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December 9, 1959

CUSTER CHANNEL WING CORPORATION and William R. Custer, for the Benefit of Custer-Frazer Corporation, Plaintiffs,
Joseph W. FRAZER, H. Fraser Leith, John Aster Drayton and Custer-Frazer Corporation, Defendants

The opinion of the court was delivered by: HERLANDS

This proceeding is a stockholder's and dissenting director's action for a permanent injunction to prevent alleged corporate waste and self-dealing by directors, and a motion for a preliminary injunction. The application for an injunction pendente lite is now before the court. At present there is outstanding a temporary restraining order which has been extended pending the determination of this motion. There are substantial issues of fact as to the ultimate questions of waste and self-dealing.

Plaintiff Willard R. Custer is the inventor of a unique principle of aircraft wing design which is not presently used on any aircraft except prototypes, although it was developed some years ago. He is the president and a director of plaintiff Custer Channel Wing Corp. (herein 'Channel Wing'), a Maryland corporation, with offices in Maryland. Custer and his family own the majority of Channel Wing's voting stock. Channel Wing has about 3,000 stockholders, apparently most or all (except the Custer family) non-voting.

 Custer is also chairman of the board of directors of defendant Custer-Frazer Corporation. However, he owns no stock therein.

 The individual defendants accuse plaintiff Custer of capricious and obstructionist activities which, they say, have for years prevented the commercial exploitation of the invention, to the prejudice and detriment of all the individuals and corporations involved.

 Custer joined Channel Wing as a co-plaintiff herein without direction of its board of directors. Of the other five directors of Channel Wing, Larson, Neal and Peat have filed affidavits in support of the defendants. The remaining two directors are officers. The record is silent as to their alignment in this controversy.

 Until the spring of 1958, Channel Wing owned the patents. The patents were then transferred to Custer-Frazer Corporation in exchange for 88 percent of the voting stock of Custer-Frazer Corporation and its assumption of liabilities in the amount of $ 93,000. Channel Wing does not appear to have any other business. As indicated, it holds 88 percent of the voting stock of defendant Custer-Frazer Corporation. Custer-Frazer Corporation is a nominal defendant.

 Custer-Frazer Corporation, the subject of this action, is a Delaware corporation, with offices in New York City. It is a close corporation.

 As noted, Custer is chairman of the Board. His daughter is a director and the treasurer. Defendant Joseph W. Frazer is the president and a director. Defendants Drayton and Leith are also directors. Frazer, Drayton and Leith reside in this District. Other directors, including Schuchert and Peat, are defendants in a parallel action in the Western District of Pennsylvania.

 Custer-Frazer Corporation was formed early in 1958. Although its charter declares one of its purposes to be the manufacture of aircraft, Peat's affidavit states that its only purpose was to find licensees and to negotiate licenses to exploit the invention. Until the events herein at issue, it had apparently failed to find such licensees.

 In this controversy, all the other directors of Custer-Frazer Corporation appear to be aligned against Custer and his daughter.

 The individual defendants are not stockholders of Custer-Frazer Corporation.

 Plaintiffs' charges of corporate waste and directors' self-dealing arise principally out of the action of the defendant-directors at a purported board meeting of Custer-Frazer Corporation on November 19, 1959, in approving a license agreement between that corporation and Channelair, Inc. Plaintiffs assert that the licenses to be granted would be exclusive and irrevocable, without adequate consideration, and would constitute a transfer of substantially all of the assets of Custer-Frazer. They further charge that one or more of the defendant-directors are beneficially interested in Channelair, Inc. and that the boards of the two corporations are actually, if not technically, interlocking. While defendants controvert every one of these allegations, it is apparent from their papers that the charges are not frivolous.

 In their affidavits, defendants state that the license agreement with Channelair, Inc. was executed and delivered on November 20, 1959, prior to the issuance of the temporary restraining order.

 Plaintiffs further allege that, apart from the ultimate issues of waste and self-dealing, the meeting of November 19, 1959 was improperly noticed and held without a quorum; that, therefore, the resolutions adopted at that meeting are null and void; and that the invalidity resulting from the improper notice and lack of quorum constitutes by itself sufficient ground for a preliminary injunction restraining the defendants from doing anything to effectuate the resolutions adopted at the November 19, 1959 meeting. Plaintiffs claim that they will be irreparably injured by any steps taken ...

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