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Gans v. Marlowe Pen Co.

APRIL 25, 1969.

LEO GANS, PLAINTIFF-APPELLEE,

v.

MARLOWE PEN CO., AN ILLINOIS CORPORATION, SWISS HARMONY, INC., AN ILLINOIS CORPORATION, RAYMOND-RICHARDS COMPANY, AN ILLINOIS CORPORATION, KING-RICHARD COMPANY, A/K/A DUDLEY SALES CORPORATION, AN ILLINOIS CORPORATION, PIEDMONT PRODUCTS, INC., AN ILLINOIS CORPORATION, LEO R. SLATON, HARRIET LILLEY, ADELE E. SLATON, DAVID KOOLISH, AND LEO R. SLATON, D/B/A DUDLEY SALES COMPANY, DEFENDANTS, LEO R. SLATON AND KING-RICHARD COMPANY (NOW KNOWN AS SWISS HARMONY, INC.), APPELLANTS. LEO GANS, PLAINTIFF-APPELLEE,

v.

SWISS HARMONY, INC., AN ILLINOIS CORPORATION, MARLOWE PEN CO., AN ILLINOIS CORPORATION, RAYMOND-RICHARDS COMPANY, AN ILLINOIS CORPORATION, KING-RICHARD COMPANY, A/K/A DUDLEY SALES CORPORATION, AN ILLINOIS CORPORATION, PIEDMONT PRODUCTS, INC., AN ILLINOIS CORPORATION, LEO R. SLATON, HARRIET LILLEY, ADELE E. SLATON, DAVID KOOLISH, AND LEO R. SLATON, D/B/A DUDLEY SALES COMPANY, DEFENDANTS, LEO R. SLATON AND KING-RICHARD COMPANY (NOW KNOWN AS SWISS HARMONY, INC.), APPELLANTS.



Appeal from the Circuit Court of Cook County, County Department, Chancery Division; the Hon. WALKER BUTLER, Judge, presiding. Decree affirmed in part, reversed in part, and remanded with directions.

GOLDENHERSH, P.J.

Rehearing denied and supplemental opinion August 1, 1969.

Defendants, Leo R. Slaton, hereafter called Slaton, and Swiss Harmony, Inc., formerly King-Richard Company, appeal, and plaintiff cross-appeals from the decree of the Circuit Court of Cook County entered in plaintiff's shareholder's derivative actions seeking an accounting of funds allegedly misappropriated, and other relief.

The defendants, Marlowe Pen Co., hereafter called Marlowe, and Swiss Harmony, Inc., hereafter called Swiss, are Illinois corporations of whose outstanding capital stock plaintiff owns respectively 16 2/3% and 12 1/2%. Slaton owns 50% of the outstanding shares of stock of Marlowe, and he and his wife own 50% of the outstanding stock of Swiss. The remaining shares of Marlowe are owned by David Koolish, and Ralph L. Stolkin, and the remaining shares of Swiss are owned by David Koolish, A.L. Koolish and Ralph L. Stolkin.

King-Richard Company, hereafter called King-Richard, is an Illinois corporation, all of whose outstanding shares are owned by Slaton. Following the sale of certain of its assets, Swiss Harmony, Inc. changed its name to Swiss Liquidating Co. and King-Richard thereupon amended its articles of incorporation and changed its name to Swiss Harmony, Inc.

Plaintiff brought two actions alleging various acts of misappropriation and mismanagement. The complaints are lengthy and the specific allegations will be discussed only to the extent necessary to this opinion. The two cases were consolidated and referred to a Master-in-Chancery. The Master took testimony, and in a Final Report and Supplemental Report reported to the court his findings of fact and conclusions of law. The court considered and ruled upon exceptions to the Reports, and entered the decree from which the appeal and cross-appeal are taken.

The evidence shows that Marlowe was in the business of selling ball-point pens, and Swiss manufactured and sold various types of novelty merchandise. These corporations, King-Richard, and several other enterprises, were all operated out of the same office and warehouse facilities. The record contains much evidence of various transactions between these companies, and the same firm of certified public accountants prepared financial reports and tax returns for all of them.

In his complaint plaintiff alleges that the business and affairs of Swiss "have been wholly managed, dominated and controlled" by Slaton, and one of the principal charges of misconduct on the part of Slaton is that he wrongfully acquired the assets of Swiss at a price far below their value, and transferred them to King-Richard. The evidence with respect to this transaction shows that at a meeting of the shareholders of Swiss, over plaintiff's objection, a resolution was adopted that the corporation be liquidated and dissolved, and providing for the sale of its inventory, furniture, fixtures and goodwill at public auction. It further provided a method of advertising the sale, and an upset price of 80% of the book value of the assets sold.

Plaintiff, in a letter dated a week before the date set for the auction, demanded the sale be postponed until certain steps were taken which he deemed necessary if the sale were to result in an adequate price for the property.

Slaton ran a small advertisement in the Tribune announcing the sale of inventory, fixtures, machinery and goodwill of Swiss, and a public preview for a period of four hours on the day preceding the sale. The auctioneer testified that he did not inventory, evaluate or examine the assets. No bidders appeared except Slaton, and he bid in the property for the sum of $145,000.

An auctioneer, called by plaintiff, testified as to the usual steps taken by an auctioneer in this type of sale, and testified that the auction was inadequate and improper under accepted practices in Chicago. He stated that if his firm were handling the sale the fee would be 5% of the total amount realized and he would have recommended that $3,500 to $5,000 be spent in advertising.

The evidence shows that on February 7, 1958, the date of the sale Slaton valued the assets of Swiss as follows:

Book Value Sales Price ----------- ----------- Inventory $159,727.26 $133,791.78 Automobiles 4,146.02 3,500.00 Other Fixed Assets 14,193.75 5,000.00 Prepaid Insurance 1,708.22 1,708.22 Trademarks ......... 1,000.00 ___________ ___________ Total $179,775.25 $145,000.00

Exhibits in evidence show that Swiss was on a December 1-November 30 fiscal year, and in financial statements prepared at the end of its fiscal years preceding the sale, the property in question was valued:

Year Inventory Fixed Assets ---- ------------ ------------- 1957 $146,693.86 $19,488.79 1956 147,329.17 29,595.91 1955 57,620.99 31,024.98 1954 94,281.18 37,813.23

Paul Schneider, a certified public accountant, testified that in each year the inventories were valued at the lower of cost or market. He defined "market" as being the cost of replacing merchandise, assuming purchase from normal sources in normal quantities, but not in excess of what could be realized from its sale. The valuations were primarily determined by Mr. Slaton, but plaintiff, and David Koolish, frequently participated in the discussions.

Vincent G. Matranza, a bookkeeper employed by Slaton in various of his enterprises, testified that the inventories were prepared under his supervision, and although most valuations were made by Slaton, some were determined by him.

Fred F. Lang, a certified public accountant, testified that at plaintiff's request he made a comparison of certain inventory prices as shown on an inventory taken as of July 31, 1957, and one as of February 7, 1958. The comparison was limited to the items which appeared in both inventories, and was done by extending the quantities shown at February 7, 1958, at the unit prices shown on the inventory of July 31, 1957. An exhibit prepared by the witness shows the comparisons made, and plaintiff's exhibit 6 shows that the valuation in the later inventory is $42,073.76 lower than in the earlier. The witness, admittedly, had no knowledge of the depreciation and obsolescence factors pertinent to this type of inventory.

Norman Zuckerman, an associate of Mr. Lang's firm, testified that he had examined King-Richard's books, and in August 1959 King-Richard sold to Selcol-Limited at a price of $10,000 a set of tools, dies, fixtures and molds for manufacture of Roundelays, one of the novelties formerly manufactured by Swiss. King-Richard's books showed that this item was treated as income, and there was no corresponding write-off or charge-off for the period between February 7, 1958 and the date of the sale. He could not state whether these items were owned by King-Richard prior to February 7, 1958, and could not say whether they were acquired from Swiss.

The testimony of George J. Collinet, a former employee of Swiss, employed by King-Richard as a designer, testified that much of what was sold to Selcol was formerly used by Swiss. He testified with respect to items which were formerly manufactured by Swiss, and which King-Richard continued to manufacture.

The plaintiff testified that he examined an inventory prepared as of December 31, 1957, and checked with Matranza in an effort to determine the replacement cost of the finished goods and other items. He found from an examination of cost records that Mr. Slaton's valuations were understated. Plaintiff's exhibit 20 is a comparison of inventory values, purporting to compare the inventories of November 30 and December 31, 1957. It shows the items, the number on hand, Slaton's valuation, and "Replacement Cost as Determined by Leo Gans." The valuation as determined by ...


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