Ladd v. Brickley

• Decision Date: 10 February 1947
• Docket Number: No. 4167.,4167.
• Citation: 158 F.2d 212
• Parties: LADD et al. v. BRICKLEY et al.
• Court: U.S. Court of Appeals — First Circuit

158 F.2d 212 (1946)

LADD et al. v. BRICKLEY et al.

No. 4167.

Circuit Court of Appeals, First Circuit.

November 14, 1946.

Writ of Certiorari Denied February 10, 1947.

Before MAHONEY, GOODRICH (by special assignment), and WOODBURY, Circuit Judges.

Howell Van Auken, of Detroit, Mich., for appellants.

B. A. Brickley and Frank B. Wallis, both of Boston, Mass. (Samuel Hoar and Edward R. Langenbach, both of Boston, Mass., on the brief), for Brickley, trustee, appellee.

Morton E. Yohalem, Counsel, Public Utilities Division (Roger S. Foster, Sol., Robert S. Rubin, Asst. Sol., Alexander Cohen, Atty., and Robert F. Krause, Public Utilities Division, all of Philadelphia, Pa., on the brief), for Securities and Exchange Commission, appellee.

John L. Hall, of Boston (John W. Davis, of New York City, Richard Wait, of Boston, Ralph M. Carson, of New York City, Choate, Hall & Stewart, of Boston, Mass., and Davis, Polk, Wardwell, Sunderland & Kiendl, of New York City, on the brief), for International Paper Co., appellee.

Joseph Nemerov, of New York City, for Ethel Kresberg and others, appellees.

Archibald Palmer, of New York City, and Friedman, Atherton, King & Turner, of Boston, Mass. (Bennett E. Aron, of Brooklyn, N. Y., on the brief), for Mildred Howard, appellee.

Writ of Certiorari Denied February 10, 1947. See 67 S.Ct. 675.

GOODRICH, Circuit Judge.

This appeal from the judgment of the District Court for the District of Massachusetts brings before us the propriety of that court's approval of a settlement in an important matter of corporate reorganization.

The affairs of International Hydro-Electric System (hereinafter called Hydro) are involved. This company is a holding company and its reorganization under the Public Utility Holding Company Act of 1935¹ is in the District Court.

Hydro was formed by a predecessor of International Paper Company (hereinafter called Paper Company).² To simplify reference to the corporate relationships we shall speak of Paper Company as though it had been in continuous existence while the acts complained of arose. The legal significance of this assumption will be subjected to analysis later. A charge that International Paper Company had improperly manipulated Hydro to its own use and to the loss of Hydro's security holders was made with such force that the District Court appointed a member of the Massachusetts Bar, Bartholomew A. Brickley, Esq., to make an investigation. Subsequently, Mr. Brickley became Trustee in the reorganization proceedings. With the help of the Securities and Exchange Commission (hereinafter called S.E.C.) a thorough investigation was made. The conclusion reached by the Trustee was that enough facts had been uncovered to call for the institution of legal proceedings against the Paper Company. Suit was started in the Massachusetts State Court; also in the United States District Court for the District of Massachusetts. Before these actions came to trial on the merits, long negotiations were had between the parties looking to settlement. The Paper Company's original offer of $500,000 was, in the course of subsequent negotiations, eventually increased to $10,000,000 plus the agreement of Paper Company to lend one of Hydro's companies $3,000,000. This was subject to the provision that a clearing agreement be had with the Bureau of Internal Revenue with regard to Paper Company's income and excess profits tax liability for the money thus paid out. This clearance was subsequently obtained and the money paid into court. The District Judge has approved the settlement; so has the S.E.C. and the majority of those interested in the company. A group of junior security holders, however, are not satisfied with the amount obtained and bring this appeal alleging an error in the approval of the settlement above described. They figure that potential claims of the plaintiff in the actions total $131,859,059.56. They say that a settlement for only 7½% of this amount is not the kind of settlement which the court in the exercise of discretion can properly approve.

There are two main points on this appeal. The first one has to do with the form in which the District Court's conclusion appears. There were no formal findings of fact and conclusions of law. The decree recited: "That the court hereby determines that the compromise provided for in that certain agreement * * * between Bartholomew A. Brickley, solely as he is trustee of International Hydro Electro System * * * and International Paper Company * * * is for the best interests of the estate of said System, that the consideration payable thereunder to said System is fair, reasonable, and adequate and that adequate notice and opportunity to be heard has been given to all persons interested, and the court hereby approves said agreement * * *." It concluded with specific directions for the execution of the agreement.

The appellants say that this is insufficient. They prefer to have the Court of Appeals make its own findings of fact, but in lieu of that say the case must go back to the District Court for findings.

Aside from this argument on the procedural point, they say that the amount paid in settlement, although it may seem a lot of money to a judge, is so disproportionate to the amount which Hydro is entitled to recover against Paper Company that the approval of the settlement was an abuse of discretion on the part of the District Judge. This last argument is coupled with a group of minor arguments such as: The fact that the District Judge did not take as long to consider the case as the appellants now think he should have taken;³ and the fact that according to the appellants the District Judge relied on the Master and the S.E.C. recommendation instead of using his own head. We do not intend to take up these minor points individually because we think this whole litigation turns on the main question of whether it was within the discretion of the District Judge to approve the settlement proposed.

To this end we shall consider some of the points which both Paper Company and the Trustee have brought up as indicating the lines of defense which the Paper Company would have brought forward, had the actions brought by the Trustee against the Paper Company been pursued. We shall not, of course, commit ourselves to an answer on the merits of these defenses. It will be enough if it appears that they have the ring of reality about them. Nor will we labor the point, since its truth is obvious, that a defendant only has to make good on one defense to win a lawsuit.

General Considerations in Approval of Settlement.

There are two or three circumstances not involved in the individual defense which should be mentioned. Before the Massachusetts actions were brought by Mr. Brickley there had been some legal advice on the question of Paper Company's liability to Hydro. This question had been raised by a security holder named Todd who had become a Director of Hydro some time after the acts complained of had taken place. Two opinions were rendered. Each opinion advised against bringing an action on the basis that a successful recovery could not be reasonably anticipated. The opinions were signed, respectively, by the firm of Ropes, Gray, Best, Coolidge & Rugg and Robert G. Dodge, Esq. The authority carried by a document bearing the name of either of these signers is too well recognized to require elaboration in this opinion. Mr. Brickley had the benefit of seeing these memoranda. It was only after several months of investigation of the facts, assisted by the S.E.C., the advantage of which the signers of these opinions did not have, that Mr. Brickley concluded and reported to the Court that he thought that discovered facts were sufficient to justify legal proceedings against Paper Company. The Trustee still thinks, however, and we agree, that the opinions thus rendered by eminent counsel to the effect that the establishment of liability was improbable may properly be considered as one of the elements on a very practical matter of the settlement of a disputed claim.

Another general element to be considered on the question of acceptability of a settlement is the attitude of the people who were financially interested in the affairs of the company. Hydro during its corporate life had issued securities which consisted of (1) debentures; (2) preferred stock; (3) A stock; (4) B stock; and (5) common stock. Some of the preferred stock has been retired.⁴ The B stock and the common stock were sold to Paper Company's parents in 1929 for $10,000,000 cash and over $19,000,000 of stock and assigned claims. This stock has been washed up in the financial reorganization, brought about by the S.E.C., and the entire issues of B and common stock were cancelled for the nominal consideration of $1.00.⁵ Facts presented to the court reveal the following mathematical classification of the disapproving security holders:

(1) 0.2% of the debenture holders (owning 9.3% of all debentures) disapprove.

(2) 6% of the preferred stockholders (owning 29% of that stock) disapprove.

(3) 9% of the class A stockholders (owning 19% of that stock) disapprove.

These objections were registered by counsel and by reply postcards, that had been mailed along with a letter of protest of the settlement by Todd to all security holders, after Brickley had given official notice of the hearing for approval of the settlement. Todd held 31% of all the class A stock owned by the dissenting A stockholders. The overwhelming majority of the security holders in this enterprise either approve of, or at least do not disapprove of, the settlement.⁶

It is to be noted, also, that the vigorous opposition to the settlement comes from the holders of A stock, although there, too, the opposition comes from a minority of about 19% of the total number of shares. We do not know how well off the debenture holders will be if $10,000,000 is added to Hydro's assets. It is clear, of course, that they will...