Watson v. Huntington

• Decision Date: 07 April 1914
• Docket Number: 171.
• Citation: 215 F. 472
• Parties: WATSON et al. v. HUNTINGTON et al.
• Court: U.S. Court of Appeals — Second Circuit

215 F. 472

WATSON et al. v. HUNTINGTON et al.

No. 171.

United States Court of Appeals, Second Circuit.

April 7, 1914

Plaintiffs 38 in number, sued to have certain votes, cast by defendant Huntington under a voting trust agreement, canceled so far as plaintiffs are concerned, and to have a conversion of the holdings of stock in the National Steel & Wire Company into the securities of the National Consolidated Wire & Cable Company set aside, so that plaintiffs, respectively, may be restored to their rights as owners of stock in the National Steel & Wire Company for the purposes of this suit, and that defendant Huntington may be decreed to account and pay over to plaintiffs, respectively, the entire amounts which they invested in their respective holdings of stock in the National Steel & Wire Company, and for other equitable relief.

The following facts are alleged in the bill:

Plaintiffs own shares in the National Steel & Wire Company, and all except one own securities of the National Consolidated Wire &amp Cable Company. Some bought prior to 1904; others in 1904 1905, and 1906. The National Steel & Wire Company, called the holding corporation, was organized about February 4, 1902; its only source of income being from the operations of certain subsidiary companies. A balance sheet of the books of the holding company for the period from July 1, 1903, to March 31, 1904, showed a surplus in favor of the company, whereas in truth this apparent surplus was fictitious and the liabilities were in fact largely in excess of the assets of the corporation, as the directors knew. Details of the bill show suppression of the fact of hypothecations, pledges, and of certain guaranties of obligations which were outstanding and unpaid, losses in business, and insolvency in April, 1904. Notwithstanding this condition of insolvency, on or before April 1, 1904, and from and after January 13, 1903, the directors had caused dividends to be paid on the preferred stock of the holding corporation. About April, 1904, Huntington and Webster entered into a plan and agreement to promote the sale of stock of the holding corporation in order to carry on the business and to provide funds to pay themselves an agreed price for their interest in a subsidiary corporation, the Safety Insulated Wire & Cable Company. The scheme was that balance sheets and reports should be issued showing that the holding corporation was the absolute owner of the shares of stock of the subsidiary companies and that dividends should be continued, notwithstanding the condition of insolvency. In aid of the plan, about May 17, 1904, Huntington was appointed by the directors of the holding company a managing director, and on May 19, 1904, a voting trust to continue for three years from September 1, 1904, was authorized by the board of directors of the holding company. The trustees under this voting trust were defendants Huntington, Mills, and Monroe. Under the voting trust the trustees agreed to inform the stockholders of the condition of the corporation, of its business and its progress. Plaintiffs, relying upon the representations contained in the voting trust agreement and upon the well-known financial reputation and business experience of the trustees, surrendered their respective certificates of stock and all their rights represented by the stock, including the right to vote for three years from September 1, 1904.

But the defendant Huntington failed to inform the stockholders of the true condition of affairs and as managing director participated in the declaration of dividends, although the corporation was insolvent, and thereby falsely represented that the corporation was not insolvent, and took part generally in the doings under the plan agreed upon with Webster.

The voting trust is charged to have been contrived by Huntington and Webster to aid them in preventing the plaintiffs, stockholders in the holding corporation, from learning the true condition of their company and to enable Huntington, as a voting trustee, to approve on behalf of plaintiffs of his and Webster's doings by voting stock in favor of resolutions validating what had been done. Huntington and Webster dominated and controlled the board of directors of the holding company and subsequent to April 30, 1904, controlled a large majority of the stock of the Safety Insulated Wire & Cable Company, a subsidiary company, for which they paid $15 a share but which they sold to the holding company at $70 a share, and in that way Huntington and Webster claimed to be creditors of the holding company in a large sum, so that the holding company became indebted to Huntington and Webster in large sums, as evidenced by notes of the holding company secretly secured by stock of the subsidiary company as collateral, in violation of the charter and by-laws of the holding company.

Thereafter, in execution of the scheme charged, Huntington and others, constituting the executive committee of the holding company, issued false reports for distribution in promoting stock sales, and in 1904, 1905, and 1906 fraudulently represented to plaintiffs that the corporation was earning dividends and was a great success, and did other things which induced some of the plaintiffs to make further investments and to turn over their rights under the voting trust agreement heretofore referred to.

Plaintiffs say that Huntington and Webster, knowing that the holding company could not continue to carry on its business, about February, 1906, organized the National Consolidated Wire & Cable Company for the purpose, among others, of taking over the securities of the holding company and issuing its own securities in exchange therefor. This new corporation was organized with dummy officers and directors and has transacted no business except on January 15, 1906, when the dummy board authorized an issue of $8,000,000 of bonds secured by preferred stock of the holding company. Huntington and Webster, keeping up the purpose of having plaintiffs remain ignorant of the real facts, issued reports of the holding company and of the National Consolidated Wire & Cable Company for the year ending June 30, 1906, fraudulently representing that the business of the holding company was more than satisfactory and that it owned certain subsidiary companies. Thereafter receivers were appointed for certain of the subsidiary companies and for the holding corporation. Plaintiffs say that they were deluded by the course of misrepresentation and deceit on the part of Huntington down to the time when receivers were appointed.

The bill was dismissed for lack of equity and because of multifariousness. Plaintiffs appeal.

Isaac W. Dyer, of Portland, Me., Bristol & White, of New Haven, Conn., Frederick H. Siggin, and Carl W. Smith, for appellants.

Leventritt, Cook & Nathan, of New York City (Walter C. Noyes and Alfred A. Cook, both of New York City, of counsel), for appellee Huntington.

Before COXE, ROGERS, and HUNT, Circuit Judges.

HUNT Circuit Judge (after stating the facts as above).

At the outset it is to be noted that one of the plaintiffs, Herbert Francis Smith, alleges that he bought shares in the National Steel & Wire Company in 1905, and that he is 'still' the owner of the same number of shares that he bought in the holding corporation. It is true that in a subsequent paragraph of the complaint there is an allegation that 'all' of the plaintiffs were induced to surrender their certificates of stock and right of voting the same in the holding company to the voting trustees and to convert their holdings into the securities of the National Consolidated Wire & Cable Company. Nevertheless, under the special averment as to Smith, he should be judged as a stockholder in the original holding company and not asking to be restored to the position of stockholder in the holding corporation.

The suit is not brought by plaintiffs in behalf of themselves and all other stockholders in the holding company who may desire to become parties plaintiff thereto; nor are plaintiffs suing in behalf of the corporation, which is not even a party to the bill. The real object of the suit is to recover the amounts which plaintiffs respectively invested in their respective holdings in the holding company, and in order to get their money they ask the court to remove such impediments as plaintiffs think will be necessary to have removed before they can recover.

The conspiracy charged was a continuing one initiated by arrangement with agents in England whereby stock sales were to be promoted in order to raise money to carry on the business of the holding company and to provide money for paying the defendant Huntington and one Webster an agreed price for their interest in a certain one of the subsidiary corporations, and continued always with the purpose of stock selling even until the plaintiffs had converted their stock into securities of the National Consolidated Wire & Cable Company. Reduced to a few words, this was the scheme charged: The conspirators persuaded certain of the plaintiffs as investors to come into the holding company, and when they had been drawn in they deceived them, as well as others who had already bought stock, as to the affairs of their corporation and misled them to such an extent as to induce them to surrender the control of their stock to the conspirators who, by the exercise of such control, carried on the scheme and were enabled to manipulate the concerns of the holding corporation and further deceive plaintiffs to their damage, even in some instances inducing them to invest more money, so that finally they were left with stock in a corporation much impoverished by wrongs of the conspirators.

Now from such a position plaintiffs wish to be relieved by some decree...