Tanzer v. Huffines

• Decision Date: 27 June 1968
• Docket Number: Civ. A. No. 3166.
• Citation: 287 F. Supp. 273
• Parties: Deborah TANZER, Plaintiff, v. Robert H. HUFFINES, Jr., et al., Defendants.
• Court: U.S. District Court — District of Delaware

287 F. Supp. 273

Deborah TANZER, Plaintiff, v. Robert H. HUFFINES, Jr., et al., Defendants.

Civ. A. No. 3166.

United States District Court D. Delaware.

June 27, 1968.

Irving Morris and Joseph A. Rosenthal, of Cohen, Morris & Rosenthal, Wilmington, Del., and Benedict Wolf and Howard L. Jacobs, of Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiff.

Ernest S. Wilson, Jr., of Wilson & Lynam, Wilmington, Del., for defendants B.S.F. and Edward Krock.

OPINION

LAYTON, District Judge.

Plaintiff, a stockholder of B.S.F. Company, a diversified management investment company,¹ filed this derivative suit against Defiance Industries, Inc., (Defiance), B.S.F. Company (B.S.F.), and certain individual defendants, Robert H. Huffines, Jr., Victor Muscat and Edward Krock. The complaint charges that the individual defendants by virtue of their control of Defiance, which in turn controlled B.S.F., were able to infiltrate into and make themselves officers and directors of certain portfolio companies of B.S.F. As a result, it is alleged that the individual defendants, without adequate consideration, improperly drew salaries, bonuses and obtained stock options, etc., from these portfolio companies. Further, the complaint charges that the transactions described not only violated the Securities and Exchange Act of 1934 and the Investment Company Act of 1940, but also that B.S.F. suffered substantial damage. The complaint goes on to allege that certain attempts to wrest control of the portfolio companies from existing management were not only unsuccessful but resulted in large and improper expenditures by way of legal fees, proxy fights, etc., and that, moreover, B.S.F. sustained heavy losses as a result of compelled purchases of stock negotiated by the individual defendants without regard for the interest of B.S.F. or the B.S.F. stockholders.

The prayers of the complaint are for the appointment of a receiver of the assets of B.S.F., an accounting to B.S.F., an order requiring B.S.F. to divest itself of the stock of certain companies owned by it and the cancellation of a management agreement between B.S.F. and Defiance.

During the course of pre-trial discovery last summer, plaintiff moved for the appointment of a receiver pending final disposition of the derivative suit. The motion was narrow in scope, based solely on the failure of defendant Muscat to respond to some 775 questions propounded by plaintiff's attorney during several deposition sessions. In an unreported opinion, this Court denied the motion, stating, "On the present state of the record, there appears to be no compelling need for the appointment of a receiver on the grounds alleged."

On February 5, 1968, plaintiff renewed her motion for the appointment of a temporary receiver. This motion, unlike that of August 1967, is broadly based. The motion was twice argued to the Court, and briefs, supplemental memoranda, affidavits and other exhibits have been submitted. The new material which has most affected the Court's view of the situation at B.S.F. is (1) the decision of Judge Mansfield in Norte and Company v. Huffines et al., 288 F.Supp. 855 (S.D.N.Y., May 15, 1968), (2) the failure of B.S.F. to comply with requirements of 15 U.S.C. § 80a-29(a), (3) omissions in material submitted to the Court by the defendants and (4) misleading information in the 1967 Annual Report to Stockholders of B.S.F. Company.

It is well settled that this Court has the power to appoint a receiver in a proper case.² However, the law is also well established that the remedy is a harsh one, one to which a Court should not resort in any but the most extreme circumstances. The language of the opinions appointing receivers speaks in terms of gross fraud and mismanagement, creating a situation of "`imperious necessity, when the right of the complainant, on the showing made by him, is undoubted * * *.'" Maxwell v. Enterprise Wallpaper Mfg. Co., 131 F.2d 400, 403 (C.A.3, 1942).

In his opinion in Norte and Company v. Huffines, supra, Judge Mansfield concluded that:

"Plaintiff has established a clear case of gross and deliberate fraud on the part of defendants Huffines and Muscat, knowingly participated in by Krock, in breach of their fiduciary duties to Defiance's stockholders and with the purpose and effect of profiting at the expense of its stockholders. It is difficult to conceive of more flagrant and callous breaches of trust on the part of corporate fiduciaries than those found here."

In commenting on the significance of Judge Mansfield's adjudication, the sole response by counsel for the defendants seems to be that this conduct occurred in 1962 and did not occur in direct connection with B.S.F.³

To the contrary, in cases where the Securities and Exchange Commission has sought injunctions against future violations of the securities laws, courts have found that illegal past conduct gives rise to the inference that there is a reasonable likelihood of future violations. S. E. C. v. Keller Corporation, 323 F.2d 397 (C.A.7, 1963). The analogy to this case is particularly strong, where the suit brought by this private plaintiff is against an investment company, which the Congress has determined to be "affected with a national public interest" and the improper management of which adversely affects the "national public interest and the interest of investors." 15 U.S.C. § 80a-1.

Rather than establishing that the reprehensible conduct of 1962 will not be repeated in 1968, the most recent activities of the defendants indicate otherwise. On June 20, 1968, this Court was advised by defendants' attorney⁴ that defendant B.S.F. was proposing a stockholders meeting for the election of a new slate of directors. The obvious purpose of advising the Court about the proposed forthcoming election was to encourage the Court to believe that hereafter B.S.F. would be subject to relatively independent direction and control. With much emphasis, the letter from counsel states that defendant Muscat will not be one of the directors, and that of the five directors proposed, only two could be regarded as having "a fixed relationship" to any of the triumvirate, Muscat, Huffines and Krock. The letter includes biographical sketches of the proposed directors to demonstrate the independence of at least three of the proposed slate. The biographical sketches are hardly complete. For example, proposed director Edward J. Spellman is listed as Executive Vice President of Modern Globe Sales, Inc.; a director of Fairlee Textile Company; Vice President of...