Bailey v. Meister Brau, Inc.

• Decision Date: 27 September 1973
• Docket Number: 71 C 114.,No. 69 C 1938,69 C 1938
• Citation: 378 F. Supp. 869
• Parties: Thomas B. BAILEY, Plaintiff, v. MEISTER BRAU, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

378 F. Supp. 869

Thomas B. BAILEY, Plaintiff, v. MEISTER BRAU, INC., et al., Defendants.

Nos. 69 C 1938, 71 C 114.

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

September 27, 1973.

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Donald Page Moore, Arthur W. Hahn, Pope, Ballard, Shepard & Fowle, Chicago, Ill., for plaintiff.

George W. Hamman, Mayer, Brown & Platt, Roger Pascal, Schiff, Hardin & Waite, Richard Mueller, Lord, Bissell & Brook, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

McLAREN, District Judge.

This cause was tried to the Court without a jury. The following opinion shall constitute the Court's findings of fact and conclusions of law for the purposes of Fed.R.Civ.P. 52(a).

Background

From 1953 to 1962, plaintiff Thomas B. Bailey ("Bailey") worked for J. L. Read Foods, Inc. ("Read") in Streator, Illinois. In April 1962, the James H. Black Company ("Black Company") acquired Read's Streator plant and hired Bailey as chief operating officer. Bailey was then elected president, treasurer, and a director of the company. Over the years, James H. Black, Sr. ("Black Senior"), the majority shareholder of the company, sold a total of 3000 of his shares to Bailey, and the Black Company granted him options to purchase an additional 15,000 shares.

In July 1966 Bailey entered into a new employment agreement which provided, inter alia, for:

(a) employment by the Black Company for a term of fifteen years (except in the event of the sale of the company, in which event the term was to have been five years);

(b) compensation of not less than $3000 per year plus an annual bonus computed at 7½% on the first $200,000 of the company's net profit before federal taxes on income, an additional 5% similarly computed on the next $400,000 of net profit, an additional 2½% similarly computed on the next $400,000 of net profit; and

(c) retirement payments of $15,000 per year for life upon completion of the fifteen year term of the contract.

The agreement, which was signed by Black Senior as chairman of the board of the Black Company, also included the following provision:

"The sellers of the majority of the shares of the common stock of the company (whether Black or his estate or heirs) shall give to Bailey a sixty (60) day right of first refusal to meet any offer to purchase such shares. Notice to Bailey shall be in writing, postage prepaid, certified or registered mail and shall contain a bona fide copy of the offer which must be in writing."

The agreement was drafted by defendant Robert S. Foster ("Foster"), an attorney, at the direction of Black Senior. Foster had served since April 1962 as legal counsel, secretary, and a director of the Black Company.

Upon Black Senior's death in October 1968, defendant Continental Illinois National Bank and Trust Co. ("Bank") of Chicago qualified as executor of his estate and Foster was appointed as attorney for the estate and investment advisor to the executor. It was soon determined that the estate, with Black Company stock as practically its only asset, had a liquidity problem and that the stock should therefore be sold.¹ After obtaining a waiver by defendant James H. Black, Jr. ("Black Junior") of his right under his father's will and codicil to operate the company, prospective purchasers were sought. A series of meetings beginning late in 1968 between Bailey, Foster, defendant Robert G. Mullen ("Mullen"), an officer in the Bank's estate administration department, and other Bank employees culminated in Bailey's offer in March 1969 to purchase the estate's shares and those of the only other shareholder, Mrs. Harre. While the amount of the offer was within the range which the Bank had computed, both the Bank and Foster felt that the terms for its financing were not in the best interest of the estate and rejected it.

Foster contacted several other prospective purchasers, but his efforts were unsuccessful until the president of Meister Brau, Inc. ("Meister Brau")² made an offer on April 11, 1969 of $950,000 for the shares of the estate and Mrs. Harre. A few days later, a Bank employee sent Bailey a copy of the offer. On April 30, the Meister Brau board of directors ratified the offer and resolved that it would remain open until July 8. On May 6, Foster sent Bailey a copy of part of the minutes of the Meister Brau board meeting by registered mail. Bailey's attorney notified Mullen and Foster, by a letter dated May 8, 1969, that Bailey would notify them within the period provided in his employment agreement that he would meet the terms of the Meister Brau offer. Neither Foster nor Mullen advised anyone else connected with the transaction of their receipt of this letter.

At the annual Black Company shareholders' meeting on May 16, Foster, defendant Charles E. Schaeffer, a trust officer of the Bank, defendant Mrs. Black (Black Senior's widow), Black Junior, Mrs. Harre, and defendant Ronald T. Cappadocia ("Cappadocia"), a senior vice president of Meister Brau, were elected to the board of directors, with the Bank voting the estate's shares for that slate at Foster's direction. Bailey was not reelected to the board. Immediately after the shareholders' meeting, the new board:

(1) elected Cappadocia as its chairman;

(2) appointed Cappadocia as president and Bernard M. Berry,³ the Black Company comptroller, as treasurer, and removed Bailey from these positions; and

(3) reduced Bailey's salary by $5000 per year (to the contract minimum of $30,000) retroactive to March 1, 1969.

On May 28, Meister Brau offered to indemnify the estate, the Bank, Mr. and Mrs. Harre, Foster, and Schaeffer against liability to Bailey if they would accelerate the closing date to June 6.

On June 6, without notice to Bailey, the following transactions took place:

(1) Meister Brau's offer of indemnification was accepted;

(2) the Black Company board caused the transfer of all of the company's assets to the Black Products Company of Delaware, Inc. ("Black Products") in exchange for all of the stock of Black Products;

(3) the Bank and Mrs. Harre as majority stockholders and the Black Company board caused the transfer of all of the Black Products stock to Meister Brau in exchange for 70,000 shares of unregistered (with the Securities and Exchange Commission) Meister Brau stock;

(4) Meister Brau purchased all of the Black Company stock held by Mrs. Harre and the estate for $950,000 (5) the Black Company, by Cappadocia, its president, agreed to indemnify Meister Brau for liability and loss arising from the acquisition of the Black shares; and

(6) Meister Brau promised that it would not sell, pledge or mortgage any of the Black Company's assets (which now consisted solely of Meister Brau Stock) without the consent of the Bank as long as it remained indebted to the Bank as executor on the note it gave in partial payment of the purchase price of the estate's Black Company stock.

After these transactions were concluded, Cappadocia, as president of the Black Company, handed Bailey a letter discharging him "for cause."

On June 9, Bailey signed and caused his attorney to deliver to the Bank a letter stating that he had elected to meet all the terms and considerations of the Meister Brau offer and was prepared to do so. He also caused his attorney to tender to the Bank a cashiers check payable to it in the amount of $25,000. Muller advised the attorney that the estate had sold its stock to Meister Brau, but refused to discuss with him the terms of the sale. By a letter dated June 12, Meister Brau offered to sell its Black Company stock to Bailey for $950,000 in cash, but advised him that the Black Company's only assets were Meister Brau stock and any residual rights it might have in his employment agreement.

The foregoing is of course not an exhaustive statement of all of the relevant facts brought out at trial. Other findings will be made as necessary in the sections below which deal specifically with liability and damage under each count.

Counts I and II Liability

These counts allege that defendants conspired with Meister Brau, Cappadocia, Berry and the Harres to defraud the Black Company and Bailey, in violation of Rule 10b-5,⁴ by exchanging Black's assets for Meister Brau stock worth less than half the value of the assets (the "assets transfer"). Count I is a derivative action on behalf of the Black Company and Count II claims damages for Bailey individually.

Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Penn Mart Realty Co. v. Becker, 300 F.Supp. 731 (S.D.N. Y.1969), and Continental Bank & Trust Co. v. Garfinkle, 292 F.Supp. 709 (S.D. N.Y.1968), which Judge McGarr relied upon in holding that Count I stated a claim, Bailey v. Meister Brau, Inc., 320 F.Supp. 539, 542-543 (N.D.Ill.1970), teach that if the controlling shareholder or directors of a corporation cause the corporation to participate in a securities transaction in which they have a conflict of interest without disclosing to the other shareholders information in their possession which reflects upon the fairness of the transaction, their acts constitute a violation of Rule 10b-5.

Each of the defendants owed a fiduciary duty to the Black Company. The Bank, by its employees and officers, acted as its controlling shareholder; the rest of the defendants were directors. All of the defendants, because of their interest in seeing Meister Brau purchase the estate's shares, had a conflict of interest in the related transfer of the company's assets. The transfer was viewed as nothing more than an accommodation to Meister Brau. The few defendants who even considered the value of the Meister Brau stock performed nothing more than a cursory investigation of it. Had those defendants with sufficient business backgrounds and understanding of the transactions of June 6 considered the asset transfer from the standpoint of the ...