Full opinion text
WOOLSEY, District Judge. I dismissed the bill of complaint, without costs, as against the defendant Arthur D. Mendes and Royce G. Martin at the conclusion of the trial; it had previously been dismissed on an interlocutory motion for lack of proper venue in this district as against the defendant Malcolm R. White. The hill of complaint herein is now dismissed, without costs, as against the other defendants remaining in the cause. I. By way of introduction to the focal questions which have to be decided in this cause, and as illustrative of the somewhat unstable financial and commercial situation to which, on its formation, the bankrupt company succeeded, the following very general summary of the circumstances which led to its genesis*will, I think, be of value: A. About 1919 a Mr. Brightson, who was the president of the Sonora Phonograph Company, and, in a period of four or five years, had built it into a successful concern, was introduced to Messrs. Hayden, Stone & Go. During the last previous three- or four years the business of the company had been expanding very rapidly. In the last year or two prior to 1919 it had been making very good profits, and in 1919' it found that it needed additional working capital to finance its growing business. Mr. Brightson was unable himself to provide this additional capital, and Messrs. Hayden, Stone & Co., on looking into the business, decided it was in good condition, and bought 10,000 shares of a new preferred stock issue, most of which was sold to customers of Hayden, Stone & Co. at $100 per share, producing approximately $1,000,000 for the additional capital needed by the company. Within a year or two after this first financing, the phonograph business went into a slump, and the profits of the Sonora Phonograph Company were much reduced. It then needed further funds, this time not for the purpose of expanding its business, but because it had run short of working capital due to overproduction and inability to market its products. Thus, within two years after the issue of the preferred stock above referred to, the Sonora Phonograph Company, which will hereinafter be referred to as Old Sonora, was in difficulties, and Hayden, Stone & Co., to help it out, and with the hope of protecting their customers who had bought the preferred stock, also bought a block of common stock. The business, however, did not improve in the succeeding years. Mr. Brightson himself got into financial difficulties, and finally Hayden, Stone & Co. were forced to buy in some of his stock in the company which, had been deposited with them as collateral for loans made to him individually. As the business of the Old Sonora continued to be poor, it had to borrow money. Finally a committee had to be formed by the banks which had lent this money in order to protect their loans. Hayden, Stone & Co. cooperated with the banks, helped to select a new president for the company, and tried to work it into a better financial and business position. Within two or three years, Mr. Martin, the new president of the company, was able largely to liquidate the surplus inventory and to get the bank loans down to a nominal figure. Tho banks then withdrew from the situation leaving Hayden, Stone & Co. as the controlling financial factor therein. During this period the Old Sonora still was without enough capital, and Hayden, Stone & Go. had to advance money to it whilst they were trying to work out some plan by which the company’s business could be continued to advantage. As a result, by the middle of August, 1927, Hayden, Stone &■ Co. had advanced to the Old Sonora $400,-000. At that time Hayden, Stone & Co. owned 70,000 shares of Old Sonora common stock which had cost them $500,000, also 36,914 shares of Old Sonora common stock bought from Brightson, and had purchased for themselves approximately 2,400 shares of the preferred stock at various prices from $80 to $30 per share. Hayden, Stone & Co. were, therefore, personally quite heavily involved in the Old Sonora, and, in addition, their clients had bought its preferred stock through them and dividends thereon had not been paid for some years. B. The first contact between Mr. Deutsch and Hayden, Stone & Co. involving O'ld Sonora in any way seems to have occurred in 1925, when Mr. Hoyt, of Hayden, Stone & Go., who had met Mr. Deutsch and know that he was vice president of the BrunswickBalke-Collender Company, in charge of its radio and music division, spoke to him with regard to the affairs of the Old Sonora, which, owing to the fact that its product had not kept up with tho development in sound reproducing and recording devices, was, as noted above, then in an unstable financial situation. At that time Mr. Iloyt had some talk with Mr. Deutsch regarding his attempt to reorganize Old Sonora and suggested that Mr. Deutsch should come in as president; but Mr. Deutsch did not then wish to leave his own organization in which he and his family had long been interested. During the late spring or early summer of 1927, however, Mr. Deutsch approached Mr. Iloyt regarding the reorganization of tho Old Sonora, and stated to Mr. Hoyt that he was not quite Satisfied with, the situation in his own business, and wondered whether something might be done in the development of' the Old Sonora along the lines of their earlier discussion of 1925'. This conference resulted in the negotiations which, led eventually to the creation of the Acoustic Products Company, Inc., by which name the now bankrupt company, of which the plaintiff is trustee, was known during the period with which we are principally concerned in this litigation. C. During the exploration of the possibilities which, might he worked out with the Old Sonora, it was considered, inter alia, whether an attempt should be made to purchase the music and radio division of the Brunswiek-Balke-Collender Company, of which Mr. Deutsch previously had charge. This plan, however, was quite promptly dropped. Later, Mr. Deutseh told Mr. Hoyt of a patent situation which he had discovered, and which he considered might offer an opportunity to Old Sonora to go into the radio and other electrical sound reproduction fields. The patent referred to was an invention of Dr. Miller Reese Hutchison which was known as the melodon. The melodon was an electric loud speaker of great apparent potential value. It was first shown to Mr. Deutseh and Mr. Hoyt at the apartment of Mr. Harris Hammond, one of the defendants herein. On that occasion Mr. Hoyt also met the defendant Mr. Biddle. Mr. Hammond, Mr. Biddle, and Dr. Miller Reese Hutchison, who' will be hereinafter referred to as the Bid-Hamson Group, had some time before this formed two companies, one, the Premier Laboratory Company, principally for experimental purposes, and the other, the Bid-Hamson Corporation, which, among other patents, owned the melodon. One of the reasons why the Bid-Hamson Group were interested in going into combination with Old Sonora was in order that a market might be developed for the melodon and its manufacture, which was expensive, might be made commercially practicable. It was finally agreed between Mr. Hoyt, Mr. Deutseh, and the Bid-Hamson Group to make a combination, with Old Sonora as its core, with the Bid-Hamson Corporation and the Premier Laboratory Company. Thereafter, on September 15,1927, a contract was entered into between them for the consolidation of these three companies by the creation of a new company under the laws of Delaware, to be known as the Acoustic Products Company, Inc., which was to exchange its stock for the patents of the Bid-Hamson Corporation and the Premier Laboratory Company and the stock of the Old Sonora. II. Accordingly, on October 6, 1927, the Acoustic Products Company, Inc., hereinafter referred to as Acoustic, was incorporated’under the laws of Delaware. On October 8, 1927, there was a meeting of Acoustic incorporators held, by-laws adopted, and temporary directors elected. On October 18, 1927, there was a directors’ meeting of Acoustic held at which the by-laws.were amended by fixing the number of directors at seven. Mr. Deutseh was elected president and director, and the defendants Hammond and Biddle, together with R. T. Watt, Dr. Miller Reese Hutchison, and A. C. Sherwood, and R. P. Hoyt, of Hayden, Stone & C'o., were elected directors. Mr. Hammond was elected chairman of the board of directors. At that meeting, in addition to the election of these directors, the offers of Premier Laboratory and Bid-Hamson to the company were accepted and arrangements authorized for the exchange of stock in Acoustic for the patents and patent applications owned by these companies (subject to licenses back to them for certain purposes not here relevant), and for the stock of Old Sonora. There wás in the Old Sonora employ a Mr. W. J. Keyes whom Mr. Martin had brought into the company as his treasurer when he became president thereof. After Mr. Martin left, Mr. Keyes continued in his capacity as treasurer for some time after the formation of Acoustic, the corporation with which we are here concerned. .Thus Mr. Keyes, with the Hayden, Stone directors, gave for some time a certain continuity in the personnel of the situation here involved in spite of changes in the corporate structure. On October 31, 1927, Mr. W. J. Keyes, treasurer of the new company, submitted to Mr. Hoyt an estimate of the capital requirements for Acoustic and its affiliated companies. He summarized the result of his figures by saying that the consolidated companies would need, for successful operation, approximately $2,000,000 of additional capital, $1,500,000 in the form of new invested capital, and $500,000 in bank loans. The details of the original contract of September 15, 1927, between the Bid-Ham-son Group and the Hayden, Stone Company is not of interest to us herein, but it should be noted that on November 29', 1927, the contract was modified so that its final provision, conditionally made, regarding the contribution to capital to Acoustic which should be made by the Bid-Hamson Group, was that they should subscribe and pay for $500,000 worth of the preferred stock of Acoustic, and that this sum should be loaned to them at 6 per cent, interest by Hayden, Stone & Co. on the joint and several notes of Messrs. Hammond, Biddle and Dr. Hutchison, payable June 30, 1928, secured by the stock as collateral. The condition of this agreement was that the Bid-Hamson Group get subscriptions for preferred and common stock of Acoustic in the sum of at least $350,000 before 12 o’clock noon on December 3, 1927. The necessary subscription was secured by that time. The note was given, and on December 6, 1927, at a special meeting of the board of directors, the status of the corporation’s capital was reported as follows: There had been paid in by Hayden, Stone & Go. for 5,000 shares of preferred stock, and 50,000 shares of. the common treasury stock, the sum of $500,000. There had been paid in by Messrs. Hammond and Biddle and Dr. Hutchison for the purchase of 5,000 shares of preferred stock and 50,000 shares of the common treasury stock (the money borrowed from Hayden, Stone & Co. under the note of December 3d), the sum of $500,000. There had been paid in by Mr. David Dows for the purchase of 1,000 shares of the preferred stock and 10,000 shares of the common treasury stock, the sum of $100,-000. A subscription was offered and accepted from Mr. Percy L. Deutsoh for 1,500 shares of the preferred stock and 15',000 shares of the common treasury stock, in the sum of $150,000, payable $25,000 in cash and the balance by a promissory note for $125,000, payable February 1, 1928, secured by certain shares of tlie stock of the Brunswiek-Balke-Collender Company and of British Brunswick, Limited. A subscription was offered and accepted from Mr. Milton Diamond for 1,000 shares of the preferred stock and 10,000 of the common treasury stock for the sum of $100,-000, payable $10,000 in cash, and $90,000 by two promissory notes, the first in the sum of $40,000, payable January 2, 1928, and the second in the sum of $50,000, payable February 1, 19-28, payment to be secured by deposit of 100 shares of preferred and 1,000 shares of common stock of the corporation. At this same meeting, the board of directors of Acoustic, at the instance of Hayden, Stone & Co., passed a resolution authorizing it to lend to its subsidiary, Old Sonora, $35,-000 to discharge an indebtedness to the Chemical National Bank due December 15, 1927, and to repay the advances made to it by Hayden, Stone & Co. as above mentioned, in the sum of $400,000, due on December 18, 1927. These amounts were 'duly lent in pursuance of this authority, and those two items of indebtedness were discharged by Old Sonora. It was quite natural that Hayden, Stone & Co., who had been involved in the Old Sonora for such, a long time, should have desired to have their advances to it repaid, especially as they had loaned $500,000 to the Bid-ITamson Group and a large part of Mr. Deutsch’s subscription to Acoustic and all of Mr. Diamond’s were represented only by their respective notes. The circumstance of the repayment of this loan of $400,000 is mentioned, not in criticism of Hayden, Stone & Co., but to show that when Acoustic got off to its start it had far less capital than Mr. Keyes, with his experience in the business, had estimated as necessary to its successful operation. Indeed, it is fair to say that it was hampered by lack of funds from the start, and its condition in this regard never mended during the period with which we are here concerned. III. A. It had been realized from the beginning by Mr. Deutseh that, in order to have a successful company operating in the radio and electrical sound producing field, it would be necessary that it should have the right to manufacture under patents which represented the then achievements in the radio art. The subsequent history of Acoustic, in so far as it concerns us, is a story of unsuccessful attempts of the president and directors of a financially weak company to secure such right from the owners of such patents and thus to lay the necessary foundation for any measure of commercial success. It was early realized that two of the avenues by which this objective of the company might be achieved were, first, by securing licenses from the Radio Corporation of America, and, second, if that was not regarded as commercially feasible, to secure some kind of a relationship with tlie De Forest Radio Corporation, which was known to he a corporate invalid in the hands of the New Jersey Chancery Court. It was found that to secure licenses from the Radio Corporation of America would not be commercially feasible, for the reason that royalties charged by it were too high, and because they covered, not only the particular patented device used, but also involved payment of a percentage of the price of the finished product, including the cabinet. Consequently, after considerable negotiations, it was determined that this avenue was closed to a company with the limited resources of Acoustic. Accordingly, Mr, Deutseh in the early part of the winter of 1928 turned his attention to the possibility involved in the De Forest Radio situation, and some money was spent in making the necessary investigation thereof. This investigation indicated that the De Forest Company had an unassignable right of user of valuable radio patents, but it was known that these patents were involved in a maze of litigation, and, although the reports of patent lawyers engaged by Acoustic to examine the technical status of these patent litigations were not entirely discouraging, the whole De Forest situation may fairly be described as that of an insolvent company whose principal assets were subject to challenge by litigation in almost every direction, as has been described in detail in the evidence of Mr. Samuel Darby. Indeed, it seems to me that, although some of the optimistic prophecies of the patent lawyers have since come true, looking forward at the situation from 1928, the directors of Acoustic might very well have felt that, if they invested moneys of the company even in securing a control of De Forest, they would be subject to criticism by their stockholders, and that a fortiori, if they only secured a minority interest in a company whose situation was apparently so unstable both in the commercial and the patent field, they would be doing something which they would find very difficult to justify to their stockholders. At the same time something had to be done in order to put Acoustic on a satisfactory commercial basis. B. In connection with the investigation of the De Forest situation, it was learned by Mr. Deutseh that on January 18th W. R. Reynolds & Co., a corporation of which Wiley R. Reynolds was the principal stockholder, had made an offer to the De Forest Stockholders’ Protective Committee which involved the purchase by Mr. Reynolds of 600,000 shares of new stock to be issued by the De Forest Company, at 50 cents a share. The De Forest Radio Company, which had been formed some time prior to 1917, under the laws of New Jersey, had licensed the Western Electric Company to use certain patents owned by it covering devices in the radio field, and had retained only nonassignable rights of user in said patents. The De Forest Radio Company was at this time, and since June 24, 1926’, had been, in receivership under the Vice Chancery Court of New Jersey. Mr. Reynolds had been a stockholder in ■the De Forest Company before it had gone into this receivership, and his offer was apparently made in an effort on his part to make up, if possible, some of the losses which he had suffered by reason of his ownership of De Forest stock. Mr. Reynolds’ offer of January 18, 1928, to the Stockholders’ Protective Committee of De Forest, and the approval of it by the Stockholders’ Protective Committee, reads as follows: “January 18, 1928. “Stockholders’ Protective Committee of De Forest Radio Company: “We hereby offer to purchase for Three hundred thousand (300,000) dollars at our option either Three hundred thousand (300,-000) Dollars principal amount of Five Tear Six Per Cent. Convertible Notes of the De Forest Radio Company, as hereinafter described, or Six hundred thousand (600,000) shares of its non-par value common stock, upon the following terms and conditions: “1. Duly called meetings of the stockholders and directors of the Company must be held and the present authorized capital stock, consisting of Two hundred and fifty thousand (250,000) shares of no par value, shall be increased to One million (1,000,-000) shares of no par value. There are also to be authorized the issue of Three hundred thousand (300,000) Dollars principal amount of Five Year Six Per Cent. Convertible Notes of the Company, convertible into its Common Stock of no par value, at any time before maturity, at the option of the holder, on the basis of two (2) shares of such Common Stock for each dollar of principal amount of such notes. If our election is to take the Five Year Six Per Cent. Convertible Notes, above referred to, proper arrangements must be made for the setting aside of Six hundred thousand (600,000) shares of the Common Stock of the Company of no par value for the conversion of such notes. “2. No substantial change shall be made in the property assets or rights of the Company without our consent, and any such substantial change made without our consent shall, at our option, be considered a cancellation and withdrawal of this proposal, but the ordinary changes occurring in its property and assets in the conduct of the ordinary business, of the Receiver and in winding up the affairs of the Company shall not be considered a substantial change within the meaning of this section. “3. The Receiver of the Company now in possession of its assets in New Jersey must be fully and regularly discharged and there must be returned to the Company all of its property of every kind and nature and the Company must be free and clear of all judgments, suits, debts, claims and expenses of-any kind whatsoever at the time of payment for the notes or the stock, as the case may be. Of the proceeds of the notes of stock not more than Two hundred thousand (200,-000) Dollars shall he used for the purpose of discharging the receivership and all debts and obliga! ions of the Company above referred to, and of this amount not more than twenty-five (25) per centum of their claims shall ho paid to the creditors in full settlement thereof. “It is an absolute condition of this offer that the De Forest Radio Company shall by the use of the Three hundred thousand (300,-000) Dollars have all of its property and One hundred thousand (100,000) Dollars for working capital in its treasury free and clear of any taxes, liens, debts, claims and charges of any kind whatsoever and free from any contracts or agreements not aceexffable to our attorneys, Messrs. Metcalf, Mcl'nnes, Allen & Hubbard. “4. A majority of the Voting Trustees acting under the Voting Trust Agreement of De Forest Radio Telephone & Telegraph Company, dated September 20, 1924, are to be nominated by or acceptable to us and we shall also have the light to nominate and to have elected all of the members of the Board of Directors. “5. The legality of all actions and proceedings taken hereunder and the validity or legality of any securities issued or to he issued and their availability for conversion of notes and of the organization of the Company and of the amendment to its charter, and the fact of the freedom of the Company from the claims, debts and liabilities above referred to, and all other matters and things herein mentioned, must be approved by our counsel before payment is made for the notes or stock, as the case may be. “Upon compliance with the foregoing conditions to the satisfaction of our counsel, wo will be prepared, on five (5) days’ written notice to us at the American Trust Company, 135 Broadway, New York City, New York, at any time before Noon on April 3, 1928, to purchase for Three hundred thousand (300,000) Dollars at our option either Three hundred thousand (300,000) dollars principal amount of Five Year Six Per Cent. Convertible Notes of the De Forest Radio Company or Six hundred thousand (600,000) shares of its non par value Common Stock, said Notes or Stock, as the case may be, to be taken up and paid for at the office of the American Trust Company above referred to. After Noon on April 3, 1928, if all conditions hereof have not been complied with, this offer shall expire and be entirely void. “In the event of our purchase of either the notes or the stock we agree to use our best efforts to provide an efficient and economical management and organization to carry on the business of the company. “This proposal is subject to acceptance by your Committee on or before January 19, 1928. “If this proposal is satisfactory to your Committee, will you please sign the acceptance hereof appended hereto and return the duplicate hereof to us. “W. R. Reynolds & Company, “By Wiley R. Reynolds, President.” “The Stockholders’ Protective Committee, at its meeting held January 19, 1928, duly approved of the foregoing proposal and hereby agrees to use its best efforts to carry the same into effect. “Stockholders’ Protective Committee “By H. P. Nash, Secretary. “Dated, January 19, 1928.” The formal resolution passed by the committee reads as follows: “I, II. P. Nash, Secretary of the Stockholders’ Protective Committee of De Forest Radio Company, do> hereby certify that at a duly called meeting of the Stockholders’ Protective Committee held January 19, 1928, at which a majority of the Committee were present, the following resolution was adopted: “Resolved, that the proposal of W. R. Reynolds & Company, dated January 18, 1928, for the purchase for Three hundred thousand (300,000) Dollars, at their option, of either Three hundred thousand (300,000) Dollars principal amount of Five Year Six Per Cent. Convertible Notes or Six hundred thousand (600,000) shares of non par value Common Stock of the De Forest Radio Company, on the terms and conditions set forth in said proposal, be and the same hereby is approved. “Further resolved, that the Committee use its best efforts to carrv the same into effect. “H. P. Nash, Secretary, “Stockholders’ Protective Committee.” It should be observed in this connection that what remained to he done in order that the Reynolds’ offer might become effective was to be done by the Stockholders’ Protective Committee. It was they who had to take such steps, by court proceedings or otherwise, as were required to meet the terms of this offer. Reynolds merely had to wait and to pay if his offer were met. With this offer by Mr. Reynolds in the field, Mr. Deutseh and the Acoustic directors tried in many directions to make some arrangements by which they could improve thereon and thus get the De Forest Company away from Reynolds. An attempt was made through a Mr. Costello to interest Mr. W. R. Hearst in a joint venture with Acoustic! in the De Forest situation. This failing, an attempt was then made to interest bankers in assisting Acoustic in its effort to get the right, through ownership of the De Forest Company, to use the unassignable rights to patents which that company owned. These attempts were all unsuccessful. The time for action was getting shorter every day, and every day Acoustic’s financial condition, was getting progressively worse, as will be shown hereinafter -in greater detail. IV. A. Finally, after all efforts to get financial assistance which would enable him to outbid Mr. Reynolds’ offer had failed, Mr. Deutseh decided to treat with him direct. On March 27, 1928, therefore, Mr. Deutseh wrote a letter to Mr. Victor C. Bell, who was then the vice president of Mendes & Co., a banking house with which Mr. Deutseh had been having some negotiations in connection with his attempt to get the De Forest Company. This letter, which has been marked as Exhibit 32, and which may fairly be regarded as the beginning of the series of occurrences on which this litigation hinges, reads as follows: “March 27, 1928. ■“Mr. Victor C. Bell, Messrs. A. D. Mendes & Co., 43 Exchange Place, New York, N. Y. ' “Dear Sir: You are familiar with our capital structure, and know that we are only set up for the immediate needs of the programs of the Acoustic and Sonora Companies, so it will not be necessary for me to go over that phase of the situation. You further know of our interest in the De Forest Company, and in fact that we have been negotiating with the Receiver and the Vice Chancellor, in conjunction with the Hearst interests, for the purchase of the controlling interest and assets of this Company. “The only other bid that seems to be forthcoming on this proposition is Mi\ Wiley Reynolds’, whom you have advised me is interested only primarily in the purchase of this stock for a turnover in the market or otherwise. “I am having Mr. Reynolds’ statement cheeked up today, to the effect that he has a definite contract with the directors of the De Forest Company to turn over to him 600,000 shares of the common stock of the company on the date which the Receiver has set for the sale of the assets. Irrespective of this, however, weighing each party’s interests in the picture, a satisfactory arrangement could be made with Mr. Reynolds on the following terms and conditions: “That he associate himself with you in the syndicate to purchase the preferred and common stock of the Acoustic Products Company. If the $300,000 which Reynolds is willing to put in the De Forest Company is used for the purchase of 3,000 shares of Acoustic preferred, he would obtain 30,000 shares of common stock as bonus. This 30,-000 shares immediately shows him a bonus of from $75,000 to $90,000. “$200,000 of his $300,000 we would put in the De Forest Company, with $200,000 of the Hearst interests, giving the De Forest Company $200,000 working capital, and $100,000 more working capital in the Acoustic Products. “With the formation of your syndicate Mr. Reynolds and yourself to enter into an arrangement with Hayden Stone & Co., whereby you would obtain options on more stock, with the idea of completing the set up which you had in mind when you originally spoke to Hoyt. “With the De Forest Company in control of Acoustic Products, the Acoustic stock would be easily marketable, and, when placed on the market, should be susceptible to considerable activity. This should be an important factor to Mr. Reynolds. “As to the operation of the De Forest Company, the Acoustic Products Company, the personnel and organization of which you are familiar with, would supervise the development and manufacture of De Forest products, and the Sonora Company will enter into a contract with the De Forest Company to merchandise and sell the entire production— the Sonora Company paying to the De Forest Company ten percent (30%) profit above the cost of their production. The Sonora Company, by reason of its distributor and dealer organization, is well equipped and qualified, under our management and direction, to build up a large volume of business fox the De Forest Company. This arrangement will necessarily work to the most efficient program, both as pertains to manufacturing and selling for the De Forest Company, as the Acoustic Products Company, in its endeavor to keep its costs down, will manufacture both efficiently and economically- in the Do Forest plant. It further will see that only the best and most salable product is produced. as the Sonora Company will he responsible for its entire sale. “For your information, will further say that wo have in our research laboratories at the present time what we believe to he a revolutionary type of tube, which we will he prepared to manufacture in the De Forest plant, to he purchased by the Sonora Company at cost plus ten percent (10%). “In the final analysis we believe this to bo a very advantageous and satisfactory proposition for Mr. Reynolds, in view of his interest in the De Forest Company, as the De Forest Company is practically assured of ten per cent (10%) profit on its entire production, thirty percent (30%) of which would aeerue to the Acoustic Products Company. “In the event that Reynolds is interested in this proposal at first hand, I would suggest that he would proceed for the purchase, under his present proposal, with the distinct understanding, however, that he would turn over to the Acoustic Company 600,000 shares of De Forest common stock, for 3000 shares of Acoustic preferred and 30,000 shares Acoustic common — we in turn selling 300,000 shares of the De Forest Company to the Hearst interests for $200,000 cash, we agreeing with Hearst to put in $200,000 as working capital for the De Forest Company. “I believe this, together with all the other data you have in connection with our operations and program, will enable you to talk intelligently with Mr. Reynolds, and give him our ideas in this connection. “Yours very truly, President” Both Mr. Reynolds and Mr. Biddle were at Palm Beach at that time, and Mr. Bell proceeded there, and, as a result of se'veral days’ negotiations, entirely failed to interest Mr. Reynolds in the proposition put forward by Mr. Deutseh in the letter above quoted. Mr. Biddle, however, was a friend of Mr. Reynolds of long standing, and, finally, the result of the Palm Beach negotiations was a letter addressed by Mr. Reynolds to Messrs. Biddle and Boll, under date of March 31st, making an offer entirely at variance with the Deutseh suggestion. This letter reads as follows: “March 31st 1928 “Messrs. A. J. Drexel Biddle, Jr., Victor C. Bell, Palm Beach, Florida “Gentlemen: Confirming the talk which we had with you this afternoon concerning the purchase by us of 600,000 shares of the no par value common stock of the De Forest Company at fifty cents per share, we are willing that you should take a one third interest in that purchase on the same basis, namely, 200,000 shares for $100,000 cash. “You are aware that our proposal to purchase this stock is upon the condition that the receivers of the De Forest Radio Company shall be discharged and the company’s property turned hack to it free and clear of all judgments, suits, claims and expenses of any kind whatsoever, so that there shall be $100,000 available of the amount paid by us for working capital. “It was further a part of our understanding that if you take this one third participation you shall have four of the nine directors, namely, yourselves, Mr. P. L. Deutseh, and Mr. Arthur Sherwood and that we shall name the remaining five Directors who will be either the men we mentioned this afternoon or men of equal standing. “It is also further understood that if you join with us in this participation Acoustic Products Company, Inc. shall have the right to enter into a contract subject to the approval of the Board of Directors of the Do Forest Radio Company to handle the managing, operating, and selling of the De Forest Products. “Your signature on a signed copy hereof will constitute an agreement between us which will be subject to the approval of your board of Directors not later than April 9th 1928. “Very truly yours, “W. R. Reynolds & Company, “Wiley R. Reynolds, President.” “Accepted subject to above provisions March 31st 1928 “A. J. Drexel Biddle, Jr. “Victor C. Bell” B. The substance of this letter was communicated to Mr. Deutseh by telegraph, and on April 3d a special meeting of the board of directors of Aeoustie was held, and the result of Mr. Bell’s negotiations with Mr. Reynolds was laid before the directors, and, as a result, the. following recitals and resolutions, inter alia, were set forth in the minutes: “Whereas, the Company had been negotiating with Radio Corporation of America for the acquisition of a license to make use of certain patents held by that Company in connection with the production of electric phonographs; and' “Whereas, in the opinion of the Board of Directors the terms upon which such license can be obtained are wholly disadvantageous to this Company and further negotiations thereon should not be entertained; and “Whereas, the De Forest Radio Company holds patents and licenses which, if made available to this Company, would in the opinion of this Company’s engineers and patent attorneys obviate the necessity of procuring such license from the Radio Corporation of America in order to pursue its activities in the electric phonograph field; and “Whereas, in the opinion of the Board of Directors it is vitally necessary for the Company to establish an intimate relationship with De Forest Radio Company so that such patents and licenses may be made available for its use in competing with other manufacturers in this field; and “Whereas, W. R. Reynolds & Company is about to acquire a controlling interest in De Forest Radio Company through the purchase of 600,000 shares of its capital stock, and has, through its President, Wiley R. Reynolds made two propositions to this Company to establish such intimate relationship, which propositions have been outlined to the representatives of this Company, as follows: “1. We are willing that you should take a one-third interest in that purchase on the same basis, namely, two hundred thousand shares for One hundred thousand dollars ($100,000). You are aware that our proposal to purchase this stock is upon the condition that the Receivers of the De Forest Radio Company shall be discharged and the Company’s property turned back to it .free and clear of all judgments, suits, claims and expenses of any kind whatsoever, so that there shall be One hundred thousand dollars available of the amount paid by us for working capital. It was further a part of our understanding that if you take this one-third participation you shall have four of the nine directors, namely, P. L. Deutsch, Arthur Sherwood, A. J. Drexel Biddle, Jr. and Victor C. Bell, and that we shall name the remaining five directors who will be either the men we mentioned this afternoon or men of equal standing. It is also further understood that if you join with us in this participation you may select a managing and operating organization which, however, is to be acceptable to us. “2. We are willing to agree with you if we become the purchasers of this stock at this time that we will not sell any part of the six hundred thousand shares before the expiration of sixty days after date. We further will agree that during these sixty days we will carefully examine the general condition and especially the patent situation of Acoustic’s properties which you represent with a view if everything proves satisfactory to try and work out with you an ultimate amalgamation of the interests of that Company and the De Forest Radio Company; and “Whereas, the first of said propositions has been reduced to writing and submitted to the representatives of this Company as follows: [Here follows the letter of March 31, 1928 above quoted] and “Whereas, said first proposition has been accepted by the representatives of the Company subject to the approval of the Board of Directors not later than April 9:, 1928, “Now, therefore, be it “Resolved, that the President of this Company be and he hereby is directed to enter into negotiations for the acquisition of a sufficient sum of money to carry out the obligations of this Company in the event of final acceptance of said first proposition by the Board of Directors of this Company on or before April 9, 1928; and “Resolved, that the President of this Company be and he hereby is directed to report upon such negotiations at an adjourned meeting of the Board of Directors on April 9; 1928, so that final determination can be made as to said first proposition; and further “Resolved, that pending report of the President as provided in the foregoing resolution, the Board of Directors of this Company hereby approve of said first proposition as the best means of pursuing the activities of the Company and competing with other manufacturers in the electrical phonograph field and urge the President of the Company to direct every effort toward procuring the necessary money in order to accept the same and carry out its terms.” “This meeting was, accordingly, adjourned to April 9, 1928.” C. In this ease we have, in the person oí Dr. Hutchison, a diarist, to whom counsel for Mr. Deutseh has aptly referred as the Pepys of Acoustic, and, inasmuch as the crucial question here involves the domestic economy of Acoustic, i. e., the arrangements among its directors, and as Dr. Hutchison was one of its directors, his diary notes of two meetings of the board — held on April 3d and April 9th — have been admitted in this ease on consent of' both the plaintiff and the defendants. I think this was a very wise procedure. For these notes show the realities of the situation and indicate the background against which the records of those meetings should be read. Dr. Hutchison’s notes with regard to the April 3d meeting are as follows: “April 4th, 3928. “Memorandum of Matters Discussed at Meeting of B’oard of Directors of Acoustic Products Company 3-5.25 P. M., 4/3/28 “Deutseh stated that when the Company setup was last fall explained to Sarnoff of R. C. A., Sarnoff assured Messrs. Hammond and Deutseh that licenses would ho granted to A. P. Co. for electrical recording; electrical reproduction of phonograph records, and a manufacturing license whereby A. P. Co. would make radio sets. “A letter confirming this conversation was sent to Sarnoff who did not reply hut who called up and stated that the letter was alright with one exception — that the A. P. Co. would have to buy a radio manufacturer, already licensed, or purchase the radio sets from the R. C. A. “Subsequently, when formal license was made out and sent to A. P. Co. it was found that this license limited the activities of A. P. Co. to malte only disc record phonographs for use in the home, without permission to sell same for use in hotels, theatres, or other 'public address’ locations; but also licensing A. P. Co. to record electrically, etc. “For this license they demanded a minimum guarantee of $100,000. per year on 7%% basis for ail phonographs made and sold, hut that if we wanted to combine a phonograph with a radio set and electrical recording, the minimum royalty would be $100,000' on radio, $100,000 on electrical phonographs and $50,000 on electrical recording. Not wishing to place the company’s neck in such a noose, Deutseh east about to find a way out. “It was found that the De Forest Company owns a license to manufacture and sell radio tubes but that this right is not transferable or licensable, and the receiver of the De Forest Co. had no jurisdiction over this right; it is vested entirely in the stockholders of the De Forest Co. “The only way out, therefore, appeared to ho to buy up the stock of the De Forest Company and get control thereof. A man named Reynolds was found, who ha.d already made the highest bid to the stockholders to take 600,000 shares of De Forest stock for $300,000 and an option on an additional 200,-000 shares for $100,000. “Out of the aforementioned $300,000, the creditors of the company on a 20% basis would be paid $175,000. leaving in the treas-. ury of the company, $125;000. “Reynolds endeavored to have the company thrown into bankruptcy, but was unable to do so> but if he purchases the stock, it can he done. “Among the creditors is the Chatham and Phoenix Bank — $27,000. “Reynolds offered to let A. P. Co. in with him on the basis of A. P. Co>. putting up $100,000 against his $200,000 and to turn over the management of the De Forest Company to A. P. Co. personnel. “Hammond stated to Sherwood that Hayden Stone and Co. had stated when H. S. & Co. took about $800,000 out of A. P. Co. treasury to pay themselves for money owed H. S. & Co. by Sonora and to pay other debts of Sonora, that if and when A. P. Co. would need additional money, H. S. & Co. would lend it or otherwise secure it for the company ; and that now the time had arrived when the company needed $100,000 to take up this exceptional offer upon which the future of the A. P. Co. depended, and that he, Hammond, naturally expected H. S. & Co', to put up this money. “Sherwood demurred in the absence of Mr. Hayden (in the office) and Mr. Hoyt (on his way to Europe), and asked that a memorandum he addressed to II. S. & Co. by Deutseh stating the present condition, and the amount of money necessary, which memorandum, he Sherwood, would put before Mr. Hayden for decision. “It was brought out, during the meeting, by receipt of a memorandum by Deutseh and telephone conversation from Biddle’s office to Mr. Hammond, that Reynolds would gave A. P. Co. until Monday, April 9th to take up the sale of the 200,000 ($100,000) shares, and Hammond stressed the urgency of an immediate decision to which Sherwood did not respond other than as above mentioned. “Deutseh explained that De Forest also invented regeneration which patents were owned by the De Forest Company and De Forest is proceeding against R. C. A. Armstrong patents in the Supreme Court, De Forest having won in every Court except the Lower District Court of N. Y. If Armstrong is declared the inventor of regeneration the patent will only run one year, and if De Forest is declared the inventor, the life is for 10 years. R. C. A. is licensed under the De Forest patent and could continue to manufacture regenerative sets but the West•inghouse would not be able to do so.. “A. T. & T. Co. is backing De Forest on his suits on tubes. “Postal Co. is backing De Forest on regeneration suits. “De Forest is suing R. C. A. under the Sherman Act on the specification made by R. C. A; that all licensees under R. C. A. must use only R. C. A. tubes. This suit has been won by De Forest in the Lower Court. The case was appealed by R. C. A. and a decision is expected in a week or so. This suit is being financed by the Radio Protective Association consisting of independent manufacturers. If De Forest wins on appeal, De Forest can license others and can then sue R. C. A. for triple damages because of the fact that this illegal restraint of trade specification of R. C. A. caused De Forest Co. to go into receivership, owing to De Forest’s inability to sell tubes. “De Forest is suing Crosley Radio for $1,500,000, which the attorney took on a contingent fee basis. “Under the understanding with Reynolds, A. P. Co. is to take 200,000 shares from De Forest for $100,000 with a call on one third of 200,000 more on the same basis — 504 on the dollar, and A. P. Co. will have four of the nine directors of the De Forest Company and manage same. Under this arrangement, A. P. Co. could manufacture and sell under all of De Forest’s patents without paying a royalty to R. C. A. “Reynolds telephoned the following from Biddle’s office ‘The deal has gone over satisfactorily’ which the board took to mean that his deal with the De Forest Company had been consummated. “When Sherwood did not consent to Hayden Stone & Co. putting up the money to buy the interest in De Forest Deutseh stated frankly that A. P. Co. would have to shut down, because A. P. Co. had not the money available to pay the cash down amount required under R. C. A. Licenses, which cash-down amount would be more than enough to> buy the interest in the De Forest Company, and Deutseh volunteered that he would see a group of bankers the morning of April 4th and endeavor to borrow, or sell stock to-them to the extent of $1,000,000 with a call on a million dollars additional preferred and common. “Hutchison asked for details as to outstanding stock of A. P. Co.) the number of shares transferred to date for Sonora stock, and asked Sherwood on what basis Hayden-Stone would dispose of their holdings, to. which Sherwood replied ‘I would sell out lock, stock and barrel for the net cost to us, perhaps retaining a few shares of common as our profit, as we, being bankers have no desire to engage in the phonograph business, simply to get into- and get out of businesses with -a profit.’ ‘Since the A. P. Co-situation seems to have become sour, I think our firm would be willing if we got out very reasonably to the purchaser.’ “Hutchison stated that he had been in conference with bankers for the last week Ór ten days, but had been unable to reach Mr. PTammo-nd by telephone to fix a conference date to discuss A. P. Co. financing, to which-Mr. Hammond replied that with the deal on with Mendes & Co. through Bristol, he did not want to bring into the picture any new people, until it was determined _ just what Mendes and his associates were going to do, “The meeting adjourned at 5.26 P. M-until Monday April 9th at an hour which I did not hear. “There were present at the meeting, Messrs. Hammond, chairman, Sherwood, Brophy, Deutseh, Keyes and Hutchison. Brophy acted as secretary of the meetings. Waivers by telegrams had been secured from-the absent members of the board.” V. A. It will be noted that the key to. the resolution passed' on April 3d, was that Mr. Deutseh, as president, was directed to-enter into negotiations for the purpose of acquiring a sufficient sum of money to carry out the proposed purchase from Mr. Reynolds of De Forest stoek as outlined in his offer of March 31st, This Mr. Deutseh tried unsuccessfully to do. Inasmuch as Mr. Beutseh’s time was short, ho had prepared prior to the meeting a memorandum on the subject for Mr. Hayden, who, as a member of the banking firm most interested in Acoustic, seemed to be the most likely recourse for prompt assistance in what Mr. Deutseh regarded as a somewhat urgent situation which involved apparently Acoustic’s last chance of getting a tie-up with the De Forest Company which would enable them to use the De Forest patents. This memorandum reviewed fully the situation of Acoustic and De Forest, both from the point of view' of their patent possibilities and their finances. The fact that it might be of great value io Acoustic to acquire the De Forest Company in whole or in part was pointed out, and it was also shown, on the basis of the amount to be paid by Mr. Reynolds for the stoek, that it was probable that, if any one furnished the money to buy the stock, there would only be a slight chance of not getting his money back quickly. It was also pointed out that cash on hand in Acoustic at that time was less than $100,-000. This memorandum liad been given to Mr. Hayden on April 1st. On April 6‘th Mr. Hayden stated that he absolutely refused to participate in the acquisition of any of De Forest stock or to allow his firm as such to participate therein. Attempts made to interest others were equally unavailing. B. Meantime, on April 5th, the De Forest Radio Company had filed a voluntary petition in bankruptcy in Delaware as a part of the procedure by which old debts were to be definitely cleared up and the equity receivership in New Jersey superseded in order to prepare for the acceptance of the offer made by Mr. Reynolds to the Stockholders’ Protective Committee of De Forest. C. On April 7th Mr. Deutseh, having failed to interest Mr. Hayden, started to explore another avenue of raising the money, and telegraphed Mr. Biddle, who was still at Palm Beach, asking him to join a group, at $25,000 each, to finance the purchase of the 200.000 shares of stoek which Mr. Reynolds was willing to sell out of his purchase of 800.000 shares of the stock of De Forest Radio Company to be issued. On April 8th Mr. Biddle telegraphed agreeing to co-operate with a group in financ - ing the De Forest purchase. VI. A. On April 9th a special meeting of the directors of Acoustic, which had been adjourned from April 3d, was held. The minutes of this adjourned special meeting, as far as here relevant, read as follows : “The President reported that he was unable to complete definite arrangements to procure funds to enable the Company to accept the proposition made by W. R. Reynolds & Company through its President, Wiley R. Reynolds, in his letter dated March 31, 1928, and accepted tentatively on behalf of the Corporation by Mr. A. J. Drexel Biddle, Jr. It was announced, however, that several individuals were desirous of accepting said proposition on their own behalf and after acquiring the stock pursuant thereto, they were willing to establish an intimate relationship with this Company so as to extend to it the benefits contemplated by tbe acquisition of tbe stock itself. If was pointed out that oven though the Company accepted the proposition of W. R. Reynolds & Company, these individuals would bo willing to relieve it of its obligations thereunder and completo the purchase of stoek as therein provided. “After due consideration and on motion duly made and seconded the following resolutions were unanimously adopted: “Resolved, that the action of Mr. A. J. Droxel Biddle, Jr. in accepting on behalf of this Company the proposition made by W. R. Reynolds & Company by its President, Wiley R. Reynolds, in Ms letter dated March 31, 1928, be and the same hereby is approved and adopted as and for tbe act of this Corporation, and further “Resolved, that the proper officers of this Company be and they hereby are directed to notify W. R. Reynolds & Company of such approval and of the acceptance by this Company of said proposition; and further “Resolved, that the proper officers of this Company be and they hereby are authorized and directed to do and cause to bo done ariy such other and further acts and things as shall be necessary or advisable or convenient and proper for the purpose of carrying out the foregoing resolutions and the intent thereof.” B. To determine what was in the minds of the persons present at this meeting and what was there said fortunately we are able to go beyond the minutes themselves, for we have again the benefit of a special memorandum prepared by Dr. Hutchison and sent by him within a day or so after the meeting to Mr. Hammond. It must be borne in mind that, leaving out for the moment the position of Mr. Reynolds and his company as defendants, this litigation involves only an intracorporate, or domestic, situation, if I may so phrase it, of Acoustic. This fact makes Dr. Hutehison’s notes relevant. They are very helpful because the minutes of the April 9th adjourned special meeting seem to be somewhat inconclusive and vague in expressing the situation, whilst his notes show what really occurred at the meeting and illuminate the focal points of this cause. Dr. Hutehison’s memorandum reads in full as follows: “Notes Taken at the Adjourned Meeting of Aeoustic Products Co. at the Offices of Hayden, Stone & Co., “Confidential April 9th, 1928 “1: Present, Sherwood, Deutsch, Brophy, Dows, Keyes and Hutchison. “2: Keyes announced he had discounted Freshman Radio note for $50,000 with Chemical National Bank, leaving additional Freshman paper of about $70,000 yet to be discounted, if possible. “8: Keyes also reported that sales inventory of Sonora had run $54,000 for January, $102,000 for February, and $200,000 for March. “4: Sherwood had the idea, he said, that when Sonora would start selling its inventory, the sales would progress faster than they have done. Deutsch replied that Martin, to make as good a showing as possible before leaving, had done as little work as possible on radio sets to go with the combination phonograph-radio sets, ¡necessitating a lot of work to be done before the sets could be made available for sale. “5: Deutsch also said, with some feeling, that if H. S. Co. had left the working capital he was promised, in the treasury until Sonora could liquidate its receivables and inventory, the Company would not now be cramped for working capital; that Sonora would work into the black from said liquidation of receivables and inventory, in time, but should not be cramped for working capital and trade credit just when it is trying to get into production; and that no new product would be available, now, until September, even if the company pulls through this trying period. “6: I noticed, all through the meeting that Deutsch’s attitude heretofore conciliatory towards HSCo., was quite the reverse- “7: Deutsch related conversation had between Hayden Hammond and Deutsch at Hayden’s hotel, in which Hayden said he did not care a damn what happened to APCo- and Sonora, and that he did not intend to-put up another cent for these companies. He also told me, privately, that Hayden had also said he did not in any way, assume any responsibility for what Sherwood might say or had said, as far as HSCo. or its personnel is concerned; that HSCo. had not, as a Company, gone into this thing but that it was an individual operation on the part of' some of the HS personnel. “8: Deutsch reported failure on his part to raise any additional money for APCo. but that a syndicate had been gotten together consisting of Biddle, Hammond, Deutsch, Bell, Dows, whereby this syndicate had raised $87,500 and, would supply the $100,000 necessary to buy into the De Forest situation-with Reynolds; but it must be understood that this money is not to be loaned to APCo. but that APCo. could benefit through thesyndieate operations if APCo. meets the syndicates requirements. Sherwood did not like this setup, saying the syndicate should lend the money to APCo., taking APCo.’s note,, possibly some of APCo., Preferred and Common stock, and the De Forest 200,000 shares, as collateral; and that this would be a safer proposition to the syndicate because, if APCo-. does not take up the note, the collateral will be taken by the syndicate. Hutchison raised the point that APCo-. preferred .and common, now in Treasury, had to bé issued for value and would not be fully paid and non-assessable if put up as collateral on a loan. Dows was in favor of the-syndicate lending the money to AP’Co., but Deutsch said he had to borrow the $25;000 he is willing to put into the syndicate, and would not, under present conditions, put any more money into or lend any money to,. APCo. and that neither would Hammond or Biddle. Sherwood then said HSCo. personnel would chip in their share on the syndicate, either on basis of syndicate lending the money to APCo. or as a separate deal. Sherwood asked Brophy if it would be legal for members of the Directorate of APCo. to-operate separately as a syndicate, and Brophy replied affirmatively. “9': Keyes reported that Sonora has pressing debts which would be alleviated, to an extent, by paying out the $50,000 received from discounting the Freshman paper; but that no time should be lost in retiring the additional debts, as some of the creditors might throw the company into receivership. “10: Keyes expressed confidence that Freshman would pull thru its threatened embarrassment. “11: Keyos also said the Day Company (whatever that is) would pay, eventually, and that an offer has been made by Sonora to Schulte to sell him the Schultz stock of Sonora for $60,000; and that Schulte is sanguine that ho will pay this for the stoek. Also that if Sonora could get $50,000 in addition to the $50,000 received from Freshman paper, the creditors could bo placated for a lime. “12: It is the opinion of those present that Reynolds intends making a market for De Forest stock (common) which is now selling around $4.00 a share. Sherwood wanted APCo. to get the credit due it from Reynolds’ apparent profit, buying a,t 50$ a share and selling at $4.00 or more. Nobody could see what he was driving at. “13: De Forest shareholders have consented to increase of the capital stock to 1,000,000 shares, under tho Reynolds plan, which they endorsed highly. Reynolds claims that as the patents are owned by tho stockholders, and the receiver has no control of the patents, this deal is bound to go thru. “14: Sherwood raised the point of legality of Reynolds, a large shareholder in De Forest present company, blocking any move that might be made, by Victor Company, for instance, which it is understood is willing to pay the creditors 30$ on the dollar and put more money into the De Forest Treasury, for working capital, than obtains under the Reynolds plan. Sherwood thinks the Court would rule in favor of the higher return. Someone stated (I think it was Deutsch) that Reynolds is prepared to go higher in his bid, if necessary. It was brought out that if such is done, the syndicate, participating with Reynolds, would have to correspondingly increase their subscriptions. “15: Petition to place Do Forest Co. in bankruptcy was acted upon by the Court favorably last Monday, and the sale of assets ■ — tho patents excepted, of course — wou A possibly be made by May 1st. “16: Reynolds is trying to show that the Victor bid is not so good for the shareholders of De Forest because Victor is doubtless acting for RCA. interests and the De Forest product would be shelved; whereas, by operating thru an independent company— APCo., the product would be put on tho market. “17: Sherwood stated we want statement in writing from Reynolds that there is or will he 1,000,000 shares in De Forest capital stock setup, of which Reynolds buys 600,000 shares for $300,000 and that the paper should also state that the syndicate paitieipates to the extent of 33%% in whatever Reynolds buys in addition'to the 600,000 shares, it being understood that he has option to- buy 200,000 shares more than the 600,000 shares, at 50$ per share. “18: Deutsch called up Reynold’s attorney, O'. P. Metcalf, of 551 Fifth Avenue, phone M. H. 0648 — stating that the option given by Reynolds expires today and that APCo stands ready to take it up. Metcalf replied that tho stoek could nob be delivered within less than two weeks, so no- payments would have to be made before that time. Hutchison inquired how an option to APCo., taken up thus, could ho a