Teltronics Services, Inc. v. Anaconda-Ericsson, Inc.

• Decision Date: 11 May 1984
• Docket Number: No. 83 CV 1401 (ERN).,83 CV 1401 (ERN).
• Citation: 587 F. Supp. 724
• Parties: TELTRONICS SERVICES, INC. and Edward M. Beagan, Plaintiffs, v. ANACONDA-ERICSSON, INC., L.M. Ericsson Telephone Company, and Ericsson Telecomm, Inc., Defendants.
• Court: U.S. District Court — Eastern District of New York

587 F. Supp. 724

TELTRONICS SERVICES, INC. and Edward M. Beagan, Plaintiffs, v. ANACONDA-ERICSSON, INC., L.M. Ericsson Telephone Company, and Ericsson Telecomm, Inc., Defendants.

No. 83 CV 1401 (ERN).

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

May 11, 1984.

COPYRIGHT MATERIAL OMITTED

Carl E. Person, Walter Reid, New York City, for plaintiffs.

Sullivan & Cromwell by Robert M. Osgood, Robinson B. Lacy, New York City and Richard G. Lyon, Greenwich, Conn., for defendants.

MEMORANDUM AND ORDER

NEAHER, District Judge.

From plaintiffs' 59-page, 131-paragraph complaint, defendants have isolated 23 separate claims which they contend entitle them to summary judgment by reason of defenses of res judicata, lack of standing, statute of limitations, or failure to state a claim upon which relief may be granted.

Plaintiff Edward M. Beagan is the president and founder of Teltronics, which was adjudicated a bankrupt in April 1980. In brief, he alleges an ongoing conspiracy, giving rise to various theories of liability, among and between the defendants to drive Teltronics out of business.

In January 1982 two of the defendants, L.M. Ericsson-U.S. (LMU) and L.M. Ericsson Telecomm, Inc. (LMB), merged into defendant Anaconda-Ericsson, Inc. Prior thereto LMU had distributed telephone equipment manufactured by L.M. Ericsson (LME), a Swedish corporation, to United States customers through distributors. Until March 1979, Teltronics was one of these distributors, engaged in marketing, installing, and servicing the equipment. The allegations of plaintiffs' complaint depict a scenario in which stealth, greed, and treachery motivated defendants to dominate and take over the United States market for a class of telephone equipment.

In the mid-1970's Teltronics was a prosperous distributor of "interconnect" telephone equipment. In this same period, LME's American subsidiary acquired independent distributors in Boston, Philadelphia, and Florida for relatively modest amounts. Allegedly the subsidiary also targeted Teltronics as a matter of economic survival because, in 1978, Teltronics represented two-thirds of its interconnect business and thus an excellent vehicle for marketing a new line of updated equipment.

According to plaintiffs, the "takeover", orchestrated by LME in Sweden, followed a pattern. To ensure adequate financing for the purchase of LMU's equipment, LMU guaranteed Teltronics' loans with Nordic American Banking Corp. (Nordic), its affiliated bank, and Citibank. Under the loan agreement, Teltronics purchased a specified dollar amount of equipment in exchange for the loan guarantees. It also gave LMU a security interest in subsequent leases of the equipment, which leases eventually became Teltronics' largest asset. If Teltronics failed to buy the specified amount of equipment, which was always larger than the amount of the loan guarantee, Nordic could accelerate the repayment schedule. Plaintiffs assert that this "tie-in" arrangement allowed LMU to charge them 15% more for equipment than the New England distributor paid.

The significance of the arrangement lies in a business decision made by Beagan. In 1978 he moved Teltronics into direct competition with the New England distributor. At about the same time, Beagan was negotiating with Gerald Tsai, who sought to purchase 20% of Teltronics' stock. Plaintiffs claim that defendants mobilized to thwart Tsai's interference because they believed that he represented a competing Japanese manufacturer. They also wanted Teltronics out of New England. Thus, they simultaneously continued to guarantee financing but refused to supply a "support letter", which apparently insured customer service and was vital to making the sale. Teltronics would not succumb, and by October 1978, after fending off Loral Corporation's attempted tender offer for Teltronics, defendants responded. They demanded that the guaranteed loans not be used in New England and stalled new loans, representing that these activities would end as soon as Teltronics withdrew from New England. The request to withdraw emanated directly from the parent corporation in Sweden.

Having failed to coerce Teltronics into submission, defendants then altered their course and sought to buy a controlling interest in the company. The negotiations were fruitful, and from the complaint, it is difficult to discern why the transaction never materialized and why plaintiffs reason that defendants chose to involuntarily bankrupt Teltronics rather than pay for the stock. The ensuing events may have related to Beagan's opposition to withdrawing from New England.

Negotiations continued through February 1979, at the end of which Teltronics owed Nordic an interest payment of approximately $230,000. On February 26, 1979 defendants informed Nordic that if Teltronics did not pay the interest the bank should charge their account. They deposited $250,000 for this purpose. Additionally, defendants agreed to a moratorium on Teltronics' principal and interest payments through March 31, 1979 in order to conclude financing negotiations, which included a proposed convertible bond issue of $25,000,000. On the basis of defendants' representations, Teltronics failed to make the interest payment. It also needed the cash on hand to continue purchasing equipment because defendants would only do business on a C.O.D. basis. The new terms were intended as a reaction to Teltronics' refusal to leave New England.

The acceleration clause proved Teltronics' undoing, however, when on or about February 28, 1979 defendants' attorneys, members of the firm of Sullivan & Cromwell, allegedly told Nordic not to credit Teltronics' account with the interest payment because defendants wanted a default. The expected default materialized, and the attorneys acted quickly to cut off Teltronics from alternate sources of money. As soon as defendants honored the loan guarantees, amounting to over $8,000,000, they moved to attach the equipment leases and issued a press release on the default. The price of Teltronics' stock plummeted, causing the Securities and Exchange Commission to suspend its trading. Instantly, Teltronics also lost $6,000,000 in signed contracts, owed $2,000,000 in accounts payable, and lost the rents from 2,300 leases in escrow. The bank that handled the payroll offset $1,000,000 in deposits against loans after learning of the attachment proceeding, which eventually was not successful. Additionally, Teltronics' creditors assembled and placed the company in bankruptcy, which ultimately resulted in the bankruptcy court declaring Teltronics a bankrupt on April 12, 1980. Plaintiffs add that the plot continues to the date of their complaint, April 12, 1983, because defendants have repeatedly interfered with Beagan's personal business dealings.

As one might expect, Teltronics did not wait until 1983 to seek recompense for defendants' alleged misdeeds. On March 8, 1979 Teltronics sued LME, LMB, and Nordic in the Southern District of New York. The four-count complaint alleged in: Count I, a securities law violation arising from alleged illegalities in negotiations whereby the instant defendants had offered to buy 30% of Teltronics' stock; Count II, a conspiracy effectuated by the above-described activities to compel the Teltronics Board of Directors to accept the offer; Count III, a nonspecific catch-all treble damage action under the antitrust laws; and Count IV, a demand for attorney's fees. Judge Lasker denied a motion for a preliminary injunction intended to bar defendants from interfering in Teltronics' business. On May 14, 1979, Judge Knapp entered the following order:

"In this action, plaintiff Teltronics Services, Inc. ("Teltronics") seeks damages for what it claims were violations of federal and state securities and anti-trust laws. Named as defendants are the L.M. Ericsson Telephone Co., L.M. Ericsson Telecommunications, Inc. ("the Ericsson defendants") and the Nordic American Banking Corporation ("Nordic"). Defendants now move to dismiss the complaint for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. After hearing oral argument on the record, we now grant defendants' motion under Rule 12(b)(6), Fed.R.Civ.P.

"The essential allegations of the complaint, as we understand it, are (1) that the Ericsson defendants proposed to purchase some 30% of Teltronics stock without filing notice of their intentions with the Securities and Exchange Commission; (2) that such filing was required by an unspecified section of the federal securities law; (3) that Teltronics, offended by this illegality and seeking a higher purchase price, rejected the Ericsson defendants' proposal; and (4) that defendants then embarked upon a course of conduct designed to coerce Teltronics into selling its stock without the required filing. The Ericsson defendants' principal weapon in this course of conduct was a state court action they commenced to recover from Teltronics some five million dollars that they had paid to Nordic as guarantors of loans upon which Teltronics had defaulted. In addition, the Ericsson defendants slowed down or stopped shipments of telephonic equipment that they had been making to Teltronics. Through these and `various unnamed means and various other tactics' (complaint ¶ 45), defendants also sought to eliminate Teltronics as a competitor of the Ericsson defendants in the Boston area.

"Accepting as true all of plaintiff's factual allegations, we are unable to find any provision of the securities acts requiring a filing in the situation above described, or anything that would render defendants liable in damages for their pleaded actions.

"We accordingly grant defendants' motions to dismiss the complaint for failure to state a claim. The Clerk is directed to enter judgment dismissing the complaint."

In a footnote, Judge Knapp added:

"In its memorandum in opposition to this motion, plaintiff invoked Section 14(a) of

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