Connelly v. Balkwill

• Decision Date: 08 April 1959
• Docket Number: Civ. A. in Equity No. 31717.
• Citation: 174 F. Supp. 49
• Parties: Lawrence E. CONNELLY, Trustee of the Estate of George C. Lucas, deceased, Ralph Restow and Irma Taylor, Co-Guardians of the Estate of Jessie Albracht, Frank L. Taylor, Trustee of the Trust created by Beatrice B. Fishley, deceased, Ann McConnell, Stephen Ward Balkwill, Plaintiffs, v. George W. BALKWILL, Gen Corporation, Pettibone-Mulliken Corporation, Cleveland Frog and Crossing Co., William V. Brooks, Defendants.
• Court: U.S. District Court — Northern District of Ohio

174 F. Supp. 49

Lawrence E. CONNELLY, Trustee of the Estate of George C. Lucas, deceased, Ralph Restow and Irma Taylor, Co-Guardians of the Estate of Jessie Albracht, Frank L. Taylor, Trustee of the Trust created by Beatrice B. Fishley, deceased, Ann McConnell, Stephen Ward Balkwill, Plaintiffs, v. George W. BALKWILL, Gen Corporation, Pettibone-Mulliken Corporation, Cleveland Frog and Crossing Co., William V. Brooks, Defendants.

Civ. A. in Equity No. 31717.

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

April 8, 1959.

COPYRIGHT MATERIAL OMITTED

Spieth, Spring & Bell, Cleveland, Ohio, for plaintiffs.

Charles D. Johnson, of Baker, Hostetler & Patterson, Cleveland, Ohio, Cummings & Wyman, Chicago, Ill., for defendants.

McNAMEE, District Judge.

Defendants' motion for summary judgment is based upon the contention that this action is barred upon one or more of the following grounds: (1) the statute of limitations; (2) res judicata; and (3) collateral estoppel.

As indicated by the second and third grounds of the motion, this is the second action growing out of the same transaction. The first action was commenced in the Common Pleas Court of Lake County, Ohio, in November 1950 against the defendants George W. Balkwill and the GEN Corporation and resulted in a judgment for the defendants which upon a trial de novo was affirmed by the Court of Appeals of the 7th Ohio Appellate District. The Supreme Court of Ohio overruled a motion to certify the record. The action in this Court was commenced on April 8, 1955.

On July 20, 1950, and for several years prior thereto, the five plaintiffs, or the persons for whom they are acting in representative capacities, and the defendant George W. Balkwill were the owners of all of the shares of stock of The Cleveland Frog & Crossing Company, an Ohio corporation. At that time there were 5,000 shares outstanding. Plaintiff Connelly, trustee, was the owner of 2,800 shares, plaintiffs Ann McConnell and Stephen Ward Balkwill were the owners of 366 2/3 shares and 183 1/3 shares, respectively. Plaintiffs Ralph Restow and Irma Taylor, as co-guardians, represent the interest of the estate of Jessie Albracht, who owned 550 shares. Conrad Albracht, trustee, since deceased was the owner of 550 shares. Frank L. Taylor is the successor trustee of the interest formerly held by Conrad Albracht. Defendant George W. Balkwill was the owner of 550 shares.

This action is brought under favor of Section 10 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j and Rule X 10b-5 of the Securities and Exchange Commission.

The complaint avers that during July 1950 defendants Balkwill, Pettibone-Mulliken and Brooks conspired to violate Section 10(b) of the Securities Exchange Act and Rule X10b-5 of the Securities and Exchange Commission by inducing plaintiffs to sell the shares of stock owned by them in The Cleveland Frog & Crossing Company (sometimes hereinafter referred to as the Frog Company) by the use of the mails, telephone and instrumentalities of interstate commerce, and upon false and fraudulent representations; by employing devices, schemes and artifices to defraud; by making untrue statements of material facts and by omitting to state to plaintiffs material facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. The complaint sets forth the various alleged acts of misrepresentation, concealment and non-disclosure which need not be repeated here. It is alleged further that relying upon the statements and conduct of the alleged conspirators plaintiffs entered into an agreement under date of July 20, 1950 to sell their shares to defendant Brooks, who was acting for an undisclosed purchaser, for the sum of $232.14 per share; that defendant Balkwill also agreed to sell his shares; that on July 20th plaintiffs and defendant Balkwill delivered their certificates for the shares and the resignations of the officers and directors of the company, including that of defendant Balkwill, to the Union Bank of Commerce as Escrow Agent; that subsequent to August 1, 1950 plaintiffs received the sale price of $232.14 per share, or a total of $1,033,031. Plaintiffs allege further that in July 1950 defendant Balkwill entered into a secret agreement with Brooks and Pettibone-Mulliken that his shares would not be sold but would be returned to him and that plaintiffs' shares would be purchased and retired as treasury shares of the Frog Company, thus making defendant Balkwill sole owner of the company.

Plaintiffs allege further that Balkwill's shares were returned to him; that plaintiffs' shares were retired as treasury shares of the company and that Balkwill, as the sole stockholder of The Cleveland Frog & Crossing Company, sold and leased certain of its assets to Pettibone-Mulliken and realized a large undisclosed profit. Plaintiffs pray for an accounting and other relief.

In their answers the defendants so charged deny the allegations of fraud, misrepresentation, concealment, non-disclosure of material facts and allegations of conspiracy. The answers of the defendants refer in detail to the findings, conclusions and proceedings in the prior state court action which constitute the bases of the defenses of res judicata and collateral estoppel and also assert that plaintiffs have failed to state a claim upon which relief may be granted. By way of further defense defendants assert that this action is barred by the statute of limitations. Except for the addition of parties defendant, the allegations of conspiracy, allegations relevant to this Court's jurisdiction and the applicability of Section 10(b) and Rule X 10b-5, this action is in all other respects essentially the same as the former action in the state court.

In support of their motion for summary judgment defendants submit a lengthy affidavit of Attorney Charles D. Johnson to which there is annexed numerous and extensive exhibits relating to the state court action in both the Common Pleas Court and the Court of Appeals. In opposition, plaintiffs submit the affidavit of Attorney Harold K. Bell, together with exhibits attached thereto. The record discloses that in the former action the Common Pleas judge wrote an opinion, filed extensive findings of fact and conclusions of law and in addition answered in writing numerous interrogatories propounded by plaintiffs. The Court of Appeals also made findings of fact and submitted conclusions of law but wrote no opinion. As indicated above, the Supreme Court of Ohio overruled plaintiffs' motion to certify the record.

The record on the motion discloses the following evidentiary facts. Early in 1950, at the instance of Balkwill and with the assent of plaintiffs, efforts were made to secure a purchaser for the shares of stock in the Frog Company. On June 28, 1950 defendant Brooks, an attorney from Chicago, Illinois, submitted a written proposal on behalf of The Mount Carmel Foundation of that city in the form of an offer to purchase all of the shares upon a deferred payment basis. At that time plaintiff Connelly offered to sell the 2,800 shares of the Lucas Estate for $650,000, payable in cash, if the other shareholders would accept deferred payments for their shares. However, the other shareholders except defendant Balkwill also demanded payment in cash, which the Foundation was unable to make. As a result no sale was consummated. On July 14, 1950 Earl Jones, defendant Balkwill's son-in-law, after conferring with Brooks, initiated negotiations with Pettibone-Mulliken, a competitor of the Frog Company, with a view to selling all the shares in the latter company to the former. Negotiations were continued at several meetings between July 14, 1950 and July 17, 1950. Present at these meetings were Jones and Brooks and Seifert and Cummings, officials of Pettibone-Mulliken. On July 17, 1950 Brooks, Seifert and Cummings came to Cleveland and conferred with defendant Balkwill at his home. On that occasion Seifert and Cummings indicated that Pettibone-Mulliken was not interested in purchasing the shareholders' interests because of possible contingent liabilities but expressed a willingness to purchase and lease assets of the Frog Company. A proposal was made that Pettibone-Mulliken purchase the inventory of the Frog Company at its book value of $450,000 payable in cash, buy the machinery and equipment for $400,000, payable $25,000 a year without interest, and lease the Frog Company's building at an annual rental of $75,000, the lessee to bear the cost of maintenance and repairs. While at Balkwill's home Seifert telephoned the Continental Bank of Chicago and arranged to have $25,000 placed in escrow as earnest money at the Union Bank of Commerce, Cleveland, Ohio. It was agreed that Brooks was to arrange to get all of the stock in escrow. An understanding was reached between the parties at the meeting that the discussion relative to the sale of assets to Pettibone-Mulliken was to be kept secret. Meanwhile Brooks had arranged through L. C. Speith, General Counsel for the Frog Company, for a meeting of the shareholders on July 18, 1950 to consider a proposal to buy their stock for cash. Accordingly on July 18, 1950 all of the shareholders and Speith met with Brooks and executed an escrow agreement dated July 20, 1950 which provided for the sale of the shares to Brooks at $232.14 per share payable in cash. The agreement specifically provided that the entire 5,000 shares would be purchased if the amount deposited in escrow amounted to $1,160,700 but if the total amount deposited was $1,033,031 the shares of defendant Balkwill would be returned to him. At the meeting of July 18th no reference was made by defendant Balkwill or Brooks to the discussion of the previous day relative to the sale of assets to Pettibone-Mulliken. Thereafter on July 21st, after all the shares had been deposited in escrow, Brooks, Pettibone-Mulliken and defendant Balkwill entered into a...