Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.


June 21, 1945

SUDMAN et al.

The opinion of the court was delivered by: BRIGHT

The plaintiffs, until September 20, 1940, were employees and until September 23, 1940, stockholders of Black Diamond Lines, Inc. Defendants were the owners of 94,500 shares of the common stock of that corporation (which consisted of 100,000 shares, par 5 cents), and from December 13, 1939 were the sole directors and officers thereof. Plaintiffs and eight other employees were the owners of the other 5,500 shares, each of the plaintiffs owning 500 thereof.

The amended complaint alleges claims under three counts. The first count is, that at or about the time plaintiffs became the owners of such stock, each gave to certain of the defendants (who have been and will be called 'executives') an option to purchase, at 'the book value or net equity of the shares as shown on the regular audited balance sheet of the corporation for the quarterly period just preceding the quarterly period in which the purchasers give notice of their election to purchase', for a period of six months after the happening of any one of three events, one of which was the 'termination of such seller's employment with Black Diamond Lines, Inc. * * * in any manner or for any reason whatsoever'; that defendants dominated and controlled the affairs of the corporation to the complete exclusion of the minority stockholders; that they gave notice of plaintiffs' discharge on September 20, 1940; on September 23, 1940, the defendant Sudman, acting for the other defendants, falsely and fraudulently stated and represented that, for the good of the corporation and in order to protect its interest and that of its stockholders, defendants had decided to dissolve the corporation, to facilitate which it was necessary for them to obtain the stock of the minority stockholders, that the business would be reorganized and the minority stockholders given an equivalent interest therein; and that the value of the stock was $ 4.38 per share. Relying upon said statements, each of the plaintiffs transferred his stock, cancelled the option agreement and released defendants from any claims arising thereunder. It is further alleged that on September 27, 1940, the corporation declared a dividend of $ 4 upon each share, transferred to the defendants the title to eight ships (for the sale of which it had been negotiating for some time prior to September 30, 1940), and the majority of its other assets, and shortly thereafter sold the eight ships for a total of $ 3,970,000. It is further alleged that defendants fraudulently concealed the negotiations for the sale of the ships and that the corporation had sufficient surplus to declare the $ 4 dividend, and that the value of the assets of the corporation, as shown upon its books, did not represent the true value thereof. By reason of these allegations, plaintiffs elect to rescind the sale of their stock, offer to repay the amount received by them, and each seeks the sum of $ 50,000 as damages. The second count alleges a conspiracy to defraud plaintiffs of their stock by means of the representations and in the respects set forth in the first count, in furtherance of which plaintiffs were discharged without any justifiable grounds and solely for the purpose of enabling the exercise of the options; and that immediately after the transfer of the stock by the plaintiff Lawrence, he 'was re-employed by the corporation as of September 23, 1940 in his former capacity as auditor'. It prays for the same relief as in the first count. The third count realleges most of the allegations of the first, and asks damages for each plaintiff in the sum of $ 100,000.

At the close of plaintiffs' case, plaintiffs moved to sever the action as against the defendant Morton, which motion was granted. There they asked, under Rule 15(b), Federal Rules of Civil Procedure, 28 U.S.C.A.following section 723c, to conform the pleadings to the proof. Upon being requested to state in what respects they desired to conform, replied that, in addition to the allegations in the complaint, they also desired to add the claims that because of the fiduciary relationship that existed between the parties prior to and throughout the existence of the corporation, and at the time of the exercise of the option, it was improper for the defendants to exercise the option under the circumstances that prevailed in the summer of 1940, when the defendants knew that the actual value of a share of the corporation was many times more than what it was carried on the books of the corporation, and what these plaintiffs were paid, that it was improper for them to dissolve the corporation, or liquidate it or to distribute its assets; and if they decided to dissolve or liquidate, they were bound to distribute the assets prorata among all the stockholders, and had no right to exercise the option for the sole purpose of getting rid of the minority and then share the money among themselves. They ask judgment for such relief as they may be entitled to, regardless of that demanded in their pleading. Rule 54(c).

 The facts, except in so far as the occurrences on September 20, and September 23, 1940 are concerned, are not in dispute. The Black Diamond Lines, Inc. was incorporated on October 20, 1937. It succeeded to the assets and business of the American Diamond Lines, Inc. (which owned the eight ships in which we are interested) and the Black Diamond Steamship Corporation, its operating subsidiary. American Diamond had been financed, and was controlled, by the Securities Corporation of the New York Central Railroad Company and A. Iselin & Co. The Securities Corporation owned 12,000 shares of preferred stock of American Diamond (par $ 50), and Iselin & Co. 12,000 of preferred and 86,000 of common. The executives had been engaged in the business of these corporations for many years prior to the date of the incorporation of Black Diamond Lines, as had also the two plaintiffs. In the fall of 1937, Iselin insisted upon withdrawing from the business and that the executives, or one or more of them, purchase its stock interest. This was finally accomplished by a bank loan to Black Diamond Lines on collateral notes endorsed by the defendant Sudman, with the proceeds of which the Iselin preferred and common stock were purchased by Black Diamond Lines at $ 50 for the preferred and $ 7.50 for the common, a total of $ 1,245,000. Black Diamond Lines was authorized by its charter to issue 6,000 shares of preferred, $ 100 par, and 100,000 shares of common, 5 cents par. The preferred stockholders of American Diamond had the right to elect a majority of the board of directors and did so. With the Iselin interest now out of that corporation, the Securities Corporation of the New York Central agreed to exchange its 12,000 shares of American Diamond preferred, par $ 50, for the 6,000 shares of Black Diamond Lines preferred, par $ 100, but upon the same condition, that so long as the preferred stock was outstanding the Securities Corporation should have the right to elect a majority of the board of directors, and it did so. That exchange was made. Ninety-five per cent. of the common stock of Black Diamond Lines was subscribed for and ultimately owned by the executives, and the remaining 5,000 shares, or the major portion thereof, by employees of the corporation, among whom was the plaintiff Lawrence, who received 500 shares and paid therefor $ 25. Black Diamond Lines started to function on or about February 11, 1938, the ships and assets of American Diamond were transferred to it, and American Diamond was later dissolved.

 When the plaintiff Lawrence, along with other employees, was given the opportunity to subscribe for common stock of Black Diamond Lines, it was upon the express condition that each of them execute to the executives the option to sell previously mentioned. Carrying out this arrangement, Mr. Lawrence and eight other employees, on January 11, 1938, executed the option in question.

 The option agreement of January 11, 1938, around which in part this action revolves, had other provisions which seem of some importance. It was signed by the owners of all of the common stock of Black Diamond. The defendants, other than Morton, together with Francis E. Huck, since dead, were designated as purchasers, and the defendant Lawrence and eight other employees, including Morton, as sellers. The sellers agreed not to sell, hypothecate or encumber their shares of common stock without offering the same to the purchasers, and granted the option to purchase for six months after the happening of the three events, one of which is quoted above. Until American Diamond shall have been dissolved, the price to be paid was 5 cents per share, and thereafter, the book value or net equity previously referred to. It further provided that the book value or net equity of the shares as fixed by the Board of Directors for any quarterly period, should be conclusive upon the parties to the agreement; the certificates of stock issued to the sellers should be endorsed with a legend that the certificate was subject to the terms of the agreement, 'and may be pledged, sold or otherwise transferred only subject to the terms of said agreement.' Any one of the executives named in the option was authorized to exercise it.

 Prior to the signing of that option, Lawrence had executed and delivered to American Diamond a somewhat similar agreement. It recited that he was an employee of that corporation which desired to assist him to acquire an interest in it in recognition of and as an award for services rendered, and in order that he might share in its profits, and for that purpose, had made an advance to him to assist him in acquiring voting trust certificates for 100 shares of its common. In consideration of the granting of that option, the corporation was willing to cancel plaintiff's indebtedness by reason of the advancement which the corporation did.

 Plaintiff delivered to the corporation the voting trust certificate upon the understanding that it should be held by the corporation until its time to exercise the option had expired, and granted an option to the corporation to purchase the certificate if Lawrence's employment 'shall terminate for any purpose, whether by expiration, resignation, discharge with or without cause, the winding up or liquidation of the corporation or for any other reason, providing a notice of the desire to exercise the option should be given within 30 days before or after such employment shall cease. The price to be paid was $ 250 per share for the first five years, $ 5 per share within the second five years, and $ 10 thereafter.

 It is clear that this option, and a number of other agreements of somewhat similar tenor, were executed by the several parties interested, all of whom were executives and employees of the corporation, for the purpose of keeping the ownership of the stock in those who were actively engaged in the business and contributing to the effort, and to prevent the possibility of others, not so engaged and possibly competitors, becoming the holders thereof. The option and the other papers substantially recite that.

 The plaintiff Deuber, on December 23, 1938, was given 200 shares of Black Diamond Lines common stock by the defendant Sudman, upon the same condition as that attached to the Lawrence shares. He executed to the executives an option agreement which was in terms almost exactly similar to that executed by Lawrence. On or about January 26, 1940, Mr. Deuber, upon the same condition, was given the opportunity to subscribe to 300 more shares of Black Diamond Lines at $ 5 a share (which was the price which the executives had had to pay for the stock of Francis E. Huck, who had been one of them and who had died on June 7, 1939). He did so along with two other employees. That option expressly confirmed the option previously signed by him on December 23, 1938, and contained provisions almost exactly similar to the other, except as to price and the consideration for the execution of the option. The money with which to purchase these shares of stock was supplied to him by dividends and bonuses which were voted by the corporation.

 The principal business of the Black Diamond Lines and its predecessors had been in the operation of these eight freight vessels from the North Atlantic ports of New York, Boston and Baltimore to the north channel ports of Antwerp and Rotterdam. The breaking out of World War II in September 1939, bid fair to, and ultimately did, interfere with that operation. The President had then declared a limited emergency; and on November 4, 1939, pursuant to the Neutrality Act, 22 U.S.C.A. § 441 et seq., about that time adopted by Congress, had prohibited all American flag vessels from operating in the belligerent areas, which included that portion of the English Channel around the two ports of Holland and Belgium mentioned.

 The board of directors of Black Diamond Lines, then composed of three directors elected by the Securities Corporation and Mr. Sudman, discussed the advisability of selling the eight ships, and it was definitely decided that they would not but would charter the vessels out to others for operation in non-belligerent zones.

 The only manner in which the Black Diamond Lines, therefore, could operate in the war zones was by chartering vessels carrying a foreign flag, which it was then decided to do and which it did. Its own vessels were operated in other areas, which included the domestic ports of the United States and the probable use of the Panama Canal for that purpose.

 By Congressional enactment a domestic railroad corporation was prohibited from having any interest in vessels operated intercoastal through the Panama Canal. To eliminate this situation, and after some negotiations with the Securities Corporation of New York Central, and at a meeting of the board of directors on December 12, 1939, at which were present the three directors elected by the Securities Corporation and the defendants Sudman and Valentine, it was decided to purchase the 6,000 shares of preferred stock which that corporation held. The par value of the 6,000 shares of preferred, plus accrued dividends to January 12, 1940, in all aggregating $ 603,568.51, was paid to the Securities Company, and on the next day, the directors elected by the Securities Corporation resigned and were replaced by three of the defendants.

 On February 24, 1940, the Black Diamond Lines executed a charter party to the Isthmian Steamship Company of all of the eight vessels, which made provisions for release of any vessel that might be sold on the completion of its then current voyage, provided for war risk insurance, if required (and it was required as to some of the vessels), to the extent of $ 500,000 for each, to be subject to change in accordance with market value of tonnage, and fixed a charter rate of $ 3.60 on total dead weight of the vessels (which totalled 65,387 tons), such charter rate to be adjusted from time to time as the market might require.

 With the invasion by Germany of Belgium and Holland, the operation by Black Diamond Lines of the foreign flag vessels was necessarily stopped and the last sailing of any such vessel was in April or May 1940. From then on the work of the 65 or 70 employees of Black Diamond Lines, including the plaintiffs, was necessarily reduced to a minimum, and it was suggested that they start to look for other positions. There was inaugurated the practice of giving many of the employees vacations with pay, with two weeks on and two weeks off. The uncertainty of the war, the events at Dunkerque and the fall of France made it seem probable that the war would soon terminate. Later with the survival of Britain, the end seemed postponed to the distant future.

 In July, 1940, President Roosevelt advocated the passage of an excess profits tax, and hearings were commenced before Congressional committees looking to that end. The possibility that such tax might be based upon the invested capital of the corporation or its profits for the three years 1936, 1937 and 1938, was discussed in Congress as well as in the newspapers. The invested capital of Black Diamond Lines was small and it had not been operating in 1936 and 1937, so that it seemed probable to the executives that any excess profits tax would wipe out a large portion of any profits which the company might receive, and at that time those profits were large, as well as require them to pay an individual tax on any distribution. Consideration was given by the executives in conference with their attorneys to ways and means which might be adopted under the circumstances. Those ways and means included the discharge of the employees or as many as could be eliminated, the dissolution of the corporation, and the formation of a partnership. The culmination of these conferences was the decision that all of the employees but four be discharged, and on September 20, 1940 all of them, including the two plaintiffs, were discharged. The employee stockholders were asked at that time to bring with them their stock certificates on the following Monday, September 23, 1940, and I have no doubt were told that the executives intended to exercise the option which had previously been given. The two ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.