Heit v. Bixby

Citation276 F. Supp. 217
Decision Date07 August 1967
Docket NumberNo. 64 C 118(1).,64 C 118(1).
PartiesCharles HEIT, Plaintiff, v. W. H. BIXBY et al., Defendants.
CourtUnited States District Courts. 8th Circuit. United States District Court (Eastern District of Missouri)

Ackert & Tompkins, St. Louis, Mo., and Pomerantz, Levy, Haudek & Block, New York City, for plaintiff.

Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., for defendants Bixby and others.

Guilfoil, Caruthers, Symington, Montrey & Petzall, St. Louis, Mo., for defendants Blumeyer and others.

Armstrong, Teasdale, Kramer & Vaughan, St. Louis, Mo., for defendants St. Louis Fire & Marine Ins. Co. and others.

W. D. Rund, St. Louis, Mo., for defendant General Contract Finance Corp.

MEMORANDUM OPINION

HARPER, Chief Judge.

The following is a glossary of abbreviations which, for the sake of convenience, will be used throughout this memorandum opinion and order:

GCFC—General Contract Finance Corporation
SLFM—St. Louis Fire and Marine Insurance Company
SLIC—St. Louis Insurance Corporation
ICSL—Insurance Company of St. Louis
Insurors—General Insurors, Inc.
WFM—Washington Fire and Marine Insurance Company
The Group—St. Louis Insurance Group (consisting of WFM, ICSL and SLFM)

This is a stockholder's derivative action in which the plaintiff, Charles Heit, a citizen of New York, is suing on behalf of GCFC, a Missouri corporation, against the individual defendants, W. H. Bixby, Frank C. Blumeyer, John W. Bowyer, Jr., Walter E. Burtelow, David R. Calhoun, George H. Capps, John L. Gillis, Edward G. Holtzman, Edward D. Jones, Chris J. Muckerman, Louis J. Orabka, A. H. Perry, Frederick G. Reiter, C. Harold Schreiber, Max P. Shelton and Stuart H. Smith, all Missouri citizens, and the corporate defendants, SLFM, SLIC and Insurors, all Missouri corporations. Four other individuals, Gwynne Evans, Roscoe Hobbs, Paul Jamison and Mike A. Moran, and ICSL were also named as party defendants in the original complaint filed on March 19, 1964.

ICSL was dropped from the amended complaint filed on March 31, 1966.

On July 14, 1967, by leave of court, all of the parties stipulated to the dismissal without prejudice of Evans, Hobbs, Jamison and Moran.

The facts are before the court by way of oral testimony, stipulations of fact, admissions, answers to various interrogatories and numerous exhibits. This court has jurisdiction by way of diversity of citizenship and amount. The plaintiff's stock ownership in GCFC is conceded by all parties to have existed since April 19, 1961. (This court has already restricted any recovery to which the plaintiff might be entitled on behalf of GCFC to events occurring subsequent to this date. See Memorandum Opinion and Order filed in this action on February 8, 1967.)

The period of this lawsuit runs from April 19, 1961, the date the plaintiff first purchased stock in GCFC, to February 18, 1964, the date of the sale of GCFC's insurance interest in ICSL, to the defendants SLFM and SLIC. (This is more fully explained hereinafter.)

The facts disclose that in the early 1930's the defendant Insurors (then fifty percent owned by the defendant Muckerman) formed an insurance subsidiary, the defendant SLFM. Following its incorporation, and during the period of this lawsuit, SLFM was a wholly owned subsidiary of the defendant SLIC. SLFM was formed with the idea that it would have no officers or staff of its own, but would depend upon Insurors, who possessed the facilities, management and operation. Insurors hired and paid all of its employees and designated all of the officers of SLFM, and completely managed SLFM for a management fee.

In 1940, GCFC's predecessor formed an insurance subsidiary, WFM, to handle automobile insurance on cars which it financed. From the time of its organization until January 22, 1964, GCFC and its predecessor owned one hundred percent of WFM. WFM, like SLFM, had no staff or officers of its own. Insurors, at the request of GCFC's predecessor, agreed to manage WFM, hire and salary its employees, designate its officers, etc., for a management fee as it was then doing for SLFM. When this agreement was made it was made on behalf of Insurors by Blumeyer and Muckerman. They were told that the business was captive business and GCFC's predecessor only wanted management and that no part of the management fee was to be paid to anyone as a commission.

In 1950, WFM and SLFM jointly organized another insurance company, ICSL, and again, like WFM and SLFM before it, ICSL was without management of its own. From the date of its organization until the sale on February 18, 1964, GCFC and its predecessor directly and indirectly through its one hundred percent ownership of WFM, owned fifty percent of ICSL. WFM, ICSL and SLFM became known as the St. Louis Insurance Group (The Group). The Group, since none of its company parts had management of their own, was completely managed by the defendant Insurors for six percent of the gross premiums written by the Group as a whole during the period here involved.

The defendant Insurors continued to manage WFM and ICSL as part of the Group throughout the period of this lawsuit.

During the period of this lawsuit the defendant Muckerman was number one in command and the defendant Blumeyer was number two in command of the defendant Insurors, and both were ten percent shareholders. During the same period Blumeyer was a vice-president of GCFC, and both he and Muckerman were directors of GCFC. Both Blumeyer and Muckerman were officers and directors of WFM and ICSL, and SLFM (The Group) as well as officers, directors and shareholders of the defendant SLIC. The other individual defendants were all directors of GCFC at varying times throughout the period of this lawsuit.

The six percent fee paid by WFM and by ICSL for WFM's and GCFC's interest therein for management was split between the defendant Insurors and the defendants Blumeyer and Muckerman, Insurors taking sixty percent thereof, and Blumeyer and Muckerman taking forty percent (twenty percent apiece) thereof. The forty percent was paid to Blumeyer and Muckerman as if it were a brokerage commission for business generated by them, and it did not appear on Insuror's books as income to Insurors. The amount of money which the plaintiff is seeking on behalf of GCFC with respect to the forty percent commissions during the period in suit is $563,689.00. The defendants concede that this figure represents the amount of money Blumeyer and Muckerman received under the forty percent arrangement attributable to GCFC's ownership of WFM and ICSL during the suit period.

The forty percent commission paid to Blumeyer and Muckerman was a well guarded secret. Only the defendant Perry had firsthand knowledge that such an arrangement existed, and even he did not know the exact percentage being taken. The defendant Burtelow became suspicious of the arrangement in 1951 after he was told by one Leo Kueper, an accountant who had inspected Insuror's books, that such an arrangement probably existed. Kueper inadvertently was shown the one set of Insurors' books which reflected the forty percent being turned over to Blumeyer and Muckerman. Immediately after Burtelow got this information he passed it on to Arthur Blumeyer, father of defendant Blumeyer, and president and chief operating officer of GCFC's predecessor. Subsequently, Burtelow on several occasions inquired of Blumeyer as to the forty percent arrangement, but such an arrangement was denied. The defendant Burtelow also asked the defendant Muckerman about the forty percent arrangement and was told to mind his own business.

Not only was the forty percent arrangement kept secret from the directors of GCFC, but it was also kept secret from the directors of Insurors, except Perry. The son of defendant Burtelow, Walter E. Burtelow, Jr., was a director and officer as well as a ten percent shareholder of Insurors from 1955 until 1964, and at no time was he informed of the arrangement. In 1963, Burtelow, Jr., and the defendant Burtelow had a conversation, at which Burtelow, Jr., compared his copy of Insurors' profit and loss statement for the year 1957 (Defendant Burtelow et al.'s Exhibit I) with the defendant Burtelow's copy (Plaintiff's Exhibit 35). The comparison revealed certain discrepancies, notably the fact that the full amount of the management fee did not show up on Burtelow, Jr.'s copy of the profit and loss statement (only the net amount, not the gross amount showed up). Thereafter, Burtelow, Jr. asked D. J. Hamman, accountant for Insurors, about the discrepancies, but, at first, he could not get the information he wanted. Burtelow, Jr. also had various conversations with the defendants Blumeyer and Muckerman, but at no time was he informed of the forty percent fee, even though the defendants Blumeyer and Muckerman knew he was seeking this information. Finally, he received a letter (Burtelow et al.'s Exhibit P) from Hamman in September, 1964, part of which is as follows:

"There are no undisclosed management fees that have been earned by General Insurors. General Insurors' books have always been kept on a net basis and the only items ever taken into income by General Insurors for the past 30 years is the net overwriting received by General Insurors after paying the brokerage commission and other expenses other than regular employees salaries covered by these fees. This applies, not only to the Management Contracts, but to our contracts with all of the companies General Insurors represents. The gross amount received from the Standard and American Casualty or the Group has never been reflected in any of our statements because it would be meaningless as this is not income to General Insurors, but instead is income owed to the individuals by agreement, such agreement having been in effect for over 30 years, and nothing would be gained by attempting to show the gross amount. Such gross figures are available and if you will let us know exactly what figures you would like to have, on any of our contracts, we will be glad to
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