Craftsman Finance & Mortgage Co. v. Brown

• Decision Date: 17 November 1945
• Citation: 64 F. Supp. 168
• Parties: CRAFTSMAN FINANCE & MORTGAGE CO., Inc., v. BROWN et al.
• Court: U.S. District Court — Southern District of New York

64 F. Supp. 168

CRAFTSMAN FINANCE & MORTGAGE CO., Inc., v. BROWN et al.

District Court, S. D. New York.

November 17, 1945.

COPYRIGHT MATERIAL OMITTED

William Rosenfeld, of New York City, for plaintiff.

Reed, Truslow, Crane & De Give, of New York City (William G. Mulligan and Milton Kaplan, both of New York City, of counsel), for defendants Russell R. Brown and Stewart M. Seymour.

Humes, Buck, Smith & Stowell, of New York City (John F. Kiernan, of New York City, of counsel), for defendant Stanhope Foster, individually and as a partner of Foster & Co.

Garey, Desvernine & Garey, of New York City (Ambrose V. McCall and Jacob J. Rosenblum, both of New York City, of counsel), for defendant Samuel L. Westerman, individually and as a partner of Foster & Co.

Edwin M. Slote, of New York City (Max E. Lynne, of New York City, on the brief), for defendants American Spirits, Inc., and Sidney Kessler, individually and as a partner of Foster & Co.

Stewart M. Seymour, of New York City, for defendant American Distilling Co.

LEIBELL, District Judge.

Plaintiff as a stockholder of the American Distilling Company, which owns 50% of the stock of American Spirits, Inc., brings this action on behalf of both said corporations and names as defendants a number of directors, a partnership, and certain individuals, who allegedly aided the delinquent directors and participated in certain transactions, which are claimed to have resulted in damage to the two corporations and in profits to the wrongdoers. Plaintiff has been a small stockholder of the American Distilling Company and its predecessor, American Commercial Alcohol Corporation, since May 8, 1939. Since this is a derivative action the claim asserted is for the benefit of the two corporations, The American Distilling Company and its subsidiary, American Spirits, Inc.

The amended complaint charges that there were four transactions in which either Distilling or Spirits was deprived of a profitable business opportunity, which the corporate directors and other individual defendants diverted to the benefit and profit of certain individuals and a partnership.

The Ozark Mountain Distilling Co. transaction.

Paragraphs 18 and 19 of the amended complaint allege that in June 1942 the defendants Distilling and Spirits and their respective Boards of Directors were informed of the fact that the business and assets of Ozark Mountain Distilling Co., including an inventory of whiskey and certain warehouses, were available for purchase and that it was highly desirable for one of said defendant corporations to make the purchase. Paragraph 20 of the complaint alleges that the defendant Kessler was sent to Joplin, Missouri, by either Distilling or Spirits for the purposes of testing the whiskey inventories of Ozark and to report on their quality, and that Kessler submitted a favorable report.

Paragraph 21 alleges:

"21. Notwithstanding the desirability of the purchase of the business, assets and inventory of Ozark Mountain Distilling Co., the defendants Kessler, Siskind, Thomas S. Brown, Russell R. Brown, Buck, Cole, Nelson, Seymour, Millar and Michell, wrongfully, negligently, recklessly and wantonly, and in violation of their respective fiduciary obligations to the defendants Spirits and Distilling knowingly caused and permitted the defendants Kessler, Siskind, Cole and Rothberg, and one Herbig Younge, an attorney for Distilling to purchase the said Ozark Mountain Distilling Co. and thereby to appropriate to the said Kessler, Siskind, Cole, Rothberg and Younge the business opportunity which was available to and desirable for the defendants Distilling and Spirits, or either of them."

Paragraphs 22 and 23 allege that in making the purchase Siskind, Kessler, Cole, Rothberg and Younge acted in violation of their fiduciary duty as directors or officers or attorney to the defendants Distilling or Spirits or both, and that the said defendants have realized and continue to realize large profits from their purchase of Ozark Mountain Distilling Co. In paragraph 44 it is charged that the funds, credit, good will and trade connections of Distilling were made available to and were used by certain of the defendants in making and financing the Ozark purchase.

The Ben Burk, Inc., transaction.

Paragraphs 24 to 28 allege that in December 1942 the defendant Distilling purchased all of the stock of Ben Burk, Inc., for the purpose of obtaining large quantities of whiskey and other alcoholic liquors which Ben Burk, Inc., had in its inventories, as well as copyrights, trade marks, trade names and good will; that immediately thereafter Distilling disposed of the liquor inventory by declaring and paying out the entire liquor inventory in the form of dividends; that it was desirable and advantageous for Distilling to continue the business of Ben Burk, Inc., for its own benefit or to liquidate it for its own benefit; that notwithstanding that fact defendant Distilling sold a 49% interest in Ben Burk, Inc., to the defendants Kessler, Foster and Westerman as co-partners doing business as Foster & Company; and that as a result of said sale the purchasers profited to the extent of more than $200,000.

The Country Distillers Products, Inc., transaction.

Paragraphs 29 and 30 allege that in July 1943 the directors of Distilling and Spirits knew that a large majority stock interest in Country Distillers Products, Inc., was for sale and that the said purchase was extremely desirable and advantageous to either of said defendants, Distilling or Spirits, and that said corporations were offered an opportunity to purchase the stock. Paragraphs 31 to 34 contain the following allegations:

"31. The defendant Distilling entered into contractual arrangements for the purchase of the said stock interest of Country Distillers Products Inc., and paid on account in connection therewith the sum of $100,000, but notwithstanding the said contractual arrangements and the payment of $100,000, and the fact that the said purchase would be of great advantage and profit to the defendant Distilling or to defendant Spirits, the defendants Kessler, Siskind, Thomas S. Brown, Russell R. Brown, Cole, Nelson, Seymour, Millar and Michell wrongfully, negligently, recklessly and wantonly, and in violation of their respective fiduciary obligations to the defendants Distilling and Spirits, knowingly, caused and permitted the defendants Kessler, Foster and Westerman, comprising the partnership of Foster & Company, to purchase said stock interest in Country Distillers Products Inc., and thereby to appropriate to the said defendants Kessler, Foster and Westerman the valuable business opportunity represented by the said stock interest in Country Distillers Products, and to deprive Distilling and Spirits thereof.

32. In order to place the defendants Kessler, Foster and Westerman, as partners in Foster & Company, in funds for the purpose of acquiring the said capital stock of Country Distillers Products Co., the individual defendants Thomas S. Brown, Russell R. Brown, Buck, Cole, Nelson, Seymour, Millar and Michell, directors and officers of Distilling, caused the defendant Distilling to obtain from many of its customers payments to said Foster & Company in sums of money aggregating in excess of $10,000,000 as deposits or payments on account of future deliveries of whiskey from the inventory of said Country Distillers Products Co. Inc.

33. The defendant Russell R. Brown, as President of the defendant Distilling, communicated with Distilling's many customers for the purpose mentioned in the preceding paragraph hereof, and most of the said customers believed that they were dealing with the defendant Distilling.

34. The defendants Thomas S. Brown, Russell R. Brown, Buck, Cole, Nelson, Seymour, Millar and Michell, officers and directors of Distilling, further caused the defendant Distilling to enter into an agreement with the defendants Kessler, Foster and Westerman, as partners in Foster & Company, that Distilling would bottle the said whisky of Country Distillers Products, Inc. and would use trade names and labels of Distilling so that Foster & Company could make deliveries of said whisky to Distilling's customers.

Paragraph 35 alleges that the defendants Kessler, Westerman and Foster, comprising Foster & Company, realized several million dollars as profits from their transaction in Country Distillers Products, Inc., and that Spirits suffered a corresponding loss.

Contract between Distilling and Foster & Company.

It is alleged in paragraph 36 that in the early part of the year 1943 certain of the individual defendants who were directors and officers of Distilling caused Distilling to enter into a contract with Foster & Company, pursuant to which Distilling would blend and bottle liquors for Foster & Company and would place on the bottles certain labels and trade names formerly owned by Ben Burk, Inc., and other trade names and labels of Distilling, and that the said contracts were not negotiated at arms' length and were unfair and inequitable, improvident and wasteful to defendant Distilling.

The James J. Sullivan, Inc., transaction.

It is alleged in paragraphs 37 to 40 that the individual directors and other defendants, in violation of their fiduciary obligations to Distilling and Spirits, knowingly caused and permitted the defendants Kessler, Westerman and Foster, comprising Foster & Company, to purchase the stock, business, assets and inventory of James J. Sullivan, Inc., although said assets were available to and desirable as a purchase by Distilling or Spirits, and that as a result Foster & Company realized substantial profits and the defendants Distilling and Spirits suffered damage in the loss of prospective profits.

Paragraphs 43, 44 and 45 charge that the individual defendants and Foster & Company with knowledge of the various transactions and of the relationship between Kessler and the other individual defendants, and with having...