Twenty Seven Trust v. Realty Growth Investors
| Decision Date | 22 February 1982 |
| Docket Number | Civ. A. No. M-81-2728. |
| Citation | 533 F. Supp. 1028 |
| Parties | The TWENTY SEVEN TRUST v. REALTY GROWTH INVESTORS and RGI Holding Company, Inc. |
| Court | U.S. District Court — District of Maryland |
William E. Taylor, III, James P. Golden, Barry Genkin, and Blank, Rome, Comisky & McCauley, Philadelphia, Pa., Gerard P. Martin, H. Russell Smouse, and Melnicove, Kaufman, Weiner & Smouse, Baltimore, Md., for plaintiff.
Donald E. Sharpe, Frank R. Goldstein, Robert J. Mathias, and Piper & Marbury, Baltimore, Md., for defendants.
The plaintiff, the Twenty Seven Trust (Twenty Seven), brought this action against Realty Growth Investors (Realty) and RGI Holding Company, Inc. (RGI) on October 22, 1981. Twenty Seven's four-count complaint alleged violations of the federal securities laws and Maryland common law in connection with RGI's attempt to acquire all of the shares of beneficial interest in Realty.1 On October 23, 1981, the Chambers Judge denied Twenty Seven's request for a temporary restraining order which, if granted, would have enjoined a special meeting of Realty's shareholders called to approve a "squeeze-out merger" between Realty and a wholly-owned subsidiary of RGI.2
Twenty Seven filed an amended complaint on November 12, 1981, adding a fifth count based on an alleged discriminatory distribution of cash and securities by Realty to its shareholders.3 Twenty Seven also filed a petition for appraisal under Md. Corps. & Ass'ns Code Ann. §§ 3-201 to 3-213 (1975 & 1981 Cum.Supp.), for a determination of the "fair value" of its Realty shares.4
The defendants have moved, pursuant to Rule 12(b)(6), Fed.R.Civ.P., to dismiss Twenty Seven's amended complaint, leaving Twenty Seven solely to its remedy under the appraisal statute.5 Twenty Seven has filed a memorandum opposing the defendants' motion,6 and the court heard argument from counsel on February 5, 1982. Accordingly, the matters raised by the defendants' motion are ready for decision.
Twenty Seven is a trust organized under the laws of New York. At all times relevant to this litigation, Twenty Seven was the owner of 22,500 shares of beneficial interest in Realty, representing 6.9% of the issued and outstanding shares of beneficial interest. Realty is a Maryland real estate investment trust (RIT) formed in 1971. RGI is a Delaware corporation formed by American Invesco Corporation (Invesco). As a consequence of the events at issue in this litigation, RGI has become Realty's sole shareholder.
Pursuant to a tender offer dated April 24, 1981, RGI offered a cash price of $14.31 per share for all the outstanding shares of beneficial interest in Realty. The offer was contingent upon the tender of at least 90% of the shares, and stated that if less than 100% of the shares were tendered, RGI would consider a merger between Realty and an RGI affiliate to eliminate any remaining minority interest in Realty.
The tender offer document also disclosed that Realty's trustees had already reached an agreement with Invesco whereby Realty would call a special meeting of its shareholders for the purpose of approving a distribution by Realty to its pre-tender shareholders. Shareholders owning 1,000 or less Realty shares were to receive $17.19 per share in cash. Shareholders owning more than 1,000 shares were to receive not cash, but rather secured, interest bearing notes in the face amount of $15.29 per share and distribution certificates. The proposed distribution was also contingent on at least 90% of the Realty shares being tendered to RGI. Neither the tender offer document nor the Notice of Special Meeting explained the reason for discriminating between shareholders with different size holdings.
Both the tender offer document and the Notice of Special Meeting disclosed proposed transactions with two Realty trustees, John Wernwaiss and Thomas M. Graham, Jr., as well as with Robert L. Dillmeir, Realty's President. Wernwaiss and Graham were to receive certain Realty assets,7 and Dillmeir was to be paid $100,000 in cash. Realty indicated that these transactions were being entered into solely to satisfy its obligations under existing employment contracts. Wernwaiss and Graham, together with Graham's father, controlled approximately 40% of the Realty shares.
The funds necessary to finance the tender offer and distribution were to be supplied by Invesco and through future liquidation of Realty assets, principally The Regency Inn located in Kissimmee, Florida. The approximately $4,750,000 in cash required to purchase all the shares of beneficial interest, at the rate of $14.31 per share, was to come from a bank loan to Invesco, the proceeds of which were to be channeled to RGI. Realty's $5,000,000 plus obligations on notes and distribution certificates issued to those owning more than 1,000 shares were to be met by the subsequent sale of Realty assets.
Twenty Seven determined not to tender its shares and to vote against distribution and, on May 21, 1981, delivered to Realty a formal written objection to the distribution. Twenty Seven's position on the tender and distribution was based on its allegations of the inadequacy of the tender price, the lack of a proper business purpose, the lack of proper disclosure concerning the reasons for the contemplated transactions and the illegality of the distribution.
Twenty Seven believed that the undisclosed purpose of these transactions, and the contemplated merger, was an attempt to secure for RGI and Invesco the benefits of Realty's tax loss carry forward to the exclusion of Realty's minority shareholders. As structured by the defendants and Invesco, RGI was paying approximately $5,000,000 in cash and committing Realty assets worth in excess of $5,000,000 to obtain control of Realty's $9,900,000 of net worth at January 31, 1981 and to discharge the purported obligations to Realty trustees and officers. Because Realty's asset base had been eroded through commitment of its major income producing assets to discharge the obligations under the notes and distribution certificates and to Messrs. Wernwaiss, Graham and Dillmeir, Realty apparently would lack the internal capacity to generate enough earnings to recover the cash being invested by RGI, let alone return a profit. Twenty Seven alleges something more was intended, but not disclosed.
Given the cost of RGI's acquisition and Realty's condition, the defendants' entire course of conduct is understandable, as Twenty Seven sees it, if, and only if, Invesco and RGI had undisclosed plans for exploiting Realty's $15,300,000 tax loss carry forward. Twenty Seven contends it will prove at trial that such plans existed and that to receive the maximum benefit from the tax loss carry forward, the defendants and Invesco decided to eliminate any minority interest in a manner that (1) precluded the minority from participating in a much enlarged entity and (2) avoided any current valuation of the minority interest that included the potential value of the tax loss carry forward. To accomplish this, Twenty Seven claims it was necessary for the defendants to conceal their plans, even if that involved a violation of federal and state securities laws.
The claimed effect of defendants' alleged scheme on Twenty Seven is as follows. If Twenty Seven were ultimately forced to accept the package offered by the defendants, it would receive only cash, a note and a distribution certificate having an estimated present value of less than $30.00 per share for shares of beneficial interest for which its assignor, and all other original subscribers, paid $100.00 per share. According to Twenty Seven, its 6.9% proportionate share of the potential advantage to be derived from the tax loss carry forward exceeds $1,000,000. Twenty Seven further alleges that it will receive no compensation for this under the defendants' scheme.
In response to the tender offer and the proposed distribution, all of the Realty shareholders other than Twenty Seven tendered their shares and voted in favor of the proposed distribution. As a result, RGI and Twenty Seven were left as the only Realty shareholders.
After the completion of the tender, Twenty Seven requested Realty and RGI to provide it with financial data and information on their plans for using Realty's tax loss carry forward. These requests were initially met with a renewed offer to purchase Twenty Seven's Realty shares, and then with silence. Twenty Seven asserts that all it ever received through October 23, 1981, were unaudited interim financial statements, containing neither footnotes nor explanations of the apparent changes in Realty's financial position. Twenty Seven further alleges that it never received any information relating to the tax loss carry forward.
Pursuant to a Notice dated October 12, 1981, Realty scheduled a second Special Meeting of Shareholders for October 23, 1981. The stated purpose of this meeting was to consider a resolution approving the merger between Realty and Realty Growth Corporation (RGC), a Maryland corporation and a wholly owned RGI subsidiary. Under the plan of merger, Twenty Seven would be forced to accept $14.31 per share in cash in exchange for its 22,500 shares. The remaining Realty shares held by RGI would be cancelled. The stock would be exchanged for new shares of beneficial interest in Realty to be issued to RGI, leaving RGI as the sole Realty shareholder.
Prior to the scheduled meeting, Twenty Seven objected in writing to the proposed merger. At the shareholders' meeting on October 23, 1981, Twenty Seven cast the votes represented by its 22,500 shares against the plan of merger. RGI voted the remaining Realty shares in favor of the plan of merger, with the result that RGC was merged with and into Realty. The Articles of Merger were filed with the Maryland Secretary of State on October 23, 1981.
Twenty Seven's amended complaint contains five claims for...
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