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Shultz v. Manufacturers & Traders Trust Co.

June 17, 1942


Appeal from the District Court of the United States for the Western District of New York.

Author: Clark

Before SWAN, CLARK, and FRANK, Circuit Judges.

CLARK, Circuit Judge.

Plaintiffs appeal from a judgment dismissing on the merits complaints in two consolidated actions which they define as "of equitable cognizance" "charging conspiracy and fraud in the acquisition and execution of an agency." They are two of the three co-executors of the late Albert B. Shultz, who died in 1932, the third executor being the first-named defendant herein, manufacturers & Traders Trust Company (the "Bank"). The suits grow out of the sale in September and October, 1928, by the stockholders of the Houde Engineering Corporation, of their stock in the corporation. Plaintiffs' testate, who paricipated in the sale, was president and principal stockholder of the corporation, owning 46 per cent of its common stock.

The defendants, in whose favor the judgment appealed from ran, are, in addition to the Bank, nineteen individuals, comprising the principal officers of the Bank (Harriman, president, Wurst, Rea, and Cantwell, vice-presidents), Cooley, a bank director and controlling proprietor of the New York Carl Wheel Company, G. H. and H. L. Chisholm, both stockholders of Houde, G. H. being also Houde's vice-president, Sawyer, who acted as Cooley's lawyer, and, besides some others who need not be here described, the co-partners of the investment banking house of Eastman, Dillon & Co. All these were claimed to have been either active participants in the conspiracy or to have received some of the profits. They are the survivors of about thirty-five defendants who were sued originally, the remainder not having been served.*fn1 Among issues presented for decision herein are (a) whether an agreement of the stockholders of September 26, 1928, legally constituted the Bank their agent to sell the stock or, on the other hand, gave the Bank the option itself to purchase the stock at the agreed sum of $4,000,000, (b) whether, assuming the Bank was so made an agent of the decedent and the other stockholders, it was faithless to its trust, in that it conspired with other defendants named to sell to itself or its own designee with asserted large profits, (c) whether all important actions taken by the Bank and other defendants were unknown by the decedent either then or later and whether, if originally unauthorized, he ratified them by sharing in the proceeds and participating in other activities hereinafter described, and (d) whether all claims are barred by appropriate statutes of limitation, since the first of the two actions was not instituted until the fall of 1938, almost ten years after the transactions involved, or whether decedent never knew of the asserted fraud and plaintiffs remained ignorant of it until just shortly before the litigation was commenced.

After a lengthy trial on the merits the district court rendered a decision finding against the plaintiffs on all points, both of fact and of law. It ruled that the Bank took an option to purchase the stock and was not an agent, that in any event the successive sales of the stock were bona fide, without fraud or overreaching, that the decedent knew or had means of knowledge of all the important facts in issue and, moreover, took the fruits of the transactions, and finally that the actions were barred under the applicable statutes of limitation. The writer of this opinion is of the view that the facts found by the court were supported by the evidence which appears of record, and that from the facts as found the conclusions of the court followed. He therefore is prepared to accept the views of the district court in toto. But it is felt y the court as a whole that decision should follow more narrow lines where possible; and since the statutes of limitation are a complete defense, they will be stressed here, and facts appropriate to that issue will be particularly discussed. A fuller discussion of the background and of the events involved, together with quotation of the important documents, will be found in the opinion of the district court as reported in 40 F.Supp. 675-687.*fn2

The transactions here brought up for reexamination disclose a not untypical American success story of the golden twenties. Prior to 1919, decedent acquired an exclusive license to the American patent rights for an automobile shock absorber invented by Maurice Houdaille of Paris, France. With an initial investment on his part of $30,000, he organized the Houde Engineering Corporation, which in 1928 was sold by him and his co-stockholders for an amount in excess of $4,000,000. His share of the sale price - excluding other profits, hereinafter noted - was $1,834,091.92 net after he had paid off a claim of other stockholders against him. This, however, did not exhaust the bonanza qualities of the stock, which still grew in worth after the sale, so much so, indeed, that these and other lawsuits followed.*fn3 It was soon resold, as we shall see, by a syndicate in which decedent participated, for six million to a Michigan investment house, which proceeded to organize a new corporation and consolidate it with others. The shares of the new concern when offered to the public and traded in advanced so rapidly on the stock market that their paper value in a short time was asserted to be over fifteen million dollars. How much of this value vanished in the bleak depression days of the thirties does not appear. But these amounts show the richness of the prize. Plaintiffs value the loss to their estate at seemingly upwards of ten million dollars. But this is based on the extreme advance of the stock; the actual profits of the various participants were much less. It will appear, too, that decedent knew of the total amount of all these profits, and at most lacked complete knowledge only of their distribution and ultimate destination. And whether for good or ill, there can be no doubt that the Bank and its associates brought to consummation a disposal of these assets where previous efforts had failed. Their very success led ultimately to extensive claims against them.

Prior to the transactions directly in issue, several attempts had been made by decedent and others to dispose of the stock. Even though the company had achieved a moderate success, its working capital was insufficient and it was too dependent on patents which would soon expire. These efforts at disposition had been unsuccessfulf; but in the fall of 1927, Houde secured the contract of supplying shock absorbers for Ford, and its business, prospects, and asking price increased. Whereas formerly the stockholders had asked, $2,400,000 and later $3,000,000 - without, however, effectuating a sale - now they desired $4,000,000 for their holdings. Decedent had gone to France on company business in September, 1928, when Rea - vice-president of the Bank in charge of its securities department - having, as he thought, an opportunity of developing a sale of the company, sought an option on the stock. The result of various negotiations, in which decedent's interests were represented by defendant George H. Chisholm, co-officer and co-stockholder in Houde, as well as decedent's financial representative, led to the execution of the instrument of September 26, 1928, which is the prime source of confusion in this case.

By this document the signing stockholders of Houde (with Chisholm signing for decedent) "give to Krauss & Company [a partnership of junior bank officers actually representing the Bank] for a period of thirty days from the date hereof, the right to purchase all 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." The word "option" was used a total of four times in the instrument, which, however, also containd this provision: "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%." It was also provided that the net assets upon exercise of the option should be equivalent to those of August 31, 1928, and any accrual in them should "adhere to the vendors in this option," and that there should be a reduction of a proportionate amount per share for all shares up to 265 which the signing stockholders could not deliver.

After the signing of this document, and in order to make sure that Shultz was in accord, certain cablegrams between Chisholm in Buffalo and Shultz in Paris, France, followed; and these, being the first direct connection of Shultz with the transaction, naturally have been much discussed by the parties and the court. They, together with the original option instrument, will be found set forth at pages 679 and 680 of 40 F. Supp. Also there set forth is an acceptance of the option signed by Krauss & Company on October 11, 1928, directed to the Houde stockholders who had signed up, the first sentence of which reads: "Referring to the option dated September 26, 1928, which you have given us for the purchase of all of the stock of Houde Engineering Corporation, at price of $4,000,000.00, we beg to advise you that we have secured as a purchaser the New York Car Wheel Company, of this city, which has agreed to purchase said stock upon the terms of our option, and has made available in our hands the sum of $4,000,000.00 therefor." A copy of this letter, sent to Shultz by regsitered mail, was received by him upon his return from Europe on October 18, 1928.

The New York Car Wheel Company, referred to as the purchaser, was a company dominated by the defendant Cooley, a director of the Bank. The bank officers had succeeded in interesting Cooley in the purchase and he was the actual purchaser of the stock, although he preferred the transaction to appear in the name of his company. Since he was averse to making such heavy commitments, even though he was a man of means, he made an agreement with the chief bank officers, defendants Harriman, president, Wurst, executive vice-president, and Rea, whereby they agreed 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 portio of the purchase if he so elected. It was stated to be the intention of the Car Wheel Company to have the syndicate relieve it of approximately $3,500,000 of the $4,000,000 commitment; further, there it seemed best not to form this syndicate for three or four days, "but the officials of the Trust Co. have signified their ability and readiness to do so." Harriman also agreed, on behalf of the Bank, to lend Cooley the money to purchase the stock upon deposit of the Houde stock and additional collateral to secure the lona. This agreement, reached on October 10, was reduced to writing on October 11, the day the Bank exercised the option. Since plaintiffs point to this instrument as showing that in substance the Bank, not Cooley, was the purchaser, it should be noted that these three individuals took only a contingent commitment, and that Cooley himself assumed no obligation at all to them.

Negotiations immediately took place with representatives of General Motors who visited the Houde plant on October 12 and conferred with the bank officials and with Cooley. This conference left little prospect of a sale to General Motors. On October 13, Cooley met with the three bank officers at the Bank and outlined in writing his intention with respect to the venture by reciting the purchase by the Car Wheel Company, "of which I own control," of the Houde stock at approximately $4,000,000 in accordance with the Krauss option; that the three bank men had agreed to relieve him of the obligation in case of death; and that negotiations were pending with a subsidiary of General Mororts. Then he went on to say that if these negotiations were successful it was his intention, after expenses were paid, to divide the net profits one-half to the Bank and its investment affiliate, 30 per cent to the three bank men, with Rea taking one-half this amount, and 20 per cent to himself. If, however, the sale was not consummated, it was contemplated that an underwriting syndicate be organized, wherein the net profits retained by Cooley should be divided 15 per cent each to Harriman and Wurst, 30 per cent to Rea, and 40 per cent to himself.

These two documents by Cooley of October 11 and 13 are particularly significant because, unlike substantially all the other documentary evidence in the case, the district court has found there was no evidence to show that decedent knew of either of them. But, as we shall see presently, he did know, and the court so found, that the Bank was loaning money to Cooley for his purchase. Hence this matter of the so-called concealed "kickbacks," referred to in the memorandum of October 13, and later paid, seems in essence the nub of plaintiffs' entire case.

When decedent returned from Europe on October 18, he thought the stock had been sold to General Motors, and was incensed, because General Motors was a large competitor of Ford. After being assured by the Bank that it had been sold to Cooley, he seems to have been not only satisfied, but rather anxious to put thedeal through. Among other things, he arranged to buy off the Scully brothers, minority stockholders, who had not agreed to make the sale and who were objecting; and actually, by agreement, $50,000 was paid by Cooley on decedent's account to settle their claims. On October 24, the Bank loaned Cooley $2,500,000 to pay for the stock; and, in addition to the Houde stock already delivered in escrow to the Bank, Cooley deposited collateral securities having a market value in excess of $600,000. Decedent, however, was not then paid in full; he received a total down payment from Cooley of $250,000 and allowed the balance to stay due on demand, ...

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