Kardon v. National Gypsum Co., Civil Action No. 6203.

• Citation: 73 F. Supp. 798
• Decision Date: 19 August 1947
• Docket Number: Civil Action No. 6203.
• Parties: KARDON et al. v. NATIONAL GYPSUM CO. et al.
• Court: U.S. District Court — Western District of Pennsylvania

73 F. Supp. 798

KARDON et al. v. NATIONAL GYPSUM CO. et al.

Civil Action No. 6203.

District Court, E. D. Pennsylvania.

August 19, 1947.

COPYRIGHT MATERIAL OMITTED

Henry Arronson and Simon Pearl, both of Philadelphia, Pa., for plaintiff.

Edward H. Cushman, of Philadelphia, Pa., and Finck & Huber, of Buffalo, N. Y., for National Gypsum Co.

Robert T. McCracken and Samuel Fessenden, both of Philadelphia, Pa., for William Slavin and Leon A. Slavin.

Roger S. Foster, of Philadelphia, Pa., for Securities and Exchange Commission, amicus curiae.

KIRKPATRICK, District Judge.

Leon A. and William Slavin, defendants, having purchased the plaintiffs' stock in a Michigan corporation and its affiliate, sold the bulk of the corporate assets to the defendant, National Gypsum Company. The plaintiffs brought this action, alleging that the Slavins had violated Sec. 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and the Commission's Rule X-10B-5 in connection with the purchase of their stock and asking, among other things, that the Slavins account for profits realized by them through the sale of the corporate assets.

The acts of the defendants specified in the complaint constitute a violation of the Act. Sec. 10(b) makes it unlawful to use any deceptive device, in contravention of the Commission's rules, in connection with the purchase of any securities registered or unregistered. Rule X-10B-5 specifically makes it unlawful "to employ any device * * * to defraud, * * * to omit to state a material fact necessary * * * to make the statements made * * * not misleading, or to engage in any act, practice, or course of business which * * * would operate as a fraud or deceit * * *." Under any reasonably liberal construction, these provisions apply to directors and officers who, in purchasing the stock of the corporation from others, fail to disclose a fact coming to their knowledge by reason of their position, which would materially affect the judgment of the other party to the transaction.

Jurisdiction of the person of the Slavins was obtained under Sec. 27 of the Act, 15 U.S.C.A. § 78aa, which authorizes extraterritorial service of process in suits to enforce any liability or duty created by the Act. On a motion to dismiss this Court held that, although not expressly provided for in the Statute, a remedy by civil action to enforce such duties and liabilities was available to the plaintiffs. The duty created is that of disclosure and the complaint and the evidence show that this suit was brought to enforce that duty. The liability to account for profits is the correlative liability attendant upon the breach of that duty.

Although a good deal of testimony was taken, the facts, except as to one relatively unimportant detail, are practically undisputed.

The plaintiffs, Morris and Eugene B. Kardon (father and son), and the defendants, Leon A. Slavin and William Slavin (brothers), owned all the capital stock of Western Board and Paper Co. and Michigan Paper Stock Co., its affiliate, each of the four holding one fourth. Western was engaged in manufacturing paper board and other paper products, having its plant located at Kalamazoo, and Michigan was a purchasing agent dealing chiefly in waste paper and similar materials for Western. All four were officers and together constituted the entire board of directors, the two Slavins and Eugene Kardon living in Kalamazoo and being actively engaged in operating the plant and Morris Kardon living in Philadelphia. All four were familiar with the plant, assets and business of the corporation.

Prior to March 18, 1946, Leon Slavin had agreed for the corporation, by written instrument, considered by the parties to it to be binding, to sell to National Gypsum, the plant and equipment of Western for the sum of $1,500,000. Corporation income taxes were not assumed by the purchaser, but the corporation and of course the Slavins, ultimately, remained liable for these taxes. There were additional terms, which included the purchase by National Gypsum of the inventories of materials and supplies at cost or market in addition to the price of the plant, retention by the corporation of accounts receivable and inventories of finished goods, and an agreement by National Gypsum to sell to the corporation one third of the output of the plant over a three-year period, during which time the corporation was to have the use of one of the buildings for a dollar a year. The agreement was signed by Leon Slavin in his capacity as Executive Vice President of Western.

On March 18, 1946, the Slavins purchased all the stock of the Kardons in the two corporations, Western and Michigan, for $504,000. At that time the Kardons knew nothing whatever about the negotiations with National Gypsum, and the Slavins did not disclose any of the facts relating to them although admittedly, at the meeting at which the sale of the stock was consummated, Leon Slavin, in answer to a preliminary question by the Kardons' attorney, whether he had made any agreement for the sale of the stock, answered No.¹

Having acquired the plaintiffs' stock, the Slavins proceeded to consummate the transaction with National Gypsum. On March 23, a formal contract of sale was executed in which the Slavins themselves, rather than the corporation, appeared as the sellers and which substantially incorporated the terms of the preliminary agreement. Finally in February of 1947, the Slavins, having themselves acquired title from the corporation, conveyed the property to National Gypsum. The Slavins thus obtained $1,500,000, plus whatever other sums they were paid under the agreement and subject to diminution in such amount as may be necessary to meet any unliquidated income tax liability.

Turning now to the remedy. In essence, the transaction is a sale by directors, in their own interest, of corporate assets, otherwise than in the course of business and without disclosure to stockholders. The plant and equipment belonged to the corporation, and the Slavins were acting for the corporation at the time when Leon Slavin executed the preliminary agreement. The fact that the actual conveyance was by them as individuals and the fact that it was not made until they had acquired all the outstanding stock are immaterial. In dealing with cases of this...