Publishers Advertising Associates, Inc. v. Wessel Co. Inc.

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Before PELL and ESCHBACH, Circuit Judges, and WYATT; PELL
• Citation: Publishers Advertising Associates, Inc. v. Wessel Co. Inc., 747 F.2d 1076 (7th Cir. 1984)
• Decision Date: 09 November 1984
• Docket Number: No. 83-2447,83-2447
• Parties: PUBLISHERS ADVERTISING ASSOCIATES, INC., Plaintiff-Appellee, v. The WESSEL COMPANY INC. and Anthony S. Jacobs, Defendants-Appellants.

Page 1076

747 F.2d 1076

PUBLISHERS ADVERTISING ASSOCIATES, INC., Plaintiff-Appellee, v. The WESSEL COMPANY INC. and Anthony S. Jacobs, Defendants-Appellants.

No. 83-2447.

United States Court of Appeals Seventh Circuit.

Argued May 24, 1984.

Decided Nov. 9, 1984.

Sherwin J. Stone, Altheimer & Gray, Chicago, Ill., for defendants-appellants.

Ronald W. Teeple, Bergstrom, Davis & Teeple, Chicago, Ill., for plaintiff-appellee.

Before PELL and ESCHBACH, Circuit Judges, and WYATT, Senior District Judge. ^*

PELL, Circuit Judge.

Defendants, the Wessel Company, Inc. (Wessel), and Anthony S. Jacobs, appeal from a judgment of $113,462.89, plus interest, entered, after a bench trial, by the district court in favor of plaintiff, Publishers Advertising Association, Inc. Although other issues are raised, particularly one regarding the propriety of piercing the corporate veil, the only issue that we need to reach in disposing of this appeal is whether the district court erred when it ruled that the Statute of Frauds did not operate to defeat plaintiff's cause of action arising from Jacobs' representations.

I. THE FACTS

Publishers is a New York corporation that, among other things, arranges advertising for magazines distributed by Warner Publisher Services, Inc., known at the time of the events of this suit as Independent News Company, Inc. (Independent). Wessel is a relatively small, diversified Illinois corporation, whose primary business is printing and inserting promotional materials into magazines. Jacobs, an Illinois resident, is the sole shareholder and chairman of Wessel. Diversity of citizenship provided the district court with jurisdiction for this case.

In early 1977, Jacobs decided to diversify Wessel's operations. Accordingly, after interviewing several people who responded to an advertisement in a number of prominent newspapers, he hired Bertram Schuster to develop a new venture in an undetermined field, although Jacobs hoped that the new venture would require Wessel's services to some extent. Jacobs and Schuster considered entering the vitamin business, and, to shield Wessel from products liability claims and to insulate Wessel from the venture's creditors should the venture fail, they formed Bart Clayton, Inc. Wessel was the sole shareholder of Bart Clayton, Jacobs was its sole director, Schuster its president and treasurer, and a Wessel employee, Mary Ellen Des Re'Maux, was the only other officer. Des Re'Maux supervised the financial books of Bart Clayton, but continued to appear on Wessel's payroll.

In November 1977, instead of entering the vitamin business, Schuster decided, with Jacobs' approval, that Bart Clayton should publish a self-improvement health magazine called Vital. Wessel initially invested $65,000 in exchange for all shares of Bart Clayton stock. In addition, because Bart Clayton needed funds to meet current expenses, Wessel periodically loaned it the money at eight and one-half percent interest. In total, these loans amounted to $605,000. Bart Clayton never repaid any part of the loans. Schuster eventually gathered a staff of eight employees for the magazine. Bart Clayton continued to maintain its offices on Wessel's premises until just prior to the publication of the first issue of Vital in September 1978. Wessel also filed consolidated income tax returns for fiscal 1977 and 1978, both of which included Bart Clayton.

Schuster first contacted Himmelman, Independent's vice president, in the late winter of 1978. Schuster told Himmelman that Wessel would provide active and extensive financial support for the Vital project, and he referred to Bart Clayton as "a division, a subsidiary, or some form of the Wessel Company." Furthermore, Schuster identified Jacobs as the management of Wessel. Schuster's first meeting with Greenberg, plaintiff's president, was in early April 1978. At that time, Schuster spoke of the financial backing of both Wessel and Jacobs. Schuster testified that he thought that plaintiff was unlikely to provide services to the magazine if the project lacked an established financial backer. References to Jacobs and Wessel provided the needed assurance of financial backing. After plaintiff and Bart Clayton reached a general agreement on a promotion campaign, but before plaintiff expended any funds pursuant to that agreement, Schuster arranged a meeting between Jacobs, Himmelman, and Greenberg. At the May 1978 meeting in New York City, Jacobs assured the two men that Wessel was willing to invest between one and two million dollars in Vital. The three men discussed the proposed advertising and promotional campaigns for the first two issues of Vital; these campaigns met with Jacobs' approval. Plaintiff had previously received Schuster's approval of the plans for the first issue and had placed several orders with various outside firms, but plaintiff would incur no expenses until the campaigns actually ran. After the meeting, Schuster continued to assure plaintiff that Jacobs and Wessel would provide extensive financial backing for the project.

The first issue of Vital, with an October 1978 dateline and a publication run of 325,000 copies, came out in September of 1978. Schuster published 400,000 copies of the second issue two months later. Evidence at trial suggested that magazine distributors do not determine the success of a publication issue until approximately seventy-five to ninety days after retailers return unsold copies. Yet, within between twenty and forty days after distribution of the first issue, Jacobs began to consider terminating the magazine project because he thought that it required Wessel to commit too much of its resources, that projections were not being met, and because experts advised him that there was little likelihood of success. In early January of 1978, the third issue was completely prepared and needed only printing and distribution, at a cost of $10,000, before it reached the market. On January 7, 1978, Jacobs told Schuster that there was no more money available for the magazine. Neither the third issue nor any subsequent issue was ever published. To this point, Wessel had already invested $670,000 in loans to and shares of Bart Clayton. At the time of Jacobs' decision to terminate, Bart Clayton owed plaintiff $113,462.89. In accordance with statements made to him by Jacobs, Schuster continued to assure all creditors, including plaintiff, that Bart Clayton's bills would be paid. In fact, Bart Clayton never made any additional bill payments.

Plaintiff brought a four-count complaint against Bart Clayton, Schuster, Wessel and Jacobs, but Schuster was voluntarily dismissed as a defendant, and Bart Clayton was insolvent. In Count I, based upon the unpaid account, plaintiff named only Schuster and Bart Clayton as defendants. Nonetheless, the district court found "for plaintiff against the remaining defendants on this count because of BC's failure to live up to its clear contractual obligation." Count II alleged that Jacobs and Wessel induced plaintiff to place advertisements on behalf of Bart Clayton and then breached their promise to provide sufficient funding for the magazine to pay plaintiff's charges. The district court held "for plaintiff on this count on the theory that defendants breached an oral contract with plaintiff to be responsible for BC's obligations." Count III alleged that Schuster, as agent for Jacobs and Wessel, made a second promise, later in 1978 or early 1979, to pay the bills that plaintiff had incurred on behalf of Bart Clayton and that defendants breached that promise. Count IV asserted that Bart Clayton was a mere instrumentality of Jacobs and Wessel and, therefore, Jacobs and Wessel were liable for its debts under the doctrine of piercing the corporate veil. The court held in favor of plaintiff against both defendants on Counts III and IV.

II. STATUTE OF FRAUDS: DEBT OF ANOTHER

Defendants' most compelling argument in support of their attempt to obtain a reversal is that the Statute of Frauds acts as a bar to the imposition of liability against them. They base their defense upon the fact that plaintiff signed an agreement with Bart Clayton before any of the subsequent assurances made by Schuster and Wessel. Therefore, inasmuch as plaintiff asserts that the assurances amounted to mere guarantees that defendants would pay the debts incurred by Bart Clayton, those assurances were agreements that had to be in writing to be enforceable.

The Illinois Statute of Frauds provides, in part:

That no action shall be brought ... to charge the defendant upon any special promise to answer for the debt, default or miscarriage of another person ..., unless the promise or agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing, and signed by the party to be charged therewith, or some other person thereunto...