Green v. Transitron Electronic Corporation, 6176

• Decision Date: 16 January 1964
• Docket Number: No. 6176,6179,6190.,6176
• Citation: 326 F.2d 492
• Parties: Jacob GREEN et al., Appellants, v. TRANSITRON ELECTRONIC CORPORATION et al., Appellees. William L. BERGER et al., Appellants, v. TRANSITRON ELECTRONIC CORPORATION et al., Appellees. DIVERSIFIED GROWTH STOCK FUND, INC., et al., Appellants, v. TRANSITRON ELECTRONIC CORPORATION et al., Appellees.
• Court: U.S. Court of Appeals — First Circuit

326 F.2d 492 (1964)

Jacob GREEN et al., Appellants, v. TRANSITRON ELECTRONIC CORPORATION et al., Appellees.

William L. BERGER et al., Appellants, v. TRANSITRON ELECTRONIC CORPORATION et al., Appellees.

DIVERSIFIED GROWTH STOCK FUND, INC., et al., Appellants, v. TRANSITRON ELECTRONIC CORPORATION et al., Appellees.

Nos. 6176, 6179, 6190.

United States Court of Appeals First Circuit.

Heard November 5, 1963.

Decided January 16, 1964.

James D. St. Clair, Boston, Mass., with whom Jacob Green, Boston, Mass., Louis Loss, Cambridge, Mass., Marvin Cherner, Birmingham, Ala., Hale & Dorr and Poster, Wilinsky & Goldstein, Boston, Mass., were on brief, for Jacob Green and others.

Lawrence Milberg, New York City, with whom William L. Berger, Boston, Mass., was on brief, for William L. Berger and others.

Milton Pollack, New York City, with whom Harris Berlack and Barry H. Singer, New York City, were on brief, for Diversified Growth Stock Fund, Inc., and others.

Harold M. Willcox, Boston, Mass., with whom Edward M. Condit, Jr., and Herrick, Smith, Donald, Farley & Ketchum, Boston, Mass., were on brief, for Leo Bakalar and others.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

HARTIGAN, Circuit Judge.

We have before us three appeals from the allowance and disallowance of counsel fees by the United States District Court for the District of Massachusetts, the requests for such fees arising out of work performed by the attorneys in producing an Agreement of Compromise and Settlement under which the sum of $5,300,000 was paid into court by defendants-appellees, Leo and David Bakalar, for payment of counsel fees, disbursements and distribution to stockholders in settlement of five law suits brought against the defendants.

Transitron Electronic Corporation is in the business of manufacturing and selling various types of semiconductors for commercial, industrial and military use. It was formed in 1952 by Leo and David Bakalar as a Massachusetts corporation and was reorganized as a Delaware corporation in 1959.

In the decade of the 1950's the electronics industry in general, and the semiconductor field in particular, experienced a rapid growth. New components and systems were developed. Concurrently, there was huge demand for a myriad of new products, the military for new weapons and industry for data processing and process control. These were particularly lush times for the semiconductor manufacturers and by the late 1950's Transitron had become one of the leaders of the entire electronics industry.

Until 1959 the Bakalars were the only substantial stockholders in Transitron. In 1959 and in the following year the Bakalars sold a total of 2,250,000 shares from their holdings at the respective prices of $36 and $35 a share. Both offerings were duly registered with the Securities and Exchange Commission and were underwritten by leading national investment firms headed by Merrill Lynch, Pierce, Fenner & Smith. The year 1961, however, saw a general fall in the market for electronics stock, with shares of Transitron tumbling to less than 50 per cent of their highest value in that year. At about this time various actions were brought against Transitron and against the Bakalars by disappointed investors in an effort to recoup some of their losses.

The first stockholder action was brought in the United States District Court for the District of Massachusetts on November 8, 1961 by plaintiffs Marvin Cherner and Cherner Clothing Company. Named as defendants were Transitron, individuals of that corporation and Merrill Lynch. The suit also purported to be a spurious class action under Fed.R. of Civ.P. § 23(a) (3), two of the counts in the four count amended complaint being brought on behalf of "all persons who have bought any shares of common stock of Transitron since December 8, 1959" in either of the distributions covered by the two registration statements in issue, and on behalf of "all persons to whom defendant Merrill Lynch has sold any shares of Transitron since December 8, 1959."¹

The amended complaint rested entirely on what have become known as the "patent allegations," to wit, that the prospectuses which were the basic part of the two registration statements which Transitron filed with the SEC prior to its two public stock offerings were materially false in stating that Transitron "holds no patent licenses from others requiring the payment of royalties and knows of no patent rights of others which might interfere with the conduct of its business." According to the Cherner complaint this statement was false or misleading because Transitron had been sued, subsequent to the second offering of stock, by Western Electric Company for the alleged infringement of Western Electric patents, the suit thereafter having been settled by means of a license agreement under which royalties became payable upon Western Electric patents used by Transitron.

Counsel for the plaintiffs in the Cherner action were James D. St. Clair, Esq., (the senior trial counsel), Louis Loss, Esq., Jacob Green, Esq., and Marvin Cherner, Esq. They are appellants here and will hereinafter be referred to as the Green group.

On March 30, 1962, Financial Industrial Fund, Inc. (F.I.F.), a mutual fund with 50,000 shares of Transitron purchased from Merrill Lynch, brought suit in the court below against the same defendants, basing its complaint on identical "patent allegations." The suit was instituted on behalf of F.I.F. by appellants Green, Loss and St. Clair.

On April 6, 9 and 10, 1962, respectively, plaintiffs-appellants (1) Diversified Growth Stock Fund, Inc., (2) Wellington Fund, Inc. and Wellington Equity Fund, Inc., and (3) One William Street Fund, Inc. hereinafter referred to as the Delaware group, filed in the Delaware Superior Court three separate complaints against Transitron Electronics Corporation et al., but not against Merrill Lynch. Along with the "patent allegations" the complaints contained what have become known as the "accounting allegations," to wit, that the registration statements contained certain misstatements and omissions with respect to valuation of inventory, price and production difficulties, price deterioration, and competitive problems of Transitron. These allegations were broadly drawn. The Delaware group was represented by Milton Pollack, Esq., of New York, who is also an appellant here.

On April 16, 1962, F.I.F. amended its complaint to include the "accounting allegations." A motion to similarly amend the Cherner complaint was denied on April 30, 1962. On August 6, 1962 Judge Wyzanski denied the defendants' motion for summary judgment in the Cherner suit. On September 25, 1962 the same court denied in the F.I.F. action the defendants' motion for summary judgment with respect to the count setting forth the "accounting allegations." On October 19, 1962 the court in the Cherner case ordered that all issues as to whether there were misstatements or omissions in the registration statements with respect to the patent question be severed for separate trial. Twenty-two persons had been granted permission to intervene in the Cherner action before the court announced on September 26, 1962 that "no further permissions for intervention are likely to be granted." The suits maintained by the Delaware group were not brought to issue until October 31, 1962 when defendants filed their answers in those cases.

During the summer and fall of 1962 discussions looking to the settlement of all cases took place involving all counsel who had appeared in the five actions. Determined settlement negotiations commenced in November 1962 and were completed in December of that year, the basic principles contained in the settlement arising out of a single session held at the offices of Hale & Dorr in Boston on November 10. The proposed settlement was conditionally approved by Judge Wyzanski and made part of a Conditional Judgment dated December 26, 1962. On the same day the court issued a show cause order directed to all persons who prior to February 21, 1962 had purchased shares of Transitron "to show cause why the Agreement of Compromise and Settlement should not be approved and the conditional judgment entered by the Court made final." Such persons were invited to file written objections to the Agreement on or before January 16, 1963 and, at their election, be heard on them at a hearing to be held on January 23, 1963. Following the January 23 hearing, the court filed an opinion indicating that final approval would not be granted until certain amendments were made in the proposed settlement. The parties thereafter having amended the proposed settlement to conform to the court's opinion and its January 28, 1963 memorandum, a final judgment approving the amended Agreement of Compromise and Settlement was entered on February 1, 1963.

In essence the amended Agreement provided for the payment into court by the defendants Bakalar of $5,300,000 in full settlement of the claims asserted against defendants in the foregoing litigation. Persons who prior to February 21, 1962 had acquired Transitron stock, who had incurred losses on that stock between a value per share of $36 and $15, and who had applied to participate in the fund within a stated period of time, would be entitled to participate ratably in the distribution of the fund after the payment of fees and expenses. From the $5,300,000 fund disbursements were to be made by the court:

"(a) To reimburse the plaintiffs and intervenors in the lawsuits listed in paragraph 1 above for fees and expenses heretofore actually paid by them to the undersigned counsel.

* * * * * *

"(c) To pay, to the extent approved by the Court, the fees and disbursements of counsel of record heretofore appearing for plaintiffs and intervenors in all five of the actions * * *. Plaintiffs and intervenors in said actions may urge all applicable grounds which support their claims for such fees and expenses. No party

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