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KRANTMAN v. LIBERTY LOAN CORPORATION

September 4, 1956

MINNIE KRANTMAN
v.
LIBERTY LOAN CORPORATION ET AL.



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

This action having been tried by the Court without a jury, and the Court having sustained the motion of the defendants to dismiss upon the merits after plaintiff completed the presentation of her evidence,

The Court does hereby make the following Findings of Fact and does hereby state the following Conclusions of Law:

Findings of Fact.

1. Minnie Krantman, plaintiff, is a resident and a citizen of the State of Iowa. Defendants I.H. Levy and D.J. Harris and David S. Nerad are residents and citizens of the State of Illinois. Defendants David B. Lichtenstein and Lyle S. Woodcock are residents and citizens of the State of Missouri. Defendant Liberty Loan Corporation is a Delaware corporation and a citizen of that State. The amount in controversy for which plaintiff sues derivatively in the right of and for the benefit of the defendant Liberty Loan Corporation and the aggregate amount in controversy for which plaintiff sues as a representative of all former Class A common stockholders of said corporation each exceeds, exclusive of interest and costs, the sum of $3,000. There was no collusion between the plaintiff and any of the defendants to confer jurisdiction on this Court of this action.

3. Liberty was organized under the laws of Delaware in 1932 and has since been engaged in the small loan business. From then to and including November 3, 1954, it had outstanding both Class A common stock and Class B common stock, and also from time to time preferred stocks which were convertible into shares of Class A common stock. On November 3, 1954, there were outstanding 537,617 shares of Class A common stock held by about 4,000 widely scattered investors and 7,500 shares of Class B common stock, of which 7,241 shares (being approximately 97%) were owned by Key Finance Company.

4. Prior to November 3, 1954, the charter of Liberty provided that after the payment of or provision for full dividends on outstanding preferred stock, any dividends declared and paid on the Class A common stock and the Class B common stock should be declared and paid share and share alike. Also prior to November 3, 1954, the charter provided that upon liquidation after payment of or provision for the amounts due on the outstanding preferred stock the holders of the Class A common stock and of the Class B common stock were entitled share and share alike to all the remaining assets of the corporation. The charter further provided that no holder of any shares of capital stock should have any pre-emptive right but that any unissued stock of any class might be issued and disposed of by the board of directors to such persons, firms, corporations or associations and upon such terms as may be deemed advisable by the board of directors in the exercise of its discretion, subject to restrictions and limitations not material here.

5. Prior to November 3, 1954, the charter of Liberty further provided that the management of all of the affairs, property and interests of the corporation was vested in a board of directors to be elected annually; that the holders of the Class A common stock voting as a class were entitled to elect a maximum minority of the total number of directors to be elected in any year and that the holders of the Class B common stock voting as a class were entitled to elect a minimum majority of said total number of directors; that upon a default equal to four quarterly dividends on preferred stock, the holders of the preferred stock voting as a class should have the exclusive right to elect a maximum minority of the total number of directors but that the holders of the Class B stock would be entitled to continue to elect a minimum majority of such directors; and that as to any and all matters other than the election of directors, the voting power was vested solely and exclusively in the holders of the Class B common stock except as the General Corporation Law of Delaware and the charter otherwise require. Such requirements are not material to the issues in this action.

6. Originally, the Class B common stock of Liberty was issued to and held by Central States Finance Company, a corporation, of which I.H. Levy and his family group held the controlling stock. Upon the liquidation of Central States in 1939 or 1940, the Class B shares were distributed to its stockholders and since that time to and including July 19, 1954, I.H. Levy and his wife held more than one-half of such stock and through such ownership controlled Liberty.

8. I.H. Levy, the chief executive officer of Liberty, in 1954 was reaching an advanced age. He was concerned about attracting and retaining excellent management for Liberty. The chief impediment to attracting such top flight management was the control feature of the Class B common stock, which, by its very nature, rendered the tenure of any such management insecure, being dependent entirely upon the actions of the owners of the majority of said stock.

9. In 1954 Lichtenstein was the Executive Vice President of American Investment Company, which was then the third largest company in the small loan industry. He was generally regarded as being one of the top executives in that field.

10. In February, 1954, Lichtenstein was granted a leave of absence from American Investment Company. Shortly thereafter, I.H. Levy met with Lichtenstein to discuss with him the possibility of Lichtenstein coming with Liberty There were several such meetings down to May 26, 1954, during which the situation was explored generally but during which Lichtenstein consistently maintained that he was not in a position to discuss any proposition so long as he remained in the employ of American Investment Company.

11. On May 24, 1954, Lichtenstein ceased to be Executive Vice President of American Investment Company. On May 26, 1954, and May 27, 1954, he had meetings with I.H. Levy and others, including Allen E. Nix and defendant Harris, two of the three Liberty directors representing the Class A shareholders. During the course of these meetings Lichtenstein's coming with Liberty was discussed, along with the possibility of a purchase by him of one-half of the Levy family holdings of Class B common stock. Such a purchase was determined to be unacceptable to either party because the balance of control would be left in the small number of shares not owned by either I.H. Levy or members of his family or by Lichtenstein. I.H. Levy then decided that he would not sell less than all of his holdings of Class B common stock.

12. Subsequently a group of investors, mostly from St. Louis, Missouri, was formed, and the purchase of 7,241 shares of Class B common stock of Liberty owned by I.H. Levy and members of his family for the price of $1,700,000, $881,000 payable in cash and the balance evidenced by notes fully collateralized, was negotiated on behalf of such group by Lichtenstein with Levy. These negotiations were carried on and the subsequent purchase was consummated at arms' length and not as a part of any scheme between Lichtenstein and I.H. Levy, as charged in the Complaint or otherwise.

13. Key Finance Company, a Missouri corporation, was incorporated on or about July 2, 1954. Its stockholders were the above mentioned group of investors. An aggregate of 47% of the stock of Key Finance Company was owned originally and at the time of trial by two sons and the wife of Lichtenstein, 9.7% of such stock was owned by William A. Gerard, 9.7% by defendant Lyle S. Woodcock, and 5.5% by Anthony A. Buford (the last three being directors of Liberty who were elected to such directorships on July 20, 1954). Full information as to this stock ownership was contained in the proxy statement of September 21, 1954. Lichtenstein has never been a stockholder, director or officer of Key Finance Company, nor has any of the other defendants except Woodcock, who was and is a stockholder.

14. On July 8, 1954, options to purchase an aggregate of 7,241 shares of Class B common stock were granted to said Key Finance Company by I.H. Levy and his wife, Louis Strilky (his brother-in-law), Harriet Levy (his daughter), and H.H. Levy (his brother) and members of the latter's family. These options related only to an outright purchase, without any contingency, condition or limitation, from I.H. Levy and the other grantors of said options of the 7,241 shares of Class B common stock of Liberty, for the aggregate price of $1,700,000. On July 19, 1954, Key Finance Company exercised said options and purchased unconditionally and became the owner of said 7,241 shares of Class B common stock without any commitment or agreement by anyone that the Class B common stock would be reclassified or exchanged for any other stock of Liberty.

15. On July 20, 1954, at a special meeting of the board of directors of Liberty four members of the then existing board, Louis Strilky, H.H. Levy, F.S. Diebler, and defendant D.S. Nerad, resigned and William A. Gerard, Anthony A. Buford, and defendants David B. Lichtenstein and Lyle S. Woodcock were elected to fill the vacancies. Gerard and Woodcock had been officers of American Investment Company and each had had long experience in the small loans business and were part of the management being provided by Lichtenstein to Liberty. These resignations and ...


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