McQuillen v. National Cash Register Co.

• Decision Date: 17 March 1938
• Docket Number: No. 2274.,2274.
• Parties: McQUILLEN et al. v. NATIONAL CASH REGISTER CO. et al.
• Court: U.S. District Court — District of Maryland

22 F. Supp. 867

McQUILLEN et al. v. NATIONAL CASH REGISTER CO. et al.

No. 2274.

District Court, D. Maryland.

March 17, 1938.

COPYRIGHT MATERIAL OMITTED

James Morfit Mullen and R. Contee Rose, both of Baltimore, Md., and Arthur Berenson and Samuel Gottlieb, both of Boston, Mass., for plaintiffs.

R. Dorsey Watkins (of Piper, Carey & Hall), William L. Marbury, Jr. (of Marbury, Gosnell & Williams), and J. Kemp Bartlett, Jr. (of Bartlett, Poe & Clagett), all of Baltimore, Md., for defendants.

WILLIAM C. COLEMAN, District Judge.

The basic question here presented is as to what disposition this court should make of various motions which have been presented by the defendants, some to dismiss the bill of complaint in its entirety, and others to dismiss portions thereof.

The motions seeking dismissal of the bill of complaint as a whole are eight in number. Briefly summarized, they allege that the bill fails (1) to state a valid cause of action in equity; (2) to state facts sufficient to entitle the plaintiffs to any relief in equity; (3) to state facts sufficient to constitute a cause of action against the defendants; (4) to contain a sufficiently intelligible statement of the plaintiffs' claim so as to enable the defendants to answer; also that the bill shows, (5) noncompliance with Equity Rule 25, 28 U.S.C.A. following section 723, in that the bill consists merely of allegations or conclusions of law based upon information and belief; (6) the plaintiffs are guilty of laches; (7) misjoinder of parties defendant, contrary to Federal Equity Rule 26, 28 U.S.C.A. following section 723, since distinct and different liabilities are asserted against the defendants; and (8) noncompliance with Federal Equity Rule 27, 28 U.S.C.A. following section 723, in that the bill admits that the plaintiffs have made no effort to secure action on the part of the shareholders of the National Cash Register Company, without assigning any reason for not endeavoring to secure such action.

The motions to dismiss only portions of the bill of complaint instead of the entire bill are nine in number. Briefly summarized, their object is to have stricken from the bill the following parts: (1) All of that portion relating to transactions prior to June 20, 1928, on the ground that the plaintiffs were not stockholders prior to that date, and that therefore, under Equity Rule 27, they cannot complain of these transactions; (2) all that portion of the bill involving transactions prior to January 10, 1929, on the ground that plaintiffs purchased additional shares on that date; (3) all that portion of the bill relating to the original issuance of the "B" stock, on the ground that sufficient facts are not alleged to permit plaintiffs to maintain a derivative action for the benefit of the company or its shareholders, with respect to such issuance; (4) all that portion of the bill attacking the original issuance of the "B" shares of stock, on the ground that the right so to do is now barred by laches, or the statute of limitations; (5) all that portion of the bill attacking the original issuance of the "B" stock, on the ground that the allegations with respect thereto are mutually conflicting and inconsistent; (6) all that portion of the bill attacking the so-called profit-sharing plan of the National Cash Register Company, on the ground that such cause is barred by laches, or the statute of limitations; (7) all that portion of the bill attacking the issuance of shares of the common "C" stock, on the ground that there is a nonjoinder of indispensable parties defendant, namely, of the present holders of the former common "B" stock and common "C" stock, and of the common stock now representing the common "C" stock; (8) all that portion of the bill attacking the issuance of the common "C" stock, on the ground that the bill fails to state facts sufficient to entitle the plaintiffs to maintain a derivative action with respect to such issuance; and, lastly, (9) all that portion of the bill attacking the issuance of the 238,000 shares of "A" stock in lieu of dividends, on the ground that there is a nonjoinder of indispensable parties defendant, namely, of the original holders or transferees of such shares.

The following summary of the allegations in the bill of complaint that are material to the issues here raised is an essential preliminary to a consideration of those issues.

The defendant corporation, the National Cash Register Company, was incorporated in January, 1926, with two classes of stock, "A" preferred, with an authorized issue of 1,100,000 shares, and the "B" preferred stock, with an authorization of 400,000 shares, both of these classes of stock being of no-par value. The "A" shares carried cumulative dividends of $3 per share, while the "B" shares carried a dividend of like amount, but noncumulative. Upon dissolution or payment of dividends in excess of $3, the "A" and "B" shares were to be placed on a parity. With the "B" shares went the right to elect a majority of the company's directors, but, in the event of default in two successive quarterly payments of dividends on the "A" shares, the "A" shareholders were to have the right to elect the majority until all accumulated dividends had been paid in full.

In January, 1926, some of the defendants, namely, Dillon, Read & Co., and Messrs. F. B. Patterson, Kuhns, Barringer, Allyn, Haswell, Hartman, Steffey, and James, caused the company to entrust to Dillon, Read & Co. the sale of the "A" shares, with the understanding that all of the proceeds therefrom were to be paid to the company. Dillon, Read & Co. sold these shares at $50 per share, that is, for the total sum of $55,000,000, none of which was ever turned over to the company. Out of this amount, $40,000,000 was paid to the various defendants, who were officers and directors of another company, already incorporated in Ohio, and, through an unlawful arrangement, the assets of this company, subject to its liabilities, were transferred to the National Cash Register Company. The balance, or $15,000,000, Dillon, Read & Co. retained itself.

This alleged fraudulent arrangement is stated in the bill of complaint to have been carried out in the following manner: The various defendants just named arranged to control the 90,000 shares of common stock of the Ohio company by causing the National Cash Register Company to issue, in exchange for such stock, all of its own authorized "A" and "B" shares. Dillon, Read & Co. then pretended to buy the 1,100,000 "A" shares and 50,896 "B" shares for $40,000,000, the named defendants taking the balance of the "B" shares. In order to give Dillon, Read & Co. funds with which to carry out this transaction, and in order that the named defendants might be paid, they, as directors of the National Cash Register Company, appropriated to themselves the money received from the subscribers to the "A" shares. Dillon, Read & Co. sold 16,667 shares of the "B" stock at an additional profit of $550,000. Thereupon, these named defendants set aside to themselves 150,000 "B" shares, to be paid for in future services. The assets received from the Ohio company were not worth more than $34,000,000, while these named defendants received $55,000,000 and the 400,000 "B" shares. Of the 150,000 "B" shares set aside to be paid for in future services, 45,000 were distributed between the years 1927 and 1932, inclusive, the balance of the "B" shares, or their equivalent in shares for which they were exchangeable, now being held by the other defendants.

It is further alleged that, no dividends having been paid on the "A" shares since the fall of 1931, the defendants, in November and December, 1932, caused the adoption by the board of the National Cash Register Company of resolutions authorizing the following unlawful transactions: Because of the small worth of the "B" shares as a result of the nonpayment of dividends, which was directly contrary to the situation with respect to the "A" shares, the defendants, as directors, issued "C" shares in exchange for the "B" shares, this new stock to have the same privileges as the "A" shares. The company's charter was then amended, converting the "C" shares into "A" shares, with the result that there was left only one class of stock, one share of "C" stock being issued for every two shares of "B" stock. Those defendants, who were directors at the time, further purported to have the "A" shareholders cancel the $7,000,000 unpaid dividends on the "A" stock, and to issue, in lieu thereof, "A" shares equal to 20 per cent. of their then holdings of "A" shares, without consideration and in violation of the agreements with the "A" shareholders. By this arrangement, 238,000 additional "A" shares were issued.

In 1931 Edward A. Deeds, one of the present defendants, was elected president of the board of the National Cash Register Company, and it is further alleged that the year following, the various defendants, as directors of the National Cash Register Company, purchased with the company's funds 50,000 "A" shares, and secretly gave Deeds an option, without consideration, to purchase these shares over a period of five years, at the rate of 10,000 shares each year, at $9.80 per share, although the book value was $50 per share. The company had no surplus at this time. This option, by reason of the additional "A" shares issued as a stock dividend, has been increased to cover a total of 60,000 shares.

A recapitulation of the total outstanding stock of the company at the time the amended bill of complaint was filed, namely, February 4, 1935, and as alleged therein, is as follows: 1,100,000 "A" shares, resulting from the following sequence of share issuance: 1,100,000 "A" shares originally issued; 200,000 "A" shares originally issued as "B" shares and exchanged for "C" shares; 238,000 "A" shares issued in lieu of accumulated dividends; and 90,000 "A" shares issued by the original Ohio company.

The first purchase by...