Penn-Texas Corporation v. Morse

• Decision Date: 21 March 1957
• Docket Number: 11750.,11740,No. 11694,11694
• Citation: 242 F.2d 243
• Parties: PENN-TEXAS CORPORATION, and Ernest Stroheim, Plaintiffs-Appellants, v. Robert H. MORSE et al., Defendants-Appellees. Henry L. GARTMAN, Intervening-Plaintiff-Appellant, v. Robert H. MORSE et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

242 F.2d 243 (1957)

PENN-TEXAS CORPORATION, and Ernest Stroheim, Plaintiffs-Appellants, v. Robert H. MORSE et al., Defendants-Appellees.

Henry L. GARTMAN, Intervening-Plaintiff-Appellant, v. Robert H. MORSE et al., Defendants-Appellees.

Nos. 11694, 11740, 11750.

United States Court of Appeals Seventh Circuit.

March 21, 1957.

W. McNeil Kennedy, John R. Whitman, Willis S. Ryza, Barnet Hodes, George L. Siegel, G. Gale Roberson, J. Herzl Segal, Chicago, Ill., for plaintiffs-appellants, Penn-Texas Corp. and Ernest Stroheim.

Owen Rall, Gerhard E. Seidel, Chicago, Ill., Peterson, Lowry, Rall, Barber & Ross, Chicago, Ill., of counsel, for intervening plaintiff-appellant.

Albert E. Jenner, Jr., Edward E. Lynn, Charles J. O'Laughlin, Charles M. Price, Chicago, Ill., Johnston, Thompson, Raymond, Mayer & Jenner, Chicago, Ill., of counsel, for appellees.

Before FINNEGAN, LINDLEY and SCHNACKENBERG, Circuit Judges.

FINNEGAN, Circuit Judge.

After thirteen days of trial plaintiffs and intervenors failed in establishing any right to equitable relief and the trial judge, correctly, we think, allowed a motion under Rule 41(b) Federal Rules of Civil Procedure, 28 U.S.C.A., dismissing the complaint on the merits for want of equity. That final decree (entered February 29, 1956), and some of its derivative aspects, is now before us on plaintiffs' appeal and that of the intervenor, Gartman.¹

Claiming to be common stockholders of the defendant Fairbanks, Morse & Co., an Illinois corporation, plaintiffs Penn-Texas Corporation and its financial vice-president-director, Ernest Stroheim, commenced the proceeding below against Illinois Fairbanks, Morse and each of its nine directors to enjoin the proposed issuance of roughly 169,500 authorized unissued common shares of that Corporation to Canadian Fairbanks, Morse Co., Ltd.,² and to some interests referred to as the "Mailman Group" in exchange for shares of common stock of Canadian Locomotive Co., Ltd.,³ on a share for share basis. Plaintiffs also sought to have a certain by-law, of the corporate defendant declared invalid. Various members of the Morse family, joined as defendants, own stock in Illinois Fairbanks, Morse and simultaneously hold considerable stock in Canadian Fairbanks, Morse Company, Limited, and Canadian Locomotive Co., Ltd. Interlocking directorates in the persons of several Morses exist among those three corporations.

The short of this case is simple enough. Plaintiffs assert standing as stockholders in Illinois Fairbanks, Morse in order to block an exchange of stock which plaintiffs claim would solidify domination by, and perpetuation in power, of the Morse family in the corporate trio and that the Morses would profit from the exchange in violation of their fiduciary relationships. By embedding the proposed exchange in a setting of family stockholders and interlocking directorates, plaintiffs would persuade us that the proposed exchange of stock is tainted enough for equitable relief. That situation is implemented by an elusive set of contentions predicated upon alleged disparity in the stocks to be exchanged.

Before going further, it is appropriate to mention plaintiffs' attack on the findings of fact filed below. We are asked to disregard them because they: (1) are condemned by plaintiffs as clearly erroneous and, (2) were prepared by attorneys for the defense. After carefully reading all of this unduly prolix record, we think the penetrating statements made by the district judge from the bench display a keen and accurate appraisal of some critical defects manifested by plaintiffs' evidence and a sure grasp of the realities spread before him, all of which is incompatible with the tenuous suggestions, about the findings he entered, now sponsored by plaintiffs in seeking reversal; thus among other things, the trial judge said:

"I don\'t know from the evidence here who the real party plaintiffs are. I don\'t know whether it is Francis I. du Pont & Company, the brokers, or some bankers behind them, or whether it is Charles H. Morse, Sr. I doubt that it is he and his family. I think he has just been smart enough to see a chance to make three or four hundred thousand dollars right quick under the circumstances.

"As I see it from the record of the evidence introduced here, he and his family have been very smart and very cunning to seize an opportunity to make probably a half million dollars on the deal. Naturally he doesn\'t care anything about continuing his efforts in the matter. He has got what he wants primarily, it would seem to me, so naturally he wouldn\'t be a named plaintiff.

"Now in summarizing my viewpoint of this case, I am not at all satisfied with the title of the plaintiffs. The intervening petitioners showed their title, and I have no quarrel with most of that. It was done and properly done.

"But whether or not the Penn-Texas Corporation and Mr. Stroheim are the real owners of this stock, I have grave doubt. It looks like to me they have got it pyramided, one on top of the other, and I don\'t know how many kinds of loans may be in the background. It looks like a conspiracy of some type or other to me to raid the stock market. It looks like to me, from the evidence that I have heard, a slugging operation, and I am not going to hesitate to tell you that this court of equity is no place for such types of action, in my judgment, and I don\'t want to see another case like this in my court.

"There is no damage shown. There is no illegal act shown. There is no abuse shown. There is no fraud charged or shown, and the title is seriously questioned. There is no act committed or threatened that a court of equity should in any way entertain."⁴

We, on the other hand, have discovered several statements in the parties' briefs that are without overwhelming support in the transcript of record. For example, plaintiffs tell us that:

"Nowhere in their brief do the defendants challenge the clear and uncontradicted evidence of the defendants themselves recited on pages 12 to 14 of our principal brief, which is epitomized by the admission of R. H. Morse, Sr. that one of the reasons for the issuance of the stock was to place it in the hands of those `who would vote such shares for the perpetuation of the present management.\'" (Penn-Texas reply brief, p. 11. Italics added)

Yet page 901 of the record, to which plaintiffs cite us, discloses the following relevant part of the actual testimony given by Mr. Robert H. Morse, Sr. when called as plaintiffs' witness:

"Q. Was not the purpose of the exchange the placing of the shares of Illinois Fairbanks, Morse in the hands of persons or corporations who would vote said shares for the perpetuation of the present management? A. I wouldn\'t say that was the sole reason.

"Q. Was it one of the reasons? A. I would be very foolish if I didn\'t consider it that way, to not try and get people who were friendly with the management in the company.

"The Court: Mr. Morse, if you answered otherwise I wouldn\'t consider your testimony worth very much."

Judge Lindley, speaking for this court in Gary Theatre Co. v. Columbia Pictures Corporation, 7 Cir., 1941, 120 F.2d 891, 892, said: "Under Rule 41(b) the judgment, supported by findings, was an adjudication upon the merits, inasmuch as defendants moved for dismissal upon the ground that, upon the facts and the law, plaintiff had shown no right to relief. Consequently our question is whether the findings are supported by the evidence. Under Rule 52(a) we can not set them aside unless they are clearly erroneous, and, by the same token we must give due regard to the opportunity of the trial court to judge of the credibility of the witnesses." Defendants' motion interposed below, and the allowance of it, brings the present appeal squarely within the ambit of the quoted passage.

Relying heavily on Winger v. Chicago City Bank & Trust Co., 1946, 394 Ill. 94, 67 N.E.2d 265 based upon transactions engaged in by directors of an Illinois insurance company, these plaintiffs insist that equity raises a presumption against the validity of the proposed exchange, accordingly contending the district judge committed error by holding that the burden of proving fairness was cast upon plaintiffs. But that argument loses all its vitality when a canvass of this record shows an absence of any evidence from which the presumption could arise and remain undiluted. Plaintiffs called several of the key defendant directors as witnesses, counsel for both sides examined them. Even if the presumption operated in full vigor the plaintiffs' evidence, in the trial judge's view, soon dissipated it. At best the alleged error was harmless.

Allred v. Sasser, 7 Cir., 1948, 170 F.2d 233, 235 was terminated by allowing a motion to dismiss and the appellant contended "that the Court should have limited its consideration of the evidence...