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CUMBERLAND CORP. v. MCLELLAN STORES CO.

April 27, 1940

CUMBERLAND CORPORATION
v.
McLELLAN STORES CO. et al.



The opinion of the court was delivered by: BYERS

BYERS, District Judge.

This is a minority stockholders action, i.e., a derivative suit, concerning McLellan Stores Company, in which, as of November 26, 1934, the plaintiff seeks:

1. To enjoin the defendants from accepting an offer by defendants Stuart Hedden, and Hedden & Co., Inc., respecting the sale to McLellan Stores Company of landlords' claims, and from making payment therefor.

 2. That such claims be impressed with a trust in favor of McLellan Stores Company.

 3. Counsel fees and necessary disbursements in this action.

 A motion for a temporary injunction was denied in November, 1934, and the cause came to trial on March 6, 1940. The reason for this delay has not been made to appear.

 The bankruptcy of McLellan Stores Company (hereinafter called McLellan) occurred in January of 1933, and the bankrupt estate was managed by Irving Trust Company, as trustee, for the ensuing two years. Through reduction in rentals as to most of its 260 or more stores, and capable administration, merchandise creditors ultimately received one hundred per cent. of their claims, and the company emerged from bankruptcy early in 1935, and has since continued the uninterrupted conduct of its affairs.

 That result was foreseen as early as June of 1934, and the specific cause of the plaintiff's grievance is a transfer by the defendant Hedden, or his corporation, to McLellan of some 62 contingent claims of landlords under long term leases, for the sum of $225,000 in cash, and 35,000 shares of non-par common stock of the company, which had a market value in November, 1934, of around $420,000, making in all about $645,000 as the consideration for the transfer.

 The transaction in contemplation when the bill of complaint was filed, was authorized at a regularly constituted meeting of directors of McLellan, held November 8, 1934 (the board retained and exercised customary functions during the bankruptcy) and that action of the directors was carried into effect at a stockholders' meeting held on November 28, 1934, by a vote of 381,910 in favor and 127,345 opposed, since the effort to prevent the holding of that meeting fell with the denial of the application for the temporary injunction.

 That the landlords' contingent claims constituted a potential obstacle to the rehabilitation of McLellan was recognized from the time that efforts to that end began to occupy the attention of stockholders' and creditors' committees; the problem soon challenged the attention of certain exterior agencies whose purpose was to conduct salvage operations in the hope of gain.

 The instrumentality of rehabilitation, as originally conceived, was a new corporation which was to purchase the bankruptcy estate as a whole, and start a separate enterprise with new working capital to be procured through conventional promotion. Two such efforts were made: First, Chain Stores, Inc., was organized and more or less definite proposals were made to establish it through procuring underwriters for its stock, but that plan never came to fruition. Second, Mac Stores Corporation was formed, and it too was never conducted to maturity as the purchaser of McLellan assets and successor to its activities.

 There were substantial efforts expended in the endeavor to perfect these successive corporate potentialities, and it would not be profitable to trace them in any detail, since neither performed any actual function in the return of the McLellan enterprise to its stockholders; perhaps the latter served a negative purpose, in that the rejection of its offer set the stage for the ultimate emergence of McLellan from bankruptcy.

 It is not proposed to rehearse the tedious history of the events leading up to the latter rejection, which was seen to be inevitable in June of 1934. Referee Coffin, in charge of the case, found the opposition too sturdy and meritorious to give the proposal his sanction, and during the summer months of that year it became apparent that McLellan could be returned to its stockholders with all proven claims paid in full.

 Then it was that United Stores Corporation, which was one of the exterior agencies no which reference has been made, began to acquire large holdings of McLellan stock in the open market, by a process that was entirely free from ostentation.

 By the time the stockholders' meeting of November 28, 1934, was held, the United Stores Corporation owned or controlled some 225,600 shares of common and 700 shares of preferred stock, all of which were voted in favor of acquisition of the landlords' contingent claims for the price which has been stated.

 The plaintiff's cause is based upon the theory that the purchase was consummated by the total stock vote earlier referred to, because information was suppressed of a secret understanding between United Stores Corporation and Hedden, the seller, that the latter's profit from acquiring and turning over the landlords' contengent claims (the 35,000 shares of common stock) was to be used in part by him for the benefit of United Stores in the liquidation of a portion of its own indebtedness to Sullivan and Cromwell, who had acted as attorneys from the early days of the bankruptcy, always for United Stores and sometimes for Hedden; and similarly with respect to Sanderson and Porter, engineers and financial advisers, who had also acted for United Stores as well as Hedden.

 It is also urged that United Stores had acquired certain so-called confidential information respecting the various leases and the lessors' properties and intentions, with the consent of the trustee in bankruptcy, under circumstances which forbade that company itself to acquire the landlords' contingent claims; and since Hedden later was acting as the undisclosed agent for United Stores, or if not, the latter was his undisclosed principal, the circumstances which constrained United Stores to forego acquisition of those claims necessarily visited the same proscription upon Hedden; these things being so as seen by the plaintiff, it urges that Hedden must be regarded as a constructive trustee for McLellan, and the proceeds of the sale turned back to the latter as beneficiary.

 That the plaintiff's undertaking was of ample dimensions is suggested by the foregoing recital.

 The cause was tried continuously from March 6, 1940, through March 22d, and as the briefs have not been accompanied by the minutes, this decision is compiled from the court's own notes.

 The defendants may be grouped as follows:

 (1) McLellan Stores Company (William W. McLellan) the former bankrupt.

 (2) Stuart Hedden, Hedden & Co., Inc., the transferor of the landlords' contingent claims.

 (3) United Stores Corporation, and George K. Morrow, the largest individual stockholder of the former bankrupt and said to be implicated with Hedden.

 (4) Lawrence Oakley and Richard Maynard, individual directors of the former bankrupt.

 Apparently the individual defendants Powdrell and May were not served, and in any case they have ...


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