Swanson v. American Consumer Industries, Inc.

• Citation: 288 F. Supp. 60
• Decision Date: 20 August 1968
• Docket Number: No. P-2891.,P-2891.
• Parties: Knute SWANSON, on behalf of Peoria Service Company, and on behalf of all shareholders of Peoria Service Company similarly situated, Plaintiff, v. AMERICAN CONSUMER INDUSTRIES, INC., United States Cold Storage Corporation and Peoria Service Company, Defendants.
• Court: U.S. District Court — Southern District of Illinois

288 F. Supp. 60

Knute SWANSON, on behalf of Peoria Service Company, and on behalf of all shareholders of Peoria Service Company similarly situated, Plaintiff, v. AMERICAN CONSUMER INDUSTRIES, INC., United States Cold Storage Corporation and Peoria Service Company, Defendants.

No. P-2891.

United States District Court S. D. Illinois, N. D.

August 20, 1968.

Richard Orlikoff, Arthur T. Susman, Chicago, Ill., Thomas V. Cassidy, Peoria, Ill., for plaintiff.

Frank O. Wetmore and Frank B. Gilmer, Chicago, Ill., Eugene L. White, Peoria, Ill., for defendants.

DECISION AND ORDER

ROBERT D. MORGAN, District Judge.

The complaint in this action was filed June 21, 1965¹ in the District Court for the Northern District of Illinois, seeking a permanent injunction against the carrying out of a plan of corporate reorganization between American Consumer Industries, Inc. (herein ACI), and Peoria Service Company, a subsidiary (herein Peoria), recision of the agreement involved and damages, expenses and attorneys' fees, on the theory that the plan as conceived, and then partially carried out, violated Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10(b) (5) of the rules promulgated thereunder by the Securities and Exchange Commission. It is clear and not disputed that ACI owned 90% of the outstanding stock of United States Cold Storage Corporation (herein U.S. Cold), which in turn owned 87% of Peoria at all times here material, and it is contended that this dominant position was used in violation of law and fiduciary duty to the detriment of Peoria and its minority shareholders. Issue was joined by Answer filed August 20, 1965, and, after some discovery on both sides and a preliminary pre-trial conference, the case was transferred to this court on October 25, 1966 in the interest of justice. This court, on December 21, 1967, allowed defendants' motion to dismiss the class action aspect of the complaint on the ground that plaintiff could not be "similarly situated" with any more than 40 persons owning some 7% of the shares involved, which was not a group so numerous that joinder of all would be impractical. (See Rule 23(a) (1) F.R.Civ. P.)

On January 31, 1968, this court allowed filing of motion by defendants to dismiss derivative action, which has been extensively argued and briefed by both sides. Plaintiff stated in his brief that allowance of the pending motion "would in effect dispose of the entire action," and "Plaintiff does not allege an individual action." Also, extensive answers to interrogatories and affidavits of facts have been filed herein.

On May 6, 1968, this court issued an Interlocutory Order stating the conclusion that, on the state of the record before it under Rule 12(b) F.R.C.P., the pending motion must be treated as one for summary judgment and be disposed of as provided in Rule 56 F.R.C.P. after all parties have been given reasonable opportunity to present all material made pertinent to such a motion by said Rule 56. A period of thirty days was allowed for filing of any additional sworn, factual material, argument and citation of authorities, and any request for further oral argument.

Thereafter, defendants filed a further quite comprehensive affidavit of one Earle D. Barton, and a memorandum in support of motion for summary judgment. Plaintiff filed transcript of a state court deposition of the chief executive officer of ACI, Peoria and U.S. Cold, and a memorandum in answer to that of defendants, together with a motion for oral argument;² but no affidavit disputing any factual material otherwise before the Court.

UNDISPUTED FACTS

In the opinion of this court, the controlling facts are undisputed in the record through allegations of the complaint admitted in the Answer; failure of denial on requests for admission; affidavits; and sworn answers to interrogatories and to questions on deposition which are not controverted. Those facts are:

1. Defendant ACI is a large, publicly held and diversified business enterprise whose shares are listed and traded on the New York Stock Exchange. At least since 1960 it has been directly engaged in the ice manufacturing business at several plants; in the operation of cold storage warehouses; in the processing and sale of eggs; and in the sale of lumber, building materials, household appliances and furnishings, motor oil and gasoline station supplies, etc.

2. U.S. Cold at all times here material was owned about 90% by ACI and was engaged primarily in the operation of cold storage warehouses in a number of different cities, not including Peoria, Illinois.

3. Peoria was an Illinois corporation engaged for a good many years in ice manufacturing and sale and in the operation of two relatively old cold storage warehouse facilities at Peoria, Illinois. It had some 81,500 shares outstanding, over 50% of which were held by a single owner in 1961. It had paid no dividends, at least in recent years.

4. In 1961 ACI acquired the controlling interest in Peoria, through an exchange of shares by agreement with the owner of over 50% of the shares, on the basis of one share of ACI stock for each nine shares of Peoria stock. On the then published market value of ACI shares this was computed at slightly less than $3.00 per share for Peoria shares (for the controlling interest). As part of that agreement ACI also made an offer to all other Peoria share holders to buy their shares at $3.00 per share. As a result of these combined transactions, ACI acquired 80% to 87% of the outstanding Peoria shares in a short time in 1961. It, or U.S. Cold, also picked up a few more Peoria shares thereafter and never paid more than $3.00 per share.

5. At all times here material after 1961, ACI was able to, and did, in fact, elect at least a majority of the Boards of Directors of both U.S. Cold and Peoria, and Mr. Joseph S. Robinson was chief executive officer of all three companies.

6. In order to effect operating economies for Peoria, to streamline management of like businesses, and to provide Peoria with engineering and other overhead services of U.S. Cold (and possibly for other reasons which do not appear), in 1962 ACI sold its shares in Peoria to U.S. Cold for the same price it had paid in acquiring them the preceding year.

7. Between 1961 and the end of 1964 numerous efforts were made by officers of Peoria, through about ten different financial institutions and individuals, to obtain financing for Peoria to obtain for operation, on an ownership or lease basis, a new cold storage warehouse facility in the vicinity of Peoria, Illinois, without success. The uniform lenders' requirement, that performance by Peoria be guaranteed by either U.S. Cold or ACI, was not acceptable to either. They expected Peoria to stand on its own feet.

8. On or about March 11, 1965, an agreement and plan of reorganization was developed providing for conveyance to ACI of all of the assets of Peoria (with the exception of corporate records and cash to close the transaction) in return for 16,319 shares of ACI stock, assumption by ACI of Peoria liabilities, and the subsequent dissolution of Peoria and distribution to its shareholders of the ACI stock at the resulting rate of one share of ACI for each five shares of Peoria. The plan was expressly subject to the approval of the shareholders of Peoria.

9. A Notice of Special Meeting was sent to all of the shareholders of Peoria on March 15, 1965 (bearing date March 12), calling for meeting on March 31, 1965 to consider the plan and liquidation of the company as provided in the agreement. A copy of the Agreement and Plan was enclosed showing the number of ACI shares to be received in exchange for the assets. A letter was written by Mr. Robinson, as President of Peoria, which accompanied the Notice of Meeting and Plan, in which approval was recommended to Peoria shareholders for three main reasons:

(1) Peoria shareholders would obtain a readily marketable security at a relatively low valuation based on market history.

(2) ACI shares had a history of dividends whereas Peoria shares did not.

(3) The interest in a larger, more diversified company would offer stability not dependent on local conditions.

This letter also told the Peoria shareholders that U.S. Cold (holder of 87%) had indicated its approval; that a favorable vote of two-thirds of the outstanding shares was required; and that any dissenting shareholders had appraisal rights under the Illinois statutes.

10. At the March 31, 1965 meeting of Peoria shareholders, 75,533 shares were represented in person or by proxy out of 81,594 shares outstanding. 71,322 shares (70,539 belonging to U.S. Cold) were voted in favor of the exchange of ACI stock for Peoria assets and for the ACI share distribution and dissolution of Peoria. Mr. Swanson, the plaintiff here, spoke in opposition to both propositions and stated his clear desire that his own 2703 shares be shown as voted in opposition to both. He also held proxies for 1508 shares which he stated were being voted against dissolution, but his statements about them were equivocal on the issue of the exchange of Peoria assets for ACI shares. He said the holders were opposed to it, but...