Goodman v. Poland

• Decision Date: 28 May 1975
• Docket Number: Civ. A. No. 21158-N,21550-N.
• Citation: 395 F. Supp. 660
• Parties: Norman B. GOODMAN et al., Plaintiffs, Mildred N. Ostrow et al., Intervening Plaintiffs, v. Sidney POLAND et al., Defendants. Milton B. EDELSON and N. Edward Nachlas, Plaintiffs, v. Sidney POLAND, et al., Defendants.
• Court: U.S. District Court — District of Maryland

395 F. Supp. 660

Norman B. GOODMAN et al., Plaintiffs, Mildred N. Ostrow et al., Intervening Plaintiffs, v. Sidney POLAND et al., Defendants.

Milton B. EDELSON and N. Edward Nachlas, Plaintiffs, v. Sidney POLAND, et al., Defendants.

Civ. A. Nos. 21158-N, 21550-N.

United States District Court, D. Maryland.

May 28, 1975.

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Herbert M. Brune and Harrison M. Robertson, Jr., Baltimore, Md., for plaintiffs in Civ.A. No. 21158.

Leroy W. Preston, John Wheeler Glenn, and O'Connor & Preston, Baltimore, Md., for plaintiffs in Civ.A. No. 21550.

H. Vernon Eney, Robert R. Bair and Venable, Baetjer & Howard, Baltimore, Md., for defendants in both cases.

NORTHROP, Chief Judge.

These consolidated actions under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, arise out of the purchase in March and April, 1968, by defendants of certain securities owned by plaintiffs. The original complaint in Civil No. 21158 was filed in this Court on August 27, 1969, while the complaint in Civil No. 21550 was filed on December 19, 1969. Pursuant to a motion by defendants, this Court on February 26, 1970, issued an Order consolidating the two cases for all purposes.

On June 13, 1974, after almost five years of discovery and other proceedings in this Court, plaintiffs moved for leave of Court to file a 101-page amended complaint. After a hearing, and over defendants' opposition, this Court on July 25, 1974, issued an Order granting plaintiffs' Motion. Defendants subsequently filed a Motion to Dismiss and for Summary Judgment. Both sides also moved for a partial summary judgment and preliminary determination by this Court as to the date on which the defendants' duty to disclose any material information under Rule 10b-5 terminated. A hearing was held on those motions and the issues raised therein are now before this Court for its decision.

BACKGROUND

In order to place the ensuing discussion of the various legal questions raised by the parties in some kind of perspective, a brief discussion of the allegations of the complaints in these cases is appropriate and necessary. The following discussion is provided as background only, however, and a more specific discussion of the relevant facts will be set forth in connection with the various issues raised. On a motion to dismiss, the well-pleaded material allegations of the complaint are taken as being admitted. 2A J. Moore, Federal Practice ¶ 12.08, at 2265-69 (2d ed. 1974). Therefore, the following summary is drawn primarily from the allegations of the amended complaint.

In 1962, defendants Sidney Poland and Morton Poland were the sole stockholders, principal executive officers and directors of Poland Brothers, Inc., a Maryland corporation engaged in business as a distributor of packaging products. In that year they approached a number of their personal and professional friends, including a number of the plaintiffs herein, with respect to raising capital for the promotion of two newly incorporated Maryland corporations, Imperial Packaging Corporation (hereinafter "Imperial") and Imperial Properties Corporation (hereinafter "Properties"). Imperial was being formed to manufacture under license from the patent holder a completely new type of paper box, chiefly for items of apparel, known as the "Carrier Box." Properties was being formed to hold title to the manufacturing plant of Imperial in Baltimore County, and to lease the same to Imperial. Poland Brothers, Inc., was to be the sole distributor of Imperial's products, for which service it was to receive reimbursement for its actual overhead expenses incurred in distributing such products.

An agreement was subsequently reached whereby the Polands' friends invested $260,000, for which they received debentures, preferred stock and 48 percent of the common stock of each company, while the two Polands invested $32,496, for which they received 52 percent of the common stock of each company. At the organizational meeting of Imperial's prospective investors in May, 1962, it was promised that, in addition to the two Polands, the Board of Directors would include a fair representation of the other stockholders, and the names of five minority stockholders were nominated for membership on the original Board. Two additional stockholders were added to the Board of Directors at its meeting on August 29, 1963.

Thereafter the composition of the Board remained substantially unchanged until the annual stockholders' meeting on August 4, 1966, at which the Polands caused the number of directors comprising the Board to be reduced to five. Only four directors were elected at that meeting, however, including the two Polands, Walter Gettinger (a close personal friend of the Polands and a member of the "friendly" minority), and Herbert Garten (a member of the "dissident" minority). Gettinger subsequently resigned from the Board in protest of certain action proposed to be taken by the Polands at the Board meeting on April 10, 1967.

At the next annual meeting of stockholders, which was held on June 14, 1967, the Polands caused five persons to be elected to the Board, including themselves and three employees of their wholly-owned company, Poland Brothers, Inc. Thereafter the Poland brothers, in addition to being the majority and controlling stockholders in Imperial, were also in full control of its Board of Directors. The plaintiffs herein were, in 1968, the holders of 14 units of subordinated debentures and preferred and common stock of Imperial and Properties.¹

According to plaintiffs, defendants Sidney and Morton Poland used their control over Imperial during the period from 1962 to 1968 to cause it to enter into various unfair and oppressive contractual arrangements by which its income and assets were diverted to their wholly-owned company, Poland Brothers, Inc. These arrangements allegedly included 1) the exaction of an excessive commission arrangement in violation of the original investment agreement of the parties, 2) the charging of an unauthorized and excessive "management fee" for services rendered to Imperial by Morton Poland, and 3) the wrongful appropriation of a corporate opportunity to manufacture certain notion and millinery bags previously purchased by Poland Brothers, Inc. from other manufacturers. The first and third of those claims along with another claim not discussed in the instant complaint were the subject of a stockholders' derivative action, Norman B. Goodman, et al. vs. Imperial Packaging Corporation, et al., No. A-49603, filed in the Circuit Court of Baltimore City on March 1, 1968, by certain of the plaintiffs herein as stockholders of Imperial.

Certain of the plaintiffs herein had also previously initiated another suit in the Circuit Court of Baltimore City, Gilbert S. Levine, et al. v. Imperial Packaging Corp., et al., No. A-49041, seeking to enjoin a proposed offering of additional shares of Imperial as being in violation of their pre-emptive rights. That action resulted in a decision and decree entered February 12, 1968, enjoining the proposed offering, which decree was still in full force and effect on April 15, 1968, although a timely appeal therefrom had been taken by the defendants in that action.

On February 13, 1968, immediately after the entry of the above decree, the Polands caused Imperial to offer 42,125 additional shares of common stock proportionately to all of its stockholders at $7.00 per share. In connection with that offering they represented that Imperial was in critical condition because of a lack of cash and that such an offering constituted the only feasible means of financing the company's continuing operations. The plaintiffs herein, however, decided not to purchase such shares, even though such failure would lead to a diminution of their proportionate ownership in the company. Unbeknownst to plaintiffs, such additional shares were never in fact subsequently issued.

In late February, 1968, preliminary negotiations for a settlement of all the pending litigation involving Imperial were entered into. In connection therewith, plaintiffs requested that they be furnished with up-to-date financial statements as to both Imperial and Poland Brothers, Inc. No such statements were released for the latter corporation, however, while the latest statement for Imperial which was made available was an unaudited interim six-month statement as of October 31, 1967.

On February 28, 1968, Dr. N. Edward Nachlas, who together with Milton B. Edelson owned one unit of Imperial Packaging and Imperial Properties securities,² telephoned Sidney Poland to inquire as to the possibility of arbitrating the differences with the dissident stockholders. Mr. Poland allegedly responded that there was no chance of anything being worked out. However, he suggested that he might be able to get some money from a source in New York to buy out the various minority interests. The Polands met with Dr. Nachlas and Mr. Edelson at the latter's apartment that evening to further discuss the matter.

At that meeting the Polands allegedly told Dr. Nachlas and Mr. Edelson that Imperial was in a very bad position financially, and was unable to meet its current bills, including a note for $93,600 which was due at the bank. They further allegedly stated that competition for the Carrier Box was getting increasingly intense and that the patent for it was questionable, so that prices, and consequently profits, could be expected to drop even further. Finally, the Polands reportedly stated that there was no possibility of a merger or of a public offering for Imperial stock in light of the company's poor financial condition, and that the best thing which Dr. Nachlas and Mr. Edelson could do was to sell out inasmuch as they were otherwise locked-in with their investment.

The Polands concluded...