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WARNER v. REPUBLIC STEEL CORP.

March 13, 1952

WARNER
v.
REPUBLIC STEEL CORP



The opinion of the court was delivered by: MURPHY

This is a suit for an accounting of some three million dollars in assets which were transferred in Ohio in 1925 by Jonathan Warner to the Trumbull Steel Company, a corporation of which Warner was founder and president. The plaintiff as administratrix of the estate of Warner, her deceased husband, commenced this action in March, 1945. Defendant is a successor by purchase to Trumbull, which was dissolved in 1928.

Jurisdiction is based upon diversity of citizenship: plaintiff is a resident of Pennsylvania; defendant, Republic Steel Corporation, is incorporated in New Jersey and since April 11, 1930, has been authorized to do business and has maintained an office in New York. Both plaintiff and Warner, it was stipulated, were never residents of New York.

Jonathan Warner was president and a director of Trumbull Steel Company which was organized in Ohio in 1912 and dissolved in 1928. He was an experienced and shrewd businessman who had dominated the affairs of Trumbull until within a few weeks of its acceptance of his resignation as president and director on September 1, 1925.

 Warner was 68 years of age when he died in Philadelphia, Pennsylvania, on May 5, 1934. Upon his death a Charles LeMaistre was appointed his administrator. Later in 1940 Clara Warner, the plaintiff, became administratrix de bonis non. In 1942, ancillary letters of administration were issued to her by the Surrogate of the County of New York, New York. She brings this action under these ancillary letters.

 The crucial facts in this action occurred in Ohio in August, 1925, during the course of transactions between Warner and John T. Harrington. The background leading to these transactions is important.

 From the organization of Trumbull and until its dissolution, John T. Harrington and the law firm of which he was a member, were its general counsel. Harrington was also a personal acquaintance of Warner.

 On July 25, 1925, Trumbull entered into an agreement with the National City Company of New York relating to the issuance by Trumbull of $ 17,500,000 in debentures which the National City Company underwrote and agreed to distribute on stipulated terms. In connection with this underwriting Warner furnished the National City Company with earnings statements and balance sheets of Trumbull up to May 31, 1925, prepared by the accounting firm of Ernst & Ernst. These debentures were offered to the public by the National City Company by means of a circular which included a statement of earnings reflecting the financial affairs of Trumbull. On the day these debentures were offered to the public in early August, 1925, the vice-president of the National City Company who had charge of the underwriting received telephone calls from two bankers, one in New York and the other in Pittsburgh. As a result of these, the vice-president immediately communicated with Warner and repeated what these bankers had reported, viz., that they had examined the circular and noted that the bank loans of Trumbull were stated to be in excess of $ 16,000,000 whereas they had recently received statements of Trumbull from Warner which showed that the bank loans were only $ 10,000,000. The vice-president then sent his assistant to Warner at the Trumbull office in Warren, Ohio, and Warner offered his explanation of the discrepancy.

 Despite the acceptance of these explanations, the National City Company retained the accounting firm of Arthur Anderson and Company to investigate the Trumbull's affairs. After its investigation the Anderson Company orally reported to National City Company that the balance sheet of Trumbull, which had been submitted by Warner in connection with the debenture issue, had over- stated Trumbull's inventory by approximately $ 3,000,000 and that the Trumbull books showed that expenses for repairs and maintenance had been improperly capitalized. The effect of the latter was an over-statement of earnings by approximately $ 5,000,000. Thereafter the agreement between the National City Company and Trumbull for the underwriting of the $ 17,500,000 debenture issue was rescinded and National City was reimbursed by Trumbull for expenses incurred in connection therewith. This cancellation took the form of a letter from Trumbull to National City on August 31, 1925.

 An appraisal of the physical assets of Trumbull was made by the American Appraisal Company by spot-check on August 14 and 15, 1925. On September 23, 1925, the appraisers reported that Trumbull's inventory had been over-stated by some $ 3,000,000.

 The crux of the case and the most controverted facts arise from transactions between Warner and Harrington during the latter part of August, 1925. These transactions have been testified to directly only by the plaintiff. Warner died in 1934 and Harrington in 1932.

 The plaintiff worked for Warner as a stenographer commencing in 1911 in Warren, Ohio. Subsequently she became his secretary and did most of her work at his home. She has retained, and exhibited during the course of the trial, all of her stenographic notebooks from 1911 to and including 1925. She had kept a personal diary for Warner. In August, 1925, she had been his secretary; a year later she became his wife.

 Leaving aside the question of the competency of the plaintiff (concededly the only person 'interested' in the estate) as a witness, cf. N.Y. Civil Practice Act, Sec. 347, Mrs. Warner testified that on August 13, 1925, Warner told her to lay out some securities for Harrington. This she did by taking them from the safe, making a list and handing them to Warner. On the same day, Warner wrote to his daughter, Elizabeth Clarke, asking for securities which he had once given to her, stating, 'I may need the Trumbull Steele especially,' and promising to see her, 'as soon as I can get this mess straightened out.'

 Plaintiff further testified that on some day between August 17 and 20, 1925, Warner told her to bring him a book in which he kept an inventory of all stock owned by him. As she brought it to him, she overheard Harrington, while pointing his finger at Warner, say, 'John, if you ever dare mention that paper, I personally will see that you go to jail.' Harrington stopped when the plaintiff entered the room, her testimony continued, then said, 'You don't understand, seem to understand, that you are in a serious position at Trumball. I am your friend and I think I am about the only one that can help you. John, you may even be facing jail, and I don't know why I have to keep repeating these things but you certainly knew it was illegal to give bonus stock. Well, all that stock will have to be returned or somebody is going to have to pay for it; and that running account of yours is absolutely illegal. We are going to have the accountant go over it, but it certainly looks as if you are going to owe the company some money, maybe a large amount of money; and you sold that Sheet & Tube stock and paid your own personal loan with it. That belonged to the Trumbull Steel Company.' According to the plaintiff, Harrington continued, 'You also gave a false statement to the National City Bank.' When Warner replied that he had used Ernst & Ernst's statement, Harrington said, according to the plaintiff, 'Well, the American Appraisal over the past week have made an actual physical inventory and that statement is all wrong; and you knew that it is a very serious matter to make false representations to banks. You could go to jail for that. Why, John, right at this minute there is talk up at the Trumblll Steel Company of indicting you, and with all this uproar, it isn't even safe for you to leave this house. If you are sensible, you will get some extra police protection.' Warner then gave Harrington the stock inventory book and Harrington 'priced' various stocks in an attempt to estimate the total. Warner also handed over to Harrington four life insurance policies.

 Plaintiff's testimony is that on August 22nd Warner gave Harrington some stock certificates which Warner had obtained from his daughter, Mrs. Clarke, and which Harrington appraised. The plaintiff also testified that she was shocked when Harrington demanded the deeds to Warner's city and farm properties. She told Warner, according to her testimony, that he did not know whether he owed Trumbull anything or not. But Warner said that he trusted Harrington, and Harrington advised her: 'I have told Warner to give over practically everything he owns to Trumbull Steel until they know where he stands on these bonus matters. We don't know what he owes and we won't know until they go over the books and find out just what condition everything is in. I assure you that I am going to see he is not charged for anything he should not be charged for.' Harrington also promised, according to the plaintiff: 'If the auditors prove there is a debt, we will have to sell enough of these securities to pay off the debt. I assure you that every penny will be accounted for. Now, if they find Mr. Warner does not owe anything, there won't be any harm done. Trumbull Steel Company is going to turn over stuff over (sic) to him. You don't have to worry about this house. Nothing is going to happen to the house.' Harrington also advised payment for remodeling work being done on the premises. 'Warner wants the work finished, he will be back before long.' With respect to the expenses of running the farm, Harrington advised payment of bills for a couple of months, 'if you want to, but just carry on everything as you have been ...


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