Austrian v. Williams

• Citation: 103 F. Supp. 64
• Parties: AUSTRIAN et al. v. WILLIAMS et al.
• Decision Date: 05 March 1952
• Court: U.S. District Court — Southern District of New York

103 F. Supp. 64

AUSTRIAN et al. v. WILLIAMS et al.

United States District Court S. D. N. Y.

January 10, 1952.

Supplemental Opinion March 5, 1952.

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Austrian & Lance, New York City (Carl J. Austrian, Saul J. Lance, George H. Schwartz, and Isadore H. Cohen, all of New York City, of counsel), for plaintiffs.

Milton Pollack and Sullivan & Cromwell, all of New York City (Milton Pollack, Arthur H. Dean, and Henry N. Ess, III, all of New York City, of counsel), for defendants Williams, Stone, Finney, Philipp and Pardee.

Sullivan & Cromwell, New York City (Edward H. Green, Arthur H. Dean, Milton Pollack, and Henry N. Ess, III, all of New York City, of counsel), for defendants Catchings, Dulles, Weinberg, Sachs and Bowers.

William Power Maloney, New York City (William P. Maloney, I. Alfred Levy, Bernard Weiss, and Max Dorff, all of New York City, of counsel), for defendants Niven, Mendes, Clowes, Wagner, Sr., Brown, Bechert, and Friedman.

LeBoeuf & Lamb, New York City (Horace R. Lamb, Craigh Leonard, and William H. Campbell, all of New York City, of counsel), for defendants Fogarty and Freeman.

Murray D. Welch, New York City (Murray D. Welch, Murray D. Welch, Jr., New York City, of counsel), for defendants McCornack, Johnson and Eccles.

McGuigan & Kilcullen, New York City (E. Gayle McGuigan, New York City, of counsel), for defendant Baker.

Markle & Pasternak, New York City (Harry J. Pasternak, New York City, of counsel), for defendant Jonas.

Cahill, Gordon, Zachry & Reindel, New York City (John T. Cahill, Charles F. Detmar, Jr. and Harold S. Glendening, all of New York, of counsel), for defendant Dillon.

Louis E. Kilmarx, pro se.

Roger S. Foster, General Counsel, and Aaron Levy, Washington, D. C., for Securities and Exchange Commission, amicus curiae.

WEINFELD, District Judge^*.

This case involves the affairs of Central States Electric Corporation, an investment company organized under the laws of Virginia, with its principal place of business in Richmond, Virginia. On February 23, 1942, the Corporation filed in the United States District Court for the Eastern District of Virginia a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., which was approved on February 27th, 1942. Messrs. Kent and Wilkinson were appointed trustees and when the latter resigned he was succeeded by Dennis.

Dennis and Kent conducted an investigation under Section 167 of the Bankruptcy Act and filed a report recommending that no suits be instituted against the officers, directors and the principal stockholder of Central States. The recommendation was approved by the District Court but upon appeal, the Court of Appeals, Fourth Circuit, reversed and directed a further investigation by disinterested trustees.¹ Thereafter, plaintiff Austrian was appointed a third trustee on November 15th, 1944. Messrs. Kent and Dennis resigned in March 1945 and the plaintiff Butcher was appointed as trustee. Austrian and Butcher have since acted as trustees. Following further investigation by them, under Section 167 of the Bankruptcy Act, Austrian and Butcher recommended that the present suit be filed and an order was entered by the District Court of Virginia authorizing them to bring this action. This suit was commenced on July 5th, 1945. Jurisdiction was sustained.²

The broad charge made by the plaintiffs is that beginning in 1922 and continuing to the filing of the petition in reorganization in 1942, Harrison Williams, the majority stockholder of Central States, in collaboration with various defendants, engaged in a continuing plan to overreach and loot Central States. Conspiracy charges are included.

Plaintiffs attack a series of transactions as wrongs committed upon Central States by Williams and the defendants or some of them, charging that they overreached Central States in these transactions, converted, wasted, destroyed and wrongfully misappropriated and disposed of its assets, were guilty of breaches of trust, and grossly mismanaged its affairs.

The defendants fall into four categories: (1) Harrison Williams, principal and controlling stockholder of Central States, but not an officer or a director after 1922; (2) directors of Central States and of Williams' wholly owned companies who passed upon, or participated in, the transactions under attack; (3) directors or partners of other parties to the transactions who were not directors of Central States; and, (4) members of the debtor's accounting firm. Not all of the defendants are charged with dereliction in all of the transactions; some are involved in only one; others, in a number; the defendant Kilmarx in all but one; and Harrison Williams, in all.

To support the charges of misconduct, the plaintiffs set forth in their complaint thirteen transactions, "A" to "M" inclusive. In the "M" transaction they contend that Williams and a number of other defendants deliberately and fraudulently concealed and kept concealed the damaging facts of transactions "A" to "L" and so conducted themselves as to toll any applicable statute of limitations. At the end of the trial, transactions "F," "G" and "H" were dismissed for lack of proof.³

In addition to a denial of the charges, the principal defense is a plea of the statute of limitations.

One of the transactions under attack took place in March 1922, the second in 1927, all others except one in 1929, and one in 1938. Thus, the events under attack cover a span of sixteen years, making it desirable to review in broad outline Central States' history during that period.

Central States is an investment company whose holdings consisted primarily of stocks in public utility holding companies, which, in turn, held stock in both utility holding and operating companies. Its history falls roughly into four phases. The first began with its organization in 1912, when it acquired the majority of the stock of Cleveland Electric Illuminating Company, an operating utility company. It entered its second phase in 1922, when it relinquished its holdings in the Cleveland Electric Illuminating Company and acquired an interest in the North American Company, then engaged principally in investing in securities of public utility holding and operating companies.

During this second phase of Central States' history, which continued until late 1928, its principal interest was the investment in the North American Company of which it was the largest single stockholder. By August 1929, Central States owned directly 839,668 shares of North American common stock, 15% of the outstanding common stock, and an additional 10% indirect interest through other companies.

Central States' third phase, which began about September 1928, and continued until the late 1929 market crash, witnessed an era of expansion and of high optimism about electric utilities and their future. Central States increased its capital in September 1928 and again in June of 1929 by the sale of two series of convertible preferred stock.

During this third phase of its existence, Central States participated in the formation of affiliated and subsidiary corporations. These corporations, largely utility holding companies, although some held industrial securities as well, included American Cities Power and Light Corporation formed in October 1928; Electric Shareholdings Corporation organized in March 1929; Shenandoah Corporation formed in July 1929; and Blue Ridge Corporation formed in August 1929. The capital structure of these corporations consisted of preferred as well as common stock. Central States' investments in these corporations were principally in the common stock, following the pattern of what has been referred to as "leverage," which gives the equity owner the full benefit of increases in values but which operates adversely when the market goes down.⁴ The leverage element with its potentiality for rapid gain during a rising market placed these common stocks in great demand during 1928 and 1929. During this period Central States' investments reached aggregate market values approximating $400,000,000.

After the break in the market in 1929, the market value of the securities held by Central States diminished severely and Central States entered the fourth phase of its history. Its principal investments then were in North American Company, American Cities, Electric Shareholdings, Shenandoah and Blue Ridge. During the 1930s it disposed of a large part of its holdings in North American and in Electric Shareholdings, its entire interest in Shenandoah, and increased in 1938 its interest in, and acquired a majority of, Blue Ridge common stock. When Central States' petition for reorganization was filed in 1942, the market value of its assets had declined from a high of approximately $400,000,000 in 1929 to $1,300,000.

Harrison Williams and Other Directors and Officers of Central States

Harrison Williams, the principal defendant in this action, had organized Central States in 1912 and throughout its history and up to the filing of the petition in reorganization, was intimately associated with the conduct of its affairs and the affairs of its affiliated corporations, and the top personnel of all of them.

Williams' activity in public utilities began in 1906, when he participated in the organization of the American Gas & Electric Company. Later, he was instrumental in the formation of other light and power companies. He was generally regarded as a person of dominance and prestige in the public utility field, and was credited with the growth and development of the North American Company.

Williams invested in the North American Company shortly after the first World War and was Chairman of its Board of Directors from 1920 to March 24th, 1922, when he resigned. He returned as Chairman of the Board in 1933, and holds that position today.

From March 24th, 1922 to 1942,...