Hodgman v. Atlantic Refining Co., 452.

• Decision Date: 09 July 1924
• Docket Number: 452.
• Citation: 300 F. 590
• Parties: HODGMAN et al. v. ATLANTIC REFINING CO. et al.
• Court: U.S. District Court — District of Delaware

300 F. 590

HODGMAN et al. v. ATLANTIC REFINING CO. et al.

No. 452.

United States District Court, D. Delaware.

July 9, 1924

Andrew C. Gray and E. Ennalls Berl (of Ward, Gray & Neary), both of Wilmington, Del., Arthur Berenson, of Boston, Mass., and Lawrence Berenson, of New York City, for plaintiffs.

Robert H. Richards, of Wilmington, Del., and Ira Jewell Williams and Yale L. Schekter, both of Philadelphia, Pa., for defendant Atlantic Refining Co.

Charles F. Curley, of Wilmington, Del., for defendant Superior Oil Corporation.

MORRIS District Judge.

Marshall Hodgman and other stockholders in Superior Oil Corporation, a Delaware corporation, brought this bill in equity against that corporation and Atlantic Refining Company. They seek to obtain from the Atlantic Refining Company, for the Superior Oil Corporation, relief to which they assert the Superior is entitled, but to secure which that corporation has neglected and refused to act, notwithstanding the efforts of the plaintiffs directed to that end. The relief sought is based upon the alleged wrongful acquisition by the Refining Company of 325,000 shares of the non-par capital stock of the Superior at one-half its actual value. The vices of the transaction, as plaintiffs assert, are actual fraud in its accomplishment and legal inability of the Superior to issue the stock for one-half of its value.

The asserted fraud consists in the concealment from the Superior of the fact that its shares were being acquired by the Refining Company at approximately $8 per share at the very time that a much larger number of shares was being sold to other persons for $16 per share, as well as being bought and sold generally on the Stock Exchange at $16 to $19 per share. The asserted fraud consists also in uncorrected partial disclosures, calculated to mislead and deceive, made to the Superior with the knowledge of the Refining Company, with respect to the price that was being paid by the Refining Company for the 325,000 shares of the Superior stock. The alleged concealment from the Superior of the price being paid by the Refining Company for the shares of the Superior stock was possible, because, as plaintiffs assert, Robert M. Catts the president of the Superior and the person through whom the transaction was carried out, aided in the concealment and actively participated in the fraud for his personal gain, and that to this end he made, with the knowledge of the Refining Company, statements to the Superior that were false deceptive, and misleading.

The Refining Company denies the alleged fraud, and denies that the Superior was without legal power to issue the shares for the consideration moving from the Refining Company. It does not deny, and cannot successfully do so, that on the day on which the Refining Company acquired 325.000 shares at approximately $8 per share 263,375 other like shares of the Superior stock were sold to a syndicate of bankers for $16 per share, in money, and 150,000 still other like shares were issued to Old Dominion Oil Company for property, on the basis of upwards of $16 per share. Shortly before and after it acquired its shares at approximately $8 per share, the Refining Company estimated the outstanding shares of the stock of the Superior to have a value of approximately $19 each.

To establish that the striking advantage obtained by it in the transaction was not a fraud upon the Superior and its stockholders, and was not brought about by fraud of the Refining Company, but was a reasonable and natural outcome solely of fair, frank, and honest dealing, the Refining Company asserts that the transaction with the Superior was had by Catts alone, and that the shares acquired by the Refining Company, by the syndicate of bankers, and by the Old Dominion Oil Company were acquired by them, not from the Superior, but from Catts, and that the price paid to him is no concern of the Superior or of its stockholders. It likewise asserts that, even if its transaction was with the Superior, and that Catts participated therein, not as an independent person, but only as an officer of Superior, still the transaction was a fair, honest, and valid one, in that, in addition to the monetary consideration, it contracted to take Superior's production of crude oil for a period of ten years at Seep's Agency's posted prices; it agreed to deposit its shares for two years and not to sell them or the deposit certificates during that time; it agreed to assume the management of Superior and to nominate men of experience to serve on the Superior's board of directors.

It is now well settled, however, that such contracts or agreements cannot be regarded as consideration for capital stock of a Delaware corporation in any amount. Wallace v. Weinstein, 257 F. 625, 168 C.C.A. 575 (C.C.A. 3); Cooney v. Arlington Hotel Co., 11 Del.Ch. 286, 101 A. 879, and on appeal 11 Del.Ch. 432, 106 A. 39; Scully v. Automobile Finance Co., 12 Del.Ch. 174, 109 A. 49; Bowen v. Imperial Theatres (Del. Ch.) 115 A. 918. Consequently we must look elsewhere to ascertain why the Refining Company was the recipient of capital stock of the Superior to the value of upwards of $5,000,000 for approximately one-half that sum. Obviously such an astounding donation by one business corporation to another cannot be said to have been brought about by fair dealing, if it was accomplished by suppression of the true facts, or by false suggestions or half truths calculated and intended to deceive. Yet, notwithstanding my reluctance to believe that the business acts of any apparently reputable person or corporation are done otherwise than in good faith and for an honest purpose, I am constrained by what I think to be the overwhelming weight of the evidence to conclude that the transaction in question was conceived in fraud and consummated by gross deception and dishonesty.

Catts caused the Superior to be organized. While he was still the owner of all of its outstanding shares of capital stock, he caused the charter to be amended, so as to make the authorized capital consist of 300,000 shares without par value, of which, during the fall of 1919, 150,000 shares were issued to him for certain oil leases. On March 2, 1920, after the shares of stock issued to him in the fall of the preceding year had become widely distributed, but while the directorate was substantially the same as that which passed upon Catts' offer of oil leases for stock, Catts made another offer to Superior to sell and transfer to it for 150,000 other shares of its capital stock certain other oil leases, subject to an indebtedness of $2,750,000 to the Refining Company. By the contract made on March 4th following, between Superior, the Refining Company, and Catts, trustee, it was recited that the indebtedness of $2,750,000 to the Refining Company, subject to which the properties were to be acquired, represented a loan made by the Refining Company to Catts, trustee, to enable him to acquire the properties. The loan was to be repaid, with interest, within 1,000 days, by 'the trustee or anyone assuming said obligation. ' The second, third, fourth, and fourteenth paragraphs of the contract provide: 'Second. Upon the acquisition of said properties by said trustee, the same shall be forthwith sold, assigned, transferred, and conveyed by the trustee to company A (Superior) for 150,000 shares of its presently unissued stock, to be issued and delivered to said trustee free from all incumbrances and subject only to the obligation imposed thereon by said trustee of said loan of $2,750,000, which indebtedness as a part consideration hereof Company A shall assume and agree to repay to Company B (Refining Company) as herein provided; said 150,000 shares to be issued to said trustee (and of which amount 86,667 shares shall be represented by one certificate issued in the name of Robert M. Catts, trustee) shall thereupon forthwith be indorsed and deposited with Company B as collateral security for the repayment of said loan of $2,750,000, with interest as herein provided.

'Third. In addition to the aforesaid 150,000 shares of stock to be deposited with Company B, said trustee will, at the time of said deposit, deposit with said Company B an additional 3,000 shares of the present outstanding capital stock of Company A, duly indorsed for transfer, likewise to be held by said Company B as collateral security for the repayment of said loan and interest as herein provided.

'Fourth. Company A shall enter into a written contract with Company B, under the terms of which Company A shall sell and deliver, in flow tanks at a well to Company B, and Company B shall purchase, the entire crude oil output of Company A's presently owned properties in Kentucky, together with those to be so acquired as hereinbefore set forth by and from said trustee, during said period of five years and so much longer as any part of said loan, with interest, shall remain unpaid, which oil shall be paid for by said Company B at the current price on date of such delivery posted by the Seep Purchasing Agency for Somerset crude oil. * * *

'Fourteenth. Contemporaneously with the making of said loan to said trustee and the acquisition of said properties by Company A as hereinbefore outlined, said trustee will deliver or cause to be delivered to said Company B the resignations in writing of a majority of the board of directors of said Company A and further the resignations of any directors who may succeed said directors, so that Company B shall always hold the resignations of a majority of the directors of Company A, but with the express understanding that this is only for the purpose of further protecting said Company B in the event that said Company A shall at any time prior to the repayment of said loan, fail to carry...