Insuranshares vs. Northern Fiscal
Insuranshares vs. Northern Fiscal
Northern Fiscal
1940
Dirkpatrick, District Judge
Digest by Clark Uytico
Topic: Duties of Directors and Controlling Stockholders Duties of Controlling Interest
Summary:
Here, the directors of the corporation sold the majority of the controlling shares to some random
Boston guys. These Boston group, when they already consummated control over the corporation, then
robbed the corporation of its assets by pledging the corporations portfolio in favor of a loan issued by
Paine, Webber & Co., the loan having been used in purchasing the directors shares beforehand. The
judge held that the directors are liable. They should have known the circumstances surrounding the
sale. In fact, Hepburn, the banks agent, perfectly knew the background of the sale and the fact that
the corporation had been robbed of the same way five years ago. There plainly was a duty upon the
Management group to make a genuine effort to obtain and verify such information as they reasonably
could get about the means by which the purchase was to be financed and the character of adequate
information, to refrain from making the sale.
FACTS
Suit brought by Corporation against its former directors, officers, and certain stockholders.
Some of the defendants (management group), prior to December 21, 1937, the owners of 75,933 of
the corporations total outstanding 284,032 shares. The management group consisted of:
BLAIR (President of the Corporation) and his associates SIMMONS, MOORE and BURNELL (all
former directors), and OGDEN, each with 24,111 shares;
the Continental Bank with 26,569 shares (subsequently taken over by Fahnestock & Co.);
YES.
Dispositive: The judgment here will be for the plaintiff generally. Further proceedings for the purpose
of assessing damages and including the amount in the judgment may be taken unless an agreement
can be reached upon that point.
RATIO
The transaction was not simply a sale of stock, hence the Management group is liable to
the stockholders
1. The price is strongly indicative of the true nature of the transaction. The sellers obtained $3.60 a
share at a time when the price of the stock in the over-the-counter market was $1 to $1.25, and when
the book value was $2.25 a figure substantially higher than could have been realized on actual
liquidation. The BOSTON group were primarily interested in getting control of the corporation together
with such stock ownership as would make that control secure and untrammeled, and the
MANAGEMENT group were primarily interested in getting as much money as possible for what they had
to sell both the control and their interest in the assets. It was the MANAGEMENT groups selling of
control as the thing which made possible the BOSTON groups criminal operation.
2. The owners of control are under a duty not to transfer it to outsiders of the circumstances
surrounding the proposed transfer are such as to awaken suspicion and put a prudent man on his
guard unless a reasonable adequate investigation discloses such facts as would convince a
reasonable person that no fraud is intended or likely to result.
In this case, the facts and circumstances surrounding the transfer are KNOWN to Hepburn, the agent of
the banks, and as largely relayed by him to HARDT, his immediate principal. In fact, the same
corporation had been systematically looted the same way some five years ago, by a different group
who bought control, using exactly the same means of financing the deal, and who stole the assets of
the corporation in much the same way. This fact is KNOWN to HEPBURN! In fact, the banks had become
stockholders, unwillingly, as a result of the wreckage caused by it. HEPBURN knew perfectly well that
in arranging for the sale of the banks interest, he had in BLAIR, a collaborator who was entirely willing
that the corporations assets should be used to finance the deal, and he was in frequent consultation
with Blair, the corporations president, and the most active figure in promotion the various attempts to
sell.
3. Hepburn had fair notice that one part of the program was to have a large part of the corporations
assets converted into cash and available in that form from the minute they took over. As a matter of
fact, a resolution was passed directing the New England Fund to transfer the certificates to SOLOMON
upon his being elected and qualified as treasurer of Insuranshares. And to show, SOLOMONT
immediately flew to Boston with the certificates and succeeded in turning them to cash.
4. Hepburn and the banks were specifically warned at least twice of the danger of carrying out the deal
with parties about whom they knew a little. This should have made them wary.
5. There were other things of less importance, and they must all be read in the setting of the
transaction. In other words, there was simply too much of the sort of thing described for this
transaction to pass a perfectly normal stock sale. With Hepburns knowledge, there was more than a
possibility of fraud and consequent injury to the corporation in the sale. There plainly was a duty upon
the Management group to make a genuine effort to obtain and verify such information as they
reasonably could get about the means by which the purchase was to be financed and the character of
adequate information, to refrain from making the sale.