Court Opinion

ID: 9794009
Source: CourtListenerOpinion
Date Created: 2023-08-31 02:56:39.935953+00
Date Added: 2024-06-11T08:09:36.683136
License: Public Domain

*617DESMOND, P. J.
I concur in the judgment and take occasion to add some observations which to me seem important. The interest of the brokers’ firm, O ’Melveny-Wagenseller & Durst, Inc., in making a success of the plan under which they proposed to manage the plaintiff corporation is shown in various ways. It first became apparent when they arranged to purchase stock in the corporation in January and February of 1944. The situation is depicted quite clearly in a letter which Mr. Wagenseller, as president of his firm, sent on January 31, 1944, not only to the Transportation Building Company but also to all the shareholders of that corporation. In that letter he said, among other things:
“During the past few days we have purchased, or concluded arrangements to purchase, from your three principal stockholders, 5046 shares Preferred Stock, Transportation Building Company 4486 shares Common Stock, Transportation Building Company representing 59.3% of the Preferred Stock and 72.1% of the Common Stock, at $26.80 for each Preferred share, ex-dividend payable February 15th to stockholders of record February 1st, accompanied by all of the Common Stock. This is equivalent to a price of $53.60 per Unit of 2 shares Preferred and 1 share Common on the basis upon which the stock has heretofore been traded. . . .
“You are no doubt familiar with the operations of our firm in connection with such properties. The undersigned, on behalf of our firm and personally, has for some years past-been operating such major loft building properties in the vicinity of your building as the Merchants Exchange Building (directly adjoining your property to the north), Cooper Building, Textile Center Building, Industrial Buildings, Allied Crafts Building, Graphic Arts Building and Lloyd & Casler Building, and several others. We have been most successful in the rehabilitation and operation of these properties and expect to apply the same thought and attention to the operations of the Transportation Building.
“In the near future we expect to propose to the stockholders of your company a plan of recapitalization and certain amendments to the Articles of Incorporation, which will permit the successful operation of the company and its property along the same lines we have used in operating the other properties in which we have an interest.
“At or about the same time we will, if conditions are acceptable to us, give every stockholder who does not care to *618continue Ms interest in the company an opportunity to sell his stock to us at the same price we paid the three largest stockholders. In the meantime, any stockholder desiring to sell his stock at this time may offer the same direct to us for immediate acceptance, at the same price paid the three largest stockholders, whose stock we have purchased.”
It is apparent that when this letter was written the brokers’ firm, with a substantial majority of stock, preferred and common, purchased or under option, had control of the plaintiff corporation. Evidence concerning the purchase was, in part, as follows: “Q. [Addressed to Mr. Wagenseller] And from whom did you buy the shares ? A. We bought the shares from the Assets Corporation, from a stockholder by the name of Weiler, from a stockholder by the name of Skinner. Those were the principal purchases. In addition to that we bought quite a number of shares from other stockholders. . . . Q. Were those shares bought in units or bought separately? A. We purchased from the Assets Corporation 2292 shares of preferred and 1146 shares of common in the form of units. Q. What did those units consist of? A. Two shares of preferred and one of common, which we paid $53.66 a unit for. Mr. S-: [Executive deputy conducting the hearing] What did you pay for the common? A. Nothing. They-gave it to us for it had no value so far as they were concerned. ’ ’ This witness stated “we didn’t solicit the purchase of stock but we made an offer to all stockholders which was the same offer which we had made to the Assets Corporation and to the other gentlemen.”
Inquiry was made concerning the prevailing market price for the units, two plus one, during the five years immediately preceding the purchase by the firm. The price quoted ranged from $20 to $22 per unit. Mr. Wagenseller testified that beginning with the latter part of January “the stock was $22.00 a unit. Then we came in and bought the stock at $53.60, which was approximately 100% over the highest price it had ever sold for clear back to 1939 and we are still buying it at that figure.”
Having examined the exhibits and having read carefully all the testimony given before the executive deputy of the corporation department, who made the actual findings adverse to petitioner upon which the assistant corporation commissioner signed the order denying the application, I do not believe that the members of the firm of O’Melveny-Wagenseller & Durst, Inc. had any intention of dealing unjustly, unfairly *619or fraudulently with anyone, or that their plan would work that way. On the contrary, their policy, it seems to me, was to make money for others as well as for themselves. The first beneficiary of that policy was Assets Corporation which, by dealing with this firm, got rid, at an advanced price, of a load of stock which up to then had been quoted at an extremely low figure. This stock the firm later sold to its clients at a profit of a few thousand dollars, dealing with the stock on a two plus one unit basis so that the purchasers all became owners of preferred and common stock. When the preferred stock shall have been disposed of, as contemplated by the petitioner, the owners will have received for that stock a cash price equaling, at least, the $255,240 minimum value mentioned in the findings drafted by the deputy, and their common stock will have absorbed a substantial portion of the value now inherent in their preferred holdings. This condition, in my opinion, tends to contradict the finding of the commissioner “That the exchange of shares as contemplated in the said application would not result in the holders of preferred shares receiving considerations commensurate with the advantages to be surrendered by such shareholders to the benefit of the holders of common shares.” Up to the present time the common stock seems to have had no value. This appears from the italicized statement of Mr. Adams, attorney for petitioner-plaintiff before the executive deputy, noted near the close of the following passage quoted from the transcript, which is enlightening also upon other aspects of the case: *620“Mb. S-[Executive Deputy] : Mr. Wagenseller, Do I understand the Articles of the Company at the present time restrict the amount of expenditures in excess of $5,000 for repairs unless there is a certain vote by the preferred and common shareholders? A. That is right. Q. In the event that vote of the preferred and common shareholders is sufficient, is there any restriction on the amount you might spend for repairs? A. No. Q. Do you and your clients hold a sufficient vote for that purpose ? A. Oh yes. Sure, our clients—as I testified before, we have about 65%—and in the last sixty days since the end of January we have purchased and resold to our clients more than 65% of the preferred, and 76% of the common stock, so we control the situation absolutely from the standpoint of our own clients. Q. Yes. A. But here is a dead horse that has gone oh for years. It has been greatly messed up. We are not interested in obtaining the property, or operating the property with all these restrictions around our necks. It has to be cleaned up. We have had an opportunity to get out, and not only that, but in this Management Contract, Mr. Commissioner, we have advised our Board of Directors in the Transportation Building that when this approval is asked of the preferred stockholders and the common stockholders for this recapitalization, that we will renew our offer of $53.60 for this stock. If they don’t want to go along they have their choice of disapproving, or approving, or selling their stock, which is still the same price we paid Assets Corporation, and which is more than 100% more than they got before. We think we have treated them fairly and honestly, , but I will be darned if we want to sit around and operate that property and pay them $50.00,—pay out $425,000.—Life is too short. We are not interested. Today, we come and put in our efforts, and whatever we get after these people have been paid $30.00 liquidation value, which is $255,000, which
*619“Mr. Adams: Mr. Wagenseller, suppose you would not be permitted to recapitalize the company by amending the Articles to eliminate these restrictive features now contained therein which have been pointed out and discussed here in this proceeding, and include the reduction of the redeemable price and liquidation price of the preferred stock from $50.00 to $30.00 a share, would you want your firm and the clients and customers of your firm to retain their stock interest in this Transportation Building?
“A. I should say not.—We have absolutely no interest in the building. We wouldn’t want them to retain their interest in the property, but so long as they have an interest in the property we have to protect that interest they have. . . .
“Q. In other words, you believe as an operational proposition that this building can’t be operated successfully unless this company recapitalize along the line of an orthodox company?
*620“A. It cannot be operated successfully, no question about that, and so far as we are concerned, we are not interested in reviving a dead horse for somebody else. We are willing to give to the people interested in this property today everything they are entitled to. In other words, we believe by paying $30.00 a share, these people will get out of their property, $255,000. If that isn’t fair, I don’t know what in the world is. If they get only $255,000, we won’t take a dime, but if they get more than $255,000, we are entitled, by gosh, to half of the profit, if we make the profit. . . . *621is $30,000 more than they have ever been able to get out of the property,—we are willing to pay them $255,000 as a liquidation value and then, after that, the same people still have 43% of the common stock, they still share with us. We are not taking it all. All we have is 57% of this company and they share with us. Q. In other words, if the company succeeds, as you anticipate, they (the shareholders) get $30.00 for the preferred shares and enjoy the prosperity of the company through their stock ownership of the common ? A. That is right. We know what we can do with the' building. There has been nobody else come along and pick up this company by the boot straps,—it has been a dead horse for a long time. We have connections to do it, we are entitled to a profit, and we don’t take the profit until we earn it and the other fellow gets his money. Mr. Adams : I think that is about your story. . . . Q. [By Mr. B-appearing for the Corporation Department] Now, this application also asks for a permit containing an issuance clause by which the corporation will be permitted to sell 3800 and some shares of common at 10(5 a share? A. That is right. Q. However, if these Articles are amended, the common cannot participate in any dividend until all the preferred has been retired, is that not so? A. That is correct. Q. I have' wondered how in the world you could figure a 10^ value, or $1.00 value, or any value at all, appertaining to that common stock, in view of that provision, which seems to make dividends rather remote on that common stock? A. Dividends are remote on the common stock. By the time the money is spent on that property to fix it up, we will not receive a penny on the property for several years to come. We will have to pay all the preferred off before we can get a dime, and not only pay it off but we will have to pay a profit upon its present current value. Q. Did you have any scheme in putting that 10^ value on the common stock? Just an arbitrary value. Mr. Adams: Mr. Wagenseller was of the opinion his firm would be entitled to the common stock for the value of his contract, the common stock having no value today, but I thought perhaps it being no par stock that it might be better to have the issuance of the common stock supported by a consideration of the value of this contract, whatever it may be, plus 10$ per share. I think I am entirely responsible for that. A. I think you will find we followed the same procedure with the Department here, with reference to the Cooper Building and the Mer*622chants Exchange Building, where we can get a like amount of stock under these same conditions. Mr. R-: Well those conditions were not an outgrowth of the same situation where you are asking to amend the Articles as you are proposing to do here. A. No,—the only reason we are amending those,— the whole thing is a tax deal. If it wasn’t for a tax deal we wouldn’t be before you now. We would have bought the property and taken it over during the same time. Q. You took a fair depreciation on the old costs of the building, which was many hundreds of thousands of dollars,—about $600,000, the cost of the building ? A. More than that. Q. The building and land came together about $905,000,—about $300,000 for the land value and the rest for the building value? A. That is right. Q. Now you can still use those old depreciation rates whereas if you bought the building you would have to establish a new depreciation rate based on the present consideration of the building? A. That is just exactly what it is. You see, our depreciation is greater than that. We took a depreciation of $15,976.92, that is the depreciation. That means that amount of money is tax money, so far as we are concerned. If we bought this building tomorrow for $225,000, I doubt if we could take more depreciation than $3,000. So we have $12,000 without paying income tax, and in addition to that we have an eight or nine hundred thousand capital set up for excess profits tax, where otherwise that would crucify us. That is all this whole thing is. Otherwise we couldn’t monkey with it at all. We would have bought the property the same as we bought other property, and these stockholders are going to be a lot better off than they have been before. They are better off now. They couldn’t have gotten more than $22.00' for it in January. Today they have $53.00. Mr. R-: Mr. Wagenseller, it may be that the stockholder is actually better off under this new management and under this proposed change, but what I am afraid of is this—it’s requesting us to make this decision puts us in the place that should be occupied by a Court. ...”
As is apparent, ultimately this case was presented to a court, and that court determined upon findings of its own that the findings and conclusions prepared, by the representative of the corporation department and adopted by the commissioner were not supported by the evidence. Among the conclusions of the trial court the following is notable:
“At the time of the hearing held by defendant on the ap-
*623plication of plaintiff, to-wit, May 12, 1944, all preferred and common shareholders of plaintiff acquiesced in the application of plaintiff and the issuance of the permit for which the application was made.”
In addition to this strong argument supporting the fairness of the plan respondent furnishes another of similar import by pointing out that before the proposed change can be finally made the shareholders “will be called upon by respondent to vote either for or against such amendment in accordance with the provisions of respondent’s certificate of incorporation. ’ ’
A petition for a rehearing was denied June 21, 1946, and appellant’s petition for a hearing by the Supreme Court was denied July 18, 1946. Traynor, J., and Peters, J. pro tern., voted for a hearing.