Unit, Inc. v. Kentucky Fried Chicken Corp.

• Decision Date: 02 March 1973
• Citation: 304 A.2d 320
• Parties: UNIT, INC., a Texas corporation, Plaintiff, v. KENTUCKY FRIED CHICKEN CORPORATION, a Delaware corporation, and John Y. Brown, Jr., Defendants.
• Court: Delaware Superior Court

Page 320

304 A.2d 320

UNIT, INC., a Texas corporation, Plaintiff, v. KENTUCKY FRIED CHICKEN CORPORATION, a Delaware corporation and John Y. Brown, Jr., Defendants.

Superior Court of Delaware, New Castle County.

March 2, 1973.

Andrew G. T. Moore, II, Joseph A. Calvarese, Jr., and J. R. Julian, of Killoran & Van Brunt, Wilmington, for plaintiff; William L. Blum, of Dinsmore, Shohl, Coates & Deupree, Cincinnati, Ohio, and Marvin Lewis, Dallas, Tex., of counsel.

Richard J. Abrams, of Richards, Layton & Finger, Wilmington, and Donald H. Balleisen, Robert Van Young, and Robert F. Matthews, of Greenbaum, Grissom, Doll, Matthews & Boone, Louisville, Ky., for defendants.

OPINION ON CROSS MOTIONS FOR SUMMARY JUDGMENT

QUILLEN, Judge:

The issues presently before the Court involve cross motions for summary judgment under Civil Rule 56. The facts as to defendants' Kentucky Fried Chicken Corporation and John Y. Brown, Jr. motion for summary judgment, stated in the light most favorable to the non-moving party, are as follows. Unit is a Texas corporation involved in the acquisition, planning, financing, construction, ownership and management of commercial real estate. Unit had its first contact with the defendant Kentucky Fried Chicken Corporation (KFC), a Delaware corporation, on or about June 5, 1969, at which time Thomas Herrington, a Unit Vice-President, and Peter B. Curlin, KFC's Vice-President for corporate development, met to discuss the proposed development of a motel and restaurant complex to be operated for KFC in Lexington, Kentucky. As the groundwork for this possible undertaking progressed, the discussions between the two corporations expanded into consideration of forming a joint venture for the planning, location, financing and construction of KFC's future building needs in the food and motel fields. This was considered as early as September 25, 1969.

A meeting was held to discuss this possible joint venture in the offices of KFC in Louisville, Kentucky, on October 15, 1969. The meeting was attended by Mr. Brown (the President of KFC), Mr. Curlin and others on behalf of KFC, and Mr. Morris (President and Chief Executive Officer of Unit), and Mr. Herrington on behalf of Unit. At this meeting, it is alleged that a joint venture was entered into between KFC and Unit for the purpose of building, owning and leasing back to KFC all future 'Fast Food Stores' to be constructed or acquired by KFC. It is further contended by the plaintiff that Mr. Brown, on behalf of KFC, offered Unit 50% Of the stock in a corporation through which the joint venture would operate. Finally, all of the terms and conditions of the proposed joint venture were allegedly agreed upon. These included the above mentioned 50% Of the stock; the guarantee of any leases by KFC; the payment of a 2% Fee above the lease for KFC's guarantee; and an agreed rental formula for said leases. Finally, a letter signed by Mr. Curlin of KFC, dated October 15, 1969, and personally delivered to Mr. Herrington in Louisville Kentucky, allegedly confirmed the agreements reached.

The next step in the series of transactions was a telephone call on or about October 21, 1969 from Mr. Curlin of KFC to Mr. Herrington of Unit involving a discussion whereby Unit was to arrange for the sale of KFC property and to lease back certain of KFC's existing holdings for a sum in excess of twenty million dollars with all of the excess to be payable to the KFC-Unit Joint Venture. This arrangement was allegedly not within the scope of the original joint venture, but was an expansion of the original agreement. In response to this arrangement, Mr. Herrington personally obtained a letter dated October 30, 1969 and signed by Mr. Curlin. This letter was personally delivered in Louisville, Kentucky.

Unit, as a result of the alleged agreements, employed a Cincinnati, Ohio law firm to draft the necessary documents to give corporate form to the joint venture. William Blum, Esquire drafted the necessary documents and forwarded such to Mr. Curlin at his request.

From October 21, 1969 to November 11, 1969, Mr. Morris proceeded to discuss means by which KFC could effect a sale and lease back of its existing properties with various representatives of institutional investors and investment banking firms. It is alleged that KFC fully understood that Unit was seeking the proposed financing from investment bankers and KFC specifically encouraged Unit to do so.

During this period, Mr. Morris contacted the investment banking firm of Loeb-Rhoades and Company. A meeting was held on or about October 29, 1969 which was attended by Robert Barbanell, Joseph Lesser, Steven Weinroth (all of Loeb-Rhoades), Maurice J. Cohn, Esquire (attorney for Unit) and Mr. Morris. Loeb-Rhoades requested some financial data of KFC at this meeting, which was provided on November 4, 1969 after an initial refusal. It is alleged that the letter containing the refusal was a device to 'cover' KFC in case it should be brought under scrutiny by the SEC for providing information prohibited by the SEC Rules. However, the important point is that KFC allegedly provided financial date to Loeb-Rhodes; the data included confidential information; and the purpose of such release was to shop KFC stock.

Between November 4, 1969 and December 9, 1969, Mr. Curlin conferred with representatives of Loeb-Rhoades in New York and a meeting was arranged at KFC offices in Louisville, Kentucky for December 5, 1969, at which Loeb-Rhoades representatives were to be present. No indication was given by KFC at any time that it did not want to deal with investment bankers. However, at the termination of this meeting of December 5, 1969, Mr. Brown informed Mr. Morris that he did not wish to deal with investment bankers since KFC had already made plans for a private placement with its investment banker (Lehman Bros.), and therefore was terminating the joint venture agreement. KFC, nevertheless, continued its contact with Loeb-Rhoades and continued to release financial information to it.

Finally, Unit alleges that it expended $50,000.00 in connection with the joint venture arrangement and that it was deprived of the $5,000,000.00 profit the joint venture would have received as a result of the sale of KFC properties for $25,000,000.00. This sale allegedly would have been completed except for KFC's termination letter of December 11, 1969 since Unit contends that it had received a firm commitment from Loeb-Rhoades for this sum and that interim financing was also available.

Unit brought a suit asserting the following three causes of action:

(1) A claim for violation of § 17 of the Securities Act of 1933 (15 U.S.C. § 77q); § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j); and Rule 10b--5 (17 C.F.R. 240, 10b--5) promulgated thereunder (2) An allegation of breach of contract; and

(3) A claim for common law fraud.

KFC denied all the allegations in the complaint; and, in addition, filed a counterclaim alleging that plaintiff knew, or should have know, that the allegations of the complaint relating to violations of the Federal Securities Acts were false and that plaintiff knew, or should have known, that only a purchaser or seller can obtain relief under those Acts and plaintiff was neither. The counterclaim also alleged that plaintiff knew that KFC was about to merge with Heublein, Inc. and that the action was brought no embarrass defendants (KFC and Brown) and for no other purpose. Each defendant therefore requested $10,000.00 actual damage and $5,000,000.00 punitive damages for abuse of process and interference with advantageous relations.

Plaintiff's first cause of action is to the effect that the representations made by the defendants inducing Unit to form a joint venture and to agree to sell KFC's real property were fraudulent in that the defendants never intended to fulfill the agreement with Unit or to accept the proffered financing. The defendants allegedly made such proposals and representations solely to induce Unit to seek financing from New York investment bankers for the purpose of 'shopping' KFC and its stock among investment bankers in order to improve the market price of its stock and to arouse interest in a proposed public issue. The plaintiff contends that these alleged activities were fraudulent and constituted violations of Rule 10b--5 of the Securities and Exchange Commission (17 CFR 240.10b--5) and Section 17 of the Securities Act of 1933 (15 U.S.C. § 77q).

In regard to this first cause of action it should be noted that Rule 10--5 was promulgated pursuant to Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j). It should also be noted that all actions brought under Section 10(b) of the Securities Exchange Act of 1934 are in the exclusive jurisdiction of the United States District Courts (15 U.S.C. § 78aa). Therefore, this Court lacks subject matter jurisdiction of any cause of action brought under Rule 10b--5.

However, the Court does have subject matter jurisdiction of violations of Section 17(a) of the Securities Act of 1933, as provided by 15 U.S.C. § 77v. Thus, for this Court to be able to grant relief, plaintiff must being itself within the requirements of Section 17(a).

Section 17(a) provides:

(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly--

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. (15 U.S.C. § 77q)

The first...