Sound Video Unlimited, Inc. v. Video Shack Inc.

• Decision Date: 09 November 1988
• Docket Number: No. 83 Civ. 5853 (GLG).,83 Civ. 5853 (GLG).
• Citation: 700 F. Supp. 127
• Parties: SOUND VIDEO UNLIMITED, INC., and Electratainment, Inc., Plaintiffs, v. VIDEO SHACK INC., Arthur H. Morowitz, Howard J. Farber, Arthur C. Zwemke and Howard P. Levine, Defendants, v. Noel GIMBEL and Lee Gimbel, Additional Defendants on the Counterclaims.
• Court: U.S. District Court — Southern District of New York

700 F. Supp. 127

SOUND VIDEO UNLIMITED, INC., and Electratainment, Inc., Plaintiffs, v. VIDEO SHACK INC., Arthur H. Morowitz, Howard J. Farber, Arthur C. Zwemke and Howard P. Levine, Defendants, v. Noel GIMBEL and Lee Gimbel, Additional Defendants on the Counterclaims.

No. 83 Civ. 5853 (GLG).

United States District Court, S.D. New York.

November 9, 1988.

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Sonnenschein Carlin Nath & Rosenthal (Bernard Nussbaum, Robert B. Millner, Richard L. Fenton, of counsel), Rudnick & Wolfe (Stanley J. Adelman, of counsel), Chicago, Ill., for plaintiffs and additional defendants on the counterclaims.

Frankfurt, Garbus, Klein & Selz, P.C. (Martin Garbus, of counsel), Mark A. Reich, New York City, for defendants.

OPINION

GOETTEL, District Judge.

This case arises from the acrimonious divorce of two large video equipment companies. Although the essential facts are largely disputed, we will attempt herein to lay out the romance, union and separation of the plaintiffs and the defendants that gave rise to this lawsuit. The parties have filed a total of 7 motions that we rule on herein. They will be addressed in turn.

I. FACTS

In the summer of 1981, Arthur Morowitz ("Morowitz"), president of Video Shack, Inc. ("Video Shack"), a large video cassette retailer and wholesaler, entered into discussions with Noel Gimbel ("Gimbel"), president of Sound Video Unlimited, Inc. ("Sound Video"), a large video cassette and record wholesale distributer, about combining the resources of the two companies to create the "premier company in the video business." Video Shack is a New York corporation with its principal place of business in New York, New York. Sound Video is a Delaware corporation with its principal place of business in Niles, Illinois. In contemplation of the consolidation, Sound Video assumed responsibility for all wholesale operations, including Video Shack's New York wholesale business, A & H Video Sales Representatives ("A & H"). A & H was operated under the name of Sound Video beginning in January 1982.¹

In March 1982, Gimbel, Morowitz, and Howard Farber ("Farber")² executed a Reorganization Agreement³ and Shareholder Agreement to give corporate form to the business combination.⁴ The Reorganization Agreement provided for Sound Video's parent company, Electratainment, Inc. ("Electratainment"), to acquire all of the outstanding shares of Video Shack stock in exchange for 45% of the outstanding shares of Electratainment stock. The agreement further provided that Morowitz was to become a director and the president of Electratainment and Farber was to become a shareholder of Electratainment. Gimbel was to become Chairman of the Board of Electratainment. The positions of chairman and president were to be alternated yearly between Gimbel and Morowitz. The Shareholder's Agreement provided that of the five member board of directors of Sound Video, Gimbel would elect three directors and Morowitz would elect two directors. Correspondingly, of Video Shack's five directors, Morowitz would elect three and Gimbel would elect two.

In July 1982, however, the combination was aborted and this lawsuit ensued.⁵ The plaintiffs' Consolidated Amended Complaint raises 21 claims against the defendants including 6 counts of violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 et seq., 5 counts of common law fraud, 2 counts of conversion, 2 counts of breach of fiduciary duty, 2 counts for punitive damages and one count each of breach of contract, promissory estoppel, federal securities fraud and an action for an accounting. The defendants have asserted 11 counterclaims against the plaintiffs Sound Video and Electratainment, as well as Noel Gimbel and Lee Gimbel including 3 counts of breach of contract, 2 counts for rescission, 1 count each of fraud, conversion, securities fraud and RICO as well as a claim for a declaratory judgment and a claim for an accounting.

II. DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

The defendants have moved herein for partial summary judgment. For the following reasons, we grant the motion in part and deny it in part.

A. Summary Judgement Standard

Fed.R.Civ.P. 56(c) provides that summary judgment is appropriate if "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." The burden is on the moving party to demonstrate the absence of a material, factual dispute. Fed.R.Civ.P. 56(e); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). If that burden is met, the non-moving party cannot simply rest on their complaint setting forth a valid cause of action. Fed.R.Civ.P. 56(e); First Nat'l Bank v. Cities Service Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968). They "must set forth specific facts showing that there is a genuine need for trial," Fed.R.Civ.P. 56(e), and there must be more than merely "some metaphysical doubt as to those material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). In determining whether that burden is met, however, the court must draw all reasonable inferences and resolve all ambiguities in favor of the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962) (per curiam). In what has now been dubbed the 1986 Supreme Court "trilogy," the Court reaffirmed its support for Rule 56 as an important procedural tool. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Against this backdrop of summary judgment jurisprudence, we turn to the defendants' motion.

B. Choice of Law⁶

The defendants argue that New York law governs all the common law claims in this action. The parties have conceded that, with respect to the elements of proof for fraud and breach of fiduciary duty (the common law issues raised in these motions), the laws of New York and Illinois do not differ. Accordingly, we will apply the law of the forum, New York, on those issues.

The crux of the choice of law dispute in this case revolves around the availability of lost profits as a measure of damages in plaintiffs' common law actions. The defendants argue that New York law applies to the lost profits analysis and does not permit recovery of lost profits for fraud, conversion, breach of contract, or breach of fiduciary duty. The plaintiffs urge application of Illinois law which permits lost profits, at least for fraud, breach of fiduciary duty and conversion.⁷

As a preliminary matter, we note that we must apply the choice of law rules of the forum state. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941); O'Connor v. Lee-Hy Paving Corp., 579 F.2d 194, 205 (2d Cir.), cert. denied, 439 U.S. 1034, 99 S.Ct. 638, 58 L.Ed.2d 696 (1978). The leading New York case on choice of law is Schultz v. Boy Scouts of America, 65 N.Y.2d 189, 491 N.Y.S.2d 90, 480 N.E.2d 679 (1985). In Schultz, the New York Court of Appeals determined that when "the parties are domiciled in different jurisdictions with conflicting loss-distribution rules ... the law of the place of the tort will normally apply, unless displacing it "`will advance the relevant substantive law purposes without impairing the smooth working of the multi-state system or producing great uncertainty for litigants.'" Schultz v. Boy Scouts of America, 65 N.Y. 2d 189, 491 N.Y.S.2d 90, 98, 480 N.E.2d 679, 687 (1985) (quoting Neumeier v. Kuehner, 31 N.Y.2d 121, 128, 335 N.Y.S.2d 64, 70, 286 N.E.2d 454, 458 (1972)). Accord In re AM Int'l, Inc. Securities Litigation, 606 F.Supp. 600, 609 (S.D.N.Y.1985); Restatement Second of Conflicts of Law § 145 comment c, at 416 (1971).⁸ In determining "the place of the tort" in a case where the conduct occurred in one jurisdiction and the injury was felt in another, "the place of the wrong is considered to be the place where the last event necessary to make the actor liable occurred." Schultz v. Boy Scouts of America, 65 N.Y.2d 189, 491 N.Y.S.2d 90, 94, 480 N.E.2d 679, 683 (1985).

In this case, plaintiff Sound Video is a Delaware corporation with its principal place of business in Niles, Illinois. Plaintiff Electratainment is also a Delaware corporation with its principal place of business in Niles, Illinois. Defendant Video Shack is a New York corporation with its principal place of business in New York, New York. By the allegations of the Consolidated Amended Complaint, the defendants made representations to the plaintiffs in person and by telephone in Niles, Illinois and New York, New York. The plaintiffs were injured, however, in their business in Illinois, primarily by virtue of their injured credit relationship with their Chicago, Illinois bank. As injury is "the last element necessary to make the actor liable" Schultz v. Boy Scouts of America, 65 N.Y.2d 189, 491 N.Y.S.2d 90, 94, 480 N.E.2d 679, 683 (1985), in fraud and related actions, we hold that the place of wrong in this case was Illinois. Accordingly, unless application of New York law "will advance the relevant substantive law purposes without impairing the smooth working of the multi-state system or producing great uncertainty for litigants," Neumeier v. Kuehner, 31 N.Y. 2d 121, 128, 335 N.Y.S.2d 64, 70, 286 N.E. 2d 454, 458 (1972), Illinois law will govern the substantive issues of the plaintiffs common law tort actions to the extent that it differs from the law of New York.

The defendants have advanced no substantial reason why New York law should be applied in this case. In support of their argument, the defendants rely on the Order of United States District Judge ...