Champion Home Builders Co. v. Jeffress
| Decision Date | 26 November 1974 |
| Docket Number | Civ. A. No. 32106. |
| Citation | 385 F. Supp. 245 |
| Parties | CHAMPION HOME BUILDERS CO., a Michigan corporation, Plaintiff, Joseph L. Kramer and Beatrice F. Kramer, Intervenor-Plaintiffs, v. Etson B. JEFFRESS, Defendant. |
| Court | U.S. District Court — Western District of Michigan |
Oscar Markus, Troy, Mich., for plaintiff.
Pomerantz, Levy, Haudek & Block, New York City, Michael C. Kovaleski, Warren, Mich., for intervenor-plaintiffs.
Robert A. Jenkins, Detroit, Mich., James C. Sargent, Whitman & Ransom, New York City, for defendant.
The defendant, Etson B. Jeffress, has been held liable for short swing profits resulting from his sale of 25,000 (50,000 after a split) shares of stock in Champion Home Builders Company ("Champion") on September 12, 1968. He acquired the shares from Champion on April 17, 1968 in exchange for all the shares of Concord Mobile Homes, Inc., ("Concord") which he owned. The Court of Appeals, in Champion Home Builders Co. v. Jeffress, 490 F.2d 611 (6th Cir. 1974), held Jeffress was an insider pursuant to Section 16(b) of the Securities Exchange Act of 1934 and remanded the case to this court for a determination of the extent of his liability, including whether or not he could set off against the liability a claim against Champion for fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. He contends Champion violated the statute and rule by not disclosing, at the time of sale, that he would be required to give back to Champion any profit realized from any sale of his stock in Champion which he had not held for more than six (6) months after his purchase of the Champion stock on April 17, 1968.
There are two issues before the court:
On April 17, 1968, Jeffress acquired 105,000 shares of Champion stock in exchange for 100% interest in Concord, which he owned. This was a 13 1/8 % interest in Champion. Prior to sale, the Champion stock was split 2 for 1. Jeffress then sold within six (6) months after the April 17, 1968 purchase date (September 12, 1968), 25,000 of the original shares before the split (50,000 of the split shares) for $1,880,000 as a part of a public offering. This was 23.81% of the Champion stock he acquired on April 17, 1968. While he held the shares a dividend was declared on the 25,000 original Champion shares (50,000 split shares) amounting to $4,000.
To determine the profit on the September 12, 1968 sale, knowing the amount of Champion shares he received, it is necessary to determine the value of what he gave in exchange for the Champion shares sold on April 17, 1968. Blau v. Mission Corp., 212 F.2d 77, 81 (2d Cir. 1954); Park & Tilford v. Schulte, 160 F.2d 984 (2d Cir. 1947); Mueller v. Korholz, 449 F.2d 82 (7th Cir. 1971); Fistel v. Christman, 135 F. Supp. 830 (S.D.N.Y.1955); Allis-Chalmers Mfg. Co. v. Gulf & Western, 372 F.Supp. 570 (D.C.N.Ill.1974). Since the Champion shares sold on September 12, 1968 equalled 23.81% of the Champion shares acquired on April 17, 1968, and since the sole consideration for the Champion shares acquired on April 17, 1968 was 100% of the Concord shares, the profit on the September 12, 1968 sale will be $1,880,000, less 23.81% of the value of Concord as of April 17, 1968, the date of the acquisition.
Four distinguished financial analysts provided assistance to the court in determining the value of Concord on April 17, 1968:
All the experts agreed the use of book value or replacement value of the underlying assets of Concord are not accepted theories to measure the going concern value of Concord, which is what Jeffress gave up in his exchange of Concord for Champion stock on April 17, 1968. Although the experts offer the court a number of different methods for determining the value of Concord as a going concern they can generally be consolidated into three different approaches, each of which has a number of different procedures for determining value.
The three approaches and the different procedures used are:
The consensus of views of the financial analysts is that no one method can be used to determine the value of a closely held company and that many factors must be taken into consideration before the value of that company can be determined. All the experts, in one way or another, have injected their judgment, based on their experience, to soften or modify the formula they used to determine value. Since all but one of the financial analysts have used more than one methed of determining value, and have then averaged their several methods in one way or another, it seems appropriate for the court to approach the problem in the same way.
All the experts believe capitalization of earnings is an important and effective input to the process of value determination. They disagreed, however, on two important ingredients of the process:
A. The earnings to be capitalized. Some experts suggest the best method of estimating the earnings to be capitalized is to use the past earnings as a prediction of future earnings. On the other hand, other experts suggest that because the industry had turned around and was in a boom period on April 17, 1968, the estimate of next year's earnings should be used.
B. The capitalization factor. The mobile home industry had an average price/earnings capitalization factor of 33 or better on April 17, 1968. The Standard & Poors' and Dow Jones' general capitalization factor was 17 or 18. All of the experts, however, tended to take a conservative approach to capitalization by bringing the price/earnings multiplier to earnings down somewhere near or below the Standard & Poors' ratio for the industry as a whole. The various price/earnings ratios applicable to Concord, according to the expert witnesses, were 12 (Whitman), 15 (Bellemore), 15.62 (Hayes) and 18 (Swigert). These price/earnings ratios were largely determined on a judgmental basis by all of the experts after they took into account various factors such as: the relative size of Concord; the financial condition of Concord; the earnings history of Concord; the growth potential of Concord; the price/earnings ratios of companies comparable to Concord; the growth status of the mobile home industry at the time, and; the enthusiastic reception by market investors for mobile home stocks at the time. The conservative nature of the approach to capitalization by all the experts was based on Concord's weak capital position and its lack of adequate management.
The court feels only Professor Hayes provided a rational method to determine the factor by which the earnings of Concord should be capitalized in this case. Mr. Whitman seemed to arrive at his factor through his intuition and general expertise. Professor Bellemore used the Standard & Poors' and Dow Jones' indexes. Professor Hayes, on the other hand, provided a sophisticated analysis of how to reach a factor that would be supported in the market place. He selected other comparable firms in the mobile home industry which went public and issued stock at a time when adjustments could be made to relate to April 17, 1968. He found five such firms. He determined the market price of the newly offered shares after the market in each instance had been stabilized. He then determined the price/earnings ratio using this price and the last year's earnings. He adjusted the price/earnings ratio by multiplying it by the ratio of the Standard & Poors' mobile home builders price/earnings ratio index on April 17, 1968, and that same index for the date used as the basis for the stabilized value of each offering. He then averaged the five adjusted price/earnings ratios. This came to 15.62 which he applied to the Concord earnings ($293,021.77) for the year 1968, making a value of $4,577,000.
The Concord 1969 estimate of earnings of $500,000 is more than of passing interest in determining the value of Concord as of April 17, 1968. First of all, the experts indicate solid estimates of earnings provide a more accurate basis for capitalization than past history of earnings. They reason that the going concern value of a company at a given point in time depends on what the company will earn in the future. They are attempting to capitalize those future earnings. Past earnings are only used as one method of estimating possible future...
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...case are considered. Even when bad faith may have been absent, interest is still sometimes awarded. See Champion Home Builders Co. v. Jeffress, 385 F.Supp. 245, 250 (E.D.Mich.1974); Perfect Photo, Inc. v. Grabb, 205 F.Supp. 569, 573-74 (E.D.Pa.1962). See also Magida v. Continental Can Co., ......
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Riseman v. Orion Research, Inc., 84-1315
...circumstances of the case. Bad faith need not be shown. See Whittaker v. Whittaker Corp., 639 F.2d at 533; Champion Home Builders v. Jeffress, 385 F.Supp. 245, 250 (E.D.Mich.1974). Normally, interest accrues from the time of transactions. But where delay has occurred for which the insider w......
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