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Consolidated Solubles Co. v. Consolidated Fisheries Co.

Court of Chancery of Delaware, Sussex County

August 27, 1954


Page 640

Action for an accounting under written contract for construction and operation of a manufacturing plant for plaintiffs and sale of the product of plant in name of plaintiff corporation and for injunctive relief. The Court of Chancery, Bramhall, Vice-Chancellor, held that contract limited plaintiff's responsibility for cost of construction and equipment of plant to the maximum amount specified in contract and that plaintiff was not responsible for any sums in excess of such amount expended by defendant for construction and equipment of plant.

Exceptions to accounting given by defendant sustained in part and disallowed in part and permanent injunction granted.

Page 641

[34 Del.Ch. 554] Action for accounting and for injunctive relief.

Samuel R. Russell, of the firm of Tunnell & Tunnell, Georgetown, and William Ginsberg, Philadelphia, Pa., for plaintiffs.

John Van Brunt, Jr., of the firm of Killoran & Van Brunt, Wilmington, for defendants.

BRAMHALL, Vice Chancellor.

Plaintiff David Levin (Levin) and defendant Thomas H. Hayes (Hayes) in 1951 entered into negotiations relative to the erection of a plant on the property of defendant [34 Del.Ch. 555] Consolidated Fisheries Company (Fisheries) for the manufacture of a by-product of the plant of Fisheries known as condensed fish stickwater. Fisheries is engaged in the processing of oils and fertilizer from fish. The condensed stickwater is a by-product recovered by a process of evaporation from the waste coming from the

Page 642

Fisheries plant. On April 6, 1951 Fisheries and Levin entered into a written contract in which it was provided that Levin was to invest certain monies up to the maximum amount of $50,000 for the purpose of incorporating a company in Delaware to be known as the Consolidated Solubles Company (Solubles), or some other appropriate name, for the purpose of erecting a plant on the ground leased by Fisheries and for the equipment thereof in order to manufacture what is called fish solubles. At the same time another agreement was entered into between Levin and Fisheries providing that Fisheries would have an option to purchase Levin's complete interest in the new plant.

The agreement between Fisheries and Levin provided that Fisheries was to cooperate in the erection of the plant and was to operate the same after completion. Fisheries was to act as sales agent in the sale of the product of Solubles for which it was to receive a commission. The product was to be sold by Fisheries in the name of Solubles and the proceeds derived from the sale were to be deposited by it to Solubles' account. Profits were to be divided after depreciation and expense of operation, Fisheries to receive 60% and Solubles 40% of the net profits.

Shortly after the beginning of the construction of the plant and the purchase of certain machinery it became apparent that the plant could not be constructed for $50,000. Levin was so informed by Hayes. On May 31, 1951 a new agreement was drawn under which Levin agreed to advance a maximum of $70,000 instead of the sum of $50,000 as originally contemplated. It was provided in both agreements that it was to be in force for a period of ten years from December 31, 1951, and that Fisheries was to have the option of purchasing all of the stock of Solubles. Fisheries agreed to supply the weak stickwater, oil, supplies, labor and was to supervise the operation of the plant itself.

[34 Del.Ch. 556] Plaintiff advanced and expended a sum somewhat in excess of $70,000 for the erection of the plant and the installation of the equipment. However, the plant, according to Fisheries, actually cost the sum of approximately $95,000. According to plaintiff the cost of the plant was somewhat in excess of $49,000. Fisheries demanded payment of the difference between $70,000 and $95,000 and upon the failure of Solubles to pay the same proceeded to sell the product of Solubles in the name of Fisheries and to retain all of the receipts therefor with the exception of a small item of $71.19. Plaintiffs contend that the plant was operated by Fisheries without consulting Solubles or Levin; that the statement submitted by Fisheries to Solubles, both as to the cost of erection of the plant and cost of production of the product, were grossly excessive and were based upon incorrect records; that the action of Fisheries in selling the product in the name of Fisheries and retaining the proceeds was contrary to the agreement and was a fraud upon Solubles.

On July 7, 1953, at the request of Solubles, I ordered that a preliminary injunction should issue directing Fisheries to desist from selling the product of Solubles as its own and not under the name of Solubles and from failing to apply the proceeds of such sales to the account of Solubles. No relief was provided for as to any sales or receipts by Fisheries prior thereto. An appeal was taken from this order. A motion to dismiss was filed and on September 18, 1953 the Supreme Court directed that the appeal be dismissed. 99 A.2d 497.

Solubles is asking for an accounting for the monies advanced by it in the construction of the plant and for the monies collected by Fisheries in the sale of the product of the plant. Solubles also asks that Fisheries be enjoined permanently from selling the product of the plant as the product of Fisheries or in any other manner than that of the product of Solubles. Solubles also requests that Fisheries be compelled to remit to Solubles the proceeds of the sale of the product of the plant in accordance with the agreement between the parties. Fisheries has given an accounting of the cost of the construction of the plant and of the cost of its operation and the proceeds of the sale of the product. However, Solubles contends that this accounting is grossly incomplete,

Page 643

incorrect and fraudulent. Solubles further contends [34 Del.Ch. 557] that in any event it is not responsible for the payment of any sum in excess of $70,000.00, which it contends is the maximum amount which it can be called upon to pay in the construction of the plant. In addition, numerous exceptions have been taken to the account filed by Fisheries. In the determination of the rights of the parties it will be necessary to consider the specific exceptions raised by Solubles.

The first question which I should determine is the limit of the responsibility of Solubles in the erection of the plant. The agreement of April 6, 1951, relative to the erection of the plant, provides that Levin shall make available to Solubles for that purpose ‘ capital and loans not exceeding $50,000.00.’ The agreement of May 31, 1951 provides:

‘ 1. There is contemplated that Consolidated Solubles, Inc., will expend the maximum of Seventy Thousand Dollars ($70,000) for the construction of a ‘ stickwater’ plant to be located on the premises of Consolidated. Levin shall advance to Consolidated Solubles, Inc., as much additional funds to enable Consolidated to expend up to Seventy Thousand Dollars ($70,000) for the erection of said plant.'

The purpose of these contracts is to provide for an advancement by Levin to Solubles for a sum of money to be used in the erection of the stickwater plant. As I interpret these contracts, the sum of $50,000, and later the sum of $70,000, was the outside limit which Solubles agreed to advance for the erection of the plant. Assuming, however, that the understanding between the parties as set forth in these agreements is not entirely clear, the testimony as to the negotiations between Hayes and Levin indicate clearly that the limit for which Solubles was to be responsible was $70,000. Levin is an accountant. He had had no experience and knew nothing about the business in which Fisheries was engaged. All he learned about the manufacture of condensed stickwater was originally obtained from Hayes. Certainly any prudent business man under such circumstances would want a definite limit to be placed upon his responsibility when he was going into a venture about which he knew practically nothing. [34 Del.Ch. 558] I find from the testimony of Levin and his wife, which is not seriously disputed, that it was only after Hayes had promised that he would look after the construction of the plant, that he had steel and many other materials and equipment which he would supply at cost and that the cost of the building could not exceed the amount specified in the agreement as the maximum sum to be advanced by Solubles, that Levin agreed to enter into the project. The furnishing of all material and equipment, labor and supervision was by Fisheries. It was Fisheries' responsibility therefore to see that the plant was erected in a proper manner and at a sum not in excess of the amount specified. Since Solubles' responsibility is limited to the sum of $70,000, all sums spent over and above that amount for the erection and equipment of the plant, are the responsibility of Fisheries and not that of Solubles.

Fisheries says that the size of the building was changed and that the purchase of certain equipment was the reason why the cost of the erection of the plant exceeded $70,000 and that by reason thereof Solubles agreed to permit Fisheries to sell the product of the plant in its own name and for its own account. In substantiation of this reference is made to a letter to this effect which was for a short period of time and which was never signed by Solubles. Attention is also called to the testimony of Levin to the effect that at one time he did give authority to Hayes to sell the product of Solubles in the name of Fisheries and to retain the proceeds thereof. As to the letter it is significant that it was never signed. As to the question and answer put to Levin in this respect, such testimony is ...

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