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SELHEIMER v. MANGANESE CORPORATION AMERICA (11/29/66)

decided: November 29, 1966.

SELHEIMER, APPELLANT,
v.
MANGANESE CORPORATION OF AMERICA



Appeals from decree of Court of Common Pleas No. 2 of Philadelphia County, Sept. T., 1960, No. 2625, in case of Perry N. Selheimer, Patrick Kelly, Arthur L. Meyer et al. v. Manganese Corporation of America, Ernest F. Pie, Albert W. Himfar et al.

COUNSEL

Alexander Conn, with him Thomas M. Hyndman, for appellants.

Robert S. Grodinsky, and Kaplan and Grodinsky, for appellant, Charles A. Gillan, Jr.

Charles A. Gillan, Jr., for appellant.

Tom P. Monteverde, with him Schnader, Harrison, Segal & Lewis, for appellee.

David O. Maxwell, with him Herbert A. Fogel, for appellees.

Musmanno, Jones, Cohen, Eagen, O'Brien and Roberts, JJ. Opinion by Mr. Justice Jones.

Author: Jones

[ 423 Pa. Page 565]

These appeals stem from a stockholders' derivative suit in equity instituted by certain stockholders of Manganese Corporation of America (Manganese) against Manganese and Ernest F. Pie, Albert W. Himfar, Nelson Kusner and Charles A. Gillan, Jr., who, at various times, were the officers and managing majority directors of Manganese.*fn1 After the commencement of this suit in the Court of Common Pleas No. 3 of

[ 423 Pa. Page 566]

Philadelphia County, Perry N. Selheimer, a director of Manganese throughout the time the corporation was engaged in business activity, was severed as a party plaintiff and joined as an additional defendant.

The thrust of this action is that the four defendants, as officers and majority directors of Manganese, so mismanaged the affairs of the corporation as to result in a wasting of the corporation's assets with a resultant loss to the corporation of approximately $400,000. The case was tried before Judge Maurice W. Sporkin of the Court of Common Pleas No. 2 of Philadelphia County, sitting as chancellor,*fn2 who held the original defendants "guilty of such negligence in recklessly mismanaging the business affairs of [Manganese], wasting its assets and causing its insolvency, as to be legally responsible for its loss and damage totaling $382,537.30. . . ." and directed that the defendants reimburse the court-appointed receiver of Manganese in that amount. Defendants filed exceptions to numerous findings of fact, conclusions of law and the decree of the chancellor. These exceptions were argued before a court en banc -- consisting of the chancellor, Judges Ethan Allen Doty and Bernard J. Kelley -- which sustained (with Judge Sporkin dissenting) defendants' exceptions both to the chancellor's conclusion of law that defendants were liable for the loss suffered by Manganese and to the decree nisi and decreed that Manganese' complaint be dismissed. Manganese has appealed from this decree (No. 90 January Term, 1966), and Charles A. Gillan, Jr. has appealed from that portion of the decree dismissing the original defendants' complaint against the additional defendant Selheimer (No. 96 January Term, 1966).

A review of the factual background of this controversy is essential. In March, 1958, the defendants

[ 423 Pa. Page 567]

Himfar and Kusner formed a corporation known as Mangamex, Inc. (Mangamex) for the purpose of producing manganese oxide at a plant located in Paterson, New Jersey.*fn3 All Mangamex's capital stock was issued to Himfar and Kusner, Pie and Gillan becoming stockholders at a later date.

In January, 1959, Pie, Gillan, Himfar and Kusner, through nominees, incorporated Manganese as a Pennsylvania corporation. Manganese' capital structure consisted of authorized capital stock consisting of (a) 400,000 shares, Class A stock, having a par value of $2 per share and (b) 200,000 shares, Class B stock, having a par value of 20 cents per share. Of the seven directors authorized, Class B stockholders were entitled to elect four persons as majority directors and Class A stockholders to elect three persons as minority directors. In Manganese' articles of incorporation Pie, Gillan, Himfar and Kusner were designated as its first directors. On January 19, 1959 -- Manganese' first regular directors' meeting -- the directors authorized the purchase from Mangamex of all its assets -- evaluated in the agreement at $91,500 -- which consisted of the lease and that portion of the equipment of the Paterson plant which it had purchased six months previously from Eastern. The consideration for this purchase by Manganese was the transfer to Mangamex of all Manganese' Class B stock -- 200,000 shares -- and an assumption of all Mangamex's outstanding indebtedness

[ 423 Pa. Page 568]

    amounting to $10,000.*fn4 Subsequent to the completion of this sale and purchase, Mangamex distributed all the Class B stock of Manganese to its four stockholders, Himfar, Gillan, Kusner and Pie, each receiving 50,000 shares.*fn5

At the same meeting on January 19, 1959, each of the Class B stockholders became an officer of Manganese and an executive committee -- to which Pie and Gillan, president and vice-president in charge of operations, respectively, were appointed -- was created with authority to exercise all the board of directors' power when the board was not in session.

At the first stockholders' meeting -- February 19, 1959 -- the four defendants were elected majority directors by Class B stockholders and Selheimer, the additional defendant, was elected a minority director by Class A stockholders.

The four defendants, as Manganese' officers, then entered into an agreement with First Securities Commission, Inc., (First Securities), a licensed dealer in securities of which Selheimer was president, for the public offering and sale by the latter of up to 200,000 shares of Class A stock of Manganese at an offering price of $3 per share. This agreement provided for a commission to First Securities of $.45 per share sold as well as $.10 per share for expenses; Manganese was thus to receive $2.45 for every share of Class A stock sold. In order to show cash on hand in Manganese at its inception, the first 40,000 shares of Class A stock were issued to Pie, or his nominees, at their

[ 423 Pa. Page 569]

    par value of $1. per share. The public offering and sale of Class A stock by Manganese was accomplished without first registering the issue with the Federal Securities Exchange Commission, under a procedure made possible by virtue of an exemption provided by the federal "Securities Act of 1933".*fn6 Such exemption was available if the entire issue of stock would be sold only to Pennsylvania residents and if Manganese, incorporated in Pennsylvania, was actually "doing business" in Pennsylvania. The total net proceeds realized by Manganese from the sale of Class A stock was $412,914.50. The prospectus and the circulars which accompanied this Class A stock public offering, prepared by and at the direction of Manganese' officers and directors, stated that Manganese proposed to erect and operate a plant in Pennsylvania wherein substantial operating activities would be centered and that Manganese had arranged for the purchase for $100,000 of an ideally located plant at Colwyn, Pa., which would enable Manganese to operate at advantageous freight rates and under other felicitous conditions.

Subsequent to the formal organization of Manganese and prior to the formulation of plans concerning an operating plant, the four defendants, without authorization at a directors' meeting, proceeded to pay themselves salaries out of the proceeds of the sale of the Class A stock. In June 1959 -- upon a resolution submitted by Selheimer, the additional defendant, -- the board of directors voted to discontinue the payment of these salaries and repay that which had been paid. Up to the date of the decree in the court below the

[ 423 Pa. Page 570]

    amount of the salaries paid prior to the June, 1959, meeting was never paid back.*fn7

On March 13, 1959, Manganese entered into an agreement to purchase for $100,000 a property in Colwyn, Pennsylvania; $10,000 was given as a down payment with final settlement to be consummated on or before September 1, 1959. The Colwyn plant was far better suited and superior to the Paterson plant for the commercial production contemplated by Manganese. The Paterson plant lacked a railroad siding, a proper storage area, and its equipment was "out of phase" or improperly arranged for profitable commercial production. Some of its inadequacies were known by defendants for Pie, in a letter to corporation counsel dated January 21, 1959, stated: "it is mandatory that we leave the plant in N. J. because it has no siding which creates a very expensive operation in the handling of the ore to and from the plant." It is beyond explanation, why, in the face of such knowledge of the unsuitability of the Paterson plant for profitable production, the defendants continued to pour corporate money into and to utilize the Paterson plant. The testimony of defendants is to the effect that they had planned to use the Paterson plant ...


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