Brown v. Eastern States Corporation, 6029.
| Citation | 181 F.2d 26 |
| Decision Date | 04 April 1950 |
| Docket Number | No. 6029.,6029. |
| Parties | BROWN v. EASTERN STATES CORPORATION et al. |
| Court | United States Courts of Appeals. United States Court of Appeals (4th Circuit) |
Eugene M. Feinblatt, Baltimore, Md., and David I. Shivitz, New York City (Simon E. Sobeloff, Baltimore, Md., and Edmund
B. Hennefeld, New York City, on brief), for appellant.
Horace R. Lamb, New York City, and George Cochran Doub, Baltimore, Md. (Marshall, Carey, Doub & Mundy, Baltimore, Md., and LeBoeuf & Lamb, New York City, on brief), for appellees.
Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.
This is an appeal from an order denying an interlocutory injunction and dismissing a suit instituted by the holder of preferred and common stock of a corporation to enjoin the carrying out of a plan of corporate reorganization. The suit was instituted in a state court but was removed into the court below on the ground that it involved a federal question. The court declined to remand the case to the state court after the complaint had been amended to eliminate all reference to rights under federal statutes and, after an extended hearing, dissolved the temporary restraining order that had been issued by the state court and dismissed the suit as involving no question not decided in the denial of injunctive relief. See Brown v. Eastern States Corporation et al., D.C., 86 F.Supp. 887. A motion was made by the appellee in this court to dismiss the appeal as moot and was heard along with the hearing of the appeal on the merits.
The litigation arises out of an attempted reorganization of the Eastern States Corporation which was and is the largest stockholder of the St. Regis Paper Company, holding 1,000,000 shares of the common stock of that corporation at the time the plan was inaugurated. Eastern is an investment corporation registered under the Investment Company Act, its sole business being the holding of stock of other corporations. It had approximately 4,000 stockholders, who held 572,132 shares of non par common stock of a stated value of $1 per share, 40,000 shares of series A, $7 guaranteed dividend, preferred stock, and 60,000 shares of series B, $6 guaranteed dividend, preferred stock. The preferred stock had a liquidation preference of $10,000,000 plus accumulated dividends of $10,363,432, or a total of $20,363,432, which was entitled to payment ahead of common stock in case of liquidation. The assets of the corporation consisted of $457,000 in cash and the 1,000,000 shares of stock in the St. Regis Paper Company, which had a value of $6.75 per share or a total value of $6,750,000. The debts amounted to only $16,354. Upon a liquidation of the corporation in ordinary course, the common stock would have received nothing and the preferred stock would have received an average of $72 per share from the assets, as against an average of around $203 per share for which the preferred stockholders had a preferential claim.
The plan was approved by the directors of the corporation but was not submitted to or passed upon by the stockholders. It was submitted in a letter of the president, dated August 30, 1949, to the preferred stockholders and was in the form of a statement that the corporation would exchange its assets for shares of preferred stock, which would be retired by the corporation and the capital stock reduced accordingly. The proposal was that for each share of the $7 dividend series A preferred stock the corporation would exchange 9 shares of St. Regis stock (value $60.75) plus $4.79 in cash, and for each share of the $6 dividend series B preferred stock 8 1/3 shares of St. Regis stock and $4.79 in cash, or an average of around $62.62 for each share of preferred stock. The plan pointed out that, assuming that all preferred stockholders accepted the plan, 860,000 shares of stock and practically all of the cash of the corporation would go to the preferred stockholders, leaving 140,000 shares of the St. Regis stock, or approximately 13% of the assets of Eastern, for the common stockholders. The plan stated that Mr. Ferguson, the president, who was shown in the "letter of plan" to own 5,925 shares of preferred stock, had indicated that he would not tender his stock for exchange under the plan and, at another place that "if less than all of the outstanding shares of preferred stock are tendered for exchange, the liquidating value of unexchanged shares of preferred stock would be enhanced, and that the amount of the enhancement would increase in direct proportion to the number of shares of preferred stock that are tendered for exchange." It was nowhere specifically pointed out or suggested, however, that the effect of the other preferred stockholders exchanging their stock and Mr. Ferguson's not exchanging his would be to give him, as a preferred stockholder, a preference claim on practically all the assets of the corporation, leaving little or nothing for the common stock.
In justification of the provisions of the plan offering the preferred stockholders approximately $10 per share less than the asset value of their shares, there was evidence that the shares were selling for from 20% to 40% less than the underlying shares of St. Regis to which the shareholders would have been entitled upon liquidation of the corporation. This fact, however, would doubtless have caused most of the holders of preferred stock, if this litigation had not intervened, to have exchanged their shares as proposed by the plan, even though they were not to receive under it their fair pro-rata of the assets.
The plan provided that it must be accepted not later than September 30, 1949; and early in September plaintiff, an owner of preferred as well as common stock, instituted this suit in a Maryland state court alleging that the plan was unfair and fraudulent and violative of the corporation law of Maryland and of the provisions of the Federal Investment Company Act of 1940, 15 U.S.C.A. § 80a — 1 et seq. An interlocutory injunction was obtained from the state court when the suit was filed; but the case was promptly removed into the federal court on the ground that a federal question was involved, and motions were made, by the defendant to dissolve the injunction, and by the plaintiff to remand the case to the state court. Pending the hearing of these motions, plaintiff was granted leave to amend and filed an amended complaint making no reference to any rights under federal statutes. The judge below refused to remand the case to the state court and dissolved the injunction on September 26, 1949, on the ground that the plan was not fraudulent or violative of the corporation law of Maryland. Between September 26 and September 30, there were 27,464 shares of preferred stock exchanged pursuant to the provisions of the plan. Following this, motion was made by defendants to dismiss the suit; and this motion was granted by the...
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