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CRANDALL v. CONOLE

June 25, 1964

L. Stanley CRANDALL, Plaintiff,
v.
Clement V. CONOLE, Charles E. Anable, Richard C. Conole, Bridwell W. Lincoln, William J. Callahan, Alva M. Meyers, Defendants



The opinion of the court was delivered by: CLARY

This is an action by L. Stanley Crandall, plaintiff (hereinafter called 'Crandall'), against Clement V. Conole (hereinafter called 'C. V. Conole'), Charles E. Anable (hereinafter called 'Anable'), Richard C. Conole (hereinafter called 'R. C. Conole'), Bridwell W. Lincoln (hereinafter called 'Lincoln'), William J. Callahan (hereinafter called 'Callahan'), and Alva M. Meyers (hereinafter called 'Meyers'), defendants. Crandall and C. V. Conole each own 300,000 shares, each comprising 50%, of the outstanding shares of common stock (total issued 600,000 shares) of Business Supplies Corporation of America (hereinafter called 'BSC'), a corporation organized and existing under the laws of the Commonwealth of Massachusetts. The remaining five defendants are Officers and Directors but not stockholders of BSC.

The case is presently before this Court for disposition of the following motions: (1) Plaintiff's motion for preliminary injunction (Docket Paper #3), including the amendment to said motion (Docket Paper #16); (2) Plaintiff's motion to hold defendants in civil contempt (Docket Paper #9); (3) Defendants' motion for preliminary disposition of motion for dissolution of temporary restraining order and to dismiss complaint (Docket Paper #7); (4) Defendants' motion for dissolution of temporary restraining order and to dismiss complaint (Docket Paper #8); (5) Defendants' amended motion for dissolution of temporary restraining order and to dismiss complaint (Docket Paper #13). Extensive hearings were held covering many trial days, briefs and requests for findings of fact and conclusions of law have been submitted (Docket Papers #17, #18 and #19), and argument has been had thereon, at the conclusion of which the Court took the matter under advisement.

 As the case unfolded, it became increasingly clear to the Court that an extra-judicial adjustment of the differences between the parties would be the most sensible solution of the entire controversy and advantageous to all concerned. Several times during the course of the hearings, the Court urged counsel to attempt to effectuate such an adjustment, to which end, a series of conferences took place between respective counsel, and the plaintiff and C. V. Conole individually, without counsel. These conferences began during the hearings and continued long after they had ended, but the parties failed to reach an accord. At this point, the writer of this Opinion met with counsel and then, for the first and only time since he has been on the bench, met briefly with each of the two principals separately and without counsel, and finally with the principals and counsel. While possible solutions were discussed, and despite the strong urging of the Judge to settle, without specifying how, it became evident that an amicable solution could not be attained. Therefore, the Court will proceed to dispose of the matter.

 1. MOTION FOR PRELIMINARY INJUNCTION AND RELATED MOTIONS

 Crandall, in 1956, was the National Sales Manager of the Data Processing Supplies Division of International Business Machine Corporation (hereinafter called 'IBM'), at which time he aided officers and counsel for that company in the preparation of a proposed Consent Decree in an antitrust suit by the Government. By the terms of said Consent Decree, IBM was to encourage new competitors in the data processing card field. Crandall, seizing the opportunity to enter a theretofore virtually closed field, obtained not only the permission of IBM to leave and engage in this field, but the testimony indicates that he was advised so to do. He left IBM and teamed up with C. V. Conole, who had had a widely varied and successful business career. C. V. Conole was to furnish the administrative ability, Crandall the 'know-how', and they sought outside financing which was obtained from people by the name of Leidesdorf. The Leidesdorfs very shortly became disenchanted with the venture, which resulted in litigation lasting five years. It ended in 1962 in a settlement by which the Leidesdorfs, from a relatively small investment, realized over $ 1,000,000.00 in settlement. This left Crandall and C. V. Conole in complete ownership of the Company on a 50% Basis.

 Since Crandall left IBM in 1956, and up to the present, he and C. V. Conole have collaborated on many ventures and have built a really substantial business enterprise. During this period they have purchased or incorporated eleven companies, some of which have been dissolved (Exhibit C-10). The necessity for a discussion of the ramifications of the dealings between the two in the interim period has been eliminated because the defendants herein insist that this proceeding be limited strictly to the granting or refusing of a preliminary, not a final, injunction.

 It is interesting to note that from 1956 up to the present, with the exception of the brief period above referred to when the Leidesdorfs were involved, during all of the related transactions, one very significant thing remained constant, viz., Crandall and C. V. Conole always owned equal one-half interests in the corporations with equal voting power.

 In 1962, Crandall became a full-time employee of BSC, successor of Whiting Paper Company, a Massachusetts corporation, purchased in 1959. This company was incorporated in 1872 and has had a long and distinguished record in the stationery field. Crandall, with full trust and confidence in the arrangement he had with C. V. Conole, entrusted the full management and operation of the business to C. V. Conole. He permitted C. V. Conole to name all of the Directors, except himself. C. V. Conole named all of the Officers and hired the key personnel, always, of course, with consultation and agreement with Crandall. In other words, C. V. Conole ran the operation, fully acquiesced in by Crandall.

 However, it began to appear early in 1963 that C. V. Conole was planning to make this a family empire. He had earlier placed his son, R. C. Conole, in the position of President of the Company, although his son is now only 27 years of age, and for a position of this importance, has very limited business or technical training. His brother-in-law, Charles E. Anable, another defendant, is a Vice-President and Director of the Company. In related companies, a son-in-law and his brother are managing officers, but are not involved in this proceeding. When C. V. Conole tried to make his son Chief Executive Officer in February, 1963, the proposal was voted down by the Board.

 The Company, because of its rapid success beyond any reasonable expectations (sales for 1962 and 1963 totaled in excess of $ 20,000,000.00), has been hampered by lack of cash working capital. In order to operate, the Company received extensive credit from its chief suppliers and obtained a loan of approximately $ 1,000,000.00 from the Chase Manhattan Bank (hereinafter called 'Bank'). As part of the agreement for the loan with the Bank, Crandall and C. V. Conole, as stockholders, voted to amend the Articles of Incorporation to increase the authorized common stock of the Corporation to $ 1,200,000 shares, to be issued by the Board when, at its discretion, it was deemed advisable (Exhibit C-17-I). Of the authorized shares, Crandall and C. V. Conole each received 300,000 shares. The remaining 600,000 shares were intended to be offered publicly to bring in not less than $ 2,000,000.00 to pay off principal creditors and the Bank loan, the balance to remain as working capital. A prospectus was prepared but the issue was never consummated because of a sharp decline in the stock market, as well as BSC becoming involved in litigation with IBM, and difficulties which arose from an Internal Revenue Service investigation. The prospectus contained no mention of proposed stock options. On August 27, 1963, provision for the public offering was deleted from the loan agreement, after which Crandall asked C. V. Conole to agree to cancel the remaining outstanding authorized issue in order that the 50% Arrangement continue. C. V. Conole refused.

 Following this refusal, Crandall held various meetings with defendants, Meyers, Lincoln and Callahan, as well as William E. Speers, Jr. (hereinafter called 'Speers'), and Charles J. Molloy, Esq. (hereinafter called 'Molloy'), Directors but not defendants. He informed them of his concern about the management and financial condition of the Company and invited their assistance in his forthcoming effort to thwart C. V. Conole's apparent attempt to convert BSC from a jointly held Corporation to a family empire. Crandall was concerned, and properly so, about the Internal Revenue examination. The details thereof are fully set forth in the record and would be important on final hearing, but not at this preliminary stage. It is sufficient to note that if the proposed action by the Internal Revenue Agent is taken, millions of dollars previously charged off as expense, will be placed in income, with a resulting tax liability running into the millions of dollars not only against the Corporation but also against Crandall and C. V. Conole and their respective spouses personally.

 Crandall and C. V. Conole were also personal guarantors on a note for $ 1,000,000.00 to the Bank, said note being security for the above related loan. Although the Bank and principal creditors knew of the existence of the Internal Revenue claim, they did not know the amount. When Crandall became aware of this, he took it upon himself to inform them of the amount in question and that he was trying to obtain a greater voice in the operation of the Corporation.

 These acts were immediately seized upon by C. V. Conole as acts of treachery which required prompt action purportedly for the benefit of the Corporation. Crandall's entreaties to the five Directors named above were only partially successful in that just two of the five, Speers and Molloy, agreed to aid him. C. V. Conole controlled and dominated the votes of a majority of the Board of Directors (the other defendants herein), either through familial loyalties or by virtue of the fact that these individuals owed their positions to him. C. V. Conole used this domination devastatingly. The record indicates that the defendants, when the opportunity arose, could and did act swiftly to eliminate Crandall and his adherents as officers of the Company, thereby effectively stifling any voice Crandall might have had in the day to day operations of the business.

 In a series of meetings in late December, 1963, and January, 1964, Crandall's proposals that he have a greater voice in the activities of the Company were voted down. Speers and Molloy were discharged from their positions in the Company; Crandall was removed as Chairman of the Executive Committee; and a Finance Committee, composed of C. V. Conole, R. C. Conole and Callahan, was set up for the purpose of issuing stock options. Viewed in this context, it is obvious to the Court, and it so finds, that the last mentioned action was the first step in C. V. Conole's ultimate plan to reduce Crandall to the role of a minority stockholder. The Court, at this preliminary stage, expresses no opinion as to the legality of the actions by the Board concerning the removal of Speers, Molloy and Crandall.

 During this same period, the Conoles, one or the other, accused Crandall of certain tortious conduct, i.e., that he was acting against the best interests of the Company, as well as certain criminal activity which will not be related here.

 One further incident of great significance occurred at this time. In late December of 1963 or early January of 1964 (the exact date is uncertain), C. V. Conole drew up and his son executed, on behalf of the Corporation, an employment contract between C. V. Conole and the Company (Exhibit D-55). C. V. Conole and R. C. Conole both testified that in preparing this contract, they used the form of contract which the Corporation had with William Whiting (Exhibit D-12) when the Whiting interests were purchased in 1959, i.e., that C. V. Conole's contract was merely a revision of the Whiting contract, the only other existing employment contract with the Company. However, a comparison of the two contracts shows startling differences. Whiting was paid a salary of $ 12,000.00 for five years. C. V. Conole's contract provided for payments from $ 50,000.00 to $ 95,000.00 a year, plus expenses, over a ten-year period, without requiring him to work regularly in the executive offices of the Company, and an acceleration clause making the whole sum ($ 725,000.00) due and payable in the event that the Corporation should be declared insolvent or bankrupt (voluntarily or involuntarily), or if a receiver were appointed or agreed to, or even if the monthly agreed salary should not be paid as it fell due. It is evident that a pre-arranged default could make this obligation secure to C. V. Conole. This contract smacks of malfeasance on the part of both Conoles, and a flagrant abuse of their respective offices could readily be found on final hearing based on the present record, but at this early stage, the Court will express no opinion on the matter.

 The present action stems from the notice of a Board meeting set for February 10, 1964 at Bryn Mawr, Pennsylvania, at 10 A.M. Notice of this meeting was mailed to Crandall on the previous Friday; February 10, being a Monday. It was delivered at his place of residence in Connecticut, after the institution of this litigation, and after a Restraining Order had been entered. The issuance of the notice in this manner was clearly a deliberate attempt to keep Crandall from knowing what was about to occur until after the fact. The attempt failed, however, because Speers and Molloy, who live nearby, received their notices on Saturday, and promptly contacted Crandall in Connecticut, who came to Philadelphia with his personal counsel from New York, and over the weekend prepared the complaint filed in this case.

 The purpose of the meeting, as set forth in the notice (Exhibit A of the Complaint), was to read and approve, subject to corrections, the Minutes of a special meeting of the Board held on December 21, 1963, and the Minutes of the regular Board meeting held on January 28, 1964 at Bryn Mawr, Pennsylvania; to approve and ratify all prior acts of the Board of Directors; to amend the By-Laws to provide for the removal of a Director for cause, after notice and hearing by fellow Directors; to authorize the Finance Committee of the Corporation to execute employment contracts with key executives and/or ratify and approve all existing employment contracts; to authorize the Finance Committee of the Corporation to extend restricted stock options to no more than ten key executives, the total value not to exceed $ 200,000.00, such funds to be used for the ordinary purposes of the business and/or to expand the business of the Corporation.

 The Complaint in this action (Docket Paper #1) was filed in this Court on Monday morning, February 10, 1964, along with a Motion for a Temporary Restraining Order (Docket Paper #2), and a Motion for a Temporary Injunction (Docket Paper #3). A Temporary Restraining Order was issued in this Court at approximately 8:52 A.M. of the same day, but due to inclement weather conditions, the United States Marshal, accompanied by Crandall and his counsel, did not reach the scene of the meeting until approximately 10:15 A.M., at which time the agenda had reached only the approval or disapproval of minutes of previously held meetings of the Board of Directors. None of the matters restrained had yet been reached on the agenda. As found by the Court in the Criminal contempt proceedings (M. #2666), each of the named defendants in this action was properly served and informed of the fact of the Order of the Court by the Marshal. Furthermore, Crandall, during the course of the meeting, read all of the Restraining Order to the Directors. Despite this, C. V. Conole and the other defendants, over the opposing votes of Crandall, Speers and Molloy, passed the very resolutions they were restrained from acting upon. The defendants herein have been found guilty of criminal contempt and have been fined. That phase of the case is now on appeal to the Court of Appeals.

 At the outset, we are met with the question of jurisdiction and venue. Jurisdiction is based on diversity of citizenship and the amount in controversy under Title 28 U.S.C.A. 1332. Clearly, this is an action between citizens of different States and the requisite jurisdictional amount is present in that the property right which is being injured is a one-half interest in a Corporation having annual sales in excess of $ 20,000,000.00; Shering Corporation v. Sun Ray Drug Co., 320 F.2d 72, 75 (3 Cir. 1963). All the defendants were personally served in this District and the acts sought to be enjoined occurred here. Therefore, this Court has jurisdiction over the parties as well as the subject matter of this suit.

 The Court also finds that venue is properly laid in this District, as provided by Title 28 U.S.C.A. 139 § 2(a); Sheppard v. Atlantic States Gas Co., 167 F.2d 841 (3 Cir. 1948); DeGeorge v. Mandata Poultry Co., 196 F.Supp. 192 (E.D.Pa.1961). This is so because all of the defendants reside in Pennsylvania. The two Conoles, Callahan, Lincoln and Anable are residents of the Middle District of Pennsylvania. The defendants have alleged that Anable does not reside in the Middle District of Pennsylvania, but his testimony is clear, and the Court finds, that he was and is a resident of Sky Top, Pennsylvania, in the Middle District, for the purposes of venue. The evidence clearly establishes that Meyers is a resident of this District. Actually, the same may be said about C. V. Conole, since at the time the action was instituted, he was residing in an apartment in Bryn Mawr, Pennsylvania, in this District. Regardless of that fact, however, the action could have been brought in either the Eastern or Middle District of Pennsylvania, and, therefore, is properly before the Court.

 The question then arises -- Should this Court decline to exercise the jurisdiction it possesses in that this case relates to the internal affairs of a foreign Corporation? Generally, Pennsylvania courts of equity decline to take jurisdiction over cases such as this, but this rule, being discretionary, is flexible, and depends on the facts of each case and Pennsylvania courts have acted in some instances; Cunliffe v. Consumers Ass'n of America, 280 Pa. 263, 272, 273, 124 A. 501, 32 A.L.R. 1348 (1924); Evans v. R. W. Evans & Co., 284 Pa. 126, 128, 130 A. 313 (1925); Wettengel v. Robinson, 288 Pa. 362, 368-370, 136 A. 673 (1927); Conerty v. Butler County Oil Refining Co., 301 Pa. 417, 420, 152 ...


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