Lichens Co. v. Standard Commercial Tobacco Co., Inc.

• Decision Date: 21 December 1944
• Citation: 40 A.2d 447,28 Del.Ch. 220
• Court: Court of Chancery of Delaware
• Parties: LICHENS CO. v. STANDARD COMMERCIAL TOBACCO CO., Inc

40 A.2d 447

28 Del.Ch. 220

LICHENS CO. v. STANDARD COMMERCIAL TOBACCO CO., Inc

Court of Chancery of Delaware, New Castle

December 21, 1944

The demurrer is sustained and an order will be entered accordingly.

Aaron Finger (of Richards, Layton and Finger), all of Wilmington for complainant.

Edwin D. Steel, Jr. (of Morris, Steel & Nichols), all of Wilmington, for defendant.

OPINION

THE CHANCELLOR.

The complainant, a stockholder of the defendant, a solvent corporation, seeks to have a receiver appointed to wind up its affairs, alleging fraud and mismanagement by its officers and imminent danger of loss of property which might cause insolvency.

The demurrer raises two questions:

(1) Does the Court of Chancery have the inherent power, upon the application of a minority stockholder, to wind up the affairs of a solvent corporation and to appoint a receiver for that purpose because of fraud and gross mismanagement by its officers?

(2) If it has that power, are the allegations of the bill sufficient to justify the appointment of a receiver?

It appears from the bill that the Standard Commercial Tobacco Company, Incorporated, the defendant, was organized in this State in 1916, with an authorized common stock issue of 1,000,000 shares, each having a par value of $ 1, and of which 434,491.7 shares have been issued and are outstanding. The complainant, also a Delaware corporation, owns 8,600 shares of that stock which were transferred to it on or about August 25th, 1942, and prior thereto had been owned for several years 'by the persons in interest beneficially in complainant.' The defendant was incorporated for the primary purpose of engaging in the tobacco trading business and in business enterprises germane thereto, and upwards of $ 4,000,000 of capital has been invested in that corporation. From the time of its organization in 1916 until April 15th, 1938, one Ery Kehaya had working control of the corporation, controlled its officers and directors in the conduct of its affairs, and dominated it as though it were wholly owned by him. During that time as a result of various acts of mismanagement, the defendant was reduced to a state of insolvency, and, on April 15th 1938, filed a petition in the United States District Court for the Southern District of New York, under Section 77B of the Federal Bankruptcy Act, 11 U.S.C.A. § 207. Its principal assets then consisted of 80,610 shares of the common stock of the Axton-Fisher Tobacco Company, which were carried on its books at the cost value of $ 2,960,268.25. All, or at least the most of that stock was then pledged, or subject to a lien for the unpaid balance of the purchase price, the exact amount of which balance is unknown to the complainants, but it believes that it amounted to upwards of $ 500,000. The Federal Court proceeding was substantially closed on April 8th, 1942, following the entry of an order on that date and of previous orders, under which inter alia the said 80,610 shares of B stock of the Axton-Fisher Tobacco Company were sold for $ 1,000,000, and the proceeds used to discharge the lien on said shares of stock, and to pay the claims of other creditors of the defendant. After that proceeding had terminated, the defendant corporation was no longer insolvent, but its losses, by reason of the mismanagement of the said Ery Kehaya, had been so great that it was left with no assets except about $ 130,000 in cash and some other assets of doubtful value, including some choses in action. The Securities and Exchange Commission had become a party to the Federal Court proceeding, and presented an analysis of two plans of reorganization, which was set out in the bill. In it, the statement was made that 'Under the presidency of Mr. Kehaya, Standard took part in several transactions which were not germane to its customary operations as a tobacco trading concern or as an investor of marketable securities, and these operations resulted in substantial losses, aggregating more than a million dollars.'

In a report, dated March 14th, 1942, filed by a Special Master in the Federal Court proceeding, and also incorporated in the bill, the statement is made that 'About 140,000 shares (of the stock of Standard) are owned or controlled by the family of Ery Kehaya.'

Upon the termination of the Federal Court proceeding, Grace Kehaya, the wife of Ery Kehaya, was the owner of a large block of stock of the defendant corporation which she had purchased during the course of the proceeding, and as a part of a transaction approved in said proceeding. Ery Kehaya is president, and in charge of the management, of the defendant corporation. Treating Grace Kehaya's holdings of stock in that corporation as supporting his management of its affairs, Kehaya is, and, since the termination of the said court proceeding, has been in working control of Standard Commercial Tobacco Company, Inc. During the long period of his control, that corporation has been so far denuded of its property that it no longer has sufficient assets to enable it to carry on the business for which it was organized, and for which its capital was supplied, with any hope of profit or benefit to its stockholders; and the relatively small amount of its said assets, nearly all in cash, constitutes a fund which it is dangerous to leave under the control of Kehaya. Since the termination of the said court proceeding, the complainant has endeavored to ascertain what business has been carried on by the defendant, but without success. By letter to the defendant, dated November 27th, 1942, and incorporated in the bill, the complainant asked: (1) for a 'financial statement as of November 1, 1942,' (2) for an 'operating statement of the same date,' (3) '* * * the nature of any investments or operations which had been made, or are being made,' and (4) 'the present fixed overhead * * * per month.' The complainant received no reply.

The complainant then avers:

(1) That by reason of the long record of mismanagement of the defendant corporation by Ery Kehaya, resulting in its insolvency, there is danger that it will again be made insolvent.

(2) That Kehaya's acts of mismanagement have brought the defendant to a condition where it can no longer carry on the business for which it was organized, with reasonable prospect of profit to the corporation and its stockholders;

(3) That complainant has received no report or information of any kind as to what has become of the said sum of $ 130,000 which was in the defendant's treasury when it came back into the control and management of Kehaya, and, so far as it knows, the stockholders, generally, are without such information, and complainant believes that such fund and the remaining assets of the corporation are in imminent danger of loss;

(4) That the choses in action, heretofore referred to, include claims, the enforcement of which should not be under the control of Kehaya; and

(5) That the only hope of complainant and other stockholders of salvaging anything out of the defendant is through the appointment of a receiver.

The complainant also alleges that among the transactions in which the Standard Commercial Tobacco Company, Incorporated, engaged under the direction and control of Ery Kehaya before the filing of the Federal Court proceeding, and which resulted in substantial losses, were:

(1) An arrangement with Standard Commercial Export & Finance Corporation, hereinafter referred to as 'Standex,' the stock of which was wholly owned or controlled by Ery Kehaya, whereby at various times between the years 1928 and 1938, the defendant sold leaf tobacco to Standex. Under that arrangement, Standex paid only a portion of the purchase price, and was to pay the balance to the defendant after resale.

Resales by Standex at a profit were contemplated, which would, therefore, enure to the benefit of the said Ery Kehaya personally. The defendant not only lost the profits which Standex received from such resales, but also lost more than $ 200,000 which represented the unpaid balances for the tobacco sold. No part of this debt is collectible from Standex; that corporation having been dissolved and being practically without assets.

(2) In or about 1933, Ery Kehaya purchased certain shares of stock in Enossis Publishing Company, which published the 'National Herald,' a Greek newspaper, and paid $ 50,000 therefor. In or about 1934 the publishing company was in financial difficulties and a receiver was appointed for it by the Supreme Court of the State of New York, with the resulting threat of the loss of Kehaya's investment in its stock. Kehaya caused the defendant to advance approximately $ 40,000 to a corporation called Standard Commercial Trading Corporation, the stock of which was owned by the defendant. He also caused the trading corporation to purchase all of the assets of the publishing company from the receiver for approximately $ 40,000. He then had the trading corporation organize another corporation called National Herald, Inc., with a capital stock of 20,000 shares, having a par value of $ 5 per share, to which all of the assets acquired from the Enossis Publishing Company were transferred in consideration of the issuance by National Herald, Inc., to the trading corporation of 20,000 shares of its capital stock, together with a bond of National Herald, Inc., for $ 100,000, secured by a chattel mortgage on all of its assets. Shortly thereafter, Kehaya caused the trading corporation to donate 11,000 shares of the National Herald, Inc., stock to the treasury of that corporation, and almost immediately thereafter he purchased those shares for $ 3,000. Kehaya was then president and director of National Herald, Inc., of the Standard Commercial Tobacco Company, the defendant, and of the...