Coffee v. Permian Corporation
| Decision Date | 09 December 1969 |
| Docket Number | Civ. A. No. 5-642. |
| Parties | Charles Wendell COFFEE, Plaintiff, v. PERMIAN CORPORATION, W. R. Davis, A. L. Bennett, C. R. Herpick, Earl Layman, and Walter K. Boyd, Jr., Defendants. |
| Court | U.S. District Court — Northern District of Texas |
Charles E. Galey, Lubbock, Tex., for plaintiff.
W. B. Browder, Jr., Gene L. Jameson, Midland, Tex., for defendants.
Plaintiff, Coffee, brings this action for damages against the Defendants for the violation of the Security Laws of 1934, 15 U.S.C. § 78a et seq. and Rule X-10b-5 of the Securities and Exchange Commission. The fact allegations of Plaintiff's complaint are, briefly, as follows:
A. Plaintiff is a minority stockholder of the J. B. Knight Company, Inc. (Knight Co.).
B. In 1965 the Defendant, Permian Corporation, acquired 50 per cent of the authorized stock of the Knight Co. Shortly thereafter, the Defendant Permian made a dominating loan agreement with the Knight Co. and gained control of its affairs. In 1966, all of the Defendants manipulated the affairs of the Knight Co. and caused Knight Co. to assume payment of improper charges which were the debts of the Defendant, Permian Corporation.
C. The J. B. Knight family originally owned in excess of 40 per cent of the outstanding stock of the Knight Co. It is alleged that in 1966 the Defendants forced this family to sell most of their stock back to the Knight Co. as treasury stock, that the Knight Co. issued its promissory note in payment of such stock, and that the Knight family stock thereby became treasury stock of the Knight Co.
D. The purchase of this treasury stock by the Knight Co. gave the Defendant, Permian Corporation, an 80 per cent interest in the Knight Co.
E. Plaintiff contends that certain financial manipulations by the Defendants, including the liquidation of the assets of the Knight Co., caused damages to him as a minority stockholder. Also, Plaintiff contends that Defendants accomplished their manipulations, at least in part, by using the United States mails and other instruments of interstate commerce.
The Defendants have filed their motion to dismiss Plaintiff's complaint, contending that the above facts do not give this Court jurisdiction under Section 78j of Title 15 U.S.C. or under Rule 10b-5 of the Securities and Exchange Commission. Section 78j provides in part:
Rule 10b-5 of the Commission, 17 C.F.R. § 240.10b-5 (1964), provides:
The Defendants, citing Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2nd Cir. 1951), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), argue that no violation of federal law has occurred because the facts which Plaintiff has alleged do not establish that Plaintiff participated in a purchase or sale of any security.
Plaintiff opposes the motion to dismiss and cites the following which he contends would give this Court jurisdiction:
The Court has considered the pleadings, the briefs of the parties and oral argument of counsel which was heard on the 13th day of November, 1969. The briefs and oral argument were directed primarily to Plaintiff's second contention and the Court will consider it first.
While Defendants rely on Birnbaum v. Newport Steel Corp., supra, to support their motion, Plaintiff urges that the Birnbaum case has been significantly eroded by subsequent decisions. In fact, Plaintiff asserts that more recent holdings, in particular Vine v. Beneficial Finance Company, 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967), give substance to his claim that this Court has jurisdiction. In the Vine case, which has been recently cited with approval by the Supreme Court in Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453, 468, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), corporation A, which owned 95 per cent of the total outstanding shares of corporation B, merged B into A in accordance with a procedure labeled "short form merger." After the merger, the remaining five per cent stockholders in B had the opportunity of obtaining the fair value of their shares or of continuing to hold certificates of ownership in a non-existent corporation. One of the remaining shareholders instituted action under the Security Laws and the Second Circuit found that he had standing to sue under Rule 10b-5 because his stock, in effect, had been involuntarily converted into a claim for cash and he had consequently become a party to a sale at the time of the merger. In the present case, Plaintiff argues that this very situation has occurred. His rationale is presented in the following manner: that Plaintiff had no options other than to dissent from the corporate action in liquidating and selling the corporate assets under the provisions of the Texas Business Corporation Act, Article 5.11, V.A.T.S., and then to surrender his shares in exchange for fair value under Article 5.12 of the Act; that he was deprived of this right to dissent to the liquidation because no shareholders' meeting as required by Article 5.10 was or has ever been called; and consequently that his only right is to hold his shares until the insiders tell him if any cash or assets are available for distribution to the shareholders. Under these circumstances, Plaintiff urges that a sale similar to the one found in Vine v. Beneficial Finance Co., supra, is present in this case.
Although the Court recognizes the holding of the Vine decision, the Court is not of the opinion that Vine controls the situation in the present case because here, since the officers and directors of the Knight Co. have taken no statutory action to dissolve, liquidate, or merge the company, Plaintiff has no right to demand value for his shares. Plaintiff is unlike the shareholder in Vine who had his shares involuntarily converted into a claim for cash by the statutory merger of the corporations. Here, Plaintiff still owns shares in a corporation that continues to operate even though its assets are in the process of being sold. It is not alleged that Knight Co. or any of its officers have followed any of the procedures under the Texas Business Corporation Act, to merge, liquidate or dissolve the Knight Co. The lack of any acts following statutory procedures to liquidate, dissolve or merge the Knight Co. distinguishes this case from Vine. However, under state law, Plaintiff is not without remedy. For example, under Article 7.05, a shareholder such as Plaintiff can bring action in a state court to have a receiver appointed for the assets and business of a corporation when it appears that the acts of the directors or those in control are illegal, oppressive or fraudulent. Therefore, although Plaintiff has standing to sue in the state courts, he has failed to establish standing to sue in this Court on the theory that an involuntary conversion of his stock has occurred to make him a seller.
Plaintiff, asserting another argument to establish standing to sue, contends he was an indirect or involuntary purchaser. His percentage of the ownership in the outstanding stock of the Knight Co. increased as a result of the purchase by Knight Co. of the stock of the J. B. Knight family; consequently, he indirectly became a purchaser of securities. In dictum, the Court of the Southern District of New York in Hoover v. Allen, 241 F.Supp. 213 (S.D.N.Y.1965) indicated that such facts do not constitute a purchase or sale. In that case, a corporation bought back some of its outstanding stock and, as a result of the purchase, defendant insiders acquired control. Minority stockholders subsequently instituted a derivative action. A question of standing to sue was raised and the Court said, at page 228:
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