and told them that plaintiff should be removed as president. At the formal meeting of the board held on March 17, 1965, for the purpose of selecting a slate of directors for the following year, plaintiff invited Kavanagh to express his complaints about management. Kavanagh declined. All of the directors proposed by plaintiff, including Kavanagh, were reslated. However, at the directors meeting three days later, Kavanagh was not reelected vice president. Beginning in April, Kavanagh had numerous conversations with one of the other directors (Huddleston), repeatedly espousing the desirability of "getting rid of" plaintiff.

In September plaintiff discharged an engineer named Schmitz. The details of the discharge are discussed at length, but we may assume that plaintiff's action was entirely proper,³ although Eason and Kavanagh thought it was unwise.

On Saturday, ...