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RUMBAUGH v. BECK

June 13, 1980

ROBERT RUMBAUGH, individually and on behalf of all other shareholders of BECK-RUMBAUGH ASSOCIATES, INC.
v.
NORMAN H. BECK, JR., CHARLES E. BOOP; EDWARD BERRY and BECK-RUMBAUGH ASSOCIATES, INC.



The opinion of the court was delivered by: HANNUM

MEMORANDUM AND ORDER

I. Preliminary Statement.

 This civil action, embellished with the caption designating it to be a shareholder's derivative action, is in reality a lawsuit between the sole two (2) shareholders of the business entity, Beck-Rumbaugh Associates, Inc. The plaintiff is a 49% shareholder and the defendant Norman H. Beck, Jr. (hereinafter "Beck") is a 51% shareholder. The defendants Charles E. Boop (hereinafter "Boop") and Edward Berry (hereinafter "Berry") appear to be primarily surplusage to the main quarrel between the plaintiff and the defendant Beck. The plaintiff has requested that the Court impose its equitable powers by entering a prohibitory and mandatory preliminary injunction, by ordering the appointment of a receiver or trustee to operate this allegedly beleaguered business entity and by requiring the conduct of an accounting and subsequent distribution of damages. Simply stated, the plaintiff has alleged that the defendants have engaged in a conspiracy to "freeze out" his interests in the entity.

 The main quarrel existing between the plaintiff and Beck may be described in an interrogative fashion as how do two (2) persons essentially engaged in a voluntary partnership which has had the misfortune of incorporating successfully terminate their association? The quarrel is compounded by the fact that the plaintiff and Beck were engaged in a personal service business endeavor where goodwill was wholly attributable to the individuals and not to the corporate name. The situation is analogous to the separation of two (2) law partners who had previously joined in practice. As a result of the nature of the business and association, there are limited tangible assets that are capable and accessible for distribution.

 When reviewing the allegations, testimony and request for relief, it appeared to the Court that the plaintiff ultimately seeks either a form of reinstatement to the business entity which would entitle him to share in its profits or some sort of liquidation of assets with a distribution according to the percentage of shares of stock held. The defendants collectively in name, but in reality only Beck, assert that the plaintiff voluntarily terminated his association with the endeavor and thus is entitled to neither reinstatement nor compensatory damages. The dilemma is readily apparent when viewing the contentions of the respective parties in regard to the relief requested. It is quite obvious that there has grown animosity between the plaintiff and Beck and reinstatement of the plaintiff to the endeavor would be similar to forcing one attorney to practice with another who was held in some degree of contempt. In either situation the union would be far from harmonious and the effect certainly deleterious. As regards an award of compensatory damages, problems are equally apparent and confounded. The plaintiff is most definitely opposed to a division of assets limited to those capable of liquidation because they would be of insufficient dollar value. The division must then account for goodwill which, as has already been stated, is attributable not to a corporate shell but solely to individuals comprising that shell. The Court could hardly command the clientele of this business endeavor to collectively procure the services of the plaintiff and Beck according to a 51-49% ratio, nor could it require Beck to continue this corporate shell as a facade for measuring and paying damages. The plaintiff may not receive the value of something not attributable to his labors through the Court's imposition of its equitable powers and, of course, the opposite is equally true.

 On the other side of the coin as respects the defendant Beck, it is his hope that his association with the plaintiff will become a matter permanently in the past and quickly forgotten. He has continually asserted an offer of settlement allowing for the distribution of all corporate tangible assets, after which the parties would be allowed to individually pursue their own business endeavors. In essence, Beck offers a clean break of relations permitting each an opportunity to establish his own individual successful business and to court past corporate clients. Impulsively, this appears to be a fair and logical remedy. The only impediment to its adoption are the Articles of Incorporation and the employment contract executed by the plaintiff. It is difficult to ignore these documents for the sake of expediency and, one might argue, practicality.

 The ultimate resolution of this case may prove novel but, fortunately, this decision does not confront the Court today. To be sure, the facts alleged by the parties respectively, evince the feeling that the truth lies somewhere in between.

 The plaintiff has alleged that Beck has diverted corporate assets, conspired to affect a "freeze out" and failed to account for corporate profits. The misconducts alleged, therefore, include breach of fiduciary duty, willful and wrongful conversion and corporate mismanagement. The following relief is sought to redress these alleged wrongs:

 1. Injunction deleting the plaintiff's name from the corporation; 2. injunction prohibiting the defendant from interfering with the plaintiff's corporate employment; 3. injunction prohibiting the defendants from using corporate assets in nonbusiness related pursuits and mandating reimbursement to the corporation of assets diverted in the past; 4. appointment of a receiver or a trustee; and 5. costs of this action. In addition, the plaintiff ultimately seeks further relief in the nature of an accounting and reimbursement and also, on his own behalf, compensatory damages.

 The defendants and particularly Beck again steadfastly contend that the plaintiff resigned his participation in the business endeavor and terminated his employment services in August, 1979. A variety of testimony, documents and corporate actions are proffered in support of this contention.

 II. Findings of Fact.

 1. Beck-Rumbaugh Associates, Inc. is engaged in the office equipment and supply business in the capacity of manufacturers representatives. *fn1"

 3. On July 1, 1976, the plaintiff entered into an employment agreement with Beck-Rumbaugh Associates, Inc. Paragraph 8(a) of this agreement provides as follows:

 
Rumbaugh agrees that for a period ending two years after the termination of his employment with the Company, he will not engage in any business conducted in whole or in part within the City of Philadelphia or within a fifty mile radius thereof which is in general competition with the business of the Company at the time of termination. The term "engage in" shall include, but shall not be limited to, activities, whether direct or indirect, as owner, proprietor, principal, agent, partner, stockholder, officer, director, participant, manager, employee, consultant or lender; provided, however, that the ownership of not more than 3% of a publicly held corporation shall not be included in that term.

 4. Paragraph 6 of this agreement provides as follows:

 
The term of this Agreement shall extend for a period of three (3) years commencing on July 1, 1976 and terminating on June 30, 1979, unless the Company shall have given written notice of its intention to terminate this Agreement as provided in paragraph 7 of this Agreement. At the expiration of such three year term, subject to the provision of paragraph 7 hereof, this Agreement shall continue until either party shall deliver written notice to the other party hereto to the effect that this Agreement shall terminate thirty (30) days from the giving of such notice.

 5. In reference to this agreement and its termination date, the plaintiff in May, 1979, first suggested his departure from the corporation to be effective on the termination date of the agreement.

 6. Shortly after the May, 1979 meeting, the plaintiff and Beck met to discuss the name and qualification of a person to replace the plaintiff. The plaintiff recommended Douglas Dalton who was employed as a sales representative for Dennison Manufacturing Company.

 7. On June 10, 1979, at a convention in Bedford Springs, Pennsylvania, the plaintiff contacted Douglas Dalton to inquire of the latter's availability for possible employment with the company. The plaintiff then advised Douglas Dalton to await contact from the defendant Beck before accepting any other employment. *fn3"

 8. On June 15, 1979, the plaintiff informed the defendant Beck of his intention to disassociate himself from Beck-Rumbaugh Associates, Inc. A termination date of June 30, 1979 was verbally established. The parties further agreed to a reasonable division of profits attributable to corporate profits made during the plaintiff's tenure as well as a form of compensation for the plaintiff's interest in the corporation's tangible assets including a Florida condominium and a limited inventory.

 9. The June 15, 1979 meeting concerned another topic of discussion; that is, a "buy-out" agreement whereby the plaintiff would be free to leave the corporation's employment and engage in competition as a manufacturer representative. A plan for the distribution of assets was also discussed and there was an "agreement in principle" with respect to the purchase of the plaintiff's stock in the corporation that would allow the plaintiff to obtain an acceptable amount for his interest in the business.

 10. On July 1, 1979, the plaintiff formally and finally terminated his association with Beck-Rumbaugh Associates, Inc.

 11. On July 9, 1979, Richard F. Biborosch met with the plaintiff to discuss the plaintiff's purchase of a life insurance policy taken out for the plaintiff and owned by the corporation. *fn4"

 12. At this meeting, the plaintiff informed Richard F. Biborosch of his departure from Beck-Rumbaugh Associates, Inc. and that he wanted to effect a transfer of ownership of the insurance policy ...


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