Gilbert v. Bagley

Citation492 F. Supp. 714
Decision Date02 June 1980
Docket NumberCiv. A. No. C-78-335-WS.
CourtU.S. District Court — Middle District of North Carolina
PartiesRichard A. GILBERT, Reorganization Trustee of The Washington Group, Inc. and Webster A. Collins et al., Plaintiffs, v. Smith W. BAGLEY et al., Defendants.





C. Edwin Allman, Jr., and R. Bradford Leggett, Winston-Salem, N. C., for Gilbert.

Thomas Winfield Blackwell, Jr., Jack F. Canady, Jack E. Thornton, Jr., Winston-Salem, N. C., Steptoe & Johnson, Washington, D. C., William S. Mitchell, Winston-Salem, N. C., for Collins, et al.

Russell M. Robinson, II, Charlotte, N. C., for Thomas.

G. Marlin Evans, Chas. E. Nichols, Edward L. Murrelle, Greensboro, N. C., for A. M. Pullen & Co.

Clarence W. Walker and Edgar Love, III, Charlotte, N. C., for Interstate Securities Corp.

Hubert Humphrey and James T. Williams, Jr., Greensboro, N. C., for Bagley.

E. Osborne Ayscue, Jr., Larry J. Dagenhart and W. Donald Carroll, Jr., Charlotte, N. C., T. V. Adams, North Wilkesboro, N. C., for Northwestern Bank.

Roy G. Hall, Jr., Winston-Salem, N. C., for Gilley.

Lloyd C. Caudle, John H. Northey, III, Charles E. Knox, Charlotte, N. C., for Johnston.

Joseph I. Moore, Jr., Chapel Hill, N. C., for Riggsbee.

Charles T. Hagan, Jr., Greensboro, N. C., Duane, Morris & Heckscher, Philadelphia, Pa., for American Bank & Trust of Pennsylvania.

Bynum M. Hunter, Larry B. Sitton and William L. Young, Greensboro, N. C., Robert L. Burrus, Jr., McGuire, Woods & Battle, Richmond, Va., for Wheat First Securities, Inc.

Percy L. Wall, Greensboro, N. C., for Chapple.

MERHIGE, District Judge, Sitting by Designation.


The amended complaint in this action was filed on August 13, 1978. Several motions, including one for class certification, remain pending at this time.1 A separate issue is whether the Reorganization Trustee may reimburse the other plaintiffs for their costs in this litigation, and this issue is currently before the United States Court of Appeals for the Fourth Circuit.2 Defendants have moved to dismiss the amended complaint on various grounds, and this memorandum addresses those and related motions.3 The parties have submitted extensive memoranda in support of and in opposition to said motions and they are thus ripe for disposition.

This suit is, in part, an action at law and in equity brought by the Reorganization Trustee of The Washington Group, Inc. ("the Company"). The Trustee seeks relief from certain former officers and directors of the Company, as well as other individuals and entities who allegedly joined in a course of unlawful activities. The Trustee alleges, in short, that defendants engaged in a course of conduct which violated their fiduciary duties and which constituted a waste and diversion of corporation income, assets and opportunities.

This suit encompasses as well allegations advanced by the Company's shareholders. Their claims are, in essence, that defendants engaged in a manipulative scheme designed to affect the market for the Company's stock and that defendants made material misrepresentations and omissions with regard to the Company, its stock and the terms of a prior judgment.

Plaintiff Richard A. Gilbert ("the Trustee") is the Company's duly appointed Trustee in Reorganization. The Trustee is a citizen and resident of the State of North Carolina, which is the domicile of the Company as well. The Company is presently engaged in reorganization proceedings in this court.4

The remaining plaintiffs are, or were, at all times relevant to this action, shareholders of the Company. For the sake of convenience, these plaintiffs are collectively identified as "the shareholder plaintiffs".

The shareholder plaintiffs are comprised of two constituent groups: The "tender offer plaintiffs" and the "purchaser plaintiffs". The "tender offer plaintiffs" are those who were shareholders on the record dates pertinent to the suit in Shaffner.5 The "purchaser plaintiffs" are those stockholders who acquired shares in the Company by purchase during the period from November 4, 1972 through June 20, 1977.

The eleven defendants may be briefly identified as follows:6

Smith W. Bagley ("Bagley") was one of the Company's controlling shareholders, member of the Board of Directors, and President of the Company from April 25, 1972 until December, 1972.

James R. Gilley ("Gilley") was also a controlling shareholder of the Company. Gilley was a member of the Company's Board of Directors and one of its officers beginning in April, 1972. Gilley's active participation in the Company's management ended in January, 1978.

David R. Johnston ("Johnston") was the principal stockholder of the Johnston Mills Company. Johnston Mills was acquired by the Company on April 18, 1973. Johnston allegedly received a substantial employment contract as part of the purchase price for his shares.

Michael W. Riggsbee ("Riggsbee") was an officer or employee of the Company or one of its affiliates at all times relevant to this action.

The Northwestern Bank ("Northwestern") is a North Carolina banking corporation. Northwestern served as trustee of the Company's employee pension plan beginning in September, 1974. Northwestern was also the trustee of the Company's profit sharing plans from September, 1975 until their termination in 1976. Bagley, at one time an employee of Northwestern, was a director of Northwestern Financial Corporation, Northwestern's parent company, during the period relevant to this action. During all times material to the lawsuit, Gilley was a member of Northwestern's Board of Directors.

Dewey W. Chapple ("Chapple") was an Executive Vice President of Northwestern and the officer in charge of the bank's operations in Winston-Salem, North Carolina. Bagley had supervisory authority over Chapple during the former's employment with Northwestern.

American Bank and Trust Company of Pennsylvania ("American") is a Pennsylvania banking corporation. American was trustee of the Company's employee profit-sharing plans from September 30, 1974 until September 30, 1975. American also served as custodian of the Company's employee stock-purchase plan from August 29, 1974 until the plan's termination on October 30, 1976.

Wheat First Securities, Inc. ("Wheat") is an investment banking firm and a member of The New York Stock Exchange.

Interstate Securities Corporation ("Interstate") is also an investment banking firm and a member of The New York Stock Exchange.

William F. Thomas ("Thomas") was a Vice President and Account Executive of Interstate at all times relevant to this action.

A. M. Pullen and Company ("Pullen") is a partnership engaged in the public accounting profession. Pullen, at various times relevant to this controversy, audited the financial records and certified the financial statements of the Company.

The claims of the shareholder plaintiffs are set forth in Counts I through VIII of the amended complaint. Those allegations arise from two occurrences: a 1973 merger, and the settlement of a suit filed in this court. A summary of the plaintiffs' allegations is necessary to fully appreciate the scope of the wrongs charged to these defendants.

Bagley and Gilley were Chairman of the Board of Directors and President, respectively, of Convenient Systems, Inc. ("CSI") prior to April 14, 1972. Together they owned a majority of CSI's outstanding shares. On April 14, 1972 CSI borrowed 2.5 million dollars from United Virginia Bank ("UVB") of Richmond, Virginia. Bagley and Gilley were guarantors on this note for the full amount of the indebtedness.

The purpose of the UVB loan was to provide CSI with the capital necessary to purchase approximately 31% of the Company's shares. CSI purchased those shares in 1972 and thereby gained working control of the Company.

On January 18, 1973 CSI was merged with a wholly-owned subsidiary of the Company, Washington Mills Retail, Inc. As a result of this merger, Bagley became the owner of 32.5% of the Company's stock. Gilley's CSI stock was transformed into ownership of 33.1% of the Company's shares. Following the merger, the UVB loan was assumed by the survivor of the CSI ?€” Washington Mills merger, Convenient Systems, Inc.

The Washington Mills ?€” CSI merger precipitated the Shaffner litigation. The Shaffner plaintiffs contended that the merger violated federal, state and common law. An "Agreement of Settlement" was executed by the parties to that litigation on July 12, 1973. This Court thereafter entered a dismissal in the case, specifically incorporating the terms of the agreement into the judgment. The first paragraph of the settlement agreement is particularly relevant to this action. That paragraph required the Company to offer to purchase the shares held by qualified shareholders of the Company.7

The shareholder plaintiffs contend that defendants engaged in a course of conduct designed to maintain the market price of the Company's stock at artificially high prices. Bagley and Gilley are alleged to have either persuaded or coerced relatives, business associates and employees into purchasing shares of the Company when demand therefor was low. Northwestern, through Chapple's direction, purportedly assisted in those purchases by extending loans under circumstances not in the regular course of business.

Northwestern and American are also alleged to have exercised their control over the Company's deferred compensation plans as a vehicle to further create artificial demand.

Interstate and Thomas allegedly aided Bagley and Gilley's efforts by discouraging sales and inducing purchases of the Company's shares. This investment advice was allegedly offered with knowledge of the purported scheme to maintain the market price for the Company's shares.

The amended complaint charges Pullen with violation of its duty as an independent auditor and deviation from...

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