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September 8, 1941


The opinion of the court was delivered by: KIRKPATRICK

KIRKPATRICK, District Judge.

The Court, having decided the question of liability against the defendants ( D.C., 35 F.Supp. 22), postponed fixing the damages in the hope that the parties might agree upon the amount of the plaintiff's loss caused by the defendants' sale of control to the Boston group. This turned out to be impossible, and the damages must now be ascertained.

One thing which complicates the problem is the fact that the Boston group, either in the same transaction as that by which they obtained control or in a closely related one, in effect returned to the plaintiff some 78,260 shares of its own stock together with certain other assets, by transferring them to Northern Fiscal Corporation, and then issuing the entire preferred stock of Northern Fiscal to the plaintiff. Later on, the plaintiff acquired and now holds all Northern Fiscal's common stock as well, and its interest in Northern Fiscal's assets, including its own stock (now 76,920 shares), has become for most purposes the equivalent of legal ownership.

 Another complication arises from the fact that the Boston group, after about three months, sold out Northern Fiscal to one Hansell. Then for a period of about two months Hansell manipulated the portfolio of that corporation, depleting its assets to the extent of more than $100,000, until he was ousted by legal proceedings.

 The parties have advanced widely differing theories for the allowance of damages. In the final result, however, the great divergence between the $384,000 claimed by the plaintiff and the $79,000 which the defendants concede they must pay if they are liable at all, depends more upon the allowance or disallowance of a few large items than upon a choice between the two theories. When these disputed items have been settled, I believe that anyone who wishes to take the trouble will find that the amount of damages comes out very nearly the same by either method.

 The plaintiff's theory is, basically, the orthodox rule of Spiegel v. Beacon Participations, 297 Mass. 398, 8 N.E.2d 895 namely, that the damages must be measured by the difference in dollars between the assets of the plaintiff before the acts complained of and those found remaining at the time of the suit. In application, the plaintiff avoids the difficulty arising from the absence of satisfactory evidence of the original value of its assets by adding together the actual items of diversion or loss (all easily ascertainable in dollars) and allowing against that sum, credits for the present value of assets retained or recovered.

 The defendants' theory disregards the fiction of separate corporate entity, both of the plaintiff and of Northern Fiscal. Their theory is that the plaintiff must be considered as the actual owner of Northern Fiscal's assets, that the 76,920 shares of the plaintiff's stock which Northern Fiscal now holds must be considered as surrendered and cancelled, and that the defendants are then bound to respond in damages to the extent only of restoring the per share value of the present outstanding stock of the plaintiff (not counting that held by Northern Fiscal) to what it was prior to the purchase of control by the Boston group.

 Both methods present difficulties. The plaintiff, in valuing the stock of Northern Fiscal, must resort to a valuation of its own assets, because there is no market for the stock. Northern Fiscal's assets, as has been stated, include a large block of the plaintiff's own stock, the value of which will be affected by the recovery in this case. However, the most important objection to the plaintiff's theory, that in its application a tentative estimate must be made of the prospective net recovery, has been obviated by the modification adopted by the Court. The defendant also criticizes the theory as unjust because it is quite possible that it may result in putting the individual stockholders of the plaintiff in a better position financially than that in which they were prior to the diversion of its assets.

 The conception of corporate entity, however, should not be disregarded unless it appears to be necessary in the interests of justice to do so. In the present case I do not find a situation which requires either such a departure from a basic legal concept or an anomalous method of fixing damages. Even if the book value of the plaintiff's shares were to be increased by applying the ordinary rule, there would still be counterbalancing elements of damage to the individual stockholders, not possible to value in dollars, arising from the corporation's assets being depleted by 50%, and this damage would not be remedied by an involuntary adjustment of the capital structure to meet it.

 The ordinary rule of damages as proposed by the plaintiff will therefore be applied in this case.

 We may proceed to a consideration of the specific items the liability for which is in dispute.

 1. The sale of Shenandoah Life Insurance Company stock. In dealing with this item it should be kept in mind that the plaintiff's claim against the defendants is predicated upon a conversion of its assets not by them but by others whom they put in control of the Corporation. This is important because, unless the basis of a claim is conversion or acts involving moral turpitude, the damages are only the value of the property lost at the time of the loss and do not include additional damages representing the higher value which the property may later have acquired.

 The Boston group sold this stock as part of their plan to turn the plaintiff's portfolio into cash as soon as possible. By reason of a scheme of refinancing which the Shenandoah Company was carrying out, the stock, had it been retained for some unspecified period, could probably have been sold for $20 a share. The price obtained by the Boston group was $13.14.

 If the Boston group had sold the stock at less than its fair market value the defendants would have been liable for the loss. But the evidence shows, and I so find, that $13.14 was the fair market value of the Shenandoah stock at the time it was sold. Consequently, I will exclude the item of $45,659.37 which the plaintiff has included in all its calculations.

 2. The same considerations apply to the plaintiff's claim for $11,846.80, representing dividends declared on the shares of the Shenandoah Life Insurance Company from the time of their sale to the present time. The earning power of the Company and the prospects of dividends were factors which went into establishing the fair market value of the stock at the time of sale.

 3. Shortly after acquiring control of the plaintiff, the Boston group involved it in a series of fraudulent transactions with another investment trust, called Bond and Share Trading Corporation. The net result of these was that the Boston group, using the plaintiff as an instrument, unlawfully diverted to their own use a large amount of Bond and Share's assets. The liability of the plaintiff to Bond and Share for its part in the transaction can hardly be disputed. It was the basis of an action commenced by Bond and Share against the plaintiff. This action was settled by the plaintiff's paying $25,500 to Bond and Share. That law suit and its settlement were clearly consequences of the general fraud perpetrated by the Boston group. The defendants' argument that, in order to subject them to liability, the injury must result solely from the particular hazard that the Boston group might steal directly from the plaintiff's portfolio is, in my opinion, untenable. The defendants subjected the plaintiff to the general hazard that the Boston group might misuse the plaintiff's corporate assets for fraudulent purposes in a manner which would result in liability and loss to the plaintiff; the Bond and Share transaction was therefore a proximate result of the defendants' fault.

 4. Lastly there is the item of $60,000 paid by the plaintiff as legal expenses in recovering $200,000 from Paine, Webber & Co. for the latter's part in the transaction of December 21, 1937. Paine, Webber & Co. is a defendant in the present action, although not served, and as such, it is alleged to be jointly and severally liable with the other defendants. The plaintiff in 1938 also sued Paine, Webber & Co. and the partners in the Supreme Court of New York. The cause of action was the same as that in the present case. In May, 1939, the New York action against Paine, Webber & Co. was settled, and the plaintiff received $200,000 in cash. In obtaining this recovery the plaintiff was compelled to pay $60,000 for counsel fees and other expenses.

 I am of the opinion that this is not an item of loss which can be considered.

 It is well settled that a plaintiff cannot recover attorney's fees incurred in connection with a suit to recover damages for a tort. Nor can he avoid the effect of this rule by bringing a separate and subsequent action to recover them. I think that this general principle alone would be sufficient to eliminate this item of the plaintiff's claim. The findings already made in this case establish the fact that Paine, Webber & Co. were joint tort feasors with the present defendants. The joint act of the two put in motion the series of events which resulted in loss to the plaintiff. The situation, therefore, is presented of a plaintiff seeking from one joint tort feasor expenses incurred in obtaining a partial recovery against another whom he has also sued jointly with the first. None of the authorities cited involve credits for counsel fees, but the general rule seems to be that the entire amount paid the plaintiff by the joint tort feasor must be applied to a pro tanto reduction of the damages to be assessed against the remaining joint tort feasors. See Berry v. Pullman Co., 5 Cir., 249 F. 816; O'Neil v. National Oil Co., 231 Mass. 20, 120 N.E. 107. The mere fact that the recovery from Paine, Webber & Co. indirectly benefits these defendants by reducing their liability, does not require them to make restitution for the cost of obtaining the recovery. See Restatement, Restitution, § 1, Comment C, and § 112. Having covered the specific items of loss in dispute, it remains to ascertain the amount of damages. This may be conveniently done by applying the formula as the plaintiff presents it in its brief, with the necessary eliminations. The calculation will be as follows: Charges Total cash portfolio depletion: This figure represents the amounts received by Paine, Webber & Co. from the sale of securities from the plaintiff's portfolio plus an amount of $11,776.29 paid out by the new borad of directors of Insuran- shares to Northern Fiscal. It is one figure in the case as to which there is no dispute what- ever. The Boston group un- lawfully took this amount from the plaintiff, and the total amount is $503,723.90 To this sum must be added the sum of $25,500 paid by Insur- anshares in settlement of the Bond and Share suit against the plaintiff: 25,500.00 Total Charges $529,223.90 Credits Sum received from Paine, Webber & Co. on May 25, 1939: $200,000.00 The value of the assets of Northern Fiscal Corporation (except 76,920 shares of stock of Insuranshares Corporation of Delaware, credit for which will be allowed later): 15,000.00 Total credits $215,000.00 Recapitulation The total amount abstracted from Insuranshares it: $529,223.90 The total credits (except the 76,920 shares) are: 215,000.00 The net loss (except for credit for the 76,920 shares) is, there- fore: $314,223.90


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