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REICH v. VEGEX

October 27, 1942

REICH et al.
v.
VEGEX, Inc.



The opinion of the court was delivered by: WELSH

In this action the plaintiffs seek specific performance of an alleged oral contract under which the plaintiffs and defendant were to join in the establishment and operation of a plant for drying and debittering brewers' yeast for human consumption. The plaintiffs claim damages for breach of the contract by the defendant, measured by the loss of prospective profits, or in the alternative, the value of their services on a quantum meruit. After presentation of their proofs, plaintiffs moved to amend the complaint to conform to the testimony, and the defendant moved for the dismissal of the bill of complaint on the pleadings and the evidence. Defendant withdrew its objections to the amendments and argument was had only upon the motion to dismiss the bill. The matter is therefore before the Court upon the question of the sufficiency of the ex parte evidence to establish the plaintiffs' claim.

The evidence consists of the testimony of the plaintiffs and their counsel, and certain documents, letters and forms of agreement pertaining to the joint venture. No written agreement was ever adopted and executed by the parties. In substance the plaintiffs' evidence establishes the following matters:

 In 1939 the plaintiff Ganellin, having made a survey of the yeast business throughout the country, proposed to Allen, president of the defendant company, a plan for drying and debittering yeast at low cost, and stated that he was looking for an associate to provide funds necessary for the establishment of a plant. In May, 1940, he again discussed the proposal with Mr. Allen and Mr. Timmer, vice president of the defendant, at which time the general proposal and estimated cost were discussed. A conference was also had in June, 1940 in which Allen stated that he was authorized by his company to negotiate an agreement, and Ganellin further outlined his proposal. At that point the proposal contemplated that a separate corporation be organized for the manufacture and sale of dried and debittered yeast and that the defendant should get its own yeast supply from the new company at cost plus a royalty payable to Ganellin. The royalty was to be 2( per pound on at least 1,000 pounds per day for the first year and on 2,000 pounds per day in the second year of operation. It was intended that all of the money necessary to establish the business would be advanced by the defendant and repaid out of profits, and it was also understood that Ganellin would seek a location, source of yeast supply, and necessary machinery, and that he would supervise the new business when established.

 On July 10, 1940, Allen and Timmer, officers of the defendant, come to Philadelphia with the plaintiff Ganellin by train. At the station they were met by the plaintiff Reich who had been described by Ganellin as an expert on the drying and debittering of yeast. The party visited a brewery where they examined and approved the proposed yeast supply. They then inspected a plant that had been selected by the plaintiffs as a place of operation and which met with the approval of the defendant's officers. At a luncheon meeting following these inspections, the plaintiffs state that Allen and Timmer agreed to having Reich join in the enterprise and to his receiving 25% of the stock of the proposed corporation and 2( per pound royalty on the minimum yeast requirements of the defendant, and to a like share and royalty to Ganellin. Defendant was to own the remaining 50% interest. The amount required to establish the business was stated to be about $25,000, an inactive corporation subsidiary of the defendant would be used as the operating company, and it was agreed that Reich should be in charge of the operations and assist Ganellin in sales promotion. Plaintiffs testified that after the meal and discussion, Allen declared "It is agreeable, it is a deal." "I am glad we arrived at an agreement. Now do your best and you will get my full cooperation." "I will make a transcript of the terms of the agreement we have arrived at so that there may be no misunderstanding."

 Plaintiffs' description of the alleged agreement was partly corroborated by Timmer who acknowledged the understanding that a separate corporation would be set up for the new venture, the name of the defendant's inactive subsidiary might be used, Ganellin and Reich were to have an interest therein, and 2( per pound royalty would be paid to each of the plaintiffs. Mr. Allen also on cross examination confirmed the fact that use of the defendant's inactive subsidiary, and Ganellin's desire for 50% interest were discussed, and that defendant was willing to pay 4( per pound royalties.

 Following the luncheon meeting, Allen on July 15 prepared and submitted to the plaintiffs an initialed memorandum which begins: "One of the important things in the matter of yeast drying in Philadelphia is a basis of arrangement between Mr. M. C. Ganellin, Mr. J. S. Reich and Vegex, Incorporated. The following suggestions were made for Mr. Ganellin and Mr. Reich to work on and perfect" followed by certain specifications with regard to the directors of the proposed corporation, execution of a lease, quantity and sale of yeast to be produced and ending with the sentence, "The point is to work out what everybody will consider to start with is a fair thing so that we can go into it with teamwork."

 Plaintiffs declare that the memorandum did not constitute a transcript of the oral agreement arrived at on July 10, 1940, and was at variance with the understanding of the parties. They complained to Allen of the inadequacy of the memorandum but were lulled into a sense of security by his assurance that he would prepare a proper agreement and also by Timmer's statement that they could rely upon Allen to perform his obligations.

 The testimony indicates that following the luncheon meeting, the plaintiffs arranged for the leasing of a plant and negotiated with the brewery for the yeast supply. They also located machinery and equipment and attended to the installation, although the contract for the purchase of the yeast, the lease and all purchases were made by the defendant. Ganellin was in the defendant's New York office frequently and consulted with Allen and Timmer throughout the progress of the enterprise, while reich looked after the establishment of the plant. Allen and Timmer also came to Philadelphia on several occasions and cooperated with the plaintiffs in the project. During this period both plaintiffs worked toward the realization of the joint enterprise and the defendant expended $23,000 in the process. Many problems were presented and decided during this period although no mutual effort was ever made to set down in writing the complete understanding of the parties until November 1, 1940. During that time it was apparent that substantial differences existed between them. On September 20, 1940, the defendant wrote Reich acknowledging that he had been on the job of equipment installation for four weeks and tendering him compensation. The same day defendant wrote Ganellin suggesting continuation of their talks which Ganellin indicated had to do with the terms upon which the yeast venture was proceeding. Defendant again wrote Reich on September 27, 1940, concerning details and stating that "The next step is what relationship there may be with you and Mr. Ganellin since we have assumed the purchases of yeast, steam, electricity and employment, should be decided upon and soon" and suggesting a meeting. In the latter part of October Ganellin submitted an outline of a proposed new agreement with the view to resolving the differences between the parties, which outline states "As a compromise I (Ganellin) propose the following new agreement to supercede the original agreement" followed by a brief statement of the terms suggested and a descripion of the benefits of the derived. On October 28, 1940, the defendant wrote to the plaintiffs suggesting a conference and mentioning the fact that a majority of the defendant's directors had previously ratified the "tentative agreement" which had been the basis of their joint venture, and asking whether either of the parties had been in any trouble with the Internal Revenue Department.

 On November 1, 1940, the plaintiffs and Mr. Wernick, acting as friend of the plaintiffs rather than as counsel, met with Allen and Timmer at the office of the defendant corporation in New York. Morton, a director and counsel for the defendant corporation, was also present. The purpose of the conference was to adjust the differences existing between the parties with the view to entering into a written agreement. The relationship of the parties in the venture, their interests and all of the essential terms under which they proposed to operate were discussed and, according to the plaintiffs' version, were definitely agreed upon. At the close of the conference, it was understood that the defendant's officers would draft and submit an agreement embodying the oral understandings. Such draft was prepared by Morton and sent to the plaintiffs on November 6, 1940, with a letter in which Allen declared "I do hope that as few changes as possible will be suggested", and discussing in some detail several of the terms contained in the draft. On the same day Allen wrote to the plaintiff Reich stating that "With the agreement which was unanimously reached with you, Mr. Ganellin, Mr. Wernick, Mr. Morton, Mr. Timmer and myself present as to the 220,000 pounds there should be no reason that while the rest of the agreement is being worked out, you should not take charge of the plant."

 The plaintiffs, however, did not deem that the draft submitted conformed to the oral understanding reached in the conference on November 1, 1940, and a further meeting was held at Mr. Wernick's on November 16, 1940, at which time he acted as counsel for the plaintiffs. The meeting was attended by Ganellin, Reich, Allen and Timmer. With the Morton Draft before them, they proceeded to a discussion of the details of their arrangement and notations were made upon the draft of changes deemed essential. After several hours of conference, the plaintiffs declare that a definite oral agreement was reached on all essential tems and that all parties agreed that Mr. Wernick should set down in a written contract the terms adopted by the parties at that meeting. Before leaving, Mr. Allen directed Mr. Wernick to have the plaintiffs sign the draft and to send it to the defendant corporation for execution. Thereafter Mr. Wernick prepared an agreement, had it signed by the plaintiffs, and sent to the defendant on November 20, 1940. Allen acknowledged receipt of what he termed the "proposed agreement" and indicated an intention to "get together with the final terms of the contract to be submitted and formally ratified by the board of directors", and further suggesting the necessity of clearing up the matter of the acceptability of the personnel including the plaintiffs. On November 23, 1940, Allen wrote to the plaintiffs' counsel advising that as soon as Morton returned, "your draft of the contract will be turned over to him with a rather extensive and I hope, fair statement of facts since Mr. Ganellin contacted us. There are several open questions which we must get to and settle," This was followed by a letter from Morton to the plaintiffs' counsel declaring that this form of agreement expressed the understanding of the parties at the meeting of November 1, 1940, and protesting that the Wernick draft was distinctly at variance with the agreement reached at that meeting. Wernick replied on December 2, 1940, offering justification of his draft as a statement of the agreement entered into on November 16, 1940, and suggesting a further conference of the parties to adjust any differences which they believed might exist. On November 29, 1940, the defendant wrote to the plaintiffs suspending operations at the Philadelphia plant until a final definite agreement had been reached, and on December 10 again wrote plaintiffs that no final agreement had been reached and that the changes in the Wernick draft submitted were not acceptable. Mr. Wernick replied that he considered defendant's letter constituted an attempted breach of the oral contract. There was further correspondence but it appears that no agreement was ever consummated. Reich reported to and sought to perform services at the plant up until February 1, 1941, at which time he was denied access to the premises.

 An attempt was made to operate the plant in November but did not succeed because a drum cracked almost immediately. There was a long delay in replacing the part and the plant never did get into operation for the drying and debittering of yeast. It was finally sold by the defendant about a year later together with other assets at a valuation fixed by the defendant of $15,000.

 The defendant urges that these facts and circumstances describe only the negotiations between parties with the view to establishing a jointly owned business enterprise, and that they do not set forth a complete definite and fixed agreement ( Edgcomb v. Clough, 275 Pa. 90, 118 A. 610) such as would be required to entitle the plaintiffs to the redress claimed. In the testimony of Allen given on cross examination, he declared that only the high spots of the proposed relationshnip and business were discussed and that no definite agreement was reached. As to the luncheon conference, he said "We had a very wide discussion; we discussed the plan of getting together what Ganellin and I had talked about in New York * * *. We were not entering into anything. We were discussing the proposed terms of an agreement." He described his subsequent memorandum of July 15, 1940, as an effort to fence off the matters to be considered in the formation of an agreement, and confirms the plaintiffs' testimony as to the efforts made to reach a final agreement on November 1 and 16, 1940.


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