Swaffield v. Universal Ecsco Corp.

• Decision Date: 27 March 1969
• Citation: 76 Cal.Rptr. 680,271 Cal.App.2d 147
• Parties: Robert M. SWAFFIELD, Plaintiff and Appellant, v. UNIVERSAL ECSCO CORPORATION, a Delaware corporation, Shinn Industries, Inc., a Delaware corporation, and Clifford L. Shinn, Defendants and Respondents. SHINN INDUSTRIES, INC., a corporation, Shinn Engineering, Inc., and Clifford L. Shinn, Plaintiffs and Respondents, v. Robert M. SWAFFIELD, Defendant and Appellant. Civ. 32642.
• Court: California Court of Appeals Court of Appeals

Page 680

76 Cal.Rptr. 680

271 Cal.App.2d 147

Robert M. SWAFFIELD, Plaintiff and Appellant, v. UNIVERSAL ECSCO CORPORATION, a Delaware corporation, Shinn Industries, Inc., a Delaware corporation, and Clifford L. Shinn, Defendants and Respondents.

SHINN INDUSTRIES, INC., a corporation, Shinn Engineering, Inc., and Clifford L. Shinn, Plaintiffs and Respondents, v. Robert M. SWAFFIELD, Defendant and Appellant.

Civ. 32642.

Court of Appeal, Second District, Division 1, California.

March 27, 1969.

Rehearing Denied April 22, 1969.

Hearing Denied May 21, 1969.

Samuel Maidman, Palm Springs, for plaintiff and appellant and defendant and appellant.

Donald C. Smaltz, Grossman, Smaltz, Graven & Perry (Keatinge & Sterling, Los Angeles, on brief), for respondents.

FOURT, Justice.

Robert M. Swaffield appeals from a summary judgment granted to defendants Universal Ecsco Corporation (hereinafter sometimes called Ecsco), Shinn Industries, Inc. (hereinafter sometimes called Industries) and Clifford L. Shinn in an action by Swaffield to cancel a promissory note; from a second summary judgment granted to defendant Ecsco in an action for wrongful termination of Swaffield's employment; and from a third summary judgment granted to defendants Industries and Shinn in a libel action. Swaffield further purports to appeal from orders of the trial court in two other actions: (1) an order granting plaintiffs Shinn Engineering (hereinafter sometimes called Engineering), Industries and Shinn a partial summary judgment in their action against Swaffield for breach of warranty, negligence, breach of fiduciary relationship and fraudulent misrepresentation; and (2) an order granting a partial summary judgment to Ecsco in a separate action instituted by Ecsco against Swaffield on similar grounds.

The five actions hereinabove referred to were, on motion, consolidated for trial prior to Swaffield's appeals. Each arises out of a transaction in which Engineering and Ecsco, and the shareholders of each, in order to obtain public financing, mutually agreed to the formation of Industries as a non-operating holding company to which the stock of both Ecsco and Engineering should be transferred in exchange for the receipt by their respective shareholders of a proportionate amount of the shares of Industries. It was contemplated that Industries should thereafter register its securities with the Securities and Exchange Commission (hereinafter sometimes called the S.E.C.) for public sale. The pertinent facts preliminary to the transaction and the general circumstances relating to the merger and the events subsequent thereto are disclosed by the pleadings and affidavits of the parties.

In early 1958 Swaffield and Stanley W. Stanick, not a party to this appeal, became the sole partners in Ecsco, a partnership which they organized to engage in business as an engineering consultant firm. Early in 1959 Ecsco was awarded contracts by the United States Post Office for the furnishing and installation of mechanized mailflow systems. Ecsco thereafter engaged primarily in the design, building and installation of integrated electrical and mechanical semi-automatic control process and handling systems for use by governmental and private industrial organizations. Substantially all of Ecsco's business consisted of contracts to provide integrated control systems for the handling and distribution of mail within certain United States Post Office areas.

The Ecsco partners apparently became aware, in the course of performance of their post office contracts, that they could not generate sufficient working capital through internal sources. As a consequence, Swaffield and Stanick during late 1959 and early 1960 approached various underwriters and eventually contacted Myron A. Lomasney & Co. (hereinafter sometimes called Lomasney) in regard to public financing. Lomasney expressed interest and suggested that as a preliminary matter Ecsco should employ a national firm of accountants to prepare certified statements of the company's financial position. Ecsco accordingly obtained the services of Ernst & Ernst, certified public accountants, to perform an audit. Thereafter, and on or about April 17, 1960, Ecsco was incorporated; the corporation acquired all of the assets and assumed all of the liabilities of the partnership; Swaffield and Stanick became the owners of all of Ecsco's issued and outstanding shares of common stock.

Meanwhile Engineering, a corporation engaged primarily in the performance of fixed price subcontracts for the fabrication of aircraft and missile components which it obtained from prime government contractors on the basis of competitive bids, also contacted Lomasney for the purpose of obtaining public financing. Lomasney concluded upon its review of the circumstances and suggested to each of the companies that it would be advantageous for Ecsco to combine with Engineering for underwriting purposes. Accordingly, negotiations were commenced which finally culminated in the approval and acceptance by both companies of a letter of intent written by Lomasney on or about November 10, 1960, outlining the terms for the consolidation of the companies under the ownership of Industries in anticipation of the registration of Industries' securities with the S.E.C. for a proposed public offering. The companies in essence agreed that they should merge and go public. In the course of the negotiations Ecsco had an audit prepared for the four month period from the date of its incorporation in April to August 31, 1960, and each company made certain representations and warranties to the other in regard to their respective business and financial statements. Thereafter, on or about November 14, 1960, Industries was incorporated and subsequently acquired through an exchange of stock, made upon the basis of a written agreement incorporating the various representations and warranties of the parties, all of the capital stock of Engineering and Ecsco. Shinn became a director and president of the newly formed holding company. On or about November 28, 1960, following Industries' acquisition of Ecsco, Stanick became vice-president and a director and Swaffield became chairman of the board of Industries. The new executives of Industries continued to hold the respective offices in Engineering and Ecsco which they occupied prior to the merger. Shortly thereafter, Industries pursuant to agreement filed with the S.E.C. its original registration statement. Amendments thereto followed and finally, during March 1961, the securities of Industries were offered for sale to the public pursuant to its prospectus and public purchases of its securities were consummated.

In June 1961 Shinn, as president of Industries, became concerned over the apparent inaccuracy of cash flow projections and the excessive financial requirements of Ecsco, and he requested that Ernst & Ernst reaudit Ecsco's financial condition as of August 31, 1960. The Ernst & Ernst reaudit, completed in August 1961, revealed both an overstatement of inventory and an understatement of losses accrued by Ecsco as of August 31, 1960. The result was an overall inflation of the assets reported on the original financial statements prepared by Ernst & Ernst for Ecsco the year before. In September 1961 Industries disclosed this asset deficiency to the S.E.C., which agreed that it would neither issue a stop order nor suspend trading in Industries' stock if Ernst & Ernst would certify that the assets of Ecsco were now the same in total amount as they would have been had the value of its assets been as represented on Industries' registration statement already on file. Accordingly, Industries made a demand upon Swaffield and Stanick that each assume personal liability for a proportionate share of the total deficiency of approximately $372,137 to satisfy the condition imposed by the S.E.C., and on December 28, 1961, each executed to Ecsco a promissory note in the amount of $186,068.68. As a condition imposed by Ernst & Ernst, each note was secured by shares of Industries stock adequate in value to justify certification, as required by the S.E.C., that the deficit had been eliminated.

The relations between the parties deteriorated rapidly thereafter. Early in January 1962 Shinn sent to Josiah M. Scott, who was a director and substantial stockholder as well as a principal financial backer of the combined companies, a letter which detailed Shinn's dissatisfaction with Swaffield and his reputedly fraudulent manipulations of Ecsco's financial statements, and which further solicited Scott's support in terminating Swaffield's employment as an officer of Industries and Ecsco. Shinn therein stated his belief that Swaffield was responsible for falsification of the books and records of Ecsco and that his position as president should be terminated for the good of the combined companies. In February 1962 the Industries' board of directors revoked Swaffield's proxy to vote Ecsco's shares and thereafter Shinn, appointed as the new proxy holder, removed all the former directors of Ecsco and elected a new board which promptly terminated Swaffield's position as president of Ecsco.

After the termination of his employment as president of Ecsco, Swaffield filed the several actions with which we are herein concerned and in which he appears as plaintiff. On or about May 9, 1962, he filed No. 795670 against Ecsco, Industries and Shinn for cancellation of the promissory note he made to Ecsco on or about December 28, 1961, and the return of the collateral security. On or about May 16, 1962, he filed in Orange County an action, which was in July 1962 transferred to Los Angeles County as No. 800,729, against Shinn and Industries for damages for libel based upon the letter written by Shinn to Scott. On or about May 28, 1962, he filed action No. 796,974 against Ecsco for termination of his employment as president.

Thereafter, on or about August 31, 1962, action No....