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July 7, 1971


The opinion of the court was delivered by: Robert D. Morgan, District Judge.


Plaintiff, a shareholder of defendant, Peoria Service Company, filed this suit on behalf of Peoria and all Peoria shareholders who are similarly situated, praying injunctive and other relief based upon allegations that violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and fraud affected a plan of corporate reorganization which led to the sale of Peoria's assets to the defendant, American Consumer Industries, Inc. (hereinafter ACI), and the dissolution of Peoria.

The case was established as a class action under Rule 23, Federal Rules of Civil Procedure, through Notice proceedings leading to order of this court, dated April 7, 1970, through which it was decided that the notice was sufficient to bind those of the class who did not elect to be excluded. Thirty-one persons, holding over 73,000 of 81,594 shares outstanding, did formally elect to be excluded. This court hereby readopts the findings and conclusions stated in that prior order.

Prefatorily, the format of litigation arises from facts which are stipulated as follows. In and prior to March, 1965, ACI owned 90% of the outstanding shares of the defendant, United States Cold Storage Corporation (hereinafter USC). U.S.C. owned slightly more than 86% of the outstanding shares of Peoria. As a result of that dominant ownership, at all material times, ACI elected all of the board of directors of U.S.C. and U.S.C. elected all of the board of directors of Peoria. At all material times, Peoria's board of directors was comprised wholly of persons who were officers or directors, or both, of ACI.

About March 11, 1965, Peoria and ACI entered into an agreement and plan of reorganization for Peoria, which provided, in pertinent part, for the sale of Peoria's assets to ACI, the consideration to be paid in ACI stock, followed by the dissolution of Peoria and distribution of the ACI shares as a liquidation dividend on dissolution to Peoria's shareholders. That plan was approved by Peoria's shareholders at a special meeting held March 31, 1965. Peoria's assets were transferred to ACI as of April 1, 1965. Peoria was dissolved August 23, 1965.

The charge of defendants' violation of Section 10(b) rests upon allegations that proxy information submitted to Peoria's shareholders with the notice of the special meeting was deceptive in that it failed to disclose material information and thus caused damage to that corporation and its minority shareholders.

In summary, that information, contained in a letter from Joseph S. Robinson, as Peoria's president, stated that the Peoria board of directors recommended approval of the reorganization plan for the stated reasons that ACI shares were readily marketable securities compared with the "relative marketless nature" of Peoria's shares; that ACI had paid dividends annually for 20 consecutive years, compared with Peoria's inability to pay dividends; and that the plan would give Peoria's shareholders an interest in a diversified industry not dependent upon local conditions. The letter also advised the Peoria shareholders that U.S.C. owned about 87% of Peoria's outstanding shares and that U.S.C. had indicated that it would vote its shares in favor of the plan of reorganization and in favor of the dissolution of Peoria. That letter further advised the Peoria shareholders that U.S.C. was a subsidiary of ACI, but it did not expressly advise them that Peoria, ACI and U.S.C. had interlocking boards of directors or some other factual matter noted below.

Summary judgment was entered for the defendants in this court on August 20, 1968. Swanson v. American Consumer Industries, Inc., 288 F. Supp. 60 (S.D.Ill. 1968). That judgment was reversed and the cause was remanded to this court for trial. Swanson v. American Consumer Industries, Inc., 415 F.2d 1326 (7 Cir. 1969). The Court of Appeals held "that these proxy statements were misleading in material respects and were deceptive as a matter of law." 415 F.2d at 1331. Deception was noted in failure of the letter to disclose that all of Peoria's directors were ACI officers and directors, in failure to state the valuation of Peoria's assets with justification, and in failure to disclose ACI's intention to dispose of Peoria's physical plant and to construct new facilities to serve the Peoria, Illinois, area, which Peoria theretofore had served.*fn1 415 F.2d at 1330-1331.

The cause was remanded for trial of factual issues to determine whether there is a causal relationship between that deceptive material and the Peoria-ACI transaction, and whether by such deception or any fraud Peoria or its minority shareholders, or both, were injured. 415 F.2d at 1332.

After a trial, as well as additional briefing and proposed findings and conclusions by the parties, the court, on the basis of the evidence and stipulations in the record before it, makes the following:


1. Any facts stated above which may not be fully covered below.

2. Plaintiff, an Illinois resident, has been a shareholder of Peoria since at least 1956, and on March 31, 1965 he was the owner of 2,703 shares of Peoria common stock.

3. ACI is a New Jersey corporation with its principal offices in New York, New York. It is primarily a holding company, engaged, both directly and through its subsidiaries, in the marketing of diversified consumer commodities and services. At all material times, ACI has engaged, directly or through subsidiaries, in the business of cold storage warehousing and in the manufacture and sale of ice.

4. At all material times, ACI's shares were listed and traded on the New York Stock Exchange.

5. U.S.C. is a Delaware corporation, with its principal place of business in New York City. It is a subsidiary of ACI, and ACI owns 90% of its outstanding capital stock. On and prior to March 31, 1965, U.S.C. was engaged primarily in the operation of a number of cold storage warehouses in various cities other than Peoria, Illinois. Since September, 1966, it has also operated a cold storage warehouse at East Peoria, Illinois.

6. Prior to its dissolution, Peoria was an Illinois corporation, which had for many years engaged in the manufacture and sale of ice and the operation of cold storage warehouses in Peoria, Illinois, operating from two warehouses, hereinafter referred to as plant number one and plant number two. Plant number one, consisting of cold storage and garage facilities, was located on Washington Street in Peoria. Plant number two, comprised of warehouse facilities, embraced two parcels of real estate on Adams Street in Peoria.

7. As of March 31, 1965, Peoria had 81,594 shares of its common stock outstanding; its shares were traded in the over-the-counter market; and on that date U.S.C. was the owner of 70,539 of Peoria's shares, or slightly in excess of 86% of its total shares outstanding.

8. In the Spring of 1961, ACI had been approached by a broker who offered about 80% of Peoria's outstanding shares for sale. That contact culminated in a contract between ACI and Peoria's controlling shareholder for the transfer to ACI of 69,206 shares of Peoria stock in exchange for ACI shares at an exchange ratio of nine shares of Peoria for one share of ACI. That exchange attributed a value of about $2.75 per share for the Peoria stock, based upon the then price range of ACI on the Stock Exchange. The agreement also provided that ACI would tender an offer to other Peoria shareholders for the purchase of their stock at a price of $3.00 per share. Additional shares were acquired by ACI as a result of that tender offer.

9. In 1962, ACI sold its Peoria shares to U.S.C. at ACI's cost thereof. U.S.C. increased its Peoria holdings from time to time until it owned about 86% of Peoria in March, 1965.

10. At all material times, Joseph S. Robinson was the chief executive officer of ACI, U.S.C. and Peoria.

11. By the early 1960's Peoria's cold storage plants were antiquated and not adaptable to modern warehousing practices. They were multi-story buildings of limited capacity. Truck docking space was inadequate, doors were too small to permit the use of lift trucks, and operation was largely a matter of hand labor. Walls and floors had cracked in some areas, roofs and insulation were in poor condition, and the elevators upon which a multi-story operation depended frequently broke down. Except for some automated equipment in its plant number one, its refrigeration equipment was obsolete, requiring constant engineering attention to keep it operating. Its operations were hampered by cumbersome and costly labor union contracts. It employed 32 persons in 1961, a number reduced to 25 employees by early 1965.

12. By 1960 Peoria had not paid any dividends in recent years. Its prior operations were marginal, in some years resulting in net losses. Its operational position was affected by its over-reliance for profit on the ice manufacturing business.

13. ACI's management was aware of the existing marginal situation when ACI acquired a controlling interest in Peoria. Robinson was then of the opinion that successful operation of Peoria would require substantial remodelling or replacement of its obsolete facilities. For that reason, he required, as a condition to the control acquisition agreement, that Peoria exercise an option which it then held to purchase the Wilton Mortuary property, situated adjacent to Peoria's Adams Street plant, and the Wilton property was purchased by Peoria at a cost of $48,000.

14. Immediately after its acquisition of control of Peoria, ACI transferred Sidney McCausland to Peoria as its vice president and general manager. McCausland then had twenty years' experience in the cold storage business. Just prior to his transfer to Peoria, he had been the manager of USC's cold storage plant at Stockton, California.

15. Upon assuming the management function at Peoria in 1961, McCausland undertook to change the business emphasis from ice manufacturing to cold storage warehousing. He sought and acquired additional storage business from national accounts, and he determined that there was more storage business potential in the area than Peoria's facilities could accommodate.

16. Peoria's operating costs were excessive due to the obsolescence of its facilities, the difficulty of keeping its equipment operable, and the labor costs. Though there was no cold storage competition in Peoria, McCausland encountered competition in national frozen food accounts from other areas, principally from Chicago. Price competition prevented increased charges to customers to offset increases in already excessive costs. During his first year at Peoria, ...

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