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Murray v. Crystex Composites LLC

May 29, 2009

JOHN MURRAY, PLAINTIFF,
v.
CRYSTEX COMPOSITES LLC, DEFENDANT



The opinion of the court was delivered by: Walls, Senior District Judge

FOR PUBLICATION

OPINION

Defendant Crystex Composites LLC moves for summary judgment pursuant to Federal Rule of Civil Procedure 56. The motion is granted.

FACTS AND PROCEDURAL BACKGROUND

This case originates from the purchase out of bankruptcy of a division of Spaulding Composites Company, Inc., Mykroy/Mycalix ("M&M"), that manufactured glass and ceramic electronic components. See Flores v. Murray, 2007 WL 3034512 (N.J. Super. App. Div. 2007).

In 2001, Spaulding filed for bankruptcy in the District of New Hampshire and hired plaintiff John Murray as a consultant accountant to review M&M. During the course of his work, Murray developed a friendship with a longtime M&M manager, George Flores. See Flores v. Murray at *1. Murray became interested in purchasing the unit and, after notifying Spaulding's creditors committee that he had concluded that M&M was a valuable asset, took steps toward purchasing it out of bankruptcy. (See Def.'s Opp'n 3-5.) Murray submitted a bid for M&M to the bankruptcy court, which rejected the bid but suggested that Murray make an offer directly to one of Spaulding's main creditors, CIT. (See id. at 4-5.) Ultimately, CIT agreed to sell M&M to Murray for $764,000. (See id. at 5.)

Murray, together with Flores, began to assemble a group of investors who would become the equity owners of defendant Crystex, to which the M&M Assets would be transferred. See Flores v. Murray at *1. Flores, Murray and a longtime friend of Murray's, Larry Milby, each agreed to contribute $200,000. Milby's niece agreed to contribute another $100,000. See id. The balance of the purchase price, $264,290.50, was to be funded by a loan from CIT, secured by pledges of stock held by Murray and Milby in American Bio Medica Corporation ("ABMC"). See id. at *2.

Because Flores was concerned that the group did not have enough money in reserve for operations, he engaged three additional investors: Keith Savel, Howard Zimmerman and David See, who agreed to invest collectively $150,000 for a 10% interest in Crystex. See id. at *2-3.

At the outset, Flores contributed his $200,000 and Milby $190,000 but Murray failed to make a contribution. See id. at *2. Murray's justification for this failure was that his ABMC stock was "going to go through the roof" and it would be foolish to sell it before it increased in value. See id. When Savel, Zimmerman and See discovered that Murray would not be contributing $200,000 immediately, they insisted that Murray have some other personal liability. See id. at *2. The parties entered a memorandum of understanding, dated October 14, 2003, providing that Murray would contribute $200,000 within six months or "forfeit his shares and ownership in Crystex." See id. at *3. A certificate of formation for Crystex was filed on October 15, 2003. (See Pl.'s Supp., Ex. E.)

Spaulding moved in the bankruptcy court for authority to sell the real estate and business assets of M&M (the "M&M Assets") and, by an order dated October 15, 2003, the bankruptcy court granted Spaulding the authority to sell all of the M&M assets to "John F. Murray, or his nominee" for $764,290.50 on terms similar to those of a form purchase agreement attached to the order of the bankruptcy court. (See Def.'s Supp., Ex. D.) None of these documents identified Crystex as the buyer.

Murray hired an attorney, Ken Wanio, who prepared contracts for the sale of the M&M Assets, incorporated Crystex and dealt with Spaulding and CIT. (See Certification of John Murray in Opp'n to Mot. for Summ. J. ¶ 33 ("Murray Cert.").) Murray certifies that Wanio's authority was based on his understanding that Murray "would receive 35.75% of Crystex and would be the Managing Member." (See id. at ¶ 34.)

On October 23, 2003, Murray signed a resolution authorizing Crystex to purchase the M&M Assets but did so as the Managing Member of Crystex. (See Def.'s Supp., Ex. F.) Wanio later prepared a deed and bill of sale transferring ownership of M&M from Spaulding directly to Crystex. (See Def.'s Supp., Exs. G & H.) Murray claims that he did not direct Wanio to prepare these documents and that he did not object only because he believed he was the largest equity owner in Crystex. (See Murray Cert. ¶ 35.) There is no evidence that Murray expressly identified a nominee. (Pl.'s Opp'n. 6.)

Shortly after the purchase of the M&M Assets, Flores became concerned with Murray's performance. Murray had "refused to honor a financial obligation owed to one of the company's manufacturing representatives, wanted to penalize valued customers, and used offensive language when dealing with a Crystex accounts payable clerk." Flores v. Murray at *5. Flores discovered that Murray had been paying an additional, unauthorized salary to his son, who was employed by Crystex in the synthetic mica department, out of the Crystex operating account. See id. Certain checks to employees of Crystex bounced because Murray had failed to transfer funds from the operating account to the payroll account. See id. Finally, Murray had paid a personal debt out of company funds. See id.

At the same time, Murray still had not contributed his $200,000. See id. On May 3, 2004 Flores called a special meeting and with the other members of Crystex voted that Murray had "failed to live up to his obligations and that he no longer had an interest in Crystex." Flores v. Murray at *6. The members filed a complaint in the Superior Court of New Jersey, Flores et al. v. Murray, seeking, inter alia, a declaratory judgment that "due to Murray's failure to comply with his contractual obligations ... Murray never had any ownership interest in Crystex, or in the alternative ... [d]eclaring that as of the [special meeting] Murray had no ownership interest in Crystex ... [and] that Murray [was] not entitled to any compensation for his forfeit [sic] interest in Crystex." (Pl.'s App. at MA000005; Sup. Ct. of N.J., Dkt. No. L-769-05 (filed Feb. 18, 2005).) Crystex did not immediately join this suit, (Pl.'s Opp'n. 10.), but Murray later joined Crystex as a third-party defendant. (Pl.'s App. at MA000020.)

The superior court held that Murray had violated his contractual obligation to contribute $200,000 and had fraudulently induced the other investments by promising that he would contribute his $200,000 at a later date. (See Pl.'s App. MA000063-80; Flores v. Murray, No. L-769-05 (N.J. Super. Ct. Law Div. 2006) ("Trial Court Transcript").) The trial court was "satisfied that the investment group [was] entitled to enforce the forfeiture clause" of the memorandum of understanding. According to the trial court, if Murray "did not come up with the $200,000, he suffered the possibility of losing his interest" in Crystex. (Pl.'s App. at MA000077; Trial Court Transcript at 224.)

The trial court added, "[w]hat is important here is that there's a total failure of consideration. He never paid the money, he never sold his stock, he never subjected his own capital to the risk of a new company." Id. The court was "satisfied that Mr. Murray never acquired a membership interest in Crystex. And any interest of his is therefore void. Any ...


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