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AUSTRIAN v. WILLIAMS

January 10, 1952

AUSTRIAN et al.
v.
WILLIAMS et al.



The opinion of the court was delivered by: WEINFELD

This case involves the affairs of Central States Electric Corporation, an investment company organized under the laws of Virginia, with its principal place of business in Richmond, Virginia. On February 23, 1942, the Corporation filed in the United States District Court for the Eastern District of Virginia a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., which was approved on February 27th, 1942. Messrs. Kent and Wilkinson were appointed trustees and when the latter resigned he was succeeded by Dennis.

Dennis and Kent conducted an investigation under Section 167 of the Bankruptcy Act and filed a report recommending that no suits be instituted against the officers, directors and the principal stockholder of Central States. The recommendation was approved by the District Court but upon appeal, the Court of Appeals, Fourth Circuit, reversed and directed a further investigation by disinterested trustees. *fn1" Thereafter, plaintiff Austrian was appointed a third trustee on November 15th, 1944. Messrs. Kent and Dennis resigned in March 1945 and the plaintiff Butcher was appointed as trustee. Austrian and Butcher have since acted as trustees. Following further investigation by them, under Section 167 of the Bankruptcy Act, Austrian and Butcher recommended that the present suit be filed and an order was entered by the District Court of Virginia authorizing them to bring this action. This suit was commenced on July 5th, 1945. Jurisdiction was sustained. *fn2"

 The broad charge made by the plaintiffs is that beginning in 1922 and continuing to the filing of the petition in reorganization in 1942, Harrison Williams, the majority stockholder of Central States, in collaboration with various defendants, engaged in a continuing plan to overreach and loot Central States. Conspiracy charges are included.

 Plaintiffs attach a series of transactions as wrongs committed upon Central States by Williams and the defendants or some of them, charging that they overreached Central States in these transactions, converted, wasted, destroyed and wrongfully misappropriated and disposed of its assets, were guilty of breaches of trust, and grossly mismanaged its affairs.

 The defendants fall into four categories: (1) Harrison Williams, principal and controlling stockholder of Central States, but not an officer or a director after 1922; (2) directors of Central States and of Williams' wholly owned companies who passed upon, or participated in, the transactions under attach; (3) directors or partners of other parties to the transactions who were not directors of Central States; and, (4) members of the debtor's accounting firm. Not all of the defendants are charged with dereliction in all of the transactions; some are involved in only one; others, in a number; the defendant Kilmarx in all but one; and Harrison Williams, in all.

 To support the charges of misconduct, the plaintiffs set forth in their complaint thirteen transactions, 'A' to 'M' inclusive. In the 'M' transaction they contend that Williams and a number of other defendants deliberately and fraudulently concealed and kept concealed the damaging facts of transactions 'A' to 'L' and so conducted themselves as to toll any applicable statute of limitation. At the end of the trial, transactions 'F,' 'G' and 'H' were dismissed for lack of proof. *fn3"

 In addition to a denial of the charges, the principal defense is a plea of the statute of limitations.

 One of the transactions under attach took place in March 1922, the second in 1927, all others except one in 1929, and one in 1938. Thus, the events under attack cover a span of sixteen years, making it desirable to review in broad outline Central States' history during that period.

 Central States is an investment company whose holdings consisted primarily of stocks in public utility holding companies, which, in turn, held stock in both utility holding and operating companies. Its history falls roughly into four phases. The first began with its organization in 1912, when it acquired the majority of the stock of Cleveland Electric Illuminating Company, an operating utility company. It entered its second phase in 1922, when it relinquished its holdings in the Cleveland Electric Illuminating Company and acquired an interest in the North American Company, then engaged principally in investing in securities of public utility holding and operating companies.

 During this second phase of Central States's history, which continued until late 1928, its principal interest was the investment in the North American Company of which it was the largest single stockholder. By August 1929, Central States owned directly 839,668 shares of North American common stock, 15% of the outstanding common stock, and an additional 10% indirect interest through other companies.

 Central States' third phase, which began about September 1928, and continued until the late 1929 market crash, witnessed an era of expansion and of high optimism about electric utilities and their future. Central States increased its capital in September 1928 and again in June of 1929 by the sale of two series of convertible preferred stock.

 During this third phase of its existence, Central States participated in the formation of a affiliated and subsidiary corporations. These corporations, largely utility holding companies, although some held industrial securities as well, included American Cities Power and Light Corporation formed in October 1928; Electric Shareholdings Corporation organized in March 1929; Shenandoah Corporation formed in July 1929; and Blue Ridge Corporation formed in August 1929. The capital structure of these corporations consisted of preferred as well as common stock. Central States' investments in these corporations were principally in the common stock, following the pattern of what has been referred to as 'leverage,' which gives the equity owner the full benefit of increases in values but which operates adversely when the market goes down. *fn4" The leverage element with its potentiality for rapid gain during a rising market placed these common stocks in great demand during 1928 and 1929. During this period Central States' investments reached aggregate market values approximating $ 400,000,000.

 After the break in the market in 1929, the market value of the securities held by Central States diminished severely and Central States entered the fourth phase of its history. Its principal investments then were in North American Company, American Cities, Electric Shareholdings, Shenandoah and Blue Ridge. During the 1930s it disposed of a large part of its holdings in North American and in Electric Shareholdings, its entire interest in Shenandoah, and increased in 1938 its interest in, and acquired a majority of, Blue Ridge common stock. When Central States' petition for reorganization was filed in 1942, the market value of its assets had declined from a high of approximately $ 400,00,00 in 1929 to $ 1,300,000.

 Harrison Williams and Other Directors and Officers of Central States

 Harrison Williams, the principal defendant in this action, had organized Central States in 1912 and throughout its history and up to the filing of the petition in reorganization, was intimately associated with the conduct of its affairs and the affairs of its affiliated corporations, and the top personnel of all of them.

 Williams' activity in public utilities began in 1906, when he participated in the organization of the American Gas & Electric Company. Later, he was instrumental in the formation of other light and power companies. He was generally regarded as a person of dominance and prestige in the public utility field, and was credited with the growth and development of the North American Company.

 Williams invested in the North American Company shortly after the first World War and was Chairman of its Board of Directors from 1920 to March 24th, 1922, when he resigned. He returned as Chairman of the board in 1933, and holds that position today.

 From March 24th, 1922 to 1942, Williams was neither a director nor officer of Central States. He had been a director and Chairman of the Board, but resigned on March 24, 1922, the date of the earliest transaction under attack. His stock ownership in Central States and his general prestige and influence reflected his real interest and status.

 When Williams organized Central States in 1912 he acquired 27 1/2 % of its common stock. At the end of 1922 he owned 64%, which was increased to 96% by the end of 1924, and to 97% in December 1928. Thereafter his stock ownership was reduced, so that in October 1929, it stood at 86% of the common stock, and in December 1929, largely as a result of transaction 'J,' at 62% of Central States' common stock. From 1930 and up to the date of the reorganization petition in 1942, he owned somewhat in excess of 50% of Central States' common stock at all times. *fn5"

 During these years Williams also owned or controlled substantially all of the stock of a group of corporations formed by him for investment and other purposes, referred to hereafter as Williams' wholly owned or personal companies. The principal one of these was New Empire Corporation, all of whose stock was owned by him. Williams also owned or controlled, directly or through New Empire, Electric Investment Corporation, Federal Utilities, Inc., Utilities Securities Corporation and North American Securities Company, referred to hereinafter as Nasco. All of them had dealings with Central States.

 The Board of Directors of Central States in 1929, when most of the transactions took place, was composed of Kilmarx, Fogarty, Freeman, Gruhl, Narlian, Schroeder, Glass, Dame (until May 28th) and Stone (from May 28th). Of all the directors who voted or participated in the transactions, recovery is sought principally against four: Freeman, Fogarty, Stone and Kilmarx. Although named as defendants jurisdiction was not acquired over the other directors due principally to service of process and venue problems *fn6" and in two instances because of death. *fn7"

 New directors were elected to the Board from time to time between 1929 and 1942. Freeman, Fogarty and Stone resigned by the end of 1934, and of those who constituted the Board in 1929, Schroeder remained until 1937, and Kilmarx was was still a director at the time of the trial. Commencing in 1935, a majority of the Board was composed of new directors. Of these, Johnson, McCornack, Eccles and Finney are included as defendants in the 'E' transaction which occurred in 1938, and along with Baker and Pardee in the 'M' transaction relating to the tolling of the statute of limitations.

 Kilmarx first became associated with Central States in 1913 as a junior accountant. He managed Williams' personal affairs from 1913 to August 1931. He was Williams' confidential aid. He kept the books and records of Williams' privately owned corporations, paid his personal bills and had charge of his taxes. These functions were taken over in 1931 by the defendant Johnson, but Kilmarx continued as director, and from 1934-1938 when the office of President was vacant he was Senior Vice President of Central States and performed the functions of president.

 Stone's association with Central States began in June 1929 when he was elected a director. In July at Williams' instance, he was elected President, which office he held until 1934. He was also president of Blue Ridge and Shenandoah.

 The defendants Freeman and Fogarty were elected directors of Central States on the invitation of Dame, a former president and a director of long standing of Central States and also president of North American. Freeman served as a director from 1928-1934. He had a broad business background as a partner in Touche, Niven & Co., Certified Public Accountants, and as president of a nationally known corporation. He had made investigations and financial analyses of various corporations for Williams. He had been associated with the North American Company since 1927 as an officer and director and is now its president. Fogarty was a director of Central States from 1926 until 1934 and his principal work was in financing and securities. He had been connected with the North American Company since 1902 and was its president from 1933 to 1939.

 Kilmarx, Stone, Fogarty, Freeman and other Central States directors were also directors or officers of one or more Williams' wholly-owned companies which were parties to a number of transactions with Central States now under attack. Freeman was a director of one Williams' wholly-owned company; Fogarty of three; Stone was a director of three; and Kilmarx was director of five, and is the only Central States director named in all transactions but one.

 Of the directors in the 'M' transaction relating to the tolling of the statute of limitations, the principal defendant is Johnson, who was first employed by affiliates of Central States in 1928 and became a director in 1937 and its president in 1938. Prior thereto, in March 1931, he had succeeded Kilmarx in the management of Williams' personal affairs and from 1931 to 1944 he was an officer and director of three William's personal companies.

 Management

 Central States maintained an office in New York at 60 Broadway from which its main activities were conducted until 1931. Central States, its staff and officers, shared common space with Williams and his personally owned companies.

 In 1923 Central States entered into a management contract with New Empire Corporation, the top company in the pyramid of the Williams' personal companies. This arrangement continued until the end of September 1929. Under its terms, New Empire supervised the operation and financing of the business of Central States, and made available 'the advice, assistance and service of our entire organization' and 'all services required other than such services as (Central States') officers * * * may otherwise provide for.' New Empire provided all necessary personnel, including officers as designated by the Board of Central States, paid their salaries and all other expenses save directors' fees. Specifically, with respect to officers, New Empire agreed to supply a president, vice-president, treasurer, secretary and such additional officers as might be elected by Central States' Board. Prior to election by Central States' Board of Directors the list of proposed officers would be submitted to Williams for his approval. New Empire also provided all employees, such as clerks, stenographers and operating personnel, offices and all data, records and reports for the keeping of the corporate books, and prepared complete reports of the 'operation and management' of Central States.

 Williams maintained a personal organization which administered his affairs and those of his privately owned companies. The services furnished by New Empire to Central States under the management contract were performed principally by members of this organization. The officers designated for Central States were employees, officers or directors of various of Williams' wholly-owned companies or of otherwise closely associated with him or his interests. Upon their election as officers of Central States they continued to function in the Williams' companies or organization, and in some instances, for example, Kilmarx and later Johnson, continued to attend to Williams' personal affairs while holding office in Central States, New Empire or other affiliated Williams' companies.

 Domination

 The plaintiffs' charges are pegged to a broad claim that Williams was more than just a controlling stockholder- that he dominated Central States in all of its affairs and operations.

 Domination must be determined as a fact from all the circumstances, the action and conduct of Williams, of the officers and directors- and not from the mere ownership of controlling stock. Nor may a finding of domination be predicated solely on Williams' vigorous interest in the affairs and activities of Central States or because his views were considered by the directors. It was not unnatural that owning so vast a percentage of the shares outstanding, representing a value of many millions of dollars, Williams' views be ascertained and considered.

 Upon all the evidence, the Court is convinced that Williams dominated and controlled Central States in all its affairs and operations. The Management pattern appraised in the context of his controlling interest compels the conclusion that he was more than just a controlling stockholder. Williams not only had voting control but managerial control as well through New Empire, his wholly-owned corporation. The staff of the Williams' organization performed all the functions required by Central States. Central States had no personnel of its own. Williams, through New Empire, furnished all the officers of Central States. They were also in the employ of New Empire or the Williams' organization. Their salaries were paid by New Empire or other Williams' companies. Thus, every man serving Central States as an officer was Williams' personal designee. Every director of Central States was elected by his votes.

 Central States' business was conducted by an operating group composed of Narlian, Schroeder, Stone and Kilmarx, all closely identified with Williams in one or more of his enterprises. Each was a director or an officer of at least three or more of Williams' wholly-owned companies. Williams himself was considered by the others as a member of this management group. Although he was neither an officer nor director of Central States after March 1922 he continued to participate actively in its management and operation.

 Every important action affecting Central States, including those in which his wholly owned companies were participants, was initiated by Williams or by directors or officers under his immediate supervision and instruction. In most of the transactions Williams, without prior consultation with Central States' directors, negotiated and determined on behalf of Central States the basic policy considerations underlying the program, following which the board members invariably gave their pro forma approval. Officers as well as directors carried out the administrative details which implemented the plan or program. He was looked to, as one of the directors described him, as 'the real guide.' Reports were made to him daily and constantly and even while abroad he was informed by cable as to major transactions.

 Kilmarx, who was president of Central States up to July 1929, when he was succeeded by Stone, described Williams' decisions as the 'equivalent of a direction.' Stone, his successor, referred to Williams as the 'key man' who 'worked right along with' the officers and directors. Stone, Kilmarx and other officers and directors admitted they attempted to meet Williams' desires and carry out his ideas.

 Certain officers of Central States who were also directors were granted options to purchase Central States' stock at prices considerably below the prevailing market under an arrangement that if the options were exercised, the stock was to be supplied by New Empire. Incidentally, this arrangement was approved at the very meeting of the Board at which the Directors approved one of the transactions complained of, one between Central States and a wholly owned Williams' company.

 Another circumstance which points strongly to Williams' domination of the officers, directors and affairs of Central States, is the destruction of records. When it became known in 1936 that the SEC was investigating investment holding companies, word got around in the Central States organization to destroy all records pertaining to Williams. Thereafter, over an extended time, thousands of files were removed and destroyed. Clerical personnel were directed and assisted by Kilmarx and heads of departments who were also directors of Central States, as well as officers of Williams' wholly owned companies. The job was completed by the time the SEC investigators arrived. No secondary evidence of the contents of the destroyed records has been supplied other than the suggestion that they contained statistical material, corporate reports and other data, some of which was supplied to Williams in confidence. With one possible exception, *fn8" we do not know whether these records had any direct bearing on the issues in this case but we do know that Williams' interests were a prime consideration in the purging of the files. The removal of documents bearing reference to wIlliams was repeated on subsequent occasions.

 I draw no adverse inference from the destruction or the removal of Central States' records with respect to specific transactions, since it would require speculation to infer their contents. However, the action taken in obliterating the records is further evidence of Williams' power and domination over the directors, officers and employees of Central States.

 A careful appraisal of this record reveals a continued policy of acquiescence by all of the directors and officers of Central States in everything proposed by Williams, including contracts or commitments between his personal companies and Central States. His wish was a command, faithfully executed by officers and directors alike. The record abundantly establishes that their loyalty was to Williams and not to Central States and that Central States was regarded as but another link in the Williams' chain of companies.

 The defendant directors invariably followed Williams' judgment and their judgment was neither independent nor considered. They yielded to Williams' dictation and decision and abdicated their responsibilities and obligations to Central States. The plaintiffs have sustained the burden of establishing that Williams was not only the controlling stockholder of Central States but dominated all of its affairs and operations. The plaintiffs also charge defendants with conspiracy, but this they have failed to sustain.

 The Law

 Before discussing the separate transactions about which the plaintiffs complain, it will help to set forth the general principles of law on the basis of which each of these transactions is to be judged and liability determined. These are clearly and emphatically set forth by Mr. Justice Douglas in Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281, as follows: 'A director is a fiduciary. Twin-Lick Oil Co. v. Marbury, 91 U.S. 587, 588, 23 L. Ed. 328. So is a dominant or controlling stockholder or group of stockholders. Southern Pacific Co. v. Bogert, 250 U.S. 483, 492, 39 S. Ct. 533, 537, 63 L. Ed. 1099. Their powers are powers in trust. See Jackson v. Ludeling, 21 Wall. 616, 624, 22 L. Ed. 492. Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein. Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 599, 41 S. Ct. 209, 212, 65 L. Ed. 425. The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain.' 308 U.S.at pages 306-307, 60 S. Ct.at pages 245.

 This statement has been characterized as 'perhaps the strongest recent statement of the duties of majority stock interests'. Crawford v. Mexican Petroleum Co. Lt. of Delaware, 2 Cir., 130 F.2d 359, 361. The principles are severe, but understandably so. The immunity afforded by the business judgment doctrine, *fn9" under which acts in good faith and in the exercise of an honest judgment conclude the corporation and the stockholders is rooted in the concept of arm's length bargaining. In the context of domination or control there can be no arm's length bargaining.

 In the view of Mr. Justice Douglas, the rule is clearly applicable in the case of either a dominant or controlling stockholder. As stated by Mr. Justice Brandeis in Southern Pacific Co. v. Bogert, 250 U.S. 483, 39 S. Ct. 533, 63 L. Ed. 1099, 'It is the fact of control of the common property held and exercised, not the particular means by which or manner in which the control is exercised, that creates the fiduciary obligation.' 250 U.S.at page 492, 39 S. Ct.at page 537.

 This standard has been applied by the New York Court of Appeals in Chelrob, Inc., v. Barrett, 293 N.Y. 442, 57 N.E.2d 825. The Court held a transaction with a controlling stockholder subject to judicial scrutiny as to its fairness notwithstanding findings that 'good faith is established by persuasive evidence', 293 N.Y. 460, 57 N.E.2d 834, the directors acted 'honestly and carefully,' 293 N.Y. 451, 57 N.E.2d 828, were not 'remiss in the performance of their duties', 293 N.Y. 452, 57 N.E.2d 830, and the controlling stockholder 'did not usurp the functions of the directors and dominate * * * their actions'. 293 N.Y.at page 460, 57 N.E.2d at page 834. But since the directors acted in good faith and on the basis of their own considered judgment, the Court of Appeals dismissed the complaint as against them.

 Where, however, directors do not act in good faith or with the care and independent responsibility which their status demands, they, too, would be liable. 'The relation of the directors to the stockholders is essentially that of trustee and cestui que trust. The directors are bound by all those rules of conscientious fairness, morality, and honesty in purpose which the law imposes as the guides for those who are under the fiduciary obligations and responsibilities. They responsibilities. They are held, in official action, to the extreme measure of candor, unselfishness, and good faith. Those principles are rigid, essential, and salutary.' Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 293, 123 N.E. 148, 151. See also Blaustein v. Pan American Petroleum & Transport Co., 293 N.Y. 281, 56 N.E.2d 705.

 The test of fairness does not permit of precise definition; it involves a judgment based on all the factors and circumstances. Chief Judge Learned Hand offers some guide in his opinion in Ewen v. Peoria & E. Ry. Co., D.C., 78 F.Supp. 312, certiorari denied, Income Bondholders of Peoria & E.R. Co. v. New York C.R. Co., 336 U.S. 919, 69 S. Ct. 642, 93 L. Ed. 1082, where he observed that "whether the proposition submitted would have commended itself to an independent corporation" is very close to the proper test of fairness, and as another approach suggests 'whether the actual (transaction) was worse than the (corporation) would have accepted, or could have been forced to accept' had the parties traded at arm's length, 78 F.Supp.at pages 316, 317.

 As to those defendants who were not directors or fiduciaries of Central States, the governing rule is that one who knowingly joins a fiduciary in an enterprise where the personal interest of the latter is or may be antagonistic to his trust, becomes jointly and severally liable with him. Jackson v. Smith, 254 U.S. 586, 589, 41 S. Ct. 200, 65 L. Ed. 418; also Irving Trust Co. v. Deutsch, 2 Cir., 73 F.2d 121. Certiorari denied, Biddle v. Irving Trust Co., 294 U.S. 709, 55 S. Ct. 405, 79 L. Ed. 1243.

 The questions of law involved in the defense of the statute of limitations interposed by the defendants in this case will be considered later in this opinion.

 Transaction 'A'

 This transaction revolves about the acquisition by Central States of shares of the common stock of the Shenandoah Corporation upon its organization in July 1929. Recovery is sought not only against Williams, and Fogarty, Freeman, Stone and Kilmarx, directors of Central States, but also against the directors of Goldman Sachs Trading Corporation, the individuals composing the partnership of Goldman, Sachs & Co. and the directors of the Shenandoah Corporation.

 Goldman, Sachs & Co., an investment banking firm, had long been engaged in the financing of industrial and general business corporations. In 1928 it formed the Goldman Sachs Trading Corporation, hereinafter sometimes referred to as Trading. The partners of Goldman, Sachs & Co. made substantial investments in the stock of Trading and the balance of the stock was sold to the public. Prior to the organization of Shenandoah, Trading's activities were principally in securities of industrial companies, for which Goldman, Sachs & Co., had acted as bankers.

 Early in 1929, John Foster Dulles, Senior partner of the law firm representing both Trading and Goldman, Sachs & Co., and Waddil Catchings, senior partner in Goldman Sachs and a director of Trading, conceived the idea of forming an investment company which would enable Trading to participate in public utility securities which were then in great demand, and at the same time make available to the investing public a security of a company dealing in both industrial and utility stocks. Since Trading's own experience had been limited to industrials, the Trading group wanted to affiliate with a person or group experience in the light and power field.

 Dulles knew Williams, one of the recognized leaders in the utility field, and introduced him to Catchings in June 1929. There ensued a series of almost daily meetings over a period of six weeks between Williams and Catchings, out of which developed the plan for the formation of the Shenandoah Corporation. The corporation was to have the benefit of the combined skill and experience of Goldman, Sachs, especially qualified and experienced in industrial investments, and of Williams with his matching competence in the field of utility investments.

 All of the major negotiations were conduced by Catchings representing the Trading and Goldman Sachs groups, and Williams who then owned 96% of Central States common stock. It was agreed that the new corporation was to be sponsored jointly by Trading and a company to designated by Williams. He designated Central States. In substance, Trading and Central States each agreed to exchange $ 25,000,000 in market values of its stock for a 40% equity in the new company. The 20% balance of the common stock, and all of the preference stock were to be sold to the public. At the time the understanding was reached on July 9th, 1929, Central States stock was selling on the market at $ 52 and Trading at $ 105, requiring Central States to deliver to Shenandoah 482,000 of its shares and Trading to turn over 238,000 of its shares.

 The preference stock of Shenandoah to be sold to the public was, in the first instance, to be bought by Central States and Trading and then sold to the public through the bankers, Goldman, Sachs & Co.

 In this transaction we are concerned only with the common stock.

 Paragraph 'Fourth' of the definitive agreement which was not approved until July 14th provided: 'Central States will issue or cause to be delivered to the New Company in such names as it may specify 480,770 full-paid and non-assessable shares of the common stock of Central States, as such shares shall be constituted after giving effect to the 200% stock dividend payable July 25, 1929 of which at least 384,616 *fn10" shares shall be of original issue and shall pay to the New Company $ 20,000,000 in cash, together with a sum in cash equal to the accrued dividend on the 500,000 shares of preference stock herein after mentioned; Trading will issue and deliver to the New Company in such names as it may specify 238,096 full-paid and non-assessable shares of the capital stock of Trading, all of which shall be of original issue, and shall pay to the New Company the sum of $ 20,000,000 in cash, together with a sum in cash equal to the accrued dividend on the 500,000 shares of preference stock hereinafter mentioned. * * *'

 The $ 20,000,000 cash was to be derived from the $ 25,000,000 which each, Central States and Trading, expected to receive upon the sale of the preference stock to the public. The net effect of this provision as far as Central States is concerned, was that it was to receive 2 million shares of Shenandoah common, valued at $ 10 per share, and $ 5,000,000 cash, a total of $ 25,000,000 in value, for 480,770 shares of its common stock.

 The charge against the defendants on this transaction centers about the $ 5,000,000 cash and the delivery to Shenandoah of 96,154 shares of Central States common, not of original issue, but which Central States purchased from Nasco, a Williams wholly owned company.

 The contract between Central States and Trading for the formation of Shenandoah was ratified by Central States' Board of Directors on July 24th, 1929. The Board authorized the issuance of 384,616 shares of its unissued common stock. At the same meeting the Board also authorized the purchase from Nasco of 96,154 shares of Central States' common stock at $ 52 per share, making a total price of $ 5,000,000. Also approved was an agreement between Central States and Trading, referred to as an equalization agreement, which provided that if upon a reappraisal of the stocks within certain prescribed periods, the ratio of the market prices of the two stocks (Central States at $ 52 and Trading at $ 105) at which they were taken in by Shenandoah no longer obtained, appropriate adjustment would be made to reestablish it.

 Thereafter on August 7th, 1929, the transaction was closed as contemplated under these agreements. Central States received from Goldman, Sachs & Co. $ 25,000,000, the proceeds from the public sale of the 500,000 preference shares, $ 20,000,000 of which it paid to Shenandoah as required by Paragraph 'Fourth' of the contract. The balance of $ 5,000,000 was paid to Nasco for the 96,154 shares, which, together with the 384,616 shares of original issue totaling 480,770 shares of its common stock, Central States turned over to Shenandoah, and in turn received 2,000,000 shares of Shenandoah common.

 The trustees claim that under the contract Central States had the right to deliver to Shenandoah all of the 480,770 shares and to retain the $ 5,000,000 cash as well as the 2,000,000 shares of Shenandoah. It is charged that Williams, with the connivance of the directors, deprived Central States of the full benefits of its right to perform Williams 'carved the juiciest part' of the contract- the cash- for himself and the Central States Board acquiesced and approved it without regard for Central States' interest.

 When the Shenandoah and Nasco contracts were approved on July 24th, the directors who were present and authorized and approved them included Fogarty, Freeman, Kilmarx and Stone. None of them personally profited or benefited from this transaction or from any of the others under attack. Stone had shortly prior to the transaction been elected president of Central States at Williams' instance. He was called in towards the very end of the Shenandoah negotiations to work out the mechanics of the plan. It does not appear that he or any other director of Central States actively participated in discussions or decisions on major policy matters.

 In view of Williams' relation to Central States and his domination of its affairs and activities, the court must be satisfied not only as to 'the good faith of the transaction but also * * * its inherent fairness from the viewpoint of the corporation and those interested therein.' *fn11"

 The basic business reason assigned by the directors of Central States for not issued all of its own shares needed for the Shenandoah transaction was that they regarded it as sound policy for Central States to retain stock as against cash. The primary purpose of the transaction, they say, was to get a 40% equity position in Shenandoah and not the cash. This, Central States received and kept. The $ 5,000,000 which Central States would have received had it issued the full 480,770 shares instead of the 384,616, would, they claim, under their policy of 'Invest and Kepp Invested' have been expended at once for other securities. Finally, it is urged that they were confident that Central States common was worth more than its then current market price and they point to the general optimistic attitude prevailing at that time, and the general belief that the period was one of continuing prosperity and increasing values. They cite the fact that the newly issued Shenandoah stock was oversubscribed at $ 17.50 per share, although the price to Central States was $ 10, and that the market reached $ 38 within a few days.

 The matters under consideration must be cast in the period during which they occurred and against the background of facts as they then existed. This was July 1929. The nation was enveloped in a spirit of marked optimism which extended no less to leaders of industry and finance than it did to the average investor. The steady advance of stocks was assumed by many to reflect a sound economy and continuing prosperity. We know now that it was an era of frenzied finance and wild speculation.

 In July 1929 Central States' directors believed that the market had not reached its limit. Their basic policy was to keep invested- that an inventory of stock was of greater value than cash.

 They point to the fact that the price of $ 52 for Central States common was based on the market price on July 9th, 1929, when the terms of the Shenandoah deal had been agreed upon tentatively between Catchings and Williams; that on July 24th, 1929, when the contract was approved by Central States' Board, the market price had advanced to $ 82 per share, and that, accordingly, so long as the stock could be obtained from Williams, through one of his companies, and he was willing to sell at $ 52, it was not only fair but signally advantageous to Central States to buy the stock from Nasco instead of using its own 96,154 shares.

 The Court is persuaded that it was the policy of Central States to hold securities and not cash, and that at that time it was assumed by most people, however misguided, that security values would keep going up. The continuing rise in the price of Central States stock was fairly cogent proof of a rising market.

 It is further contended by plaintiffs that Williams deprived Central States of its corporate opportunity, as distinguished from an invasion of its rights under the contract once it was signed, by injecting himself into the deal and so negotiating it as to permit him to take a portion of the deal for himself.

 The credible evidence establishes that Trading was interested in merging forces with Williams and not primarily Central States. Trading sought association with Williams because of his ability and know-how in the power and light industries, which was his special area of prestige and influence in the financial and investment world. Catchings and his group were interested in Williams, the individual, and not in Central States. Central States was merely one of the companies in which Williams had a substantial personal interest and which itself had extensive investments in holding and utility companies.

 The importance of Williams personally is demonstrated by his acceptance of membership on the Board of Directors of Shenandoah,- a departure from his fixed policy of not being a director of any company in which he was heavily invested.

 This was not a business opportunity which was presented to or belonged to the corporation. In essence, this was Williams' deal- his opportunity. He was, at the outset, given the right to name any one of the companies which he controlled. As I see the record, he retained for himself 20%, with the rest going to Central States. Williams was free under the facts of this transaction to have handled it entirely for himself. If, in the first instance, he had, out of his vast holdings of Central States common, at that time in excess of 7,000,000 shares, undertaken to deliver to Shenandoah the full 480,770 shares through any of his wholly owned subsidiaries, Central States would have been in no position to complain. There is no evidence that the Goldman Sachs group preferred Central States to any other Williams' company. It cannot be said, as plaintiffs contend, that Central States was entitled exclusively to participate in the Shenandoah deal. The participation by Williams appears to have been part and parcel of the transaction rather than a last minute contrivance.

 The doctrine of corporate opportunity has been held not to apply where the business opportunity comes to the officer or director or controlling stockholder in his individual capacity and where the opportunity is not essential to the corporation or is one in which it has no interest.

 "where a business opportunity comes to an officer or director in his individual capacity rather than in his official capacity as an officer and director, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which the corporation has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it." Blaustein v. Pan American Petroleum & Transport Co., 263 App.Div. 97. 126, 31 N.Y.S.2d 934, 962 (1st Dept.), affirmed 293 N.Y. 281, 56 N.E.2d 705, quoting with approval from Loft, Inc., v. Guth, 23 Del.Ch. 138, 2 A.2d 225, 238 affirmed 23 Del.Ch. 235, 5 A.2d 503.

 Upon either theory, that is, the deprivation of corporate opportunity or interference with a corporate right already in being, the same result is reached. The evidence does not warrant a finding that Williams interfered with a corporate opportunity which belonged to Central States, or, once the contract was signed, that the delivery of the 96,154 shares of stock by Nasco rather than Central States, was under the then existing circumstances unfair.

 This conclusion makes it unnecessary to consider the charges made against the directors of Goldman Sachs Trading Corporation, Shenandoah or the partners of Goldman, Sachs & Co.

 In respect the transaction 'A' all the defendants are entitled to judgment dismissing the complaint upon the merits.

 Transaction 'B'

 In this transaction it is charged that Williams and other defendants invaded Central States' contract right to sell 68,423 shares of North American stock and to retain the proceeds of $ 11,426,641. The plaintiffs also complain about an accompanying interest payment of $ 34,279.92 made by Central States to the Williams' companies. Named as defendants, in addition to Williams and directors Stone, Freeman, Fogarty and Kilmarx, are members of the accounting firm of Touche, Niven & Company, who are charged with having made improper entires on the books of Central States in furtherance of Williams' purpose to overreach Central States in this transaction.

 The Shenandoah Corporation was launched with marked success. The public offering of its stock was oversubscribed seven times. This led to the formation of still another company, the Blue Ridge Corporation, sponsored jointly by Central States and Trading. Blue Ridge was to follow the investment program of Shenandoah in industrial and utility stocks. Again, both Williams and Catchings were the principal architects, but in this instance there can be no doubt that Williams acted as agent for Central States. The participation by the defendant directors was confined to carrying out the policy decisions reached by Williams and Catchings.

 The basic organization agreement was signed on August 29th, 1929. The capital of Blue Ridge was fixed at $ 127,500,000. Shenandoah was to purchase 6,250,000 shares of the common stock, 86% of the total for $ 62,500,000. In order to put Shenandoah in funds to acquire the Blue Ridge stock, Central States and Trading each agreed to purchase from Shenandoah 375,000 shares of its common stock for $ 12,500,000 and 375,000 shares of its $ 50 par value preference stock for $ 18,750,000, adding up to $ 31,250,000 for each, and a total for both of $ 62,500,000. The closing date was set for September 5th, 1929.

 On August 21st, Blue Ridge also entered into agreements with Central States and Trading, under which Blue Ridge agreed to purchase from each various securities at market prices at the close of business on August 17th, 1929. We are concerned only with the Central States agreement, Central States agreed to sell and Blue Ridge agreed to buy blocks of nine different securities for $ 35,000,041. One of the blocks consisted of 68,423 shares of North American common stock at $ 167 per share, totaling $ 11,426,641. The Board of Directors of Central States at a meeting held on September 3rd, 1929, ratified and approved the sale of the various securities and authorized the officers to carry out the agreement.

 There is a sharp dispute as to when, if at all, Central States delivered the securities to Blue Ridge, which we shall discuss presently. It is not disputed that on September 5th, 1929, the closing date, Central States received from Blue Ridge $ 35,000,041, representing the agreed price for the entire package of securities, including the 68,423 shares of North American, and that Stone, as president of Blue Ridge, acknowledged receipt of the securities and Kilmarx, as Treasurer of Central States, acknowledged payment in writing as follows: 'Received of Central States Electric Corporation pursuant to the agreement between us dated August 21, 1929, the following securities of an aggregate value of $ 35,000,041 in full satisfaction of the obligation of Central States Electric Corporation under said agreement: Closing Market Shares 8-17-29 Total 29,200 Commercial Investment Trust Corpn. 185 $ 5,402,000. 69,000 Mathieson Alkali Works 59 4,071,000. 18,000 Detroit Edison Company 349 6,282,000. 7,900 Stone & Webster 166 1,311,400. 14,000 Pacific Gas & Electric Co. 76 3/4 1,074,500. 4,000 Peoples Gas Light & Coke Co. 396 1,584,000. 7,000 American Tel. & Tel. Co. 293 2,051,000. 10,000 Consolidated Gas Co. of New York 179 3/4 1,797,500. * 68,423 The North American Co. 167 11,426,641. September 5, 1929. BLUE RIDGE CORPORATION BY C. F. STONE Pres. "RECEIVED of Blue Ridge Corporation $ 35,000,041 in full payment for the securities listed above. September 5, 1929. CENTRAL STATES ELECTRIC CORPORATION By L. E. KILMARX V. P." There is no other written record, memorandum or entry of any other aspect of the transaction until September 23rd, 1929, when Central States issued to four Williams' companies checks totalling $ 11,426,641, the exact amount previously received by it for the North American shares, as follows: Number of North American Payee Amount Shares Electric Investment $ 1,670,000 10,000 Utilities Securities 3,340,000 20,000 Federal Utilities 3,340,000 20,000 New Empire 3,076,641 18,423 /-- /-- $ 11,426,641 68,423

 These checks were in payment of the 68,423 shares of North American delivered by the Williams companies to Blue Ridge sometime after the closing date, September 5th.

 The evidence does not definitely establish when the Williams' companies delivered the North American shares but at the earliest it was September 23rd; *fn12" and there is sufficient evidence to support a finding that in fact a substantial number, 18,423 shares, were delivered later, on October 16th, which may account for the fact that a portion of the interest charged against Central States was not paid before October 23. *fn13" The net result was that eventually Williams' companies, and not Central States, sold the 68,423 shares of North American and received from Central States the purchase price, and in addition the interest payment.

 The plaintiffs charge that Central States; right to sell and retain the proceeds of the sale, with its incidental profit, had been invaded by Williams, who with the acquiescence of the directors appropriated that right for himself. They point out that Central States had 839,000 shares of North American stock and was well able to make the sale; that the price at which Central States was to sell was a good one to it; that Central States was without cash funds to meet its obligation of $ 31,250,000 to Shenandoah for the purchase of the preference and common stock; that the average cost of North American shares to Central States according ot its books, was $ 11 and with the sale price at $ 167 it stood to realize a profit of more than $ 10,650,000; that Williams' companies in selling the shares realized a profit of $ 10,727,764.59.

 The transaction is defended on various grounds, paralleling substantially those advanced to uphold the 'A' transaction. Here, too, it is urged that Central States' corporate policy and its own interest was to invest and stay invested; that Central States was the largest holder of North American stock (it owned directly and indirectly 25%), which represented its largest single investment, and that it was its fixed policy not only to retain that stock but to increase its North American holdings. that with Williams, instead of Central States, selling the stock of North American, Central States indirectly increased its holdings in North American through its interest in Shenandoah which owned in excess of 80% of Blue Ridge; and conversely, had Central States itself made the sale it would have reduced its stake in North American.

  The credible evidence is far from convincing that the reasons now advanced to justify the transaction were those which motivated it. The testimony in support of the transaction is weak and unpersuasive. Indeed, the record justifies a holding that the officers of the Williams' companies, some of whom were also officers and directors of Central States, simply substituted North American stock of the Williams' companies to accommodate Williams' personal interests, In so doing, they violated their trust to Central States.

  In the Court's view, the sale by the Williams' companies was not conceived and undertaken until almost three weeks following the sale by Central States, during which time Central States of course had the proceeds. Interest was not paid on September 23rd, 1929 when Central States paid the $ 11,426,641 to the four Williams' companies.

  The attempt to justify this transaction on the same basic grounds as those advanced in support of the 'A' transaction must fail for there is substantial variance on the facts. The contrast between the circumstances surrounding this transaction 'B' and those of the 'A' transaction is so marked as to carry its own condemnation of this transaction. In the instant transaction, other than the assertions of those directors who testified on the subject, proof is lacking that delivery of the North American shares by Williams was contemplated either during the negotiations or up to the very time when the delivery was made by the Williams' companies, no earlier than September 23rd, eighteen days after the Blue Ridge closing.

  Here, is no single person of the Trading group, Catchings or any other of its representatives, testified as to any knowledge that Williams' companies, and not Central States, intended to deliver the shares, although the matter of creating a portfolio of securities for Blue Ridge was the subject of extended discussions between representatives of the two sponsoring groups.

  The defense contends that it was always understood by the directors that Williams, and not Central States, would sell the North American stock, and that this was known throughout the negotiations, on August 21st, the date of the letter agreement for the sale of the stock by Central States, and on September 3rd, when the Board of Directors approved the sale. It is significant that despite this claim, no resolution or minute recording that fact or any commitment by Williams was entered in any corporate record. In the 'A' transaction the contract between Central States and Nasco was acted upon at the very meeting that the major transaction was approved, and Nasco was firmly bound to make delivery.

  Even if the story that it was always intended that the Williams' companies were to deliver the shares were to be accepted, they were, in the absence of any binding agreement, free to deliver or not to deliver. This put Williams as a fiduciary in an advantageous position to Central States' disadvantage.

  It is no answer to suggest that neither was any entry made in the minutes with respect to other securities which Central States was obligated to sell to Blue Ridge under the letter agreement and which it obtained from other sources. Of the nine blocks of securities to be sold thereunder, Central States did not have six and the directors knew these had to be obtained elsewhere. But it did have the remaining three, including the North American stock. Two of these three Central States delivered out of its own portfolio holdings, but not the North American, which it had in abundance.

  The sale of the securities by Central States was deemed of sufficient importance to require Board action. Yet, revocation of that action is nowhere recorded. The sale by Williams' companies, instead of Central States, effectively reversed the resolution of the Board. The testimony that during the negotiations Williams indicated he was willing through his companies to furnish the North American stock if Central States preferred not to sell and that the directors, after careful consideration, decided to retain the stock and accept Williams' offer, is not on this record credited.

  Considerable testimony was taken on the question of the dates of delivery and transfer of the shares, much of it relating to when, if at all, Central States delivered the shares directly to Blue Ridge.

  The defense contends that notwithstanding the receipt signed on September 5th by Stone on behalf of Blue Ridge, acknowledging receipt from Central States of the 68,423 shares, Central States in fact never delivered them on that day or at any other time. It suggests the closing was by means of a due bill- a promise by Central States to deliver at a subsequent date- and that thereafter on September 23rd, the Williams' companies made good on the due bill by delivering their North American shares. No credible proof was offered that the closing was on the basis of a due bill and the suggestion finds no support in the very considerable testimony which attempted to trace the shares of stock, by whom delivered, and the dates delivered. Stone issued and signed the receipt acknowledging delivery by Central States on September 5th of all the securities, including North American shares. No satisfactory explanation has been offered by Stone or any of the other defendants why he should have acknowledged receipt of the securities when, in fact, they had not been delivered. Even if we were to disregard, which we do not, the testimony of Kilmarx on the subject, who, after some contradictions, convincingly testified after examining certain records, that he was positive that Central States had delivered the securities, the evidence still requires a finding of delivery on September 5th by Central States. Kilmarx testified that all of the securities for which Stone had issued the receipt, were delivered on September 5th, at the time of closing, and that they, including the 68,423 shares of North American were taken out of the Central States vaults and placed in the Blue Ridge vaults. Kilmarx, at that time, was treasurer of Central States, Blue Ridge and the four Williams' companies.

  As to when the 68,423 shares were returned to Central States, the record is not altogether clear. But Kilmarx related 'the practical way' of handling the delivery by the Williams' companies on September 23rd, or later. His recollection was that he substituted in the vault box of Blue Ridge the 68,423 shares from the Williams' companies in place of the 68,423 shares which Central States had delivered on September 5th.

  The vault records of the Williams' companies would have shown definitely the various delivery dates but these were reported missing, with the exception of the vault record of New Empire. This vault record shows that New Empire delivered to Blue Ridge 18,423 shares in October 16th, 1929. New Empire received payment from Central States for this number of shares on September 23rd, and Central States also paid interest amounting 5o $ 9,229.92 thereon to New Empire on November 13th, 1929.

  The Court finds that on September 5th, the closing date, Central States delivered to Blue Ridge its own 68,423 North American shares referred to in the letter agreement of August 21st; that the Williams' companies delivered to Blue Ridge 68,423 shares of North American of which 18,423 were delivered on October 16th and the remainder no earlier than September 23rd; and that the shares of stock previously delivered by Central States to Blue Ridge were returned to it; that at no time prior to September 23rd was it contemplated that Central States would not make the sale and retain the proceeds thereof and that up to that time the directors who participated gave no consideration to the business reasons which they say impelled their actions, but rather carried out Williams' purpose in having his companies instead of Central States sell the North American stock- and this in violation of a corporate resolution of the Board of Directors directing the sale by Central States.

  The Court concludes, to state it bluntly, that this was simply a case where after Central States sold and made delivery of the stock and received the proceeds of the sale, Williams, whatever his reasons, which we need not probe, *fn14" decided to avail himself of the cash. The funds which belonged to Central States landed in Williams' companies treasuries on September 23rd. Thus, Central States' absolute right under its contract with Blue Ridge to receive and retain the $ 11,426,641 was invaded.

  Williams violated his fiduciary obligations to the corporation and imposed upon it a transaction that lacks any acceptable elements of fairness to Central States.

  Of the directors, only Kilmarx and Stone appear to have played an active role. In permitting this transaction to take place they were negligent of Central States' interest and failed to exercise due care. Forgarty voted only at the board meeting approving the letter agreement of August 21st with Blue Ridge, and there is insufficient evidence upon which to hold him for participation in the events which led to the substitution by Williams' companies of the North American shares. Freeman was out of the country at the time of the Blue Ridge deal; he was not present at the Board meeting which approved the sale by Central States, and here, too, there are insufficient facts to indicate that he aided Williams in the furtherance of his purpose.

  The plaintiffs also seek to hold members of the firm of Touche, Niven & Company, accountants for Central States. The charge against these defendants is that in furtherance of Williams' design to overreach Central States and in violation of their obligations and in complete subservience to his wishes, and with full knowledge of Central States' right to sell the North American stock to Blue Ridge and to retain the proceeds of the sale, they made or permitted entries on the books of Central States, the effect of which was to make it appear, contrary to fact, that Williams' companies and not Central States were the sellers of the stock.

  These defendants, in addition to accounting services, performed bookkeeping services for Central States and had possession of its books of original entry wherein entries were made from records usually delivered to them by messenger. Minutes and other corporate records were also available to the accountants.

  They also acted in the same capacity for Federal Utilities, Electric Investment and Utilities Securities, three of the four Williams' companies which received payments from Central States for the North American Company stock. Here, too, Touche Niven performed bookkeeping and auditing functions and kept the books at its office, making the entries from records send over by the companies.

  To establish their claim, plaintiffs rely upon certain erasures and alterations in Central States' books. An original entry in the journal indicated there was due to Central States a total of $ 35,000,041 for the securities sold under the letter agreement of August 21st and itemized separately each security listed and the sales price thereof, including the 68,423 shares of North American stock for $ 11,426,641. The words 'North American Common' were removed by ink eradicator and 'Sundry Debtors' substituted. On another page of the journal, in connection with these shares, the words 'Accounts Receivable' were similarly erased and the words 'Sundry Debtors' inserted. The substituted entries reflected a sale of the North American shares by somebody other than Central States.

  Plaintiffs rely upon the original entries and the changes, as well as other entries and omissions, to substantiate their charges, offering no other proof. They contend that the accountants, through their representative who made the entries on the books, knew of the contract for the sale by Central States of the 68,423 shares of North American, and of the approval of the sale by the directors; also that they knew of the subsequent delivery of the shares on September 5th by Central States to Blue Ridge and the receipt by Central States of the proceeds of the sale, and that Central States had thereafter paid the proceeds to the Williams' companies on September 23rd, before the Williams' companies delivered any of the stock, and that notwithstanding, and without authorization by Central ...


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