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ADELMAN v. CGS SCI. CORP.

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


August 26, 1971

Herbert ADELMAN
v.
CGS SCIENTIFIC CORPORATION et al.

Broderick, District Judge.

The opinion of the court was delivered by: BRODERICK

FINDINGS OF FACT CONCLUSIONS OF LAW AND ORDER (August 26, 1971)

BRODERICK, District Judge.

 This matter is before the Court to determine whether preliminary relief should issue pending a final determination of this case on the merits in connection with a civil action brought by plaintiff Herbert B. Adelman, who seeks rescission of an allegedly fraudulent contract of sale whereby the Crowell Corporation, of which he was a 20% owner, was sold to the Defendant CGS Scientific Corporation.

 After hearings on July 9, 19 and 20, 1971, on plaintiff's motion for a preliminary injunction and appointment of a receiver or custodian of the Crowell Division of CGS Scientific Corporation, the Court makes the following:

 FINDINGS OF FACT

 1. Plaintiff, Herbert B. Adelman (Adelman), is a citizen of and resides in the state of Delaware.

 2. The individual defendants Albert J. Feldman (Feldman), John H. Clarke (Clarke), Elliott L. Goldman (Goldman), Curtis J. Yamas (Yamas), Gerald J. Wood (Wood), and Raymond F. McHugh, Jr. (McHugh) are individuals residing in Pennsylvania. The defendant Reuben Wasserman (Wasserman), is an individual residing in Massachusetts. The defendant John W. Hurley (Hurley) is an individual residing in New York. The partnership defendant Arthur Andersen & Co. is a firm of certified public accountants with a place of business in Pennsylvania. The defendant CGS Scientific Corporation (CGS) is a Pennsylvania corporation with its principal place of business in Pennsylvania.

 3. Adelman, prior to September 10, 1969, was the owner of twenty percent of the stock of the Crowell Corporation (Crowell). He was also the President of Crowell at an annual salary of $26,000.

 4. The Crowell Corporation, now the Crowell Division of CGS Scientific Corporation, manufactured and continues to manufacture gummed tapes.

 5. In an arbitration proceeding on September 10, 1969, between Adelman and the owners of the eighty percent interest of Crowell, it was stipulated that the value of Crowell was $1,600,000. Adelman was given the right to purchase or to cause to be purchased the other eighty percent interest in Crowell for $1,280,000 within thirty days. If this right was not exercised within thirty days, Adelman's twenty percent stock interest in Crowell could be purchased within the following thirty-day period for $320,000 by either the holders of the eighty percent stock interest, the Crowell Corporation, or a third party.

 6. On October 8, 1969, Clarke was the President and Goldman was the Treasurer of CGS.

 7. During the preliminary discussions between CGS and Adelman for the sale of Crowell to CGS, which took place prior to October 8, 1969, it is highly probable that: (a) Adelman received through the mail from Clarke, as President of CGS, an unpublished internal interim financial report of CGS consisting of the balance sheet and income statement for the three-quarter period of 1969; (b) Adelman, his attorney and Goodman were shown the Annual Report of CGS for the fiscal year ending August 31, 1969; (c) these unpublished figures of the Annual Report then appeared as the year-end figures in the 1969 Statement of CGS audited by Arthur Andersen & Co.

 8. It is highly probable that plaintiff relied on representations as to the financial strength of CGS, its prospects for the future and the ability of CGS to raise the necessary cash to consummate the deal and that plaintiff at that time was also considering offers from other possible buyers of Crowell.

 9. On October 8, 1969, Adelman negotiated the sale of Crowell to CGS:

 (a) Pursuant to an agreement signed on October 8, 1969, between Adelman, and other stockholders of Crowell and CGS, CGS paid $1,280,000 in cash to the owners of the eighty percent stock interest of Crowell.

 (b) In a separate agreement of the same date, October 8, 1969, CGS purchased Adelman's twenty percent stock interest in Crowell for $100,000 cash, plus twenty-five thousand shares of CGS common stock with a par value of $0.20 per share, plus additional shares of CGS common stock to be issued in each year from 1970 through 1974 computed from a formula set forth in the agreement, which formula was based on the net earnings of Crowell, the fiscal year base income and the average price of CGS common stock. Also, Adelman was to be given additional shares of CGS common stock, not to exceed 4,000 shares, which would be necessary to make so many of the 25,000 shares issued at closing as were held on November 30, 1970, equal to the value such shares which were then held would have if the price of CGS common on November 30, 1970 were twenty dollars per share.

 10. At closing of the agreement mentioned in 9(b) above, Adelman, the President of Crowell, Goodman, the General Manager, and Donald Blevins (Blevins), the Production Foreman, executed employment agreements with CGS.

 11. No warranties were made in the agreement, signed October 8, 1969, by CGS to Adelman with respect to the financial statements or financial condition of CGS. Adelman, however, made numerous warranties and the agreement provides that "* * * there are no representations, warranties, understandings or agreements with respect to such transactions other than those expressly set forth herein * * *."

 12. The unpublished figures of the CGS annual report referred to in (7) above appeared as the year-end figures in the published 1969 Annual Report of CGS.

 (a) The financial statements contained in the 1969 Annual Report for the fiscal periods ending August 31, 1969 and August 31, 1968 (restated) were prepared by Arthur Andersen & Co.

 (b) Arthur Andersen & Co.'s report was dated October 3, 1969. (c) The financial statement of CGS for the year ending August 31, 1969, showed: 1969 1968 (Restated) Net Income $366,679.00 $161,558.00 Earnings Per Common Share 0.53 0.30

19710826

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