Heublein v. Wight

• Decision Date: 19 November 1915
• Citation: 227 F. 667
• Parties: HEUBLEIN et al. v. WIGHT et al.
• Court: U.S. Court of Appeals — Fourth Circuit

227 F. 667

HEUBLEIN et al. v. WIGHT et al.

United States District Court, D. Maryland.

November 19, 1915

Haman Cook, Chesnut & Markell and Vernon Cook, all of Baltimore Md., for plaintiffs.

Keech Wright & Lord, W. H. De C. Wright, and Robert R. Carman, all of Baltimore, Md., for defendants.

ROSE District Judge.

The defendants are the Sherwood Distilling Company, a Maryland corporation, hereinafter called the Company, John H. Wight its president, his brother, William H. Wight, its secretary-treasurer, and his son, Frank L. Wight, one of its salesmen. They are all citizens of Maryland. The two elder Wights between them hold a majority of its capital stock. Each of the three individual defendants is in receipt of a very substantial salary from the Company. These salaries are fixed by the directors. Each of them is a director, and the three of them constitute a majority of the board of five.

The plaintiff, Gilbert F. Heublein, is a citizen of Connecticut. He owns almost precisely one-third of the Company's stock. One-half of his holdings stand in the name of his coplaintiff, Louis P. Roberts. The latter has no real interest in the Company and no concern in the outcome of this litigation. When the word 'plaintiff' is used, the reference is to Heublein.

The substantial complaint of the bill is that the three Wights have used their control of the stock and of the board of the Company to get for themselves salaries far in excess of the value of their services, and unwarranted by the financial condition of the Company. In July, 1915, the plaintiff, through his representative on the board, unavailingly sought to have these salaries reduced. The bill asks that such reduction be made by this court.

Many years ago the father of the two older defendants, and their uncle, one Edward Hyatt, went into the distilling business at York, Pa. They subsequently removed to Cockeysville, in this state, and were there established as early as 1868. They originally operated as copartners, but in 1882 the Company was organized with a capital of $30,000. The defendant John H. Wight was one of the original stockholders. He increased his holdings; he bought some of those of Hyatt. Ultimately all of his father's stock came to him and his two brothers, the defendant William H. Wight and one Alpheus H. Wight, who will be hereafter referred to. Hyatt died in 1894. The three Wight brothers owned among them 200 of the Company's 300 shares; 33 others stood in the name of a Mrs. Vanneck, a daughter of Hyatt. By the latter's will he left the remaining 67 shares to the defendant John H. Wight, in trust, to hold the same for 10 years for the benefit of his widow and daughter, and at the expiration of that period to turn over 50 shares to his widow and 17 shares to his daughter. For 10 years after the death of Hyatt the Wight brothers held in their own right, or one of them held in trust, all the stock of the corporation, except the 33 shares which belonged to their cousin, Mrs. Vanneck. The defendant John H. Wight had her full confidence. Dailey v. Wight, 94 Md. 269, 51 A. 38.

In September, 1905, shortly after the 10-year trust expired, there was a meeting of the board of directors of the Company. There were present only the defendants John H. and William H. Wight and one Geddes. The last named was bookkeeper of the Company, held none of its stock, and cannot be assumed to have been in a position to have exercised any judgment independent of that of the Wights. At this meeting the salary of John H. Wight was raised from $10,000 to $15,000 and of William H. Wight from $5,000 to $7,500. Their salaries have remained at those figures ever since.

About the time that this increase was voted, the 50 shares which had passed to Hyatt's widow, who had become a Mrs. Dailey, came upon the market. The stock was offered to the plaintiff and his brother, since deceased, and they ultimately bought it. Before doing so, however, they had one or more interviews with the defendants John H. and William H. Wight. The latter had neither liking nor respect for the Heubleins. They thought they knew that the Heubleins had been in the habit of mixing inferior, or at least less famous, whiskies with the Sherwood whisky, and then branding the compound in exact imitation of the Company's genuine and unadulterated product. This practice had been stopped about 1903. There had been an adjustment, with which the Wights professed themselves satisfied; but their opinion of the Heubleins apparently remained unchanged. They did not want the latter in the Company. They told them that if they bought the stock they should not forget they were buying a minority interest and would be only minority stockholders. Precisely what significance the Wights attached to this warning does not appear, otherwise than may perhaps be gathered from their subsequent actions. The record does not show whether they attempted to secure the stock themselves, or, if they did, why they did not succeed.

The annual profits of the Company for each of the six years from 1902 to 1907, inclusive, averaged $70,000, or 2 1/3 times its then capitalization. The plaintiff paid for the stock he first purchased 15 1/2 times its par value. In 1907 those interested in the Company thought it best to increase its capitalization. To this course the plaintiff consented. The Company distributed what may be called, for lack of a better term, a bond dividend of $300,000; that is to say, it issued $300,000 of bonds and at least attempted to secure them by mortgage. These bonds were distributed among its stockholders, so that every holder of one share of the Company's stock received $1,000 of the bonds. As the defendant owned 50 shares, he received $50,000 of bonds, and apparently still holds them. The capital stock was increased from $30,000 to $700,000; that is to say, for each share of the old stock 23 1/3 shares of new were given. The earnings of the Company for the six years preceding this augmentation of the nominal capital would have allowed the payment of 5 per cent. interest on the bonds and left enough for a dividend of between 7 per cent. and 8 per cent. on the new capital stock.

But, as has happened to many another company, the increase in capitalization was followed immediately by a great reduction in profits. The average of these for the eight years succeeding 1907 was $35,000 a year, or only one-half of what they had been for each of the six years preceding that date. In the answer and the various statements submitted by the accountants, the total profits for the eight-year period foot up $293,136.17; but in all fairness there should be deducted from this total a net loss of $12,872.91 incurred in the operation of the Dairy Food Company. All the stock of this latter company is held by the Sherwood Company; all its assets and liabilities appear upon that company's annual balance sheets. The subsidiary company's net loss in operation is carried as an asset of its parent. Of the remaining $280,263.26, $120,000 has gone to pay interest on bonds. This left $160,263.26, which was theoretically available for dividends on capital stock. Dividends, however, were paid in only four of the eight years. None were paid in 1909, and none have been paid in any year since 1912. During the eight years, the aggregate dividends paid were $133,000, or at the rate of $16,666 a year, a sum equivalent to a little over 2 per cent. on the capital stock. On its books, the net increase of the Company's surplus during the eight-year period was, after deducting the loss of the Dairy Food Company, $27,263.26. Nevertheless the excess of the value of the quick assets of the Company over its current liabilities is probably less that it was at the beginning of the period, as it certainly is less than it was in 1910, the first year for which a detailed balance sheet appears in the record. This result is due to the fact that the Company has had to lock up some $90,357.17 in the buildings and machinery of the Dairy Food Company. As a consequence, although the Company has since 1910 charged off $59,246.92 to depreciation, its building and machinery account shows an increase of $36,387.74 in the last five years. Moreover, in 1910 the Company was using some $76,000 lent to it by its stockholders and friends. On July 1, 1915, this sum had been reduced to $35,000, and the Company will apparently shortly be called upon to pay off some $28,000 of that. The change in the state of the Company's affairs is reflected, among other things, in a reduction of the cash on hand from $66,531.27 on July 31, 1910, to $15,805.34 on the 1st of July, 1915.

Ever since the plaintiff became a stockholder, there has been recurring friction between him and the two elder defendants. From time to time he suggested that the salaries paid were very large. These suggestions were usually ignored and have never been accepted. Some years ago the plaintiff sought to have the Company's books audited by accountants of his own selection. The Wights refused. They said, and they doubtless believed, that the plaintiff's purpose was to secure a list of the Company's customers, so that he might unfairly compete with it for their trade, to his gain and its loss. Litigation followed. Wight v Heublein, 111 Md. 649, 75 A. 507. When that case came back to the lower court to be tried, as the Court of Appeals directed, upon its merits, the parties reached an agreement that the Company would put one set of auditors to work and the plaintiff another, but that those employed by him should have no access to the books which contained the names of the Company's customers. In a very few days after the audit began, two of the Company's employes, namely, its bookkeeper and its distillery superintendent, were each...