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July 31, 1941

SHULTZ et al.

The opinion of the court was delivered by: BURKE

BURKE, District Judge.

These are actions brought by two of the three executors of the estate of Albert B. Shultz against the Manufacturers & Traders Trust Company (herein referred to as the Bank), individually and as their co-executors, and certain of its officers and directors and persons and corporations associated with them. Albert B. Shultz was the owner of 46% of the common stock of Houde Engineering Company (herein called Houde), which company was engaged in the business of making shock absorbers for automobiles. The basis of the suits is the alleged conspiracy and fraud on the part of the Bank and certain officers and directors named as defendants, in fraudulently contriving to obtain from Albert B. Shultz and other owners of Houde stock, and ultimately securing from them by fraudulent representations, what is claimed to be an exclusive agreement of agency, by the terms of which the Bank undertook to secure from the House stockholders on a commission basis a purchaser for their stock at an aggregate price of not less than $4,000,000. The claim is that the Bank and its officers, having secured such an agreement, began to act, not as agents in accordance with the agreement, but to fraudulently secure such stock for itself, its officers and directors through a nominal purchaser for resale at a profit. It is alleged that the fraudulent plan was carried out by devious means to the benefit of the defendants and the stock resold at a profit. The plaintiffs seek recovery of upward of $10,000,000. An accounting for the profits realized by the defendants is demanded. These transactions took place in 1928. The decedent died in 1932. The plaintiffs claim that the fraud was never discovered by the decedent, nor by the plaintiffs until shortly before these actions were commenced which was in 1938. The defendants deny the allegations of fraud, allege full knowledge of the transactions by the decedent and assert that the actions are barred by the Statute of Limitations.

Prior to September 25, 1928, the relationship of commercial bank and customer existed between the Bank and the Houde Engineering Company. In the Fall of 1927 the Ford Motor Company began ordering shock absorbers from Houde in large quantities. On January 20, 1928, an agreement was entered into between Ford and Houde covering the purchase of shock absorbers by Ford. This meant a large increase in business by Houde and required substantial expansion of its plant. Capital was needed. Late in December, 1927, or early in January, 1928, a survey of Houde operations was made by the Bank at the request of Houde which had for its purpose an analysis of the advantages and disadvantages of the new Ford business and setting up of a plan to secure the necessary financing. In this survey the Bank with the consent of Houde, and for the reason that new capital was to be sought, associated with itself Central Trust Company of Chicago which dealt largely in the investment business and the investment banking firm of Eastman, Dillon & Company of New York and Chicago. The survey was completed in February, 1928. The outcome of the survey was a roposal presented to the owners of Houde by Eastman, Dillon which contemplated the furnishing to Houde of $1,000,000 which was estimated as the necessary working capital. The terms of the proposal were unsatisfactory and were rejected by the owners of Houde. In January, 1928, Houde owed the Bank $150,000. The loan was increased so that in May, 1928, Houde owed the Bank $925,000. Operations with Ford were eminently successful. In July, 1928, Houde was making large reductions in its obligation to the Bank. By the end of the year it had increased its earnings so as to show a profit for the year of $1,000,000. The interest of Central Trust and Eastman, Dillon in the Houde matter continued after the rejection of the proposal of Eastman, Dillon by the Houde stockholders. During the negotiations which resulted in the proposal the Central Trust Company and Eastman, Dillon had been informed of the desire of the Houde owners to dispose of their holdings at a satisfactory price. Buffington, of Eastman, Dillon communicated with Rea, an officer of the Bank, in July, 1928, relative to a prospective customer, Timken-Detroit Axle Company. Some talk of a definite price or option took place between Rea and Buffington. Buffington was negotiating with Timken and reported to Rea interest on the part of Bendix and the Borg-Warner Company. Buffington urged Rea to secure and option on the stock. The desirability or necessity of obtaining a definite price for the stock, if the negotiations were to continue, led to a meeting on September 25, 1928, at Rea's office in the Bank. On September 24, 1928, Rea had a talk with George Chisholm, a director and substantial stockholder of Houde and the financial adviser of Shultz, at which Rea told Chisholm that his negotiations had reached a point where he had to have a definite "price" or "option". Chisholm quoted Rea a price of $4,000,000 for all the stock, but said that he would have to consult the other stockholders. A meeting was arranged. Present at the September 25th meeting were Rea, George Chisholm, Dave Shultz, brother of the decedent and an officer and director of Houde, and James Sculty, also a stockholder and officer of Houde. A. B. Shultz was not present.He had left Buffalo for Europe in the early part of September on business of the company. There is some dispute about the conversation that took place at this meeting, but whatever the conversation was there is no evidence that the decedent relied upon it or even knew the substance of it. The outcome of that meeting was the preparation of a written instrument by Rea. This instrument was taken that evening by Chisholm to Fisk, an attorney who had acted for the Houde Company since its formation. Fisk was at his home. He suggested certain changes in the instrument. The instrument was redrawn by Chisholm incorporating the changes suggested by Fisk and was there-after signed. It reads as follows:

 "In consideration of $1.00 receipt of which is hereby acknowledged, we the undersigned stockholders of the Houde Engineering Corporation, hereby give to Krauss & Company, for a period of thirty days from the date hereof, the right to purchase sll the stock, of the Houde Engineering Corporation at a price of ($4,000,000) Four Million Dollars in total. This option can only be exercised by the payment of cash before its expiration. It is understood that the net assets of the Houde Engineering Corporation, when, as, and if this option shall be exercised with be at least equivalent to the position as set forth in its balance sheet dated August 31st, 1928, and any accrual in these net assets occurring since the close of business August 31st, 1928 shall adhere to the vendors in this option.

 "Inasmuch as Krauss and Company will act as a broker in this transaction, it is also understood that in the event of the sale of said stock being consummated Krauss and Company will be entitled to a commission from the purchase price of 3%. If stockholders owning not more than a total of 265 shares of said stock, who do not sign this option, refuse to join in the sale at the price aforesaid, there shall be a reduction made in the purchase price of $1,640.19 per share for each share of said stock which the undersigned shall be unable to deliver to the purchasers. It is understood that the name of A. B. Shultz is signed hereto in pursuance of verbal authority given by him to negotiate a sale of said stock.

 "A. B. Shultz, by G. H. Chisholm

 "George H. Chisholm, V. Pres.

 "Harry L. Chisholm, Treas.

 "B. D. Shultz, Secretary

 "J. N. Scully, V. P. Director."

 Krauss & Company, named in the instrument, was a partnership of bank officials customarily used by the Bank in executing its commitments and may for all purposes be regarded as the Bank. After its execution the instrument was delivered to Rea. Rea wanted confirmation by A. B. Shultz of Chisholm's authority to execute the instrument in his behalf. Chisholm accordingly cabled Shultz in Paris, France, on September 28th as follows: "Looks as if sale will go through if can take prompt action. Price Four Million cash for all stock. All others have agreed. Please cable me immediately authority for me to act for you and Clare. No need hastening your return."

 The following day Shultz cabled Chisholm to telephone him. The telephone connection was unsatisfactory. As a result Chisholm on October 2nd again cabled Shultz as follows:

 "A. B. Shultz

 "Hotel Pierre Premier

 "Paris (France)

 "Manufacturers Bank trying to get best price possible acting in our interests. Option four million cash minimum. Commission three per cent. Believe can effect sale now under present financial and industrial conditions which may change. We are pessimistic if delay necessary. Purchaser would buy capital stock assuming all assets and liabilities August Thirty-first. Profits since come to us in addition. We feel future competition uncertain and all agree wise to take sure thing. Any or all present organization remain if wish. Purchaser's attitude hope they stay. Please cable authority to act for you and Clare. Am afraid may lose opportunity if wait your return. Prospects Timken Bendix third party unknown.

 "G. H. Chisholm."

 On October 2, 1928, Shultz cabled Chisholm informing him that the "option as cabled has our approval".

 After the execution of the option negotiations were continued with Buffington's prospects Timken, Bendix and Borg-Warner, each of whom declined to purchase. Independent efforts were made by Rea to interest others. He tried to interest Trico Products Company, a large manufacturer of automobile windshield wipers. Oshei, its president, was a director of the Bank. Oshei was not interested. On October 8, 1928 Rea put the proposition of the purchase of Houde stock up to the defendant Cooley. Cooley was the president and controlling stockholder of New York Car Wheel Company and a director of the Bank. Cooley was interested and made some investigation of the matter. On October 10th he met at the Bank with Harriman, its president, Wurst, executive vice-president and Rea. The testimony regarding this meeting is that Cooley said his wife was averse to his making such a large commitment and that if he should undertake the purchase he would want some protection in case of his death or disability and that the investment was too large for him to carry as a permanent one. At that meeting it was agreed that if Cooley would undertake the purchase that Harriman, Wurst and Rea would agree to take the commitment off his hands in the event of his death or disability and to form a syndicate to relieve him of a portion of Cooley's purchase, if he so elected. Harrimam agreed, on behalf of the Bank, to lend Cooley the money to purchase the stock upon deposit of the House stock and additional ...

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