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Borden v. Sinskey

filed: January 19, 1976; As Amended February 25, 1976.



Seitz, Chief Judge, Rosenn and Garth, Circuit Judges. Rosenn, Circuit Judge, concurring and dissenting.

Author: Seitz


SEITZ, Chief Judge.

Plaintiff, William S. Borden, trustee in reorganization of Corpamerica, Inc. ("Corpamerica") and Middlesex Trading Corporation ("Middlesex"), brought this action against the defendants, R. Abbott and Minna Sinskey, husband and wife, charging them with conversion of corporate assets, usurpation of corporate opportunities and violations of Rule 10b-5, 17 C.F.R. ยง 240.10b-5 (1974), in connection with a series of bank acquisitions carried out by the defendants. The district court dismissed the Rule 10b-5 claim, but found that the defendants had breached certain fiduciary obligations owed by them to both Corpamerica and Middlesex. Consequently, it awarded plaintiff money damages and imposed a constructive trust on certain bank stocks owned by the defendants. The defendants appeal from this judgment, while the plaintiff cross appeals from the dismissal of his Rule 10b-5 claim.*fn1


A. Corpamerica :

Corpamerica is a Delaware corporation which was formed in 1950 by defendant R. Abbott Sinskey for the purpose of buying and holding bank stocks and bank-related assets, including the controlling interest in banks. Sinskey placed it into reorganization in 1967 to halt a derivative suit brought by a former director. At the time of the present action, Corpamerica had no assets other than its claims against the defendants.

Since its creation, Corpamerica has had two classes of stock outstanding: "Class A", a non-voting "investment" stock with dividend and liquidation preference rights, and "Class B", a voting stock paying no dividends and subordinated on liquidation. The "Class A" stock of which there are approximately 23,000 shares outstanding, is publicly held by shareholders who have invested approximately $340,000 in Corpamerica. Neither of the defendants owns any "Class A" shares. On the other hand, all of the 10,000 shares of "Class B" stock are held by defendant Minna Sinskey. These shares were originally issued to her for a total investment of $1,000, and, since that time, have been owned exclusively by either her or her husband. Consequently, the Sinskeys have always exercised control over Corpamerica.

The Sinskeys' control is reflected in the composition of Corpamerica's management. From Corpamerica's creation until the institution of reorganization proceedings in 1967, R. Abbott Sinskey served as both president and a director of the corporation. The remainder of Corpamerica's three man board of directors has always, with a single exception, consisted of close personal friends and/or business associates of the Sinskeys.

B. Middlesex Trading :

Middlesex, a New Jersey corporation, was formed by R. Abbott Sinskey in 1960 for the limited purpose of purchasing, and then reselling, the minority stock interest in Perth Amboy National Bank ("Perth Amboy"), Perth Amboy, New Jersey, the controlling interest of which Sinskey was then in the process of acquiring. Throughout its existence, Middlesex has never been more than a mere instrumentality of both Corpamerica and the Sinskeys. This domination was assured by their control of Middlesex's corporate board which has always consisted of individuals intimately connected with Corpamerica. R. Abbott Sinskey himself became president and a director of Middlesex in 1963, and, from that time forward, the boards of both Corpamerica and Middlesex were identical. So were their fates. Like Corpamerica, Middlesex was placed into Chapter X reorganization by Sinskey in early 1967; like Corpamerica it had no assets other than its claims against the Sinskeys at the outset of this litigation.*fn2

C. R. Abbott and Minna Sinskey :

As already noted, R. Abbott Sinskey founded both Corpamerica and Middlesex, and also served both corporations as a president and director. From 1950 until 1966, he served in the same capacities at Colonial National Bank ("Colonial"), Wilmington, Delaware, the controlling stock of which was owned by his wife Minna. In addition, Sinskey himself was the controlling stockholder in the following banks: Perth Amboy, of which he was also president and a member of the board (1961-present); First National Bank of Carteret ("Carteret"), Carteret, New Jersey, of which he was also a director (1955-61); and Edgewater National Bank ("Edgewater"), Edgewater, New Jersey, for which he also served as president (1959-66).

Minna Sinskey never actively participated in the management of either Corpamerica or Colonial despite her controlling interests in those entities. Rather, she placed her control at the disposal of her husband, thus enabling him to embark on his course of bank acquisitions.*fn3

At the outset, we find it necessary to comment briefly on the potential liability of Minna Sinskey as this issue pervades the entire opinion, yet remains largely hidden from view because of her husband's domination of the events giving rise to this litigation. The court below imposed joint and several liability on both Minna Sinskey and her husband. Defendants challenge this determination with respect to Minna Sinskey contending that she was guilty of no misconduct whatsoever. Instead, as the district court found, she was totally dominated by her husband and merely followed his directions in all financial matters. Hence, they assert that there is absolutely no evidence in the record on which to predicate her liability.

We, however, cannot agree that her generally passive role in the matters complained of necessarily exonerates her of all liability in this case. It is undisputed that she placed all of her business affairs, including the management of her controlling interests in both Corpamerica and Colonial, in the hands of her husband. Under the circumstances, we believe that she thus authorized him to act as her general business agent. Indeed, she herself characterized their relationship in matters financial as one of agency.

It is alleged, in substance, that her husband defrauded Corpamerica and Middlesex while exercising the power she had placed at his disposal and that the fruits of his misconduct inured to their mutual benefit. Hence, under familiar principles of agency, so long as he was acting within the scope of his authority, she would be fully liable for any fraud committed by him in the course of managing her business affairs. Moreover, this liability would exist even if his fraud was committed without her knowledge, consent or participation. See In re Brandywine Volkswagen Ltd., 306 A.2d 24 (Del. Super. 1973), aff'd sub nom. Brandywine Volkswagen, Ltd. v. State, Dept. of Consumer Affairs, 312 A.2d 632 (Del. Supr. 1973).

In addition, we note that she did in fact admit participation in the challenged transactions, albeit at her husband's direction. In particular, she personally signed notes, guaranteed indebtedness, and pledged her Colonial stock as security for loans. These acts were essential to the success of her husband's alleged schemes to defraud both Corpamerica and Middlesex. Consequently, we believe that if the district court correctly found R. Abbott Sinskey guilty of misconduct in acquiring the banking opportunities for himself, it was fully justified in imposing liability on Minna Sinskey as well, especially since the plaintiff-trustee seeks only the return of assets, and the benefits derived therefrom, which were allegedly diverted wrongfully from both Corpamerica and Middlesex.


Plaintiff brought this action in 1968 against the Sinskeys alleging that they had violated their fiduciary obligations toward Corpamerica and Middlesex by usurping certain corporate opportunities rightfully belonging to Corpamerica and otherwise converting assets of each corporation to their own use. Plaintiff's charges stem from a series of bank acquisitions and bank related transactions carried out by R. Abbott Sinskey during his tenure as a director and officer of both Corpamerica and Middlesex. From 1955 to 1961, Sinskey acquired for himself control over the Carteret, Perth Amboy and Edgewater banks. In addition, at the time of the Perth Amboy transaction, Sinskey had his wife enter into an executory agreement with Corpamerica purporting to sell to it her controlling stock in Colonial National Bank. Plaintiff claims the Sinskeys' interests in each of these banks (or the profits derived from their sale) as assets of Corpamerica.

Although the various transactions giving rise to plaintiff's allegations of fiduciary wrongdoing are exceedingly complex, the district court comprehensively described them in its opinion below. Therefore, rather than chronicling them in detail once again, we will only summarize each transaction in this section of our opinion. A more detailed treatment of the facts will follow where relevant to our disposition of the issues raised on appeal.

A. Carteret :

In early September 1955, Sinskey learned that the control stock of the First National Bank of Carteret was available for a total purchase price of $165,000. After a discussion with his fellow Corpamerica directors, it was apparently decided that Corpamerica would ultimately purchase the Carteret stock, but that Sinskey would take title to it in the interim. On September 6, Sinskey began negotiations with the seller. An agreement naming "Corpamerica, its nominees and/or assigns" as purchaser was drawn up the same day. By October 7, the sale was completed, and, three days later, Sinskey took title to the stock as planned. The transaction was structured in the following manner: At the time of the agreement's execution, Corpamerica made an initial downpayment of $88,000; on October 7, it issued the seller 1,200 shares of its "Class A" stock valued at $30,000; and, on the same day, Sinskey paid the $47,000 balance yet due of the $165,000 purchase price.

Although Sinskey's $47,000 payment completed the transaction from the seller's point of view, Corpamerica and Sinskey continued to exchange funds. On October 10, Sinskey received $75,000 from Corpamerica. He then obtained a $200,000 loan secured by the newly-acquired Carteret stock and his wife's holdings in Colonial National Bank. With the proceeds of this loan, he repaid Corpamerica $118,000, representing the corporation's downpayment and the value of its stock that had been issued to the seller. This payment left Corpamerica and Sinskey with investments in Carteret of $75,000 and $90,000, respectively.

As the transaction allegedly envisioned Corpamerica's ultimate control of Carteret, Sinskey presented the corporation with an option to purchase the Carteret stock at the same price paid by him. Under the terms of the option, Sinskey was entitled to retain control of all the Carteret stock until he received payment in full from Corpamerica. By February 1956, Corpamerica had made additional payments of $80,000 to Sinskey giving it a total investment in the Carteret stock of $155,000. However, Sinskey never permitted Corpamerica to discharge the balance of the option price. As a result, Corpamerica never received title to a single share of Carteret stock. The option was finally cancelled in 1960 when an option to purchase the controlling stock in the merged Carteret-Perth Amboy bank was substituted in its place. This option, too, was later cancelled.

Although Sinskey's net investment in Carteret totalled only $10,000 while Corpamerica's totalled $155,000, all benefits from the acquisition ultimately inured to Sinskey personally. From 1956 until 1962 (the time of the Carteret-Perth Amboy merger), he exercised personal control over the bank. During this same period he received dividends and director's fees totalling $17,285, none of which was ever turned over to Corpamerica.

B. Edgewater :

In June 1959, Sinskey acquired for himself the controlling stock interest in the Edgewater National Bank at a total purchase price of $428,043. At that time, Corpamerica, through Sinskey, was actively seeking bank acquisitions. In spite of his activities on Corpamerica's behalf, Sinskey neither advised Corpamerica of, nor offered it, the opportunity to purchase the Edgewater stock, although it does appear that his fellow directors were aware of the transaction. Sinskey retained his Edgewater stock until 1966 when he sold it for $750,000.

No Corpamerica funds were apparently used in the initial purchase. Instead, Sinskey financed the transaction with two loans: (1) a $205,000 loan secured by his wife's Colonial stock and, quite possibly, the Carteret stock under option to Corpamerica; (2) a $223,040 loan secured by the Edgewater stock itself. However, $200,000 paid by Corpamerica to Sinskey in connection with the Perth Amboy transaction, infra, was used by him to liquidate the latter loan and free the Edgewater stock.

The Edgewater transaction proved extremely profitable to Sinskey. From 1959 until his disposition of the stock in 1966, he received dividends and salaries from Edgewater in the amount of $193,469.86. In addition, he realized a profit of approximately $250,000 on his sale of the Edgewater stock.

C. Perth Amboy :

In April 1960, Sinskey discovered that nearly all of the outstanding stock in Perth Amboy National Bank was available for purchase in a single block. Perth Amboy, by Sinskey's own testimony, represented an "excellent deal" for Corpamerica as well as an excellent candidate for merger with the Carteret bank. In addition Sinskey admitted that Corpamerica had expressed an interest in purchasing Perth Amboy and that it possessed an "expectancy" in the bank in the event financing could be arranged. However, once again, he purchased the controlling interest for himself; once again, Corpamerica was left with an option to purchase his interest, this time in the merged Carteret-Perth Amboy bank. This option, too, was eventually cancelled.

The transaction proposed by Sinskey, and ratified by Corpamerica's board, was as follows: The entire block of Perth Amboy stock would be purchased for approximately $65.00 per share with the intention of merging Perth Amboy and Carteret. Sinskey himself would buy the controlling interest for approximately $50.00 per share ($630,000). The minority interest would be purchased for approximately $80.00 per share ($695,360) by a broker who would then resell it to the public following the contemplated merger. To secure Corpamerica's interest in the transaction, its earlier option to purchase Sinskey's Carteret stock would be cancelled and an option to purchase his control interest in the merged Carteret-Perth Amboy bank for $1,165,000 substituted in its place.*fn4 The consideration for this new option was set at $355,000 -- a credit for the amount already paid Sinskey in connection with the Carteret stock, and an additional $200,000 in new money.

Sinskey's plan encountered an immediate obstacle when he could find no broker to underwrite the sale of the minority interest. Consequently, Middlesex was formed by him for this purpose. However, even though Middlesex would take title to the minority stock interest, Corpamerica ultimately agreed to assume any gains or losses on its resale.*fn5

Except for this change, the transaction went forward as planned. In early May, Corpamerica's Carteret option was cancelled and replaced by the option in the merged banks. Sinskey received from Corpamerica the consideration for the new option in two $100,000 installments -- the first in May, the second in July. Sinskey ultimately discharged his earlier loan secured by the Edgewater stock with these funds. However, the initial installment was first used by him as a deposit on the Perth Amboy purchase until financing was arranged.

The Perth Amboy acquisition itself occurred in July 1960 with Sinskey purchasing the control stock and Middlesex the minority. Each purchase was financed 100%. Both Sinskey and his wife signed the loan financing the control stock purchase. The loan for the minority stock was signed on Middlesex's behalf by Sinskey and guaranteed by both him and his wife in their individual capacities. Although the two loans were independent of one another, they were apparently secured by the same collateral -- the Sinskeys' stock interests in Carteret, Perth Amboy, Edgewater, and Colonial.

With the acquisition of Perth Amboy successfully completed, Sinskey embarked on the second phase of his plan -- the merger between Carteret and Perth Amboy. In this regard, he filed a merger application with the Comptroller of the Currency. However, this initial application was rejected in December 1960. Shortly thereafter, Sinskey met with the Deputy Comptroller hoping to obtain a reversal of this decision. This attempt, too, proved unsuccessful. However, the Deputy Comptroller did advise Sinskey that his application would receive favorable consideration in the event a strengthening of Perth Amboy's management and a clear record of operation over a reasonable period of time occurred.

Although both the Deputy Comptroller's statements and his own subsequent actions seem to indicate otherwise, Sinskey testified that he believed the planned merger to be a "dead issue" in January 1961. Consequently, Corpamerica's option to purchase control of the merged banks was cancelled at a meeting of its directors held that month. The cancellation, of course, left Sinskey with a personal obligation to Corpamerica in the amount of $355,000, the price paid by Corpamerica for the now-cancelled option. However, rather than discharging this debt, which was by his own statement then "due and payable", he had his wife enter into an executory agreement with Corpamerica purporting to sell it her control stock in the Colonial National Bank for approximately that amount.

Despite his alleged belief that it was a dead issue, Sinskey continued his efforts to effectuate the merger between Carteret and Perth Amboy after the cancellation of the option. These efforts were ultimately rewarded when a second merger application was approved by the Comptroller in August 1962.

Like the earlier transactions, the Perth Amboy acquisition advanced only the personal interests of R. Abbott Sinskey. In addition to placing him in control of Perth Amboy, and eventually the merged Carteret-Perth Amboy institution, his stock ownership produced more than $750,000 in dividends. Moreover, as a director and the chief executive officer of the bank he received fees and salaries totalling nearly $375,000. Corpamerica, on the other hand, found its goal of acquiring a bank frustrated once again by Sinskey's actions. Despite its ...

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