Transcontinental Oil Corp. v. Trenton Products Co.
| Decision Date | 18 July 1977 |
| Docket Number | Nos. 672,785,D,s. 672 |
| Citation | 560 F.2d 94 |
| Parties | 23 UCC Rep.Serv. 156 TRANSCONTINENTAL OIL CORPORATION, Trecon Oil Co. Ltd. and B. Edwin Sackett, Individually and as nominee, Plaintiffs-Appellees and Cross-Appellants, v. TRENTON PRODUCTS COMPANY, Bernard Fein, Herzfeld & Stern, Loeb, Rhoades & Co., Gerstley, Sunstein & Company, A. Arthur Weiss, Louis C. Fieland and Theresa Zappley, Defendants, Trenton Products Company and Bernard Fein, Defendants-Appellants and Cross-Appellees. TRENTON PRODUCTS COMPANY and Bernard Fein, Defendants and Third-Party Plaintiffs-Appellants and Cross-Appellees, v. Phillip P. GOODKIN, Louis Goodkin, Michael A. Roberts, David Frankel, James E. Davis, Paul A. Rossborough, J. Streicher & Company, Harry B. Leslie, Bertram F. Fagenson, Edwin B. Sackett and Fagenson and Frankel Company Incorporated, Additional Defendants-Appellees on Counterclaim. ockets 76-7465, 76-7467. |
| Court | U.S. Court of Appeals — Second Circuit |
Stroock & Stroock & Lavan, New York City (Frank G. Raichle, Buffalo, N. Y., and Gerald D. Fischer, New York City, of counsel), for defendants-appellants.
Kaufman, Taylor, Kimmel & Miller, New York City (Irwin M. Taylor, New York City, of counsel), for (1) plaintiffs-appellees and cross-appellants and (2) additional defendants-appellees on counterclaim.
Before ANDERSON and MESKILL, Circuit Judges, and MARKEY, Chief Judge, U. S. Court of Customs and Patent Appeals. *
This is an appeal by defendants, Trenton Products Company ("Trenton") and Bernard Fein, and a cross-appeal by plaintiffs, Transcontinental Oil Corporation ("Trans"), Trecon Oil Co. Ltd. 1 and B. Edwin Sackett. 2 Trenton and Fein appeal (1), from the judgment in favor of Trans against Fein, on Count 2, awarding $48,200 (plus interest) as damages resulting from Fein's conversion of 100,000 shares of Trans's common stock The District Court's Findings of Fact
and (2) from the dismissal of their three counterclaims. Trans and Sackett cross-appeal from the dismissal of their Counts 1, 9, and (in part) 10. 3
As the district court prefaced its findings, "this action is reminiscent of the puzzles which require tracing paths through a maze in this case, a cat's cradle of stock transfer transactions to reach the desired destination in this case, determination of the ownership of the shares of a corporation which has been the victim over the years of sufficient fraud and embezzlement to scare off a generation of investors."
The district court made 91 findings of fact. We summarize those relevant on this appeal as follows:
The Active Parties
(1) Trans is a Delaware corporation with its principal place of business in Connecticut; (2) Sackett, who became a stockholder of Trans in 1950, is the Chairman of the Board of Trans and a citizen of Connecticut; (3) Trenton was a New Jersey corporation which, at the time of commencing this action, had its principal place of business in New York; (4) Fein, a citizen of New York, served without compensation, as a director of Trans from April 3, 1956 until April 12, 1966; as its president from April 4, 1956 to November 30, 1959 and from August 12, 1960 to August 12, 1966; and as chairman of Trans's Board of Directors from November 30, 1959 until October 12, 1966 (from May, 1960 until August 12, 1966, Fein, together with Trenton, a corporation of which Fein was a principal stockholder and at times the president, exercised working control of Trans).
In the early 1950's Fein became a shareholder of Trans, acquiring over 100,000 shares from, among others, a New York stockbroker named Harry B. Leslie (one of the additional defendants below). In 1956, Trans was controlled by a group headed by Samuel Brown and related to the Virginia Iron, Coal & Coke Company. At that time Leslie, with assistance from Fein, led a successful proxy fight to gain control of Trans. Leslie then asked Fein to become president of Trans for a short period until he could find someone more familiar with the oil business to run the company.
After Fein assumed the presidency, it was discovered that the prior management had been systematically looting Trans. Brown and his associates bought freedom from civil and perhaps criminal prosecution by a settlement whereby Virginia Iron, Coal & Coke Company purchased all of Trans's wells for $550,000 cash. The bulk of this amount was applied in satisfaction of debentures which the prior management had issued to finance Trans's drilling operations. Trans also acquired Brown's stock in Trans as treasury shares. After paying off the debentures, Trans was left with only two assets, a tax loss, and $55,000 in cash which was used to purchase United States Treasury Bonds.
In 1959, Leslie introduced Fein to Orville V. Burkinshaw and Thomas Cairns who were the principals of a Canadian company, Anglo-Pacific Oil and Gas, Ltd. To take advantage of Trans's tax loss carry-forward, Burkinshaw and Cairns proposed that in exchange for 1,000,000 shares of Trans's common stock and other consideration, Trans would acquire from Anglo all the outstanding stock of a corporation which was the owner of a Rangely, Colorado oil property. The proposal was accepted in a written agreement dated October 1, 1959, and 1,000,000 shares were issued to Anglo in care of Burkinshaw on February 5, 1960.
As a result of this transaction, Anglo acquired full management and control of During Burkinshaw's tenure, the acquisition of an oil and gas property in Sedalia, Alberta, Canada was considered. Because Trans was unable to secure the required financing on its own, Burkinshaw arranged with Fein to raise the needed funds. Fein went to Bernard Green, a Trenton, New Jersey lawyer, who, together with a number of his clients and A. Arthur Weiss (a defendant below), undertook to finance the Sedalia property acquisition. The group of investors, which formed Trenton for this purpose, raised $225,000. Fein added $17,000 of his own and the total of $242,000 was loaned to Trans pursuant to an agreement dated April 11, 1960. In return, Trenton received Trans's note for $242,000 a security interest in the Rangely property, 150,000 shares of original issue Trans stock represented by thirty 5,000-share certificates (the Original Issue shares) and a three-eighths working interest in the Sedalia property.
Trans. Fein resigned as president of Trans effective November 30, 1959 and Burkinshaw was elected in his place. Burkinshaw and his Anglo associates assumed a majority of the seats on the Trans Board of Directors and all of its executive positions. The books and records of Trans were removed to Anglo's Canadian offices.
The Original Issue shares were issued on April 25, 1960 pursuant to a resolution adopted by Trans's Board of Directors on April 12, 1960. The certificates were subsequently delivered to Trenton.
Anglo, which also wished to participate in the Sedalia property, entered into an agreement with Trenton whereby Anglo received one-third of Trenton's three-eighths working interest in the Sedalia property in exchange for 150,000 shares of the stock Anglo had acquired from Trans in the Rangely transaction. These shares (the Anglo-Trenton shares) were represented by certificates for 100,000 shares and 50,000 shares.
Subsequently, Green expressed his view that Trenton was entitled to receive freely transferable shares rather than newly issued, unregistered stock. Therefore, Trans's Board of Directors amended the earlier resolution and on May 27, 1960 authorized the issuance to Trenton of 141,000 treasury shares (the Brown shares) and 9,000 original issue shares to replace the Original Issue shares which were to be surrendered to the corporation. However, they were never cancelled and ultimately came into the possession of Fein.
On the same date (April 12, 1960) that the Original Issue shares were authorized, and for reasons which are not clear, Trans's Board of Directors authorized the issuance of 100,000 shares of common stock to Arthur A. Desilets. It appears that Desilets was a mere front for Burkinshaw and that the issuance of these shares was just one of many frauds committed by Burkinshaw's group while it was in control of Trans. These shares (the Desilets shares) were transmitted by the corporation transfer agent to Buchman & Buchman, Trans's attorneys, who notified Fein of their receipt on April 26, 1960 and delivered them to Fein shortly thereafter. 4 Fein testified that he was not aware of the existence of the Desilets shares until the middle of 1966. Upon discovering the certificates for these shares, Fein made no attempt to determine where they came from but simply "assumed" that Trenton was the correct owner. Proceeding upon that assumption, in August, 1966, Fein directed the transfer of 70,000 of the Desilets shares to Louis C. Fieland (a defendant below) and the remaining 30,000 of the Desilets shares to Weiss.
Shortly after the Sedalia acquisition was completed in 1960, it was discovered that 25 per cent of the Rangely property, which had been pledged as security for Trenton's loan by Trans, had previously been assigned by Burkinshaw to third parties. It was also discovered that Burkinshaw had overstated the purchase price for the Sedalia property by $65,000 and had misappropriated all but $10,000 of this difference. Upon learning of these acts, Green, who was then Trenton's president, threatened to call the note 4. Trenton Products shall be entitled to receive from us, such additional shares of our company as we are able to recover from the former management and control of the company, together with such shares as may be held in the Treasury of the company, as partial recoupment of the damages sustained by you arising out of the failure of this company to perform its obligations, and without further obligation. While it is recognized that such shares have no value at this time due to the...
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