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MAYER v. DEVELOPMENT CORP. OF AMERICA

April 22, 1981

Henry D. MAYER and Marianne Mayer, Plaintiffs,
v.
DEVELOPMENT CORP. OF AMERICA, Alvin Sherman, Morris R. Sherman, Pedro Diaz, Irving Fishman, Edward Lempka and Berta Dee Stern, Defendants



The opinion of the court was delivered by: MEANOR

OPINION n*

Background and Procedural History

 On May 3, 1978, the complaint in this diversity action was filed by Henry and Marianne Mayer, citizens of New Jersey. Defendant Development Corporation of America (hereinafter referred to as "DCA") is a Florida corporation with its principal place of business in Hollywood, Florida. Defendant Alvin Sherman is a citizen of Florida and was, at all relevant times, the chief executive officer of DCA. Defendant Morris Sherman is a citizen of New York and was, at all pertinent times, counsel to DCA. *fn1" The remaining individual defendants, Pedro Diaz, Irving Fishman, Edward Lempka and Berta Dee Stern, were alleged to have been members of DCA's board of directors at all times pertinent hereto. *fn2"

 Up to and during 1969, Henry and Marianne Mayer, along with others, owned all of the outstanding stock in three New Jersey corporations, namely, the Mayer Construction Co., Barnegat Light Development Co. and Coast Realty Co. Henry Mayer was the major stockholder in each of these companies and was president of Mayer Construction Co. from 1960 to 1969. On September 5, 1969, an "Agreement and Plan of Reorganization" (hereinafter referred to as "Agreement"), Exhibit D-2, was entered into by the parties. Pursuant to the Agreement, DCA was to acquire all the outstanding stock of the Mayer Corporation-an entity into which the three above mentioned corporations had been consolidated. The Agreement was the culmination of a series of negotiations which had their inception in the spring of 1969. The Agreement is also the focal point of the instant controversy.

 In their complaint, plaintiffs allege that actions taken by the defendants in connection with DCA's claim for certain tax deductions constitute a breach of contract and various torts. The individual liability of defendants Alvin Sherman and Morris Sherman is predicated upon theories of tortious interference with the contractual relations between plaintiffs and DCA and the intentional infliction of emotional distress upon the plaintiffs. For relief, plaintiffs seek a declaratory judgment to that effect and that

 
all Defendants are required, jointly and severally, to indemnify Plaintiffs for any and all damages which may be incurred by them as a result of Defendants' wrongful conduct, including but not limited to all taxes, interests and penalties which may be found due and owing by Plaintiffs to the IRS as a result thereof, together with any and all expenses, costs and legal fees incurred by Plaintiffs in connection with the efforts of the IRS to collect the alleged deficiencies.

 Complaint at 15 to 16, para. (a)(iv). In addition, plaintiffs seek compensatory damages from DCA for the willful and deliberate breach of contract and compensatory damages from Messrs. Sherman and Sherman for their alleged tortious conduct and infliction of emotional distress. Lastly, they seek the imposition of punitive damages on all counts.

 After substantial discovery was had, the defendants moved for summary judgment on a variety of grounds. In an unpublished opinion, filed April 30, 1980, I granted in part and denied in part defendants' motion. Mayer v. Development Corp. of America, Slip Op. (D.N.J., Apr. 30, 1980) (hereinafter cited as "Slip Op.").

 The matter then came on for trial, without a jury, on October 31, 1980. After four days of testimony, I reserved decision and requested the parties to submit their proposed findings of fact and conclusions of law with supporting memoranda shortly thereafter. *fn3" The opinion which follows constitutes this court's findings and conclusions pursuant to Fed.R.Civ.P. 52(a).

 I. Findings of Fact

 A. The 1969 Agreement.

 As mentioned above, on September 5, 1969, an "Agreement and Plan of Reorganization" was entered into between the parties. Pursuant to the Agreement, DCA acquired all the outstanding stock of the Mayer Corporation. The Agreement was the culmination of a series of negotiations which had their inception in the spring of 1969. At that time, Henry Mayer had placed advertisements in the Wall Street Journal soliciting potential purchasers of the Mayers' corporations. DCA's reply was one of the approximately twelve responses received by Mayer in which Mayer expressed an interest. Tr. 183.

 As a result of Mayer's response to the DCA inquiry, Mayer met with various DCA personnel, including DCA's head of acquisitions, George Samuels, and its president and then largest stockholder, Alvin Sherman, in April and June of 1969 in Hollywood, Florida. Tr. 114, 162, 183. At one of these meetings, Alvin Sherman proposed a formula by which DCA would acquire the Mayers' corporations in a non-cash stock exchange. Tr. 184. Since the proposed acquisition would be cash-free, however, Mayer insisted that the exchange would have to be tax-free. Tr. 185. Mayer testified that "since there was no cash involved ... (he) couldn't very well come up with money to pay the taxes when ... (he) was in essence getting a piece of paper." Tr. 186-6 to -8. Accordingly, a determination was made to structure any acquisition as a "tax-free exchange." *fn4" In a letter dated June 25, 1969, Henry Mayer also expressed his desire to be placed on the board of directors of DCA. D-1, para. XI, at 4.

 In late July 1969, Mayer received from DCA a proposed draft of an acquisition agreement (hereinafter referred to as "Initial Draft"). DB-1. The Initial Draft was prepared by Morris Sherman. Tr. 313-18. It contemplated the acquisition of all the outstanding stock of the three Mayer corporations through the issuance and delivery of shares of DCA common stock to the shareholders of those companies in a tax-free reorganization pursuant to section 368(a)(1)(B) of the Internal Revenue Code ("I.R.C."), 26 U.S.C. § 368(a)(1)(B). *fn5" In fact, the Initial Draft stated such explicitly: "it being intended by the parties hereto that such exchange be a tax-free reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1954, as amended, ...." DB-1, at 2.

 The original structure of the transaction, as set forth in the Initial Draft, provided for the delivery of DCA stock to the Mayers in two "installments." DB-1, Art. V, at 10. The first "installment," termed the "Initial Shares," was to be determined on the basis of a formula geared to the September 30, 1969, financial condition of the three Mayer companies. These shares were deliverable at the closing of the agreement. The second "installment," termed the "Additional Shares," would be determined on the basis of another formula geared to the earnings performance of the Mayer corporations during the three-year period ending December 31, 1972.

 Upon receipt of the Initial Draft, Henry Mayer had it reviewed by his accountant, Frank J. Ewart. Ewart then suggested that the agreement be reviewed by David Beck, Esq., an attorney considered by Ewart to be experienced in this field. Mayer complied with this suggestion and a copy of the Initial Draft was forwarded to Beck for his review. Tr. 13. Beck's primary concern was to determine whether the Initial Draft would qualify the transaction as a tax-free reorganization. Id. However, Beck also undertook a general review of the entire agreement. Id., 17. At some point during his review, the question of possible "imputed interest" *fn6" arising out of the transaction occurred to Beck. Beck testified that the structure of the exchange of the "Additional Shares" contingent upon the subsequent earning capacity of the acquired corporation presented this problem. As a result of some additional research, Beck believed that the Initial Draft

 
violated (the) imputed interest rule which meant that on the exchange which we wanted to be tax free, the Internal Revenue Service by its own guidelines would read into this contract consequences whereby the shareholders would be taxed to the extent of ordinary income based on a formula being read in that they would have had interest imputed to them even though not stated in the agreement.... (It's) imputed to the stockholders, and by the same token the acquiring corporation would have had an offsetting deduction for income tax purposes.

 Tr. 18-22 to 19-7.

 The court is persuaded that Henry Mayer, once appraised by Beck of the tax implications of the proposed agreement, as set forth in the Initial Draft, sought to avoid these implications at all costs. In both their deposition and trial testimony, Messrs. Mayer, Tr. 191 to 197, 261 to 263, Mayer 50, and Beck, Tr. 28 to 33, 46 to 47, Beck 18 to 19, 21 to 24, 35 to 36, 39, 43, 44 to 45, stated that they consistently and unwaivingly expressed to DCA's representatives their paramount desire to avoid the imputation of interest income to the Mayers as a result of this transaction. Morris Sherman's testimony corroborates this point. Tr. 322 to 359. Mayer's insistence was so definite that Beck testified that "there would have been no deal had we not changed it around." Tr. 30-4; see Tr. 192. Accordingly, negotiations commenced between the parties in an attempt to produce a satisfactory agreement.

 Beck suggested to Morris Sherman that language be inserted for the purpose of avoiding imputed interest income to Mayer and precluding a deduction for imputed interest by DCA. Beck relied heavily upon Example 8 of the Regulations under section 483 and a tax article written by David R. Tillinghast entitled "Contingent Stock Pay-outs in Tax-Free Reorganizations," appearing in 22 Tax Lawyer 467 (1969). DB-3. Morris Sherman does not deny that this material was shown to him during the course of the negotiations. Tr. 323 to 326. It was Beck's position that to avoid the concept of an installment payment and the imputation of interest income, Tr. 24, the final agreement must provide for the immediate delivery of all DCA shares receivable by the Mayers, coupled with an escrow as to any "earn out" shares. Tr. 323. Beck also indicated that it would be necessary to change the term "installment" in the Initial Draft to "categories." Tr. 28.

 Morris Sherman, DCA's attorney and principal negotiator in this matter, acknowledged that he originally gave no consideration to the concept of imputed interest when he prepared the Initial Draft. Tr. 314. Beck injected the issue into the negotiations. Tr. 322, 457 to 458. Sherman admitted, however, that the avoidance of imputed interest was a "very important consideration at the time." Tr. 323-15. He indicated that DCA had no objection in principle to Beck's proposal of the avoidance of imputed interest, but its main concern was the protection of its business interests. Tr. 357-18. Sherman also indicated that certain "business considerations" prevented DCA from taking a position "that would have been clear, simple and unequivocal," and that he did not form an opinion on the question of imputed interest until April 1974 when DCA was considering litigation against Mayer. M. Sherman 60 to 62.

 The actual negotiations on this issue and the results generated therefrom are matters of some dispute. Morris Sherman testified that Beck's proposed method of avoiding the imputation of interest income to Mayer, i.e., the immediate delivery of all shares of DCA stock potentially receivable by the Mayers coupled with an escrow of divestible shares, could cause difficulty. Some of the business considerations which might have caused difficulty for DCA were alluded to by Mayer. The immediate delivery of all the shares, totaling 170,000, to the Mayers would dilute DCA's earnings per share. Tr. 192 to 193. Also, it would have provided the Mayers with approximately the same number of voting shares as Alvin Sherman. Tr. 196. Furthermore, it was also possible that DCA was unwilling to agree in September 1969 that the purchase price of the Mayer corporations was 170,000 shares of DCA stock when the Mayer corporations at that time were only worth approximately one-half of that amount. Tr. 346 to 348, 350. Thus, it is clear to the court that the prospect of preserving a future tax deduction for imputed interest expense was not a motivating factor for DCA in 1969.

 On the other hand, the avoidance of imputed interest income was a matter of grave concern to the Mayers; it was a focal point in the negotiations to Henry Mayer. David Beck and Morris Sherman both testified that Beck's concern over the avoidance of imputed interest caused them to draft substantial revisions to the Initial Draft in the form of the escrow provisions found in the final agreement. Tr. 23 to 24, 26 to 28, 33 to 34, 43, 329 to 331, 344, 438 to 440, 457 to 458. Of considerable interest to the court is Mayer's testimony concerning the initial negotiations over the imputed interest problem. Mayer testified that during the negotiations he never relented on his insistence that interest income imputation be avoided. Tr. 192. When the issue finally came to a head, Messrs. Mayer and Alvin Sherman themselves negotiated the question. Mayer explains:

 
During the drafting sessions-I won't call them negotiations, although the imputed interest question was a negotiating item, but the rest was draftsmanship, I spoke-George Samuels got Al Sherman on the phone and we discussed-Al's position was the only way that we can get around the imputed interest was the delivery of all of the shares initially. And Alvin's reaction to that was negative because it would dilute the earnings per share of the parent companies.
 
....
 
And I told him that if that was the only way that the deal was structured and if he was unwilling to go along with that there was no point in continuing the drafting sessions because they were expensive and we were not going to arrive at any conclusion.
 
So he wanted some time to discuss it with his associates in Florida, and he called back an hour later to George Samuels and said, go ahead, and structure it with all the shares to be issued initially.

 Tr. 193-6 to 194-7.

 Furthermore, David Beck credibly testified that he believed he had reached an understanding and agreement with Morris Sherman, on behalf of DCA, that imputed interest would not apply to this transaction. Tr. 34, 45, 47. Beck explained that everything possible had been done by the parties to avoid the application of imputed interest in the agreement. Consequently, he did not consider it necessary to include in the agreement a declaration of intent similar to that found in section 13.10, *fn7" in which the parties proclaimed their desire to preserve the tax-free nature of the reorganization under section 368(a)(1)(B). *fn8" Tr. 35 to 36, 44, 104 to 105.

 The credible testimony discussed above lends strong support to a finding by the court that the parties reached an understanding in 1969 that, regardless of any potential entitlement under the Internal Revenue Code, DCA would contractually forego its right to claim a subsequent tax deduction for any imputed interest. Of course, DCA's forbearance and loss is merely the concomitant of the Mayers' benefit, i.e., the avoidance of imputed interest income and the associated taxation. This finding; however, is greatly buttressed when the court considers the other evidence before it.

 A review of the executed Agreement reveals that it was structured along the lines demanded by Mayer and Beck. *fn9" Pursuant to section 5.1(a) of the Agreement, the Mayers were to exchange their stock in their corporation for DCA stock "to be delivered and maintained in two separate categories ... referred to as the "Initial Shares' and the "Additional Shares.' " D-2, § 5.1(a), at 14. That section also provides that "D.C.A. shall deliver ... to the Shareholders, ... 85,000 shares of its Common Stock as the Initial Shares...." Id. at 15 to 16. Of these 85,000 Initial Shares, 25,000 shares were escrowed for a short period with Messrs. Morris Sherman and Beck to await verification of the financial performance of the Mayer companies through and including September 30, 1969. Id., § 5.1(b), at 16. With respect to these escrowed shares, all dividends received were to be delivered by the registered owners into escrow. Id., § 5.1(c)(i), at 16 to 17. Furthermore, the registered owners would have the right to vote the escrowed shares "as though the same had not been deposited in escrow." Id., § 5.1(c)(ii), at 17.

 With respect to the so-called "Additional Shares," the Agreement provided:

 
On the Post-Closing Delivery Date, ... D.C.A. shall deliver to the Shareholders, ... the Additional Shares due Shareholders hereunder, determined in accordance with the factors, calculations and methods set forth in Section 5.4 hereof; provided, however, that the maximum number of such Additional Shares shall in any event be limited to, and shall not exceed, the number of shares of D.C.A. Common Stock comprising the Adjusted Initial Shares....

 Id., § 5.2(a), at 19. In an acceleration provision, the Agreement further stated:

 
Notwithstanding the foregoing provisions hereof, D.C.A. shall, within 15 business days after receipt of written request from any Shareholder made at any time following the calculation and determination of the number of Adjusted Initial Shares made by Ewart under the provisions of Section 5.3 hereof, deliver to such Shareholder prior to the Post-Closing Delivery Date, as the Additional Shares due him hereunder, in certificates of such denominations as requested by such Shareholder, but subject nevertheless to the terms and conditions set forth hereinbelow, such number of shares of D.C.A."s voting common stock as shall be equal to such Shareholder's interest in the number of Adjusted Initial Shares to which the Shareholders collectively are entitled under Section 5.3.... Upon the delivery by D.C.A. of the said Additional Shares:
 
(i) The Shareholder shall, concurrently with the receipt of the certificates representing such Additional Shares, deliver all of the said certificates duly endorsed in blank, ... to the Escrow Agents named in Section 5.1(b) hereof (Messrs. Beck and M. Sherman).
 
(ii) Said Escrow Agents shall receive ... said Additional Shares as a separate escrow fund, ... (T)he escrow period for such Additional Shares shall end on April 30, 1973, at which date the Escrow Agents shall, ... distribute and deliver said Additional Shares to and between D.C.A. and the Shareholders as their respective interests may then appear under the computations, ...
 
(iii) The delivery of said Additional Shares to the Escrow Agents by D.C.A. pursuant to the foregoing ... shall discharge pro tanto the obligations of D.C.A. to the requesting Shareholder....

 Id., § 5.2(b), at 19 to 21. Like the escrowed Initial Shares, the registered owners received the dividends and then escrowed them and enjoyed full voting rights with respect to all the shares so escrowed. Id., § 5.2(b)(ii), at 20, 16 to 19.

 There is no dispute that after the Agreement was executed 85,000 Initial Shares were, in fact, delivered to the Mayers at the Closing and that 25,000 of these shares were escrowed for a short period of time, until the financial performance of the Mayers' corporations through September 30, 1969, was verified. Tr. 187. With respect to the second category of shares-the Additional Shares-they were issued, registered in the Mayers' names and delivered to them in April 1970, although escrowed with Messrs. Morris Sherman and Beck. Tr. 188 to 189, 278. As the quoted provisions of the Agreement illustrate, it is clear the parties contemplated that the delivery of the Additional Shares to the escrow agents was in lieu of physical delivery of the stock certificates to the Mayers. Furthermore, stock dividends declared and paid by DCA on both the Initial Shares and the Additional Shares were sent directly to the Mayers. They then returned the certificates to Beck and Morris Sherman for division into smaller denominations to effectuate the escrow arrangements. Tr. 189 to 190. No cash dividends were paid by DCA between 1969 and 1973. Tr. 189. Also, the Mayers voted both the Initial and Additional Shares throughout the escrow period. Tr. 190. Furthermore, during the escrow period, Morris Sherman, in a letter dated May 1, 1970, advised Beck that:

 
The attorneys preparing the proxy statement for D.C.A. have advised me that Henry must prepare and file a "Form 13D" with the Securities and Exchange Commission as soon as possible. This is due to the fact that Henry became the beneficial owner of more than 10% of D.C.A."s issued and outstanding stock with the delivery of the Additional Shares. Henry is aware of this. Will you please follow up on obtaining and filing this Form.

 DT-5. Finally, in April 1973, the total amount of Additional Shares were released from escrow to the Mayers.

 In addition to these facts, certain documentary evidence before the court compels a finding that the parties agreed to eliminate imputed interest from this transaction. In the early part of 1971, a minor dispute between the parties occurred concerning the number of shares that the Mayers could register for an upcoming public sale. In a letter from Beck to Mayer, dated January 13, 1971, Beck advised Mayer that the registration sales factor of ten percent should be applicable "to the total of the Initial Shares and Additional Shares received, as defined." D-13, at 3. Mayer then calculated the number of shares that his group would register and forwarded his calculations, as well as a copy of Beck's opinion letter, to Alvin Sherman. D-13.

 Upon receipt of Mayer's letter of January 15, 1971, Alvin Sherman sought an opinion from Morris Sherman. Although Morris Sherman reasoned that the ten percent factor was not applicable to the Additional Shares, his letter casts light on the present controversy. He wrote:

 
The original understanding of the parties to the Agreement involved a payment divided into two parts; i.e., a fixed amount of D.C.A. shares to be delivered at the Closing and the later delivery of a contingent number of D.C.A. shares to be computed on the basis of Mayer's future performance during the period ending December 31, 1972. The Mayer Shareholders did not dispute this approach but merely insisted upon avoiding a higher rate of income tax which would apply by reason of a portion of the contingent payment being deemed "unstated interest". It was in compliance with their demand that D.C.A. agreed to the procedure of immediately issuing the Additional Shares, subject to certain safe-guards to assure that the ultimate receipt and ownership of such shares by the Mayer Shareholders would not occur until the financial results of Mayer's operations during the period ending December 31, 1972 had finally been computed.

 DB-8, at 2 (emphasis added). Clearly, these statements reflect the understanding between the parties that DCA would forego the possibility of an interest deduction. This forbearance would be the only method of complying with the Mayers' "demand."

 Further support for this finding surfaces in an April 30, 1974, letter from Morris Sherman to Pedro Diaz, vice-president of DCA. DT-4. The letter contained a discussion of the availability to DCA of a deduction under section 483 for " "unstated interest' in respect of the 192,610 shares of "Additional Shares' which were delivered to the former Mayer Shareholders, ... under the Reorganization Agreement of September 5, 1969." DT-4, at 1. At this time, DCA was considering a claim for an interest deduction with respect to the Additional Shares. Morris Sherman wrote:

 
Essentially, the determining factor as to whether a portion of these "Additional Shares" may be deemed to include "unstated interest" depends on when these Shares were "received" by the Mayer Shareholders and whether they constitute an "indefinite payment".
 
First, in considering the time at which they were "received", we must go back to the circumstances existing at the time of the negotiations between D.C.A. and the Mayer Shareholders and the intention of the parties involved at arriving at the Agreement which was executed on September 5, 1969. As the draftsman of the Agreement and as one of the principal negotiators involved, I clearly recollect that it was the intention of D.C.A. to pay the Mayer Shareholders a fixed number of "Initial Shares" upon the closing of the transaction and to pay them a number of "Additional Shares" early in 1973 computed and determined by reference to the operating results of The Mayer Corporation during the period October 1, 1969 through December, 1972. Said "Additional Shares" were limited in number so that, regardless of operating results, they could not exceed the number of "Initial Shares". There was no dispute between the parties on this basic point but when Dave Beck brought to our attention the possible problem of "unstated interest" which might result from the foregoing procedure, we agreed to try to accommodate the Mayer Shareholders by issuing and delivering the maximum number of "Additional Shares" which might thereafter accrue to said Shareholders to Dave and myself, as Escrow Agents, to hold until such time as the actual number of such shares would be computed pursuant to the formula set forth in the Agreement. It was never the intention of D.C.A. to transfer to The Mayer Shareholders the full beneficial ownership to any specific number of "Additional Shares". We agreed, in effect, merely that under certain conditions we would advance to the Escrow Agents at a date following the closing the maximum number of shares which D.C.A. might become obligated to deliver in 1973 under the formula applicable to The Mayer Corporation's operations during the period ending December 31, 1972. This was as far as we agreed to go in order to help the Mayer Shareholders solve their "unstated interest" problem; and although we admittedly made sufficient changes in the original drafts of Agreement to create some ambiguity we did not, in my opinion, go far enough to eliminate the problem.

 DT-4, at 1 to 2 (emphasis added). Although this explanation contains certain inconsistencies, the existence of an "accommodation" is clearly conveyed. However, if DCA had not agreed to forego its possible interest deduction, the accommodation would be entirely illusory. It is apparent that DCA agreed to structure the transaction in such a manner so as to eliminate the blatant and obvious violations of section 483 that would spark an I. R. S. investigation, yet it sought to maintain enough flexibility in the Agreement so as to protect its non-tax business considerations. It is inconceivable then that plaintiffs would allow this accommodation to be frustrated by DCA lighting the match itself.

 In addition, in its Letter Protest to the I. R. S. dated October 20, 1975, supporting its imputed interest expense deduction, DCA stated:

 
It should be noted that Section 5.2(a) of the Reorganization Agreement provides that "Additional Shares" were to be delivered on the "Post-Closing Delivery Date", which would have been some time in May of 1973 in accordance with the provisions of Section 8.2. Section 5.2(b) was included in the Reorganization Agreement at the request of counsel to the former Mayer shareholders for the sole purpose of creating an escrowed pool of shares-flowing from D.C.A. through the Mayer shareholders to the Escrow Agents in a simultaneous series of transactions-so that the former Mayer shareholders might be given some basis for claiming that their shares had been delivered to them prior to 1973, and thus preclude any "unstated interest" problem.

 DT-3, at 63. DCA then contends that this was "ineffective" since

 
this did not alter the fundamental concept that the "Additional Shares" were not to be given to the former Mayer shareholders until some time in 1973 and only to the extent determined under the formula in Section 5.4 of the Reorganization Agreement.

 Id. Even in this entirely self-serving document, there is support for the court's finding that the Agreement was structured, at the insistence of Beck and Mayer, in such a manner so as to avoid imputed interest to the Mayers. It is logically inconsistent to suppose that plaintiffs would bargain for a "basis for claiming that their shares had been delivered to them prior to 1973, and thus preclude any "unstated interest' problem" without including in that bargain an agreement from DCA that it would not attempt to erode that basis.

 Finally, certain language in the January 5, 1976, Releases, which were executed during the settlement of prior litigation between the parties, provides strong inferential support for this finding. The Releases ran to all claims except those arising out of certain tax actions taken by DCA "with respect to any tax year through and including 1974." D-20, at 3; D-26, at 3. The exempted claims were those that might arise from DCA's deductions for either "imputed interest" or any other tax treatment asserted by DCA inconsistent with the treatment "expressly or by implication contemplated by the parties to the ... Agreement ... at the time its provisions were negotiated and agreed upon." Id. (emphasis added). Thus, several years prior to the Mayers' institution of this litigation there is a reservation of rights against DCA with respect to causes of actions which would arise from the actions of DCA contrary to those implicitly contemplated by the parties during the negotiations. Although this reservation is merely circumstantial support for plaintiffs' position, it is language agreed upon by both parties. I do not believe that the Mayers would have bargained for a reservation founded upon non-existent agreements.

 Accordingly, the court concludes, on the basis of the testimonial and documentary evidence before it, that the parties reached an understanding in 1969 that, regardless of any potential entitlement under the Internal Revenue Code, DCA would contractually forego its right to claim a subsequent tax deduction for imputed interest expense arising out of this transaction.

 As previously mentioned, it is equally clear to the court that the parties intended the Agreement to be a tax-free reorganization under section 368(a)(1) (B) of the I. R. C. Mayer credibly testified that the transaction would have to be tax-free since no cash was involved. Tr. 185 to 186. Morris Sherman also testified that DCA intended the transaction to qualify under section 368(a)(1) (B) for certain business, not tax, considerations. He explained that the business considerations centered around the "pooling of interest" and the avoidance of large cash expenditures for the acquisition. Tr. 317 to 319, 321, 322. In fact, Morris Sherman stated that if the transaction did not qualify as a tax-free reorganization, the desired "pooling of interest" treatment would not be available to DCA. Tr. 322. Alvin Sherman also testified concerning DCA's interest that the transaction qualify for the benefits from the pooling of interest. Tr. 128.

 This mutual intent permeates the entire Agreement-both the preliminary and final drafts. For instance, the Preamble, wherein is stated the "Intent of the Parties," reads:

 
WHEREAS, the Shareholders desire to transfer to D.C.A. and D.C.A. desires to acquire from the Shareholders all of the outstanding shares of the Corporations, solely in exchange for shares of voting common stock of D.C.A. which has no other class of stock outstanding, and for no cash or other property, upon the terms and conditions hereinafter set forth, it being intended by the parties hereto that such exchange be a tax-free reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1954, as amended, and that upon and after such exchange D.C.A. shall be the sole record and beneficial owner of all of the issued and outstanding capital stock of the Corporations;

  D-2, at 1 to 2. *fn10" Furthermore, under "ARTICLE XIII-MISCELLANEOUS PROVISIONS," section 13.10 states:

 
13.10 Actions of the Parties After Closing
 
Neither Shareholders, D.C.A. nor any of the Corporations shall hereafter knowingly or deliberately take, maintain or defend any course of action or position which may reasonably be construed as repudiating, conflicting with or being inconsistent with the interest of the parties as expressed herein that the exchange of stock as provided for in this Agreement shall be a tax-free reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1954.

 D-2, § 13.10, at 49. *fn11"

 Beck's testimony, both at trial and during depositions, is especially helpful. During the course of his deposition testimony, Beck discussed his understanding of section 13.10. He stated:

 
At the time that I participated in the preparation of this document, this provision was put in to preclude anybody, shareholders, DCA, any of the corporations from taking any action that would upset the intent and spirit of this Agreement.
 
Now, the intent and spirit of this Agreement ran to the tax-free nature of the reorganization, and it was understood between Morris and me that there would be no adverse tax consequences to anybody.
 
That included Henry Mayer. It included Alvin Sherman. It included anybody.
 
It was supposed to be a deal that was free of tax consequences that would be inconsistent with the interest of the parties.

 Beck 38-4 to 17. I note, however, that at trial there was some retraction from the broadness of these statements. During cross-examination, Beck testified:

 
Q So you would admit, then, that the words in Article 13.10 are not aimed at all tax ramifications, correct?
 
A Yes. I would say they didn't aim at all tax ramifications, right.
 
....
 
Q My question to you is that 13.9b of DB-1 limits itself only to tax implications which now are going to be avoided by section 368 A1B (sic ), correct?
 
A That is correct. And for a purpose.

 Tr. 76-3 to -7, 77-10 to -13. On redirect, Beck explained what that purpose was:

 
Q We have heard in your cross-examination, Mr. Beck, about the several references to Section 368 that appear in the preamble and Section 13.10. Why are there no references to Section 483 in either the ...

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