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Central Ry. Signal Co. v. Longden.

January 15, 1952


Author: Lindley

Before KERNER, DUFFY and LINDLEY, Circuit Judges.

LINDLEY, Circuit Judge.

In its complaint in the District Court, plaintiff averred that defendant Ralph L. Longden, through the instrumentality of defendant Victory Ordnance Corporation, while president of plaintiff, diverted a corporate opportunity presented in the form of proposed facilities and supply contracts with the Navy Department of the United States for loading 20mm. antiaircraft shells. The court entered judgment in favor of plaintiff and against defendant Ralph L. Longden for $84,000 and against each of defendants Ralph L. Longden and Edna S. Longden in the sum of $7500, the total of which, however, the court held should be credited with $52,900. The court further decreed that all assets of defendant Victory Ordnance Corporation are in equity the property of plaintiff, that Victory holds them as trustee for the benefit of plaintiff, subject to appropriate accounting by defendant for the income and disbursements of Victory subsequent to December 31, 1947, and directed transfer and delivery to plaintiff of certificates representing all of the outstanding shares of Victory's capital stock. This appeal followed.

Defendants urge that the court erred in finding that they had diverted a corporate opportunity from plaintiff and in failing to find that, if such a diversion occurred, plaintiff had acquiesced in and fully ratified what had been done by defendants; that the court should have found that a full and complete agreement of compromise and settlement, carried out by defendants, bars maintenance of the suit; that, in view of the fact that Noma Electric Corporation of Maryland, who now owns 99% of the capital stock of plaintiff, acquired it long after the acts of diversion were committed, plaintiff's action is barred; that, if plaintiff is entitled to recover, the court should have limited the judgment to such stockholders as held shares at the time of the diversion; that plaintiff is barred by laches; that it came into court with unclean hands, and that the court erred in denying defendants' motion for a new trial.

The court made lengthy findings of fact and conclusions of law. It found substantially as follows: Plaintiff, a Massachusetts corporation, was organized in June, 1930, to take over a predecessor company. Defendant Longden had been associated with the predecessor company as comptroller and came to the plaintiff upon its organization as, and continued to be, until October 1, 1947, its president, general manager and chief executive officer. On July 31, 1950 the Triumph Explosives, later Triumph Industries, Inc., and still later Noma Electric Corporation of Maryland, bought from Longden and the other stockholders 27,083 shares of plaintiff's common stock out of a total issue of 27,933 shares. Noma later bought additional stock.

Prior to 1941 plaintiff, as well as its predecessor, had manufactured and sold railway fusees, flares used in the operation of trains, and track torpedoes, which are pellets which explode when trains run over them. It had a plant in Indiana, one in Pennsylvania, another in Massachusetts and still another, through a subsidiary, Pacific Railway Signal Company, in California. Its principal office was at 272 Center Street, Newton, Massachusetts. Triumph Explosives had manufactured fireworks and had attempted, without success, to manufacture and sell railway fusees. Sale of fireworks being on the down grade by reason of prohibitory legislation, Triumph in 1940 and 1941 had turned to the manufacture of munitions and war materials for foreign governments. After obtaining control of plaintiff, Triumph ceased manufacturing fusees and torpedoes and took a contract with the United States for the manufacture of Mark IV Fuses or percussion primers, and was preparing to manufacture 40 millimeter antiaircraft shells for the Navy.

On March 6, 1939, Longden entered into employment contracts with both plaintiff and Triumph, which expired on December 31, 1941, under which plaintiff paid Longden an annual salary of $12,000 plus a bonus computed on a percentage of plaintiff's net profits. Under his contracts, Longden directed the operations of plaintiff just as he had before the sale of his stock to Triumph. After his agreement with plaintiff expired on December 31, 1942, he continued to manage the company as before, until a new contract was executed on June 1, 1942. At that time, of the seven members of the Board of Directors of plaintiff, four were connected with Triumph Explosives. The plaintiff's Board of Directors unanimously adopted a motion that "Longden investigate the possibility of our company undertaking a job of loading MK 19 percussion primers at our plant in Hammond, Indiana, or at a plant located in East St. Louis, Illinois, as a sub-contractor for Triumph Explosives, Inc.; and that written confirmation be obtained of any arrangement made with Triumph Explosives, Inc., if it develops that this work will be undertaken by our company." Percussion primers are highly explosive. Plaintiff could not have manufactured them in its Indiana, Pennsylvania or Massachusetts plants but might possibly have done so at its plant in East St. Louis, Illinois.

Pursuant to these instructions, Longden sent McNulty an employee of Central, to Washington on February 6, 1942, to ascertain whether it was feasible for plaintiff to attempt to procure a Navy contract to manufacture percussion primers. McNulty was then working for plaintiff at$75 a week. He proceeded to Washington and, upon returning, told Longden that the Navy had all the primers or fuses it then needed but that it could well use 20 millimeter ammunition. McNulty then said "this is something we want to take for ourselves, - I want a part of it." Longden agreed with McNulty that this was an opportunity which the two of them should take for themselves. Consequently, in March Longden caused the corporate defendant Victory to be organized, with an authorized capital of $50,000, with himself and his wife, Edna, as officers, directors and controlling stockholders. Longden continued to operate and to dominate plaintiff.

McNulty had also reported to Longden that the Naval authorities had suggested that the National Fireworks plant located in Massachusetts was a reliable source for information on the methods of manufacture of 20mm. ammunition. Longden asked that company to furnish a corporation, to be known as Victory Ordnance, with necessary information and data and to supervise construction of a plant which the Navy Department, he said would finance for Victory. McNulty, still an employee of plaintiff, was directed to find a site suitable for the facilities which the Navy was to construct.In Peru, Indiana, he found property which met Navy qualifications and negotiated a lease for it early in March 1942, on behalf of Victory.

On February 26, 1942, Longden submitted to the Navy a written proposal for loading 20 millimeter ammunition, signed by Longden and bearing beneath his signature "Central Railway Signal Company, Inc., 272 Center Street, Newton, Massachusetts." On April 13, 1942, at a conference between Longden and Navy officials, a representative of the Navy stated that "The Victory Ordnance Corp. made a proposal to the Bureau of Ordnance to become a manufacturer of 20mm. ammunition originally under the name of the Central Railway Signal Corporation. They have since found that their property is too small in area; so they have formed a new corporation and are incorporated in the state of Indiana. They have selected and acquired a site at Peru." He asked Longden whether the "subsidiary" had any paid-in capital. Longden replied that "they have a small capital of $25,000." On May 12, 1942, at a similar conference, Longden produced, not a balance sheet of Victory, but one of plaintiff. He answered questions regarding the past profits of plaintiff and was asked whether the plaintiff was the parent organization of Victory. He replied that Central had an investment in Victory but that he himself had "the majority investment."

The court found that the inference to be drawn from the foregoing facts and from the entire record is such as to establish the fact that the Navy was under the false impression that it was dealing with a company which had been organized by plaintiff to handle its contracts for war materials; that this inference was warranted by the manner in which Longden answered the questions put to him by the Naval officer, and that at no time did Longden attempt to correct the Navy in its mistaken view that Victory was a part of plaintiff.

Longden made use of the services and time of plaintiff's employees in connection with the development of Victory, such as McNulty, Friis, chief chemist, Kemp, a bookkeeper, and Miss Simms, a secretary. However, plaintiff was reimbursed by Victory for their services, at least in part. McNulty was taken into Victory, given a substantial increase in salary and made vice president, while he was still employed by plaintiff.

At the time Longden presented the application for Navy contracts, the corporate defendant had had no experience in the manufacture of antiaircraft ammunition other than the general experience which Longden had acquired in his connection with plaintiff. Plaintiff was in excellent financial position and could have carried out the Naval contracts. Victory's contract obligations were for the most part financed by loans secured by assignment of payments due under the supply contract.

In April 1942, Longden entered into a facilities contract and, in June, 1942, a supply contract with the Navy. Under the terms of the former, the government undertook to finance the construction of the necessary production plant in Peru, spending eventually $895,000. The initial supply contract, under which the Navy ordered 20mm. ammunition, ...

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