Foltz v. US News & World Report, Inc.
| Decision Date | 28 March 1985 |
| Docket Number | Civ. A. No. 84-0447. |
| Citation | 608 F. Supp. 1332 |
| Parties | Charles S. FOLTZ, et al., Plaintiffs, v. U.S. NEWS & WORLD REPORT, INC., et al., Defendants. |
| Court | U.S. District Court — District of Columbia |
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Alan Raywid, John D. Seiver, Susan P. Baxter, Cole, Raywid & Braverman, Washington, D.C., for plaintiffs Foltz, Handleman, Price, Williamson.
Richard J. Leighton, Avis Black, Washington, D.C., for Save the Fund.
Leslie A. Nicholson, Jr., Hannah E.M. Lieberman, Washington, D.C., for defendants U.S. News, Madana Realty.
Lawrence Latto, William Galeota, Julie Melamud, Shea & Gardner, Washington, D.C., for Profit-Sharing Plan.
Richard J. Wertheimer, Hadrian Katz, Edward Wolf, Washington, D.C., for defendants Sweet, Stone, Dunn, Keker.
Willis B. Snell, Willard K. Tom, Steuart H. Thomsen, Washington, D.C., for defendant The American Appraisal Co.
This class action litigation arises from the sale of the defendant U.S. News and World Report, Inc. ("U.S. News") in October of 1984. The shareholders of this employee-owned company realized $176 million from the sale in return for their interests in the company. The $176 million sales price represented a value approximating $3,000 per share of the company's outstanding stock. At the time of the sale, the employee-shareholders, including the individual defendants in this proceeding, liquidated their interests in U.S. News at this value.
The plaintiffs in this class action represent all former employee-shareholders of U.S. News who retired or otherwise terminated their employment between 1974 and 1981. When they left the employ of the company, these individuals liquidated their stock and profit-sharing interests in U.S. News at values established by annual appraisals conducted by defendant American Appraisal Associates, Inc. ("American Appraisal"). The plaintiffs assert that those appraisals were flawed, improperly developed and not in accordance with accepted procedures, which resulted in gross deficiencies in the amounts they received for their interests in the corporation. They also allege that the present employees who received the sale proceeds benefited from the undervaluation during the 1974-1981 class period.
The defendants are U.S. News and its wholly-owned subsidiary, Madana Realty, American Appraisal, and the Profit-Sharing Plan of U.S. News ("Plan"), an employee benefit plan whose members are current and recently retired employees of U.S. News. Eight individuals have also been named as defendants — John Sweet, Marvin Stone, William Dunn, Samuel Keker, Lester Tanzer, John Touhey, Raymond Naimoli, and James McIlhenny. They served on the Board of Directors ("Board") of U.S. News during the relevant time period.
The plaintiffs allege in their Fourth Amended Complaint that the defendants breached their fiduciary obligations by deliberately and knowingly undervaluing the stock of the corporation. Specifically, they allege that the defendants (1) utilized discriminatory appraisal procedures and wrongfully manipulated appraisal values; (2) withheld or undervalued corporate real estate holdings; (3) diluted the potential interests of the class members through self-dealing and issuing substantial amounts of phantom stock to members of the Board; (4) operated and conducted U.S. News' affairs in such a manner as to conceal their improper conduct and the true value and worth of the plaintiff class members' interests. They charge the defendants with common law fraud, fraudulent concealment, breach of fiduciary duties, gross negligence, violations of federal securities and antitrust laws, and violations of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq.
The matter is presently before the Court on the plaintiffs' application for an order preliminarily enjoining and restraining the Profit-Sharing Plan and U.S. News from distributing the lion's share of the proceeds of the sale, pending the outcome of this litigation.1 The Plan received approximately $135 million from the proceeds of the sale. As of the end of 1984, the assets of the Plan equalled approximately $138.5 million, including interest on short-term investments. U.S. News also holds certain assets in the form of payments due on notes held by six of the individual defendants, payable over 15 years. These debt obligations represent the deferred compensation owed to these defendants.
In January 1985, counsel for the Plan notified the Court and the parties to this proceeding that it would honor requests of Plan members for a full or partial distribution of their account balances, effective March 31, 1985. The plaintiffs responded to this announcement by filing a motion for a preliminary injunction seeking to enjoin all disbursements by the Plan and U.S. News.
After considering the legal memoranda, supporting affidavits, extensive exhibits, and the oral argument of counsel for the parties, the Court determines that the plaintiffs have not sufficiently satisfied two of the stringent criteria that are a predicate to the extraordinary relief they seek. They have failed to demonstrate that they will sustain irreparable harm and injury in the absence of injunctive relief at this time. Nor have they satisfactorily responded to the concerns and questions presented by the present employee-shareholders who have lawful claims to the remaining undistributed proceeds from the sale, and who are not charged with any wrongdoing. Accordingly, the plaintiffs' motion for a preliminary injunction is denied. The reasons for this determination are set forth below.
A brief review of the types of interests possessed by U.S. News' employees is helpful to an understanding of this litigation. Beginning in the early 1960's, U.S. News rewarded its employees for their services with two types of stock-related interests: a proportionate share of the value of the stock held in the Plan, and bonus or anniversary stock. The class members received payments for these interests upon termination or retirement. Following the 1984 sale, the current U.S. News' employees also received payments representing the value of each of these interests. The plaintiffs do not directly seek any preliminary relief against payments for bonus stock; those funds have already been dispersed. However, since both interests are relevant to the plaintiffs' claim for damages, they deserve some discussion.
STOCK INTERESTS
U.S. News' employees received awards of common stock, known as bonus or anniversary stock, at five-year intervals. The amount of stock issued was based on the employees' salary and length of employment. Upon termination, retirement or attaining the age of 65, the employees were required to sell this stock back to the company. The bonus stock was valued by American Appraisal on the same basis as the shares of stock held by the Plan. The value of the two types of interests was thus identical in any given year.
In 1962, U.S. News was reorganized for the purpose of transferring the beneficial ownership and management of the corporation to its employees. After the reorganization, the company maintained an existing profit-sharing trust or plan, whose assets included 30,000 shares of Class A stock of the corporation, later increased to 50,000 shares. The Class A stock had full voting rights. Since the reorganization, the value of the stock has been based on an annual appraisal rendered by American Appraisal.
The Plan was managed by a Profit-Sharing Committee, whose members were appointed by the Board of Directors. Board members frequently served as members of the Profit-Sharing Committee. All of the individual defendants, with the exception of Tanzer and Tuohey, were members of the Committee at some point during the relevant period.2 Each employee's interest in the Plan was based on his proportionate share of the value of the Plan assets. An employee was required to liquidate his interests in the fund upon retirement or termination of his employment with U.S. News, either immediately or proportionately over a 10-year period.
In 1967, U.S. News placed the Plan's stock in a voting trust, which was governed by six trustees. The trustees were chosen from among the principal officers and department heads of the company. Since the voting trust stock represented a majority of the corporation's outstanding stock, these trustees retained majority control of the corporation. Membership on the voting trust also overlapped with membership on the eight-member Board of Directors.
In addition to bonus stock awards and interests in the Profit-Sharing Plan, the members of the Board and certain senior employees also received deferred compensation in return for their expected services. This executive "perk," known as phantom stock, did not represent actual ownership rights in the corporation. Instead, it represented a contingent promise that U.S. News would pay sums measured by the value of its stock at the time the holder retired, died or became disabled, or in the event the company was sold. These rights were referred to as phantom stock because their value was equal to the value of regularly-issued stock.
The phantom stockholders liquidated their interests when U.S. News was sold, based on a value of approximately $3,000 per share. In actuality, U.S. News gave each holder a 15-year corporate note in return for his deferred compensation claim. U.S. News will satisfy its obligation on the notes by 60 quarterly payments over this period. See discussion supra at 3. Thus far, the phantom stockholders have received one quarterly payment, and a second payment is due shortly.
All of the plaintiffs' claims for relief are based on the allegation that they liquidated their stock and profit-sharing interests in U.S. News at grossly undervalued rates...
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Foltz v. US News & World Report, Inc.
...1985 and was followed in February by a renewed motion for preliminary injunction. The Court again denied the motion initially, 608 F.Supp. 1332 (D.D.C. 1985), but upon review the Court of Appeals, 760 F.2d 1300 (D.C.Cir.1985), ordered a partial hold-back of funds. 613 F.Supp. 634 (D.D.C. 19......
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