Action by Howard O'Connor against Seaboard Commercial Corporation, to restrain defendant from carrying out proposed settlement of contingent claims with its former accountants and former officers and directors. The Court of Chancery in and for New Castle County, Seitz, Chancellor, held that preliminary injunction restraining defendant corporation from making proposed settlement of contingent claims for seemingly disproportionate amounts in view of value relationship between possible assets of corporation if claims were successfully prosecuted and losses to stockholders which must follow if settlement was approved would be granted pending final hearing to see whether approval of settlements exceeded reasonable bounds of good business judgment.
Preliminary injunction granted.
Where corporation which was insolvent had contingent claims against its former accountants and former officers which is successfully prosecuted would provide sufficient funds to pay creditors and considerable amount to stockholders, individual stockholder would be granted preliminary injunction to restrain corporation from making settlement with former accountants and officers for seemingly disproportionate amount pending final hearing to determine whether action of Board of Directors and majority of stockholders in approving proposed settlements should be permanently restrained as exceeding bounds of good business judgment.
Arthur G. Logan, of Logan, Marvel & Boggs, and Stephen E. Hamilton, Jr., of Wilmington, for plaintiff.
C. S. Layton, of Richards, Layton & Finger, of Wilmington, and Charles Tuttle, of Breed, Abbott & Morgan, of New York City, for defendant.
This is the decision on a rule to show cause why a preliminary injunction should not issue restraining the defendant corporation from carrying out the following proposals:
1. A proposal to settle all claims which the corporation [32 Del.Ch. 144] and all certified public accountants employed by the corporation or their subsidiaries prior to August 1, 1948 may have against each other and their releasing each other from any and all further liability.
2. A proposal to settle all claims which the corporation may have against any of its former officers and directors and releasing said former officers and directors from any and all further liability.
Defendant corporation is admittedly insolvent in both the equity and bankruptcy senses. It has been liquidating its assets and settling with its creditors. Defendant's principal asset is a lawsuit in New York against its former certified public accountants in the sum of $6,797,373.15. The lawsuit is predicated on the negligent manner in which this accounting firm performed its work with resultant heavy financial losses to the defendant corporation.
The corporation has another asset in the form of causes of action and possible causes of action against its former officers and directors for breach of duty. The parties to the present action are in serious disagreement as to the practical value of these assets.
In one of the affidavits filed by the defendant, it is stated as follows: ‘ * * * the liquidation of Seaboard's assets will, at best, fall some $2,000,000 short of providing sufficient funds to pay Seaboard's creditors in full. At the worst the deficit may approximate $3,000,000. Even if, by any stretch of the imagination, the pending litigation when prosecuted to completion resulted in securing collectible judgments of this amount, Seaboard's creditors would assert a prior claim over Seaboard's stockholders to all proceeds collected by the corporation.’
However, according to another of defendant's affidavits, the creditors' claims at most amount to only about $3,000,000. While it is not too clear, it appears that there can be added to these claims, a government tax claim and other possible obligations aggregating upwards of $650,000. [32 Del.Ch. 145] It should be pointed out however that a substantial part of these latter claims is highly contingent. As has already been noted, these obligations may be contrasted with claims in excess of $7,000,000. The claim against the accountants is of real substance because of the New York law and the fact that the accounting firm saw fit to settle suits against it by certain of the defendant's creditors for $750,000.
The corporation is settling these claims for a sum ($1 per share) which, realistically, would mean practically nothing to the stockholders. The original par value of the preferred and common stock was $10 per share. The corporation says that if this settlement falls, the stockholders will get nothing because the creditors will take everything that could possibly be ...