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Webster Eisenlohr Inc. v. Kalodner

September 27, 1944

WEBSTER EISENLOHR, INC.
v.
KALODNER, JUDGE, ET AL.*FN*



Author: Goodrich

Before BIGGS, MARIS, JONES, GOODRICH, and MCLAUGHLIN, Circuit Judges .

GOODRICH, Circuit Judge .

The proceedings at bar are upon a petition to this court for writs of mandamus and prohibition to be directed to the Honorable Harry E. Kalodner, one of the Judges of the District Court of the United States for the Eastern District of Pennsylvania, and David Bortin, Esq., a Special Master appointed pursuant to his order.

Judge Kalodner has filed an answer to the petition. Mr. Bortin has filed none.

The essential facts are not in dispute. Andrew J. Speese, 3rd, alleging himself to be a citizen and resident of Texas and the owner of 10 shares of the preferred stock of the petitioner, Webster Eisenlohr, Inc., a Pennsylvania corporation, filed a suit against that company on February 1, 1943, in the District Court of the United States for the Eastern District of Pennsylvania. The action was brought by Speese "for and on behalf of all the preferred stockholders" of Webster Eisenlohr, Inc. The complaint, inter alia, described the division of the stock of the company into common and preferred shares and alleged that dividends on the preferred shares had remained unpaid since April 1, 1931, and, as of December 31, 1941, amounted to $75.25 per share; that the certificate of incorporation of Webster Eisenlohr, Inc., provides that the preferred stock shall not be entitled to vote at any meeting of stockholders, and shall not be entitled to participate in the management of the corporation "* * * unless and only in the event [that] (1) two quarterly dividends payable thereon shall be and remain unpaid and in arrears, * * * whereupon * * * full voting power shall be vested in the preferred stock, until the arrearages of accumulated dividends upon * * * [the] preferred stock shall have been paid * * *." It was further alleged that at the annual meeting of stockholders of the corporation on March 10, 1942, Speese, acting for himself and as proxy for 815 shares of preferred stock, demanded that the voting power be vested exclusively in the preferred stock and that the corporation, acting through its president, refused the demand and ruled that the preferred stock and common stock together had the voting power to elect directors; that the company persisted in this attitude despite frequent demands of Speese and other preferred stockholders; that the corporation is dominated and controlled by the Chase National Bank of the City of New York by reason of its ownership of a large block of the common stock of the company and that the control of Webster Eisenlohr, Inc., had been "usurped" by reason of the action of the company in refusing to recognize the officers elected by the preferred stock; that the alleged usurpation "is in fraud of the rights and privileges of the preferred stockholders and has had the effect of illegally depriving * * * [them] of their right to name directors"; and that the assets and property of Webster Eisenlohr, Inc., are being managed, controlled, financed and otherwise disposed of for the sole benefit of the holders of the common stock to the "irreparable injury and prejudice of the preferred stockholders, notwithstanding the financial ability of the defendant company to pay or secure the rights and privileges * * *" of the preferred stockholders.

Speese prayed that the court adjudge that the preferred stockholders possess presently the exclusive voting power in the company, that a receiver pendente lite be appointed, and that general relief be granted.

Webster Eisenlohr, Inc., filed an answer denying the substance of the allegations of the complaint and set out two affirmative defenses which need not be stated here.

Between hearings upon the matter before the District Court the company sent to its stockholders copies of its annual report for the year 1942. Following the sending of the report the company also wrote its preferred stockholders, offering to purchase their interests. Copies of these documents were supplied to the District Judge upon his request although not introduced in evidence in the litigation. At one of the hearings Judge Kalodner indicated his belief that the financial statement sent by the corporation to stockholders was misleading and he criticized the letter sent to preferred stockholders for failure to state facts which he deemed material. Then, at a hearing on April 24, 1943, counsel for Speese stated to the court that he had no client since the shares of Speese and other stockholders which he had represented had been purchased. Judge Kalodner again expressed his dissatisfaction with the actions of the company and stated: "I will advise you gentlemen that I am going to appoint an examiner to look into this matter." Subsequently the court did appoint Mr. Bortin as Special Master under Rule 53 of the Rules of Civil Procedure, 28 U.S.C.A. following section 723c. The Special Master was directed "to investigate: the acts, conduct, property, liabilities, financial condition, books, records and assets * * * [of Webster Eisenlohr, Inc.]; all the circumstances relating to an Offer made March 26, 1943 to the Holders of 7% Cumulative Preferred Stock * * *; the arrangement made by and between * * * [Webster Eisenlohr, Inc.] with White, Weld & Co. of New York and Bertram K. Wolfe, Esq. with reference to the Offer made to the Preferred Stockholders; the conduct of the Board of Directors * * * with reference to the making of said Offer to the Preferred Stockholders; the propriety, reasonableness and adequacy of the said offer to the Preferred Stockholders; the question as to whether or not there was any violation of Rule X-10B-5 'Employment of Manipulative and Deceptive Devices' of the Securities and Exchange Commission, and any other matters which may be referred to the Special Master by the Court as relevant to these proceedings."

Counsel for Webster Eisenlohr, Inc., sought vacation of the order in the District Court and, failing that, asks a writ of mandamus directing the District Court to vacate this appointment and a writ of prohibition directed to the Special Master to prevent him from carrying out his commission. A majority of the court believe the company's position to be well taken.

The fundamental proposition which probably no one would dispute is that a court's power is judicial only, not administrative nor investigative. A judgment may only be properly given for something raised in the course of a litigation between the parties*fn1 Now, what was the litigation in this case? The complaint presents the question of the legal effect of the provision that preferred stockholders, under given circumstances, shall have full voting power. Whether full voting power means that they may vote along with holders of shares of the common stock or whether "full" as used in the certificate of incorporation means "exclusive" is a question of interpretation of language to be made with such help as the Pennsylvania decisions give, since the corporate litigant is a Pennsylvania corporation. The allegations of fraud made in the complaint are conclusions from the plaintiff's claim that he and other preferred stockholders were entitled to exclusive voting rights and did not get them. This interpretation is corroborated by a letter sent by counsel for Speese "To the Remaining Preferred Stockholders * * *" of the company giving information concerning the institution of the Speese suit. The letter said "The gist of the suit was to settle, if possible, the long standing controversy between the preferred stockholders and the company as to whether or not the preferred stockholders should have the exclusive voting power in the company in view of the default in the payment of dividends, as distinguished from the right to vote together with the common stockholders."

If the plaintiff's contentions on voting rights are upheld as a matter of law, the preferred stockholders are entitled to determine who shall manage the corporation, and other questions which may be determined by stockholders.They are entitled to court help to get those rights if they need it. On the other hand, if the plaintiff's contentions as to the meaning of the phrase are incorrect, they have alleged no legal grounds for complaint. While a receiver was asked for, it was simply in connection with the relief to be given the plaintiff, based on the correctness of this theory of his voting rights. No one disputed the solvency of the corporation.

The directions given the Master went far beyond anything involved in the issues presented in the litigation, as will be seen from the reading of the order appointing him.

Masters are provided for in the Rules of Civil Procedure, Rule 53. This rule does not, in so many words, place any limitation on the scope of a master's commission. Nor has that question, apparently, been the subject of a great deal of litigation. There are general statements supporting the view that an order of reference cannot be more extensive than the allegations and proofs of the parties and there is some judicial authority to this effect*fn2 No authority has been found the other way*fn3

On principle, however, the matter seems clear. Rule 53 is explicit in its statement that "A reference to a master shall be the exception and not the rule" and that in actions to be tried without a jury "a reference shall be made only upon a showing that some exceptional condition requires it."*fn4 It is clear, we think, that a master is appointed only to help the court in a case where the help is needed. His appointment and activities are only for the purpose of assisting the court to get at the facts and arrive at a correct result in a complicated piece of litigation pending before the court. The master operates as an arm of the court. Surely he has no wider scope of activity than the court itself. If the court is ...


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