Full opinion text
LEAHY, Chief Judge. Defendant’s legal responsibility for damages was decided. Speed v. Transamerica Corp., D.C.Del., 99 F.Supp. 808. Col. E. Ennalls Berl was appointed Special Master, to find and determine the amount of plaintiffs’ recovery, and to determine any personal defenses which defendant might urge. The Special Master commenced the performance of his duties. He completed his final report on March 31, 1954. On that day he made corrections on the last several pages. The next day he died. He never signed his final report. The parties disagreed as to whether the final report could have judicial acceptance for filing. I resolved the problem by entering an order providing for my independent determination of all the issues relating to defendant’s liability for damages and to the special defenses urged by defendant. It was agreed the Court’s determination might be had upon the record made before the deceased Special Master and upon any additional proof the parties might offer the Court. This old and complex litigation is now approaching its final phase in this Court. Questions of law must be considered as well as factors affecting the exercise of the Court’s discretion. The record before the late Master shows few, if any, disputed issues of fact. The Court must determine the measure of damages. Once the appropriate rule is settled, the record before the Master furnishes all the data necessary to compute the amounts payable to plaintiffs. The questions for decision are: 1. the measure of recovery of the several classes of plaintiffs; 2. what interest, if any, should be allowed on the sums awarded; 3. the right of certain individual plaintiffs to participate in the recovery. The purpose here is to assess damages which will compensate plaintiffs for any harm suffered as a result of defendant’s improper conduct. Various plaintiffs do not stand in the same relationship to Transameriea. The ZahnFriedman plaintiffs surrendered their shares at the call of the directors of Transameriea. The finding was made that the call was illegal. Damages for such breach are usually, but not always, measured according to principles of restitution. As to Speed plaintiffs, Transamerica did not acquire the shares through the exercise of any call. Defendant was a purchaser of these shares. A restitution theory of recovery, based on breach of fiduciary duty, would seem inapplicable, for the liability in these cases is based upon an implied misrepresentation of fact. The measure here, defendant suggests, is the difference between what the Speed plaintiffs received- and the fair value of their shares at the time they sold their shares to defendant. Part I. Principal Amount Recoverable 1. The Zahn-Friedman Case a. In the Zahn-Friedman case, 15,397 shares of stock were denied by the call from sharing in the net proceeds of Axton-Fisher available on dissolution. There is apparently no conflict between the parties that these proceeds, adjusted to take account of the rescission of the call, amounted to $16,034,631.33. The single issue as to these particular plaintiffs is what basis is to be determined, assuming they would have participated in these proceeds. In sum, Zahn-Friedman plaintiffs’ position is the call of their A shares was illegal. Hence, they are entitled to participate in the liquidation in accordance with their liquidation rights as described in the Axton-Fisher charter as to the A shares. These plaintiffs warn of the error of the Special Master in the amount of the per share recoverable principal per unredeemed and per redeemed A share, because, they claim, he erroneously excluded $80.80 which should be paid as part of the recoverable principal. They also argue he was in error in reducing the recoverable principal per unredeemed and per redeemed Zahn-Friedman A share by $16.90, by improperly combining with the 15,397 Zahn-Friedman A shares the 13,796 Speed A shares and the 5,707 Speed B shares so as to make the number of A shares participating in the preferential dividend arrears payment 21,193 instead of 15,397, with the result the number of combined residual liquidation units were 186,670 instead of 472,-874. The apparent specificity of these arithmetical figures will come into focus, infra, when it is disclosed they are irrelevant until the final decree is entered herein fixing exact liability of defendant Transamerica. We are now driven to the utilization of the first basic assumption, e. g., that the call would have been made, accompanied by adequate disclosure of intent to liquidate and disclosure of the true values underlying all shares outstanding. Given such a call and disclosure, the Zahn-Friedman plaintiffs would have exercised the privilege, granted under the charter and their share contracts, to convert their shares from Class A to Class B stock. They would have participated in the liquidation as B shareholders. On this basis, their participation in the proceeds would have amounted to $101.82 a share (or such other mathematical figure to be fixed in the final decree to be entered) against which would have been credited the redemption price of $80.80 which these plaintiffs each received or could have received since the redemption date. Under this view, $21.02, for example, is the principal amount of the damages per share. In short, these plaintiffs should be put in the position they would have had ex the illegal call, and had the affairs of AxtonFisher proceeded to its dissolution without any improper conduct on the part of defendant Transamerica. The Zahn-Friedman cases were given prior consideration in Zahn v. Transamerica Corp., 3 Cir., 162 F.2d 36, where the Court held the resolution redeeming the A shares was “voidable in equity at the instance of a stockholder injured thereby.” Thus, the Court said these plaintiffs might “maintain [their] cause of action to recover from Transamerica the value of [their] stock * * * as that shall be represented by its aliquot share of the proceeds of Axton-Fisher on dissolution.” The Court of Appeals’ opinion left two unknowns to be found: 1. the amount of the “proceeds of AxtonFisher on dissolution” and 2. the “aliquot share” of the proceeds allocable to each share held by plaintiffs. At the threshhold of the matter for decision here, I must apply the “what might have been” doctrine. Necessarily this is conjectural; but the problem must be worked out with regard for the reasonable expectations of stockholders, based upon the corporate relationships, in order to reach a result which is fair and equitable. The litigants agreed, on recreating a valid liquidation I must give effect to the presence of assets which were not available for distribution in the actual liquidation, and of shares which did not, in fact, participate in the distribution of those assets. In passing, I note plaintiffs contend for reconstruction of corporate acts which might have been —but were not. To do equity to plaintiffs, they argue, all conjectures must be for the highest dollar of recovery. This view, of course, ignores examination of any intervening circumstances; and is bottomed on the proposition plaintiffs would have continued as Class A shareholders with power to enforce liquidation preferences during the eleven months that elapsed between the illegal call and the dissolution on May 31, 1944. Plaintiffs thus demand $23.73 per share, corresponding to accrued dividends, and a division of the remaining proceeds, on the basis of an amount per share equal to double that allocable to each B share. Such a distribution would amount to three times the call price fixed by the charter of Axton-Fisher for the A shares. The invalid call of April 30, 1943 restores plaintiffs to the status of Class A shareholders 'as of July 1, 1943, the redemption date. But, this does not solve the difficult damage question to be decided. Plaintiffs’ status as of May 31, 1944, the liquidation date, will be determinative of their “aliquot share”. Under the real or “what might have been” liquidation, a disinterested board could have legally called the A stock. The A shares then would be powerless to exercise their two-for-one liquidation preference. Three Courts, analyzing the particular problem, agree on this legal exercise of power by disinterested directors (for the benefit of the B shares, who, under the charter, were the beneficiaries of the residual assets). For example, in Taylor v. Axton-Fisher Tobacco Co., 295 Ky. 226, 173 S.W.2d 377, 148 A.L.R. 834, the Kentucky Court held the benefit to the B shareholders resulting from a call was the legal fact which made the call irrevocable. This is primer corporate law. In Zahn v. Transamerica Corp., D.C.Del., 63 F.Supp. 243, at page 246, I accepted the legal fact the charter did not prohibit a call which would deprive A shareholders of the right to exercise their liquidation preferences. The Court of Appeals did not question this. It affirmed this interpretation of the charter by writing “the act of the board of directors in calling the Class A stock [was] an act which could have been legally consummated by a disinterested board of directors * * (Emphasis added.) 162 F.2d at page 46.' Thus, all three Courts recognized a call by a disinterested board of directors in anticipation of liquidation was legally authorized by the AxtonFisher charter. It is not abstract speculation but a certainty any disinterested board would exercise the power to call the A shares in the normal course of business judgment prior to liquidating the company. Such a call would have existed ex any improper scheme. Assuming intent to liquidate, a call would disclose an intention to liquidate together with information about the appreciated value of Axton-Fisher’s tobacco inventory. The A shareholder would have been bound to elect whether to surrender his stock for $80.80, the redemption price, or to exercise the conversion privilége granted by the charter to convert to B stock on a one-for-one basis. Only by adopting the second course would plaintiffs have participated in the liquidation at all, and then as a B shareholder with such shareholder liquidation rights. There is no other basis except ZahnFriedman plaintiffs should recover as B shareholders upon a reconstructed liquidation of Axton-Fisher. A disinterested board of directors would call the Class A shares before liquidation because it would have been to the advantage of the junior securities, the Class B stock, and this could have been a matter of sound business judgment. Such a call option is always reserved as against senior securities for the benefit of the junior securities. In fact, “the chief function of the provision for redemption in stock or bonds is to facilitate the retirement of senior securities for the benefit of the holders of the common shares * * * ”. The benefit conferred on junior securities (owners of the equity) is to be rid of restrictions and prior claims to assets and earnings. It is orthodox procedure in the financial community when the value of senior securities in terms of earning power and assets exceeds the call price, to exercise the option. When a senior security has greater earning power and increased assets behind it, the redemption or call benefits the junior security and this is disadvantageous to holders of the senior called shares. Detriment may result to the senior security-holders from the restricted opportunity for reinvestment, from elimination of rights to participate in management, or from taking the senior shareholder out of a profitable investment. Anyone aware of the essential capital structure of modern corporate enterprise knows, the exercise of redemption options are arbitrary decisions, because under our system of democratic capital they are the result of the bargaining of parties to the share contract. It is classic pro-' cedure to allocate potential benefits to junior shareholders at the expense and to the disadvantage of the senior class of shareholders. A senior security seeks security; a junior security assumes risk. This is the legal bargain. The exercise of a call does not operate equitably as among the several groups of shareholders affected. It is the Hornbook law of Wall Street, “A preferred issue * * * does not ordinarily rise in price very far above the call price.” It has been suggested the excess over the call price which the market may sometimes give reflects the time required to effect a call. Where the callable issue is convertible into other securities, as here, the call price does not act as a ceiling, but the market reflects the value of the shares into which the callable stock may be converted. In addition to the text writers, both courts and administrative agencies have relied upon the call feature in solving complex problems in corporate law. The call feature has been so considered even though the intrinsic value of the called shares may far exceed the call price. This is the position taken by the Securities and Exchange Commission on securities subject to call and the Commission’s expertise has been accepted by the profession without criticism. Another example is found in the tax field of option valuation. Judge Learned Hand has written: Commissioner v. McCann, 2 Cir., 146 F.2d 385, 386, “An option immediately exercisable — a ‘call’ — will, however, ordinarily be regarded as a limit upon market value, or any other value however ascertained or ascertainable, because the person having the option, if well advised, will exercise it as soon as the value rises above the option price. If there are reasons why he will not then do so, he must prove them who wishes to discard the option price as the measure.” A senior security with preferences, instead of providing valuable leverage as a junior security, when earning power and asset value increase, becomes a financial burden to the junior owners of the residual assets. “Ordinarily a company in this position would exercise its call privilege and redeem the preferred at its call price.” Engineers Public Service Corp., 24 S.E.C. at p. 574. Thus, ex an illegal call and if the call had disclosed the increased value of the inventory, the only fair and equitable value to assign to the A shares would be a value equal to its call price. A comparable analysis of the liquidation of Axton-Fisher was made by Edward Hopkinson, Esquire. He confidently predicted the course of action which would follow the exercise of normal business judgment by a disinterested board of directors. Mr. Hopkinson testified: “I would calculate the amount which each share of class A stock would be entitled to receive out of the estimated net realizable value of the assets upon the assumption that liquidating distributions in accordance with subparagraph (i) of Article IV of the charter were made to them, namely: accumulated dividends plus $2 a share for each $1 per share paid to the class B stockholders. If the amount so distributable to the class A stockholders was less than the. redemption price of $60 per share, plus accumulated dividends, I should assume that the class A would not be called. * * * “Second, if my computation which I have described should indicate that the amount distributable to the class A stockholders under subparagraph (i) of Article IV of Axton-Fisher charter would be in excess of the call price, then I should assume that prior to liquidation the class A stock would be called at the redemption price, and that the class B stockholders would receive the remainder of the assets.” His analysis of the facts of the present case demonstrates there could have been nothing else but a call prior to liquidation. Masters’ DX 25 shows net realizable value of Axton-Fisher assets on March 31,1943. If on that date the company had paid its liabilities, retired its preferred stock, satisfied its dividend arrearages on preferred and Class A stock, and then liquidated without calling the A stock, each A stockholder would have received $91.62. This would have been more than the call price of $60. This evidence is uncontradicted. b. The ineluctable fact is the AxtonFisher charter did not prohibit a call of the A stock in anticipation of liquidation. In all corporate problems it is necessary to analyze provisions of the charter and the share contract between the corporation vis-a-vis the stockholder, and the share contract between the various groups of security holders inter sese. This is the dichotomy of corporation law. Here, the Axton-Fisher A shares had a combination of extraordinary features not found ordinarily in senior corporate securities. The participation of the A stock in corporate earnings and assets depended upon the degree of success which the corporation enjoyed. The call price of $60 was $50 above par and $40 above the initial liquidating value; and this master fact has importance: A stock was convertible one-for-one into Class B shares at the option of the holder. As said before, the financial community long ago concluded call prices of redeemable securities are set somewhat above the par value of the stock to enable “the stockholder to tide over the period required to reinvest advantageously or compensate him for a lower return on his next investment if the redemption comes at an inopportune time for him.” Thus, a premium price is a few points above par or above a fixed liquidation price of the security. This spread above par and asset value envisions something in addition to the minor inconvenience of reinvestment by the A shareholder in event of call. In the instant case the high call price was intended to protect the radical preferences of the A over the B shareholders as to earnings and assets during the period of corporate growth. Obviously, the call dollar-price given to the A shares froze the ceiling of the A shares on any conceivable fair basis. The A shares had a conversion feature on- a one-for-one basis into B shares, and it could mean nothing but advantageous to convert the A shares into B shares when a call occurred. I have discussed the detail of the share contract inter partes for it discloses a recognized system of checks and balances, protecting the position of each class of securities to maintain equity and fairness in all sorts of circumstances which might arise in the course of the corporate destiny of the company, whether for growth or liquidation, voluntary or involuntary. It was a contract between classes of shareholders which . excluded the doctrine of preordination. Under the circumstances of Transamerica’s misconduct in the present ca.se, an A stockholder, who would have been advised, would have done nothing but elect to convert. The plain equity is the participation of the A shares in the reconstructed liquidation should be measured, according to the charter and the share contract, by the liquidation rights of a B shareholder. This view of the claim of the A shareholders was recognized at the time of the 1943 call by Judge Dawson, an Axton-Fisher director of unchallenged independence (a man whose integrity I have referred to throughout this litigation). He played one of the main roles in the corporate incident which is the subject of this judicial inquiry. Under date of June 8,1943, Judge Dawson wrote: “ * * * if liquidation, merger or sale of substantially all of the assets in the immediate future is contemplated by those in control, it would seem that equity and fair dealing would require that the holders of Class A stock, well in advance of any redemption thereof, should be given full information as to the probable profit which would result from liquidation, merger or sale of the company’s assets, and given an opportunity to elect between surrendering their stock for redemption or exchanging it for Class B common stock, enabling them, by such exchange, to participate in any benefits of liquidation. * * * “I have been advised that the controlling stock interests of the corporation have concluded that the corporation can not afford to fritter away the apparently tremendous inventory profit in operation; and in view of this fact, and of other matters hereinabove referred to, I think the Board of Directors should at once, by proper order, extend the date of redemption to August 1,1943, and promptly .notify all Class A stockholders of all pertinent facts so that they may make their own decision as to whether or not they will exchange their Class A Common stock for Class B stock, or will surrender their stock and accept $80.80 per share in redemption thereof.” (Emphasis added). Looking at the historical incident of this litigation, objective observers have reached the same conclusion after analysis of the Axton-Fisher situation. The Harvard Law Review states: “The parties to the present agreement must have contemplated that the majority would exercise the power of redemption should the enterprise prove successful, since the right of conversion can only be explained as a measure of protection against redemption * * * It would seem unreasonable, therefore, to suppose that the Class A stockholders expected to realize large benefits under the dissolution provision.” No one would disagree if a recovery on a two-for-one basis were to be granted the A shares, “they will get a windfall far in excess of [their] contractual rights * * * recovery must be limited to the dissolution value of an equal number of Class B shares”. In isolating the totality of equities in the present litigation, I conclude the extent of the, Zahn-Friedman plaintiffs’ rights in the reconstructed liquidation are the same and no greater than B shareholders. This is in accordance with their share contract, in the fact of the impact of the realities of corporate experience, as reflected in call options. Such application of equitable principles is in agreement with court and administrative authorities and financial texts. It is a “fair and equitable” treatment to all holders of callable A shares. c. There remains the determination of the “aliquot share” to the stock represented by the Zahn-Friedman plaintiffs. The computation is simple.' 15,-397 A shares were outstanding on July 1, 1943, the redemption date. Absent the illegal call of April 1943, these A shares would have been callable before liquidation by a disinterested board of directors after making adequate disclosures of increased values of inventories. Such call would have put an A shareholder to elect between surrendering his shares for redemption or converting them on a one-for-one basis for B stock. Ex necessitate we indulge in the assumption of “reconstructed liquidation”, and the A shares would have converted. Plaintiffs A shareholders either have taken down $80.80 per share, or such amount has been deposited against the redemption of the stock in the Fidelity & Columbia Trust Co. of Louisville. These amounts, either received or receivable by the A shareholders, must be deducted from the “aliquot share”. This determines the principal amount of damages owing to plaintiffs who owned A shares. 2. The Speed Case Relief in this separate case seeks restoration to Speed plaintiffs as to A shareholders on dissolution $148.09 and to B shareholders $70.18. Basis of alleged liability to Speed plaintiffs is different (although the measure of recovery is identical) from liability to Zahn-Friedman plaintiffs. In Speed, corporate mechanisms of Axton-Fisher were not used in the acquisition of these plaintiffs' shares. Transamerica was a buyer and plaintiffs were sellers. Defendant Transamerica urges I ignored any breach of fiduciary duty in the companion case of Geller v. Transamerica Corp., D.C.Del., 53 F.Supp. 625, affirmed 3 Cir., 151 F.2d 534. Defendant says I drew a distinction that Transamerica is “accountable” to the Zahn-Friedman plaintiffs, but only liable in damages to Speed plaintiffs. The labels suggested for relief are unimportant. Legal reality is what measure of compensation will be fair and equitable to both A and B shareholders who were all victims of a sharp corporate campaign (a “fast deal”) designed and executed by Transamerica against minority publicly held shares. Some of Speed plaintiffs were owners of A shares. While their shares were not called and redeemed, as in the Zahn-Friedman case, they were, in fact, sold by the holders to Transamerica before the actual call took place. I apply the same damage formula to these Speed plaintiffs as has been fixed as the measure of damages for the holders of A shares in the Zahn-Friedman cases. This leaves to be considered rights and liabilities growing out of the sale of Speed plaintiffs’ B shares to Transamerica. As to the latter, defendant urges the orthodox measure of damages in a misrepresentation case is the difference between the price received and the fair value of the article sold. 1. The rights of both Speed A and B plaintiffs arise: 1. from defendant’s breach of duty to disclose as controlling stockholder; and 2. from defendant’s breach to disclose under Rule X-10B-5 of the Securities and Exchange Commission. In fixing liability, I said: “It is unlawful for an insider, such as a majority stockholder, to purchase the stock of minority stockholders without disclosing material facts affecting the value of the stock, known to the majority stockholder by virtue of his inside position but not known to the selling minority stockholders, which information would have affected the judgment of the sellers. The duty of disclosure stems from the necessity of preventing a corporate insider from utilizing his position to take unfair advantage of the uninformed minority stockholders.” In this particular relationship, the injured party is not held within the limitations of the difference between price received and fair value of article sold. The injured party is entitled to require the perpetrator to disgorge gains made at the expense of the injured. I said: “ * * * Some courts have called this a fiduciary duty while others state it is a duty imposed by the ‘special circumstances’ ”. I have already determined defendant was an “insider”. As such, defendant was master of the corporate household and could not rely on arm’s-length dealing with its minority. Kardon v. National Gypsum Co., D.C., 73 F.Supp. 798, dealt with this situation and likewise involved an action for violation of Rule X-10B-5. In that case, Judge Kirkpatrick suggested a fiduciary relationship existed by virtue of the Rule. I cited the Kardon case with approval in fixing defendant’s liability to plaintiffs here, for those in dominating positions have high duties to other security holders which will be strictly enforced. While no formal status has been given to the Special Master’s Report, I have read it assiduously. Regarding this issue, he also wrote: “There is something shocking in the suggestion that a defrauded .stockholder is restricted to an action for damages measured by the value of his stock on the day upon which it was fraudulently procured from him, thus leaving the defrauder quit of liability by the payment of the value of the stock on that day and free to enjoy, as was the case here, the large profit for which it schemed when it committed the fraud.” And later, in recognition of the broad sweep of equity, the Special Master said; “This, however, is a matter upon which I need not dwell, because the law of Restitution operates with equal effect upon persons who were fraudulently deprived of their stock by a fiduciary and upon those who were fraudulently and tortiously deprived of stock whether by one who was their fiduciary or by one who was not.” A new work, “Securities Regulation”, by Professor Loss, more precisely considers the subject of relief available to a plaintiff under Rule X-10B-5: “In appropriate circumstances it seems clear that the plaintiff should also be able to seek an accounting or receivership or any other of the traditional equitable remedies;” while Charles Hughes & Co. v. Securities and Exchange Commission, 2 Cir., 139 F.2d 434, considered the Securities Exchange Act, 15 U.S.C.A. § 77 q(a), as placing a defendant under a “special duty”. Another variation on the theme of liability, i. e., relationship of Transamerica as majority and controlling stockholder, was described by Chief Judge Biggs in the Zahn case. He wrote: “ * * * In our opinion, however, the law of Kentucky imposes" upon the directors of a corporation or upon those who are in charge of its affairs by virtue of majority stock ownership or otherwise the same fiduciary relationship in respect to the corporation and to its stockholders as is imposed generally by the laws of Kentucky’s sister States.” Judge Biggs then concluded: “The tenor of the federal decisions in respect to the general fiduciary duty of those in control of a corporation is unmistakable.” Moreover, the special circumstances rule requires such relief according to the law of Kentucky, where the transactions occurred. In the case of Hays v. Meyers, 139 Ky. 440, 107 S.W. 287, 289, 17 L.R.A.,N.S., 284, it was held where “the circumstances surrounding the parties and the transaction are such as to make it the duty to disclose the information not within the knowledge of the other, equity will afford relief.” 2. As stated, on this facet of the case, defendant’s argument is recovery for Speed plaintiffs is limited to the difference between the price received and the fair value of the stock at the time of sale. Support for this are citations to Prosser on Torts, § 90, and Restatement of Torts, § 549. The body of Professor Prosser’s text fails to support defendant. He writes: “When restitution is sought either in equity or at law a much more liberal policy has been adopted. Since the purpose is not to compensate the plaintiff’s loss but to restore what the defendant has received, the courts look to the inequity of allowing him to retain it rather than to the damage which the plaintiff has sustained.” Moreover, Professor Prosser earlier had this to say: “Misrepresentation was recognized very early as a basis for the jurisdiction of courts of equity, at a time when the existing forms of action at law were inadequate to deal with the injustices which resulted. When the law courts later developed remedies for such cases, the equity courts refused to surrender their jurisdiction, saying that the nature of the ‘fraud’ made it peculiarly a matter for their interference. The particular form of relief granted by equity might be almost anything appropriate to the particular case; but the most common remedies for misrepresentation were rescission or reformation of a contract between the parties, or requiring a defendant who had been unjustly enriched to hold the money or property he had received subject to a constructive trust, or an equitable lien. “The equity courts were not bound by rules adopted at law, and proceeded to evolve their own definition of the ‘fraud’ which would justify relief. Since they did not take jurisdiction for the purpose of giving the plaintiff damages, they were more concerned with the injustice of allowing the defendant to retain what he had received through the plaintiff’s erroneous belief in the truth of his statement than with the question of the wrongfulness of his own conduct. Hence, they give a remedy for innocent misrepresentation, without the element of intent which became necessary for the tort action of deceit.” [The Final Report of the Special Master has no official status, for it never received his personal imprimatur. I neither adopt nor reject all or any parts of it. This litigation presented complex problems. The case was considered and subjected to legal analysis by the Special Master over several years of work. His. product and labor should not be condemned to some legal purgatory. The Special Master was a learned lawyer and had a delicate sense of the equities. I agree with certain of his views — and disagree with others — as found in his .original MS, left unsigned and unfiled.] The Special Master examined the Restatement of Torts. He pointed out “Restitution” as a legal principle is of recent historical origin, recognizing, too, the principle a party who has been fraudulently deprived of his rights is entitled to be restored to those rights or to recover the “natural and proximate consequence of the act complained of”. This has been said before. Because of the scholarly presentation of the doctrine of restitution by the Special Master, I refer to this portion of his MS (pp. 9-17): [Berl, Special Master.] “Restitution as a Remedy “I have given careful consideration to the contention of plaintiffs that the theory upon which damages should be awarded is that of the constructive trust. I believe that the principles applicable to trustees ex maleficio are apposite in the circumstances of this case, but I do not believe that' the constructive trust remedy, the one most commonly associated with decrees entered against trustees ex maleficio, furnishes the complete answer in the present case. “As I see the situation here, the proper remedy lies in the field of restitution, which, since the compilation of the Restatement of the Law, has been recognized as a remedy in itself. Although it partakes of the nature of constructive trusts, as well as of rescission, it is not hampered by some of the conditions which attach to those remedies. “In an article in the Law Quarterly Review for January 1938, Professors Seavey and Scott, the reporters of the Restatement of Restitution discuss extensively the reasons which riioved the American Law Institute to publish a Restatement Volume which was to bear a name which could not be applied to any of the principal branches of the law. The authors say: “ ‘The purpose of the American Law Institute is to analyze the most important topics of the law and to state succinctly the rules which are shown by analysis to represent the predominant American authority. In the restatements already published it has been possible to use familiar names and familiar categories. It so happens, however, that because of the way in which the English law developed, a group of situations having distinct unity has never been dealt with as a unit and because of this has never received adequate treatment. It was for the purpose of making clear the principles underlying this group and of attempting to give it the individual life and development which its importance demands that the restatement of this subject was undertaken. Although it is a rule of the Institute that no' new word should be coined, it is consistent with its practice to use an old word with either a more precise or a more generalized meaning. With this in mind, the word “restitution” was chosen, a word which has a connotation of the right to recover back something which one once had. In order to indicate the sweep of the subject and to justify its separate treatment, it may be well to indicate its scope. In brief it includes most of the situations dealt with in the few works on quasi contracts, together with the addition of corresponding matters dealt with in treatises on equity and trusts, including the specific remedy of constructive trust. But we are told by Professor Winfield in one of the most interesting of recent books that the Bar does not know what is included within the term “quasi contract”, and for the benefit of those who have been so unfortunate as not to have read his book, it appears desirable to make a more detailed statement as to what' is meant by restitution.’ “As illustrative of the scope of restitu. tion the authors say: “ ‘The law of torts is based upon the premise that a person has a right not to be harmed by another, either with respect to his personality or with respect to his interest in things and in other persons. The law protects this right by requiring a wrongdoer to give such compensation to the person harmed as will be substantially equivalent to the harm done. The accent is upon wrong and harm. Beside these two postulates there is a third, sometimes overlapping the others, but different in its purpose. This third postulate, which underlies the rules assembled in the Restatement, under the heading “Restitution”, can-be expressed thus: A person has a. right to have , restored to him a benefit gained at his expense by another, if the retention pf the benefit by the other would be unjust. The law protects this right by granting restitution of the benefit which otherwise would, in most cases, unjustly enrich the recipient.’ “Again: “ ‘Another type of case which has become important in recent years is that where a broker has possession of share certificates owned by a number of customers which he pledges with a third person for a debt of his own, the pledge being valid because the certificates have been endorsed in blank. Here, if the pledgee sells the certificate of one of the customers in order to satisfy the debt of the broker, the customer is entitled to contribution from the others whose certificates were not sold. If it were not for the principle of restitution there would be no remedy. “ ‘These cases and numerous others where relief is properly given indicate that a theory of restitution is essential to dealing justly between the parties.’ “With the background of the remedy of restitution thus explained it is not surprising to find the case at bar aptly provided for in the Restatement volume. Sec. 151, I think, covers the situation of this case. It reads: “ ‘§ 151. Value of Property Acquired by Consciously Tortious Conduct. “ ‘Where a person is entitled to a money judgment against another because by fraud, duress or other consciously tortious conduct the other has acquired, retained or disposed of his property, the measure of recovery for the benefit received by the other is the value of the property at the time of its improper acquisition, retention or disposition, or a higher value if this is required to avoid injustice where the property has fluctuated in value or additions have been made to it.’ “In the discussion of Section 151 the authors cover under sub-paragraph (c) what appears to me to be the precise situation of this case: “ ‘e. Where the subject matter is of fluctuating value. Where the subject matter is of fluctuating value, and where the person deprived of it might have secured a higher amount for it had he not been so deprived, justice to him may require that the measure of recovery be more than the value at the time of deprivation. This is true where the recipient knowingly deprived the owner of his property or where a fiduciary in violation of his duty used the property of the beneficiary for his own benefit. In such cases the person deprived is entitled to be put in substantially the position in which he would have been had there not been the deprivation, and this may result in granting to him an amount equal to the highest value reached by the subject matter within a reasonable time after the tortious conduct.’ “Defendant contends there is no fiduciary responsibility on its part to the Speed plaintiffs or claimants, and says that the Court has not found the defendant to be a fiduciary vis-a-vis them. It may be that the Court has not so found expressly, [Correct] but it is certainly true that the Court has not found that defendant was not a fiduciary as regards those plaintiffs and claimants. [Quaere] I see no advantage, however, in dwelling upon this point, because, under the Restatement, as has been seen from the text just quoted, the liability is the same, whether the wrongdoer was a fiduciary or a tortfeasor in the circumstances which the Court has adjudicáted here. “Not only have the various volumes of the Restatement been treated with authoritative force by the courts to which they have been presented, because of the distinguished character of their authors and editors, but the foregoing statements from the text are in themselves eminently reasonable and just. There is something shocking in the suggestion that a defrauded stockholder is restricted to an action for damages measured by the value of his stock on the day upon which it was fraudulently procured from him, thus leaving the defrauder quit of liability by the payment of the value of the stock on that day and free to enjoy, as was the case here, the large profit for which it schemed when it committed the fraud. “Counsel for defendant argue that by fixing damages as the value of the stock at the time when the fraud occurred, presupposing a public knowledge of the additional value of the inventory and of the fact of imminent liquidation, it will have adequately compensated those it defrauded. This, counsel says restricts the horizon of damages for those who were defrauded to the foreseeable future. Its witnesses, under this view, allowing in their testimony for the foreseeable future, testified as to a value figure which was little more than the amount which the defrauded stockholders had already received from defendant. It may be true that in this case the future held out uncertainties, but it is also true that the judgment which defendant exercised as to that future resulted in a return to it upon a scale hardly comparable to the views held by the witnesses whom, long after it had realized a great profit, it called to testify as to values before the profit was realized. “Defendant’s counsel points to the fact that its witnesses gave testimony which was uncontradicted as to the value of the stock on what might be called the respective conversion dates. It is true that plaintiffs offered no rebutting testimony. In failing to do so, it may have been for the reason that upon their theory as to the remedy which the law afforded them such testimony had no relevance; or it may have been that they were without the means which were available to defendant in the tobacco industry; or it may have been for a variety of reasons. “However that may be, there is a certain incongruity in an argument which speaks of undenied testimony given in behalf of the defendant when the experience of the defendant itself, perhaps in the exercise of rare good judgment, perhaps as a result of good fortune, or again, perhaps for a variety of reasons, is itself the effective denial of the testimony of its own witnesses, in that it was able to cash in for itself afterwards several times the value which its witnesses gave as of the dates when the fraud was committed. “I find, therefore, that plaintiffs in all the cases are entitled to sit at what they have termed the distribution table as if at that time they were in possession of the stock of which they were deprived. In reaching this conclusion I have proceeded in the matter of damages payable upon the basis of the law as quoted from the Restatement of Restitution. Apart from this consideration, however, the Court of Appeals in its decision in the Zahn case stated the following: “ ‘In our opinion, if the allegations of the complaint be proved, Zahn may maintain his cause of action to recover from Transamerica the value of the stock retained by him as that shall be represented by its aliquot share of the proceeds of Axton-Fisher on dissolution. It is also our opinion that he may maintain a cause of action to recover the difference between the amount received by him for the shares already surrendered and the amount which he would have received on liquidation of Axton-Fisher if he had not surrendered his stock.’ When this statement of the court of Appeals was put forward by plaintiffs as the law of the case amounting to a requirement that the view of that Court as to the damages payable to the plaintiffs in the Zahn case, should the allegations of the complaint be sustained, must be adhered to in the proceedings under the Orders of Reference, defendant offered certain objections. It claimed that the quoted words constituted no part of the decision of the case which was before the Court, being dicta and not decision, and as such that I should not give them decisional force. It contended, too, that if I should consider myself bound by the view expressed by the Court of Appeals,, the'language used does not sustain the contention of plaintiffs that they are entitled to look to the amount received by defendant for the tobacco sometime after the liquidation was completed, and that the damages must be computed upon the value of the tobacco at the time of the liquidation. They say further that the words ‘the amount (a holder of surrendered shares) would receive on liquidation’ and the words ‘the value of the stock retained’ cannot be considered as a requirement that plaintiffs be treated as owners of Class A stock at the time of liquidation. “If it should be assumed that no issue presented to the Court of Appeals called for the expressions used by it and that therefore the words employed fall into a dicta category, it seems to me that I nevertheless am not warranted in treating them as lightly as defendant suggests. I do not know if the law recognizes a distinction between words spoken obiter by a higher court in the very litigation with which a lower court is dealing, and dicta uttered in a different case. “Whether such a distinction exists or not, no court is ever required to reject either its own dicta or that of another court. Many undoubtedly authoritative principles of law which are everywhere accepted found their origin in words spoken by the way. Be that as it may, I would consider that he would be indeed a bold Master who decided to turn his back upon the expressions of the court appellate to the one out of which his Order of Reference issued in the very , litigation. Even as to what was put forward as dicta pronounced in other litigation this Court recently said: “ ‘It is a matter of delicacy for one court, and especially an inferior court, to attempt to limit or circumscribe the pronouncement of an appellate court when the latter has not done so * * *.’ Dimet Proprietary v. Industrial Metal Protectives, D.C.Del., 109 F.Supp. 472, 476 [per Rodney, J.]. Thus, I accept, as I think I would be constrained to do, although I myself should hold an opposite view, [Emphasis added] the quoted language of the Court of Appeals as setting forth the damages which the Zahn plaintiffs are entitled to receive. “What then is the. meaning of that language in its application to the matter referred to me ? “It is true, as defendant suggests, that the words used in the Court of Appeals speak of the position which the plaintiffs in that case are entitled to hold ‘on liquidation of Axton-Fisher.’ This obviously means that plaintiffs at that time should have been entitled to receive tobacco warehouse - receipts which représented their ‘aliquot share’. These they did not receive for the simple reason that defendant received them in their stead. Having received them, defendant did not at once sell them as did apparently the public stockholders of Axton-Fisher under an arrangement that was made for them through the services of defendant. Had plaintiffs received their warehouse receipts upon the liquidation, as was their right under the decision, it is impossible to say whether they would have accepted the offer which defendant arranged for the other public stockholders, or whether they would, as did defendant, have held them for a better price. The Restatement in the part quoted above considers that the defrauded party is ‘entitled to be puf in substantially the position in which he would have been had there not been the deprivation’ and it then goes on to recognize that ‘this may result in granting to him an amount equal to the highest value reached by the subject-matter within a reasonable time after the tortious conduct.’ What that highest value became within a reasonable time after the liquidation does not appear in this record. Nevertheless, within what I consider a reasonable time defendant itself sold its warehouse receipts at a substantially higher price than that received by the public stockholders. In the circumstances, it would, I think, be a curious decision of an appellate court which specified that the damages payable to the defrauded party were to be measured in values at the time of the liquidation when plaintiffs were by the act of defendant deprived of the opportunity to gamble on future prices, and to permit the tortfeasor itself, who deprived them of that right, to take the gamble successfully and to retain the proceeds which resulted from it. According to the Restatement, and I think .this is a ease which falls within the purview of its text, the defrauded party is entitled to damages based on the highest values reached within a reasonable time after the commission of thé fraud. A substantially higher price was realized by defendant itself within what I consider a reasonable period within the meaning of the text, and I know of no principle of equity or of damages which would permit it to retain the excess at the expense of the party which it defrauded. My view, therefore, is that the sales price received by defendant for the tobacco measures the damages which plaintiffs are entitled to receive.” 3. The Kardon case, supra, is a decision on the measure of damages awarded under Rule X-10B-5. But there are other cases under the Securities Exchange Act which have awarded damages-against “insiders”. While these cases áre under § 16B of the Act, which has to do With short-swing transactions by insiders, they are close enough to the transaction- at bar to be helpful. Judge Clark wrote: “We must suppose that the statute was intended to be'thorough-going, to squeeze all possible profits out of stock transactions, and thus to establish a standard so high as to prevent any conflict between the selfish interest of a fiduciary officer, director, or stockholder and the faithful performance of his duty. * * * The only rule whereby all possible profits can be surely recovered is that of lowest price in, highest price out — within six months — as applied by the district court.” And, Judge Learned Hand has written : “The situation falls within the doctrine which has been law since the days of the ‘Chimney Sweeper’s Jewel Case,’ that when damages are at some unascertainable amount below an upper limit and when the uncertainty arises from the defendant’s wrong, the upper limit will be taken as the proper amount.” Disgorging of profits must, under the peculiar facts of this case, be fixed within the frame of damages as I see the rule of damages. 3. The Measure of Damages The range of fair values' for plaintiffs’ shares at the period of sale, according to the Hopkinson evidence, is the market value of the A.shares limited by the redemption price required discount of 10%. Thus defendant claims the fair value of the A stock should be $70. In the case of B stock, Hopkinson found the fair, value to be one of six different figures, depending on whose valuation of assets was used and amount of discounts applied for- the risk factor. His fair value figures for B stock were $38.34, $36.09, $37.05, $34.87, $49.46 and $46.55. Defendant contends a fair procedure . in. selecting a value for the B stock is to take the average of these figures. This works out to $40. From the figure received for the B stock and from the figure received for the A stock must be substracted $12 and $40, respectively, the prices paid by Transamerica to plaintiffs for their B and A shares. The result, according to defendant, is plaintiffs are entitled to $30 per A share and $28 per B share. In considering the ZahnFriedman claims, defendant urged an amount per A share of $101.82. The computation is recognized but not accepted. I decide the Zahn-Friedman plaintiffs, as well as the Speed plaintiffs, are entitled to the same measure of damagés with respect to the call of A stock, whether such shares were unredeemed or redeemed in fact. For the purpose of reconstructing the liquidation, such A shares are to be considered as converted into B shares. Deciding Speed plaintiffs’ B stock should not be limited to the difference between the price received and the fair value of the stock sold at the time of sale, it is necessary before the entry of a final decree for the parties to utilize a new formula for recovery of the principal amount payable on each share of A and B stock. To this must be added my determination of the allowance of interest, claimed credits, and the disposition of special defenses to particular stockholders. My decision is, in short, this: on a “what might have been” or a “reconstructed liquidation”, assuming a valid call and full disclosure of facts as to values, all stock owned or formerly owned by plaintiffs shall be considered as “B” stock. All stock owned by defendant shall be also so considered. All shares of plaintiffs and those acquired by defendant shall be divided into the value of the assets at the time of liquidation. This is the rule of recovery. I assume an honest management, no defrauded stockholders, and both plaintiffs and defendant shareholders sitting at the distribution table share and share alike on liquidation of residual assets. I proceed to an examination of the remaining questions in the case. 4. Matters of Etc. From the record made before the Special Master, it appears defendant claimed certain credits allowable to it. These were: (a) Storage charges for tobacco between date of distribution of warehouse receipts and sale of tobacco for $81,018.-95. (b) Insurance premiums of $26,007.02 paid by it during this period. (c) Personal property taxes levied on tobacco by Kentucky Tax Authorities of $20,351.43. (d) California State Franchise Taxes paid by defendant' for 1944-46, 1950 which would not have been paid but for the liquidation distributions made to it by Axton-Fisher of $334,171.03. (e) A further claim for compensation for services for making possible profit realized on tobacco sale. As to (a), the Special Master agreed with defendant’s position. I do too for this is a direct cost of preservation of tobacco in the period between distribution and sale. As to (b) insurance premiums were likewise allowed. I agree; and the same view is expressed as to (c) involving personal property taxes. As to (d), the California State Franchise Tax item was considered in the nature of an income tax rather than a franchise tax. I agree. And (e), as to the allowance to defendant for expert services, should be disallowed. The parties did not treat these claimed credits in the presentation of the cause before me. If they had, I would dispose of them in the same fashion the Special Master did, and decide them on a similar basis. Part II. Interest 1. Plaintiffs claim interest upon all recoverable damages and contend such interest is to be compounded annually. For detail of the interest claims as to the A and B shares and dates from which interest should run, reference for convenience is made to the Master’s Final Report. As Zahn-Friedman plaintiffs put it: they should receive 6% annual interest, compounded annually, at least not later than, the commencement of the present suit. Zahn-Friedman plaintiffs warn of error in the Master’s'Report by stating he disallowed any interest on the sum of $80.80 per unredeemed A share; and, he was in error a like sum per redeemed A share should not bear interest. Moreover, plaintiffs assert he erroneously considered offsetting interest should be charged against each redeemed ZahnFriedman A share for the $80.80 redemption payment. Speed plaintiffs likewise claim the interest rate chargeable against defendant should be 6%. They, too, warn of error in the Master’s computation of interest, and argue they should receive the legal [?] rate of 6%, compounded annually, until payment. Finally, they argue no interest should be charged against plaintiffs on monies they have already received from defendant. I allude to the Master’s Final Report simply for its informational nature. He wrote: “It is agreed by the parties that under the law of Kentucky the question of interest is discretionary with the Court. As I understand defendant’s contention the thing which should move discretion to refuse interest is the fact that out of many volumes of testimony, in several cases, the Court has been barely able, upon indirect evidence, to arrive at the judgment of fraud. It seems to me that what in effect defendant is suggesting is that it has taken much litigation, with many obstacles to overcome, to make the fraud stand out. Unquestionably there has been much litigation which for my purposes has culminated in the judgments out of which Orders of Reference issued to me. Those judgments, are however, clear and specific, both in the decision and in the findings, as to defendant’s fraud and the systematic and deliberate nature of it. “As a result of that fraud, according to my findings, plaintiffs have been deprived of specific amounts of money as of specific dates. Plaintiffs have not been able to use the money, to which they were on those dates entitled and defendant has had the money from those dates until the present time and has presumably used it in its business. Conceding a discretion in the Court to award or not to award interest I cannot conceive, in the circumstances, how the withholding of interest would fail to be an abuse of discretion.” And he also wrote: “Defendant makes the further argument upon the authority of certain cases that upon the constructive trust theory urged by plaintiffs they are not entitled to interest. This, it is said, is for the reason that plaintiffs have claimed the profit which defendant made upon the sale of warehouse receipts by holding them for a better market than that of which the public stockholders availed themselves in the sale of their receipts shortly after the liquidation. The claim is that the law does not authorize a plaintiff in such a situation to have both interest and profits and that he is compelled to elect between the two. It may well be doubted in the circumstances of this case whether defendant can be said to have made any profit upon the sale of the receipts. The record does not show what the market price of the tobacco was at the time when Axton-Fisher delivered the warehouse receipts to its stockholders in its liquidation. It shows that the public stockholders sold their receipts at a given figure and that defendant, after the sale by the public stockholders, sold its receipts at different times and varying prices which in the aggregate were higher than those received by the public stockholders. To me the transaction appears to be merely that defendant received choses in action which it subsequently sold. It did not buy receipts at one price and sell them at another. There was no profit involved. Whether the proceeds realized by it represented prices higher or lower than the market price of the tobacco at the time of liquidation does not appear. It does appear, as has been shown, that the greater part of the receipts was sold at a price lower than defendant sold other receipts earlier. Whether plaintiffs, had they made the showing that the prices realized by defendants considerably later than when it acquired the receipts were less than the market at the time of the liquidation and had they in such a case claimed that they were entitled to the highest market within a reasonable time after the liquidation, need not be considered, because plaintiffs have made no such claim. “That which plaintiffs are demanding is their aliquot share of the proceeds actually realized by defendant. And from the time of that realization they are asking for interest upon that aliquot share. “The theory which defendant puts forward whereunder profits and interest cannot be claimed at the same time obviously rests upon facts quite different from those of the present case. Had defendant used that part of the proceeds of the sale of the tobacco, which plaintiffs should have received at the time of the liquidation, in profitable investments, and had plaintiffs bee