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August 9, 1976


The opinion of the court was delivered by: HUYETT



 This dispute arose, we have concluded after months of considering the legal and factual convolutions of this case, out of the frustration and need to assign fault engendered when an important business deal went sour. On June 4, 1973, after two and one-half months of negotiation, plaintiff Coleco Industries, Inc. (Coleco), a Connecticut manufacturer of recreational products, including toys, swimming pools, and swimming pool accessories, purchased Royal All-Aluminum Swimming Pool Corp. (Royal), a smaller New Jersey corporation specializing in the design, packaging, and distribution of above-ground aluminum pools. The purchase was effected by the transfer to Coleco of all shares of outstanding Royal capital stock by the five Royal stockholders -- Abe Berman, Royal's president, and Joseph Rubin, Royal's secretary-treasurer, both of whom managed Royal's daily operations, and Irvin, Lewis, and Frederick Cohen, brothers and outside shareholders. *fn1" Subsequent to the purchase date in June 1973, Royal's fortunes went quickly and steadily downhill and by 1975 Royal All-Aluminum Swimming Pool Corp. was inoperational. Plaintiff Coleco did not wait until 1975 to bring suit, however. Under the terms of the 1973 Purchase Agreement (Ex. 1), which contemplated both contingent and non-contingent payments to Berman, Rubin, and the Cohens, *fn2" Coleco, at closing, paid to the Royal shareholders $135,000 of the $500,000 non-contingent purchase price plus 6% interest. The second non-contingent payment of $57,500 plus interest was due in January 1974. Coleco initiated suit against all five Royal shareholders and Royal's accountants in December 1973, however, and made no payment beyond the amount paid at closing.

 Under the complaint filed in December 1973, which is jurisdictionally grounded both in the federal securities laws and diversity of citizenship, *fn3" Coleco demands damages of nearly one and one-half million dollars against the five Royal shareholders, Berman, Rubin, and the Cohens, *fn4" for securities fraud, common law fraud, and breach of contract. The complaint also named as a defendant, Zelnick, Sobelman, & Co. (Zelnick), Royal's accountant from its inception in 1971 through the June 1973 purchase date. Just prior to trial, however, Coleco and defendant Zelnick reached a settlement which shifted Zelnick's posture in the case from that of defendant to that of third-party defendant since there remained claims against Zelnick by defendants Rubin and the Cohens. All defendants filed counterclaims demanding the remainder of the purchase price as well as repayment of their personal loans to Royal, another part of the contract consideration. *fn5" In addition, Berman and Rubin counterclaimed for breach of their employment contracts with Coleco executed at the same time as the Purchase Agreement and related to it. *fn6" Finally, the Cohen defendants crossclaimed against Berman and Rubin on the basis of a side agreement entered into at the June 1973 closing between Berman and Rubin on one hand and the Cohens on the other (Ex. 397), under the terms of which any breach damages due Coleco out of the non-contingent purchase price would come first out of Rubin's and Berman's shares.



 Following almost two years of discovery and other pretrial activity, we tried this case non-jury *fn7" beginning November 10, 1975, and continuing, with a few interruptions, to January 29, 1976; the trial record exceeds 4000 pages. Now, having reviewed with care the notes of testimony, the documentary evidence submitted, and the post-trial briefs and proposed findings of fact and conclusions of law, we find the case ripe for decision.

 For ease of understanding, we choose to document our findings of fact and conclusions of law in narrative form rather than in separately numbered paragraphs. *fn8" The narration that follows shortly, then, constitutes our findings of fact required under Fed.R.Civ.P. 52(a). In making our findings, we rely perhaps most heavily upon the lengthy testimony of Joseph Rubin, one of the defendants. His demeanor and the substance of his testimony impressed us greatly; he was a straightforward, conscientious, and intelligent witness. In crucial areas where his testimony contradicts that of plaintiff's witnesses, we credit Mr. Rubin's testimony. We also credit substantially the testimony of Abe Berman, especially that testimony dealing with information about Royal that he revealed to Coleco's officers, agents, and representatives prior to June 4, 1973.

 A. 1971 Through March 1973

 Joseph Rubin, a mechanical engineer with a B.S. in engineering, met Abe Berman in 1968 while they were both working for Esther Williams Swimming Pool Co. Berman is a high school graduate who has worked in sales all his adult life. At Esther Williams, Rubin was responsible for the design of a new line of pools, and Berman was the company's national sales manager. Sometime in 1971, Berman and Rubin, now vice-president of Gindy Manufacturing Co., discussed seriously the prospect of their going into the swimming pool business together. As Berman explained the situation:

I don't know who brought it up or what, but the fact remained that he [Rubin] in his experience and knowledge of production and design and my experience in promotion and sales, we just felt that it would be a real good combination for starting our own company, if we could acquire capital. . . .

 Tr. at 28:3609. To acquire capital, Rubin contacted Irvin Cohen, a Reading, Pa., businessman, with whom he had had business dealings and interested Cohen and through Cohen his two brothers, Lewis and Frederick, in investing in the proposed company. In addition to investing his own money, Irvin Cohen could aid Rubin and Berman in their enterprise through his contacts with Reading banks which made likely the prospect of the new company's obtaining a loan. As a result of this activity, then, Royal All-Aluminum Swimming Pool Corp. was formed in late Summer or early Fall 1971 with an initial capitalization of $84,000 -- $12,000 each from Rubin and Berman and $60,000 from the Cohens together. Because Irvin Cohen wanted Royal to use as its accountant the accounting firm that he employed for his other enterprises, Royal hired the firm, Zelnick, Sobelman, & Co., in the Fall of 1971 for a retainer of $300 a month. Rubin told Norman Zelnick that because he had no significant accounting knowledge (Tr. at 20:2412-13) and because both he and Berman would be constantly occupied with design, production, and sales (Tr. at 20:2412), he expected Zelnick, Sobelman, & Co. to be totally responsible for Royal's accounting including the costing of the various pool models which Royal would market. Zelnick agreed to this undertaking. Tr. at 20:2417 & 2418. Rubin designed three pools in Fall 1971, the Crest pool, which came in two sizes, the Crown pool, in two sizes, and the Jewel pool, which came in four sizes. Royal went into production in December 1971 and shipped its first pools in March 1972, Rubin and Berman projecting a sales total of 900 pools for the 1972 season.

 In January 1972 Royal obtained a $100,000 loan from the National Central Bank in Reading. Also, in January 1972, Rubin and Berman met Leonard Greenberg, Coleco's then president, *fn9" at a National Swimming Pool Association trade show. Greenberg was apparently impressed with Royal's products and suggested to Berman the possibility of Coleco's acquiring Royal. Tr. at 28:3619. Berman responded that since Royal had not yet done a year's business, he thought the suggestion premature. Tr. at 28:3619. Leonard Greenberg followed up this conversation with a letter dated February 4, 1972 (Ex. 7), in which he reiterated his interest in discussing Coleco's acquisition of Royal.

 Royal was to sell only 600 of the 900 pools projected in 1972, at least in part because June 1972, one of the key months for pool sales, was an inordinately rainy month and pool sales suffered accordingly. By Fall 1972, because of this discrepancy between the number of pools sold and the number projected, Royal had a substantial amount of inventory on hand for which it couldn't pay its suppliers. Its financial condition was poor, and in late 1972 and early 1973 its five shareholders made it various personal loans; some of which were repaid. The balance of the loans, $43,333.44, remained outstanding on June 4, 1973, the purchase date. Tr. at 31:3950. In addition to the loans, in early 1973 Rubin and Berman stopped drawing salaries. In spite of these financial problems, or perhaps because of them, Rubin began designing in Fall 1972 two new pools, a low cost, above-ground pool in two sizes, named the Castle, and another above-ground pool, the Camelot. The Castle design was never completed, however, because of technical difficulties encountered by Royal's suppliers of aluminum extrusions in executing parts of the designs (Tr. at 20:2448-49) and because the unpaid suppliers were reluctant to cooperate with Royal. Tr. at 20:2461. In November 1972 Leonard Greenberg again approached Abe Berman at a swimming pool trade show and expressed interest in acquiring Royal. Berman promised to talk to him about the matter at a pool show they would both attend in January 1973. Tr. at 28:3621. At year end 1972 Royal was struggling. Rubin made the following assessment of Royal's financial condition as of December 31, 1972:

We were not in good condition. We had an unbalanced inventory. We had suppliers that we owed a substantial amount of money to that were pushing us to get them money and at the same time, we were trying to work up ourselves different methods of trying to obtain capital.

 Tr. at 20:2465.

 January 1973 brought some relief in the forms of a $220,000 Small Business Administration loan and a $20,000 increase in Royal's loan from National Central Bank. Although this new capital was not sufficient to pay all of Royal's debts, it did start supplies flowing more freely to Royal from its main extrusion suppliers. Berman and Rubin projected total sales for 1973 as 1200 pools. In February and March, however, Royal's financial condition again worsened. Its inventory was high but out of balance. The imbalance was caused partly when Rubin was forced to substitute parts from other pool models for the parts of the Castle pool he could not, for one reason or another, get from his suppliers. Nor could Royal balance its inventory because its lack of capital discouraged suppliers from providing it with the parts it needed. This state of affairs is memorialized in the "Whereas" clauses of the Purchase Agreement:

WHEREAS, ROYAL'S operations have produced a deficit for the twelve (12) month period ended January 1, 1973 of over One Hundred Seventy Five Thousand (175,000) Dollars; and
WHEREAS, ROYAL is in immediate need of additional working capital to continue its operations; and
WHEREAS ROYAL is not presently able to obtain said additional working capital from any source;

 Meanwhile Leonard Greenberg and Abe Berman had met at the pool show in January 1973. Greenberg told Berman that he thought it was time to sit down and talk about Coleco's acquiring Royal -- "that he [could] make rich men out of us." Tr. at 28:3624. Rubin and Berman, exploring different avenues for providing Royal with much needed capital, agreed; eventually a meeting between Rubin and Berman and Leonard Greenberg was set to take place at the Royal plant in New Jersey on April 18, 1973.

 B. April 18, 1973 Through June 4, 1973

 On April 18, 1973, Leonard Greenberg did, in fact, spend the day at Royal in Pennsauken. He talked to Rubin and Berman both separately and together. He collected information on Rubin's and Berman's backgrounds, and Rubin showed him around the Royal plant where Greenberg was impressed with the efficiency and orderliness of the packaging and shipping operation as well as the general design of the pool models. He noticed an apparently obvious discrepancy between the large amount of stock on some pool parts and the relatively small amount on others, and this observation triggered a discussion between Rubin and Greenberg on the problem of Royal's inventory imbalance. Tr. at 20:2510. Rubin and Berman discussed with Greenberg their increasing difficulty in getting parts because of lack of capital, and Rubin told Greenberg that in addition to any purchase price which Coleco paid for Royal it would have to pay out a substantial amount almost immediately to pay suppliers. Tr. at 20:2514. Berman told Greenberg that the crux of Royal's problem was that although the orders were coming in, Royal lacked the capital necessary to start a strong flow of pools from Royal to fill the orders. Tr. at 28:3625-26. Greenberg asked if Royal could produce and sell 2500 pools in 1973. Rubin said such production would be possible with a substantial infusion of capital, *fn10" operating two 10-hour shifts six days a week, and if Coleco provided Royal with production foremen. Tr. at 20:2514-15. Greenberg said money and personnel would be available and suggested further that Coleco could ease Royal's burden by providing Royal with certain Coleco-manufactured pool parts and with trucking services. Tr. at 20:2515-16. He also pointed out that should Coleco acquire Royal, suppliers would not press as hard for payment, because of the Coleco name. Tr. at 20:2515. Rubin told Greenberg that he believed Royal to be making an average $500 gross profit on each pool sale which would result in $4 million total sales for 2500 pools and a gross profit of $1,250,000. See Ex. U-14 at 4. There was also discussion among the three men of Royal's inroads and potential inroads on the dealer/customers of Abco Swimming Pool Co., a subsidiary of Coleco. Greenberg pointed out that one advantage of the acquisition would be the elimination of competition between Abco and Royal. Tr. at 20:2507. Greenberg testified on cross-examination that on April 18, 1973, he was aware that Abco and Royal shared some of the same customers and that Royal was courting one of Abco's larger customers. Tr. at 8:872-73. Finally, Greenberg told Rubin and Berman that Coleco wanted to acquire Royal because

It would be an extension of the swimming pool -- their participation in the swimming pool field on a high quality pool which they had not made before and he said that they had the choice of either designing it themselves from scratch or buying someone that was in the industry and it looked like we had been doing fairly well.

 Tr. at 20:2511. The three men then discussed a purchase price of approximately $1 million (Tr. at 20:2512), and Greenberg conditioned his tentative offer on Royal's allowing Coleco personnel to visit Royal and examine its books and records. Tr. at 20:2513.

 The substance of this April 18th meeting is corroborated by exhibit U-14, a memorandum, dated April 20, 1973, from Leonard Greenberg to Arnold Greenberg and Mel Gershman; the two Greenbergs and Gershman formed Coleco's executive committee. Some of the more salient portions of the memorandum document Coleco's motivation, as expressed by its then president, in acquiring Royal and Coleco's recognition that the acquisition was a speculative one. Greenberg begins the memo:

Remembering, of course, that this company has yet to make a profit, the question really gets down to what management capability are we buying, and how is this evidenced by their product line, and what would it take for us to duplicate this type of product line and sell it.

 He also suggests that Coleco could, upon acquisition, raise the price of each Royal pool about $200 since "they [Rubin and Berman] entered the market a little nervous this year, and let their pants down with regard to prices." Near the end of the memo Greenberg states, in discussing a purchase price,

At this point I'm holding out for a million dollars and I have a hunch that they would be willing to sell for a million, and I stress, of course, in these notes, that they have still to show their first profit. Everything is conjecture.

 In addition to Leonard Greenberg's April 20th memorandum, the record contains a memo, dated April 19, 1973, from Gershman to the Greenbergs. This memo (Ex. U-304) contains information which Gershman had collected at Leonard Greenberg's request in order to verify Royal's reputation and status in the swimming pool industry. Through discussions with the principals at Esther Williams Swimming Pool Co., Gershman did indeed verify that Royal was "undercapitalized and, therefore, couldn't really move in the marketplace because it takes so much money to build the inventory and carry the accounts" but that Hank Greenberg of Esther Williams (no relation to Leonard and Arnold Greenberg) said

that Royal pool was coming up very strong, with apparently a good product copied after Esther Williams, and was in his second year. He indicated that both Berman and Rubin seemed to know what they were doing and that because of their limited finances he had to work carefully with them but indicated an estimated sale of 2500 filters this season.

 Gershman also notes the "drastic material costs increases" in the pool industry in 1973 and that aluminum prices, in particular, were "increasing very rapidly." *fn11"

 On April 21, 1973, the Greenbergs and Gershman met among themselves in Hartford to discuss the details of a possible acquisition of Royal. Although they were aware that Rubin and Berman wanted to effect any acquisition as rapidly as possible because of Royal's need for working capital, the Coleco principals, especially Arnold Greenberg, wanted a full audit as of June 30, 1973, to verify the $500 per pool gross profit figure Rubin had given to Leonard Greenberg. Tr. at 2B:26-28. This, in Arnold Greenberg's estimation, would delay closing until August 1973. Tr. at 2B:30. Should this take place, however, the Greenbergs and Gershman agreed they would pay $1 million for Royal over a three-year, payout period. Tr. at 2B:30.

 One week later, April 28, 1973, Rubin and Berman came to Hartford and met there with Arnold and Leonard Greenberg, Mel Gershman, Michael Schwefel, Coleco's general counsel, James Hubert, Coleco's corporate controller, and Edward Fialkowsky, Coleco's treasurer. The meeting was a lengthy one beginning with a discussion of Rubin's and Berman's backgrounds and the nature and status of the Royal operation. Although Rubin and Berman were enthusiastic about Royal's potential, they told the group at the meeting, as they had told Leonard Greenberg on April 18th, that Royal had to have an immediate infusion of several hundred thousand dollars of working capital for suppliers. *fn13" Tr. at 21:2527-28. The conversation also covered the availability of Coleco foremen, pool parts, and trucking (Tr. at 21:2532 & 2535-36), as well as joint Abco/Royal customers and customers that Royal would bring to Coleco. Tr. at 21:2529. Rubin discussed the problems he was having with his newest pool model, the Castle. He told the Coleco representatives that he was having technical problems with the aluminum extruders because of their difficulty in executing his designs and that he had no final costing figures on the Castle. Tr. at 21:2531. He also told them that because of difficulties with suppliers he was shipping pools to dealers short parts when the dealers were willing to accept incomplete pools temporarily and wait for missing parts. Tr. at 22:2708-11. The Coleco representatives then told Rubin and Berman that before closing they wanted a June 30, 1973, audit. Rubin and Berman responded that Royal could not wait that long for relief. This seeming impasse was resolved when the parties tentatively agreed that the non-contingent $1 million purchase price originally contemplated would be reduced to $500,000 with another $500,000 contingent upon the profitability of Royal over a three-year period. As Arnold Greenberg put it: "In other words, if we were to be persuaded to go forward without a June 30 audit, they ought to wait for their money." Tr. at 2B:58. The parties also agreed that the Royal shareholders would warrant Royal's financial and operational status in the purchase agreement and that Royal's accountant, Zelnick, Sobelman, & Co., would prepare an unaudited April 30, 1973, financial statement also to be warranted in the Purchase Agreement. Finally, since Berman was reluctant to open fully his customer files to Coleco without some assurance that the acquisition was being seriously considered, the parties agreed that Coleco would provide Royal with a letter of intent to purchase, and plans were then made to send a team from Coleco to Royal

to take a look around, to get some comfort, to take a look at certain books and records to see if they backed up the recommendations we heard.

 Tr. at 2B:77 (Arnold Greenberg).

 The examining team, consisting of Schwefel, Hubert, and Gerald Glassman, Coleco's then director of costing, *fn14" subsequently visited Royal on May 2, 1973. Schwefel, who brought with him the letter of intent, spent a good deal of time with Berman going over the status of Royal's individual dealer/customers. Tr. at 21:2599 and 28:3642-45. Berman told Schwefel about Royal's practice of giving customers so-called "protected territories," that is, making informal, usually oral agreements that Royal would not sell pools to other dealers in a certain geographical area. Berman considered these agreements a common practice in the swimming pool industry, terminable at will, and without any legal force. Tr. at 28:3616-18. Schwefel told Berman he was familiar with the concept of "protected territories" through Abco, Coleco's subsidiary, which also engaged in the practice. Tr. at 29:3738-40. Berman also discussed with Schwefel special problems with Regency, Carib, and Style, all pool companies. *fn15" Tr. at 28:3643-47. In addition Schwefel sat in on a discussion between Berman and Royal's attorneys concerning litigation with Carib Pool Co. in which Royal was involved and went over the Royal shareholder and bank loan agreements. He asked to see customer service files, and Rubin told him that no files existed since service complaints were minor, usually having to do with faulty liners and were dealt with informally. *fn16" Tr. at 4:304-5. Hubert spent his time with two of Royal's accountants, Norman Zelnick and Steven Savett, going over their work papers for a January 31, 1973, financial statement they had prepared for Royal. *fn17" Based on information given to him, Hubert then prepared an estimate of Royal's profits for 1973. Glassman spent his time either with Rubin or alone going over invoice files and a cost sheet and bills of material on the different pool models made available to him. *fn18" Glassman toured the factory with Rubin and noted that the Royal inventory was "very much out of balance," (Tr. at 19:2255) and he and Rubin discussed the problem. Rubin then showed him the cost sheet *fn19" on the 15 by 30 foot Crest pool, Royal's largest seller for 1972. Eventually, Glassman found that $70 worth of materials had been left off this cost sheet. *fn20" Tr. at 19:2259 and 2283. Although Rubin did not show him cost sheets on other pools, he showed him the bills of material *fn21" for several other pools but not the Castle and Camelot models, and Glassman found the same items missing on these bills of material as he had found on the Crest cost sheet. Tr. at 19:2267. Rubin and Glassman also discussed the fact that Royal's cost sheets had not been updated from 1972 and that aluminum prices were rising. Tr. at 19:2284. Rubin estimated the price rise would affect the price of a pool by $50. Tr. at 19:2284. Finally, near the end of the day, Rubin discussed with Schwefel, Hubert, and Glassman together the problems caused by inventory imbalance, particularly the problem of shipping out Castle pools with heavier and more expensive Crown and Crest parts substituting for the missing Castle parts. Tr. at 21:2567-68. After this meeting at Royal, Glassman discussed his findings at Royal with Hubert and Schwefel. He summarized those discussions this way:

Only to the effect that I was satisfied that the items listed on the Bills of Material or the Bill of Material, if you will, were costed properly according to invoices, but that I did have a concern that perhaps there might be other items that I didn't find inasmuch as I had found some $70 of items already just by probing that were not contained on the Bill of Materials.

 Tr. at 19:2283. Back at Coleco, Glassman told Mr. Gershman about the discrepancies he had found:

 Tr. at 19:2294. Glassman and Gershman discussed Royal's inventory imbalance. Tr. at 19:2300-01. Glassman also reported his May 2nd findings directly to Arnold Greenberg. *fn22" Tr. at 19:2296. Stangely enough, although Schwefel visited Royal again and Hubert twice more prior to acquisition, Glassman was not again instructed to concern himself with Royal until September 1973. Tr. at 19:2296-97.

 Sometime after May 2, 1973, Schwefel called Royal to say that Coleco was willing to go ahead with the acquisition and that he was sending to New Jersey a copy of a draft agreement. The upshot of this call was the next meeting between Royal and Coleco in Hartford on May 14, 1973. This time, however, Rubin and Berman met only with Schwefel and Hubert, Arnold Greenberg coming into the room only a few times to engage in a quick exchange and then leave. Beginning a pattern of practice followed by Coleco through the critical Summer of 1973, Schwefel conducted the direct communications between Rubin and Berman and Coleco. The parties once again discussed joint Abco/Royal customers (Tr. at 24:3094), Royal's need for a large infusion of capital (Tr. at 21:2618), its inventory imbalance (Tr. at 21:2618), and its special relationships and problems with Regency, Style, Carib, and Apex pool companies (Tr. at 21:2602-03). *fn23" Berman and Rubin were unhappy about unilateral changes they felt Coleco had made from their original understanding to the draft agreement and were offended by the Greenbergs' seeming refusal to deal with them directly. Before leaving Hartford, however, Rubin did telex banks and certain of Royal's suppliers authorizing them to release to Coleco's representatives financial information they had on Royal. Tr. at 21:2618-19. In addition, before they left, Arnold Greenberg stopped in the meeting room to say that the litigation with Carib pools must be resolved before closing. Tr. at 21:2623. Within several days after this May 14th meeting, Schwefel called Royal to inquire into the status of the acquisition, and Rubin and Berman told him that they had decided against going ahead because of the discourteous treatment they had received in Hartford on May 14th. This announcement precipitated a phone discussion between the Greenbergs in Hartford and Rubin and Berman in Pennsauken during which agreement was again reached. Thereafter, Hubert visited Royal twice more on May 25 and June 1, 1973, to work with Royal's accountants on the April 30, 1973, statement which was to be warranted as part of the Purchase Agreement, and reported back to Hartford. Although Hubert had, over his several visits to Royal, discovered more than one error made by Zelnick, Sobelman, and Co., he missed two others that defendants concede render the April 30, 1973, statement erroneous in the amount of $49,922.88. *fn24" At last, on June 4, 1973, the Carib litigation having been settled, the acquisition was effected and closing took place in Pennsauken and Philadelphia. The Royal shareholders received $135,000 plus interest as the first of three non-contingent payments, and Coleco took Royal.

 To summarize, then, and to make explicit our assessment of the character of Rubin's and Berman's negotiations with Coleco which culminated in the June 1973 acquisition of Royal by Coleco, we find that during the whole of the pre-acquisition negotiations, both Rubin and Berman were forthright in their dealings with the principals and representatives of Coleco and did not deliberately misrepresent any aspect of Royal's status or operation. Any factual misrepresentation made through the vehicle of the warranties in the Purchase Agreement, especially through the warranty of the April 30, 1973, financial statement, was not studied.

 C. June 4, 1973 Through November 1973.

 Immediately upon closing and continually thereafter Berman, and especially Rubin, applied to Coleco, through Michael Schwefel, for the heavy infusion of capital to suppliers they had been led to expect would be forthcoming. Tr. at 21:2657-67. It simply never came. In June Coleco advanced $155,000, in July $45,000, and in August $9,000 to pay suppliers. Tr. at 3:226. The continuing shortage of working capital had three immediate effects. It left suppliers unsatisfied so that they withheld materials from Royal. *fn25" Tr. at 21:2659-70 and 28:3673-74. This, in turn, precluded Royal from delivering on its orders and from balancing its inventory. Id. Finally, it made Royal's accounts receivable difficult to collect for reasons on which Berman and Anthony Gaeta, a Royal salesman, agreed. Tr. at 28:3674-75 and 30:3844-45. As Gaeta explained the problem:

The reason I was having a problem is that at that time of year, the manufacturer is in a very critical position. The dealer has sold his pool. If he does not receive delivery, the customer is going to cancel, so the dealer will go somewhere else. In order for the dealer to go somewhere else at that time of the season, he had to pay cash or certified before delivery so he would hold up the monies that he owed me to pay another manufacturer.

 Tr. at 30:3844-45. This situation left Rubin contending daily with suppliers to obtain what parts he could (Tr. at 21:2673) and Berman contending daily with dealer/customers on whose previously obtained orders he could not deliver. Tr. at 21:2668-69. Nor did Rubin ever get any Coleco personnel to help him in the factory, and for seven weeks during the summer of 1973 he worked seven days a week, 13 and 14 hours a day. Tr. at 22:2698 and 2702. Moreover Berman and Rubin were relegated to dealing with Schwefel, Coleco's general counsel, in trying to work out Royal's operational problems. Schwefel told Rubin to deal through him (Tr. at 21:2646-47), and, when Rubin attempted to contact directly Mel Gershman, Coleco's overseer of purchasing, he was unsuccessful. Tr. at 21:2666.

 Aside from preventing Royal from producing the number of pools Coleco wanted it to produce, the frustrating state of affairs in Pennsauken had a second debilitating effect. Berman and Rubin were fast alienating each other. Berman obtained many more orders than Rubin could fill so Berman was constantly importuning Rubin for more finished pools. Rubin, in turn, without the foremen Coleco had promised and instructed by Schwefel to use Berman in the factory (Tr. at 22:2698), attempted to draft Berman into production. At this Berman balked saying to Rubin:

 Tr. at 26:3442. Berman also left the office work and supervision of the office workers to Rubin. Tr. at 26:3428, Ex. R-35. For instance, in a letter to his counsel that Rubin wrote in September 1973, he made the following statement which we credit:

Berman never Credited dealers on returns. He never Debited suppliers on returns. Generally the office work was a disaster. . . .

 Ex. R-35 at 4 (admitted without objection). By July Rubin was keeping a diary of Berman's comings and goings and reporting them to Coleco (Ex. 18). Berman told Rubin that "he will do what he wants and let Coleco fire him then he will sue." Ex. 18, Tr. at 26:3439. This statement was part of the information that Rubin relayed to Coleco. Tr. at 26:3439. In addition, Rubin testified at trial that Berman spent less and less time at Royal in July but that he didn't know whether Berman spent his time away from Royal on personal matters or on Royal's business. Tr. at 26:3429. According to Berman and Gaeta, whose testimony we accept, the bulk of the time away from Royal was spent on telephones with and at the premises of dealers/customers trying to placate those whose orders were overdue. Tr. at 22:3689-92 and 30:3845-46. Also in July Coleco made known to Rubin and Berman that it was considering adding Al Katz to Royal's sales staff. Berman objected strongly, first, because he disapproved of Katz's sales techniques, and, second, because he felt that Royal, heavy on orders and light on production, needed no addition to its sales staff. Tr. at 28:3679-80-81. In spite of Berman's strong objections, Leonard Greenberg announced to Berman at a meeting in Hartford on July 14, 1973, that Coleco had hired Al Katz as Royal's sales manager. At the same meeting Berman presented a 1974 sales projection considered unrealistic by the Coleco personnel and by Rubin, whose opinion we accept. Tr. at 26:3434-36. Shortly thereafter Schwefel instructed Rubin to inform Berman that he was no longer President of Royal, and Rubin transmitted the message. Tr. at 28:3698-99. Next, Coleco informed Berman he would no longer have authority to sign checks for Royal. Tr. at 28:3700. Then sometime at the end of July or the beginning of August, Rubin told Berman that Leonard Greenberg had requested Rubin to keep a log on Berman and to tell Berman he was doing so. Tr. at 27:3466 and 28:3704. At this point Berman left Royal and was gone a few weeks. He described his reaction when Rubin told him about the log this way:

The fact that the money -- we didn't have the money to buy materials, that we couldn't supply pools, that they took the presidency away from me, that they took the check signing authority away, the way I was treated up in Hartford, this [Rubin's telling him about the log] was more or less the straw that broke the camel's back. I just felt my heart palpitating, my stomach turning over and my face turning red, and I said to Joe, "Joe, I'm sorry; because of what's going on here, I must get out of here."
I left and sat down with my wife and told her what happened and she immediately called the doctor and we went over to see him and as a result of this I called Joe and told him that I must have time off, I did go to see a doctor; I must have time off. Otherwise, it is going to result in a nervous breakdown and that I was going away to the seashore for a few days; that I will be in touch with him and as soon as I am able to return, I certainly will, which should be approximately two weeks.

 Tr. at 28:3705-06. During the time Berman was away from Royal, he missed an executive meeting in Hartford which he was supposed to attend. Shortly after he returned Arnold Greenberg informed him by phone that he was discharged. Coleco also notified him formally by letter (Ex. 146).

 Meanwhile Royal was struggling through the Summer with suppliers dunning them for payment and dealers clamoring for pools. An inventory was taken *fn26" at the end of July, badly taken according to Rubin (Tr. at 22:2732-36) whose opinion we credit, and Coleco personnel contended that based on the figures Royal had given them at closing, they had come up short. At approximately the same time as the taking of the inventory Gershman issued a memorandum (Ex. R-49) cancelling all orders with suppliers and authorizing new purchase orders only for materials "to balance off and complete 320 pools." According to Rubin's testimony, which we credit, this directive increased the chaos at Royal:

With regard to paragraph 3, I asked, "What model 320 pools are we supposed to build?" With regard to paragraph 2, I asked, "Why are we cancelling orders that were placed in an effort to balance out the inventory and then issue new orders for 320 pools that I didn't know what models they were referring to?" It just didn't seem to make any sense. . . . In some cases, it didn't make any difference because vendors had refused to ship us for lack of payment, so cancelling was a futile gesture and in other cases when we cancelled it threw out of balance what we were trying to balance out.

 Tr. at 22:2730-31. Yet, in spite of the results of the inventory and the directive from Gershman, on August 16, 1973, Leonard Greenberg wrote to Rubin after an August 13th meeting in Hartford:

Let's all put our shoulders to the marketing wheel now. I think we know what we have to do for next year, and I think we have an excellent opportunity to grow successfully.

 Exhibit U-83 at 4. Also in August Royal received a handful of complaints (less than 10) that Castle pools had pulled apart or "blown" in the field. As a result Rubin designed a "retrofit kit" (Tr. at 22:2760), an assembly to be added to the structure of the pool to prevent any further problems.

 In September Abco, Coleco's subsidiary pool company, began to take over the Royal sales functions. The situation with suppliers was as bad or worse than ever. Rubin told Schwefel and Hubert "that they will not open for business in 1974 unless they pay suppliers." Tr. at 22:2772. A letter dated September 25, 1973, from Rubin to Leonard Greenberg (Ex. U-94) records Rubin's assessment of Royal's problems with its accounts payable. After noting that relations with Howmet were excellent, that Howmet was willing to wait for its money, and that he did not intend to deal with Capital, Rubin went on to say:

On the balance of suppliers we are having major problems. These are small operators that require money immediately. I have not been able to find anyone at Coleco that will give me a clear financial picture at this time and it has placed me and Royal in a very poor position as far as negotiating with these suppliers. I had hoped that when I sent my Aug. 27th letter to Ed Fialkowsky that the picture would clarify itself since it covered in total, our fourth quarter budget plus cash flow plus receivables plus expenses. However, neither Hubert nor Fialkowsky have at this point been able to give me information as to when monies would be available. I have been told on an unofficial basis that everyone would be paid by Dec. 15th, but this was not definitive enough for me to clearly negotiate with the suppliers. As a result, our credibility factor has been questioned and probably some of the suppliers will not be willing to do business with us next year. If the target date is Dec. 15th and I definitely know about it, at least I know where and how to act. However some monies must be paid prior to that date as some suppliers absolutely cannot wait. *fn27"

  Exhibit U-94. He received no response from Coleco to his letter. Tr. at 22:2779. In September the communications lines between Rubin and Coleco remained down. Tr. at 22:2785. On September 27, 1973, however, Rubin attended a meeting in Hartford with the Greenbergs, Gershman, and Schwefel. During the course of the meeting, Leonard Greenberg told Rubin that the manufacturing of Royal's above-ground models was to be moved to West Haven, Connecticut. Tr. at 22:2797. Since most models of Royal pools were above-ground models, such a change would, in Rubin's words, render the Pennsauken facility a "hollow operation." Tr. at 22:2798. When the Coleco men asked Rubin if he wanted to move to West Haven, he responded negatively and invoked the clause in his employment contract which stipulated that Royal's operation would not be moved more than 30 miles absent an agreement of the parties. Tr. at 22:2798. He then asked what would comprise his duties at Royal in New Jersey after the move but received no answer before the meeting adjourned. Tr. at 22:2798. Just before adjourning Arnold Greenberg told Rubin that Coleco was "going [to go] after the Cohens . . . and Abe Berman" if necessary by a lawsuit. Tr. at 22:2799. He told Rubin he was satisfied with his work and would like to retain and protect him; Greenberg asked Rubin if he would testify for Coleco in a lawsuit. Tr. at 22:2800. Rubin responded that he would simply testify to the truth. Tr. at 22:2800. Back in Pennsauken, Royal employees were being given their working instructions directly by Coleco representatives, a method of operation that bypassed Rubin. Tr. at 22:2810.

 In October Rubin received a memorandum, dated October 17, 1973, from Gershman (Ex. R-135) in which Gershman informed Rubin that he was to complete packaging the 150-200 pools for which he had parts on hand. Gershman went on to say:

We would suggest that you, Joe, then personally sell off these Royal pools so that Abco will not get involved in cleaning up the pools from your stock.

 Following receipt of this memorandum Rubin procured an order from a pool dealer, Eugene Margolis, for 300-400 Castle pools. Tr. at 22:2820. When Rubin notified Coleco of the sale, however, Schwefel told him not to contact Margolis again, and Hubert later told him Coleco never sold the pools to Margolis. Tr. at 22:2821. Sometime in November Rubin came upon an advertisement in a trade journal (Ex. R-152) that, for the first time, informed him of the use to which Coleco was putting the Royal name and reputation. The advertisement is headed:

This year ABCO is also ROYAL
the Famous Line of

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