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March 3, 1977

DAVID COHEN et al., Plaintiffs

The opinion of the court was delivered by: JONES

This non-jury action was originally filed in the Court of Common Pleas of Philadelphia County, Pennsylvania. The case was removed to the United States District Court for the Eastern District of Pennsylvania. 28 U.S. Code §§ 1441, et seq. Subsequently the action was transferred to the United States District Court for the District of Columbia pursuant to 28 U.S. Code § 1404(a). In the state of Pennsylvania and under its law the defendant law firm was sued as an entity and service obtained over the firm as an entity rather than by serving the individual partners. Rule 2128(a) and (b), Pennsylvania Rules of Civil Procedure. Just before the trial of this case on January 5, 1977, defendant firm moved to amend the answer to assert that under the law of the District of Columbia it could not be sued as an entity but the individual members had to be named and served. This motion was denied on the authority of Van Dusen v. Barrack, 376 U.S. 612, 639-40, 642-43, 11 L. Ed. 2d 945, 84 S. Ct. 805 (1964).

 Full discovery was entered into and full pre-trial briefing was conducted as required by Pre-Trial Order No. 1 entered by this Court. As a result of such pre-trial discovery and procedures required, the issues are as follows:

 (1) Richard Kelly's criminal record was allegedly known to the defendant firm but not to the plaintiffs and that defendant firm failed to make known that record to the plaintiffs. This according to the plaintiffs breached their contract of employment with the defendant firm and also was the result of negligence and fraud on the part of the defendant firm.

 (2) Checks were drawn by Kelly but payment was refused because of lack of sufficient funds, all of which according to plaintiffs was known to defendant firm but not to the plaintiffs and defendant firm failed in its duty to disclose such facts.

 (3) Kelly claimed ownership or control of several companies which he stated had assets totalling as much as $50,000,000 and which produced an annual return of $5,000,000, when according to the plaintiffs actually Kelly did not own or control such companies, hence the claimed asset value and return were false, all of which was not known to the plaintiffs, but they alleged the defendant firm knew those facts and failed to disclose them to the plaintiffs.

 At the close of plaintiffs' case, defendant firm moved for a dismissal of plaintiffs' entire action on the grounds that upon the facts and law plaintiffs had failed to show any right to the relief claimed. Plaintiffs' counsel candidly admitted that the record failed to show that Kelly's claim of ownership or control of the several companies was false or that the companies did not possess the claimed asset value and produce the claimed annual return. The Court's review of the record confirms that concession by counsel. Defendant's motion was, therefore, granted to the extent of dismissing the third issue but denied as to the other two claims.

 Plaintiffs' trial counsel was brought into the case by plaintiffs just prior to the commencement of the trial. He had nothing to do with the pre-trial stages, including conferences with the Court. However, his predecessors along with the defendant firm's counsel advised the Court that this case could be tried in nine days if it commenced on January 5, 1977. The trial was commenced on that date and it became obvious after several days that it would be impossible to try both the liability question and damages in the time allotted. The Court therefore bifurcated the trial and limited the first phase to the question of liability.

 Factual Background

 Chris-Craft Industries, Inc. (Chris-Craft) in 1970 found its management faced with a number of dissatisfied shareholders. The feeling of the latter was that the management had depreciated the value of the Chris-Craft stock. In February and August, 1970, there were two meetings in Chicago of dissatisfied shareholders. Plaintiffs Balsbaugh and Schnell attended at least one of those meetings and possibly two. Plaintiff David Cohen was present at both Chicago meetings. In 1970 Cohen held Chris-Craft stock, which had cost him approximately $1,000,000. Balsbaugh's original cost for the shares he held was $350,000, while Schnell's stock holdings were considerably less. At the Chicago 1970 meetings the shareholders present discussed their dissatisfaction with Chris-Craft management. Various approaches were considered including organizing a proxy contest to take over control of the company. However, Cohen, who had some knowledge of a proxy contest, told those present of the rather substantial cost of such a contest as well as problems associated with it. The shareholders then present determined not to institute the proxy contest but rather to meet with management. That meeting subsequent to August 1970 meeting was held without any satisfactory result being achieved by the dissatisfied shareholders.

 In late May or early June, 1971, Cohen learned of Richard Kelly's attempt to purchase Siegel's Chris-Craft stock interest. Siegel was the Chairman of Chris-Craft. Cohen also learned that Charles Reed, by that time a partner in defendant law firm, was Kelly's lawyer. Furthermore, Cohen was advised that Reed had drafted a form of letter addressed to Kelly for the purpose of having it signed by dissatisfied shareholders to the effect that they were unhappy with the way management was conducting the Chris-Craft business. The purpose of the letters was to strengthen Kelly's bargaining position with Siegel. Cohen signed such a letter with certain changes made by him and with the understanding that it would not be made known to management.

 Cohen heard of a July 23, 1971, meeting between Kelly and Reed and Chris-Craft management, at which time Cohen was advised there was discussed Kelly's proposal to merge certain companies with Chris-Craft. In return for such a merger it was Kelly's proposal that he would receive a substantial block of Chris-Craft stock. A meeting was held in Cohen's Philadelphia law office on August 4, 1971. Among those present were Cohen, Kelly and Reed. Among the matters discussed were the efforts Kelly had been making to acquire a substantial interest in Chris-Craft as well as Cohen's experiences with the two 1970 Chicago meetings. Various alternatives were discussed, including a proxy contest. It was finally concluded at the August meeting that Kelly and Reed would continue the negotiations and keep Cohen and the others present advised.

 On August 11, 1971, Kelly and Cohen met in New York after Kelly had had a meeting with Chris-Craft management. Kelly's description of the events of that meeting indicated on his part a degree of optimism that the merger proposal and other negotiations with management were not at an end. Either at the Kennedy International Airport or LaGuardia Airport in New York on August 26, 1971, Cohen, Kelly and Reed had a meeting. Kelly and Reed were on their way to Canada. Cohen came to the airport to meet with them with respect to the Chris-Craft matter. Thereafter, in defendant law firm's office in Washington a meeting was held on September 23, 1971. Present, among others, were Reed and Surrey of the law firm, as well as Kelly and Cohen, Balsbaugh and Schnell among the dissatisfied shareholders. There it was decided that the dissatisfied shareholders were to initiate a proxy contest for the purpose of removing the present management of Chris-Craft. Reed and Surrey explained to those present the meaning of a proxy contest. To aid in that explanation each dissatisfied shareholder present was presented with written material referred to as a book. Among other things, the material contained a form for each participant to make known his relative biographical data. It explained to participants that anything derogatory in their lives had to be revealed because it could be expected that management in a proxy contest could become aware of such facts and disclose them. At least one of the participants -- a dissatisfied shareholder -- determined not to participate in the contest because of his background. Other participants lost interest in the contest when they learned of the costs that would be entailed and the problems that would be faced. Only Kelly and the three plaintiffs expressed an interest in undertaking the proxy contest.

 Cohen mailed his $25,000 check to the defendant firm on October 1 and thereafter asked Reed not to deposit the check until October 13. Balsbaugh on October 1 mailed his $7500 check to the defendant firm. Schnell presented his $3712 check to the firm on October 16, 1971 at a meeting. It was on the latter date that a second meeting was held in defendant law firm's Washington offices. Some time between September 23 and October 16, 1971, Kelly gave Reed two checks. A $15,000 check was dated October 25, 1971, while a $10,000 check was dated October 13 or earlier. All checks were payable to the account of the Independent Stockholders Committee.

 At the October 16 meeting it appeared as though the three plaintiffs and Kelly had met their contribution pledges and the Independent Stockholders Committee was formally organized. Balsbaugh was chosen chairman of the committee. A number of resolutions were adopted and agreements entered into by the Committee. One of those resolutions provided for retaining defendant firm to represent the Committee in the proxy contest. Another resolution provided for opening a Committee bank account and authorizing the firm to draw on the account for proxy contest purposes.

 In the Committee's agreement with the defendant law firm, it was provided that the firm would represent the Committee in the proxy contest and it would be compensated at their regular hourly rates. The Committee agreed to deliver a $25,000 retainer to defendant firm and it was provided that if the firm's fees did not reach $25,000 prior to the termination of their services, the difference would be rebated to the Committee. In the event the fees at the hourly rate exceeded the $25,000 retainer, the firm would bill the Committee for the excess on a monthly basis. Also the firm's out-of-pocket expenses for the proxy contest would be billed on a monthly basis.

 In addition to adopting resolutions and entering into agreements, the Committee and counsel at the October 16 meeting discussed a number of matters pertinent to the proxy contest. During the meeting Kelly raised the question of his background possibly being a problem to the Committee and he offered to withdraw from participation. He made a disclosure of his background, the extent of which is in dispute and will be referred to later.

 Under date of November 20, 1971, Chris-Craft management distributed to the company's stockholders a document which has been referred to in this case as a "fight letter." (Pltfs. Ex. 48.) That letter stated that David Cohen had claimed the protection of the Fifth Amendment before a Federal Grand Jury in Philadelphia. The Grand Jury was investigating the activities of the Teamsters League of Philadelphia and Vicinity. The fight letter stated that Cohen refused to testify. The Grand Jury's investigation encompassed possible income tax evasion "as related to a local Teamster official but collaterally as to any individual, including David Cohen." Accompanying the fight letter was a copy of an opinion and order of the United States District Court for the Eastern District of Pennsylvania denying the Government's motion to compel Cohen to testify before the Grand Jury and holding that Cohen's claim of privilege had been timely asserted and had not been waived.

 The same November 20, 1971 fight letter stated that Richard Kelly in trying to take control of Polarad Electronics Corporation gave Polarad his personal check for $38,000, which check was returned unpaid because of insufficient funds.

 The third Kelly conviction cited in the December 2, 1971 fight letter was on a finding of guilt in Wichita, Kansas, in 1960 of the offense of falsely advertising a cosmetic and drugs. According to the letter, Kelly was sentenced to 60 days in jail and fined $300. The letter further stated that in an unrelated SEC investigation, Kelly testified that he posted a bond and did not go back to Wichita.

 A December 4, 1971 meeting in defendant's offices in Washington was attended by the four Committee members, who were also director nominees in the proxy contest, the other director nominees, Reed, Surrey, Michael Nussbaum, firm partners, and firm associates, Cherif Sedky and Mark Wolf. The principal matters discussed were the action initiated on December 1 by Chris-Craft against the director nominees in the United States District Court for the District of Delaware and the December 2 management fight letter. The complaint sought an injunction and money damages. *fn1" The view was expressed that the most serious allegations of the complaint were those against Kelly and his record, since the thrust of the claim was that the operating authority for the company's television stations would be placed in jeopardy. (See Def. Ex. 18.) Counsel expressed the opinion that Kelly's past record would have little or no effect on the issuance of any broadcasting license by the Federal Communication Commission. At the meeting Kelly described the charges against him and the background thereof. He offered to resign and he left the room while the director nominees, including the three plaintiffs, considered whether to accept the offer of resignation. They deferred the decision until there could be obtained an indication of the impact of management's December 2 letter on the shareholders to whom the letter was addressed. Never did the director nominees, including the three plaintiffs, decide to accept the resignation. However, Kelly on his own volition resigned on December 14, 1971.

 As has been noted, it is plaintiffs' claim for relief that the defendant law firm did not reveal Kelly's criminal record or his issuing checks without sufficient funds to cover them. Plaintiffs assert that if they had known of those facts they would never have associated themselves with Kelly in the proxy contest. They do not assert that that record or the returned checks caused them to lose the proxy contest at the January 11, 1972 shareholders meeting.

 1. Kelly's Criminal Record

 From the evidence in this case it is found that the first time any one in the defendant firm knew of Kelly's criminal record was when Charles Reed learned of it in September, 1970. Reed at that time was a member of another law firm. He represented Kelly in a Securities and Exchange Commission (SEC) investigation in the matter of First Liberty Fund, Ltd. and others. There Kelly appeared as a witness; no charges had been filed against him. (Pltfs. Ex. 6.) The hearing was in Fort Worth, Texas. At that hearing Kelly testified that he had been arrested and formally charged with issuing insufficient fund checks in 1959 in Phoenix, Arizona. However, he further testified that he assumed that the charges were dismissed, since to his knowledge he wasn't tried and convicted and he was not given a sentence.

 He further testified that in 1954 he was arrested, charged and tried in connection with his issuance of an insufficient fund check in Asheville, North Carolina. However, he asserted that while he had been sentenced the matter was dropped when his family "came up with the money."

 He also testified that in 1960 he was arrested in Wichita, Kansas, and charged with false advertising, but he added he was not tried, that he posted a bond and did not go back to Wichita.

 He further testified that he had been arrested in Santa Ana, California, in 1961 because he failed to appear on a traffic ticket. He was not asked, nor did he disclose, the result of that arrest. (Pltfs. Ex. 6, pp. 49-51.)

 Following the hearing in Fort Worth, Kelly and Reed drove to Dallas, a trip of about 30 minutes. Reed, wanting to know all of the details of the matters as to which Kelly testified, questioned him. Kelly told Reed that in 1953 or 1954, when he was nineteen years old, he owned an automobile which was involved in an accident. Kelly made a claim for insurance and the adjuster approved the claim. Kelly then had the automobile fixed but, after receiving it from the repair shop, he discovered the repairs were not complete. The claims adjuster approved the additional work and when this work was completed, Kelly paid for it by check on the assumption that he was going to receive insurance money. However, at this time the adjuster who had approved the claim was in the hospital. The successor adjuster denied Kelly's claim and as a result the check bounced. Because of that Kelly was arrested but, as he related to Reed, his family "came up with the money, and the matter was dropped." Tr. 62.

 During the same ride to Dallas, Kelly told Reed that in 1959 he moved from Phoenix to Los Angeles. In leaving Phoenix he believed that he had a couple of milk bills which had been paid. He closed his Phoenix bank account and opened an account in California. Subsequently the two checks he had written for the milk bills were presented to the Phoenix drawee bank and dishonored for lack of funds. When the milk company made this fact known to Kelly he attempted to pay the milk bill. When he failed to find or missed connections with the milk distributor, he failed to pay the bill. But on a trip to Phoenix he made telephone contact with the milk distributor after which he went to the distributor's office to pay the bill. When he arrived he was arrested. He thereafter retained a lawyer who advised him to plead guilty to the charge of writing insufficient fund checks. He did plead guilty when the lawyer told him that it was not worthwhile to defend the action.

 During the same trip to Dallas, Kelly told Reed that he had been charged with drunken driving or being drunk in a public place in California and that the charge was dismissed, that he was not convicted. Kelly also told Reed that he had received a traffic ticket in Santa Ana, California, that he had given a check to his secretary to pay that ticket and that she neglected to do so. He had been arrested on a warrant and that he had paid the ticket.

 On the same trip, Kelly told Reed that at one time he had been with a company that retailed cosmetics, hair and scalp treatment and that it had placed an advertisement in Wichita newspapers. He further recounted that on a trip to Wichita for the company he was arrested and charged with false advertising, that he retained a lawyer who told him that arrangements had been made with the prosecutor ...

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