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April 15, 1950


The opinion of the court was delivered by: BONDY

The plaintiff, as trustee of Childs Company (hereinafter called 'Childs'), debtor in reorganization proceedings under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., seeks to recover damages from defendants on three separately alleged causes of action.

The first cause of action has been brought to recover for losses sustained by Childs, its stockholders and creditors as a result of the acts of defendants in causing the adoption and furtherance of employees' stock purchase plans by the company, allegedly for the sole purpose of promoting their own personal interests and in utter disregard of the rights of Childs, its stockholders and creditors.

 The New York Statute of Limitations has been pleaded as a defense in the answers of all the defendants. Plaintiff concedes that the action is barred by the Statute of Limitations unless the 'gravamen of the action' is fraud, in which case 'The cause of action * * * is not deemed to have accrued until the discovery by the plaintiff, or the person under whom he claims, of the facts constituting the fraud.' New York Civil Practice Act, § 48(5).

 On August 18, 1928, Tucker, Anthony engaged in business as underwriters, engaged in business as under-writers, brokers and dealers in securities, William A. Barber, general counsel and a director of Childs, Leroy W. Baldwin, president of Empire Trust Company, a New York banking corporation, and acting for that corporation, and William Childs, president of Childs, entered into a syndicate agreement for the purpose of purchasing, holding and dealing in shares of the common stock of Childs. Tucker, Anthony & Co., Laird, Bissell & Meeds and William Barber were appointed managers of the syndicate and were to acquire not more than 100,000 of the 362,612 shares of Childs outstanding common stock. The shares held by the syndicate were to be voted at all meetings of Childs in such manner as might be determined by a majority of the subscribers. Upon the request of a majority of the subscribers William Childs and Barber undertook to create three vacancies on the board of directors to be filled by persons designated by a majority of the subscribers, and the by-laws of Childs were to be amended to provide for an executive committee of the board of directors which, subject to the direction of the board, should have and exercise all of the powers of the board. The members of the executive committee were to be directors of Childs designated for membership on the committee by a majority of the subscribers of the syndicate. The syndicate, which was to continue for one year, was extended by subsequent agreements to November 18, 1930, at which time it was terminated.

 On December 11, 1928, William Childs retired from the syndicate and the participation of the other subscribers was increased to one quarter each.

 At the annual stockholders' meeting of Childs on March 7, 1929, there was a proxy fight between William Childs and a group of stockholders on one side, and Barber and a group of stockholders, including all the syndicate participants on the other, which resulted in a victory for the Barber faction. William Childs was ousted from control of Childs and a group of directors nominated by the Barber group was elected. All of the syndicate participants were represented on the newly elected board of directors, which included Barber, Baldwin, Hollyday S. Meeds, Jr., a partner of Laird, Bissell & Meeds, Clement R. Ford, a partner of Tucker, Anthony & Co., and Ramon O. Williams, an employee of Tucker, Anthony & Co.

 By November 1, 1929, the syndicate had acquired approximately 92,000 shares of Childs common stock at an average cost of approximately $ 56 a share. During the remainder of 1929 the syndicate neither bought nor sold any substantial amounts of Childs common stock. Both Tucker, Anthony & Co. and Laird, Bissell & Meeds gave subparticipations in their interests in the syndicate, carrying their sub-participants on margin accounts, but the management and control of the syndicate remained in the hands of the original subscribers. Among the sub-participants of Laird, Bissell & Meeds were a senior partner of the firm, a corporation owned by another partner and his family, and important customers and clients. Among the sub-participants in the interest of Tucker, Anthony & Co. were the wives of three of the partners of the firm and important customers. Empire Trust Company, in addition to its 25% participation in the syndicate, also financed Barber's participation. The collateral held by Empire Trust Company for its loans to Barber, which exceeded $ 1,200,000, was a certificate of deposit for $ 100,000, and Barber's stock itself.

 During the latter part of October and the early part of November, 1929, there was a drop in the stock market generally and Childs common stock, which on October 23rd had sold at a high of $ 75 3/8, dropped to a low of $ 45 on November 12th. This decline threatened considerable loss to the syndicate participants and sub-participants, who had invested in excess of $ 5,000,000 in the purchase of the stock, and Tucker, Anthony & Co. demanded and received additional margin from its sub-participants. Empire Trust Company was faced with a loss not only on its own investment in the syndicate but also on its loans to Barber, which on November 12th exceeded the amount of the certificate of deposit and the value of Childs common stock held as collateral by approximately $ 140,000.

 On November 13, 1929, Childs, under the management and control of the syndicate, began to purchase shares of its own common stock in the open market. The charter of Childs authorized it to trade in its own stock, but the minutes of the meetings of the board of directors do not disclose the reason for the purchase of stock at this particular time, nor do they authorize such purchase. The minutes of a meeting of the board held on November 27, 1929 show that the treasurer reported that during October and November, 1929, Childs had purchased some of its own preferred stock and debentures, but do not contain any mention of the approximately 4,300 shares of Childs common stock that had been acquired by the corporation at a cost of over $ 200,000 during the month of November, 1929. The minutes state that whereas the 'Board is of the opinion that it would be advantageous, both to this corporation and to its employees, to have the employees of the corporation become stockholders therein, and that it would be well for the corporation, if possible, to aid its employees in the purchase of its stock'; it is resolved to appoint a committee with the power 'to consider and, in their discretion, to adopt such plan or plans as they may deem proper for the sale by the corporation of shares of the common capital stock of this corporation to its employees and to fix the terms of payment for such shares and the price or prices (which may be greater or less than the cost thereof to the corporation) at which the same shall be sold; and if they adopt any such plan or plans, to take any and all action which may be appropriate to carry the same into effect; and * * * to acquire for the corporation such shares of its issued and outstanding common capital stock as they may deem proper, at such price or prices as they may determine, either for the purpose of carrying out any such plan or plans or in anticipation of the adoption of a plan or plans as herein provided.' Every participant in the syndicate was represented on this stock committee, which consisted of Barber, Baldwin, Ford and Meeds.

 A stock purchase plan (hereinafter called 'the Plan') was submitted to the employees of Childs on or about December 20, 1929. The Plan enabled the employees to buy Childs common stock at $ 56 a share, payable in minimum monthly installments of $ 1.50 over a period of approximately 37 months. Larger payments could be made if desired, but in no event were stock certificates to be delivered to the purchaser until the expiration of one year from the date of the offer. If an employee left the service of the company or failed to make payments at the provided minimum rate his subscription was to be cancelled and settlement made at the option of the company by either or both of the following methods: (1) The total amount of money paid by the subscriber would be returned to him with interest at 4 1/2% per annum; or (2) A sufficient number of shares would be sold at the market price at the time of cancellation to complete the amount due on the total subscription and the remainder of the shares would be delivered to the subscriber. All subscriptions had to be made not later than February 1, 1930. If the subscriptions received exceeded the available stock, there was to be a proportional allotment of shares to the subscribers.

 The fact that an employees' stock purchase plan had been adopted and that stock had been acquired for the purpose of such plan was disclosed in a statement released to the press and published in the New York Times on December 20, 1929.

 With the exception of 4,000 shares, which Childs purchased directly from the syndicate, substantially all of the purchases of stock for Childs were made in the open market. Empire Trust Company was the agent of Childs through which the acquisition of the stock was made. It received the stock from the brokers and it made payment therefor out of funds provided from time to time by Childs. For these services Empire Trust Company did not make any charge.

 By February 4, 1930 Childs had acquired approximately 14,200 shares of its common stock. On that day a letter from the treasurer of Childs informed the syndicate that subscriptions for approximately 18,500 shares had been received from 2,481 employees and that if the syndicate would sell to Childs 4,000 shares at $ 59 a share this would be sufficient to meet the demand of the employees without raising the cost of the stock to Childs over $ 55.96 a share. In response to this letter the syndicate on February 17, 1930 sold to Childs 4,000 shares for $ 236,000 at an average of $ 59 a share. The market price of Childs at this date was approximately $ 64 a share. By this time Childs had purchased a total of 18,200 shares for the Plan at a cost of slightly over $ 1,000,000.

 From the commencement of acquisitions of stock for the Plan, purchases therefor represented a considerable proportion of the transactions in Childs common stock on the New York Stock Exchange. Beginning with the third week in November, 1929, and continuing throughout the months in which stock was acquired for the Plan, the price of Childs common stock increased more rapidly from its low point at the end of the second week in November than did any other comparable securities. When acquisitions for the Plan ceased, the fluctuation of the price of Childs stock was similar to that of other comparable securities.

 On November 13, 1929, the day that Childs began purchasing its stock, Hollyday S. Meeds, a partner of Laird, Bissell & Meeds, purchased 2,350 shares of stock and two customers of that firm purchased 3,000 shares at $ 40.25 a share. On November 14, 1929, Empire Trust Company purchased for its own account 5,350 shares of Childs common stock at the same price.

 In January and February of 1930, when the purchase of stock for the Plan was drawing to a close, the syndicate sold 16,000 shares for its own account and it gave an option to a potential purchaser for 16,000 additional shares at prices ranging from $ 62 to $ 69 a share. During this same period Empire Trust Company sold 3,600 shares for its own account at prices ranging from $ 61 1/2 to $ 68 per share, and Hollyday S. Meeds sold 850 shares at prices ranging from $ 65 3/4 to $ 67 a share.

 The price of Childs common stock remained fairly steady during the summer months of 1930. In September, however, there was a sharp decline in the price from a high of $ 58 a share on September 6th to a low of $ 44 1/2 a share on September 30th. This decline, like that in November, 1929, impaired the investment of the syndicate and endangered the Plan because employees were unlikely to continue paying the subscription price of $ 56 a share when they could acquire the same stock in the market at $ 44 1/2. By the beginning of October approximately 15% of the total number of shares subscribed under the Plan had been cancelled and many other subscriptions were in default. ...

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