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ALCO STD. CORP. v. BENALAL

June 7, 1972

ALCO STANDARD CORPORATION
v.
Samuel F. BENALAL et al.


Masterson, District Judge.


The opinion of the court was delivered by: MASTERSON

MASTERSON, District Judge.

 This is a classic case of complex corporate dealings in which the parties suddenly find themselves embroiled in a major lawsuit which none of them specifically contemplated while formulating any of the agreements.

 The chronology of important events (which we have distilled from plaintiff's affidavit) begins in November, 1970 when Samuel F. Benalal, a defendant, visited a booth maintained by the Jackson Products Company, a manufacturer of commercial dishwashers and sub-subsidiary of Alco Standard Corporation (ALCO) at the National Hotel Exposition in New York City. On that occasion, Mr. Benalal spoke with Alan Levin of the Jackson Products Company concerning Mr. Benalal's business activities in Spain and the possibility that ALCO might wish to invest in these enterprises.

 Along with his two brothers, Abraham and Ariano, as well as the Investment Holding Fund, a Panamanian corporation, which was itself wholly owned by the three brothers, Samuel F. Benalal owned all of the stock in five Spanish operating companies (Spanish companies) which manufactured various kinds of kitchen and laundry equipment. Specifically, the three Benalal brothers owned 50% of the stock in these five firms while the Investment Holding Fund owned the other 50%. Shortly thereafter, Samuel F. Benalal sent a letter to John T. Vaughan, President of Vaughan Industries, a division of ALCO and the parent of Jackson Products Company, inquiring about "the possibility of incorporating his Spanish companies into the ALCO Standard Corporation."

 Mr. Vaughan decided to pursue this potential deal and met personally with Mr. Benalal on February 22, 1971 in Tampa, Florida, the home of Jackson Products Company. At that meeting, Mr. Benalal explained the business of the five Spanish corporations and gave Mr. Vaughan 1969 financial reports for each of them. Mr. Vaughan then asked Mr. Benalal for the 1970 financial reports, but the latter explained that these reports were not yet available but would be forwarded as soon as they were completed.

 On March 6, 1971, Mr. Benalal advised Mr. Vaughan that the financial statements for the year ending December 31, 1970 were still not ready, but he did enclose balance sheets for the companies as of September 30, 1970. These balance sheets were signed by Mr. Benalal as President. Then, in late April, Mr. Vaughan traveled to Spain and visited various operations of the Benalal companies in that Country.

 On May 12, 1961, Mr. Benalal sent Mr. Vaughan a consolidated balance sheet for all of the Spanish Companies as of December 31, 1970. This document was also signed by Mr. Benalal as President.

 The possibility of an acquisition by ALCO of some interest in the Benalals' Spanish Companies increased when, on May 24 and 25, 1971, Mr. Tinkhum Veale, Chairman of the Board of ALCO, and Mr. Vaughan held further discussions with Samuel F. Benalal in Chicago. Three days later, Mr. Vaughan sent a letter to Mr. Benalal which expressed the intention of ALCO to enter into a transaction with the Benalals involving the acquisition by ALCO of a 50% interest in the five Spanish Companies in exchange for 76,000 shares of ALCO common stock worth approximately $1,600,000 plus certain financing and guarantees to the Spanish Companies totaling $2,500,000. This letter of intent was immediately accepted by the three Benalal brothers, the Investment Holding Fund, and the five Spanish Companies. Samuel F. Benalal signed for all of these parties.

 Appended to the "Stock Agreement" was a certification signed by Samuel F. Benalal as "Chief Financial Officer of the [Spanish] Corporations" which stated that:

 
"The attached unaudited [consolidated] balance sheets of the corporations as of December 31, 1970 and March 31, 1971 and the related unaudited statements of profit and loss . . . have been prepared from the books and records of said corporations . . . and in my opinion, present fairly their financial position at such dates . . . in accordance with generally accepted accounting principles . . ."

 In addition, the "Stock Agreement" itself expressly provided under the sub title "Representations and Warranties of the Transferors" that:

 
"Transferors have furnished ALCO with the Corporations financial statements [which] are correct and complete, have been prepared in accordance with generally accepted accounting principles consistently applied, and fairly present the financial position of the Corporation on the dates indicated . . ."

 The actual closing took place on July 23, 1971.

 In August, 1971 ALCO arranged for the European accounting firm of Whinney, Murray, Ernst & Ernst, the European affiliate of the American accounting firm of Ernst & Ernst, to conduct an audit of the five Spanish Companies. Apparently, this was the first independent audit of these enterprises that ALCO had arranged. ALCO alleges that from late August until early December, the auditors were unable to complete a report because of inadequate records of the Spanish Companies. As time went on, ALCO became increasingly concerned. This concern turned into alarm when, so it is alleged, Ernst & Ernst confirmed that contrary to Mr. Benalal's representations, the Spanish Companies were previously audited by Price, Waterhouse & Co., but Mr. Benalal had refused to accept their draft opinion.

 On January 13, 1972, ALCO finally received a draft opinion of the financial status of the Spanish Companies for the period ending August 31, 1971. But Ernst & Ernst was still unable to certify these statements. On the basis of this opinion, however, ALCO concluded that it had been misled by the various financial representations made by the Transferors in connection with the acquisition. Basically, ALCO believed that profits and assets were materially overstated while important liabilities were not disclosed. Accordingly, this action was commenced on January 21, 1972 against 11 defendants: Samuel F., Abraham and Ariano Benalal, the Investment Holding Fund, "Pansub" and "Spansub," and the five Spanish Companies; Zocentro, S.A., Zondassa, S.A., Becasa, S.A., Zobalsa, S.C., and Gasalelec, S.A. ALCO seeks (1) rescission of the contract, i.e., recovery of its 76,000 shares of common stock in return for its 50% interest in the Spanish Companies; (2) damages of $1,000,000 representing loans of $500,000 in cash and $500,000 in bank guarantees to "Pansub" which were extended between August 27, 1971 and October 19, 1971; and (3) cancellation of its future contractual obligation to provide "Pansub" with additional loans not to exceed $500,000 and additional bank guarantees not to exceed $1,000,000.

 Plaintiff premises entitlement to such relief upon two separate theories. First, ALCO alleges that the defendants made material misleading statements in connection with the sale of a security, thereby violating Section 10(b) *fn1" of the Securities Exchange Act of 1934, as amended (15 U.S.C. § 78j(b) and Rule 10b-5 *fn2" of the Securities Exchange Commission (17 C.F.R. § 240-160-5). Secondly, ALCO contends that the defendants violated Pennsylvania common law by making false representations and warranties in the Stock Agreement. Jurisdiction over these two causes of action is predicated upon Section 27 of the Securities Exchange Act of 1934, as amended (15 U.S.C. § 78aa) and 28 U.S.C. § 1332(a)(2) (Diversity of Citizenship) respectively. We agree that jurisdiction exists over the subject matter of this suit on the basis of these statutes.

 Defendants, through their attorney, have filed a motion to dismiss on the basis that: (1) under the terms of the Stock Agreement and an Indemnity and Escrow Agreement which was executed a month later on the date of closing, plaintiff is committed to submit all of the claims contained in its complaint to arbitration; (2) this court lacks personal jurisdiction over each of the defendants; (3) a cause of action has not been stated against "Pansub," "Spansub" or any of the five Spanish Companies since it is not alleged that they committed any fraud or made any material misrepresentations in connection with the acquisition; and (4) the plaintiffs are guilty of laches because of undue delay in bringing an action. Alternatively, the defendants move for a more definite statement claiming that the complaint is so vague or ambiguous in certain areas that they cannot reasonably be expected to frame an intelligent answer.

 For the reasons developed below, we conclude that defendants' motion to dismiss must be denied in its entirety. We also believe that a more definite statement is not needed in order for the defendants to answer the complaint, rather the details of the allegations are more appropriately reserved for the discovery process. *

 I. ARBITRATION

 At the closing on July 23, 1971, an Indemnity and Escrow Agreement was entered into between Samuel F. Benalal (denominated "The Shareholder") and ALCO. In substance, this Agreement provided that (1) Samuel F. Benalal would place 38,000 shares (1/2 of the total) in escrow until December 31, 1974; and (2) "the Shareholder agrees to indemnify ALCO from and against all damages defined in paragraph 1(c) hereof and agree [sic] that the escrow fund ...


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