Toebelman v. Missouri-Kansas Pipe Line Co.

• Decision Date: 13 October 1941
• Docket Number: No. 129.,129.
• Citation: 41 F. Supp. 334
• Parties: TOEBELMAN et al. v. MISSOURI-KANSAS PIPE LINE CO. et al.
• Court: U.S. District Court — District of Delaware

41 F. Supp. 334

TOEBELMAN et al. v. MISSOURI-KANSAS PIPE LINE CO. et al.

No. 129.

District Court, D. Delaware.

October 13, 1941.

Julius M. Rosenfield (of Rothbart & Rosenfield), of Chicago, Ill., and John J. Morris, Jr., and Harold B. Howard (of Hering, Morris, James & Hitchens), both of Wilmington, Del., for plaintiff Lorena W. Toebelman, and others.

Robert Burnett (of Burnett, Stern & Liberman), of St. Louis, Mo., and Herbert L. Cohen, of Wilmington, Del., for intervenor Charles W. Hahn.

Arthur G. Logan (of Logan & Duffy), of Wilmington, Del., for defendants.

KIRKPATRICK, District Judge.

This is a stockholders' derivative suit against the directors of the defendant corporation, for misfeasance. The principal prayer is for an accounting of funds alleged to have been improperly spent. The corporation is a holding company with some 2,400,000 shares of stock outstanding, of which the plaintiffs and the intervenors together own 4,695 shares, or about one fifth of one per cent.

The defendants have moved for summary judgment. Supporting affidavits were filed and the matter has been fully argued. After the hearing I entered judgment in favor of the defendants as to all the causes of action stated in the complaint, except the one set forth in paragraphs 8, 9, 16 to 22, both inclusive, 31 and 35. These paragraphs deal with excessive expenditures. Fraud is charged adverbially, the allegations in that respect being to the effect that certain disbursements were "fraudulently exorbitant and fraudulently in excess of" the reasonable value of the services for which the payments were made, and the like.

Although at the time of the hearing I felt that the undisputed facts as shown by the affidavits strongly indicated that the plaintiffs had not and could not meet the burden of proof necessary to support this last cause of action, I was moved to withhold the entry of summary judgment as to it by two considerations:

First: Mokan was a holding corporation, and the amount of its operating expenses seemed exceptionally large for such a company, and,

Second: An item of $571,851.70, $549,050.95 of which appears in the two annual reports to stockholders and the balance on the books for the three months following the date of the last report, all charged to reserve for legal and other expenses, did not seem to me to have been explained with the explicitness with which it could have been. I thought it possible that there might be some merit in the plaintiff's charge that the method of bookkeeping with respect to these items was intentionally misleading.

Until these two matters were more fully developed, I did not feel sufficiently informed to pass upon the motion for summary judgment. To meet this thought, the parties agreed that the Court should appoint an independent certified public accountant as examiner, who would have full access to all the books and records of the corporation and of the defendants, and that his report should be filed in affidavit form and considered as an additional affidavit in the case, subject to his presenting himself for further examination by the parties.

All this has been done. The accountant's report, and the record of his examination have been filed as affidavits. He has advised me that the defendants afforded him every possible facility for the development of all the relevant facts, and that he received their fullest co-operation. It might also be said that earlier in the proceedings by permission of the defendants, the plaintiffs had an accounting firm of their own selection make an examination of the defendants' books and accounts. The result of this evidently was not satisfactory to the plaintiffs, but it does not appear that the accountants were refused access to the relevant books and records. I am satisfied that any reasonable discovery procedure which might now be awarded would develop very little, if anything, more than is contained in the accountant's report and supplemental affidavit.

Based on the undisputed facts appearing from all the affidavits, I am of the opinion that the plaintiffs have wholly failed to establish anything entitling them to proceed further in the case. There is no genuine issue as to any material facts, and I do not think that the defendant or its officers should be put to the expense and effort of defending a lawsuit as to which there can be but one outcome.

A conflict, however sharp, between the management of a corporation and a minority group, as to the wisdom or propriety of regularly authorized corporate expenditures does not constitute an issue of fact, at least not a "genuine" issue in the legal sense, because Courts have universally refused to undertake to resolve such disputes. Davis v. Louisville G. & E. Co., 16 Del.Ch. 157, 142 A. 654. Nor does it make any difference that one side embodies its views in a formal complaint and denounces the acts complained of as fraudulent. Nor that the situation disclosed is complicated. When the relevant facts have been fully disclosed, it is the duty of the Court to determine whether or not the suggestion of fraud has anything to support it. If not there is no genuine issue of fact. So on a motion for summary judgment, if the affidavits show that all challenged expenditures were duly authorized by the directors, and no fact is disclosed which tends to rebut the "presumption * * * that the directors * * * were actuated * * * by a bona fide regard for the interests of the corporation" Karasik v. Pacific Eastern Corporation, 21 Del.Ch. 81, 180 A. 604, 607, judgment should be entered.

Almost every fact contained in the affidavits is relevant, and in passing upon the question of the right of the defendants to summary judgment the Court must be familiar with all the facts which are presented to it. An attempt to present them in detail would be merely a restatement. The following, therefore, it will be understood, is only in the nature of a very general summary:

Mokan was chartered May 5, 1928. During the year 1929 it organized and acquired the entire capital stock of Panhandle Eastern Pipe Line Company, an operating company delivering natural gas from fields in Texas and Kansas to various points in the middle west.

In 1930 Mokan got into financial difficulties, and in order to preserve its existence it believed it necessary to and did enter into a contract with Columbia Oil and Gasoline Corporation, a subsidiary of Columbia Gas and Electric Corporation, a potential competitor. By this contract Columbia Oil became the owner of fifty per cent of the stock of Panhandle Eastern, and shortly thereafter it also became the owner of all the Panhandle bonds.

This contract, made September 17, 1930, was the source of a vast amount of litigation, too complicated and extensive to be detailed here. At any rate, the situation in which Mokan had been compelled to place itself resulted in it going into equity receivership on March 18, 1932. This receivership continued until September 29, 1937, at which time, so far as anything relevant to this case is concerned, it was terminated and a new phase of corporate existence began.

The items of claim as to which I entered summary judgment had to do with matters arising prior to the final decree of the Court approving a reorganization and the acts of the receivers. The remaining part, which is now under consideration, has to do entirely with expenditures from September 29, 1937, until December 31, 1940. It covers four fiscal periods of the corporation, the first three of one year each and the last of three months. During the four fiscal periods the corporation received income amounting to $2,455,625.33, mainly dividends from Panhandle.

Of the amount so received by the company, $300,000 went to reduce a loan. The reorganized company started out with a bank indebtedness of $1,100,000, all of which arose from the payment of claims, allowances and expenses arising out of the receivership. This item was reduced to $800,000 by the payment referred to. I find nothing in the transactions relating to it which calls for comment, either in the method of dealing with it or of reporting what was done to the stockholders.

$671,546.74 went to the purchase by the company of 15,149 additional shares of the common stock of Panhandle, bringing its holdings in that company up to 42 per cent of that company. These expenditures were the result of an exercise of judgment by the board of directors. Not only do I find nothing to indicate it was improvident, but it is abundantly clear that it was for the benefit of and for the best interests of Mokan.

$327,457.96 was paid out in dividends by Mokan to its own stockholders.

The foregoing payments, as to which there can be no possible criticism, leave two items to be considered:

First, operating expenses of $651,755.88, and,

Second, the item of $571,851.70 referred to above, charged to "reserve for estimated legal and other expenses to be incurred in the prosecution and settlement of claims and other matters arising during or prior to receivership." The amounts that were transferred to this reserve came from the capital surplus account. While there is some difference of opinion among accountants as to the correctness and propriety of the method of bookkeeping, I find nothing to indicate that it was intended as a fraudulent concealment of payments. The essential fact, namely, that the company spent that much money in addition to its operating expenses during the periods in question, was never concealed, and the purposes for which that money was spent are now fully and completely disclosed.

Dealing first with the operating expenses. They are itemized on page 16 of Exhibit A to the examiner's original affidavit. The largest item is officers' salaries, which amount to $138,785.11. In view of the interests involved, the mere size of this figure is not in my judgment so large as to indicate bad faith or even a faulty exercise of judgment on the part of the...