The opinion of the court was delivered by: SAMUEL DER-YEGHIAYAN, District Judge
Plaintiff Unique Envelope Corp. ("Unique") filed the instant action
against Defendants GSAmerica, Inc. ("GSA") and Frank Rosenberg
("Rosenberg") alleging a breach of contract claim against GSA, a breach
of contract claim against Rosenberg as an alter ego of GSA, and a fraud
claim against Rosenberg. Unique seeks compensatory damages, prejudgment
interest, punitive damages, and attorneys' expenses and fees. Defendant
GSA filed a counter claim against Unique alleging four Counts
containing breach of contract claims, four Counts containing fraudulent
inducement claims, three Counts containing misrepresentation
claims, a negligence claim, and a tortious interference with
contract claim. GSA seeks compensatory damages including consequential,
prospective, and exemplary damages against Unique. GSA also seeks pre
judgment interest, post judgment interest and attorneys'
fees. A bench trial was conducted in this case on January 15, 2004
through January 23, 2004, We have reviewed all admissible evidence in
this case and enter the following findings:
FINDINGS OF FACT
Unique Envelope Corp. ("Unique") and all of the Defendants are citizens
of different states and the amount in controversy exceeds $75,000.00,
exclusive of interests and costs. Plaintiff Unique is an Illinois
corporation, with its principal place of business in Chicago, Illinois.
Defendant GSAmerica, Inc. ("GSA") is a Tennessee corporation and during
the relevant time periods, GSA's principal place of business was located
in Tennessee. Defendant Rosenberg is a citizen of Tennessee.
II. Unique Envelope Assignment
Unique is in the business of manufacturing and supplying standard and
custom made envelopes, printing, and lithographic services to commercial
clients for use in their respective business enterprises. Unique was
incorporated on November 12, 1998. Melvin Kozbiel operated Unique as a
sole proprietorship until December 31, 1998. Melvin Kozbiel assigned to
Unique all of the claims brought against GSA and Frank Rosenberg
("Rosenberg") in this lawsuit.
III. Transactions Between the Parties
In 1996, GSA began purchasing envelopes from Unique. Payments for
envelopes purchased by GSA during 1996 and 1997 were due within 30 days
of the invoice date. Based upon a meeting in June of 1997 in Chicago
between Rosenberg, John Bums and Darrell Kozbiel an agreement was reached
regarding envelope orders for 1998. Under the agreement payments for non
Christmas card envelopes would be due within 90 days of the
invoice date. For all envelopes purchased for the T.V. Allen and Empress
lines of Christmas greeting cards, 30% of the invoice would be due within
90 days of the invoices date, and the remainder would be due on January
10th of the following year. At the time of the June, 1997 meeting, GSA
was suffering from severe cash flow problems. At no time prior to or
during 1998 did Defendants ever disclose to Unique that GSA was having
cash flow problems. Although GSA was consistently late in making payments
to Unique, it had, prior to June of 1998, eventually paid all amounts
During 1998, GSA ordered envelopes from Unique, but failed to pay for
all the invoices. The total amount due on unpaid invoices for envelopes
shipped to GSA by Unique is $195,450.62. Throughout 1998, GSA had issued
blanket purchase orders to Unique for certain types of envelopes which
were specially manufactured by Unique for the blanket purchase orders.
These specially manufactured envelopes could not be resold by Unique to
third parties and the total price for envelopes ordered but not paid for
by GSA pursuant to blanket purchase orders is $34,485.92.
In 1997, at the request of Rosenberg, Darrell Kozbiel traveled to Los
Angeles to appraise certain envelope manufacturing equipment ("Crane
Equipment") and he appraised it in the range of $25,500 to $47,500.
During this same period, GSA was negotiating a transaction whereby it
would purchase the assets of the T.V. Allen division of Crane &
Co., Inc. ("Crane"), and the Crane Equipment that Darrell Kozbiel
appraised was one of those assets. After such visit and appraisal,
Rosenberg asked Darrell Kozbiel if Unique would like to make an offer for
the Crane Equipment and in response Unique offered $38,500 for the Crane
Equipment and offered to add $10,000 to its bid price if it obtained
$1,000,000 in envelope orders from GSA. GSA accepted Unique's offer of
$48,500 for the Crane Equipment. However, GSA failed to purchase at least
$1,000,000.00 worth of envelopes from Unique.
During 1996, 1997, and 1998 GSA experienced severe cash flow problems
and GSA's 1997 audited financial statements included a statement by the
company's auditors indicating that there was "an uncertainty about the
Company's ability to continue as a going concern." In 1997, Rosenberg and
John Burns began contacting GSA suppliers in an attempt to extend the
terms which GSA had with such suppliers because GSA was experiencing
severe cash flow problems. On October 15, 1997, GSA caused its subsidiary,
Empress Greeting, Inc. ("Empress Greetings") to purchase from Crane the
assets of Crane's T.V. Allen Division even though GSA did not have
sufficient capital for Empress Greetings to purchase the T.V. Allen
Division's assets from Crane. Rosenberg participated on behalf of GSA in
the negotiations for the purchase.
In January, 1998, GSA was past due on the amounts it owed to Unique. As
a result, Darrell Kozbiel called Dana Crooker, a GSA employee, and told
him that Unique was stopping shipments until all past due amounts were
paid. Within minutes after Darrell Kozbiel's telephone call to Dana
Crooker, both Dana Crooker and Rosenberg telephoned Darrell Kozbiel.
Rosenberg asked Darrell Kozbiel how GSA could get Unique to resume
shipping. Darrell Kozbiel told Rosenberg that GSA needed to pay all past
due amounts and the next day Unique received a
check via overnight delivery from GSA for all past due amounts.
In a letter on GSA letterhead dated January 22, 1998, Rosenberg asked
Darrell Kozbiel to contact Jack Wilton ("Wilton"), a GSA employee, the
next time GSA fell behind on payments. Wilton was GSA's production
manager during most of 1998 and as such, he had personally dealt with
Darrell Kozbiel at Unique regarding the ordering and delivery of
envelopes, and had personal knowledge of the orders placed with Unique.
In January, 1998, Rosenberg communicated on behalf of GSA with Starr
Toof Printing Company ("Starr Toof) regarding a potential business
combination between the two companies (Exhibit 14). In that
communication, Rosenberg stated that GSA would not allow a merger of the
corporate structure of GSA since it involved personal holdings and other
relationships that GSA reserved the right to liquidate, including
accounts receivable, payable, and other hard assets. In communications
with Starr Printing, Louis Rosenberg, GSA President, and the son of
Rosenberg, confirmed that GSA's corporate shell could not be part of any
transaction because it was important to the personal holdings and tax
structure of his father Frank Rosenberg and Don Sundquist (Exhibit 13).
Rosenberg's goal at the time was to consolidate the value of GSA with the
profits of publishing companies owned by Vestmark, Inc. ("Vestmark")
which is a holding company which invests in printing and publishing
companies. Rosenberg was, during the relevant time periods, a
shareholder, director and officer of Vestmark. Rosenberg founded
Vestmark, and was an integral part of its operations. Rosenberg
controlled the decisions of the Vestmark Board of Directors. Between 1998
and 2000, Rosenberg received cash payments from Vestmark totaling
approximately a quarter of a million dollars. In addition to Rosenberg's
active involvement with various companies, his personal business was also
intertwined with GSA and
its operations. Rosenberg controlled the decision of the board of
directors of T.V. Allen. Even after Rosenberg's involvement in the
transactions relating to GSA, T.V. Allen and Unique, he continued to
actively participate in the business affairs of T.V. Allen. For instance
he took an active role in the sale of assets of T.V. Allen to Four
Seasons in August of 1999 as is illustrated by Exhibit 82.
In 1998, Rosenberg directed GSA to take certain "corrective steps."
which included the following: (a) Restructuring GSA's stock ownership to
give Rosenberg 7% of GSA's stock; (b) Granting Rosenberg and Don
Sundquist options for 240,000 shares of stock, at an exercise price of $4
per share; and (c) Authorizing Rosenberg to negotiate and close the sale
of 50.5% of Empress Greetings stock to a group led by John Bobango. The
Executive Committee of the Board of Directors of GSA resolved to adopt
the above directives. Rosenberg and other investors had previously (in
1994) sold all of their GSA stock back to the corporation. In exchange,
Rosenberg and the other investors received promissory notes, which they
then assigned to the Rosenberg Sundquist Trust. Rosenberg and Don
Sundquist were the Trustees of the Rosenberg Sundquist Trust.
Rosenberg was also the owner of 81% of the beneficial interest of the
trust. The notes held by the Rosenberg Sundquist Trust from GSA
were not secured by GSA's assets. The principal amount of the notes was
Although Rosenberg acted on behalf of GSA with vendors and potential
business partners, he was not an officer or employee of GSA in 1997 or
1998 and he retired from GSA's Board of Directors on March 17, 1998.
However, notwithstanding his official "retirement," Rosenberg executed a
Memorandum of Understanding on April 6, 1998 between GSA and Starr
Printing, concerning an extension of credit by Starr Printing to GSA and
Rosenberg signed on
behalf of GSA.
By the spring of 1998, GSA could not support the cash flow needs of
both GSA and Empress Greetings. Specifically, GSA was not able to pay the
employees and vendors of both entities. In May, 1998, a new corporation
called the T.V. Allen Company ("T.V. Allen") was incorporated for the
purpose of running the T.V. Allen business and marketing and selling the
T.V. Allen lines of Christmas cards. Rosenberg and his family owned
approximately 28% of T.V. Allen. The organizational meeting of the T.V.
Allen shareholders took place in the office of GSA on July, 9, 1998.
Rosenberg was "acting Chairman" during the organizational meeting of the
T.V. Allen shareholders. At the organizational meeting of the T.V. Allen
shareholders, T.V. Allen approved the acquisition of the T.V. Allen
Assets and the Empress line of cards from GSA. During such meeting,
Rosenberg nominated the entire slate of directors for T.V. Allen, which
slate was approved. At that meeting, the shareholders recognized that the
President of T.V. Allen was also the Chief Executive of GSA, and waived
any "apparent conflicting responsibilities and loyalties." Neither GSA's
shareholders nor its Board of Directors were ever notified of or approved
any conflict resulting from its Chief Executive also serving as T.V.
On July 15, 1998, Rosenberg attended a meeting of the Executive
Committee of GSA's Board of Directors. Although Rosenberg was not a
director, officer or employee of GSA at this time, he opened the meeting
and potential reorganization plans for GSA were discussed. In the summer
of 1998, the T.V. Allen Company began using the assets of Empress
Greetings, which included the assets of the T.V. Allen Division purchased
from Crane (collectively, the "T.V. Allen Assets"). At the time that the
new T.V. Allen Company started using the T.V. Allen Assets, sales
employees who had worked for Empress Greetings or GSA started working for
new T.V. Allen Company. For a period of time in 1998, these
employees worked for the new T.V. Allen Company but were paid by GSA.
Beginning in the summer of 1998, GSA took the materials purchased from
its vendors, including Unique, packaged them into a final product (mostly
boxes of cards and envelopes), and transferred that product to T.V.
Allen. T.V. Allen did not make its first payment on a GSA invoice until
December 28, 1998. By June of 1999, T.V. Allen had only paid
approximately 50% of the amounts it owed to GSA.
In August 1998, GSA transferred to T.V. Allen its print management
business for a customer called Community Communications, Inc. ("CCl").
The CCI business would have generated an approximate gross profit of
$88,000 for GSA for the last five months of 1998. T.V. Allen paid no
consideration to GSA for the CCI business. Defendants did not disclose to
Unique the transfer of the T.V. Allen and Empress lines and the CCI print
management business to T.V. Allen.
In August of 1998, Cary Johnson ("Johnson") was the outside accountant
for both GSA and the new T.V. Allen Company. Johnson had also provided
accounting services to Rosenberg personally. In August of 1998, Johnson
allocated certain expenses and liabilities between GSA and the new T.V.
Allen Company. All such expenses and liabilities had been paid by GSA,
and Johnson was determining which expenses and liabilities should be
reimbursed by T.V. Allen. Johnson's allocation also included
reimbursement to GSA for the T.V. Allen Assets that were being used by
the new T.V. Allen Company. Johnson's allocation determined that T.V.
Allen owed GSA $2,845,528.22, and of that amount, only $443,420 was to be
paid in cash. Ultimately, T.V. Allen paid only $534,412 of the total
amount in cash.
By August, 1998, GSA was at least 120 days past due on every invoice it
GSA's Board of Directors never approved, or even discussed, the
transfer of the T.V. Allen Assets to the new T.V. Allen Company. Although
Glenn Wimmer ("Wimmer") was GSA's President from June, 1998 through at
least December, 1998, he had no involvement in, or personal knowledge of,
the use or transfer of the T.V. Allen Assets from GSA to the new T.V.
Allen Company. The price that the new T.V. Allen Company was to pay for
the T.V. Allen Assets was not finalized until October or November of
1998. Notwithstanding the fact that the new T.V. Allen Company started
using the T.V. Allen assets in June or July, 1998, an agreement for the
transfer of the T.V. Allen Assets from GSA to the T.V. Allen Company was
not executed until November 6, 1998. Just before T.V. Allen started using
the T.V. Allen Assets, in May of 1998, GSA had obtained an appraisal of
the library of T.V. Allen Christmas card designs that was included in the
T.V. Allen Assets (the "Library"). The express purpose for obtaining the
appraisal was to arrange for financing. The appraisal valued the Library
at over $2,900,000. Both Rosenberg and his son Louis Rosenberg were given
copies of the appraisal at the time of its completion. When Johnson
assigned a value to the Library for use in the transfer of the T.V. Allen
Assets from GSA to T.V. Allen, he valued the Library at approximately
$1,800,000 or over $1,100,000 less than the May, 1998 appraised
Defendants did not disclose to Unique the transfer of the T.V. Allen
and Empress lines to T.V. Allen, Defendants did not disclose in 1998 to
Unique the fact that GSA was transferring products, including the
envelopes being shipped by Unique, to T.V. Allen with no payment.
During 1998 and part of 1999, GSA and T.V. Allen shared the same office
space and the same telephone number. Lewis Dalton ("Dalton") testified
that Vestmark and T.V. Allen also had shared the same office space. Given
its financial circumstances, GSA transferred assets to
the new T. V. Allen Company under terms that did not provide an
adequate down payment or cash flow. T.V, Allen originally planned on
raising approximately $1,800,000 in capital, but only raised
approximately $1,300,000. As a result of this $500,000 shortfall, T.V.
Allen ultimately paid GSA $500,000 less than originally planned, and GSA
had $500,000 less to pay creditors than originally planned. By
transferring GSA's assets to T.V. Allen for inadequate consideration and
cash, while continuing to use GSA to purchase the materials necessary to
supply the T.V, Allen and Empress lines, Rosenberg was able to use GSA's
credit to finance the T.V. Allen's business.
By the end of 1998, the transfer of the T.V. Allen Assets from GSA to
the new T.V. Allen Company was complete. At this time, however, T.V.
Allen had not fully paid GSA for the transferred assets or for the goods
purchased from GSA in 1998. At the end of 1998, Rosenberg began
corresponding on behalf of the new T.V. Allen Company using T.V. Allen
letterhead. Although Rosenberg was not an employee, officer, or director
of T.V. Allen at any time during 1998 or 1999, he served as "Acting
Chairman" of T.V. Allen Board meetings, actively participated in ...