Appeal from United States District Court for Eastern District of Pennsylvania; George A. Welsh, Judge.
Before BIGGS, MARIS and JONES, Circuit Judges.
BIGGS, Circuit Judge. Facts
On March 7, 1940, the plaintiff, a preferred stockholder of Transit Investment Corporation, a Pennsylvania corporation, filed suit on behalf of himself and the other stockholders of Transit Investment Corporation against that company, against Pennsylvania Acceptance Corporation, a Delaware corporation, and against certain individuals who were or are officers and directors of Transit Investment Corporation. An amended complaint was filed and to this the defendants filed an answer.
The amended complaint alleges that the officers and directors of Transit Investment Corporation " * * * contrary to the express purpose of its organization * * * viz.: investing in securities of Philadelphia Rapid Transit Company, Mitten Bank and other properties under the supervison of Mitten Management Inc.", and in violation of their fiduciary duties caused the wrongful use and misappropriation of corporate funds in excess of one million dollars. The answer sets forth the purpose of the corporation as described in its certificate of incorporation which is that of "transacting the business of investing", without reference to investing in securities of Philadelphia Rapid Transit Company or other properties under the supervision of Mitten Management, Inc. It is obvious in view of this and allegations in the amended complaint as to investments made by Transit Investment Corporation that in fact there has been no failure of corporate purpose.*fn1
There are allegations that on a balance sheet as of December 31,1939 (the end of the fiscal year preceding the filing of the complaint) Transit Investment Corporation showed total assets of a value in excess of $38,000,000, but that "Said assets did not then or ever since have a fair value exceeding 25 percent of the value asserted." It is not alleged that Transit Investment Corporation is insolvent in that its liabilities exceed its assets or in that it is unable to meet its debts as they mature in the ordinary course of business; nor is it asserted that the corporation is in a precarious financial position insofar as creditors are concerned. There is no doubt that Transit Investment Corporation is solvent.
Acts of alleged misconduct by officers and directors of Transit Investment Corporation are particularized as follows: First, it is stated that the officers and directors caused the corporation to make improper and speculative investments in stocks and bonds in substantial amounts; second, that they made "alleged" advances in excess of $1,200,000 to "affiliated" companies; third, that they caused the corporation improvidently to buy the Mitten Building and other parcels of real estate in Philadelphia at exorbitant prices; and, fourth, that these purchases were made at a time when T. E. Mitten and his associates were directors of both grantor and grantee corporations.
It is alleged that since 1931 the officers and directors of Transit Investment Corporation have caused that corporation to hold and operate the Mitten Building at substantial losses and that the deficit so caused now exceeds $650,000. The amended complaint further alleges that the officers and directors of Transit Investment Corporation caused that corporation without substantial or adequate consideration to guarantee the payment of principal and interest of bonds secured by a first mortgage on the Mitten Building despite the fact that there was no equity in the property over the amount of bonds outstanding.
It is alleged also that Transit Investment Corporation in July, 1939, proposed to the holders of the bonds maturing in March, 1940, to enter into an agreement with two guarantor corporations for the extension of the maturity of the bonds until March 15, 1950, for the reduction of the interest rate, and for the elimination of amortization payments until March 15, 1940; and that Transit Investment Corporation agreed also to retire and cancel $551,000 par value of those bonds as a condition precedent to the consummation of the contract. This agreement of adjustment, the amended complaint alleges, was beyond the power of Transit Investment Corporation. It further states that $551,000 face value of the bonds were actually retired and cancelled between the time of the filing of the original complaint and the time of filing the amended complaint.
The amended complaint further alleges that since 1931, Transit Investment Corporation by reason of the gross mismanagement of its affairs by its officers and directors, has shown no profits and paid no dividends and that the continuation of excessive and exorbitant payments for salaries and expenses will dissipate the assets of the corporation to the irreparable injury of the stockholders.
The amended complaint prays for an accounting by the officers of Transit Investment Corporation, for an order requiring certain of them to pay back to Transit Investment Corporation such sums as may be found to be due from them, for an injunction to prevent the corporate defendants from making any sale or other disposition of their property, and, finally, for a receiver for the corporate defendants, "* * * with the usual powers of a Receiver in Equity to take possession of all their properties and effects and hold the same subject to Order of Court for liquidation and distribution to such cteditors and stockholders as may be entitled thereto. * * *"
The answer denies all allegations of fraud and mismanagement and asserts that the investments made by Transit Investment Corporation were sound and provident.
On the day that the original complaint was filed the plaintiff moved for a preliminary injunction and for the appointment of a temporary receiver. No hearing was had on the motion, but the court entered an order in the cause which recited that exceptional circumstances had arisen and appointed a member of the bar as an "examiner" to examine the books of Transit Investment Corporation. After the examiner reported that he had been refused access to the records of the corporation, the matter was set down for hearing. Testimony was taken on the issues presented by the amended complaint and the answer. On April 24, 1940, at the conclusion of taking of testimony, counsel for the parties asked the court for an opportunity to confer. The court then granted a thirty day continuance for the purpose of working out a plan which would enable the corporation to be "truly representative and responsible to its own stockholders".
In the interval the examiner, who had been granted access to the books of Transit Investment Corporation, submitted a report in which he stated as his conclusion that the officers of Transit Investment Corporation had conducted its affairs in such a way that there was danger that all of ita assets would be dissipated and the men who managed the corporation in the past could not be trusted to represent the shareholders fairly in the future. The court characterized some portions of the report as "shockiog". It was not filed as a record in the case, however, until August 27, 1942, when an appeal was taken to this court.*fn2
the report discloses that a meeting was held in the office of the leading counsel for Transit Investment Corporation who served as chairman of the meeting. The examiner acted as secretary. The examiner's report states, "At this meeting, three possible courses were suggested: 1. Change of capital structure and general house-cleaning [of Transit Investment Corporation] without liquidation; 2. Change of capital ...