Masterson v. Pergament

• Decision Date: 23 March 1953
• Docket Number: No. 11410.,11410.
• Citation: 203 F.2d 315
• Parties: MASTERSON et al. v. PERGAMENT et al.
• Court: U.S. Court of Appeals — Sixth Circuit

203 F.2d 315 (1953)

MASTERSON et al. v. PERGAMENT et al.

No. 11410.

United States Court of Appeals Sixth Circuit.

March 23, 1953.

COPYRIGHT MATERIAL OMITTED

Robert S. Marx, Cincinnati, Ohio, Lemuel B. Schofield, Philadelphia, Pa., Clair John Killoran, Wilmington, Del., and Lewis M. Dabney, Jr., New York City, G. Fred Di Bona, Marvin Comisky, Philadelphia, Pa., and Murray C. Bernays, New York City, Ernest P. LaJoie, Detroit, Mich., Samuel Marion, New York City, and David V. Martin, Detroit, Mich., on brief, for objecting stockholders and appellants.

Theodore E. Rein, Chicago, Ill., Rockwell T. Gust and George E. Brand, Detroit, Mich., Gordon Johnson, San Francisco, Cal., for appellees.

Samuel L. Chess, New York City, Perlman, Goodman, Hecht & Chesler, Chicago, Ill., Fischer & Fischer, Detroit, Mich., Theodore E. Rein, Chicago, Ill., Samuel L. Chess, New York City, and Bernard T. Hecht, Chicago, Ill., of counsel, for Jerome R. Pergament and George J. London, plaintiffs and appellees.

Butzel, Eaman, Long, Gust & Kennedy, Rockwell T. Gust, A. Hilliard Williams and Philip T. Van Zile, II, Detroit, Mich., for Jos. W. Frazer, H. J. Kaiser, E. F. Kaiser, G. G. Sherwood, E. E. Trefethen, Jr., Clay P. Bedford, W. A. MacDonald, Hickman Price, Jr.

Willkie, Owen, Farr, Gallagher & Walton, Mark F. Hughes and Walston S. Brown, New York City, for Kaiser-Frazer Corp.

George E. Brand and George E. Brand, Jr., Detroit, Mich., Gordon Johnson and Robert G. Sproul, Jr., San Francisco, Cal., for Kaiser Aluminum & Chemical Corp. (formerly The Permanente Metals Corp.).

Norman Annenberg, New York City, for Abram J. Berkwitz, Abraham Fistel, Claude S. McTeague, Richard H. Locke, Bernard D. Brodie, stockholders of Kaiser-Frazer Corp.

Before SIMONS, ALLEN and MILLER, Circuit Judges.

ALLEN, Circuit Judge (dissenting).

This is an appeal from an order of the District Court approving a compromise entered in a derivative suit between Pergament and London, appellees and stockholders of Kaiser-Frazer Corporation (hereinafter called Kaiser-Frazer) and appellees Joseph W. Frazer, Henry J. Kaiser and other directors of Kaiser-Frazer Corporation. Graham-Paige Motors Corporation, Otis & Company, Cyrus Eaton, The Permanente Metals Corporation, Permanente Products Company, United States of America, Reconstruction Finance Corporation and Kaiser-Frazer Corporation were joined as defendants. The United States and the Reconstruction Finance Corporation were dismissed as party defendants and no error is assigned to this action.

The compromise covers a series of stockholders' suits filed primarily against the directors of Kaiser-Frazer, a corporation formed in 1945 by Henry J. Kaiser and the Kaiser interests for the purpose of manufacturing automobiles. The various stockholders' suits in general assert breach of trust on the part of the directors, and fraud and illegal preferences to various corporations dominated by the Kaiser interests, and joined as defendants. The compromise was executed October 25, 1949, submitted to the District Court of the Eastern District of Michigan, and approved under Rule 23(c), Federal Rules of Civil Procedure, 28 U.S.C.A. The judgment dismissed the action of Pergament and London which as finally amended included the claims of all other stockholders' derivative suits theretofore started against the same defendants. The suit for damages of Kaiser-Frazer Corporation against Otis & Company filed in New York, while growing out of one phase of the transactions involved, was not affected by the judgment.

The first stockholders' action was instituted by James F. Masterson February 9, 1948, in the state court of Wayne County, Michigan. A similar suit was filed by Michael Stella May 10, 1948, in the United States District Court for the Southern District of New York. The instant case was filed by Jerome B. Pergament and George J. London in the District Court of the Eastern District of Michigan May 14, 1948. June 30, 1948, Eva Lefker instituted an action in the United States District Court of Delaware and a similar suit was started by Otis & Company in the Chancery Court in Delaware July 2, 1948. In all of these suits service was obtained a considerable time before the settlement was executed.

July 9, 1948, the plaintiffs Fleming and Piantineda filed in the state court of California a derivative suit attacking the lease of the Long Beach property.

The following were the most important claims: (1) The Graham-Paige transaction in December 1946, as to which appellants claim that a loss of several million dollars was incurred by Kaiser-Frazer under a contract by which it acquired all of the automotive assets of Graham-Paige, a corporation in which Joseph W. Frazer, president of Kaiser-Frazer and one of its directors, was heavily interested; (2) the Fleetwings transaction in 1946 and 1947, between Kaiser Fleetwings, Inc., a Kaiser-owned corporation, and Kaiser-Frazer. It is claimed among other things that the prices paid Fleetwings by Kaiser-Frazer for automobile doors and deck lids were excessive and exorbitant. (3) The Permanente Metals transaction, which arises out of the transfer in 1946 by Kaiser-Frazer to the Permanente Metals Corporation, approximately 65% of the stock of which was at the time owned by the Kaiser interests, of a letter of intent issued by the United States Government and accepted by Kaiser-Frazer. The letter offered a lease to Kaiser-Frazer on favorable terms with option to purchase an aluminum rolling plant at Trentwood, Washington, for which the Government had paid approximately $47,630,000. While the lease of other Government aluminum plants was involved, it is particularly contended that the contract for the lease of the Trentwood plant was transferred to Permanente without adequate consideration. (4) The manipulation and stabilization transaction arising out of claimed violations in 1948 by Kaiser-Frazer of § 9(a) (2) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78i (a) (2). Kaiser-Frazer had agreed with three underwriters to offer an issue of 1,500,000 shares of stock for sale to the public at the close of the market on February 3, 1948. It was arranged that Kaiser-Frazer should stabilize the stock by purchase until the close of the New York Curb, and it was estimated that Kaiser-Frazer, in order to stabilize, should purchase not more than 25,000 shares. These arrangements miscarried, and as a result Kaiser-Frazer purchased 186,200 shares of its own stock at a price of $13.50 per share. Later Otis & Company and the First California Company, two of the underwriters, notified the corporation that they would not handle the stock and so the stock sale was completely abortive. Out of this transaction hostility and litigation arose between Kaiser-Frazer and Otis & Company. A suit filed by Kaiser-Frazer in New York for damages for breach of contract by Otis & Company due to its failure to accept and pay for the stock which it had contracted to underwrite was successful in the United States District Court. But the Court of Appeals for the Second Circuit reversed the judgment below and directed entry of judgment for defendants upon the ground that Kaiser-Frazer in this transaction misrepresented certain items of profit in the prospectus and registration statement and that Otis & Company was thus released from liability. Kaiser-Frazer Corp. v. Otis & Co., 2 Cir., 195 F.2d 838. Certiorari denied, 344 U.S. 856, 73 S.Ct. 89.

The Court of Appeals for the Second Circuit declared in that case, 195 F.2d at pages 843, 844: "Kaiser-Frazer stated its earnings in such a way as to represent that it had made a profit of about $4,000,000 in December 1947. This representation was $3,100,000 short of the truth. * * * Any sale to the public by means of the prospectus involved here would have been a violation of the Securities Act of 1933, 15 U.S.C.A. § 77l(2)."

Other actions pleaded involved business deals with Kaiser Steel and Kaiser Engineers, corporations owned and dominated by the Kaiser interests, the manufacture by Kaiser-Frazer of 30,000 rototillers for Graham-Paige, and the granting of the New York Kaiser-Frazer distributorship to the Muntz Car Company. These actions asserted that favoritism was shown and excessive fees and profits paid by Kaiser-Frazer to the companies named. Interlocking directorates existed between the various Kaiser companies, and it is alleged that Kaiser-Frazer, in which the Kaiser interests owned a smaller proportion of the stock than in the other companies, was milked for their profit.

Gross negligence is charged in the lease of the Long Beach, California, property.

If the directors of the corporation acted fraudulently or unfairly in arriving at the settlement, it should be set aside. Feldman v. Pennroad Corp., 3 Cir., 155 F.2d 773. The District Court correctly held that in the proceedings under Rule 23(c) it is the duty of the court to see that the compromise is fair and reasonable and that no collusion or fraud has been practiced in the consummation of the settlement agreement. Winkelman v. General Motors Corp., D.C., 48 F.Supp. 490, 493. The directors and dominant and controlling stockholders are fiduciaries. Their powers are powers in trust. Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 84 L.Ed. 281; Epstein v. United States, 6 Cir., 174 F.2d 754, 764; Mayflower Hotel Stockholders Protective Committee v. Mayflower Hotel Corp., 84 U.S.App.D.C. 275, 173 F.2d 416, 418; Young Spring & Wire Corp. v. Falls, 307 Mich. 69, 101, 11 N.W.2d 329.

Under Michigan law the burden was on the interlocking directors to prove that they acted fairly in the interests of the corporation. Wiseman v. United Dairies, Inc., 324 Mich. 473, 37 N.W.2d 174; Mich. Stat.Ann. 21.13(5). Comp.Laws 1948, § 450.13, subd. 5. This is also the federal rule. Epstein v. United States, supra; Wentz v. Scott, 6 Cir., 10 F.2d 426, 428. As stated by Judge Knappen, in such cases co-directors and managers occupy...