Levine v. Biddle Sawyer Corporation, 74 Civ. 347.

• Decision Date: 04 October 1974
• Docket Number: No. 74 Civ. 347.,74 Civ. 347.
• Citation: 383 F. Supp. 618
• Parties: Robert L. LEVINE et al., Plaintiffs, v. BIDDLE SAWYER CORPORATION et al., Defendants.
• Court: U.S. District Court — Southern District of New York

383 F. Supp. 618

Robert L. LEVINE et al., Plaintiffs, v. BIDDLE SAWYER CORPORATION et al., Defendants.

No. 74 Civ. 347.

United States District Court, S. D. New York.

October 4, 1974.

Cleary, Gottlieb, Steen & Hamilton, New York City, for plaintiffs; George Weisz, New York City, of counsel.

Emmet, Marvin & Martin, New York City, for defendants; Thomas B. Fenlon, Bernard F. Joyce, New York City, of counsel; Morris, Nichols, Arsht & Tunnell, Wilmington, Del., of counsel as to Point III.

MEMORANDUM

BONSAL, District Judge.

Plaintiffs moved for leave to file an amended complaint. Defendants moved pursuant to F.R.Civ.P. 12(c) and 12(h)(2) for judgment dismissing the complaint and, alternatively, for a protective order pursuant to F.R.Civ.P. 26(c) and 30(d).¹ At argument on July 8, 1974, plaintiffs' motion to file an amended complaint was granted and it was stipulated that defendants' motion would apply with equal force to plaintiffs' amended complaint. The parties were given until July 12 to file additional papers, and none have been filed, except a "Further Reply Memorandum" filed by the defendants.

This litigation concerns Biddle Sawyer Corporation ("Biddle") which as of December 1, 1973 had issued and outstanding a total of 3,750 shares of common stock. At that time, plaintiffs owned 300 shares, or 8%, of the outstanding common stock as follows:

                  Robert L. Levine     200 shares
                  Laurence W. Levine    75 shares
                  Jay H. Levine         25 shares
                                      ____
                                       300 shares
                

The remaining 3,450 shares of Biddle, or 92%, were owned by the individual defendants, as follows:

                  Wallace Chavkin         1,275 shares
                  Jack D. Haim            1,275 shares
                  Robert E. Chavkin         600 shares
                  Benjamin Benveniste       300 shares
                                          _____
                                          3,450 shares
                

The amended complaint alleges two causes of action arising out of the same operative facts. The first cause of action claims that defendants violated section 10(b) of the Securities Exchange Act ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. The second cause of action is founded on pendent jurisdiction and claims a violation by the defendants of the laws of Delaware.

The amended complaint alleges that commencing in late 1971 or early 1972, the individual defendants began to waste the assets of Biddle by paying themselves exorbitant salaries and other compensation, and by promoting other measures for their personal benefit. This allegation is the subject of a derivative action instituted by the plaintiffs in the Supreme Court of New York, New York County, on December 21, 1973, on behalf of Biddle against the individual defendants, which action is still pending.

Plaintiffs then allege that in or about January 1973 "by reason of the complaints which the plaintiffs had made concerning the excessive compensation which the individual defendants had taken for themselves . . . and because the individual defendants desired to obtain for themselves all of the fruits and benefits of the future profitability of Biddle Sawyer to the wrongful exclusion of the plaintiffs, the individual defendants herein set upon a fraudulent scheme and conspiracy to force the plaintiffs herein to relinquish their stock ownership in Biddle Sawyer, against their will and for a sum far less than the true value thereof." The "fraudulent scheme" is alleged to have taken the following course:

In or about January 1973, the individual defendants dismissed plaintiffs' law firm as counsel to Biddle and dismissed plaintiff Robert Levine as Secretary. Thereafter, between January 1973 and June 1973, the individual defendants invited plaintiff Robert Levine to various meetings to induce him, and through him, the other plaintiffs to sell their shares in Biddle so that the individual defendants would own 100% of the company. At these meetings the individual defendants misrepresented the financial condition of Biddle and threatened plaintiffs with costly legal action if they refused to sell. During this same period, the defendants were taking monies from Biddle to keep down the value of the stock.

On December 3, 1973, plaintiff Robert Levine, who was a director of Biddle, was advised that the other members of the Board of Directors wished to have a meeting in early January 1974. A date of January 7, 1974 was chosen. Plaintiff Robert Levine was later told that the purpose of the meeting would be to vote additional compensation and a pension plan for the benefit of the individual defendants. Plaintiff Robert Levine expressed opposition to these proposals as being unfair to the minority stockholders. On December 10, 1973, plaintiff Robert Levine received a notice of a meeting of the directors of Biddle to be held on January 7, 1974, but no agenda as to the business to be transacted. The following day he received a notice of a meeting of the Board of Directors of Biddle's wholly-owned subsidiary, Enzyme Development Corporation, also to be held on January 7, 1974. The stated purposes of the latter meeting were "renegotiation of existing employment contracts" and "adoption of a pension plan." Both of the January 7, 1974 meetings were cancelled without prior notice to plaintiff Robert Levine. The purpose of these notices of meetings was to put further pressure on plaintiffs to sell and to conceal plans to squeeze plaintiffs out of Biddle through a merger.

Commencing in November 1973, the individual defendants, without notice to plaintiffs, began consideration of some form of merger which would extinguish plaintiffs' stock ownership in Biddle. On December 18, 1973, a decision was made by the individual defendants to merge Biddle with a company not then in existence, for the sole purpose of squeezing out plaintiffs. Without notice to plaintiff Robert Levine, Delaware counsel and an accounting firm were retained by Biddle to accomplish the merger.

Also without notice to plaintiff Robert Levine, the firm of F. S. Mosely, Estabrook Inc. was retained to evaluate Biddle for the purpose of deciding how much to offer the plaintiffs upon surrender of their shares pursuant to the merger. In order that the valuation be as low as possible, the individual defendants misrepresented the financial condition of Biddle, withheld relevant financial information, and instructed the Mosely firm to write an opinion placing as low a value on Biddle as they possibly could. The Mosely firm rendered a valuation addressed to the Board of Directors of Biddle on December 29, 1973. No copy was furnished to plaintiff Robert Levine, who was still a director of Biddle, and Robert Levine's request for a copy, after learning about the valuation in January 1974, was refused. As a result of the misrepresentations and non-disclosures of the individual defendants, the value placed on Biddle by the Mosely firm was far less than its true value and inconsistent with advice given to the Biddle Board of Directors by a predecessor in interest of the Mosely firm in a prior year.

To extinguish plaintiffs' interest in Biddle through a merger, the individual defendants, on December 27, 1973, caused the incorporation in Delaware of a shell...