Levitan v. Stout

• Decision Date: 14 April 1951
• Docket Number: Civ. No. 1615.
• Citation: 97 F. Supp. 105
• Parties: LEVITAN et al. v. STOUT et al.
• Court: U.S. District Court — Western District of Kentucky

97 F. Supp. 105

LEVITAN et al. v. STOUT et al.

Civ. No. 1615.

United States District Court W. D. Kentucky, at Louisville.

April 14, 1951.

Herbert Monsky, Louisville, Ky., Harold F. Levin, Morton Roth, New York City, Milliken & Handmaker, Louisville, Ky., for plaintiffs.

Louis Lusky, Wilson W. Wyatt, and Wyatt & Grafton, all of Louisville, Ky., for defendants Samuel E. Stout, Edwin O. Dulaney, Tinsley W. Rucker, III, John L. Farris and W. L. Lyons.

SHELBOURNE, Chief Judge.

This is a stockholder derivative action brought by certain stockholders of General Plywood Corporation (hereinafter referred to as "The Corporation"). The named defendants are the Corporation, on whose behalf the action is brought, and six individuals — Samuel E. Stout, Edwin O. Dulaney, Tinsley W. Rucker, III, Calvin M. Hilton, John L. Farris, and W. L. Lyons — who are alleged to have been directors or former directors of the Corporation. According to the allegations of the amended complaint, which for present purposes must be taken as true, the essential facts are as follows:

The plaintiffs own common stock in the Corporation. One of the plaintiffs has held such common stock since September 24, 1946. The plaintiffs are citizens of New York and New Jersey.

The Corporation was organized August 27, 1945. It is a Kentucky corporation having its principal office in Louisville.

The individual defendants are Kentucky citizens except Farris, who is a citizen of Georgia.¹

The defendants Stout and Rucker were members of the Corporation's Board of Directors from the date of incorporation down to the date this action was brought. The defendant Lyons was a director of the Corporation from about November 1945, down to the date this action was brought. The defendants Dulaney, Hilton and Farris were directors from the date of incorporation until about August 27, 1948. At the time this action was commenced — on March 7, 1949 — the Board of Directors of the Corporation consisted of six directors.

From the date of incorporation down to the date this action was brought, the defendant Stout was chairman of the Board of Directors of the Corporation, and the defendant Rucker was one of its vice-presidents. From the date of incorporation until August 27, 1948, the defendant Dulaney was president of the Corporation, the defendant Hilton was one of its vice-presidents, and the defendant Farris was its secretary.

From August 27, 1948, down to the date this action was brought, the defendant Farris was one of the vice-presidents of the Corporation.

The Corporation has 600,000 shares of common stock outstanding, each share having a par value of 50¢. The plaintiffs own an aggregate of 8,000 shares. The defendant Stout, at all times since the date of incorporation, has owned at least 32.10% of the outstanding common stock and the defendant Dulaney, who is his son-in-law, has owned at least 8% of said common stock. (Until about April 1947, the defendant Dulaney owned about 15% of said common stock).

The amended complaint alleges that the remaining stock, being listed by and traded upon the New York Curb Exchange, is scattered among stockholders throughout the United States and that the defendant Stout, by virtue of his 32.10% stock ownership had "effective and actual voting control of said Corporation." It alleges further that this control was augmented by the voting power of the defendant Dulaney, who is said to have joined his voting power with that of his father-in-law in order to control the election of directors.

It is further alleged that the defendants Stout and Dulaney controlled and dominated the actions of the directors.

The gist of the action is that the individual defendants managed the affairs of the Corporation incompetently and negligently, with resulting damage to the Corporation, and that they kept the defendant Dulaney in office as president despite his allegedly demonstrated incompetence, because he and his father-in-law, exercising their alleged control through stock ownership, required them to do so.

The amended complaint, then describes, in considerable detail, a series of business transactions to which the Corporation was a party. These allegations may be summarized as follows:

a. Plywood barrels. Shortly after the Corporation was organized, it began to manufacture plywood whiskey barrels. At that time the use of plywood barrels was not authorized by the Alcohol Tax Unit of the Bureau of Internal Revenue, and (until such authority should be granted) whiskey stored in such barrels could not be so labeled as to make its sale commercially feasible. Nevertheless the Corporation made contracts to supply such barrels to several distilling companies, which contracts were cancellable at the option of the purchasers, and made a heavy investment in plant and equipment for the manufacture of such barrels at a cost of at least $130,000. The Corporation undertook experimental and developmental work in connection with the project, and manufactured a number of the barrels. The distilling companies cancelled their purchase contracts. The Corporation consequently suffered an alleged loss of approximately $500,000.

The amended complaint alleges that, in causing the Corporation to embark upon this project, the individual defendants acted with "gross culpable negligence in complete disregard of the interests of" the Corporation.

It will be noted that the amended complaint does not allege that the plywood barrel program was undertaken, or that any of the $500,000 loss was attributable to, expenses incurred subsequent to September 24, 1946, the earliest date on which any of the plaintiffs is alleged to have acquired his stock.

b. Veneer Products, Inc. The amended complaint alleges that, in November 1945, the Corporation purchased from Joe K. Hays and others (referred to in the amended complaint as "Associates") two-thirds of the Class B common stock of Veneer Products, Inc. The agreement for the purchase of this stock provided that General Plywood would pay to Associates $8,000 in cash; would cause Veneer Products, Inc. to issue $155,000 of debentures, payment of which would be guaranteed by General Plywood Corporation; that $126,000 of such debentures would be issued to Associates; that General Plywood Corporation, for a period of five years, would purchase the entire output of Veneer Products, Inc., which was usable in any of its operations or processes; and that Veneer Products, Inc. would designate the Hays Company, in which the Associates were interested, as its exclusive sales agent at a commission of 5% of net sales.

The amended complaint alleges that, at the time of the foregoing transactions, Veneer Products, Inc., had been operating unsuccessfully and that its capital was impaired; that the purchase price paid for its stock was excessive and unreasonable; and that the 5% sales commission amounted to a gift to the Hays Company, since the Corporation's agreement to buy the entire usable output of Veneer Products, Inc., rendered the services of a sales agent superfluous.

It is alleged that the amount paid to the Hays Company as sales commission was more than $113,000, which constituted a waste of the assets of the Corporation, and that the Corporation suffered further losses in an amount not presently determinable by reason of its guarantee of the debentures and the payment of the allegedly excessive price for the stock of Veneer Products, Inc. It is alleged that the individual defendants, in carrying out the foregoing transaction, acted with "gross culpable negligence in complete disregard of the interests of" the Corporation.

Again, it will be observed that the amended complaint fails to allege that any of the alleged acts of negligence took place subsequent to September 24, 1946, the earliest date on which any of the plaintiffs is alleged to have acquired his stock.

c. Costa Rican timber. The amended complaint alleges that the Corporation purchased timber rights in Costa Rica and proceeded to cut timber in excessive quantities, in unseasonable weather, and in such a negligent and improperly supervised manner that much of said timber was unsatisfactory for commercial use or was usable only for low-grade plywood.

It is alleged that the individual defendants "acted negligently and without proper care" in selecting employees to supervise and execute the project, and "failed to exercise proper supervision and control of the persons so selected."

The Corporation is alleged to have suffered loss in the amount of at least $400,000 by means of said alleged "culpable negligence, incompetence, and waste."

d. Plywood toilet seats. The amended complaint alleges that the Corporation negligently embarked upon the manufacture of plywood toilet seats, at a time when the usability of plywood for this purpose had not been established, and without any reasonable probability that there was a commercial market for such toilet seats.

It is alleged that large numbers of the toilet seats were manufactured and had to be disposed of at a loss. The Corporation is alleged to have incurred a loss of at least $400,000 as a result of the "culpable negligence, incompetence and waste of corporate funds" in the said project, which is alleged to have been undertaken "negligently and with reckless disregard of the welfare of the Corporation."

e. Expansion program. The amended complaint alleges that the individual defendants, "negligently and with reckless disregard for the welfare" of the Corporation, caused it to undertake a huge expansion program without any reasonable probability that the additional plant facilities and equipment would be used; that, by reason of said alleged over-expansion, operations were suspended from time to time in several of the Corporation's plants; and that operational losses resulted. It is further alleged that, in an effort to keep the said plants in operation, the Corporation entered into further lines of manufacture, including...