Zelman v. Cook

• Decision Date: 17 July 1985
• Docket Number: No. 83-2537-CIV.,83-2537-CIV.
• Citation: 616 F. Supp. 1121
• Parties: Jerry ZELMAN, Plaintiff, v. James R. COOK, R. Lawrence Dunworth and Rorer Group, Inc., Defendants.
• Court: U.S. District Court — Southern District of Florida

616 F. Supp. 1121

Jerry ZELMAN, Plaintiff, v. James R. COOK, R. Lawrence Dunworth and Rorer Group, Inc., Defendants.

No. 83-2537-CIV.

United States District Court, S.D. Florida.

July 17, 1985.

COPYRIGHT MATERIAL OMITTED

Richard Williams, Miami, Fla., for plaintiff.

Barry R. Davidson and Lewis F. Murphy, Miami, Fla., Raymond Cullen, Philadelphia, Pa., for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

KEHOE, District Judge.

Plaintiff Jerry Zelman ("Zelman"), a former shareholder of Cilco, Inc. ("Cilco") brought claims based on alleged violations of the Florida and federal securities laws, state common law, and the Florida Anti-Fencing Act against Defendants James R. Cook ("Cook") and R. Lawrence Dunworth ("Dunworth") who were also former shareholders, officers and directors of Cilco, and against Defendant Rorer Group, Inc. ("Rorer"), the present corporate parent of Cilco's merger partner.

The Plaintiff claimed that the individual defendants usurped the value of Cilco in two steps. First, Cook and Dunworth allegedly diverted without consideration, certain corporate assets from Cilco, i.e., regional exclusive distribution rights, to Tri-State Optical Company, Inc., ("Tri-State"), a corporation owned 50% each by Cook and Dunworth. Then, almost a year later Cook and Dunworth allegedly negotiated a triangular merger of Cilco, Tri-state and a subsidiary of Rorer for a total price of $35,000,000.00 for both entities, thereby receiving excessive value in exchange for their Tri-State shares, i.e. $12,000,000.00, which value allegedly should have been added to the $23,000,000.00 of Rorer stock exchanged for Cilco shares. Plaintiff claimed that Cook and Dunworth implemented the merger by seeking unanimous shareholder approval of the plan through fraud, economic duress and undue influence, and that Rorer aided and abetted in this alleged scheme to defraud Cilco's minority shareholders. The merger plan received full approval of all shareholders, including Zelman, and was subsequently consummated.

On April 18, 19, and 22, 1985, a non-jury trial was conducted. On April 26, this Court heard closing argument and subsequently found for the Defendants on all claims. The following paragraphs set forth the findings of fact and conclusions of law to support the judgment of this Court. Fed.R.Civ.P. 52(a).

FINDINGS OF FACT

1. Cilco is a Delaware corporation engaged in the distribution and sale of certain intraocular lens devices (hereinafter "IOLs") and is the successor to Intra-Lens and California Intra Lens Co. ("California Intraocular" or, collectively, "the Company"). Zelman and Tri-State, along with others, first bought stock in the Company in 1975. Tri-State subsequently sold its shares to Cook and Dunworth in 1977. At the time of the merger, Cook and Dunworth owned approximately 30.5% of the Company each, and Zelman owned 16%.

2. On January 31, 1976, both Southeast Intraocular Lens Distributors, Inc. (hereinafter "Southeast"), a corporation owned by Zelman, and Tri-State, owned by Cook and Dunworth, entered into five year regional distributorship agreements with the Company. These distributors purchased accounts receivables in their regions and provided an influx of capital into the Company by shifting certain burdens of cash flow from the Company. The distributorships developed the vigorous marketing and sales programs necessary to establish the Company in a very competitive marketplace. Distribution in the western region was performed by Cilco Western Sales ("Cilco Western") and later by Cilco Sales Corporation ("Cilco Sales") after it was formed as a solely owned subsidiary of Cilco. The Board of Directors and Officers of Cilco and Cilco Sales were the same and held contemporaneous meetings. The formation of Cilco Sales also provided certain preservation of capital advantages through tax deferral.

3. In May 1977, Southeast was $99,000.00 in arrears under its distribution agreement. Zelman proposed a payment plan to Cilco's Board of Directors to eliminate this debt, which the Cilco Board approved. Zelman and Cook both served as directors at this time. The Board also agreed with Zelman that once payment was made, Southeast would be reinstated as a distributor but that Tri-State would actually perform Southeast's distribution functions, i.e., invoicing shipping, inventory, telephone order taking, etc., from that point on with Zelman receiving three-fourths of Southeast's 40% commission in the retail sale price of the IOL's during the period of the five year agreement.

4. In July, 1978, Cilco Western was terminated for cause, and Cilco Sales took over the region. The Board of Directors, including Zelman, Dunworth and Cook then president of the Company, voted unanimously for the termination.

5. Cilco was a rapidly growing high tech company under the strict regulatory control of the Bureau of Medical Devices (BMD) of the Food and Drug Administration (FDA). Under the authority of statutory provisions for investigational device exemptions, FDA regulations required extensive clinical testing of IOLs by qualified opthalmalogists and the tracking of every lens manufactured and implanted. The distributors undertook the financial burden of hiring and training a sales force capable of ensuring compliance with FDA regulations. In this regard, Tri-State also purchased and leased to Cilco a computer programmed to meet compliance with FDA regulations.

6. Industry growth during this time period was rapid as new IOL styles were developed and marketed. Because Cilco was a new company in a fledgling highly regulated industry, Cook and Dunworth were required to personally guarantee all Cilco loans and lines of credit. These guarantees totalled in excess of $1 million on loans and credit lines obtained by Cilco to finance its expansion.

7. Convertible debentures were also sold to raise capital. While the debentures were offered to all shareholders on a pro rata basis, only four shareholders, including Cook, Dunworth and Zelman, purchased the convertible debentures when offered.

8. On September 15, 1979, Zelman was not reelected to the Cilco Board of Directors. At that time, Dunworth became Executive Vice President of Cilco. Cook and Dunworth retained their positions as officers and directors through the effective date of the merger.

9. On November 26, 1980, Cook notified Zelman by certified mail that Southeast's distribution agreement with Cilco would not be renewed after the expiration of its five year term in January, 1981, and it was not in fact renewed.

10. As of December, 1980, Tri-State's distribution contract was renewed. Under the renewed agreement, Tri-State continued its distribution functions in its original territory and additionally assumed such functions for a six state area formerly in the western region and for Southeast's territory. Tri-State paid $300,000.00 for the accounts receivable of the incremental six state area, thereby infusing needed capital into Cilco.

11. As of December, 1980, Tri-State had accounts receivables in the neighborhood of $1,000,000.00 which Cilco would have been obligated to purchase either in lump sum or overtime had it not been renewed. Tri-State and its sub-distributors had a strong sales force then in place and the capacity for rapid training and deployment of a large sales force into the newly acquired territory at a time when the Company was emphasizing market penetration and sales development. As of the time of the merger, Tri-State and its sub-distributors had hired, trained and placed in the field a substantial sales force.

12. Although Cook and Dunworth made all significant policy decisions and controlled the Cilco Board of Directors at this time and at all times thereafter, the renewal of Tri-State was in the best interest of Cilco and Cilco's shareholders. Tri-State was not renewed solely for the financial benefit of Cook and Dunworth.

13. Cook and Dunworth fully disclosed the potential conflicts of interests between themselves and entities they controlled which provided services, equipment or facilities to the Company and its operations to the Board of Directors and to the Company's shareholders.

14. In January or February, 1981, Zelman, individually and on behalf of Southeast, agreed to accept $153,914.70 in settlement of the accounts receivables due Southeast. On March 10, 1981, after consulting with his accountants, Zelman signed a general release as to "any and all causes of action" he or Southeast had at that time against "Cilco" and "Tri-State," and "their officers, directors, employees and agents, as representatives and personally ..." Zelman has received the full $153,914.70 in settlement and has not tendered its return. Zelman's decision to sign the release was completely voluntary and was made without coercion or duress or undue influence.

15. From 1976 through December, 1981, various entities expressed an interest in acquiring or merging with the Company and its distributors. In about June, 1980, Defendant Rorer began to express such an interest through its Vice President for Corporate Development, Arthur Rauch. However, discussions were terminated in early December, 1980. In April, 1981, representatives of Rorer, in particular Rauch, suggested the reopening of discussions which began in earnest in August, 1981.

16. Cook, Dunworth and their attorneys met with Rauch and other members of Rorer's management and its attorneys in Fort Washington, Pennsylvania on September 14 and 15, 1981 to negotiate a merger of Cilco and Tri-State into a to-be-formed subsidiary of Rorer. On October 8, 1981, Rorer, Cilco, Tri-State, Cook and Dunworth reached an agreement in principle, reduced to writing, but not executed by Cook and Dunworth, on the merger of Cilco and Tri-State into RGI New Company, a to-be-formed subsidiary of Rorer.

17. The obligation of Cilco and Tri-State to proceed was subject to unanimous approval of Cilco and Tri-State shareholders, while...