Knapp v. Kinsey

• Decision Date: 01 May 1956
• Docket Number: No. 12676.,12676.
• Citation: 232 F.2d 458
• Parties: Burton S. KNAPP et al., Appellants, v. John P. KINSEY et al., Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

232 F.2d 458 (1956)

Burton S. KNAPP et al., Appellants, v. John P. KINSEY et al., Appellees.

No. 12676.

United States Court of Appeals Sixth Circuit.

May 1, 1956.

Richard Ford and Charles H. King, Detroit, Mich. (Kenneth B. McConnell, Fischer, Sprague, Franklin & Ford, Detroit, Mich., on the brief for voting trustees; Arthur W. Sempliner, Detroit, Mich., on the brief for Burton S. Knapp, and others; Charles H. King, Detroit, Mich., on the brief for Geo. J. Huber), for appellants.

George E. Brand and George E. Brand, Jr., Detroit Mich., for appellees.

Hugh Francis, Detroit, Mich., for Monroe Paper Products Co.

Before SIMONS, Chief Judge, and ALLEN and MILLER, Circuit Judges.

MILLER, Circuit Judge.

This is a stockholders' suit brought by John P. Kinsey, individually and as a director and stockholder of Monroe Paper Products Company, hereinafter referred to as the Monroe Company, Lawrence G. Kunkel and the Waterbury Corrugated Container Company, individually and as stockholders of the Monroe Company. It is directed against Burton S. Knapp, Charles E. Raney, George A. Blum, Don B. Leathers and Arthur W. Sempliner, individually and as directors and stockholders of the Monroe Company, and as Trustees under a Voting Trust Agreement pertaining to the stock therein; also George J. Huber, individually and as Chairman of a Stockholders' Committee, and the Monroe Company itself. It charges breach of fiduciary duties on the part of the directors, and seeks among other items of relief their removal as directors of the Company, that the Voting Trust Agreement be declared illegal, and an accounting for the loss and damage sustained by the Company by reason of said violations of fiduciary duties. From a judgment favorable to the plaintiffs, the defendants Knapp, Raney, Blum, Leathers, Sempliner and Huber have appealed.

The complaint as amended was based upon allegations which can be briefly summarized as follows: The Monroe Company was incorporated as a Michigan corporation on or about March 20, 1920 and has been engaged in the business of manufacturing paper and paper container products. Its authorized outstanding capital stock was 190,000 shares of $1.00 par value common stock. For some ten years prior to his death on March 10, 1953, Alex J. Groesbeck was the President, a director, and the largest single stockholder of the Company, and to a large extent controlled its affairs. During that period it was the policy of the Company for Groesbeck to purchase company stock on the open market at market prices on behalf of the Company and transfer the same to the Company's treasury for periodic retirement. The Company was conservatively operated, made conservative dividend payments to stockholders, and maintained substantial cash reserves.

Following Groesbeck's death, a cleavage resulted in the Board of Directors between those supporting the Groesbeck interests and those supporting the defendant Knapp. Knapp, who was a director, but had little knowledge of the Company's business, was elected President, and the defendant Raney, who was also a director, became the operating head of the Company. A fight for the control of the Company followed. On or about October 1, 1953, the Waterbury Corrugated Container Company purchased from the Groesbeck estate faction and others approximately 75,000 shares of the common stock at a price of $10.00 per share. Plaintiffs Kinsey and Kunkel were President and Vice President respectively of Waterbury Company.

In the meantime, the Knapp faction discontinued making purchases of the Company stock for the benefit of the Company, and attempted to acquire stock for the benefit of themselves and those friendly to them. Funds were secretly deposited in escrow by the Knapp faction with the Monroe State Savings Bank, which had previously handled stock purchases of the Company, through which 15,538 shares of the Company stock were purchased during September, October and November 1953. On October 11, 1953, the defendant, against the vote of the non-defendant directors, without disclosure of the escrow stock purchases and despite a 50% increase in the regular dividend paid September 15, 1953, passed a large unprecedented extra dividend equal to the total 1952 dividends, but withheld payment thereof until January 15, 1954, in order, as charged by the complaint, to allow themselves time to deliver the escrow stock to themselves and those friendly to them.

A stockholders' committee was formed by the defendants, which drafted a Voting Trust Agreement which gave to the defendant directors the voting control of the majority of the Company stock for five years. Company funds and Company facilities were used to solicit stockholders to submit their stock to the Voting Trust Agreement. In addition, the amended complaint charged mismanagement of the Company's affairs and unauthorized expenditures of Company funds in substantial amounts.

The complaint was filed by Kinsey, Kunkel and the Waterbury Company on February 2, 1954. As later amended it charged that the Voting Trust Certificates were not registered under the Securities Act of 1933 and had not been qualified under the Michigan Blue Sky Law; that the Voting Trust Agreement was a restraint of interstate trade and commerce prohibited by the Sherman Anti-Trust Act, 15 U.S.C.A. §§ 1-8, 15 note, and the Clayton Act, 15 U.S.C.A. § 12 et seq., and was an unlawful restraint on alienation of property contrary to the laws and public policy of the State of Michigan. It asked that the defendant directors be required to disclose information about the foregoing transactions, that the escrow agreement be declared unlawful and in violation of the fiduciary duties of the defendants, that the Voting Trust Agreement be declared unlawful and all deposits thereunder be cancelled, that the defendants be removed as directors and officers of the Company and be required to account to the Company for the damage resulting from violations of their fiduciary duties, and that all stock of the Monroe Company purchased by the individual defendants since July 1, 1953 be cancelled and returned to the Company in accordance with a suggested formula providing for proper compensation. The material allegations were denied by the defendants, and in addition the Company and the individual defendants, except Huber, filed counterclaims, to which replies were filed, making the issues.

Shortly after the filing of the complaint, extensive discovery proceedings were conducted until October 12, 1954 when the trial was started before the Court without a jury. The trial continued until June 2, 1955. On August 4, 1955, the District Judge handed down extensive findings of fact and conclusions of law and entered a partial final judgment under Rule 54(b) of the Federal Rules of Civil Procedure, 28 U.S.C. The judgment provided that the Monroe Company recover from the defendants jointly and severally the sum of $306,982.62 with the Court reserving jurisdiction to enter additional judgments for items of damage not yet passed upon; that the defendant directors be enjoined from recognizing or carrying out the Voting Trust Agreement; that the Trustees under the Voting Trust Agreement be enjoined from voting any of the shares deposited thereunder; and that they terminate and cancel the Voting Trust Agreement and deliver all certificates for shares of stock deposited under the Agreement to the depositors thereof or their transferees. Notice of appeal was filed on August 5, 1955. The District Judge having stated in colloquy with counsel on June 2nd that he would not grant a stay, appellants made application to this Court which entered a stay order on August 12, 1955, conditional upon the execution of a supersedeas bond in the amount of $250,000. The bond was executed and filed.

This appeal has been thoroughly briefed and argued on its merits. It involves a voluminous record. In addition to the issues presented in a consideration of the merits, appellants at the outset contend that the District Court's findings have no value, and that the judgment should be reversed, because of bias and prejudice on the part of the trial judge and a pre-judgment by him of important issues before trial. Our attention has been directed to many portions of the record as supporting the contention, to some of which we will refer.

One phase of this case, involving an analogous question, has recently been reviewed by us in Appeal of the United States Securities and Exchange Commission and William H. Timbers, its General Counsel, from Order Adjudicating William H. Timbers in Contempt, reported at 6 Cir., 226 F.2d 501, hereinafter referred to as the Timbers case. The facts involved in that phase of the case are set out at length in that opinion, to which reference is now made, and will not be repeated here. Those facts furnish an important background to the question now presented.

As pointed out in the opinion in that case, much of the controversy between the District Judge and the appellants apparently arose out of the erroneous view taken by the District Judge that a part of his function was to conduct a searching inquisition into what he considered to be neglectful inaction of the Securities and Exchange Commission in relation to the Monroe Company's affairs, at page 519. The extent to which this view influenced his actions in the case is shown by the following:

Shortly after the start of the trial the District Judge wrote the District Attorney calling his attention to the charge that the defendants had sold voting trust certificates "in violation of the Securities Act" and making available for examination the file, depositions and a transcript of parts of the evidence. Counsel for the plaintiffs had brought this matter to the attention of the Securities and Exchange Commission, and the Blue Sky Commission of Michigan before institution of the suit, who investigated the matter but took no action. On October 27th the District Judge...