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Smith v. Alleghany Corp.

decided: May 8, 1968.

MORRIS SMITH AND DAVID WIENER, APPLICANTS-APPELLANTS,
v.
ALLEGHANY CORPORATION, PLAINTIFF-APPELLEE, ALLAN P. KIRBY, JR. AND FRED M. KIRBY II AS GUARDIANS OF THE PROPERTY OF ALLAN P. KIRBY, FRED M. KIRBY AND CHARLES T. IRELAND, JR., DEFENDANTS-APPELLEES. MORRIS SMITH AND DAVID WIENER, INDIVIDUALLY AND ON THEIR OWN BEHALF AND THAT OF ALL OTHER SHAREHOLDERS OF ALLEGHANY CORPORATION SIMILARLY SITUATED AND DERIVATIVELY ON BEHALF OF ALLEGHANY CORPORATION, PLAINTIFFS-APPELLANTS, V. ROBERT J. FITZSIMMONS, ALLAN P. KIRBY, JR. AND FRED M. KIRBY II AS GUARDIANS OF THE PROPERTY OF ALLAN P. KIRBY, AND ALLEGHANY CORPORATION, DEFENDANTS-APPELLEES. ALLEGHANY CORPORATION, PLAINTIFF-APPELLANT, V. ALLAN P. KIRBY, JR. AND FRED M. KIRBY II AS GUARDIANS OF THE PROPERTY OF ALLAN P. KIRBY, CHARLES T. IRELAND, JR. AND FRED M. KIRBY, DEFENDANTS-APPELLEES



Friendly and Smith, Circuit Judges, and Gignoux, District Judge.*fn*

Author: Smith

J. JOSEPH SMITH, Circuit Judge:

We have considered together an appeal in No. 31115, Smith et al. v. Alleghany et al., an appeal in No. 31342, Smith et al. v. Fitzsimmons et al., and motions to set aside the judgment in No. 28397, Alleghany v. Kirby, entitled as motions under Rule 19(c). We find no error on the appeals and affirm in both cases. We deny the motions.

Nos. 31115 ("Smith v. Alleghany") and 31342 ("Smith v. Fitzsimmons"), and the motion in No. 28397 ("Alleghany v. Kirby"), are attempts to revive the litigation which grew out of a 1949-50 selfdealing transaction by four of the directors of Alleghany Corporation ("Alleghany").

In 1949, Alleghany acquired 85% of the voting stock, and 48,000 shares of "class A" common stock, of Investors Diversified Services (IDS), a highly leveraged investment company (and investment advisor to a large mutual fund complex). In December 1949, it was resolved at a meeting of Alleghany's board of directors that Alleghany offer to its officer-directors the opportunity to acquire "class A" IDS stock in exchange for Alleghany preferred stock. After shareholder approval, Alleghany on May 15, 1950 transferred 48,125 shares of IDS "class A" common to Allan P. Kirby and Robert R. Young (president and chairman of the board, respectively, and both directors) in exchange for 4,840 shares of Alleghany preferred. The IDS stock was transferred at a price of $8.1453 a share, and by 1954 its price had advanced to about $200.00 a share.

Numerous derivative actions, based upon the alleged illegality of the above transaction, as well as alleged irregularities in other transactions, were brought on behalf of Alleghany against various of its officers and directors (including Kirby, Young, and Clint W. Murchison, Jr. and John D. Murchison) in 1954. Ten such actions were consolidated in the New York courts under the title of Zenn v. Anzalone ("Zenn"). Ten more were consolidated in United States District Court (Southern District of New York) under the same title. [The latter action, according to the affidavit of Benjamin Vinar (Donovan, Leisure, Newton & Irvine), was dismissed for lack of prosecution on August 9, 1966. See Appendix for Kirbys in No. 31342, p. 41A.] Although Kirby was made a defendant in both actions, he was served only in the federal one.

Another derivative action on behalf of Alleghany, entitled Breswick v. Briggs, 135 F. Supp. 397, was commenced in United States District Court (Southern District of New York) on February 14, 1955. Randolph Phillips was retained as a consultant to the plaintiffs' attorney in the Breswick action.

Negotiations between Abraham L. Pomerantz (attorney for the plaintiffs in both the state and federal Zenn actions) and representatives of the defendant officers and directors resulted in April 1955 in a tentative settlement of all claims asserted in any pending derivative action involving Alleghany. The consideration was to be $700,000 cash paid by the defendants to Alleghany, plus the revision in favor of Alleghany of certain loss guarantees issued by the Murchisons in connection with certain joint ventures.

Upon application by Alleghany in the New York Supreme Court for approval of the settlement, that court appointed Robert J. Fitzsimmons as Referee, directing him to inquire into the "fairness, reasonableness and adequacy" of the stipulation of settlement. Notice of the terms of the proposed settlement was mailed to all Alleghany stockholders, and one Samuel R. Rosen, a stockholder represented by the law firm of Graubard & Moskovitz, appeared as an objectant to the settlement. Randolph Phillips served as a consultant to Graubard, and worked with him and Rosen in opposing the settlement in hearings which commenced before Fitzsimmons on September 19, 1955 and continued until January 1956. Kirby was excused from appearing at those hearings by Fitzsimmons. (A doctor testified that appearing would endanger Kirby's life.)

Meanwhile, the attorneys in the Breswick action, asserting that their exclusion from the Zenn settlement negotiations had been unfair, brought a proceeding in United States District Court to enjoin the defendants in Breswick from interposing in that action "any defense based upon any judgment entered in any action other than this action pursuant to any agreement not negotiated with the [ Breswick ] plaintiffs or their attorneys." An injunction was granted, by order dated October 27, 1955.

At the conclusion of the hearings before Fitzsimmons, the Breswick defendants moved to vacate the injunction in their case, and after argument of the motion, Judge Walsh of the United States District Court suggested that settlement of the entire litigation be discussed between plaintiffs and the defendants, who included Kirby. Negotiations followed, and led to an increase over the offer made in Zenn. But the Breswick plaintiffs still were not satisfied, and when the defendants again moved to vacate the injunction, the United States District Court appointed Fitzsimmons as Special Master to hear and report on the good faith of the Breswick settlement proposal. These hearings were held in October and November, 1956. Fitzsimmons submitted a report to the United States District Court on November 17, 1958 recommending that the injunctive order be vacated. On the same day he submitted a report to the New York Supreme Court recommending that the original stipulation of settlement in Zenn, as augmented by the additional settlement, be approved. (By the terms of the settlement as it stood at that time, defendants were to pay $1,000,000 cash to Alleghany; the loss guarantee was to be amended; and a transaction in which the Murchison brothers had obtained 130,000 shares of IDS voting common was to be reversed.)

The matter of confirming the reports was argued in both the state and federal courts. The objectant stockholder Rosen, in Zenn presented three basic points relating to the 1949-1950 IDS transaction, all of which had, of course, also been presented to Fitzsimmons as Referee: (1) Kirby and Young, it was alleged, had possessed inside knowledge that the earnings of IDS would increase approximately 500% in 1950 alone; (2) the December 1949 directors' meeting was allegedly illegal; and (3) the directors had allegedly failed to disclose material facts, etc. to the stockholders in the proxy statement for the meeting at which the exchange was ratified.

Justice McGivern of the New York Supreme Court approved the settlement as recommended by Fitzsimmons on March 9, 1959. Zenn v. Anzalone, 17 Misc.2d 897, 191 N.Y.S.2d 840. He noted that "this court is the beneficiary of a lucid, painstaking and comprehensive report of a Referee achieved after protracted hearings which more nearly resembled a trial on the merits than on the adequacy of the proposed settlement. * * * The Referee has concluded that * * * the amended offer of settlement constitutes a fair, reasonable and adequate basis for a settlement of this litigation * * *." 191 N.Y.S.2d at 843-844. Justice McGivern stated, however, that no order could be entered upon his decision until after action by the United States District Court on the motion to vacate the injunction.

Judge Dimock of the United States District Court took a somewhat less favorable view of the suggested settlement; on September 22, 1959 he rejected Fitzsimmons' report as Special Master and referred the matter back to him for further hearings. Phillips, who had a hand in both the Zenn and Breswick actions, realized that Judge Dimock's order improved the plaintiffs' position considerably. He therefore got in touch with Charles T. Ireland, Jr., an attorney representing Alleghany and Kirby, and advised him that new hearings would now be held at which Kirby would have to testify. [Young had died on January 25, 1958, and Kirby had then become Chief Executive Officer and Chairman of the Board of Alleghany.] At the time, one Mr. Daly (of Lord, Day & Lord) was representing Alleghany and Kirby and the other defendants; Daly and Mr. Adams, who represented the Murchisons, were opposed to allowing Phillips to participate in the settlement discussions. Daly preferred to deal with Pomerantz, with whom the original $700,000 settlement had been worked out, but Graubard (who represented stockholder Rosen) objected to that. Daly apparently thought that further hearings should be held, and that Kirby should testify. Meanwhile, dissension grew in the plaintiffs' ranks. Phillips managed to keep the pressure on Kirby, however, and Kirby inquired of Daly what his maximum liability might be. Daly's response, dated October 22, 1959, indicated that liability in connection with the IDS exchange transaction might cost Kirby $22,800,000, or, if he were held jointly liable, $39,350,000. Kirby then authorized Ireland to negotiate settlement terms with Phillips. [It is interesting to note, however, that Phillips' extra leverage was obtained by the federal court's refusal to approve the Special Master's report in the Breswick litigation, which did not involve the IDS exchange transaction.]

During the final settlement negotiations, in late 1959, Kirby decided to change attorneys (apparently as a result of Daly's failure to advise him as to whether he could settle individually). The firm of Donovan, Leisure, Newton and Irvine was substituted for Lord, Day & Lord, with the understanding that they would try to work out a settlement of Kirby's individual liability by the end of the year.

Intensive negotiations on December 19 and 20, 1959, produced a final settlement, under which Kirby agreed to make a payment of $1,100,000 in addition to his obligation under the $1,000,000 basic settlement earlier arrived at. On December 24, Judge Dimock was advised that the Young estate was willing to contribute an additional $900,000 to the basic settlement; accordingly, the Breswick plaintiffs agreed to the vacating of the 1955 injunction. The effect of the final settlement was that Alleghany would receive $3,000,000 from the various defendants, and that control of IDS would be returned to Alleghany from the Murchisons. The settlement was approved by the New York Supreme Court on December 28 and 29; between those dates and May 1960, Alleghany issued releases to the defendants. A judgment dismissing the action on the merits as to all parties was entered in New York Supreme Court on June 21, 1960.

The order entered by Justice McGivern on December 29, 1959, approving the final settlement, provided that Fitzsimmons might apply to the New York Supreme Court for an allowance for his services both as Referee in that court and as Special Master in the United States District Court. Prior to making his fee application, Fitzsimmons spoke with Judge Dimock about the allowance for his services, and was told that he would not be required to proceed in the United States District Court with reference to fees for his services as Special Master. Fitzsimmons made application to the New York Supreme Court on May 16, 1960, for $150,000 compensation for his services as Referee and Special Master. In his affidavit submitted with the application, Fitzsimmons referred both to the amount of effort expended by him and to "the value of the ultimate settlement" in arriving at the $150,000 figure. The only party to the settlement which objected to that figure was Alleghany; Ireland, acting as its attorney submitted a memorandum in which he pointed out that: "Applicant's compensation for services rendered as Referee and Special Master could in no wise depend upon the value of the recovery for the corporation; the Applicant would be entitled to compensation for his services had there been no recovery whatever for the corporation." The memorandum suggested that appropriate compensation for the maximum estimate of Fitzsimmons' time would be $115,000. Fitzsimmons subsequently met with Ireland at the latter's office, and suggested that Alleghany file an affidavit with the court indicating what it considered the value of the services to be. Justice McGivern, by order dated June 10, 1960, fixed the fee at $125,000; it appears that before doing so he communicated with Alleghany and was advised by counsel that the sum would be acceptable.

We next come to what has been termed by Judge Friendly the "Willheim chapter" of the Alleghany Corporation -- that chapter which takes us "through the proxy contest resulting in the victory of the Murchison brothers over Allan P. Kirby at the annual meeting of the stockholders of Alleghany Corporation in May 1961." See Phillips v. S.E.C., 388 F.2d 964 (2 Cir. slip opinion 1007, 1008, January 16, 1968). Simultaneously with the commencement of that proxy contest, the Murchisons, on September 8, 1960, brought a derivative action in the United States District Court for the Southern District of New York against Kirby, Phillips, Ireland, and six other defendants. The suit was brought on behalf of Alleghany, which was named as a nominal defendant. [After the Murchisons' victory in the proxy fight, Alleghany was substituted as party plaintiff, and the action was dismissed as to all defendants other than Kirby, Phillips, Ireland and Fred M. Kirby.]

The gravamen of the complaint, as amended, was in the allegation that there had been fraud in the obtaining of the settlements (and in the obtaining of the United States District Court order vacating the 1955 injunction in Breswick). The complaint focused upon Kirby, seeking inter alia the following relief: (1) That the December 24, 1959 stipulation of settlement in Zenn, and the December 24, order vacating the injunction in Breswick and approving a separate Kirby settlement in Breswick, be declared null and void (or, in the alternative, that Kirby be enjoined from pleading the orders, etc. as res judicata); (2) That the order of the New York Supreme Court in Zenn approving a separate Kirby settlement be declared null and void (or that Kirby be enjoined from pleading it as res judicata); (3) (similar relief as to the judgments of the New York Supreme Court dismissing the ...


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