Treadway Companies, Inc. v. Care Corp.
| Decision Date | 16 April 1980 |
| Docket Number | No. 79 Civ. 5066 (GLG).,79 Civ. 5066 (GLG). |
| Citation | 490 F. Supp. 668 |
| Parties | TREADWAY COMPANIES, INC., Plaintiff, v. CARE CORPORATION, Dr. Robert W. Browne, Daniel Cowin, and Philip deJourno, Defendants. CARE CORPORATION, Dr. Robert W. Browne and Philip deJourno, Counterclaim-Plaintiffs, v. FAIR LANES, INC., Treadway Companies, Inc., Daniel Parke Lieblich, John R. McDonnell, Simon Gluckman, Norman Brassler, Murray L. Cole, Samuel B. Dobrow, and Bernard Mills, Counterclaim-Defendants. CARE CORPORATION and Philip deJourno, suing derivatively in the right and for the benefit of Treadway Companies, Inc., Counterclaim-Plaintiffs, v. FAIR LANES, INC., Daniel Parke Lieblich, John R. McDonnell, Simon Gluckman, Norman Brassler, Murray L. Cole, Samuel B. Dobrow, and Bernard Mills, Counterclaim-Defendants, and Treadway Companies, Inc., Nominal Defendant. |
| Court | U.S. District Court — Southern District of New York |
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Battle, Fowler, Jaffin, Pierce & Kheel, New York City, for plaintiff and the individual counterclaim-defendants; Samuel R. Pierce, Jr., Gerald J. Fields, Raymond J. Soffientini, Richard S. Lawch, New York City, of counsel.
Marshall, Bratter, Greene, Allison & Tucker, New York City, for defendants and counterclaim-plaintiffs, Care Corp., Dr. Browne and Philip deJourno; Daniel S. Greenfeld, Stephen B. Camhi, New York City, of counsel.
Skadden, Arps, Slate, Meagher & Flom, New York City, for defendant Cowin; Michael H. Diamond, Douglas M. Kraus, Robert W. Wien, David M. Hashmall, New York City, of counsel.
After months of extensive motion practice and pretrial maneuvering in this action involving an ongoing struggle for control over Treadway Companies, Inc. ("Treadway"), a trial was held before this Court. The following findings and conclusions have been reached.
The prize involved in the instant action is Treadway, a New Jersey corporation principally engaged in the operation and management of bowling centers, and in the franchising, operation, and management of motor inns. The principal characters involved are, on the one side, the incumbent management of Treadway, lead by the chairman of its board of directors, Daniel Parke Lieblich ("Lieblich"), and on the other side, Care Corporation ("Care"), a Delaware corporation with its principal offices in Michigan which is engaged in the operation of long term health care facilities and in the operation of recreational facilities, including bowling centers. Individual named defendants are: Dr. Robert W. Browne ("Browne"), who is Care's chairman of the board and is also a Treadway director; Philip deJourno ("deJourno"), Care's former president and also a Treadway director; and Daniel Cowin ("Cowin"), formerly a director and paid financial consultant as well as the largest shareholder of Treadway. A late entrant in the dispute (named but not served as a defendant in the counterclaims) is Treadway's "white knight," Fair Lanes, Inc. ("Fair Lanes"), a Maryland corporation engaged in the operation of bowling facilities, restaurants, and real estate.
The case began in January of 1978. At that time Browne approached Chauncy Leake ("Leake"), an investment banker and securities analyst who had assisted Care in its initial public offering and was a member of its original board of directors (which he rejoined in August 1978), and asked him to prepare a study of companies, including Treadway, involved in the bowling industry. In furtherance of this study, Leake suggested that he talk, on Browne's behalf, with Cowin, an investment banker whom he had known professionally since the early 1960's, and whom he knew to be a director of Treadway. (Allegedly, Leake did not know that Cowin was its financial advisor.)
Cowin, by as early as November 1, 1977, (in conjunction with his wife, who held 50,000 shares in her own account) was Treadway's largest shareholder. He did not, however, control the corporation, a fact made clear on December 21, 1977, when his request to the board of directors that he be made chairman was denied (although he was made chairman of the executive committee). Cowin had been a director of Treadway since August 1974. During that time he had also served as financial consultant to the company, a part-time position for which he was paid $500 per month until May 1, 1978, at which time his contract, at his request, was extended and his compensation increased to $1,000 per month.1
Browne, like Leake, knew that Cowin was a director of Treadway, and, in fact, professed to believe that Cowin was the reason for the corporation's success. (Browne also denies knowing, at that time, that Cowin was also the corporation's financial adviser but acknowledges that he learned of this prior to November 1978.) Browne agreed with Leake that talks with Cowin would be useful. Subsequently Leake called and spoke with Cowin in late February and early March 1978, and subsequently met with him. At that meeting Leake told Cowin about Browne and Care, and informed him that Care was considering buying Treadway stock.
Following this meeting, Leake telephoned Browne to let him know that Cowin would be willing to meet with him. The Browne-Cowin meeting was then arranged for March 21, 1978. During the talks (which were also attended by John Bouwer ("Bouwer"), the president of Care's bowling subsidiary Concordia Corp.) Cowin was informed that Care had just started to purchase Treadway stock on the open market, and was asked how Care, which had a considerable amount of cash on hand, could best acquire a "reasonable amount" of Treadway stock. Cowin informed Browne that, while Care could purchase the stock through a tender offer at a premium, it could also buy the same stock on the open market and thereby avoid paying the premium. Cowin, however, also claims he told Browne that he had no interest in selling his own stock.
Leake again met with Cowin on April 5, 1978, and once more discussed the purchase of Treadway stock. Cowin did not inform any one at Treadway about this or any of his prior meetings and contacts with Care. Although all involved parties profess to have failed memories concerning these contacts, contemporaneous documents indicate that they were then thought important by all involved.
Care's first purchases of Treadway stock occurred about the time of these meetings. These purchases were made by Leake, who, although no specific volume or dollar limitation had been placed on his power to buy, realized that he should consult with Care before purchasing blocks costing $10,000 or more. Leake was directed to buy near the bid side in order to avoid putting upward pressure on the price of the stock. Leake continued to make such purchases through April.
At the same time as Care's interest in purchasing Treadway stock was developing, Treadway was considering a "spin-off" of its then unprofitable Inns Division. In furtherance of this, a report was prepared by Helmsley-Spear, Inc. on the liquidation value of the inns. This report was discussed by Cowin and Lieblich with representatives of Helmsley-Spear, and was a topic of discussion at the March 8 board meeting of Treadway. Subsequently, on April 7, 1978, Lieblich sent to all directors, including Cowin, a letter marked confidential, stating that the liquidation value of the Inns Division greatly exceeded its going concern value, even though its earnings were improving.
Care's interest in Treadway continued. In April 1978 Bouwer visited all or most of Treadway's inns and all but two of its bowling centers. Thereafter, inquiries were made to Cowin concerning the spin-off, and subsequently Leake and Cowin met on June 6 to discuss the likelihood that the spin-off would actually be carried out.
At this time Care's ownership in Treadway was approaching 5% and as a result Care would soon be required to file a Schedule 13D with the Securities and Exchange Commission ("SEC"). Accordingly, Leake suggested that a meeting between Browne and Lieblich be arranged so that Care could explain its intentions prior to the filing. At the meeting which took place on June 30, 1978, Browne informed Lieblich that Care had bought the shares for investment purposes only. Lieblich asked Browne whether he would be interested in obtaining a position on Treadway's board and Browne said that he would not. Also discussed was the possibility of a merger by the two companies and the sale by Care to Treadway of Care's bowling interests. Both subjects were raised by Lieblich. In a further discussion by telephone on July 12 between Lieblich and Leake, Lieblich renewed his offer to buy Care's bowling concerns. At none of these discussions was any mention made of Cowin's prior contacts with Care, and Leake's notes of his conversation specifically state: "No mention of Cowin."
On July 17, 1978, Care filed its Schedule 13D with the SEC. It indicated that Care then owned 7.16% of Treadway stock and stated that Care's current purpose in obtaining the stock was as an investment.2
Meanwhile, the proposed spin-off was moving forward. In furtherance of it, Treadway's SEC counsel, Lawrence Bangser, sent a letter and memorandum, on or about June 23, 1978, to all directors indicating that they should not trade publicly in Treadway stock because of the spin-off. This directive was repeated in a memorandum sent by Bangser on August 22 to the directors stating that, as a necessary requirement for the effectuation of the spin-off, a representation had to be made that they had no present intention to sell their Treadway stock. Soon after, Cowin, Lieblich, and a partner of Bangser discussed this memorandum. Subsequently, on August 24, 1978, Cowin indicated at a meeting of the board of directors that he had no present intention to sell his shares. He made no mention of his contacts with Care. Bangser sent another letter on October 6 to the directors, this time stating that the spin-off was unlikely to get favorable tax treatment unless all the...
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Treadway Companies, Inc. v. Care Corp.
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