William D. Pettit and Thomas J. Crawford, Trustees-Appellants v. Doeskin Products, Inc. And Keta Gas & Oil Company

270 F.2d 95

• Court: Court of Appeals for the Second Circuit
• Decided: October 13, 1959
• Docket: 25437_1
• Status: Published

Opinions

LUMBARD, Circuit Judge.

The trustees in a Chapter X, 11 U.S.C.A. § 501 et seq., reorganization of Swan-Finch Oil Corporation applied to the District Court for the Southern District of New York for an order directing Doeskin Products, Inc. and Keta Gas & Development Company to turn over to them a certificate for all the outstanding stock of Keta, namely 1,140,390 common shares, and all of its assets, which they claim is the property of Swan-Finch.

The basic facts are virtually undisputed. Lowell M. Birrell who dominated Swan-Finch and the three other companies involved, caused the name of the registered owner, “Swan-Finch Oil Corporation,” to be altered by striking “Oil” and typewriting over it the words “Gas Development.” A similar alteration in handwriting was made on the certificate stub. Thereafter by treating the subsidiary Swan-Finch Gas Development Corporation as owner of the stock, by causing an unauthorized agreement for the exchange of stock to be executed between Gas Development and Doeskin and by causing the issuance of 700,000 shares of Doeskin stock to Gas Development which Birrell then had Gas Development’s president hand over to him, Birrell has availed himself of the proceeds and Doeskin has become the registered owner of the stock.

The trustee’s claim derives from the contention that the debtor never authorized the transfer of the Keta shares to the Doeskin company or to its own wholly-owned subsidiary, Gas Development, but that such transfer as was purportedly made was carried out by a fraudulent agent of both companies, Lowell M. Birrell. The trustees contend that Judge Palmieri erred in holding that they may recover the shares transferred by Birrell only if they restore to Doeskin the shares it issued to Birrell. We hold that the transaction by which the Keta shares were transferred to Doeskin was entirely without authorization; that the receipt by Gas Development’s president did not constitute receipt by the debtor of the Doeskin stock, and that therefore the debtor may recover the Keta shares from Doeskin without returning the shares given up by Doeskin in receiving them.

Birrell’s domination of the four companies which he accomplished through Mary B. Prior, his sister, Roy H. Callahan and others, is conceded. Apparently Birrell made and unmade directors and officers pretty much as he saw fit. The salient facts regarding the four dominated companies during the times in question may be briefly stated:

Swan-Finch Oil Corporation (Swan-Finch), a New York corporation with offices at 41 East 42nd Street, New York, was both a holding and an operating company, with 6,000 stockholders and assets of about $12,000,000. Its stock was traded on the open market. Until October 1, 1956 Birrell was a director and the principal executive officer and after that date he was also treasurer. Callahan was a director, a vice-president, and for a time in 1957 he was president. Mary Prior was a director, vice-president and secretary.

Swan-Finch Gas Development Corporation (Gas Development), a Pennsylvania corporation wholly-owned by Swan-Finch, had New York offices at 545 Fifth Avenue where Birrell’s law office was located, three short blocks away from 41 East 42nd Street. Birrell was a director, Callahan was a director and president and Mary Prior was a director, vice-president and secretary.

Keta Gas & Oil Company, a Pennsylvania corporation, was engaged in developing and drilling gas wells principally in western Pennsylvania. While it maintained offices at Bradford, Pennsylvania, its executive offices, at least after September 27, 1955, were at 41 East 42nd Street. Keta’s assets were carried at about $4,000,000 at the time it was acquired by Swan-Finch in September 1955 and at $6,800,000 at the end of 1956. After Keta’s acquisition Birrell became a director and the principal executive officer, Mary Prior became a director and secretary, and Callahan became a director and sometime later became president.

Doeskin Products, Inc., a New York corporation engaged in the manufacture and sale of paper products, also had its offices at 41 East 42nd Street. Doeskin had numerous stockholders and its stock was traded on the open market. Birrell was a director and the principal executive officer of Doeskin, Callahan was a director and president for a time, and Mary Prior was a director and secretary.

On September 27, 1955 Swan-Finch acquired all the outstanding 1,140,390 shares of Keta common stock and there was issued to it certificate No. 2 for those shares.

During the last few days of December 1956 Birrell’s manipulations bore fruit and he secured possession of 700,000 shares of Doeskin’s stock in return for the Keta stock. Although Birrell, his sister, Mary Prior, and Callahan were the three principal actors in the transactions, only Callahan was available as a witness. Sometime about September 1957 Birrell went to Cuba where he was later joined by his sister, Mary Prior, and these two concededly have been evading the jurisdiction of our courts. But the main events and the inferences to be drawn therefrom seem beyond dispute.

On December 28,1956 Birrell presented to a meeting of the Doeskin directors what purported to be a contract between Gas Development and Doeskin for the exchange of all the Keta stock in return for 700,000 shares of Doeskin stock. The contract was signed by Callahan for Gas Development and by Birrell for Doeskin on or about December 25, although it was dated October 5, 1956 and provided for a closing on November 15. Callahan testified' he first heard of the proposal late in December and that he had not known that Keta had been transferred from Swan-Finch to Gas Development.

The Doeskin directors not dominated by Birrell had never heard of the contract and they objected. Three of them, Emanuel Katz, Harry Troilin and Alexander Blumenthal, immediately resigned. A fourth, Robert Six, left the meeting, and a fifth, William Erb, testified that he did not approve. As a quorum was no longer present the meeting was adjourned to December 31. The respondents produced alleged minutes which purport to show that the meeting was postponed to December 31, and December 31 minutes which purport to show that three directors were then present, Birrell, Callahan and Joseph Crosby, also Comptroller, and they recite approval of the contract at that meeting. Doeskin’s president, Ralph Damp and directors Edward G. Brown and William Erb were never notified. Judge Palmieri’s finding that no December 31 meeting ever took place is clearly right.

Birrell also caused the fabrication of minutes of a Swan-Finch directors’ meeting of January 4, 1956, and of a Gas Development directors’ meeting of January 26, 1956, which minutes record the approval of the transfer of the Keta stock from Swan-Finch to its subsidiary Gas Development. But it is abundantly established that no one, aside from Birrell and Mary Prior, had any inkling that Keta was no longer a subsidiary of Swan-Finch. It is clear from the record that the alleged Swan-Finch meeting of January 4, 1956 and the alleged Gas Development meeting of January 26, 1956 never took place.

On December 31, 1956 Birrell and Callahan went to the 29 Broadway office of the Manufacturers Trust Company, Doeskin’s transfer agent, to secure the issuance of the 700,000 Doeskin shares pursuant to the spurious contract. Birrell in the additional capacity as counsel to Doeskin gave his written opinion of the corporate regularity of the transaction and stated that the transaction was “for investment and no public offering is involved.’’ Thereupon the bank issued seven certificates each for 100,000 shares of Doeskin common stock which were given to Callahan, president of Gas Development, who, at Birrell’s request immediately handed them over to Birrell before they left the bank.

Apparently the altered certificate No. 2 for the Keta shares was turned over the same day, December 31, to Doeskin and, although it was never endorsed by anyone on behalf of Gas Development, Keta issued certificate No. 3 to Doeskin for 1,140,390 shares, dated December 31, 1956, and signed by Mary B. Prior as secretary and Callahan as president.

Sometime in January 1957 Callahan, as president of Gas Development, executed stock powers in blank at Birrell’s request. From January 8 to March 28, 1957 the seven certificates for the Doeskin shares found their way to brokers in Canada. Thus except for Callahan’s momentary token possession, as to which he was in no way authorized by the directors of Gas Development, there is no evidence that Gas Development ever received the Doeskin shares. Likewise there was no attempt to show that Callahan was authorized to execute the stock powers.

The first question presented by these facts is whether the debtor authorized the transaction by which the Keta shares were transferred to Doeskin, and at the forefront of this question is the problem of which company, the debtor or its wholly-owned subsidiary, Gas Development, ought to be regarded as the shareholder. In the view we take of the case this preliminary question is not decisive, since in any event no greater authority existed for the transfer from the debtor to Gas Development than for the transfer to Doeskin, and in our view of the case the governing defect flows from the second transfer. We will therefore regard the debtor as the Keta shareholder, and direct our attention to the question whether it authorized the transfer to Doeskin.

Judge Palmieri expressly found on disputed evidence that there was no directors’ meeting of the debtor with regard to the transfer of Keta shares, and that three of its six directors had no knowledge whatever of the dealings of Birrell and his cohorts with the stock. He appears nevertheless to have concluded that Birrell’s conceded domination of the affairs of all the corporations concerned was a satisfactory substitute for such authorization. We think the law of New York, the state of incorporation of both transferor and transferee, is to the contrary.

Under the law of New York mere “domination” of a board of directors is not the equivalent of the assent of the board in cases where such assent is a legal condition of the transaction. See Manson v. Curtis, 1918, 223 N.Y. 313, 322-323, 119 N.E. 559; McQuade v. Stoneham, 1934, 263 N.Y. 323, 189 N.E. 234; Long Park, Inc. v. Trenton-New Brunswick Theatres Co., 1948, 297 N.Y. 174, 77 N.E.2d 633.

Nevertheless the question remains whether the transaction was within the implied authority of Birrell, acting as president, without the assent of the directors. The law of New York on this question appears substantially unchanged since this court’s decision in Schwartz v. United Merchants & Manufacturers, Inc., 2 Cir., 1934, 72 F.2d 256, where we held that such authority exists only as to matters which are “usual” or “ordinary,” and that the burden rests upon the party challenging the president’s authority to show that the transaction was “unusual” or “extraordinary.” What is usual or ordinary necessarily depends on the circumstances of the particular case, and in the circumstances here presented there can be no doubt that the transaction was extraordinary. Before the transaction took place Doeskin, an operating company, had 470,000 shares outstanding, of which the debtor held about 200,000, or» about 40%. Had the transfer been properly carried through the debtor would then have held 900,000 of a total of 1,-170,000 shares of Doeskin, or about 77%. For such an increase in its ownership of Doeskin, the debtor surrendered the Keta shares, of an estimated worth of approximately $6,800,000, or about one-half of the assets of the debtor. As to such a transaction it is clear that no authority existed by implication or appear-anee in a single corporate officer. Accordingly the transfer of the Keta shares was an entirely unauthorized transaction, and the issuance of Keta certificate No. 3 to Doeskin did not make it any more the shareholder of Keta than if it had been issued by a stranger.

We assume for purposes of this decision that as a result of the unauthorized nature of the transfer purportedly made by the debtor, it can recover the Keta shares from Doeskin, but that it can recover them only if it tenders back to Doeskin such benefit as it has received from the carrying out of the transaction. The question whether such a tender back is required in the present circumstances is not without considerable difficulty, e. g. compare United States Fidelity & Guaranty Co. v. Newburger, 1933, 263 N.Y. 16, 188 N.E. 141, with, Appleton v. Citizens Bank, 190 N.Y. 417, 421, 83 N.E. 470, 32 L.R.A.,N.S., 543, affirmed 1909, 216 U.S. 196, 30 S.Ct. 364, 54 L.Ed. 443; Losie v. Ken-Vic, 3rd Dept. 1943, Sup., 43 N.Y.S.2d 914, affirmed 266 App.Div. 1045, 44 N.Y.S.2d 473; Eisen v. Post, 1 A.D.2d 344, 149 N.Y.S.2d 864, reversed on other grounds, 1957, 3 N.Y.2d 518, 169 N.Y.S. 2d 15, but it need not be decided here in view of our decision of the ultimately decisive question of whether or not the debtor received the Doeskin shares surrendered by the transfer agent.

Two New York cases establish that Callahan’s receipt of the Doeskin certificates from the transfer agent did not amount to their receipt by the debtor. In the first the Court of Appeals held that an action for money had and received would not lie against a corporation whose agent had procured the plaintiff’s check made out to the corporation, deposited it to the corporate account, and then made a withdrawal for his own benefit. Although the corporate accounts had thus been employed by the corporate president to secure the plaintiff’s funds it was held that no receipt on the part of the corporation resulted because of the absence of corporate authorization and corporate knowledge of the transaction. Credit Alliance Corp. v. Sheridan Theatre Co., 1925, 241 N.Y. 216, 149 N.E. 837. In the second the operative facts were substantially the same. Mat-teawan Mfg. Co. v. Chemical Bank & Trust Co., 1 Dept. 1935, 244 App.Div. 404, 279 N.Y.S. 495. The facts in the instant case differ only in the respect that in order to effect the transfer of the Doeskin shares Birrell had to command the assistance of Callahan. Since it amply appears that throughout Callahan was duped by Birrell and acted in effect as his alter ego, we do not think this a sufficient ground of distinction. We conclude therefore that mere possession of the Doeskin shares by Birrell or his confederates did not, under New York law, constitute the debtor a possessor of the shares.

Accordingly we hold that the debtor may recover the Keta shares without tendering back to Doeskin the shares with which Birrell apparently absconded, and therefore the decision below is reversed.