Junker v. Crory
| Decision Date | 17 July 1981 |
| Docket Number | No. 79-3221,79-3221 |
| Citation | 650 F.2d 1349 |
| Parties | Fed. Sec. L. Rep. P 98,236 James G. JUNKER, Individually and on behalf of himself and other Shareholders of Reco Investment Corporation, Plaintiff-Appellee, v. Walter H. CRORY, Chesley D. Crory, Joseph B. Mongogna, James T. Carmen, Jack R. Walter, James Davidson, Jr., Frederick P. Heisler, Road Equipment Company, Reco Investment Corporation and Road Equipment Company, Inc., Defendants-Appellants. . Unit A |
| Court | U.S. Court of Appeals — Fifth Circuit |
Klein & Rouse, Henry L. Klein, New Orleans, La., for defendants-appellants.
James J. O'Connor, P. J. Stakelum, III, Paul E. Hurley, New Orleans, La., for plaintiff-appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before SKELTON *, Senior Judge, RUBIN and REAVLEY, Circuit Judges.
A Louisiana resident who was a minority shareholder in a corporation voted against its proposed merger into another corporation. The merger was approved on the strength of the voting power of the majority shareholders. Once the merger was consummated, the minority shareholder sought relief in federal district court on a variety of federal securities law claims and on pendent claims for violation of state-imposed duties. We affirm the trial court's judgment in favor of the plaintiff shareholder against the corporate officers and directors based on the pendent claims, and, therefore, reach the federal claims only in regard to the remaining defendants, the corporate attorney and the surviving corporation. As to these defendants, we also affirm the judgment in favor of the minority shareholder. We reverse that part of the judgment awarding a derivative recovery to the merged corporation. Because the trial court's award of damages failed to consider the value of the stock received by the minority shareholder in the merger, we remand for calculation of a reduction in the damages to reflect that value. Finally, we modify the judgment to eliminate the award of attorney's fees because we perceive no legal basis for it.
Road Equipment Company, Inc., a Louisiana corporation engaged in selling construction equipment, was organized in 1959 by Walter Crory, his wife, Chesley Crory and James G. Junker. Walter Crory owned all the voting stock in that corporation. Junker joined Road as a salesman and was elected vice-president and general sales manager at the time of Road's incorporation.
Another Louisiana corporation, Reco Investment Corporation, was organized in 1962 by Walter Crory, Chesley Crory, James Carmen, Jack Walter and Junker to acquire, improve, and lease industrial property. Junker paid $162 for 162 shares of the 1,000 shares of Reco common stock outstanding. Reco subsequently purchased from the Illinois Central Railroad three adjacent tracts of land in 1963, 1965, and 1967 respectively. Reco improved the properties by constructing a brick office building on one tract in 1963 and a steel office building on another in 1965.
Although it is not clear from the record whether he quit or was fired, Junker's employment with Road terminated in late 1965 and he started another business that competed directly with Road. Crory claimed that a settlement agreement entered into with Junker when he left Road's employ required the surrender of Junker's 162 shares of Reco stock. However, the trial court found that Junker retained ownership of his Reco shares after he ended his relationship with Road. That finding, which is not directly attacked by the defendants on appeal, is not clearly erroneous.
Thus, Junker owned 16.2% of Reco, i. e., 162 of 1000 outstanding shares of stock. The other 83.8% of Reco was owned by Walter Crory (28.4%), Chesley Crory (21.2%), Joseph Mongogna (9%), James Carmen (16.2%) and Jack Walter (9%), all of whom were joined as defendants in this action. These five defendants constituted the board of directors and officers of both Reco and Road. 1
In 1963, Reco leased to Road one of its industrial properties including the office building located on it for a monthly rental of $1,200. The lease had a term of ten years with an option to renew for an additional ten years at a monthly rental of $1,320. In 1972, subsequent to Junker's departure from Road and without notifying him, Reco entered into a new twenty-five year lease with Road at a monthly rental of $1,200, which was increased to $1,320 in 1973. The new lease expanded the size of the leased premises and included a renewal option for another twenty-five years at a $1,500 monthly rate.
From Reco's inception it had paid Road a management fee of $1,200 annually. After Junker's departure from Road, the boards of directors of the two corporations agreed to increase the management fee to $3,600 a year. Subsequently, the fee was again increased to $4,800 per annum. Junker received no notice of these increases.
Junker did receive notice of a Reco shareholders' meeting held in April 1973, to discuss Reco's indebtedness to Road in the amount of $71,735. This debt represented the management fees and monies advanced by Road for Reco's other expenses. Thus, the rental being paid by Road was apparently inadequate to cover the expenses incurred by Reco in connection with the property it leased to Road. The shareholders' meeting notice indicated that, if the capital needed to satisfy the debt could not be raised, dissolution of Reco might be necessary. At that meeting, Frederick Heisler, an attorney who represented Walter Crory, as well as Reco and Road, and who attended the meeting as proxy for Walter and Chesley Crory, was appointed chairman. He explained that Reco would either have to borrow the funds needed to pay the Road debt or liquidate. Junker's proxy attended the meeting and made a motion that Reco retain an appraiser to determine the fair market value and fair rental value of its property. He also moved that, in the event Reco was unable to locate a tenant willing to pay that fair rental value, the property be sold at its fair market value. He also proposed that, if the appraisal established that the rentals paid by Road were inadequate, the lease between Reco and Road be terminated and Reco seek damages from its officers and directors. The motion was not seconded and thus never came to a vote. The liquidation was approved over Junker's opposition and Heisler was appointed as liquidator. Shortly thereafter, Junker, through his attorney-proxy, wrote a letter to Reco's board of directors stating his belief that Reco's property had greatly increased in value and that the rentals paid by Road to Reco were inadequate.
Junker received notice in July, 1973, of another Reco shareholders' meeting to discuss rescission of the liquidation order and a merger of Reco and Road on a book value basis. Heisler was once again present, this time as proxy for Chesley Crory and James Carmen. He stated that, in the opinion of the real estate experts to whom he had spoken, liquidation was not feasible because of the then existing credit crunch and high interest rates. Heisler suggested that, because Reco was unable to satisfy its indebtedness to Road, the only alternative was to merge Reco into some other company, such as Road, and that by merging Reco into Road, the debt owed to Road would be extinguished.
Junker voted to terminate the liquidation of Reco, but he voted his 162 shares against the proposed merger with Road. However, the defendants voted the remaining 838 shares of Reco in favor of the merger. The 83.8% of the voting power controlled by the defendants was sufficient to approve the merger. Because the merger was approved by at least 80% of the total voting power, Junker was not entitled to demand that Reco pay him fair cash value for his shares pursuant to La.Rev.Stat. 12:131. 2
The defendants, constituting and acting as Reco's board of directors, approved the merger. They also approved the merger in their capacity as officers and directors of Road. The merger formula required the exchange of one share of Reco stock, which had a per share book value of $17.55, for one and a half shares of Road stock, which had a book value of $12.73 per share. Thus, Junker received 265.52 shares of Road for his 162 shares of Reco stock. Book values of Reco's land and buildings were used in determining the merger formula despite the fact that the Reco property was located in an area where real estate values had ballooned since the time the property was acquired and despite the fact that the cost of constructing buildings had also risen substantially.
The court credited the expert testimony of the plaintiff's appraiser as to the fair value of Reco's property. The defendants offered no expert testimony but relied on sales of what they contended were comparable properties to argue that the expert testimony was incorrect. The trial judge did not consider this sufficient to impugn the expert testimony.
The following table sums up the testimony:
DEFENDANTS'
COST VALUATION PLAINTIFF'S
(PURCHASE FOR MERGER EXPERT'S
PRICE) FORMULA VALUATION 3
IN 1973
----------- ----------- ------------------------
1973 1975
---- ----
3 parcels
of land $ 89,122.52 $100,286.48 $338,700.00 $463,500.00
2 buildings 154,049.36 95,000.00 234,946.00 251,409.00
----------- ----------- ----------- -----------
TOTALS $243,171.88 $195,286.48 $573,646.00 $714,909.00
----------- ----------- ----------- -----------
Thus, the plaintiff's real estate expert valued the Reco land and buildings in 1973 at $573,000, and in 1975, at $715,000. Their book value, i. e., the cost of the land added to the cost of the buildings reduced by depreciation of...
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