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RODMAN v. GRANT FOUND.

November 13, 1978

Charles G. RODMAN, Trustee of the Estate of W. T. Grant Company, Bankrupt, Plaintiff,
v.
The GRANT FOUNDATION, The Connecticut Bank and Trust Company, Individually and as Trustee of Trusts established in December 1942 and May 1956 for the benefit of Helen Grant Biddle Allchin, Edward Staley, Richard W. Mayer, John G. Byler, Raymond H. Fogler, John G. Curtin, Harry E. Pierson, A. Richard Butler, John J. LaPlante, Joseph A. Livolsi, Louis C. Lustenberger, James G. Kendrick, Joseph W. Chinn, Jr., John D. Gray, Joseph Hinsey, DeWitt Peterkin, Jr., Charles F. Phillips, and Asa T. Spaulding, Defendants



The opinion of the court was delivered by: POLLACK

The defendants seek dismissal of this suit on the grounds that the plaintiff has failed to state or show grounds entitling him to relief and that the Court lacks subject matter jurisdiction. Rules 56(b), 12(b)(1) and 12(b)(6), Fed.R.Civ.P. The plaintiff has proceeded in this Court on the notion that he is asserting violations of the Securities Exchange Act of 1934, specifically sections 10(b) and 14(a) thereof, 15 U.S.C. §§ 78j(b), 78n(a), and Rules 10b-5 and 14a-9 thereunder, 17 C.F.R. §§ 240.10b-5, 14a-9.

This suit arises from seven purchases by the W. T. Grant Company ("Grant") of its own stock, common and preferred, made between May 1969 and September 1972. The plaintiff seeks to have either rescission from the sellers of the stock or damages from the sellers and the directors of Grant. A prior suit is pending in New York State Supreme Court which seeks the same relief for the same stock purchases against the same defendants. Other matters are complained of as well in the state court suit.

For the reasons shown hereafter, the defendants are entitled to judgment of dismissal of this suit.

 I.

 W. T. Grant Company was a mercantile chain founded by William T. Grant in 1906. It flourished and grew to have assets at the end of 1968 of approximately $ 400 million. Its annual sales were of almost $ 1 billion; it operated 1100 stores; it had 17,500 stockholders and approximately 13.8 million shares of common stock issued and outstanding. A "control group" (so styled by the plaintiff) *fn1" collectively controlled 43.3% Of Grant's shares and voted those shares identically when one or more members of the group did not abstain. This group at the end of 1968 consisted of the defendants William T. Grant Foundation ("Foundation"), a charitable foundation organized by the founder of Grant, the Connecticut Bank and Trust Company ("CBT"), trustee or co-trustee of numerous trusts established by Mr. Grant, and the individual defendants Staley, chairman of Grant and a trustee of the Foundation, Mayer, president and chief executive officer of Grant, Fogler, a director of Grant and a trustee of the Foundation, and Byler, a director of Grant and treasurer of the Foundation. The Foundation owned 9.4% Of Grant's outstanding common stock (1,294,325 shares). CBT and Staley were co-trustees of trusts that held 11.9% Of the outstanding shares (1,651,940 shares). CBT and Mayer were co-trustees of trusts that in April 1969 held 7.7% Of Grant common stock, and by the end of 1969 held 14.8% (2,052,956 shares). CBT and Byler were co-trustees of another several hundred thousand shares. In all CBT was trustee or co-trustee of 28% Of Grant's common stock. At the end of 1969, the Foundation was remainderman of 3,402,336 of these shares in trust, and the Foundation's approval was required before the trusts could sell the shares of which it was the remainderman.

 II.

 On April 13, 1976, the W. T. Grant Company was adjudged bankrupt, and the plaintiff, Charles G. Rodman, was named Trustee in Bankruptcy. The company's overwhelming financial collapse came in the wake of the business conditions and problems with which Grant was apparently confronted in the changed economic climate following the 1974-75 recession.

 The plaintiff filed his New York Supreme Court lawsuit on April 6, 1978, just short of two years after his appointment, and this suit followed on April 12, 1978. Parenthetically, the individual defendants have requested that if any of the claims herein were not to be dismissed, this Court should exercise its discretion to stay them until resolution of the state court claims pending on the same transactions.

 III.

 The defendants in this suit are the Foundation, CBT and 17 individuals who were directors of Grant. The complaint is set out in five counts. The first two counts are the only counts on which relief is sought against the Foundation. Count I embraces purchases of Grant common stock in 1969, 1970 and 1972, made by Grant from the Foundation pursuant to a Stock Purchase Agreement executed on February 25, 1969, which was approved by a vote of Grant's stockholders, the Foundation abstaining. Count II concerns a purchase in 1970 of Grant preferred stock by Grant's officers, following which Grant's board of directors voted to retire the shares purchased. The remaining three counts pertain to purchases of Grant common stock made by Grant from CBT as Trustee in 1969 (Count III), from CBT and Mayer as co-trustees in 1969 (Count IV), and from New York University and the Sloan-Kettering Institute made in 1972 (Count V).

 Count I: Purchases Under the Agreement Between Grant and the Foundation

 In June 1968 the trustees of the Foundation decided to diversify its investments. Later that year Staley told R. M. Lloyd, chairman of the Foundation's board, that Grant wished to purchase some of its own stock for use in its Employee Stock Purchase Plan. Lloyd asked Staley whether Grant was interested in buying some of the Foundation's shares. Staley replied that Grant was interested, and negotiations began.

 Grant and the Foundation executed a Stock Purchase Agreement on February 25, 1969. The Agreement provided that the Foundation would sell Grant 250,000 shares of Grant common stock on May 1, 1969, and that Grant would have an option on up to 950,000 more shares, to be purchased in blocks of 200,000 to 300,000 shares on May 1 of each year from 1970 through 1974. Grant had the right to defer purchases from May 1 of each year to May 1 of any of the following years through 1974. The price was to be the average closing market price of the stock during the month preceding the purchase, less 3%. The Agreement was to become effective only if approved by a majority of Grant's shareholders, the Foundation not voting, and if approved could be terminated by either party after purchase of the initial 250,000 shares on May 1, 1969.

 On April 1, 1969, Grant sent a proxy statement to its shareholders announcing the Stock Purchase Agreement. They were told that the purpose of the purchases was to meet the requirements of proposed amendments to Grant's 1960 Employee Stock Purchase Plan and for other corporate purposes, including possible acquisitions of other business enterprises.

 The statement stated that it was proposed to amend the existing Employee Stock Purchase Plan "to make available additional shares under the Plan in order to permit further offerings to be made to newly appointed executives and managers and to present participants in amounts consistent with their responsibilities." In that connection it was stated that the initial 250,000-share instalment of the purchases would be used for offers to be made under the Plan (as amended) on May 1, 1969, and, to that extent issuance of authorized but unissued shares reserved under the Plan would not be required.

 The statement disclosed all of the facts recited in Part I, supra, about Staley's, Fogler's and Byler's affiliation with the Foundation and the ownership of Grant stock by the Foundation and the various trusts, except that the statement did not disclose that the trust instruments required the approval of the Foundation before shares of which it was the remainderman could be sold. In addition, the statement disclosed that Staley and his immediate family owned 53,919 shares, that Byler owned 12,410 shares and had a life interest in another 51,800 shares, that Mayer and his immediate family owned 13,631 shares, and that Fogler owned 54,400 shares. The proxy statement then recited the terms of the purchase agreement and said that in the view of Grant's board the stock purchases would be a desirable way to provide shares for the Employee Stock Purchase Plan and other corporate purposes.

 The Stock Purchase Agreement was approved by Grant's shareholders at their Annual Meeting on April 29, 1969. The Foundation did not vote its shares. Under the agreement Grant purchased 250,000 shares at $ 45.82 per share on May 1, 1969; 300,000 shares at $ 44.08 per share on May 1, 1970; no shares in 1971; and 250,000 shares at $ 40.52 per share on May 1, 1972. Grant common stock reached its all-time high of $ 70 5/8 in 1971. On February 15, 1973, the parties terminated the remaining options under the purchase agreement; Grant common was then selling at $ 37 per share. All told Grant purchased from the Foundation 800,000 shares for $ 34,810,142.

 The Trustee alleges that the purchases of stock made under the stockholders' authorization were unfair and unreasonable to Grant; involved a breach of fiduciary duty by the Foundation and the individual defendants and deception of Grant and its shareholders; and were part of a scheme or artifice by Staley and Mayer, consciously acquiesced in by Grant's other directors, to defraud Grant. The Trustee charges that the "true reason and primary purpose" for the purchases was that Staley and Mayer "wanted to keep said stock out of unfriendly hands in order to perpetuate their own control" and, at the same time, to enable the Foundation and the trusts to receive more for their shares than they would in an arm's length sale. According to the Trustee such a scheme constitutes fraud in violation of section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.

 The Trustee attacks the proxy statement as false and misleading and in violation of section 14(a) and Rule 14a-9 because it failed to disclose the alleged "true purpose" of the purchases to the public shareholders and was deficient in the following further respects, namely: that it failed to say that Grant's management had earlier rejected the idea of buying the Foundation's stock for the Employee Stock Purchase Plan; that Grant would have to increase its borrowing to finance the purchases if it was also to maintain its existing expansion and dividend policies; that the proposed purchases would undermine the flow of new capital to Grant; that "it was Staley's and Grant management's opinion that additional equity capital was "needed,' " ; that Grant would have to finance a $ 20 "loss" on each share purchased; that Grant had eight million authorized but unissued shares that could have been used instead; that the price of the shares was in excess of book value and that Grant's net worth and net worth per share therefore would be decreased by the purchases; that the 3% Discount was less than the going rate for block discounts; that the price was more than the Foundation would receive in an arm's length sale; that Grant might have to pay more for the shares than their market price on the day of closing; and that Staley intended to buy 20,000 shares from CBT soon after the Annual Meeting at which the shareholders were to vote on the Stock Purchase Plan.

 Finally, the Trustee alleges that the Foundation is liable because Staley, Fogler and Byler acted in concert with and on behalf of the Foundation and for its benefit; because the Foundation was in a position to control or influence the conduct of Staley, Fogler and Byler and failed to do so; because the Foundation permitted the use of its name in false proxy material from which it benefitted; because the Foundation was an aider and abettor; because the Foundation is responsible for the actions of its trustees and officers under the doctrine of respondeat superior; and because the Foundation was unjustly enriched.

 Count II: Purchase of Preferred Stock from the Foundation

 On May 8, 1970, defendant Curtin, then financial vice-president of Grant, wrote to Byler, then treasurer of the Foundation, that Grant was interested in buying the Foundation's 11,929 shares of Grant preferred stock and was willing to pay $ 51.75 per share, the average price that Grant had paid for its preferred stock during the first four months of 1970. Byler wrote to Lloyd on May 14, 1970, to recommend that the Foundation accept Grant's offer. On May 20, 1970, Curtin wrote to Byler again and confirmed that Grant was willing to buy the preferred shares at $ 51.75 and to close the sale on July 1, 1970. The trustees of the Foundation accepted those terms at their meeting of June 4, 1970, and the terms were reconfirmed in a letter of June 4, 1970, from Grant's secretary and general counsel to the Foundation.

 At the meeting of Grant's board on January 26, 1971, Mr. Curtin reported that Grant had recently purchased 18,500 shares of its preferred stock. The directors then voted to retire those 18,500 shares.

 The Trustee alleges that unspecified defendants failed to disclose to Grant's board that the Foundation was the seller of "most" of the shares purchased; that the purchase price was over the market price on the date of sale; and that the closing was delayed to permit the Foundation to receive the second quarterly dividend. Further, the Trustee alleges that the purchases (Sic ) was unfair and unreasonable to Grant; a waste of its assets; a breach of fiduciary duty by the Foundation and certain individual defendants that involved deception of Grant, its directors, and its shareholders; and part of a scheme or artifice of the Foundation and certain individual defendants to defraud Grant. Finally, the Foundation is alleged to be liable for the same additional reasons given in Count I.

 Count III: Purchase of 20,000 Shares from CBT

 On or about June 2, 1969, at Staley's suggestion, Grant purchased 20,000 shares of its common stock from CBT as trustee of a trust established by Mr. Grant. Grant paid $ 45.75 per share, 3% Less than the average of the high and low market prices on May 29, 1969. Grant's board ratified this purchase after it was consummated.

 The Trustee alleges that unspecified defendants did not disclose to Grant's board that the Foundation was the remainderman of the trust that sold the stock or that as trustees or officers of the Foundation, ...


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