Opinion ID: 2289995
Heading Depth: 1
Heading Rank: 5

Heading: the harrison dairy products acquisition, the dugan investigation, the hooper and robinson settlements, and disclosure to the membership

Text: The final items in the series of acts said by the appellants to constitute fraud and culpable mismanagement will be treated under this heading since there is something of an overlap in this regard. The findings of fact adopted by the chancellor, with some editing, are set forth below. In the spring of 1961 Hooper discussed with several members of the board the possibility of the Association selling its milk products on the Florida market. One of the Association's largest customers in the Florida market, Galloway West, had recently entered into an arrangement to purchase its supply from the Borden Company, and Hooper was anxious to continue to sell Association products in Florida. Hooper learned that the Florida Milk Commission would not, however, issue a permanent permit to an out-of-state cooperative. They would only issue individual shipment permits. J. Homer Remsberg, the then president of the Association, had a conversation with Hughes, the Association's general counsel, in the spring of 1961 regarding    selling products in Florida. This conversation was not on the subject of Hooper and Robinson setting up a private corporation but rather dealt with the inability of the Association to get a permit for the Florida market. Hughes was told by Remsberg to look after the Association's interests. In late July of 1961 Remsberg found an undated letter on his desk from Hooper in which Hooper sought to review with him the organization of the distributing corporation    Robinson and I have set up to handle Association products as well as some local products in Jacksonville, Florida. The statements and representations in the letter were subsequently joined in by Arthur V. Robinson, who also signed the letter. The letter stated that Robinson, Hooper and members of their families were the beneficial owners of the capital stock of this distributing corporation. Hooper stated in the letter that it was his intention to be on record so that if the Association felt the maintenance by them of the corporation was not in the best interests of the Association they would sell their stock to the Association at whatever the fair market value might be. Robinson agreed with these representations. Although Remsberg recalled discussion of the Florida market prior to receipt of the undated letter, he never had a discussion with Hooper or Robinson, wherein he was advised by either that they were setting up a personal corporation in Florida. Remsberg had never approved of such a corporation, and the board had never authorized one. After receiving the undated letter, Remsberg called Hooper into his office for a conference. He informed him that his and Robinson's ownership of Harrison Dairy Products (Harrison) was, in his opinion, a pure conflict of interest and that as president of the Association he would have to take it [the ownership matter] to the board and that in his opinion it cannot be. On August 7, 1961, Remsberg received an eight-page letter from Hooper, which also dealt with Hooper's and Robinson's ownership of Harrison in Jacksonville, the distributing corporation he had referred to in the prior letter. The first member of the board of directors with whom Remsberg discussed Hooper's revelations on Harrison was F. Upton Gladhill. The discussion took place sometime in late July along the side of the road near Gladhill's pea field. Remsberg explained to Gladhill what he had come to learn about the ownership of Harrison, and Gladhill informed Remsberg that he too thought the matter should be brought to the attention of the members of the board at the next meeting. At the Plant Committee meeting on August 10, 1961, an executive session was held wherein Remsberg brought the members of the Plant Committee up to date on what he had learned about Hooper's and Robinson's ownership of Harrison. The matter was further discussed at subsequent board meetings and a decision was made by the directors that the situation could not continue as it was and that the possible purchase of Harrison should be explored. Subsequent to the disclosure of Hooper's and Robinson's interests in Harrison, Hooper advised Remsberg that he was scheduled to appear before the Florida Milk Commission. The appearance, he suggested, could only be made in his capacity as an officer of a Florida corporation, and he also deemed it in the Association's interest for him to do so. Conversations with Robinson on the possible purchase also took place. At the board of directors meeting of January 12, 1962, the board passed a resolution authorizing the Executive Committee to go to Jacksonville, Florida, to make a first-hand inspection of the Harrison operation. On February 1, 1962, the Executive Committee met at the Harrison plant in Florida for the purpose of inspecting the facilities. What they saw was a going dairy concern. It was a small plant, well kept, with an inventory of powdered and sterile milk, and several employees were present and working. The overall impression was one of substantial activity at the facility. On February 9, 1962, the Executive Committee recommended to the board that the Association purchase Harrison. On the same day the board approved the Executive Committee resolution. In approving the purchase of Harrison, on terms to subsequently be determined, the board of directors took into account the personal inspection trip by members of the Executive Committee and their report that the operation was a going concern. They also considered the elimination of the conflict-of-interest situation, which they believed the operation of Harrison presented. The board was also aware of the potential Florida market for Association products which Harrison was apparently serving. Remsberg requested Edward L. Merrigan, an attorney who had been doing work for the Association, to represent the Association in drawing up the final papers for the sale of Harrison. Remsberg took this step to insure protection of the Association's interest since Hughes, the then general counsel, had been involved in the initial chartering of Harrison. Remsberg gave Merrigan a copy of a proposed agreement between the parties, which set forth the terms at which the Association would purchase Harrison and also a document entitled, Basis for Sale of Harrison Dairy Products, which indicated that the figure would be approximately $89,000. In order to compute the exact purchase price, Merrigan sent to Ernest Clifford of Wayne Kendrick & Co. on March 27, 1962 a copy of the agreement between the parties along with the Basis for Sale document which he had been given by Remsberg. Clifford was requested to compute the actual purchase price per the agreement and to prepare a statement showing his computations. On April 9, 1962, Wayne Kendrick & Co. submitted a report to Merrigan computing the value of the Harrison stock as per the proposed agreement of purchase. This figure was $81,341.27 as shown by the computation in Exhibit A of Kendrick's report. Remsberg and Merrigan discussed the Wayne Kendrick statement prior to the actual consummation of the purchase on April 12, 1962. Remsberg was aware of the fact that the business of Harrison was primarily the sale of merchandise purchased from [the] Association, and also that the book value of Harrison stock, one of the factors to be considered, was $33,641.72. Book value, however, was not determinative in Remsberg's mind of actual value and the board was interested in buying a going concern which had a license to operate in Florida. Remsberg was aware of the fact that the actual figure at which Harrison was purchased was approximately $8,000 less than the proposed figure which had been submitted to Kendrick. In deciding to purchase Harrison, the board of directors relied upon: (a) the recommendation of their Executive Committee, which had inspected the property; (b) they considered the computation of the approximate purchase price as computed at $89,000; (c) their opinion that the price represented fair market value; (d) their belief that they were purchasing a going concern which was profitable and active in the Florida market; and (e) their desire to eliminate what they considered to be a conflict of interest. At the time of the Association purchase of Harrison on April 12, 1962, no director of the Association was aware of the fact that large portions of Harrison's sales were to previous customers of the Association or that actual delivery of products, the sales of which were credited to the books of Harrison, were being made directly from the Laurel, Maryland, plant. Furthermore, there were no documents in the Association's files which reflected the above. Subsequent to the acquisition of Harrison, the Association's records reflected substantial sales and profits from the plant's operation for the last nine months of 1962. Sometime during the latter part of 1961 Remsberg, and other members of the board, became aware that Robinson and his partner, Berman, through a corporation known as Mutual Milk Sales, Inc., were involved in constructing a milk processing plant in Oneida, New York, for a federation of New York cooperatives. The fact of Robinson's participation in the construction of the plant was reported in several trade journals, and Hooper was aware of Robinson's making weekend trips to Oneida. The members of the board were, however, unaware of the fact that Robinson was involved in the actual management of this plant when it became operative in the spring of 1962. Mr. Hooper and members of the Plant Committee were aware of the fact that sales of powder manufactured at Laurel were often made at prices less than the government support price. This matter had been discussed among Hooper, Robinson, Click (identified infra ) and members of the Plant Committee; and while the parties differed on the actual amount, they were in agreement that sales to the government could actually result in the Association's receiving between 2 and 3 cents less per pound than the actual price paid by the government. This resulted from several factors: (a) within a period of one year from the time of sale, the government could reject for impurity any of the powder which it had purchased; (b) if powder was rejected, the cost of removing it from the warehouse was borne by the seller; (c) sales to the government required multiple inspections and resulted in delay in removing the powder from the Association's limited storage facilities at Laurel; (d) it took the government between ninety and one hundred and twenty days to make payment to the Association; (e) special bags were required for packing the government powder; (f) the Association had to pay the government's inspection costs; and (g) if one bug was found in a shipment, the government prohibited resale for human consumption, and the powder could then only be sold far below the government price for use as animal feed. During the course of 1962, sales from Laurel below the government support price were made to Mutual Milk Sales Packaging Division, Inc. It was not until February of 1964, however, when Dean Dugan rendered his report to the Association that any member of the board of directors became aware that Arthur Robinson was a co-owner of Mutual Milk Sales Packaging Division, Inc. The operation of the Laurel plant was profitable to the Association. While labor costs and market conditions affected profit margins, the plant was exceptionally successful and earned over $4,000,000 between 1958 and 1963. The plant at Oneida was not in direct competition with Laurel as it could not produce the same high grade powder, Grade A, which Laurel did and it served a different milk shed area. In some instances, Laurel and Oneida even cooperated to the benefit of Laurel in handling shipments of Extra Grade, a lower grade powder which Laurel also produced, which Laurel alone could not fill. On November 8, 1963, James E. Click, the assistant general manager and assistant treasurer of the Association, submitted his resignation to the board of directors. At this same meeting, Click leveled a series of charges against Hooper and Robinson which alleged impropriety and conflict of interest in the performance of their official duties for the Association. Click had, in July of 1962, previously submitted a memorandum to Hooper which set forth certain rumors which had come to his attention. At the time of his resignation in November of 1963, Click attempted to substantiate some of the earlier charges and included in his charges every rumor which had come to his attention in the interim. The board of directors refused to accept Click's resignation on November 8, 1963 but instead voted to authorize a full investigation of the Association's affairs, past and present. The Plant Committee was given the responsibility for seeing that an independent, thorough and full investigation was made. Merrigan, the then general counsel, submitted the names of three individuals to the Plant Committee, all, in his opinion, qualified to conduct the investigation. The Plant Committee chose Dean Frank Dugan of the Georgetown University Law Center, a nationally renowned fact-finder, to conduct the fact-finding mission. It also hired Wayne Kendrick, the Association's auditor, to personally assist Dean Dugan in his investigation. Dean Dugan as a condition of accepting the responsibility for the investigation insisted that his report be covered by the attorney-client privilege and be confidential because of the unique nature of the investigation. Using as a basis for his investigating the charges leveled by Click, Dean Dugan called nineteen witnesses before him, all of whom appeared freely, voluntarily and without counsel. On January 30, 1964, Messrs. Merrigan, Dugan and Remsberg were advised by Robert M. Goldman, Esq., that he represented Robinson. On January 29, 1964, Hooper advised Dean Dugan that he had retained James T. Reilly, Esq., as his attorney. At a Plant Committee meeting on February 12, 1964, Dean Dugan read and explained his report. On the same day Dean Dugan again read and explained his report to the entire board of directors. At this same meeting, Wayne Kendrick discussed two confidential reports which he had prepared in the course of Dean Dugan's investigation. One of these reports showed that Harrison, during the period of its ownership by Hooper and Robinson, had made a gross profit of $135,529.67 from sales to former customers of the Association or new customers whose purchases had been shipped directly from the Association's Laurel plant. The other report showed that Mutual Milk Sales Packaging Division, Inc., had made gross profits of $100,256.23 from the resale to Weldon Farms Products, Inc., of milk powder which it had purchased from Laurel, but which had been shipped directly to Weldon from the Laurel plant. In the course of his investigation for Dean Dugan, Kendrick was able to conduct a complete study of the Harrison books and records. With respect to Mutual Milk Sales Packaging Division, Inc., Kendrick examined each sale on the Association's books and also Mutual Milk Sales Packaging Division, Inc.'s sales records which showed the other side of each transaction. The latter documents were made available to Kendrick by Robinson at Merrigan's request. Kendrick was also able to determine the gross profits which Mutual Packaging made on these sales by virtue of a certificate from Robinson's accountants. No other sales of dairy products were made by the Association to any corporation with which Robinson had any connection. On February 12, 1964, as a result of the revelations in the Dugan Report, the board of directors requested Hooper to resign. Hooper refused to do so, and he was immediately terminated by the Association. Robinson's contract had not been renewed, and it expired on December 31, 1963. In his report to the board, Dean Dugan suggested that certain matters which he had not had time to follow up should be considered by the Association. One document in his possession indicated Hooper had a connection to Marshall Properties, Inc. Click had also questioned the relationship, if any, of Red-73 to the Laurel plant. Dugan recommended that an investigation of the latter be made. Subsequently Merrigan wrote Click, who had been made acting secretary-treasurer and general manager, and as a result, Click requested Messrs. Snyder, Marshall and others on the Association's staff to continue to investigate the above matters and also any matters which might involve claims against Hooper and Robinson. Among the latter were an allegation of improper use of an airplane which had been rented by the Association from Hinson Aviation Company, an entity in which Robinson had an interest, and the alleged purchase of certain assets from Mutual Milk Sales. Merrigan was advised by Click that he was satisfied that there was no additional information which substantiated any charges of impropriety in connection with these allegations. The board of directors, after receipt of the Dugan Report, had authorized Merrigan and Dean Dugan to take steps to recover for the Association monies due from Hooper and Robinson. On or about February 25, 1964, Merrigan, at a conference in his office, presented the Association's demands. Mr. Reilly asserted claims against the Association on behalf of Hooper in the amount of $112,000 plus unliquidated claims and punitive damages. Merrigan threatened to bring action under the Association's crime bond and counsel for the other side responded by asserting their own claims against the Association. Merrigan and Dean Dugan examined the prospects of litigating the claims against Hooper and Robinson. They came to the conclusion that it would most probably be necessary to institute numerous and separate proceedings in different jurisdictions if litigation were resorted to. They also considered the fact that the claims of Hooper were not without merit. They also considered the litigation expense which would be involved and the uncertainty of the eventual result. After a thorough study of the posture of all parties to these negotiations and the merits of the respective claims, Dean Dugan and Merrigan recommended in a detailed written report to the board of directors that they authorize a settlement with Hooper and Robinson. At a board of directors meeting on March 13, 1964, the reasons for and the details of the settlement recommended by Dugan and Merrigan were presented. A copy of Dugan and Merrigan's letter was given to each director, and the recommendations contained therein were explained and discussed among the board and counsel. Counsel were informed that the board wished to extract the maximum amount of money from Hooper and Robinson and to pay as little as possible to satisfy Hooper's demands. Dugan and Merrigan explained to the board their opinion that it would be necessary to institute multiple legal proceedings in different jurisdictions if the Association decided to litigate the matter. They also said that they could not guarantee success in these proceedings and pointed out the cost to the Association of maintaining several lawsuits. It was their recommendation to the board of directors that the settlement as outlined in their letter be entered into since, in their opinion, it insured the Association a substantial recovery, avoided the costs of litigation and would allow the Association to put its own house in order and proceed with the business of selling the members' milk. It was the opinion of counsel that the settlement as outlined in their letter of March 10, 1964, was in the best interests of the Association. After a thorough discussion of all aspects of the release transaction and in reliance upon the recommendation of Dugan and Merrigan, the board of directors authorized counsel to enter into mutual releases between the parties. During the period of time after the board had authorized counsel to consummate releases with Hooper and Robinson, Merrigan sought assurances from Click and other members of the board that all pending matters between parties had been fully explored to the satisfaction of the Association. Merrigan received assurances from Click that the matters which Dean Dugan had requested be given further attention had, in fact, been looked into by the Association and found to not involve a possible cause of action in favor of the Association against Hooper or Robinson. This investigation was conducted prior to the time the releases were entered into. Merrigan continued to keep members of the board informed of his investigations and negotiations up until the actual consummation of the releases. On April 1, 1964, the Association executed mutual general releases with Hooper and Robinson. As consideration, the Association received: (a) a check from Robinson for $95,686.65; (b) a credit on salary due Robinson under his 1963 contract in the amount of $38,527.28; (c) a credit on the unpaid balance due for the stock of Harrison in the amount of $19,700.07; (d) checks from Hooper in the amounts of $818.69 and $254.51 for miscellaneous accounts; (e) release by Hooper of approximately $46,000 in liquidated and other unliquidated claims against the Association; (f) the release of the Association from claims of Robinson, his family, Mutual Milk Sales, Inc., Mutual Sales Packaging Division, Inc., and Olney Acres Dairy Products; and (g) indemnity of the Association for possible claims against it by the minor children of Hooper and Robinson. The releases by the Association of April 1, 1964 were the result of substantial research and consideration on the part of Merrigan, Dugan, Association employees and the board of directors; the setting forth of all claims by the respective parties; continuing investigation by the Association; arms-length negotiations among the attorneys for the parties; the opinion of general and special counsel that the releases were in the best interest of the Association; and the decision of the board, in reliance on counsel's opinion, that the Association's interests could best be protected through execution of general releases. Subsequent to the execution of the releases with Hooper and Robinson, Dean Dugan continued his investigation, focusing on charges which had been made against Click by Hooper and M. Belmont Ver Standig, the Association's public relations advisor. The board determined that the entire matter could only be fully brought to rest after these charges had been explored. Merrigan attempted to arrange for Hooper to testify but was informed by Hooper's attorney, Mr. Reilly, that Hooper would only testify if the Association would grant him the right of indemnification for any damages he might experience as a result of his testimony. Merrigan refused to do this. Dean Dugan attempted on several occasions to arrange for Belmont Ver Standig to testify but Ver Standig was ill. Ver Standig was contacted at his place of recuperation and finally stated he would not appear to testify. Dean Dugan drew to the attention of the board the efforts which had been made to secure testimony from Hooper and Ver Standig. On May 8, 1964, the board voted to conclude the investigation into the affairs of the Association since it was obvious that the testimony of neither of these individuals could be secured. It was stipulated by all parties that there was no merit to the allegations made against Click. During the course of Dean Dugan's report to the board, he had mentioned the entity, Marshall Properties, Inc. Marshall Properties, Inc. was a corporation used by Robinson and his partner, Berman, to acquire land in Laurel, Maryland. They did not wish it known that they were acquiring the property and, as a result, asked Hooper if they might use his name as president. Hooper allowed them to do so. Hooper performed no services for the corporation, received no money from the corporation, and the corporation had no business whatsoever with the Association. During the course of his report to the board Dean Dugan mentioned the entity, Red-73, and suggested that its relationship, if any, to the Association be looked into. Red-73 was a manufacturing plant somewhere in Indiana or Ohio, which was owned by C.Y. Stephens, the owner of High's Dairy. Robinson purchased the stock of Red-73 for the purpose of liquidating the corporation. Robinson did not operate it as a dairy or manufacturing plant but rather sold off its assets. There was no connection between the Association and Red-73. Click mentioned Red-73 to Dean Dugan as an unsubstantiated rumor and without knowledge of the true nature of its operation or Robinson's relationship to it. As a result of sales made by the Association to High's Dairies, the estate of C.Y. Stephens and corporations owned by him owed the Association approximately $275,000. All of these funds were fully paid with interest. Subsequent to the settlement of April 1, 1964, with Hooper and Robinson, the Association filed a claim for federal income taxes which had been paid during the period of time that Hooper and Robinson owned Harrison. This claim was subsequently settled when the Association recovered $25,000 of the approximately $50,000 which Harrison had paid in taxes. A similar claim was filed with respect to the sales to Mutual Milk Sales Packaging Division, Inc., which is still pending. [Its present status is unknown to this Court.] At the board of directors meeting of February 14, 1964, Wayne Kendrick presented his Annual Report on the operations of the Association. At this time the investigation into the affairs at the Laurel manufacturing plant was still continuing, and a determination had not been made as to whether there were any additional claims against Hooper and Robinson arising out of the Laurel operation. In order to adequately reflect that the investigation was still continuing and to indicate that a resolution of the matter had not yet taken place, the board authorized Merrigan and Kendrick to draw up an appropriate comment, which would indicate that the Laurel operation was still under investigation. To reflect the above Merrigan and Wayne Kendrick agreed to include the following comment in the financial report for 1963, which would be published in the annual report for that year: A review of sales, prices and procedures at the Manufacturing Division has been initiated but determinations and adjustments, if any, were not completed at the date of this report. At the annual meeting on February 22, 1964, there was a general discussion of the investigation which was being made into the affairs of the Association. Because of the presence of press at the meeting and the confidential nature of the Dugan and Kendrick reports, the directors of the Association resolved that the membership should be fully informed of all aspects of the investigation at district meetings, which would be held in the spring of 1964. It was resolved that a report on the discount of the Embassy Dairy note would also be made at these meetings. In the spring of 1964 Merrigan prepared a 43-page summary of the Dugan Report and an 18-page summary of the entire Embassy transaction. These reports were read to the membership at the district meetings; in some instances, by the director from the particular district and in other instances by Merrigan himself. A full discussion of the matters contained in the reports took place at these meetings. In respect of the Harrison purchase the chancellor had this to say: The evidence shows here clearly, unequivocally recognized, of course, by the Association directors then, by everyone now, a clear conflict of interest in the acquisition by Mr. Hooper and Mr. Robinson of the plant in Florida and the incorporation of it under the name of Harrison Dairy. This was a conflict of interest which was brought to the attention of Mr. Remsberg in August of 1961. We think it important to point out at the outset of this episode that at that time the directors were not aware of the transactions with reference to `phantom brokerage' through the use of this corporate entity which came to light during the Dugan investigation in late 1963 and 1964. At this particular time Mr. Homer Remsberg, the then president, considered that there was indeed, when it was brought to his attention, a conflict of interest and he remarked, `This cannot be.' It has been urged upon the court that certain actions should have been taken much sooner than they were. The record does show in this case that Mr. Remsberg, after talking with Mr. Gladhill of this county [Montgomery], whom he referred to as `one of our most responsible directors,' then took it up at the next meeting of the board of directors. It was determined that something should be done immediately. And the record shows the appointment of a committee including at least two members of the Executive Committee to make a trip to Florida to examine the Harrison facilities. The Plant Committee had a meeting down there in Florida and their minutes are in the record. There was thereafter a meeting of the board of directors in Arlington, at which time the question of acquisition of Harrison was considered. Commenting on the Click charges the chancellor found that the board acted very responsibly at that time in the face of a festering problem in the corporate family   . He continued: What they did at that juncture  and how it was done  was critical to the future of the Association. They chose at that time to have a confidential fact-finding investigation by Professor Dugan of Georgetown University Law School, a person described in this record as one of the most renowned men in the country in that specialty, certainly a man of great eminence and integrity. The evidence in this case shows abundantly that there was complete cooperation between Professor Dugan and the defendant directors, that they gave him carte blanche, the only restriction being that he was not to interview a competitor; the Association would make all of the books and records available, all directors would be made available. Mr. Robinson did appear more than once, we recall three times, and without counsel. Mr. Hooper fully cooperated. Professor Dugan made a complete and confidential report, public disclosure of which would have been unnecessary and ill-advised.