Gerdes v. Reynolds

28 N.Y.S.2d 622 (1941)

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Nature of the Case

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Facts

Clarence, Richard, and Richard Jr, Reynolds along with William Woodward (Ds) were officers and directors of Reynolds Investing Company, Inc. a Delaware corporation acting as an investment trust. All were stockholders as well, and with them and members of their families, they owned the majority of the stock. Their ownership of the majority of the stock was sold, and the above-named parties then resigned their offices and elected four persons as designated by the purchaser to replace themselves. Assets for the company made the stock worth only about six cents per share, but Ds got an offer of purchase at $1.25 per share. Prentice was the person who made the offer and Ds discovered that Prentice was a member of a small Stock Exchange Company of good reputation with capital of about $500,000 which was sometimes spread out thin, but because of a reputed relationship with the Rockefeller family it was assumed that the firm had access to large and substantial sums of money. After negotiation, the parties agreed to a price of $2 per common share for a sale of not less than 1,035,000 shares and not more than 1,055,000 shares. The money was exchanged, and the incumbent directors resigned and elected Mayer, Davis, Mclanaham, and Prentice in their place. No notice was given to the other stockholders, and no substantial investigation was conducted and the only reason any of the new directors were elected is because that was what the new purchaser wanted. No real investigation of Prentice had been made by Ds. Such an investigation would have revealed that he had an unblemished reputation but that he owned practically nothing and that all the capital in his firm was borrowed money. The Corporation had over $5 million in readily saleable assets mostly consisting of securities. Immediately on January 3, 1935, Prentice began converting the Corporation assets to their own use. They wound up in bankruptcy, and the trustees appointed in the proceeding sought to hold accountable those who sold and those who bought and those who aided in the transaction. P sued Ds for a violation of fiduciary duties as the transactions were illegal or at the very least negligent and done in bad faith.