Kravetz v. United Artists Corp.

Decision Date25 July 1955
Citation143 N.Y.S.2d 539
PartiesRina M. KRAVETZ, as ancillary Executrix under the Last Will and Testament of Max M. Kravetz, deceased, Plaintiff, v. UNITED ARTISTS CORPORATION, Arthur B. Krim, Robert S. Benjamin, Seymour M. Peyser, Matthew Fox, William Heinemann, Max Youngstein, Samuel Spiegel, Walter E. Heller & Company, Inc., Milton Gordon, Davis E. Scoll, Frank L. McNamee, The Pickford Corporation, Mary Pickford, Charles Chaplin, Frank A. Celentano and Marion Bardes, as Executors under the Last Will and Testament of Paul V. McNutt, deceased, and Chemical Bank & Trust Company (now known as Chemical Corn Exchange Bank), Defendants, and Oona O'Neill Chaplin, Defendant, joined by Supplemental Summons.
CourtNew York Supreme Court

Jay Leo Rothschild and Meyer Boskey, New York City, by Jay Leo Rothschild, New York City, of counsel, for plaintiff.

Phillips, Nizer, Benjamin & Krim, by Louis Nizer, New York City, and Walter S. Beck, New York City, of counsel, for defendants: United Artists Corp., Arthur B. Krim, Robert S. Benjamin, Seymour M. Peyser, Matthew Fox, William Heinemann, Max Youngstein, Milton Gordon and W. E. Heller & Co.

Thomas G. Proctor, and John F. Lang, New York City, by Thomas G. Proctor, New York City, for defendants David E. Scoll, Frank A. Celentano and Marion Bardes, as Executors under the last Will and Testament of Paul V. McNutt, deceased.

Schwartz & Frohlich, by Arthur Schwartz, New York City, of counsel, for defendant Charles Chaplin.

Bernard B. Smith, New York City, by Leonard H. Steiber and Robert Stephen Haft, New York City, of counsel, for defendants: Mary Pickford and The Pickford Corp.

Margulies & Heit, by Albert Heit, New York City, of counsel, for defendant Samuel Spiegel.

Cravath, Swaine & Moore, by Alexander S. Andrews, Jr., New York City, of counsel, for defendant Chemical Bank, etc. MARKOWITZ, Justice.

Plaintiff, Rina M. Kravetz, sues as ancillary executrix under the will of her deceased husband, Max M. Kravetz, to impose a constructive trust upon the capital stock of United Artists Corporation deposited with the Chemical Bank and Trust Company, and upon the voting trust certificates issued to represent them; to enjoin the defendants from removing such stock; to enjoin the transfer of said voting certificates, and to compel an accounting as well as for money damage.

The action was commenced in July 1953. It stems from an alleged breach of an option agreement dated July 11, 1950 under which the defendants Chaplin and the Pickford Corporation granted to Paul V. McNutt, 1 Frank L. McNamee and Max M. Kravetz (plaintiff's decedent) as partners, an option to purchase a block of 7,200 shares of the capital stock of United Artists Corporation, 3,600 shares each from Chaplin and the Pickford Corporation, at a price of $675 per share totalling $4,860,000. This block of stock represented 90 per cent control of United Artists Corporation. The option agreement was to remain in effect until July 11, 1952, and by its terms was irrevocable. Concurrently, on July 11, 1950, an instrument was executed by Pickford Corporation and Chaplin which constituted the defendant Paul V. McNutt the trustee of such stock and conferred upon him the sole power of management of the corporation and to vote the stock as he, in his 'sole discretion shall deem for the best interests of said Corporation.' McNutt was further granted permission to hold the stock until July 11, 1952, and if the option was not exercised, then the said stock was to be returned to Chaplin and the Pickford Corporation. The trust agreement also permitted the issuance or sale of additional treasury stock by McNutt, but only with the consent of Chaplin and the Pickford Corporation. On the same day the optionees were elected directors and officers of the corporation.

After a period of about six months defendants McNutt and McNamee renounced the option and resigned their directorships, and the defendant McNutt resigned his trusteeship. New management was substituted, new financing invited and secured, and new arrangements made for the issuance of treasury stock and a distribution of capital stock of the corporation, all of which was provided for under agreements dated February 7, 1951, between Chaplin and Pickford Corporation, and the defendants Arthur Krim and his associates.

Plaintiff alleges and contends that the option and trust agreement and the designation of the optionees as directors and officers of the corporation constituted a single transaction, of which the primary purpose was the protection and promotion of the interests of the optionees leading to the ultimate exercise of the option by them within a two-year period. Plaintiff further claims that McNutt by virtue of his partnership with decedent under the terms of said option agreement owed a paramount fiduciary duty to the decedent in respect of the corporate management and in the performance of the trusteeship and that as trustee McNutt was obligated to hold the trusteed stock until July 11, 1952. Plaintiff also contends that the defendants conspired to exclude the decedent, to disable the trustee from performing his superior fiduciary duty to his co-optionees and to enable them to secure and enjoy the benefits of decedent's exclusion. This, it is contended, was accomplished by the resignation of the trustee, the renunciation of the option and trust agreement by decedent's co-optionees, the resignation of the co-optionees as officers and directors prior to the expiration of the two-year option period, and engagement in agreements with the other defendants to alter the capital set-up of United Artists Corporation and to transfer control of the corporation to the Krim group, thus completely disabling the trustee and destroying the partnership venture and, accordingly, depriving the decedent of his opportunity to exercise his option rights during the two-year period. On this basis plaintiff seeks to invoke the equitable jurisdiction of this court to impress a constructive trust on the capital stock of the corporation and to direct an accounting with respect to the transactions following upon renunciation of the option by the defendants McNutt and McNamee and for other relief.

United Artists Corporation for many years was among the foremost producers and distributors of motion pictures. Pickford Corporation (controlled by Mary Pickford) and Charles Chaplin, were the sole stockholders of United Artists. For some time prior to 1950 United Artists was not operating profitably. Differences arose between Pickford and Chaplin as to the management of United Artists. They knew decedent Kravetz and agreed to allow him to try to dispose of their stock interest. His efforts were to no avail. It was obvious that a person of unimpeachable repute and know-how in the field of corporate reorganization was necessary to assume the direction of the task which faced United Artists. Kravetz knew McNutt, and recommended him. McNutt was an outstanding public figure, having held many public offices of responsibility, including High Commissioner to the Philippines and Governor of the State of Indiana. Moreover, he had extensive experience in corporate affairs and finance.

It was agreed to bring McNutt into the picture and they--Pickford and Chaplin--placed their utmost confidence in him to seek new life for the foundering corporation. In this way McNutt's services were sought and obtained with the full acquiescence of all concerned. McNutt brought in his friend and business associate, McNamee. He was thus placed in the key role of rebuilding United Artists even though neither he, the decedent, nor McNamee had any specialized experience in the financing and management problems of the motion picture distribution and production industry.

It was by virtue of the confidence and trust that Pickford and Chaplin had in McNutt that even the option agreement was given to Kravetz, McNutt and McNamee. However, under the trust agreement McNutt was made the sole trustee. In addition, it provided that in case of McNutt's death or inability to act as trustee, then Chaplin and Pickford were to have the exclusive right to designate his successor. Neither Kravetz nor McNamee was granted such succession.

It is abundantly clear that in July, 1950, when McNutt, McNamee, and Kravetz took over, producers refused to deliver their motion pictures to the corporation, the distribution office shrank in personnel and quality, and the source of supply was drying up.

The financial condition of United Artists Corporation as of July 1, 1950, indicated a deficit of $47,499.45 and an operating loss and adjustment reserve of $733,067.73 for the preceding six-month period. This operating loss and adjustment wiped out the entire surplus of $685,618.28 which existed on January 1, 1950.

It further appeared from the memorandum from Scoll to McNutt, dated September 18, 1950, referring to a meeting held September 17, 1950, that, it was then indicated it was essential to re-establish confidence of the motion picture industry in United Artists and that it was the industry's impression the company was close to insolvency and needed additional working capital. Its place in the field of distribution was near collapse. In the event of an open break by any one producer, the remaining producers would follow and all existing contracts would be broken. Restoration of confidence required changes in policy and operating procedures which could be effected only with a change of operating personnel.

The final statement as of December 30, 1950 indicated an increased deficit to $185,161.35, resulting from an operating loss from July to December 1950 of $137,731.90.

Again, the January 4, 1951, report of the president of United Artists refers to the company's precarious position and continuing losses. The indicated solution was to attract $2,000,000 risk capital at once to enable management to adopt...

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