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September 8, 1941


The opinion of the court was delivered by: KIRKPATRICK

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 ...

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