Albert B. KAHN and Howard L. Williams, Plaintiffs,
GENERAL DEVELOPMENT CORPORATION, a corporation of the State of Maryland, et al., Defendants.
George T. Coulson, of Morris, Nichols, Arsht & Tunnell, Wilmington, for Bellanca Corp., George N. Craig, of Craig, Summers & O'Hara, Washington, D. C., of counsel.
Daniel L. Herrmann, of Herrmann & Duffy, Wilmington, for defendants-appellees, Theodore Charnas, Hyman Jacobs and Stephen Charnas, New York City, of counsel.
SOUTHERLAND, C. J., and WOLCOTT and BRAMHALL, [*] JJ., sitting.
This is an appeal from a judgment of the Chancellor dated October 21, 1960 abrogating the effect of an agreement under which shares of General Development Corporation (hereafter General) and shares of Bellanca Aircraft Corporation (hereafter Bellanca) were deposited in escrow for ultimate exchange.
The suit arose by the filing of an action of interpleader by the escrow agents who held both the General stock and the Bellanca stock subject to the terms of the escrow agreement, hereafter more fully noted. The parties interpleaded and divided into two controverting sides, each claiming the General stock held by the escrow agents. Bellanca represents one side to the controversy and is the appellant, while certain of the depositing stockholders of the General stock represent the other side and are the appellees.
General was organized in 1946 but, by 1956, had fallen into financial difficulty and was in critical need of working capital. Various means of raising working capital were explored but ultimately, in June, 1956, pursuant to a proposal of Bellanca, an escrow agreement was entered into between the two corporations. The escrow agreement gave Bellanca the right to exchange 4000 shares of its stock deposited with the escrow agents for all of the outstanding stock of General deposited with the escrow agents by General's stockholders. [40 Del.Ch. 86] The option of Bellanca to exchange its stock for General stock could be exercised by it at any time during a period of five years.
The escrow agreement gave Bellanca voting control of General; required it to furnish General with officers and directors for its management, and also required it to enter into an agreement with Equitable Security Trust Company (hereafter Equitable) to pledge sufficient collateral with Equitable to establish a line of credit for General in the amount of $150,000 to be used by General as working capital.
The deposit of the General stock with the escrow agents was approved by General's stockholders at a special meeting called by a notice sent to stockholders outlining the proposal made by Bellanca to General. The actual deposit of General's stock in escrow was made by means of a stock deposit letter from each stockholder, inter alia, establishing the conditions that if the Bellanca proposal did not become operative, or if Bellanca defaulted in its obligations under the escrow agreement, the General stock so deposited would be returned to the depositing stockholder.
The notice to General stockholders outlining the proposal of Bellanca to General, which presumably led to the approval of General's stockholders, was that Bellanca would loan General sufficient shares of Automatic Washer Company stock to be used by General to negotiate a loan of $150,000.
On the same day Bellanca and General entered into the escrow agreement, pursuant to its requirement Bellanca entered into a collateral loan agreement with Equitable which established a revolving line of credit to General of $150,000, provided Bellanca kept on deposit with Equitable at all times collateral with a market value of at least 200% of the balance of the current amount loaned by Equitable to General.
We note that the escrow agreement between Bellanca and General did not put into effect the proposal outlined to General's stockholders since Bellanca, rather than General, contracted with Equitable[40 Del.Ch. 87] for the establishment of the line of credit. No point, however, is made of this departure from the original proposal and all parties seemed to have accepted it. We so assume from the fact that the appellees, the depositing stockholders, later charged Bellanca not with a departure from its original proposal, but with a breach of specific provisions of the escrow agreement entered into with General.
Meanwhile, pursuant to its obligation under the escrow agreement, General delivered to Bellanca the resignation of all of its officers and directors, and the escrow agents thereupon elected seven directors upon the nomination of Bellanca. Four of such directors were employees of Bellanca and three of such directors were employees of General. From the new directors so elected, Blythe of Bellanca was elected president; Shaw and Deppert of General were elected vice president and vice president and secretary respectively, and Baldini of Bellanca was elected treasurer.
Bellanca thereupon deposited with Equitable sufficient Automatic Washer Company stock to open a revolving line of credit for General of $150,000. Equitable thereafter, from June 5, 1956 to September 11, 1956, loaned a total of $70,000 to General. In October, 1956, for various reasons, the Automatic Washer Company stock became unacceptable as collateral to Equitable and it sold sufficient shares to realize $50,000 which was credited against General's loan. Bellanca thereupon paid Equitable $20,000 to liquidate the balance of General's loan and received back the unsold shares of Automatic Washer Company stock. Thereafter, while the loan agreement between Bellanca and Equitable remained uncancelled, Bellanca never deposited further collateral with Equitable to permit further borrowings by General under the loan agreement. It is probable that no further collateral was deposited under the loan agreement because of Bellanca's own financial difficulties.
On October 17, 1956, it was reported to General's board that Equitable would not accept any longer Automatic Washer Company stock as collateral, and that, accordingly, from them on, Bellanca would advance money to General direct. In November and December,[40 Del.Ch. 88] 1956, Bellanca advanced to General in installments an aggregate of ...