Deckert v. Independence Shares Corporation

• Decision Date: 18 May 1939
• Docket Number: No. 218.,218.
• Citation: 27 F. Supp. 763
• Parties: DECKERT et al. v. INDEPENDENCE SHARES CORPORATION et al.
• Court: U.S. District Court — Western District of Pennsylvania

27 F. Supp. 763

DECKERT et al. v. INDEPENDENCE SHARES CORPORATION et al.

No. 218.

District Court, E. D. Pennsylvania.

May 18, 1939.

Harry Shapiro, of Philadelphia, Pa., for complainants.

Robert F. Irwin, Jr., and Frank Rogers Donahue, of Donahue, Irwin, Merritt & Gest, both of Philadelphia, Pa., for defendants.

Francis H. Bohlen, Jr., of Saul, Ewing, Remick & Saul, of Philadelphia, Pa., for defendant Pennsylvania Co.

KALODNER, District Judge.

The complainants are owners and holders of certain contract certificates purchased from Capital Savings Plan, Inc., since merged with and now Independence Shares Corporation, a Pennsylvania corporation.

The principal defendant is the Independence Shares Corporation, a trust and investment corporation, organized, existing, and doing business under and by virtue of the laws of the Commonwealth of Pennsylvania, with its principal place of business in Philadelphia. The individual defendants are officers and directors of the Independence Shares Corporation.

The Pennsylvania Company for Insurances on Lives and Granting Annuities is a banking corporation, organized, existing, and doing business under and by virtue of the laws of the Commonwealth of Pennsylvania, with its principal place of business in Philadelphia. The Pennsylvania Company, &c., is trustee under several agreements between the trustee and the Independence Shares Corporation and certain of its predecessor companies.

The complainants seek the appointment of a receiver for the Independence Shares Corporation, with full power and authority to take into possession all the property and assets of the Independence Shares Corporation, and the trust assets held by The Pennsylvania Company, &c., under its agreements with the Independence Shares Corporation. They also seek determination of liabilities, liquidation and distribution and dissolution of Independence Shares Corporation.

The complainants ground their action on alleged misrepresentations and fraudulent statements made to them at the time they purchased Capital Savings Plan contract certificates from the predecessor of the Independence Shares Corporation. They aver that they and other plan holders have been, and are being defrauded by the Independence Shares Corporation.

The complaint also avers that the Independence Shares Corporation is insolvent.

The jurisdiction of this court is invoked under its general equitable and receivership powers, and under Section 22(a) of the Act of Congress of May 27, 1933, entitled the "Securities Act of 1933," as amended and supplemented (Act of May 27, 1933, c. 38, Title 1, Section 22(a), 48 Stat. 86, U.S.C.Title 15, Section 77v(a), 15 U.S.C.A. § 77v(a).

As previously stated, the principal offices of the Independence Shares Corporation, and of The Pennsylvania Company, &c., are within the Eastern District of Pennsylvania. All the individual defendants are residents of the Eastern District of Pennsylvania.

Eight of the nine complainants are residents of the Eastern District of Pennsylvania. The ninth complainant, Abe Zubrow, is a resident of the State of New Jersey. All the complainants individually own $2,000 contract certificates, on which sums ranging from $80 to $500 have been paid in installments.

Prior to December 31, 1938, the Independence Shares Corporation was a wholly-owned subsidiary of Capital Savings Plan, Inc. The officers and directors of the two corporations were substantially the same. On December 31, 1938, there was a merger of Capital Savings Plan, Inc., and Independence Shares Corporation, under which the latter acquired all of the liabilities, assets, functions, and business of Capital Savings Plan, Inc., which was an investment and trust corporation, organized, existing, and doing business under and by virtue of the laws of the Commonwealth of Pennsylvania. Capital Savings Plan, Inc., was originally incorporated in Pennsylvania on October 15, 1931.

Independence Trust Shares registered with the Securities and Exchange Commission prior to the merger of the two companies on May 2, 1938, under the Securities Act of 1933, 15 U.S.C.A. § 77a et seq. The registration was with respect to Independence Trust Shares Purchase Plans, providing for maximum aggregate payments of $6,720,000, with a maximum of 5600 Monthly Payment Plans, and $480,000 under a maximum of 960 Full Paid Plans.

From January, 1932, to April, 1938, and under three different trust agreements, the defendant Capital Savings Plan, Inc., issued and sold to members of the public residing in the Eastern District of Pennsylvania and elsewhere, securities, namely Capital Savings Plan Contract Certificates, which are participations in an investment trust or scheme commonly known as an "Installment Investment Plan," for which The Pennsylvania Company, &c., is trustee and defendant Capital Savings Plan, Inc., was sponsor and distributor.

These certificates are monthly payment plans issued and sold in unit denominations of $1200 providing for the payment of $10 per month on a periodic or installment basis over a period of ten years. They could be purchased in one-half units of $600 or any multiple thereof. They could be secured with life insurance protection providing that upon the death of the purchaser the insurance company would pay to the trustee in one lump sum the installment payments remaining unpaid, which sum ranges downward on a $1200 unit certificate, from $1190 to $10.

The trustee upon receipt of each periodic or installment payment deducted and still deducts the various fees and charges. The fees include a service fee of $60 on a $10 per month unit certificate, deducted from the equivalent of the first nine monthly payments; a trustee fee of 25 cents per $10 payment or fraction thereof, deducted from each monthly payment; and, on installment payment plans with insurance, an insurance fee deducted in decreasing amounts from each monthly payment.

The remaining balance after fees and charges are deducted was and is used by the trustee at the direction of the defendant Independence Shares Corporation and its predecessor, Capital Savings Plan, Inc., to acquire from defendant Independence Shares Corporation, Independence Trust Shares for the account of each purchaser. These shares are interests in an installment investment trust for which The Pennsylvania Company, &c., is trustee and of which defendant Independence Shares Corporation is issuer, sponsor and depositor.

Each Independence Trust Share represents a 1/1000 interest in a deposit unit previously created by defendant Independence Shares Corporation with funds borrowed or supplied by it. The deposit unit consists of one share each of the common stock of forty-two corporations and cash accumulations to the proper proportion of a distribution account. The price at which Independence Trust Shares were and are sold to the Trustee for the account of the purchasers of Capital Savings Plan Contract Certificates was not and is not the actual creation cost of each share, but was and is computed upon the last sales price of each of the forty-two common stocks which make up the deposit unit, as of the day before the Trustee makes the purchase, to which was and is added odd-lot brokerage, commissions and taxes. To the total of this was and is added an arbitrary charge or load of nine per cent (now reduced to 7½ per cent) and any distributable accumulations which may then be applicable to the deposit unit. This nine per cent arbitrary charge or load was divided, 1½ per cent to defendant Independence Shares Corporation and 7½ per cent to the defendant Capital Savings Plan, Inc., and was a source of income to the defendant Capital Savings Plan, Inc. through the ten-year term in addition to the $60 service charge which is deducted from the first nine payments or their equivalent. Independence Trust Shares were and are subject to an additional charge of 2½ per cent of currently distributable income and currently distributable principal, which charge is deducted semi-annually and paid to the trustee.

The Installment Investment Plan of Capital Savings Plan, Inc., was in effect a trust upon a trust, with two sets of trustees' fees, and with two sets of sponsors' fees, expenses, charges and other costs of operation deducted from the moneys paid in by the purchasers and from the earnings derived from the underlying common stocks in the portfolio of Independence Trust Shares. The Independence Trust Shares purchased by the trustee are held in a common portfolio, but the account of each purchaser is credited with the shares or fractional shares to which he is entitled. At any time the purchaser may receive the Independence Trust Shares which are credited to his account or the liquidating value thereof in cash. The liquidating value of each share was and is computed at the bid price maintained by defendant Independence Shares Corporation and was and is based upon the market bid price of the forty-two common stocks underlying the shares plus the applicable portion of the distributable accumulations and less odd-lot brokerage, commissions and taxes. This price is customarily approximately ten per cent less than the then offering price of the shares.

Defendant Independence Shares Corporation maintains offices in Philadelphia and Pittsburgh, Pennsylvania, and has general agencies in other cities and sub-divisions of Pennsylvania. Defendant Independence Shares Corporation is represented, and its certificates were offered and sold in defined territories, by junior salesmen, senior salesmen and general agents. Their sole remuneration is dependent upon commissions, and over-riding commissions, based upon the amount of certificates sold, the initial commission being payable only after delivery of the certificates and being contingent thereafter upon receipt by the trustee of subsequent installment payments. Many of the salesmen were part-time representatives, such as office workers, public employees,...