Lawson v. Baltimore Paint and Chemical Corporation

• Citation: 347 F. Supp. 967
• Decision Date: 31 May 1972
• Docket Number: Civ. No. 18497.
• Parties: Seward N. LAWSON et al. v. BALTIMORE PAINT AND CHEMICAL CORPORATION et al.
• Court: U.S. District Court — District of Maryland

347 F. Supp. 967

Seward N. LAWSON et al. v. BALTIMORE PAINT AND CHEMICAL CORPORATION et al.

Civ. No. 18497.

United States District Court, D. Maryland.

May 31, 1972.

COPYRIGHT MATERIAL OMITTED

David Freishtat, Baltimore, Md., for plaintiffs.

Charles Yumkas, Baltimore, Md., for defendant Baltimore Paint.

William J. Kenney, Washington, D. C., for defendant Krock.

Seymour J. Kurtz, Chicago, Ill., for defendant Muscat.

Benjamin C. Howard and Daniel B. Leonard, Baltimore, Md., for defendant Huffines.

No appearance entered for defendant Cohn.

THOMSEN, District Judge.

This shareholder's derivative suit, seeking damages from former directors and officers of Baltimore Paint and Chemical Corporation (Baltimore Paint), has been tried before the court without a jury. The second amended complaint, on which the case went to trial, alleges that at some time prior to January 1, 1961, defendants Krock, Muscat and Huffines (the trio) formed a plan and conspiracy to acquire, directly or indirectly, for their personal benefit, effective control of a "multitude of corporations", including Baltimore Paint; that pursuant thereto the trio and others, including defendant Cohn, who from time to time joined them in the conspiracy, acquired control of Baltimore Paint and caused it to make payments to them and to others in the form of unjustified salaries and other compensation, legal fees and reimbursement of expenses, and to engage in other transactions, wasting Baltimore Paint's assets.

Baltimore Paint was incorporated in Maryland and has its principal office and place of business in Baltimore. Federal jurisdiction is founded on diversity of citizenship and amount in controversy, which are not disputed. Venue in this court exists by virtue of 28 U.S.C.A. § 1401.

In a previous opinion, 298 F.Supp. 373, this court ruled on a number of points raised by motions to dismiss the first amended complaint and each cause of action alleged therein, motions to quash service of process, and other motions. The motions to quash were denied as to all defendants except Defiance Industries. The motions to dismiss were granted as to all causes of action against Shuford, one of the original defendants, and as to some causes of action against defendants Krock, Muscat, Huffines and Cohn. The basis for that ruling was that none of the plaintiffs became a shareholder of Baltimore Paint until December 1964, and some of the causes of action alleged in the first amended complaint were consummated before December 1964. See 298 F.Supp. at 375-377. Leave to amend some of the causes of action was granted.

The second amended complaint adopts most of the allegations of the first amended complaint and asserts five causes of action against Krock, Muscat, Huffines and Cohn, jointly and severally, based upon the alleged scheme:

First Cause of Action. Excessive salaries and bonuses to Krock, Muscat, Huffines, Cohn and others after December 1964, and stock options granted to Muscat and exercised by him.

Fourth Cause of Action. Excessive fees paid to Cohn's law firm and others.

Fifth Cause of Action. Improper payments to Krock for claimed expenses.

Sixth Cause of Action. Money paid by Baltimore Paint in 1966 in settlement of a suit against Baltimore Paint, Krock, Muscat, Huffines and Shuford, and for related attorneys' fees, arising out of the 1962 purchase by Baltimore Paint of the stock of Synkoloid Company, as part of the alleged scheme.

Seventh Cause of Action. Retention after December 1964 of the stock of BSF Company, alleged to have been purchased and retained as part of the scheme.

Cohn has not defended the suit. The remaining defendants, Krock, Muscat and Huffines, besides denying all of the charges, question whether plaintiffs are proper representatives of the corporation to bring the action. The facts with respect to standing will be set out in Part II of this opinion.

I. Findings of Fact

1. From 1946 to 1958 the Shuger family owned and managed Baltimore Paint. In 1958 they sold their Baltimore Paint stock to American Dryer Company, receiving in return about $3 million cash and American Dryer stock. Albert, Leroy, Julius and Sewell Shuger also received long term employment contracts from Baltimore Paint. Albert was President and had charge of trade sales, Leroy was in charge of research and the technical aspects of production, Julius was the financial man, and Sewell oversaw the production, purchasing and industrial finishing departments.

2. Shortly thereafter American Dryer sold some of its Baltimore Paint stock to the public, but retained enough to have effective working control of Baltimore Paint. American Dryer subsequently merged with another corporation, and changed its name to Utronics Corporation.

3. In or about 1960 Krock, Muscat and Huffines initiated a series of transactions with the intention of obtaining actual or working control of various corporations, so that they might receive salaries and other compensation from such corporations and their subsidiaries.

4. Pursuant to that scheme the trio —with additional instrumentalists added and dropped from time to time as the program dictated—acquired control of various corporations. By mid-1961 the trio, their families and a corporation wholly owned by Muscat had acquired effective working control of Defiance Industries, Inc. (Defiance),¹ which controlled various other corporations.

5. Before July 27, 1961, Defiance acquired 52.9% of the voting stock of American Dryer (Utronics), which in turn owned 47.2% of the voting stock of Baltimore Paint, giving the trio effective working control of Baltimore Paint.

6. On July 27, 1961, Muscat, Huffines and Krock caused themselves to be elected directors of Baltimore Paint. Krock became Chairman of the Board, Chief Executive Officer and a member of the six-man Executive Committee. Muscat became Vice-chairman of the Board and a member of the Executive Committee. Huffines became Chairman of the Executive Committee. By June 1963, the Executive Committee had been reduced to four members: Muscat, Huffines, Krock and Joslin, all of whom were also directors of Defiance at that time. The salaries and bonuses paid to the trio over the years are set out in Schedule A, made a part of Finding 11, below.

7. In early 1962 Muscat, Krock and Huffines embarked on a series of corporate transactions designed to give them voting control, as well as working control of Defiance.

(a) In April 1962 the trio learned of the financial problems of A. Alex Shuford, an old friend of Huffines, arising out of Shuford's being an accommodation party to a note payable to a Denver bank by Clute Corporation, of which Shuford was a substantial shareholder and creditor. In March 1962 the Denver bank had called upon Shuford to pay the Clute note.

(b) Shuford was also the President and controlling shareholder of Shuford Mills, Inc., which in turn owned 14% of the stock of Insurance and Industrial Enterprises, Inc. (IIE). Muscat, Huffines and Krock, along with their respective families owned a controlling interest in IIE, and were substantial creditors of IIE.

(c) Capitalizing on their positions of control in Defiance, Baltimore Paint and IIE, the trio worked out a deal to relieve Shuford of his obligation to the Denver bank in return for his cooperation in a proposed exchange of stock between Defiance and IIE, which resulted in the trio and their families acquiring sufficient additional shares of Defiance to give them a majority of the voting stock of Defiance.

(d) The catalytic agent for this scheme was Baltimore Paint. Clute owned all the outstanding stock of Synkoloid Company, which manufactured paint and paste products. The trio caused Baltimore Paint to buy the Synkoloid stock from Clute.² Ignoring a resolution of the Clute board of directors that a specific portion of the proceeds of the sale be used for designed corporate purposes and the balance deposited to the credit of Clute pending a plan of reorganization, arrangement or other plan of rehabilitation,³ the trio caused a substantial portion of the proceeds to be diverted to the payment of the note endorsed by Shuford. Shuford, in turn, cooperated with the trio in working out the IIE-Defiance stock exchange described in (c), above, which was consummated on July 13, 1962.

8. Having strengthened their control over Defiance and its subsidiary corporations, the trio schemed to enlarge their empire by obtaining control of the B.S.F. Company (BSF), an investment company which held controlling stock interests in various financial and industrial corporations.

(a) On July 12, 1962, Defiance and National Bankers Life Insurance Company, controlled by Defiance, purchased almost $700,000 of BSF stock at $8.50 per share from the Chamberlain Company of America (Chamberlain). Simultaneously, in a connected transaction, defendants caused Baltimore Paint to purchase from Chamberlain a paint company (Foreman Ford), which has been a losing enterprise for Baltimore Paint since the date of purchase.

(b) On July 20, 1962, Defiance and some of its controlled companies (Baltimore Paint, IIE, Utronics and National Bankers Life) purchased from ten banks approximately $1,300,000 of BSF stock at $8.50 per share; Baltimore Paint's share was $168,000, of which $20,000 was later sold to its Employee Retirement Fund.⁴

(c) From the end of July through August 20, 1962, the trio, along with Shuford, Joslin and Albert Shuger, purchased from others $1,000,000 of BSF stock.

(d) As a result of the foregoing transactions, the trio and their controlled corporations obtained working control of BSF and placed themselves, Shuford, Joslin and Albert Shuger, on its board of directors.

9. The trio caused Baltimore Paint to purchase Synkoloid and BSF stock for their own selfish interests, and not for the benefit of Baltimore Paint. Their attempted justifications for such uses of Baltimore Paint's cash were not convincing. Their claimed reason for Baltimore...