Kessler v. General Cable Corp.

• Decision Date: 01 May 1979
• Citation: 155 Cal.Rptr. 94,92 Cal.App.3d 531
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 71,484 Robert KESSLER, etc., et al., Plaintiffs and Appellants, v. GENERAL CABLE CORPORATION and Sprague Electric Company, Defendants and Respondents. Civ. 53666.

Page 94

155 Cal.Rptr. 94

92 Cal.App.3d 531, Blue Sky L. Rep. P 71,484

Robert KESSLER, etc., et al., Plaintiffs and Appellants, v. GENERAL CABLE CORPORATION and Sprague Electric Company, Defendants and Respondents.

Civ. 53666.

Court of Appeal, Second District, Division 4, California.

May 1, 1979.

Hearing Denied June 27, 1979.

Baltaxe, Rutkin & Klein and George Baltaxe, Beverly Hills, and Theodore Field, Northridge, for plaintiffs and appellants.

Pillsbury, Madison & Sutro and John B. Bates, John A. Sutro, Jr. and Walter R. Allan, San Francisco, for defendant and respondent General Cable Corporation.

Latham & Watkins and A. Victor Antola and Kenneth W. Oder, Los Angeles, for defendant and respondent Sprague Electric Co.

JEFFERSON, Associate Justice.

Plaintiff Robert Kessler, the holder of $10,000 in convertible debentures issued by defendant Sprague Electric Company, on behalf of himself and other debenture holders similarly situated, filed an action against Sprague, a Massachusetts corporation, General Cable Corporation, a New Jersey corporation, and numerous Doe defendants. This complaint sought damages for violation of California Corporate Securities Act, for breach of contract, for breach of fiduciary relationship, and for declaratory relief. The corporate defendants filed answers to the complaint and obtained some discovery through interrogatories. Each corporate defendant then filed a motion for summary judgment.

In addition to opposing the summary judgment motions, plaintiff moved to file a first amended complaint. At the single hearing on the motions for summary judgment and the motion to file a first amended complaint, the parties stipulated that written affidavits and exhibits submitted by defendants should be admitted into evidence. The parties also stipulated that plaintiff's motion for leave to file a first amended complaint should be granted and that defendants' motions for summary judgment were to be deemed directed to the first amended complaint.

The first amended complaint also alleged breach of contract, a violation of the California Corporate Securities Act, a breach of fiduciary relationship and, in a cause of action directed at defendant General Cable, a "breach of prospective advantage." Added as defendants in the first amended complaint were numerous officers and directors of the corporate defendants who made the motions for summary judgment.

At the hearing on the motions for summary judgment the parties orally stipulated that, insofar as these motions were concerned, there were no triable issues as to any material fact before the court and, hence, the motions could be determined as a matter of law. The court granted the summary judgment motions and a judgment was accordingly entered for the two corporate defendants. Plaintiff has appealed from the judgment.

A preliminary dispute between the parties on appeal concerns the nature and effect of the judgment entered below. Plaintiff takes the position that the trial court's determination was solely of a question of law, I. e., the viability of plaintiff's amended complaint in stating a cause or causes of action against defendants, a determination that may appropriately be made by demurrer. Defendants point out that the trial court granted a motion for summary judgment, encompassing not only the determination of legal issues but the absence of triable issues of fact as well. A demurrer, of course, admits facts well pleaded; defendants stress that they took issue with plaintiff's factual assertions below, particularly with respect to the issue of damages.

We perceive the issues raised by the amended complaint as both legal and factual. While a question of law is appropriately determined on demurrer, "such defect is not waived by the failure to raise it by demurrer and may be considered in the context of a motion for summary judgment." (Bowden v. Robinson (1977) 67 Cal.App.3d 705, 710, 136 Cal.Rptr. 871, 875.) In addition, however, our review must be conducted pursuant to the well established principles which guide summary judgment proceedings. It is well understood that the primary purpose of such proceedings is to ascertain the existence of triable issues of fact from a record which includes but is not limited to "affidavits, declarations, admissions, answers to interrogatories, . . . " (See, generally, Code Civ.Proc., § 437c; Chern v. Bank of America (1976) 15 Cal.3d 866, 873, 127 Cal.Rptr. 110, 544 P.2d 1310; DeSuza v. Andersack (1976) 63 Cal.App.3d 694, 698, 133 Cal.Rptr. 920.)

Certain facts which generated this dispute are uncontroverted. Plaintiff Kessler acquired Sprague's convertible debentures in December 1974. Sprague had described the debentures in this particular issue in a prospectus dated September 27, 1967, offering $25,000,000 of them to investors at an interest rate of four and one-fourth percent. By the indenture agreement dated October 1, 1967, the holder of debentures issued under the agreement could convert them to the common stock of Sprague "at the rate of 21.978 Common Shares for each $1,000 principal amount of Debentures, or, in case an adjustment in the conversion rate has taken place pursuant to the provisions of Section 1304, then at the applicable conversion rate as so adjusted, . . ." At the stated conversion rate, the cost of each share of common stock would be $45.50.

The indenture agreement provided for certain protection of the debenture holders, by reserving sufficient common stock to enable the corporation to respond to exercise of the conversion option, and a sinking fund available for redemption of the debentures. The indenture agreement also provided for preservation of the rights of the debenture holders in the event of consolidation, merger or conveyance of corporate assets. The debentures so issued were of 25 years' duration, payable in 1992. The debentures could be redeemed by the corporation prior to that time at the corporation's election. Prior to that redemption by election or the passage of the stated time, the holder could exercise his right of conversion to common stock.

On November 12, 1976, defendant General Cable Corporation made a tender offer to the shareholders of Sprague, offering to purchase all of the publicly held shares of Sprague common stock for $19.50 per share, a price above the market price for the stock at that time. The offer was also made to purchase the stock held by officers, directors and employees of Sprague, and to purchase certain stock options held by them at the same price. The Sprague Board of Directors recommended to their shareholders acceptance of the tender offer. By the end of 1976, defendant General Cable had acquired 96.3 percent of the total outstanding common stock of Sprague, an objective undertaken to expand and diversify General Cable's corporate enterprise.

As a result of General Cable's acquisition of Sprague's common stock, the common stock of Sprague, and the 1967 Sprague debentures were delisted from the New York Stock Exchange (NYSE) on January 4, 1977, because these securities no longer met NYSE requirements concerning the level of public ownership by participating corporations.

In essence, in the case before us, plaintiff is complaining that the acquisition of almost all of Sprague's common stock by General Cable Corporation, and the subsequent removal of Sprague's stock and debentures from the NYSE, has deprived plaintiff and other debenture holders of a public market for their debentures and for Sprague's common stock. Plaintiff points out that the delisting of these securities from NYSE has limited sales of these securities to over-the-counter transactions. Plaintiff argues that, as a result, the market has been reduced to the point where it will never be profitable for holders of Sprague debentures to convert the debentures to Sprague common stock because the price of Sprague common stock will never increase sufficiently to make exercise of the conversion right meaningful. Thus, plaintiff asserts, the conversion right has in effect been destroyed, and the debenture holders have been deprived of one of the potential "benefits of the bargain" offered to such investors to persuade them to participate in the transaction of purchasing convertible debentures.

Plaintiff's suit constitutes an effort, in California at least, to clarify the various rights and duties which result from the issuance of corporate convertible debentures; to specifically ascertain the status of rights of conversion contained in such debentures; and to identify what relief, if any, is available to the holder of a conversion right which is in jeopardy or which has been diminished in value by corporate conduct. Plaintiff's amended complaint, which alleged five causes of action, sought rescission or compensatory damages as well as punitive damages of $25,000,000.

The corporate defendants' response is two-fold. First, they deny that a corporation owes any duty to debenture holders which exceeds that owed to any creditor of the corporation pursuant to the credit instrument and, secondly, they deny that these particular defendants had, during the course of conducting corporate affairs, either intentionally or otherwise caused the plaintiff (or other similarly situated debenture holders) damage; this second line of defense was buttressed by the introduction of evidence below in the form of the affidavits of the presidents of the two corporate defendants, and other materials.

Before addressing the five causes of action alleged in plaintiff's amended complaint, some discussion is necessary relating to the legal status past and present of convertible debentures and holders of such debentures.

A debenture represents, primarily, evidence of debt owed by the issuer to the holder, and a corporate debenture or bond is one issued by a corporation. As Fletcher notes, "(b)onds are to be distinguished from stock, in that the distinguishing feature of bonds is the...