Issen v. GSC Enterprises, Inc.

• Decision Date: 26 January 1981
• Docket Number: No. 74 C 0346 and 74 C 2215.,74 C 0346 and 74 C 2215.
• Citation: 508 F. Supp. 1278
• Court: U.S. District Court — Northern District of Illinois
• Parties: Phillip ISSEN, on behalf of himself and all others similarly situated, and Derivatively on behalf of GSC Enterprises, Inc., Plaintiffs, v. GSC ENTERPRISES, INC., The Bank of Lincolnwood, Steinway Drug Company, Ford Hopkins Company, Richard Goodman, Samuel Bergman, Egmont Saunderling, Walter Goodman, Erwin Horwitz, Mason Loundy, Raymond Eiden, Edward Gorenstein, Marshall D. Lieb and Haig Pedian, Defendants. Seymour ABRAMS, individually and on behalf of himself and all other persons similarly situated, and Derivatively on behalf of GSC Enterprises, Inc. and the shareholders thereof, Plaintiffs, v. GSC ENTERPRISES, INC., a corporation, The Bank of Lincolnwood, a corporation, Miller, Cooper & Company, a partnership, Richard Goodman, Walter Goodman, Samuel Bergman, Egmont Saunderling, Erwin Horwitz, Mason Loundy, Raymond Eiden, Edward Gorenstein, Marshall D. Lieb, Haig Pedian, Clyde Wm. Engle, Roger L. Weston, Sierra Capital Group, a limited partnership, the Trustees of the Janice L. Engle Children's Trust, Michael D. Coughlin, William N. Weaver, Jr., and Ronald K. Zuckerman, Defendants.

508 F. Supp. 1278

Phillip ISSEN, on behalf of himself and all others similarly situated, and Derivatively on behalf of GSC Enterprises, Inc., Plaintiffs, v. GSC ENTERPRISES, INC., The Bank of Lincolnwood, Steinway Drug Company, Ford Hopkins Company, Richard Goodman, Samuel Bergman, Egmont Saunderling, Walter Goodman, Erwin Horwitz, Mason Loundy, Raymond Eiden, Edward Gorenstein, Marshall D. Lieb and Haig Pedian, Defendants.

Seymour ABRAMS, individually and on behalf of himself and all other persons similarly situated, and Derivatively on behalf of GSC Enterprises, Inc. and the shareholders thereof, Plaintiffs, v. GSC ENTERPRISES, INC., a corporation, The Bank of Lincolnwood, a corporation, Miller, Cooper & Company, a partnership, Richard Goodman, Walter Goodman, Samuel Bergman, Egmont Saunderling, Erwin Horwitz, Mason Loundy, Raymond Eiden, Edward Gorenstein, Marshall D. Lieb, Haig Pedian, Clyde Wm. Engle, Roger L. Weston, Sierra Capital Group, a limited partnership, the Trustees of the Janice L. Engle Children's Trust, Michael D. Coughlin, William N. Weaver, Jr., and Ronald K. Zuckerman, Defendants.

Nos. 74 C 0346 and 74 C 2215.

United States District Court, N. D. Illinois, E. D.

January 26, 1981.

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Pressman & Hartunian, Chicago, Ill., for plaintiffs.

Harry Young, Bilantic, Neistein, Richman, Hauslinger & Young, Ltd., Charles Pressman, Pressman & Hartunian, Chicago, Ill., for plaintiffs.

Margaret Mazwell, Hubachek, Kelly, Rauch & Kirby, Richard Goodman, pro se, John T. Coleman, Norman J. Barry, Baker & McKenzie, Peterson, Ross, Rall, Barber & Seidel, Jerome Torshen, Torshen, Fortes & Eiger, L.E. Sachnoff, Joel Feldman, Jack L. Block, William N. Weaver, Sachnoff, Schrager, Jones & Weaver, Stephen M. Merrick, Fishman, Merrick & Perlman, Edward A. Gorenstein, Lieb, Pedian, Eiden & Gorenstein, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

These cases have a long and complicated history dating back almost seven years since the filing of the original complaints. Presently before the Court is the motion of certain defendants¹ to dismiss an amendment to plaintiff Abrams' complaint charging them with various violations of the federal securities laws in connection with a "going private" merger accomplished by GSC Enterprises, Inc., in October, 1977, on the ground that the allegations of the complaint as amended fail to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The defendants also oppose Abrams' motions for a preliminary injunction and for class certification of the additional counts challenging the 1977 merger as well as the count seeking to challenge the merger derivatively on behalf of GSC. Since the resolution of the motion to dismiss will dispose of a large portion of this case, it will be considered first in this opinion.

BACKGROUND

The original complaints in this consolidated action were filed in 1974 by Phillip Issen (No. 74 C 0346) and Seymour Abrams (No. 74 C 2215) against GSC Enterprises, Inc. ("GSC"), a Delaware corporation, Miller, Cooper & Co., certified public accountants for GSC, and various individual directors and major stockholders of GSC and its subsidiaries: The Bank of Lincolnwood, Steinway Drug Co., and Ford Hopkins Drug Co. The plaintiffs sought declaratory, injunctive, and monetary relief individually and as representatives of a large class of GSC shareholders or, in the alternative, derivatively on behalf of GSC, for alleged violations of sections 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(a), and Rules 10b-5 and 14a-9 promulgated by the Securities and Exchange Commission.² The complaints also asserted various pendent state causes of action for breach of fiduciary duty. Jurisdiction was grounded in section 27 of the Securities and Exchange Act, 15 U.S.C. § 78aa, 28 U.S.C. § 1331, and upon principles of pendent jurisdiction over the state law claims. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). The only motion pending at present with regard to the original complaints is plaintiffs' consolidated motion for class certification, which is not addressed in this opinion.

After the original complaints were filed, the management and major shareholders of GSC changed. This new group, the "Engle group," proceeded to acquire approximately 55% of the outstanding shares of GSC through open market and private purchases and in October, 1977, caused a merger between GSC and Lincolnwood Bankcorporation, Inc. ("LBI"), also a Delaware corporation. LBI was wholly owned by the majority shareholders of GSC, who transferred their GSC shares to LBI in exchange for all of LBI's stock, and was incorporated solely for the purpose of enabling GSC to undertake a "going private" merger pursuant to sections 228 and 251 of the Delaware Corporation Code.³ As a result of the merger, the Engle group became the sole owners of GSC, the surviving corporation, and the approximately 6,000 minority shareholders representing 45% of the outstanding stock of GSC were "frozen out" of GSC. Shareholders with less than 435 GSC shares were entitled to receive $1.15 per share in cash for their shares and the other minority shareholders were entitled to $500 12-year 8½% capital notes of the Lincolnwood Bank, a wholly-owned subsidiary of GSC. The merger agreement was signed on October 19, 1977, and it became effective on October 24, 1977. The minority shareholders were notified within ten days of the effective date as required by Delaware law.

Following the merger, plaintiff Abrams amended his complaint, adding Counts IV through X charging the new management and controlling shareholders of GSC with violations of sections 10(b), 13(d), and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(d), 78n(a), and various breaches of fiduciary duty under state law in connection with the merger. Abrams has not yet tendered his GSC shares pursuant to the terms of the merger and, as far as the record indicates, has not sought his appraisal remedy in the Delaware courts.⁴ His motion for a temporary restraining order to delay the implementation of the merger was denied by Judge Flaum on November 7, 1977.

The Amendment to the Complaint

In the amendment to his complaint, Abrams charges the defendants with failing to disclose certain material facts in the merger notice and other documents sent to the shareholders immediately following the merger as required by Delaware law. Briefly summarized, Abrams' allegations of nondisclosure are as follows:

1) The defendants failed to disclose certain insider agreements pursuant to which defendant Engle, chairman of the board and president of GSC, allegedly agreed to purchase (15 months after the merger) the GSC shares owned by the defendants Lieb, Pedian, and Eiden for $2.52 per share in cash and the GSC shares held by Eiden's children for $1.96 per share in cash while only paying $1.15 per share to GSC's minority shareholders at the time of the merger. Amended Complaint, ¶ 15(a).

2) The defendants failed to disclose in GSC's financial statements the fair market value of GSC's one-half interest (through its wholly-owned subsidiary, Toulin, Inc.) in the Lincolnwood Bank building and adjacent land amounting to $1,045,750 or approximately 25 cents per GSC share. Amended Complaint, ¶ 15(b), (c).

3) The defendants failed to disclose that there was no market for the 8½% 12-year capital notes of the Lincolnwood Bank given to the minority shareholders in exchange for their GSC shares under the terms of the merger and that if the notes had to be sold at a discount, they were not the equivalent of cash as the merger notice stated. Amended Complaint, ¶ 15(d)-(f).

4) The defendants failed to disclose that they had been discussing "going private" for at least two years prior to the merger and that the GSC board had commissioned a study in 1976 on the feasibility of delisting GSC's stock, which had been listed on the Amex, and had hired an appraiser in 1977. Amended Complaint, ¶ 15(g), (j), (k).

5) The defendants failed to disclose that GSC could have paid a dividend prior to the merger, but that defendants deliberately chose not to do so in order to depress the market price of GSC stock on the date of the merger. Amended Complaint, ¶ 15(h).

6) The defendants failed to disclose that defendant Engle was in default of a $500,000 payment due to Walter Goodman in February, 1977, in connection with Engle's purchase of Goodman's 800,000 GSC shares. Amended Complaint, ¶ 15(l).

7) The defendants failed to disclose that the stock pledged by Engle to GSC as collateral for a $700,000 loan (the proceeds of which were used by Engle to satisfy his indebtedness to Goodman who had been a major stockholder in GSC before the control of the company changed hands) had been earlier pledged to a Chicago bank as security for another $700,000 loan, so that the GSC loan to Engle was actually unsecured. Amended Complaint, ¶ 15(m).

8) The defendants failed to disclose that Engle had not paid the interest when due on two previous loans of $600,000 and $35,000 from GSC. Amended Complaint, ¶ 15(n).

9) The defendants failed to disclose that the GSC board of directors felt that GSC's purchase of 126,200 of its own shares for $1.25 per share on the open market in the months preceding the merger was favorable to GSC even though GSC's assets were allegedly worth less at the time of these open market purchases than at the time of the merger. Amended Complaint, ¶ 15(o).

10) The defendants failed to disclose their conflict of interest in determining the price to be paid for the minority shares since the value of their GSC stock would be reduced by the amount paid to the minority for their shares. Amended Complaint, ¶ 15(p).

11) The defendants failed to disclose the existence of a conspiracy, scheme, and device to

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