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January 25, 1968

OLD COLONY TRUST COMPANY, United Ventures, Inc., and Gabriel Powers, Plaintiffs,
PENROSE INDUSTRIES CORPORATION, Wm. Penn Broadcasting Company, Redevelopment Authority of the City of Philadelphia, William H. Sylk, Harry S. Sylk, Jonas Senter, Selma Katz, Sammuel Rosenblum, Simon Rosenblum, Leon J. Obermayer, Conservator, and Walter E. Heller & Co., Inc., Defendants, and the Borden Company, Intervenor Defendant

The opinion of the court was delivered by: VAN DUSEN


 This case concerns a sale of collateral under Article 9 of the Uniform Commercial Code. It is now before the court after a non-jury trial on the issues raised in Count II of the Complaint: an action seeking a declaratory judgment *fn1" that the plaintiffs' sale of collateral was "commercially reasonable" and otherwise lawful.

 History of the Case

 The Complaint was filed June 1, 1967, by certain secured parties in this commercial transaction and the trustee holding the above mentioned collateral. The named defendants included various other secured parties, allegedly junior in lien, the debtor, and its subsidiary. Also named as a party defendant was Leon J. Obermayer, who was appointed Conservator by this court with respect to certain assets of the debtor on May 11, 1965, in Civil Action No. 37995. Attached to the Complaint was a contract for sale of the collateral held by the plaintiffs, the common stock of a radio station (the debtor's wholly-owned subsidiary), which contract had been signed May 26, 1967. Count I of the Complaint sought preliminary injunctive relief to enable plaintiffs to consummate the sales contract. After a hearing on June 7, 1967, a preliminary injunction was granted by order of June 8, 1967, and modified after a further hearing June 13, 1967. These orders, declaring that defaults had occurred under the various agreements outlined below, enjoined the debtor or its officers from various acts which would alter the value of the collateral and required their cooperation in providing financial and other information as covenanted in the various security or pledge agreements (Documents 5 and 8). A third hearing was held June 21 on whether to require cooperation of the debtor and its subsidiary with the plaintiffs in their application to the F.C.C. for change in control of the radio station. *fn2" As had been discussed in the previous hearings, the court also stated its willingness to receive any other firm offers for the collateral radio station stock at this hearing to be used as evidence in deciding the issues under Count II. One such offer by David Milgram and Associates was followed by their motion to intervene as plaintiffs (Document 17 of June 26). After argument and briefing on the issue of what status such offers should have in this case, the court on July 10, 1967, denied the motion to intervene (Document 28), but gave Milgram leave to present argument amicus curiae at the end of the trial on Count II. This decision has been affirmed by the United States Court of Appeals for the Third Circuit, 387 F.2d 939 (January 9, 1968). Inherent in this order was the conclusion by the court that such offers were relevant in this case only as evidence in the determination of "commercial reasonableness" under Count II. A fourth hearing on July 19, 1967, resolved the issue of a possible jury trial and scheduled the trial to the Court for August 23, 1967. The actual trial took 13 days and produced 2027 pages of testimony and over 100 exhibits.


 A. Facts

 Penrose Industries Corporation ("Penrose") is indebted to the plaintiffs, United Ventures, Inc. ("United") and Gabriel Powers ("Powers"). United holds certain "senior notes" currently being $740,000. principal amount of 5 1/2% interest-bearing notes. Powers also holds certain notes ("Powers Notes"), being $1,000,000. principal amount. As security for these notes, Penrose pledged on August 20, 1960 and August 21, 1962, respectively, the entire capital stock of its wholly-owned subsidiary, William Penn Broadcasting Company ("WPEN"). The plaintiff, Old Colony Trust Company ("Old Colony"), is acting as trustee for United and Powers under the "Senior Stock Pledge" agreement with United and the "Powers Stock Pledge" agreement with Powers.

 Defendants William and Harry Sylk ("Sylks") are the chief officers of WPEN and Penrose and effectively control them both. On January 31, 1962, WPEN issued a debenture ("the debenture") to the Sylks, "acting for themselves and others as their respective interests appear." This debenture was then pledged on August 21, 1962 to United and Powers as additional collateral to secure the debt Penrose owed the plaintiffs (the "Senior Debenture Pledge" agreement and "Powers Debenture Pledge" agreement, respectively). Since December 1, 1964, Penrose has been in default under all these agreements as determined in the findings, and order of June 8, 1967 (Document 5) and as more fully shown at trial. Although the Powers Notes provided for no interest for the first five years, this was waived by Penrose on July 13, 1966 (P-79), when it agreed to pay Powers his interest from December 1, 1964, at 6% per annum as consideration for Powers not fully enforcing his rights under the original note purchase agreement with Penrose (dated July 1, 1962), which would have required the immediate sale of the WPEN stock in December 1964 (par. 1B of P-77). Accordingly, United and Powers, as the two most senior secured parties, seek payment from the collateral of $1,740,000. principal amount of indebtedness, plus interest owed, plus the reasonable expenses and attorneys' fees incurred by them and the trustee, Old Colony, in efforts to realize on this collateral.

 Since December 2, 1964, there is no question that Penrose, the Sylks, and the other secured parties junior to United and Powers have had ample notice that first two secured parties wanted to sell the collateral. *fn3" Powers was also informally in touch with the Sylks throughout the period since December 1964 and for purposes of such communication, the Sylks were both principal officers of the debtor Penrose and junior secured parties as well.

 For various reasons, however, the secured parties have been unable to negotiate a contract of sale for the WPEN stock until now. To begin with, the Sylks have generally been opposed to any sale, WPEN being perhaps the most valuable remaining asset of Penrose (see N.T. 6/7/67- 60-66). Since May 11, 1965, a Conservator has been attempting to realize the maximum amount from certain assets of Penrose in a capacity similar to that of a common law receiver (Civil Action No. 37995) and has made known his claim to this asset. During this period, WPEN has perhaps been Penrose's most valuable asset and pays the Sylks both a generous salary and rents as a landlord, which one appraiser found to be comparatively high (P-14). WPEN has apparently also been useful during the Penrose insolvency as a guarantor for certain Penrose obligations. *fn4" Both before and after the Conservator was appointed, having the stock of a radio station as collateral was apparently quite useful for Penrose and the Sylks. F.C.C. regulations prevented the secured parties from controlling the station even though they had the stock [ 47 U.S.C. ยง 310(b); see, e.g., Lorain Journal Company v. F.C.C., 122 U.S.App.D.C. 127, 351 F.2d 824 (1965), cert. den. 383 U.S. 967, 86 S. Ct. 1272, 16 L. Ed. 2d 308 (1966)], and with the stock held by a trustee, junior interests could be created, slotted, or rearranged to provide flexible collateral for many situations. It appears from the testimony and many exhibits that the group of secured parties below United and Powers included the Philadelphia Redevelopment Authority, Walter E. Heller & Co., Inc. ("Heller"), Jonas Senter ("Senter"), and the Sylks in a complex of priorities that need not be determined in this decision, but one which shows an additional reason the Sylks wanted any sale delayed if possible.

 Against this background of a conservatorship claiming an interest in the collateral and opposition from those who had effective control of the "collateral" radio station, the plaintiffs had to attempt a sale if they were ever to secure repayment of the amounts owed them. After the default notices of December 2, 1964 (P-10), Old Colony and Powers demanded, without success, (P-11, December 11, 1964) that the Sylks honor their agreement of July 1, 1962 (P-78) wherein they had promised personally to purchase the stock of WPEN for $3,500,000. in the event of default.

 The plaintiff's next step was to secure a competent appraisal of the value of the WPEN stock. In January 1965 they employed Mr. Harvey of Blackburn and Company, an experienced and highly reputable "media broker" who had made approximately 200 to 250 appraisals in his career. *fn5" He valued the stock at $5 million.

 At a meeting in late December 1964, the Sylks and others agreed to form "Quaker Broadcasting Company" ("Quaker") and purchase the collateral from Penrose for themselves (P-87). Powers who attended the meeting was asked to get Old Colony to delay their efforts toward making any sale. This he did (P-17). On advice from his lawyer in February, however, Powers insisted that the sale be made through Old Colony since there was danger that the Quaker-Penrose deal was not "at arms length" (P-87, P-21) (N.T. 930ff.). The negotiations between Old Colony and Quaker were apparently temporarily fruitless due to the problems facing the Sylks with Penrose creditors and the conservatorship of May 11, 1965 (P-39). The deal had reached the draft stage, however, in April (P-21, P-22, P-23).

 During the summer of 1965, interest in the stock was shown by two mid-west groups and a Cincinnati broker in particular. Despite active efforts by Powers to encourage these offers, *fn6" the fact that stock only (and not assets) was for sale, plus financing problems, soon ended these offers (P-27, P-28, P-30, P-29, P-33).

 The alternative of public bidding, or at least bidding by invitation to a limited group, had been considered at the outset in December 1964. The experienced advice of Mr. Harvey was that negotiated sales would bring a higher price given the unique nature of broadcasting properties. *fn7" In the fall of 1965, however, all active interest in WPEN having waned, the plaintiffs and their counsel again considered the possibility of sale by a limited public offering (DS-15, P-15, P-42, DS-10, DS-11.) This idea was discarded again, however, due to the S.E.C. and other legal problems (P-59, DS-11) and apparently due to a new round of parties interested in a negotiated deal. Powers received one $2 million offer (N.T. 794) and United's counsel was actively negotiating with a party in Philadelphia. *fn8" Quaker apparently also revived its interest at this time (P-46), although Powers was sure any Quaker offer would again prove fruitless (DS-15).

 In December, Martin W. Field ("Field") and the plaintiffs entered active negotiations and by January 1966 had virtually concluded a deal. The plaintiffs had both formally and informally investigated Field's ability to pay for the stock and were satisfied he could perform his obligations under the contemplated contract of sale. The transaction bogged down, however, when the Sylks threatened to cause a default under the WPEN debenture *fn9" (DS-23) and the plaintiffs decided that they had to sell both the stock and the debenture together. At this point, the Fields withdrew from negotiations (P-56). During this period, the Sylks continued to press their revived Quaker offer (P-50) but, by the analysis of Old Colony's counsel made in Feb., 1966, their offer did not appear as valuable as the Field offer (P-54). Whether or not the comparison was correct, and it appears that it was substantially accurate, the trustee had to be concerned with the Sylks' involvement with Quaker. Such a sale was potentially one not at arm's length, and with the underlying insolvency of Penrose, Old Colony might be liable to suit by Penrose's creditors and others. Moreover, once Field withdrew, the Quaker offer was not pressed again. As Powers testified (N.T. 982-83), every time the plaintiffs got active on a sale, the Sylks also would get active. This pattern has continued to date.

 During 1966, "tight money" apparently made buyers even less willing (N.T. 989-990). The Sylks and the other principal in Penrose, Jonas Senter, tried to get Powers to delay again *fn10" while they made some new financial arrangements involving the WPEN collateral *fn11" and the structure of Penrose. *fn12" At the end of the year, Powers tried to revive the Field interest (N.T. 1059 ff.) and a limited public sale was again mentioned (P-59).

 In late January 1967, the plaintiffs received a second show of interest from Field (P-61, DS-16). They began active negotiations immediately, asked Mr. Harvey to up-date his appraisal (DS-13, P-71), and over the period of three months finally hammered out a contract of sale for both the stock and debenture of WPEN. The ability of Field to consummate such a deal financially was again investigated and found satisfactory by the plaintiffs and their agents. *fn13" The contract was signed May 26, 1967, and by notice of that date, the debtor was further given until June 7, 1967, to redeem the stock (P-82); all other parties were given additional notice of a sale to take place the same date (P-72). During the February to May 1967 negotiations, the Sylks came forward in April 1967 with another offer, one from "Welcome Radio," for the purchase of WPEN's assets. Although the offer was never put into concrete or final form during the time of these Field negotiations, "Welcome" was apparently also willing to buy stock. During May 1967, the Sylks were not given a copy of the Field contract they sought to use as a model for a "Welcome" offer because the principals would not authorize Old Colony's lawyer to distribute a copy. It was not shown that this failure either caused "Welcome" to withdraw or prevented their making a firm offer for the stock. Rather, it showed the plaintiffs' concern for not allowing the Field negotiations to be undermined, since they were finally close to a sale after over two years of fruitless efforts.

 The Field Contract, as finally signed, is a complicated document in detail, yet relatively simple in concept. Since the sale was non-consensual as far as the Sylks, and hence Penrose and WPEN, were concerned, it was impossible for Old Colony, Powers or United to make or obtain any of the warranties that normally accompany such a sale of stock. *fn14" Furthermore, since the plaintiffs had not been given adequate information of the financial condition of WPEN, provision had to be made for what might turn up which would increase or decrease the value of the station, and the stock, materially. *fn15" Several items on the WPEN balance sheets listed as assets were advances to the insolvent parent, Penrose. Their probable value was negligible. Similarly, certain liabilities of the corporation looked as if they could be reduced or eliminated if subjected to an "arm's length" test or renegotiation. *fn16" To deal with these and similar unknowns, and to allow the purchase price to be adjusted for the changes in WPEN occurring between the most recently available certified financial statements of January 31, 1966, and the closing, the Field contract of sale provided for adjustments and escrows. To facilitate an adjustment for net worth changes, the contract defines certain categories of "deductible assets," and "deductible liabilities." *fn17" By using these definitions in the contract, net worth, as described by the contract, can be computed by the accountants named in the contract: Peat, Marwick, Mitchell & Co. A second adjustment was provided which would allow commutation of leases should they prove unreasonable or differ from "fair value." *fn18"

 Two escrows were also provided in the contract. The first again had its own contract definitions-"rejectable assets and rejectable liabilities"-and was computed tentatively by the accountants. The second escrow, for "undisclosed liabilities," was a $300,000. escrow to be disbursed at $100,000. a year if such liabilities do not appear. In this fashion, both buyer and seller have protected themselves against the unknowns in this "warrantless" situation. Although defendants have argued that all these provisions in the contract will aid the buyer, it should be noted, for instance, that to the extent "deductible assets" are actually collected in the future, the buyer must pay the sums over the seller. Similarly, if WPEN makes profits since January 31, 1967, these two will increase the buyer's price.

 Under this contract, simple in concept but difficult to compute under the various definitions, the accountants have prepared a preliminary pre-closing audit based on figures as of January 31, 1967 (DS-6). This gives an accurate idea of what the buyer, Field, is paying for the stock, although, of course, such information may well be subject to some change before the post-closing audit since the Sylks control the operations of the radio station. The purchase price that the plaintiffs will receive under the Field contract is as follows:

(1) $5,000,000. for the fair value of the assets as of their appraisal based on audited statements of January 31, 1965; ...

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