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DWYER v. TRACEY

February 2, 1954

DWYER ET AL.
v.
TRACEY.



The opinion of the court was delivered by: Perry, District Judge.

  Plaintiffs are the trustees in bankruptcy for Majestic Radio and Television Corporation incorporated under the laws of the State of Delaware. The defendant, a resident of Illinois, was a director of Majestic from March 31, 1941 until February 6, 1948, when a voluntary petition was filed by Majestic under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. The defendant became president of Majestic on May 27, 1942, and continued in that office until after the filing of the Chapter XI proceedings.

One of the directors of Majestic on March 31, 1941, who continued as a director as well as an officer of the corporation until after February 6, 1948, was Curtis Franklin of New York. Franklin was also an officer and director of Automatic Products Corporation and of numerous other corporations including the British Type Investors, Inc. In 1942, Franklin made arrangements for the defendant Tracey to become a member of the Board of Directors of Automatic Products Corporation.

Edward V. Otis, a resident of New York, was another director of Majestic whose name prominently appears in the evidence adduced in the trial of this case. He was a director from January 17, 1942, to May 8, 1946, and was continually active in the affairs of Majestic. He also was a director and officer of Automatic Products Corporation, Allied International Investors Corporation and British Type Investors, Inc. being president of said corporations.

The plaintiff's complaint charges that the defendant for his own gain and profit violated the duties and obligations to the debtor corporation which the law imposed upon him as a fiduciary. Four causes of action are alleged in the several counts of the complaint. 1) The plaintiff seeks to recover from the defendant the profits which he realized from the alleged illegal cancellation of his first employment contract and from the option from the debtor corporation as well as salaries in excess of $10,000 annually and bonuses which he was paid under the third employment contract. 2) The plaintiff seeks damages which arose from the alleged shifting by defendant of his stock options to three management heads to the debtor corporation. 3) The plaintiff seeks to recover from defendant the profits which he realized from his participation and activity in a partnership enterprise during his employment by the debtor, which enterprise is alleged to have been in competition with the debtor. 4) The plaintiff also seeks to recover from the defendant the amount of money paid to the children of James J. Walker out of corporate funds of Majestic Records, Inc., a wholly subsidiary of the Debtor corporation.

I. It is the view of this court that the evidence amply supports the allegations of the first Count. The testimony establishes the fact that on March 24, 1941, the defendant entered into a written contract with the debtor Majestic Radio and Television Corporation whereby he agreed, among other things to devote all his time and abilities exclusively to the debtor corporation for a period of five years until May 31, 1946, at a fixed annual salary of $10,000. Simultaneously with the execution of this employment contract, the defendant entered into a written agreement with Allied International Investing Corporation, Automatic Products Corporation and Allen B. Dumont Laboratories, Inc., whereby these corporations granted to the defendant an option to purchase from them a total of 350,000 shares of common stock of the debtor at an average price of $1.50 per share. The defendant was granted no option whatsoever by the debtor to purchase shares of its stock by virtue of the provisions of his employment contract or otherwise. On March 31, 1941, at a meeting of the Board of Directors of the debtor corporation, the defendant was duly elected both a member of and chairman of the Board of Directors, and his employment contract was duly approved and ratified by the Board.

During the summer of 1941, the defendant entered into negotiations with a Canadian corporation to become its president and general manager on a part time basis. He announced these activities to the Board of the debtor at a meeting held on July 12, 1941, at which time he expressed a desire to continue his affiliation with the debtor corporation. It should be noted that the defendant entered into these negotiations in Canada in spite of and notwithstanding the contractual provisions which gave the debtor corporation the defendant's exclusive services.

At the next meeting of the Board on August 21, 1941, after considerable negotiations by the defendant with Curtis Franklin, a resolution was adopted whereby the defendant was granted an option to terminate his existing contract of employment after 90 days, provided that notice of said termination was served upon the debtor corporation not less than 30 days prior to November 20, 1941. The minutes of the meeting, conducted by the defendant in his capacity as chairman of the Board, state that the sole consideration for this option was the defendant's assumption of one-third of Automatic Products Corporation's existing guarantee of the $30,000. bank loan to the debtor. These minutes revealed that the Board granted this option "so that he would be in a position to negotiate a new contract of employment, which would permit him to devote a portion of his time to the affairs of Rogers-Majestic Ltd. and a portion of his time to the affairs of Majestic Radio and Television Corporation". The defendant gave no consideration to the debtor for the option to terminate his contract of employment with the debtor.

The evidence does not show that the defendant ever served a thirty day notice of termination upon the debtor as provided in the Board's resolution of August 21, 1941, whereby the defendant was granted the option to terminate. Nevertheless, the minutes of the Board meeting of November 24, 1941, report that Curtis Franklin, as secretary of the Board, stated that the management and employment contract between the debtor corporation and the defendant had been terminated on November 20, 1941, pursuant to the agreement made by the Board with the defendant. The evidence does not disclose any corporate agreement to this effect. It does tend to show that the defendant was negotiating privately with Franklin to the point that they reached an agreement as to the terms of the second employment contract and the second option agreement. This agreement was presented to the Board of Directors of the debtor corporation on November 24, 1941, at which time the Board unanimously adopted a resolution authorizing its execution. Parenthetically, the Court advises that the existence of a thirty day notice of termination would not in any manner alter the ultimate conclusion of the Court.

According to this second agreement, the defendant was to receive the same annual salary of $10,000. but was required to devote only nine days in each consecutive four weeks of his time and attention to the service of the debtor. He was granted thereby an option from debtor to purchase 100,000 shares of common stock at $1 per share with the provision that he would not offer any said shares to the public.

During the latter part of 1942, the defendant and Curtis Franklin again began to discuss still another new employment contract for the defendant. At a meeting on December 1, 1942, the Board at the instance of the defendant and Franklin, adopted a resolution which approved a new employment contract for the defendant. This agreement provided that defendant was to devote his time and attention exclusively to the debtor at a fixed salary of $20,000 to May 31, 1943, and thereafter at a fixed annual salary of $25,000 to May 31, 1946. No consideration was paid to the debtor for this new contract.

Eventually, the defendant exercised his stock option paying the debtor $100,000. The total difference between this sum and the market value of the debtor's stock on the date of the exercise of the option amounted to approximately $313,497.50. The defendant eventually sold this stock at a net profit of approximately $273,062.50.

The total salary received by the defendant in excess of the provisions in the contracts of March 24, 1941, was $59,290.80.

The officers and directors of a corporation are trustees for the stockholders. This is a fiduciary relationship which imposes upon the officer or the director the duty and responsibility of constantly exercising the utmost good faith in the management of corporate affairs. All actions and dealings must be performed by them with a view to promote the corporate interest and not their personal interest. Their dealings with the corporation are subject to rigorous scrutiny where any of their contracts or engagements with the corporation are challenged the burden is on the director not only to prove the good faith of the transactions but also to demonstrate its inherent fairness from the view point of the corporation and those interested ...


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