The opinion of the court was delivered by: HERLANDS
HERLANDS, District Judge:
Begun in 1936 and tried in 1967, this litigation is an unfortunate exemplar of the Jarndyce v. Jarndyce genre. See Holdsworth, Charles Dickens As A Legal Historian (1929) 79-115; Vaughan, Dickens and His Lawyers, 41 ABAJ 595, 597-598 (1955). From September, 1936 until January 7, 1958, the case was in the New York State courts, shuttling back and forth between the motion parts of the Supreme Court, the Appellate Division of the Supreme Court and the Court of Appeals. A volume is required simply to record the docket entries of the labyrinthine proceedings.
After the case was dismissed on January 7, 1958 in the State courts, it started its federal career on March 5, 1958 in this Court. Despite the use of a broad spectrum of pretrial techniques, it has taken over eight years to bring this controversy to trial. At last, on twelve days in May and June, 1967, the case was tried.
In a decision, early in the history of the case in this court, denying defendants' motions for summary judgment and judgment dismissing the complaint, this Court had occasion to describe some of the major background facts. Marco v. Dulles, 177 F. Supp. 533 (S.D.N.Y.1959). As pointed out in that opinion, 177 F. Supp. at 537, it would be a fruitless emprise to assess the multitudinous interlocutory and appellate proceedings with a view to resolving "the question of comparative dilatoriness."
This Court has conferred on numerous occasions with counsel in order to clarify the basic issues of fact and law, to facilitate the introduction of documentary proofs, to stipulate the uncontroverted facts, and to achieve the other objectives of effective pretrial. See Calendar Rules of the U.S.D.C., S.D.N.Y., Rule 13(b), par. III. The result has been a 77-page formal pretrial order (filed March 3, 1967), amplified by Supplemental Pretrial Order # 1 (filed March 16, 1967) and Supplemental Pretrial Memorandum (filed April 3, 1967).
In compliance with the Court's instructions and Calendar Rules of the U.S.D.C., S.D.N.Y., Rule 13(b), par. III(c), counsel have submitted proposed findings of fact and conclusions of law. During the trial the Court, having been furnished with duplicate copies of all exhibits, was able on a session-to-session basis to coordinate close analyses of the documentary evidence with the daily trial testimony. Upon the conclusion of the presentation of evidence, the Court devoted two days to the concluding arguments of counsel which, in accordance with the Court's directive, consisted of detailed expositions of the respective proposed findings and conclusions. This procedure has expedited the rendition of the Court's decision, while the evidence is still fresh in the Court's mind.
This opinion contains the findings and conclusions required by Fed.R.Civ.P. 52(a).
Utilizing the recommended approach to non-jury fact-finding (see United States v. El Paso Gas Co., 376 U.S. 651, 656, 84 S. Ct. 1044, 12 L. Ed. 2d 12 ; United States v. Forness, 125 F.2d 928, 942-943 [2d Cir. 1942]), the Court has detailed precisely the facts that, upon its study and deliberation, it considers as having been established by the fair preponderance of the credible evidence. Because the findings and conclusions as proposed by respective counsel reflect the Court's suggestions presented in conferences concerning their preparation and format, the Court can selectively accept - after determination of the merit or lack of merit of each proposed finding and conclusion - much of this material, substantially as submitted, though it goes without saying that such acceptance does not represent mechanical adoption.
The pretrial order (p. 1) provides that the pleadings are deemed amended in accordance with the framing of the issues in paragraph 9 of the pretrial order and that the trial shall be based upon said order and upon the pleadings as so amended.
Plaintiff is the administrator of the estate of Harry Marco, deceased, who, at the time of his death, was a citizen of the State of New Jersey.
The only defendants now sued herein are Waddill Catchings, John Foster Dulles, Walter E. Sachs and Sidney J. Weinberg. During the pendency of this action, defendant John Foster Dulles died, and The Bank of New York (a banking corporation organized under the laws of the State of New York) and Arthur H. Dean, as executors of his estate, were substituted and appeared herein as defendants in his place.
There is complete diversity of citizenship between plaintiff and all the defendants herein.
This is a stockholder's derivative action instituted on March 5, 1958 which plaintiff brought as administrator, derivatively in the right of Blue Ridge Corporation ("Blue Ridge") alleging that it is now Blue Ridge Mutual Fund, Inc. ("Mutual Fund"), and/or Ridge Realization Corporation ("Ridge Realization"), on a cause of action claimed to have belonged originally to Blue Ridge.
The second amended complaint, pleading two causes of action, seeks to impose liability for breach of defendants' fiduciary duty as directors of Blue Ridge. The first claim is predicated upon intentional wrongdoing; the second is based upon negligence.
The pretrial order [p. 75, par. 9(c)] formulates this issue of culpability as follows:
"Did any or all of the individual defendants, Messrs. Dulles, Sachs, Weinberg or Catchings, commit a breach of fiduciary duty, owed as a director of Blue Ridge Corp., by reason of any acts of commission or omission properly complained of and proven herein?"
Independently of the resolution or disposition of the other issues formulated and tried (see pretrial order, pp. 75-76, par. 9), the Court finds and concludes, with respect to the central substantive issue of culpability, that none of the defendants violated any directorial fiduciary duty, intentionally, negligently or otherwise. The Court exonerates the defendants of all of the charges levelled against them by plaintiff. Detailed findings and conclusions concerning this issue are presented in the course of this opinion.
The Court's resolution or disposition of the other issues fomulated and tried is set forth in the findings and conclusions detailed in this opinion. Prefatory to that recital of the detailed findings and conclusions is the following statement in general terms of the criteria and guidelines used by the Court in appraising the evidence.
The Court has endeavored (1) to place itself in the position of members of the securities business community from 1929 to 1932; (2) to consider a business environment that in a little more than three years had plunged from never-before-attained heights of prosperity to never-before-plummeted depths of depression; (3) to consider the attitudes of businessmen who passed from the euphoria of early 1929 through the shock and gloom of late 1929 and the cautious optimism of 1930 into the panic of 1931; and (4) to judge the transactions in issue in this case by the applicable legal standards but without the benefit of hindsight as to the facts.
The Court is asked by plaintiff, in effect, to substitute its judgment for that of the directors with respect to transactions affecting the internal affairs of Blue Ridge that occurred about thirty-seven years ago. The defendants were not insurers of the successful outcome of their investment decisions. As directors they were, of course, required to perform their duties in accordance with the high standards of fidelity, honesty and prudence applicable to fiduciaries. The onus probandi rests upon plaintiff to establish the material facts upon which his accusations of culpability are grounded by a fair preponderence of the credible evidence. Plaintiff has failed in every respect to sustain that burden of proof.
On the other hand, defendants, while not required to establish their freedom from fault, have clearly demonstrated the legality, propriety and validity of their acts and their exercise of reasonableness and prudence with respect to the transactions challenged by plaintiff.
Were the oral and documentary evidence to be considered most liberally from plaintiff's viewpoint, the inferences arguendo favorable to plaintiff's position flowing from the proofs are only equivocal. Even in this state of evidential equipoise, one set of inferences is that the transactions criticized by plaintiff were handled in good faith, with the motive and for the purpose of benefitting Blue Ridge, and in the exercise of business judgment that was reasonable under the circumstances prevailing at the time when the transactions were negotiated and effected. The inferences that plaintiff unsuccessfully attempts to draw turn out to be, in light of the record considered as a whole, nothing more than a skillful assemblage of suspicions, surmises and conjectures.
This case involves vital issues of subjective fact: defendants' motive, intent, business purpose, good faith, credibility, judgment and the exercise of judgment, and the intrinsic fairness to Blue Ridge of the transactions in issue as reconstructed and retrospectively interpreted in their then contemporary setting. With respect to the resolution of such issues oral testimony is especially helpful to the Court. The documentation of the transactions, however sensitively read or closely scrutinized, sheds but little light on those non-objective factors.
The only oral testimony adduced by plaintiff that could possibly be construed as adverse to defendants on any issue of subjective fact was that of Milan D. Popovic. The Court rejects his testimony in this case as unreliable, biased and unimpressive in crucial respects.
On the other hand, defendant Walter E. Sachs, defendant Sidney J. Weinberg, and Clifford F. Stone who testified in open court as to the issues of subjective fact favorably impressed the Court as credible and trustworthy; and the Court accepts their testimony as reliable, plausible and persuasive. Moreover, taking their testimony in conjunction with that of William A. Gill and the documentary proofs relied upon by defendants, the Court accepts their testimony as an integral part of the correct total explanation of the transactions and the motivations behind them, leading to the ultimate finding and conclusion that defendants are not liable herein.
In dismissing the complaint upon the merits, the Court has applied the conventional standards of proof applicable to the generality of civil cases; and, contrary to defendants' submission in their trial brief, the Court has not subjected plaintiff's evidence, such as it is, to any special criteria.
In addition to and in amplification of the findings and conclusions above expressed, the Court now sets forth its detailed findings and conclusions.
Blue Ridge was organized August 12, 1929 as a Delaware Corporation.
The certificate of Blue Ridge authorized it, among other things:
"To underwrite, purchase, acquire, hold, pledge, hypothecate, exchange, sell, deal in and dispose of * * * stocks, bonds and other evidences of indebtedness and obligations of any corporation, association, partnership, syndicate, entity, person or governmental, municipal or public authority, domestic or foreign, and evidences of any interest in respect of any such stocks, bonds and other evidences of indebtedness; * * * and, while the owner or holder of any such, to exercise all the rights, powers and privileges of ownership in respect thereof; and, to the extent now or hereafter permitted by law, to aid by loan, subsidy, guaranty or otherwise those issuing, creating or responsible for any such stocks, bonds or other evidences of indebtedness or obligations or evidences of any interest in respect thereof.
To make any guaranty respecting stocks, dividends, securities, indebtedness, interest, contracts or other obligations so far as the same may be permitted to be done by a corporation organized under the laws of Delaware. * * *."
The initial portfolio of Blue Ridge was created in August, 1929. Blue Ridge commenced business with at least $127,500,000 of cash and common stocks. Blue Ridge acquired large blocks of highly desirable stock as a result of its sponsor organizations' having furnished them at the existing market price.
The directors of Blue Ridge from August, 1929 to December, 1938 were as follows:
Date Elected Date Resigned
Waddill Catchings August 17, 1929 April 21, 1933
John Foster Dulles August 17, 1929 April 21, 1933
Clifford F. Stone August 17, 1929 Nov. 14, 1935
Sidney J. Weinberg August 17, 1929 Nov. 14, 1935
Harrison Williams August 17, 1929 April 21, 1933
Walter E. Sachs May 26, 1930 April 21, 1933
Floyd B. Odlum April 21, 1933 April 18, 1935
L. Boyd Hatch April 21, 1933 Nov. 14, 1935
N. Peter Rathvon April 21, 1933 Nov. 14, 1935
Melvin E. Sawin April 21, 1933 Nov. 14, 1935
C. M. Finney Nov. 14, 1935 Dec. 19, 1939
L. E. Kilmarx Nov. 14, 1935 Nov. 21, 1935
Thurston P. Blodgett Nov. 14, 1935 Nov. 21, 1935
Homer B. Vanderblue Nov. 14, 1935 Nov. 21, 1935
H. A. Anderson Nov. 14, 1935 Nov. 21, 1935
O. A. Phillip Nov. 14, 1935 Nov. 21, 1935
Earle Bailie Nov. 21, 1935 Nov. 21, 1938
Waddill Catchings Nov. 21, 1935 Dec. 19, 1939
J. Russell Forgan Nov. 21, 1935 March 12, 1942
George Murnane Nov. 21, 1935 Jan. 22, 1941
Francis F. Randolf Nov. 21, 1935 Nov. 21, 1938
Richard Wagner Dec. 7, 1938 March 12, 1942
C. A. Johnson Dec. 7, 1938 June 11, 1945
The following were officers of Blue Ridge at the following times:
Clifford F. Stone From August 19, 1929 to April 21, 1933
C. A. H. Narlian From March 17, 1930 to April 21, 1933
G. W. Schroeder From August 19, 1929 to April 21, 1933
W. C. Ross From August 19, 1929 to April 21, 1933
In the period from 1929-1932:
(a) Shenandoah Corporation owned approximately 80 per cent of the stock of Blue Ridge.
(b) Shenandoah Corporation was organized in July, 1929 under the joint sponsorship of Goldman, Sachs & Co. ("Goldman Sachs"), Goldman Sachs Trading Corporation, and Central States Electric Corporation ("Central States"). Said corporations had charter powers and purposes comparable to those of Blue Ridge.
(c) Central States and Goldman Sachs Trading Corporation each owned approximately 40 per cent of the stock of Shenandoah Corporation.
(d) Harrison Williams was the majority stockholder of Central States.
In December, 1928 Goldman Sachs Trading Corporation was organized. It was managed until 1933 by Goldman Sachs, a partnership engaged in the securities business.
Goldman Sachs made and, until 1933, continued an investment of approximately $10,000,000 in Goldman Sachs Trading Corporation.
The financial interests of Harrison Williams and Goldman Sachs in Blue Ridge, through their respective interests in Central States, Shenandoah Corporation, and Goldman Sachs Trading Corporation, represented investments of millions of dollars. It was to the financial advantage of Harrison Williams and Goldman Sachs that the business of Blue Ridge be profitable; their business interests and objectives were allied with the best business interests and success of Blue Ridge in its ventures and investments.
From at least August, 1929, Walter E. Sachs and Sidney J. Weinberg were partners in Goldman Sachs. From at least August, 1929, Waddill Catchings was a partner in Goldman Sachs. He ceased to be a partner about May 26, 1930.
Conde Nast Publications, Inc. ("Publications") was a corporation organized in 1922 under the laws of the State of New York. The total outstanding common stock of Publications consisted of 320,000 shares. Its common stock was listed on the New York Stock Exchange.
In 1930 and thereafter, Publications was active in a number of branches of the publishing industry. It published Vogue, Vanity Fair, House & Garden, and The American Golfer, which were nationally known and distributed magazines in the "class" field that appealed to well-to-do and cultivated readers. It owned a large and modern printing plant in Greenwich, Connecticut, where it printed its own magazines and those of other publishers. It manufactured and sold paper dress patterns. It had competent executives and the highly-regarded leadership of Conde Nast. It was prudently managed, and had a history of profitable operations since its first full year of operation in 1923. It did not require financing of any kind in 1930. In 1930, its common stock was selling at eight and a half times estimated earnings; and its dividend represented a five and a half percent return. Its prospects for increased earnings in 1931 were good as the result of the completion of its plant expansion in 1929 and 1930.
The outstanding figure in Publications was Conde Nast, who over the years had developed the business of Publications to the large and successful enterprise it was in 1930. He had an outstanding reputation in publishing circles for his acumen and ability in directing the activities of and in staffing magazines. In 1930, Conde Nast did not desire to give up control of Publications.
In 1930, Conde Nast was indebted for approximately $4,000,000 to various creditors. The collateral securing the indebtedness was about twice the value thereof. Each of such debts was in good standing; the interest thereon was paid; and none of Conde Nast's creditors were pressing for payment. In June 1930, Conde Nast had assets in excess of $10,000,000. By October, 1930, the value of such assets had declined; but Conde Nast's net worth, after giving effect to all liabilities, was over $4,000,000.
Waddill Catchings was a director of Publications from 1927 until October 11, 1933. Sidney J. Weinberg was a director of Publications from December, 1930 through January, 1934.
A certificate bearing number NYCO 11015 representing 35 shares of the common stock of Blue Ridge was issued in the name of Harry Marco and dated April 21, 1930.
Said shares were not transferred out of the name of Harry Marco on the books of Blue Ridge or its transfer agent.
The certificate of incorporation of Blue Ridge, from at least the time that Harry Marco became a stockholder until at least 1936, provided:
"A director of the corporation shall not, in the absence of fraud, be disqualified by his office from dealing or contracting with the corporation either as vendor, purchaser or otherwise, nor in the absence of fraud, shall any transaction or contract of the corporation be void or voidable or affected by reason of the fact that any director or any firm of which any director is a member, or any corporation of which the director is an officer, director or stockholder is in any way interested in such transaction or contract, provided that, at the meeting of the Board of Directors or of a committee thereof having authority in the premises to authorize or confirm said contract or transaction, the interest of such director, firm or corporation is disclosed or may be known, and there shall be present a quorum of directors or of the directors constituting such committee not so interested or connected, and such contract or transaction shall be approved by a majority of such quorum, which majority shall consist of directors not so interested or connected. Nor shall such contract or transaction be void or voidable or affected by reason of the fact that the vote of such director or directors, who have or may have interests therein which are or might be adverse to the interest of the corporation, shall have been necessary to obligate the corporation upon such contract or transaction, nor shall any director or directors having such adverse interests be liable to the corporation or to any stockholder or creditor thereof, or to any other person, for any loss incurred by it under or by reason of any such contract or transaction nor shall any such director or directors be accountable for any gains or profits realized thereon; always provided, however, that such contract or transaction shall, at the time it was entered into, have been a reasonable one to have been entered into and shall have been upon terms that at the time were fair.
Any contract, transaction or act of the corporation or of the Board of Directors or of the Executive Committee which shall be ratified by a majority in interest of a quorum of the stockholders of the corporation having voting power at any annual meeting or any special meeting called for such purpose shall be as valid and as binding as though ratified by every stockholder of the corporation, provided, however, that any failure of the stockholders to approve or ratify such contract, transaction or act, when and if submitted, shall not be deemed in any way to invalidate the same or to deprive the corporation, its directors or officers, of their right to proceed with such contract, transaction or action."
In October, 1929, a business and market depression began which proved unpredictably to be of extreme severity and length. Prices of securities declined; and the values of portfolios decreased. In October, 1930, experienced business and financial leaders generally believed that the depression would not be protracted, and business and market conditions were viewed with at least cautious optimism.
In the fall of 1930, Conde Nast determined to consolidate his indebtedness with one creditor and sought an arrangement with Blue Ridge in connection therewith. He proposed to Waddill Catchings, then chairman of the Board of Blue Ridge, that in consideration of the benefits set forth hereafter Blue Ridge undertake a commitment to The Chase National Bank ("the Chase Bank") in relation to the loan mentioned below.
The directors of Blue Ridge believed in good faith and it was their judgment which was reasonably held by them that the bottom of the market and depression were near in October, 1930. They believed it was then opportune to invest and seek investments. Blue Ridge made purchases of securities, as shown by its treasurer's reports. It was the economic program and policy of Blue Ridge and its board of directors at the time to remain in a fully invested position rather than liquidating. The directors were motivated by the expectation that conditions would get better and that Blue Ridge would derive profit from this policy.
It was Catchings' plan to acquire at least a 20 per cent interest in Publications and possibly an interest in excess of 50 per cent. 5000 shares would be bought in the market; Blue Ridge would then be entitled to an option on an additional 5000 shares. Blue Ridge was to receive 10,000 shares for agreeing conditionally to acquire the 160,000 shares on December 31, 1931, and was to have an option on 40,000 additional shares. Together, this would enable Blue Ridge to acquire 60,000 shares or 20 per cent of Publications for an initial cash outlay of only approximately $180,000 or less. In the event that Blue Ridge became a purchaser of the 160,000 shares, it would own 10,000 additional shares (5000 bought in the market and 5000 under option) and thereby have more than 50 per cent of the outstanding stock at about $10 per share under the October, 1930, market price.
Catchings brought to Blue Ridge the opportunity to make an investment in Publications because he believed it would give Blue Ridge a great opportunity to make a good investment in a company which had a good record and a promising future. The record of success of Publications had been extraordinarily good. It had three fine well-established magazines, a magnificent printing establishment near Greenwich which had no parallel in the United States and possibly in the world. It was the expectation of Catchings that its stock would advance substantially.
Said arrangement, as concluded through various agreements, included the following:
(a) A loan from the Chase Bank in the amount of $4,000,000, due December 31, 1931, secured by 160,000 shares of the stock of Publications (an amount sufficient to give control) made to The Vogue Company ("Vogue") wholly owned by Conde Nast, and the money so lent to be used to pay the debts of Conde Nast, his companies, and associates whose indebtedness Conde Nast had personally guaranteed.
(b) An agreement that, if said loan were not paid on the due date, Blue Ridge would purchase from the Chase Bank the 160,000 shares of stock of Publications for $4,000,000 plus any unpaid interest on the loan.
(c) An agreement that, if said loan were paid on the due date, Conde Nast and his companies would deliver to Blue Ridge without further consideration 10,000 shares of the stock of Publications and would grant Blue Ridge an option to buy 40,000 additional shares of the stock of Publications for a price of $35 a share.
On or about October 9, 1930, Waddill Catchings, on behalf of Blue Ridge, entered into an agreement with Publications undertaking to purchase up to 5,000 shares of the common stock of Publications, if available, on the New York Stock Exchange within the next six months, at $36 per share or better. In consideration thereof, Publications agreed to sell to Blue Ridge at any time within one year from said date 5,000 shares of the common stock of Publications at the following prices: $40 per share, up to the number of shares equaling the number of shares which Blue Ridge had purchased at $36 per share or less; and $42 per share, up to the number of shares which represented the difference between the number purchased by Blue Ridge at $36 or better and 5,000 shares. Said agreement further provided that, if and to the extent that Blue Ridge should fail to exercise either of the above options, Publications agreed to sell to Blue Ridge, during the period from October 9, 1931 to October 9, 1932, at $45 per share, the number of shares necessary to make the total purchases by Blue Ridge from Publications 5,000 shares; and all options granted under said agreement would expire at October 9, 1932.
The arrangement to buy 5,000 shares of Publications did not oblige Blue Ridge to do so, but if Blue Ridge did buy the shares, it expected to exercise its option to acquire another 5,000 shares. This option was at prices which favored acquiring the shares in the market at or less than the then price of $36 and was thus a market deflationary incentive. It was not a plan for bolstering or inflating the market price.
Pursuant to the above-described agreements, Blue Ridge between October 6, 1930 and April 10, 1931 purchased 5,000 shares of Publications on the New York Stock Exchange at prices ranging between 36 and 31-7/8, for a total cost of $172,750; and Blue Ridge did not exercise any of the said options.
On or about October 24, 1930, Conde Nast, his personal companies and associates (whose indebtedness he had guaranteed) were indebted as follows, on collateralized loans:
Chase National Bank $ 2,382,156.28
Goldman Sachs 1,083,268.96
Guaranty Trust Company 240,082.18
Broadway Plaza Trust Company 150,550.00
Blue Ridge evaluated on its merits each stock purchase that it made. It had an efficient statistical organization that investigated every purchase situation; and reports were prepared of every security purchased for the information of the board of directors. The officers of Blue Ridge reviewed market ...