National Home Products, Inc. v. Gray

• Decision Date: 18 May 1976
• Docket Number: Civ. A. No. 4256.
• Citation: 416 F. Supp. 1293
• Parties: NATIONAL HOME PRODUCTS, INC. (formerly known as Scotten, Dillon Company), a Delaware Corporation, Plaintiff, v. Harold GRAY et al., Defendants. Harold GRAY et al., Third-Party Plaintiffs, v. F. Steven BERG et al., Third-Party Defendants.
• Court: U.S. District Court — District of Delaware

416 F. Supp. 1293

NATIONAL HOME PRODUCTS, INC. (formerly known as Scotten, Dillon Company), a Delaware Corporation, Plaintiff, v. Harold GRAY et al., Defendants.

Harold GRAY et al., Third-Party Plaintiffs, v. F. Steven BERG et al., Third-Party Defendants.

Civ. A. No. 4256.

United States District Court, D. Delaware.

May 18, 1976.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Arthur G. Connolly, Jr., of Connolly, Bove & Lodge, Wilmington, Del., for plaintiff.

R. Franklin Balotti of Richards, Layton & Finger, Wilmington, Del. and Robert P. Knapp, Jr. and Andrew N. Grass, Jr., of Windels & Marx, New York City, for defendants and third-party plaintiffs.

Jack B. Jacobs and Richard A. Levine of Young, Conaway, Stargatt & Taylor, Wilmington, Del., for third-party defendants.

OPINION

LATCHUM, Chief Judge.

National Home Products, Inc., a Delaware corporation formerly known as Scotten, Dillon Company ("Scotten, Dillon"),¹ brings this action for a declaratory judgment determining liability for $29,940.50 in expenses² incurred in connection with a proxy solicitation conducted for the Reconvened 1970 Annual Shareholders Meeting by a majority of the Scotten, Dillon board of directors as lawfully constituted on July 22, 1970. The Reconvened 1970 Annual Shareholders Meeting was held on October 27, 1971. Two proposals, voted upon by the shareholders in person and by proxy, were adopted: (1) the expansion of the board of directors from seven to nine members, and (2) the election of Andrew N. Grass, Jr., Robert M. Schroder, Charles A. Baratelli, and Robert A. Goldschmidt to the board. Plaintiff claims that all of the defendants are liable for these proxy solicitation expenses because they promoted the issuance and the dissemination of a proxy statement that violated Section 14(a) of the Securities Exchange Act of 1934³ and Rules 14a-3, 14a-4, 14a-9 and 14a-11 promulgated thereunder. Liability is also sought to be imposed upon defendants Gray, Hill, Schroder, C. B. Richard, Ellis & Co. and Grass under Rule 14a-9 for their failure to comply with Section 13(d) of the Securities Exchange Act of 1934 and companion regulations.

Subject matter jurisdiction and venue of this action exist by virtue of 15 U.S.C. § 78aa.⁴ The case was tried to the Court without a jury from April 28 through May 2, 1975.⁵

I. THE FACTS

A. The Background

This action by Scotten, Dillon grows out of this Court's decision and orders entered in Dillon v. Berg, 326 F.Supp. 1214 (D.Del. 1971), aff'd 453 F.2d 876 (C.A.3, 1971).⁶Dillon v. Berg was brought in the late summer of 1970 by Len Dillon ("Dillon"), Harold Gray ("Gray") and Fred R. Davis ("Davis"), the so-called "Gray faction" of Scotten, Dillon's board, against F. Steven Berg ("Berg"), William Lerner ("Lerner") and Ernest Summers ("Summers"), the so-called "Berg faction" of the board.⁷ The underlying purpose of the original suit instituted by the Gray faction was to oust the Berg faction from control of Scotten, Dillon in order to obtain majority control of the board for themselves. In that action this Court held that the August 20, 1970 Scotten, Dillon annual shareholders meeting was invalid and set aside the election of two directors because of proxy rule violations. The Court then ordered that a Reconvened 1970 Annual Shareholders Meeting be held and proxies be resolicited for the election of directors. Although both factions turned their attention to setting in motion the process of reconvening the 1970 Annual Shareholders Meeting, it is clear that Gray, Davis and Grass, their attorney, spearheaded this effort. Because each of them exerted a predominate influence on the proxy solicitation here under attack, a brief word about them is in order at this point.

Harold Gray was first elected to the Scotten, Dillon board of directors on December 9, 1968. (Tr. 491). He is an attorney in Palm Beach, Florida (Tr. 476) who presently devotes the greater part of his time to counseling Willis H. DuPont in legal matters. (Tr. 477-482). Another of Gray's clients is Phyllis Joan Mandery Briggs Hill ("Hill"). Since 1965 he has functioned in a dual capacity as Hill's attorney and investment adviser. (Tr. 315-316, 343, 495).

About the time Gray became a director of Scotten, Dillon he persuaded Hill to invest extensively in its stock. (Tr. 498-499). As a result, between December 1968 and April 1969 she purchased a total of 29,150 shares of Scotten, Dillon common. (DX 44; Tr. 319-320, 374-375, 238, 246; Docket Item 137 at 9). Then in April 1969 Gray convinced Hill to "sell" him a 10,000 share block known as the "McCusker Block" for $300,000, which sum represented an immediate loss to Hill of $50,000.⁸ (Tr. 502, 320-321, 358). Gray did not pay cash for this block of shares (Tr. 362); rather, his consideration was in the form of a promissory note which he drafted and prepared. (Tr. 363, 550-551; Docket Item 137 at 21). Under the terms of the note as Hill understood them, she obtained a promise from Gray to pay her $300,000 in full upon demand on or before five years.⁹ No payments of principal or interest were otherwise required before maturity and it was Hill's erroneous understanding that even after maturity she had to demand payment of the principal for the note to become due. (Tr. 370, 366, 367, 368; Docket Item 137 at 22). Hill was aware that Gray was not personally liable on the note (Tr. 364) and that her only security was the 10,000 shares of the McCusker Block.¹⁰ Hill also knew that she, instead of Gray, under the terms of the note would be assuming the risk of any future decline in their market value. (Tr. 369).

Gray did not review the terms of this transaction with Hill in advance nor did Hill review them with any other attorney. (Tr. 363). On April 24, 1969 Hill signed an agreement memorializing the transaction with Gray (DX 39) and the next day wrote C. B. Richard, Ellis & Co. directing it to transfer record ownership of the McCusker Block to Gray. (DX 42). By July 15, 1969 Gray had received the stock certificate representing the McCusker Block (Tr. 328) which he then forwarded along with his stock power to Hill. (DX 60). Over a year later Gray represented to this Court under oath in Dillon v. Berg that he was the unqualified beneficial owner of 10,100 shares of Scotten, Dillon (PX 1, par. 4; see also PX 2, par. 1) even though in the interim he had advanced no money to Hill for the so-called purchase of the 10,000 McCusker Block shares. And as of June 1971 the same held true. Gray, captain of the victorious plaintiffs in Dillon v. Berg, "owned" 10,000 of his 10,100 shares by virtue of the unwitting beneficence of his client Mrs. Hill, not by virtue of any investment of his personal money or by incurring a personal liability.

Fred R. Davis, a Reading, Pennsylvania businessman (Tr. 95-96), was elected to the Scotten, Dillon board on August 26, 1968 (Tr. 132; PX 12 at 1). He initially invested in Scotten, Dillon by purchasing 1,100 shares of common stock during the summer of 1968. (Tr. 121, 101, 103, 104-105). Davis was also the record owner of an additional 2,000 shares of Scotten, Dillon common stock which his friend William Knauer bought in mid-1968. (Tr. 105-106). Knauer was first financial vice president of Helme Products, Inc. (Tr. 380) whose wholly-owned subsidiary, the Bloch Brothers Tobacco Co. (Tr. 386) was and is a major competitor of Scotten, Dillon National Home Products, Inc.. (Tr. 388; Pre-trial order (c) (Items 1 & 21)). When Knauer purchased his 2,000 shares about the same time Davis bought his own 1,100 shares, he asked Davis to register the 2,000 shares in Davis' name. Davis did so and then executed a stock power in Knauer's name and handed over twenty 100 share certificates to Knauer. (Tr. 105; Docket Item 72 at 54-56). In Dillon v. Berg, Davis was represented to the Court as the beneficial owner of 3,100 shares of Scotten, Dillon common stock. (PX 1, par 4; PX 2, par. 1).

Andrew N. Grass, Jr. was a partner in Windels, Merritt & Ingraham of New York City. (Pre-trial Order (c)(15)). Somewhat experienced in the nuances of federal securities law by reason of an eight year stint with the New York Regional Office of the SEC (Tr. 182), he first met Gray in 1965 when the Windels firm was general counsel for C. B. Richard & Co. (Tr. 184), a New York brokerage firm into which D. H. Ellis (of which Gray was a limited partner) later merged. (Tr. 184). In the spring of 1970 Gray contacted Grass about Scotten, Dillon. (Tr. 186). Later, in the fall of 1970, Grass agreed to become a nominee for the Scotten, Dillon board if the plaintiffs in Dillon v. Berg, prevailed in nullifying the outcome of the 1970 annual shareholders meeting. (Tr. 257; Docket Item 151 at 91-92).

B. Gray Faction Strategy for the Reconvened 1970 Meeting

Shortly after the Court's opinion in Dillon v. Berg of May 6, 1971, Gray, Davis and Grass began in earnest to formulate their strategy for reconvening the 1970 Annual Shareholders Meeting. On one occasion Davis contacted Ralph Power ("Power"). The Court in Dillon v. Berg had found that Power had been illegally removed from the Scotten, Dillon board in July 1970 and he was held to be the seventh director of the legally constituted board on July 22, 1970. The directors who would have to meet to vote on the arrangements of the Court ordered reconvened meeting were Berg, Lerner and George K. Bissell ("Bissell") of the Berg faction, Gray, Davis and Dillon of the Gray faction and Power. Thus, Power was in the position of holding the swing vote between the two factions.

The purpose of Davis contacting Power was to inform him of the Court's order and to discuss the economic prospects of Scotten, Dillon's tobacco processing subsidiary, the Wisconsin Tobacco Company. (Docket Item 62 at 141). Power had been elected president of Scotten, Dillon in 1968, on the same day that Davis had joined the Scotten, Dillon board. (PX 12 at 1, 2). In the ensuing year the two negotiated...