Mendelsohn v. Leather Mfg. Corp.
| Decision Date | 06 July 1950 |
| Citation | 326 Mass. 226,93 N.E.2d 537 |
| Parties | MENDELSOHN v. LEATHER MANUF. CORP. et al. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Argued Dec. 9 1949.
Zechariah Chafee, Jr., Cambridge, of Rhode Island bar (S Leventall, Boston, with him), for plaintiff.
E. O. Proctor Boston (H. G. Seligman, Boston, with him), for defendants.
Before QUA, C. J., and LUMMUS, WILKINS, SPALDING and COUNIHAN, JJ.
To a better understanding of the objectives of this bill in equity a description of the parties and a recital of some of the facts will be helpful. The activities of the following corporations, in one way or another, are involved in this litigation: Leather Manufacturing Company (hereinafter called Company), Plastics Specialties Corporation (hereinafter called Plastics), Leather Sales Company (hereinafter called Sales), and Leather Manufacturing Corporation (hereinafter called Corporation). [1] Of these only Corporation, as a defendant, is a party to this suit. The other defendants are B. Edward Benson (hereinafter called Benson) and Edward C Bartlett (hereinafter called Bartlett). [2]
For many years prior to the events which gave rise to this litigation the plaintiff and Benson had been friends. During that period they had had business dealings together which included selling securities and the development and joint ownership of certain tire patents. Bartlett, who had made a study of leather chemistry, had spent many years in developing products compounded of leather and other materials. He had endeavored, but without success, to develop a midsole composed of leather and rubber. In April, 1942, Bartlett rented the first floor of a factory in Hyde Park from the plaintiff's brother for the purpose of manufacturing glue from scraps of chrome leather. In the fall of 1942 the plaintiff, through his brother, met Bartlett. In the spring of 1943 Benson was introduced to Bartlett by the plaintiff and the three began experiments 'looking toward the production of a salable leather substitute.' From time to time Benson raised the necessary money for carrying on this work from one Arthur P. Day, a banker in Hartford, Connecticut.
On July 26, 1943, Company was incorporated for purposes which empowered it to tan, reclaim, and convert leathers, and 'to manufacture * * * buy, sell and deal in every manner * * * in leather * * * soles, midsoles, [and] innersoles.' Company had three classes of stock: class A preferred, with par value of $10; class A common, without par value; and class B common without par value. The preferred stock had no voting rights and was preferred in liquidation to the other classes of stock. Five hundred twenty-five shares of this class were issued to Day. Class A common had no voting rights and was entitled to dividends 'when and as declared' only after the preferred stock had been retired. Two hundred fifty shares each were issued to the plaintiff, Benson and Bartlett. The class B common stock had only voting rights and was the only class that had such rights. Benson and Bartlett each held five hundred shares of this class. Bartlett and Benson were respectively president and treasurer of Company, and the plaintiff was its clerk. The directors were Bartlett and his sister and Benson and his wife. The preferred stock was issued for cash and the common stock was issued for formulas, processes, and services.
Various experiments were carried on by Company throughout the remainder of 1943 and the early part of 1944. Concerning the nature of these experiments and their duration and the extent of the plaintiff's participation in them there is considerable dispute. But there is no dispute that at least for several months both before and after the incorporation of Company Bartlett, together with Benson, and the plaintiff, was experimenting with methods of making a leather substitute in sheet form of leather shavings. Down to the spring of 1944 these experiments had not resulted in the production of a substitute which had any commercial value. In May of 1944 the plaintiff ceased to participate in or to make any further contributions to the production of such a substitute. As the judge found, he 'abondoned the idea of the successful production of a leather substitute, at least so far as the defendants Benson and Bartlett were concerned.' Thereafter the plaintiff devoted himself exclusively to another business.
On May 15, 1944, Benson and Bartlett signed the articles of organization for Plastics, and it was incorporated on June 16. Bartlett was its president and Benson its treasurer. The stock in this corporation was owned by Bartlett, Benson, Day, and one Penn. As in the case of Company, Day supplied the finances for Plastics. Under its purposes Plastics was empowered, among other things, to manufacture, sell, and deal in plastics, rubber, and animal fibre, and to manufacture products from these materials either alone or in combination.
On July 18, 1944, the plaintiff gave Benson an option expiring on August 22, 1944, to purchase his stock in Company for $500. This option was never exercised and on August 24, 1944, the plaintiff gave Benson another option expiring on October 15, 1944, to purchase his stock at the same price. On October 2, 1944, Benson called at the plaintiff's house and after some discussion the plaintiff sold his stock in Company for $125. As to this there is no dispute, but the testimony of the plaintiff and Benson was in conflict as to who brought up the question of the sale and what was said concerning Company's affairs. On October 5, three days later, a meeting of the directors of Company was held at which, after a statement had been made by the president (Bartlett) that experiments could not be continued due to lack of funds and materials, it was voted to discontinue the business. On January 30, 1945, a joint meeting of the directors and stockholders of Company was held and it was voted to dissolve it and to transfer its assets to Day in consideration for the surrender and cancellation of his preferred stock. On December 19, 1945, Company was dissolved by a decree of this court.
After Plastics were formed the experimental and development work in which Benson and Bartlett were engaged was carried on by that corporation. This continued down to April, 1946, when Corporation was formed. The purposes of Corporation were very broad and permitted it to do all that Company and Plastics were authorized to do. A few days after Corporation was formed, Plastics, pursuant to a vote of its stockholders, transferred all of its assets to Corporation in exchange for stock in the latter. By this exchange the stockholders of Plastics received equivalent stock interests in Corporation. Shortly after corporation was organized Bartlett and Benson were elected president and treasurer respectively. Plastics thereafter did no business and was dissolved by a decree of this court on May 28, 1947.
Concerning Sales a word or two will suffice. Benson and Bartlett caused it to be incorporated on March 7, 1945, to act as a selling agency for Plastics. No stock appears to have been issued by it and its activities in so far as they relate to the issues here involved are of little or no consequence.
At some time during the spring or early summer of 1944 Benson and Bartlett began experiments with a view to producing a midsole made from leather shavings and rubber. [3] Eventually a midsole called Leathertite was developed which, the judge found, had 'a salable value.' It is not disputed that for a considerable period prior to the hearing below in 1948 Leathertite had passed well beyond the experimental stage and was being produced and sold in substantial amounts.
On March 24, 1945, Benson received from the plaintiff a general release. The testimony relating to the execution of this instrument was conflicting. With respect to it the judge made, as he could have on the evidence, the following findings.
The facts recited above are based on findings made by the judge and those made by us either from documentary evidence or from testimony as to which there is little or no dispute.
In this suit the plaintiff seeks to set aside the release and to rescind the sale of his stock in Company on the ground that they were induced by fraud on the part of the individual defendants. The bill alleges that, as part of the fraudulent scheme entered into by these defendants and for the purpose of concealing their activities from the plaintiff and to make it difficult for him to obtain redress they caused Company to be dissolved and organized successively Plastics, Sales, and Corporation to carry on the business formerly conducted by Company, and asks that the plaintiff be given an interest in Corporation equivalent to his former interest in Company. The bill further asks that the individual defendants be ordered to pay to the plaintiff one third of the dividends and profits received by them from the various corporations. By an amendment to the bill the plaintiff alleges that Benson...
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