Marcus v. Otis, 257

• Decision Date: 20 May 1948
• Docket Number: Docket 20969.,No. 257,257
• Citation: 168 F.2d 649
• Parties: MARCUS v. OTIS et al.
• Court: U.S. Court of Appeals — Second Circuit

168 F.2d 649 (1948)

MARCUS v. OTIS et al.

No. 257, Docket 20969.

Circuit Court of Appeals, Second Circuit.

May 20, 1948.

COPYRIGHT MATERIAL OMITTED

Kenneth M. Spence and Spence, Hotchkiss, Parker & Duryee, all of New York City (Julius J. Teller, of New York City, and Thomas L. Howe, of White Plains, of counsel), for appellants Otis, Franklin, Hutchinson and Harrison.

Robert P. Patterson and Charles L. Sylvester, both of New York City (Sidney G. Kingsley, of New York City, and Ambrose L. Cram, of Roslyn Estates, of counsel), for appellants Eugene A. Tracey and Marie L. Tracey.

Kent H. Meyers, of Cleveland, Ohio, and Robert E. Connolley, of New York City, for appellant Kuth.

Abraham Marcus, pro se.

Samuel Marion, of New York City, for appellees, Miller and Smigel.

Clifton P. Williamson and Alexander & Green, all of New York City (James D. Ewing, of New York City, of counsel), for Automatic Products Corporation.

Before L. HAND, AUGUSTUS N. HAND and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

The case comes up upon appeals by the defendants from a judgment holding them liable, as directors of the Automatic Products Corporation, a Delaware corporation, for the conversion of 116,500 shares of stock in another corporation, Majestic Radio & Television Corporation, which the Automatic Products Corporation had bought from a third corporation — Allen B. DuMont Laboratories, Inc.¹ The judge held the defendants also as "constructive trustees," because, being directors of "Automatic," they had withdrawn its funds to buy the shares in controversy; and he held that the measure of liability was the same on either basis. The chief questions are whether the defendants did convert the shares; and, if so, how many? Whether they are liable as "constructive trustees"? What is the measure of the recovery in case they are liable for either reason? The same action was before us two years ago upon an appeal from a judgment approving a settlement, as required by the Rules.² We reversed that judgment and remanded the cause for trial,³ and it has now been tried on the merits. The most important issue is how a transaction is to be interpreted, which occurred on April 26, 1943, and by which "DuMont," for a payment of $137,000, transferred to the defendants all the securities in "Majestic" which it held. The plaintiffs are not shareholders of "Automatic," but of British Type Investors, Inc., a holding company which owns a controlling interest in a second company — Allied International Investing Corporation — and the Allied International Investing Corporation in turn owns a controlling interest in "Automatic." We shall, however, decide the case as though the plaintiffs were direct shareholders of "Automatic," disregarding the two holding companies. Although "Automatic" itself was not a manufacturing company, it was more than a passive holding company, for it advanced money in aid of their business to manufacturing companies, among which was "Majestic." "Majestic" had been unsuccessful; it had been through a second reorganization in 1940, it had not declared a dividend since that time, and it had needed substantial financial assistance, which "Automatic" had given it. It had issued a small number of preferred shares, a few debentures, and 786,375 common shares, of which before December 2, 1942, "Automatic" had acquired 325,570, and Allied International Investing Corporation, 147,771; so that together their holdings came to nearly two-thirds of the total issue. The defendant, Tracey, had had experience in making radios, which was "Majestic's" business; and he had become its president at the solicitation of "Automatic" and "DuMont," for "DuMont" itself owned 91,414 common shares in "Majestic," about 600 preferred shares, and $22,472 of debentures; and it had also an option on 100,000 unissued shares at $1.00. As an inducement to Tracey to become president ("Majestic" not being in a position to pay him a large salary) "DuMont" had given him an option on 40,000 of its shares; 20,000 at $2.00, and 20,000 at $2.50, which expired respectively on May 1, 1945 and May 1, 1946.

So much is conceded; what follows is the substance of the testimony at the trial, all of which with unimportant exceptions came from the defendants themselves, or from one, Raibourn, "DuMont's" treasurer. Tracey, who had already become a director of "Automatic" on December 2, 1942, reported to a meeting of its board on that day that "DuMont" was looking for a chance to be rid of all its holdings in "Majestic"; and he suggested that it might be willing to sell at cost — $24,000. The board directed its officers to look into the matter; and soon afterwards Franklin, "Automatic's" treasurer, chanced upon "DuMont's" president, Allen B. DuMont. That gentleman very positively rejected the suggestion of a sale at cost; and at a meeting of "Automatic's" directors on January 26, 1943, Franklin so reported and at his recommendation the board dropped the project. However, "DuMont's" officers had apparently not abandoned their desire to get rid of its interests in "Majestic," and, about the first of April, Raibourn opened negotiations with Tracey and Franklin. Raibourn did not know that Tracey had become a director of "Automatic," but supposed that he had to include him in any sale because of Tracey's option upon 40,000 shares. Raibourn told Tracey that he had sounded out one of Tracey's partners in an engineering firm, who told him that the firm was unable to "finance" the purchase; and for that reason he told Tracey that he would try to learn from Franklin whether "Automatic" would do so. Raibourn offered to sell at $200,000, and he later telephoned Franklin, suggesting that "Automatic" should "finance" the sale. Tracey at once told Franklin of his talk with Raibourn, and Franklin answered that he did not think it wise for "Automatic" to buy the securities, but that it might be worthwhile for it to "finance" the purchase for a proper return; and that he might himself take 10,000 shares. Later Tracey and Raibourn had several telephone talks, and on April 16th, they agreed upon a price of $137,000, Tracey saying that he thought "Automatic" would furnish the money at the end of the ten days within which the sale was to be closed. Tracey told Franklin of this agreement, and concededly Franklin on that day telegraphed Raibourn as follows: "Confirm purchase from you of DuMont's entire investment in Majestic Radio for $137,000. * * * Please wire your acknowledgment. Curtis Franklin, Treasurer, Automatic Products Corporation." Raibourn called up Tracey that day, and asked why Franklin had signed as treasurer of "Automatic," and Tracey answered that Franklin and Otis, "Automatic's" president, wished "Automatic" to "finance" the sale. Thereupon Raibourn still on the 16th telegraphed in reply: "This will confirm purchase by you of DuMont's entire investment in Majestic Radio as outlined your wire."

All of "Automatic's" directors, except the defendant, Kuth, met in Chicago on the 20th; but not only was there no evidence that anyone except Franklin and Tracey had learned of the exchange of telegrams, but Franklin affirmatively swore that he did not mention them at the meeting. However, Tracey did tell the board of the offer, and said that, although he might be able to "finance" the sale through a bank, he preferred to have "Automatic" advance the money for a period of six months, in consideration of an allocation of 15,000 shares to it at a nominal price, or at six per cent interest. He then left the meeting, and the others discussed the proposal, and then passed the resolution, recorded in the minutes, of which a copy appears in the margin.⁴ That evening, Franklin, from Chicago called up Kuth in Cleveland, and told him what had taken place; Kuth agreed to what had been done, and said he would personally take 3,000 shares; and Franklin mailed to him a copy of the minutes. Before the closing date on the 26th each of the directors signed a note to "Automatic" for the price of his shares at $1.20, and executed a power of attorney by which his certificates, when issued, would become security for what he borrowed. On the 26th, Franklin delivered a cheque of "Automatic" to "DuMont" for $137,000; Tracey released "DuMont" from his option; and "DuMont" delivered the "Majestic" securities, including its option on 100,000 shares at $1.00 a share. On the next day new certificates were issued; but, since "DuMont" then held only 94,414 shares, it was necessary, before all the required shares could be distributed, for "Automatic" to take up the option on 100,000, transferred by "DuMont." "Automatic" did take up that option on May 10th, and the certificates were thereupon issued and distributed as provided in the minutes. All the "subscribers" paid their notes before November 30, 1943, except Mrs. Tracey, and she paid hers in March, 1944. Thus all the money taken from "Automatic's" treasury was returned, and "Automatic" had received 25,000 shares of "Majestic" at 57 cents. The defendants sold all but a few of their shares either in the autumn of 1943 or in the spring of 1944; and all sold at a profit above the buying price. "Automatic" never sold any of the shares which it held, except those — 130,000 — necessary to answer certain options which Tracey had acquired earlier than any of the transactions here in question. Thereafter the value of the stock varied greatly; up to the time of trial its highest quotation was $7.87½ in February, 1945. In the month following the election of a new and independent board of directors of "Automatic," the price ranged between $2.00 and $3.00 — not far from that at which the directors had sold. The judge made no findings regarding the testimony of which we have just stated the substance, apparently because he thought any oral agreements made between "Automatic" and "DuMont" had been merged in the telegrams of the 16th, the resolution of the 20th and perhaps in a...