Kohler v. Kohler Co.

• Decision Date: 06 September 1962
• Docket Number: No. 58-C-351.,58-C-351.
• Citation: 208 F. Supp. 808
• Court: U.S. District Court — Eastern District of Wisconsin
• Parties: Walter J. KOHLER, Plaintiff, v. KOHLER CO., a corporation, Herbert V. Kohler, Ernst & Ernst, a partnership, and Paul F. Johnson, Defendants.

208 F. Supp. 808

Walter J. KOHLER, Plaintiff, v. KOHLER CO., a corporation, Herbert V. Kohler, Ernst & Ernst, a partnership, and Paul F. Johnson, Defendants.

No. 58-C-351.

United States District Court E. D. Wisconsin.

September 6, 1962.

COPYRIGHT MATERIAL OMITTED

Steven E. Keane, Lynford Lardner, Jr., Marvin E. Klitsner and William J. Kiernan, Jr., Milwaukee, Wis., for plaintiff, Foley, Sammond & Lardner, Milwaukee, Wis., of counsel.

Louis Quarles and Maxwell H. Herriott, Milwaukee, Wis., Edward J. Hammer and Lyman C. Conger, Kohler, Wis., for defendants Kohler Co. and Herbert V. Kohler, Quarles Herriott & Clemons, Milwaukee, Wis., of counsel.

Norman C. Skogstad, John J. Ottusch, Milwaukee, Wis., and Leslie Nichols, Cleveland, Ohio, for defendants Ernst & Ernst and Paul F. Johnson, Wickham, Borgelt, Skogstad & Powell, Milwaukee, Wis., of counsel.

GRUBB, District Judge.

This is an action at law to recover damages allegedly incurred by the plaintiff, Walter J. Kohler, upon the sale of his stock to the defendant, Kohler Co. It is alleged that plaintiff was induced by "the misrepresentations, half-truths, and omissions" of defendants to sell 21,415.6139 shares of Kohler Co. common stock on February 20, 1953, at a price of $115 per share, which was at least $10 per share less than its "actual" or "fair market" value.

The actions of defendants in connection with the purchase of plaintiff's stock are attacked on two grounds: First, that they constituted a violation of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891 (1934), 15 U.S. C.A. § 78j(b)¹ and of Rule X-10B-5² of the Securities and Exchange Commission issued pursuant thereto; and second, that they constituted a breach of defendants' duty as "fiduciaries" and "insiders" to make a full and accurate disclosure to plaintiff of all facts material to the value of this stock which they were negotiating to purchase.

From the stipulations and evidence, the court finds the facts and legal conclusions as follows:

Plaintiff was a stockholder of Kohler Co. from 1931 to February 20, 1953, at which latter date he owned 21,415.6139 shares out of 200,000 shares of common stock outstanding. In addition, the Walter J. Kohler Trust held 2,550.2180 shares. Plaintiff was an employee of Kohler Co. in various capacities from 1925 to 1947, a director from 1936 to 1947, and secretary of the company from 1937 to 1947. He has been president of the Vollrath Company, a kitchen utensils firm, from 1947 to the present, and a director of that firm from 1940 to the present. He was Governor of the State of Wisconsin from 1951 until sometime after the date of the sale here in question on February 20, 1953.

The defendant, Herbert V. Kohler, is an uncle of plaintiff and was at all times pertinent hereto the president and chairman of the board of directors of Kohler Co. The defendant, Kohler Co., is a closely held corporation, having had only twenty-six common stockholders up to the date of this sale. It is engaged primarily in the manufacture of plumbingware fixtures at Kohler, Wisconsin. The defendant, Ernst & Ernst, is a partnership engaged in the profession of public accounting and since 1930 has performed all auditing and public accounting work for Kohler Co. The defendant, Paul F. Johnson, is and was at all times subsequent to 1946 a partner in Ernst & Ernst and in 1953 was the partner in charge of the Kohler Co. account.

On February 2, 1953, plaintiff, while Governor of the State of Wisconsin, wrote a letter to Herbert V. Kohler in which he stated that he held an option to purchase certain stock in the Vollrath Company, of which he was then president, and that in order to exercise that option it would be necessary for him to dispose of his Kohler Co. stock. Plaintiff suggested four possible methods of accomplishing this, one of which was an offer to sell his stock to Kohler Co. for cash. Upon receipt of this letter, Herbert V. Kohler consulted with his fellow directors and officers as to whether the company would be interested in buying plaintiff's stock. It was then decided that Johnson should act as an intermediary and meet with plaintiff to "negotiate" the transaction and find out what price plaintiff had in mind.

On February 5, 1953, Herbert V. Kohler wrote to plaintiff that Johnson would contact plaintiff and that "He Paul F. Johnson has available the facts which might play a part in a discussion of values."

On February 11, 1953, plaintiff telephoned Lee Rasey, a partner in the brokerage and underwriting firm of Robert W. Baird & Co. There is a sharp dispute as to the substance of this conversation. Defendants claim that plaintiff asked Rasey for an "appraisal" of his Kohler Co. stock, and plaintiff, in pretrial depositions, did so testify. Later plaintiff stated that he did not ask for an "appraisal" but merely asked Rasey to furnish him with a comparison of the last ten years' earnings of American Radiator & Standard Sanitary Corporation and Crane Company (hereinafter referred to as "American-Standard" and "Crane"), the two major competitors of Kohler Co., and also told Rasey that he could get any financial data of the Kohler Co. from plaintiff's brother Robert. Plaintiff's brother, Robert E. Kohler, was a director of Kohler Co. from 1937 to March 1952. After that time, he remained a stockholder, owning 21,188.8547 shares in February 1953.

Rasey instructed a member of his staff who dealt in stock appraisal work, E. R. Van Horn, to supply plaintiff with the information requested. Van Horn obtained certain financial data on American-Standard and Crane from Standard & Poor's investment service (along with data on other companies not pertinent here) and financial data on Kohler Co. from Robert Kohler. This information included earnings of Kohler Co. for the eleven months ended November 30, 1952, and estimated earnings of $2,500,000 for the full year 1952. Van Horn indicated in his report to plaintiff that he did not have complete figures on Kohler Co. and that the difference between the reported eleven months' earnings of $1,568,000 and estimated 1952 earnings was "quite substantial." He concluded his report with an opinion that plaintiff's stock was worth "somewhere in the range of $75 to $100 per share." Plaintiff testified that he wholly disregarded this report and the data contained therein because he regarded it as "incomprehensible" and "unreliable," and Van Horn himself characterized it as a "horseback opinion" since it was drawn up on short notice and with incomplete data.

Plaintiff made no disclosure to any of the defendants that he had acquired this information. He made no inquiry as to the "quite substantial" increase in estimated 1952 earnings.

Plaintiff then met with Johnson in Madison, Wisconsin, on February 13, 1953, to discuss the sale. Up to this point, plaintiff had decided upon an asking price of $125 per share, which price, he testified, was based upon his "judgment" and "general knowledge" of Kohler Co. There is no evidence as to how he arrived at this figure.

At this initial meeting, plaintiff told Johnson that he had a price of $125 per share in mind. The evidence is not clear as to what Johnson said, but plaintiff testified that Johnson at that time "mentioned" $115 per share, although Johnson did not make a firm offer to purchase the stock at that price. Johnson was instructed by Herbert V. Kohler to inquire whether the stock held by the Walter J. Kohler Trust would also be for sale, and plaintiff said it was not. Plaintiff also stated that he wanted an answer by February 18, 1953, and indicated that he wanted at least a $100,000 down payment with the balance within thirty to sixty days. Johnson then reported this discussion to Herbert V. Kohler in a telephone conversation from Chicago to Kohler, Wisconsin, indicating to him that plaintiff "Would be interested at around 115."

On February 15 and 16, 1953, Herbert V. Kohler again conferred with his fellow directors and officers, at which time they agreed that Johnson should inquire as to whether plaintiff would give a thirty day option to Kohler Co. to purchase his stock at $115 per share, the price of the option to be $5,000. Herbert V. Kohler testified that the reason the company wanted an option was to enable them "to think it out a little bit more." He then sent $5,000 to Johnson in Chicago. Johnson returned the check because he felt that plaintiff would not consider giving an option. On February 19, 1953, Herbert V. Kohler again wrote to Johnson, this time authorizing him to purchase plaintiff's stock at $115 per share and upon the terms that plaintiff had suggested, i. e., $100,000 down and the balance in thirty to sixty days.

Meanwhile, on February 16, 1953, Johnson mailed to plaintiff from his Chicago office certain statistical data with the following letter:

"At the time of our discussion last Friday afternoon, it was agreed that I would furnish you with the statistical data that I had used in projecting the possible value of Kohler Co. common stock. These projections are based upon average earnings and other data of Crane Company and American Radiator & Standard Sanitary Mfg. Co. I believe that these schedules are self-explanatory but should any question occur to you, I shall endeavor to answer it."

The data furnished included a series of ten projected values of Kohler Co. stock ranging from $58.83 to $149.38, based upon certain comparative ratios of Crane and American-Standard, both of which are publicly traded stocks. The ratios employed were (1) average ten-year earnings to market price, (2) average five-year earnings to market price, (3) average ten-year dividends to market price, (4) average five-year dividends to market price, and (5) book value to market price. The first four ratios were derived from financial data of the three companies for the ten (or five) years ending December 31, 1951, and the fifth ratio was derived from the book values as of December 31,...