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Tanzer v. Huffines

decided: March 18, 1969.


Van Dusen, Aldisert and Stahl, Circuit Judges.

Author: Per Curiam


This is an appeal from the appointment of a receiver pendente lite in a stockholder's derivative action wherein the plaintiff alleges inter alia that the individual defendants, Robert Huffines, Victor Muscat and Edward Krock, by virtue of their control of Defiance Industries, Inc., which in turn controlled B.S.F. Company, infiltrated and were able to make themselves officers and directors of certain of B.S.F.'s portfolio companies; that the individual defendants improperly withdrew salaries, obtained bonuses and stock options from those portfolio companies; and that they caused B.S.F. (1) to suffer substantial damage in attempts to gain control of those portfolio companies by requiring large and improper expenditures in legal fees and proxy fights, and (2) to sustain heavy losses as a result of stock purchases and sales they compelled in their own interests without regard to the interests of B.S.F. or its shareholders.

It is clear that a District Court may appoint a receiver in a proper case. Burnrite Coal Briquette Co. v. Riggs, 274 U.S. 208, 212, 47 S. Ct. 578, 71 L. Ed. 1002 (1927). A receiver may be appointed to avert further loss of assets through waste and mismanagement. Savage v. United States District Court, etc., 144 F.2d 575 (9th Cir. 1944); Coskery v. Roberts & Mander Corporation, 97 F. Supp. 14 (E.D.Pa.), appeal dismissed, 189 F.2d 234 (3rd Cir. 1951). After a careful examination of the record, we have concluded that there was no abuse of discretion by the District Court in appointing the receiver pendente lite for B.S.F.

The District Court primarily relied on the following factors as justifying appointment of a receiver pendente lite [Tanzer v. Huffines, 287 F. Supp. 273, 274 (D.Del.1968)]:

(1) The decision of Judge Mansfield in Norte & Company v. Huffines, 288 F. Supp. 855 (S.D.N.Y.1968), where the court pointed out that "Plaintiff has established a clear case of gross and deliberate fraud on the part of defendants Huffines and Muscat, knowingly participated in by Krock * * *";

(2) B.S.F.'s non-compliance with the requirements of 15 U.S.C. ยง 80a-29 by failing to file the Annual Report, Form N-1R, with the Securities and Exchange Commission;

(3) omissions from material which the defendants submitted to the court; and

(4) misleading information in the 1967 Annual Report to Stockholders of B.S.F.

In Norte, supra, another District Court found that the individual defendants had violated the federal securities law in the operation of Defiance. The record is also clear that B.S.F. did not file Form N-1R as required. This failure is significant because that form elicits essential information such as an analysis of per share income and capital charges, a statement of remuneration paid to officers and directors, and a statement identifying those officers and directors.*fn1 Added significance must be attached to the failure to mention the names of the officers and directors in the Annual Report to Stockholders, since the record shows that B.S.F. had been operating with only three of the five authorized directors. Not only did the report omit the directors' names, but also it was actively misleading in that (1) the net asset figures for 1966 and 1967 were reversed;*fn2 (2) improper treatment was given to the gain on the sale of investments;*fn3 and (3) in the notes attached to the Report, the obligation to Dallas Transit Trust No. 1 is discussed without indication that B.S.F., at cost less reserve, had pledged $1,941,729. of its portfolio securities to meet its obligation to Dallas.*fn4

The last of the four bases upon which Judge Layton principally relies is a letter sent him by defendants' counsel which purportedly included biographical sketches of proposed directors of B.S.F. That letter was quite misleading. It stated "Of the five Directors proposed, two (Scholz and Keating) must be regarded as having a fixed relation to the present management." That statement was literally and figuratively a half truth. In fact, four of the proposed directors had a fixed relation to the existing management.*fn5

Judge Layton also commented on Muscat's failure to responsively answer over 700 questions on deposition and Krock's failure to appear for deposition until threatened with a default judgment. See 287 F. Supp. at 276. The court also noted the decline in the value of a share of B.S.F. from the time the defendants acquired control of that company.*fn6

We agree that collectively, at least, these reasons listed by the District Court are sufficient to require our holding that there was no abuse of discretion in the appointment of a receiver pendente lite. By our independent examination of the record,*fn7 we find that the defendants' activities with relation to American Hardware Company, Republic Corporation, Mercantile National Bank of Chicago, Fifth Avenue Coach Lines, Gray Line Corporation, American Steel & Pump Corporation, and Wright Machine Corporation as a result of their control of B.S.F. lend additional support to the propriety of the appointment of a receiver.*fn8

For the foregoing reasons, the judgment of the District Court appointing a receiver pendente lite ...

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