Parish v. Maryland & Virginia Milk Producers Ass'n

McWilliams, J., delivered the opinion of the Court. The principal question before us is whether the judgment of the chancellor, Moore, J., in the light of Maryland Rule 886, is clearly erroneous. Resolving that question was as arduous as stating it was easy. The events which provoked this litigation were set in motion early in 1954.

The original bill of complaint, however, was not filed until February 1965. The second amended bill of complaint was filed in July of that year. The third amended bill of complaint (and its accompanying exhibits) was filed on 28 February 1967 and on 29 March the chancellor, Pugh, J., sustained the demurrers of the defendants. In Parish v. Maryland and Virginia Milk Producers Ass’n, Inc., 250 Md. 24, 107 (1968), we reversed his order and remanded the case for-further proceedings.

Judge Barnes, who wrote (74 pages) for the Court in Parish , thought the third amended bill of complaint (the bill) “with its eight exhibits * * * a rather formidable document,” consisting of “84 printed pages.”' No less formidable is the transcript of the record which has come back to us from the Circuit Court for Montgomery County. The docket entries take up 28 printed pages. They show that the chancellor held no less than 15 hearings on motions of one kind or another and that the trial on the merits went on without interruption for four weeks. The transcript weighs over 100 pounds; the record extract and the briefs occupy in excess of 3,000 printed pages; a dozen or more pleadings (over 100 typewritten pages) have been filed since the oral arguments.

Because Judge Barnes has provided us with a full dis ⁶²¹ cussion and explanation of the bill, the exhibits, the identity of the parties, and the many allegations and charges set forth in the bill, we shall limit our comments in this regard to the few changes which have taken place since. (At this point, of course, one ought to lay aside this opinion and read carefully what Judge Barnes has said in Parish beginning with page 34 and continuing through page 71.) On 5 November 1969 the bill was further amended by the addition of new paragraph No. 28; 1 the prayers for relief were amended by the addition of para ⁶²² graphs 4A, 4B and 4C. 2 Wayne E. Lenn, Edwin R. Lenn, J. A. B. Dahlgren, and E. Irving Eldridge were allowed to withdraw as parties plaintiff. 3 The number of defendants was increased by service on 12 additional directors, William B. Hooper, a former officer of the Association, and Wayne Kendrick, its former auditor. Frank Parish was dismissed as a party plaintiff by the order of 3 October 1969, from which order he has appealed. The trial on the merits was concluded on 19 November 1969.

The chancellor heard arguments of counsel on 16 December and on 5 January 1970 he gave orally in open court his reasons for dismissing the bill. This able and comprehensive opinion occupies 30 printed pages of the record extract. We shall make liberal use of it. The final decree was filed on 15 January.

All petitions for a rehearing were dismissed and this appeal followed. The Maryland and Virginia Milk Producers Associa ⁶²³ tion, Inc. (Association), is a farm cooperative organized and functioning as such under Code (1966 Repl. Vol.), Art. 23, § 349. For the past half century it has been engaged in the collective marketing of milk and milk products for its members.

They are the family and corporate farming entities who ship their milk to the Association. As the chancellor put it: “* * * [T]his has been overall a successful organization. From very humble beginnings in the early ’30’s in a small office in Washington, * * * with a gross business * * * in the neighborhood of $20 million a year * * * it has become a large organization * * * with a vast force of over 200 employees, with members aggregating 1100 in number and doing a gross volume of $50 million a year. “Over the years this association has responded to an urgent need, a public interest, the interest of the consumers of this area. They have succeeded in establishing at Laurel, according to the evidence here — and the complainants do not by any means cast any doubt upon this in their testimony nor argument — they have established at Laurel, Maryland, a manufacturing plant for milk and milk products which is a model for such plants in this country, and, indeed, throughout the world.” Dean Dugan, about whom we shall say more later on, thought that the Laurel Plant “was operated in a highly efficient manner and that it returned extraordinary gains to the Association.” The affairs of the Association are managed by 21 directors each of whom is elected at local district meetings of the members.

The districts are located in Maryland, Virginia, West Virginia and Pennsylvania. The elections are ratified at the annual meeting of the entire membership. Each director receives $25 per meeting to reimburse him for the cost of attending. The chancellor com ⁶²⁴ mented that the directors are farmers and producers and that none of them “personally profited from any of the transactions complained of.” He went on to say: “[We have] been impressed with the testimony of the directors who have appeared here and testified on the witness stand, impressed with these directors’ integrity, with their industry, and, of course, with the fact, basically, that being producers their principal motivation, their own self-interest is furthered and fostered by the success and prosperity of the Association. “We think, also, that they have been in capable hands insofar as expert assistance is concerned.

These gentlemen, who are farmers, have not relied upon their own resources insofar as their business decisions are concerned, although in this wise, too, some of them are bank directors and some are businessmen as well as farmers, and in these particular instances they have resorted to their own knowledge and experience. “By and large, these men have been producing farmers who have, when the occasion needed it, and it seems to have been rather frequent in the history we have been studying, when they needed expert advice — and the court is impressed with the fact — they obtained the most expert advice available. They did not rely upon their own judgment in areas where expertise was required.” There are three main committees of the board of directors. The Finance Committee has jurisdiction over all matters relating to expenditures by the Association and oversees the handling of all Association monies. The Plant Committee, created when the Association acquired Embassy Dairy (Embassy) in 1954, is charged with the supervision of the Association’s retail operation and its manufacturing plants.

The Executive Committee is a policy body which deals with whatever may be assigned ⁶²⁵ to it by the directors. There are other committees but the three just mentioned are the most important ones. The board holds regularly scheduled monthly meetings, as do the Plant and Finance committees; as a rule they schedule their meetings to be held just before the board meetings. Full minutes are kept of all committee and board meetings.

All matters are initially referred to a committee for study. The committees report to the full board with recommendations. In each instance of mismanagement by the directors, as here alleged, this system of study and recommendation was followed. The Secretary-Treasurer-General Manager is the ranking managing officer of the Association.

He is directly responsible to the directors for all aspects of the Association’s operations and for the performance of all employees. To keep the membership fully informed the Association publishes a monthly newsletter and each year distributes an annual report. Both are sent to all members. Additionally, local meetings are held in each district and an annual membership meeting is held in the spring.

There are three operating divisions. The Fluid Milk Division is concerned with the retail dairy business; the Manufacturing Division produces skimmed milk, cottage cheese, ice cream and powder; the Equipment Division sells farm and dairy equipment to the members. As the agent of all members in the sale of their milk, it is the Association’s purpose to secure the maximum price. The highest price for raw milk is obtained when it is sold for Class I or fluid use, ultimately to be used as table milk or table cream.

Sales into Class II or manufacturing use are for the purpose of producing cottage cheese, skim milk powder or other products manufactured from milk. At one time there was a third class, Class III, which was defined as surplus use. Shipping into this category was the least remunerative and least desirable disposition of the members’ milk. It was and is the objective of the Association to sell its members’ milk into the highest possible class.

In actual practice, however, the milk is sold into different classes, for different uses. ⁶²⁶ At the end of the month each member receives a monthly milk check which represents payment to him for the total number of pounds of milk shipped by him to the Association. The amount each member receives is determined by the percentage of Association milk shipped into each class. For example if 70% of all milk shipped by the Association went into Class I, 20 % into Class II, and 10% into Class III, each member would have these same percentages applied to his total monthly shipments. In order to finance the Association’s operations a brokerage fee of approximately one cent per gallon is deducted from each member’s milk check.

At the end of each year the Association computes the net profits derived from its overall operations and issues a patronage dividend to each member in the form of a Revolving Fund Certificate. This represents each member’s pro rata interest — based upon the quantity of milk shipped — in unexpended brokerage, net profits from the sale of equipment, and net profits from the general operation of the Association. These certificates are payable to the membership over a period of time which is within the discretion of the board of directors. The appellants’ bill charges the officers and directors of the Association with a series of acts which they say constitutes “waste, illegality, gross negligence, culpable mismanagement in the affairs of the Association and breach of trust and fiduciary duty.” We shall now consider the evidence produced in support of the allegations in the bill.

THE FINDINGS OF FACT ' The chancellor adopted “the proposed findings presented to the court on behalf of the defendant directors to the fullest extent not inconsistent with” any findings in his oral opinion. Those findings, with only minor editing, we shall now set forth. ⁶²⁷ THE EMBASSY DAIRY PURCHASE Early in 1954 James Ward, the owner of Embassy Dairy (Embassy), suggested to Hooper, then assistant-secretary of the Association that the Association should purchase his dairy. Embassy did not purchase milk from Association producers but rather took its fluid milk supply from “Bootleg” and independent producers. As a result available Association milk was being sold for Class III surplus use rather than going into Class I use.

The possibility of purchasing Embassy was an attractive proposal to the management and directors of the Association, since it would eliminate price cutting by Ward and enable the Association to sell its members’ milk to Embassy for more than the members would have received if the milk was sold as surplus. Originally Yv'ard told Hooper that he was asking $7.5 million for the dairy. Hooper said this was an unrealistic figure but nevertheless reported Ward’s interest to Mr. Derrick, then general manager and secretary-treasurer of the Association, and. the board of directors, who suggested that Hooper should continue to pursue the matter with Ward. While the negotiations with Ward were continuing, the Association took various steps to determine the most feasible method of financing the contemplated acquisition.

The proposal to acquire Embassy was presented to the Baltimore Bank for Cooperatives, a banking institution chartered by the Federal Government for the purpose of making loans to farm cooperative associations. Various officers of the Baltimore Bank for Cooperatives considered the Association’s proposal and conducted field visits to the dairy. The Baltimore Bank and the United ⁶²⁸ States Department of Agriculture were informed of the method in which the Association proposed to finance the acquisition of Embassy, the method of pricing the milk sold to Embassy, and the method whereby the Association proposed to repay the loan to the Baltimore Bank for Cooperatives. The United States Department of Agriculture recommended the Association’s proposed acquisition to the Bank, and eventually the Bank agreed to commit to lend up to $2,100,000 toward the purchase price.

On April 12, 1954, Hooper turned to the legal aspects of the acquisition and asked Mr. William E. Leahy and Col. William J. Hughes, Jr., the general counsel of the Association, to look into the question whether the purchase of Embassy would be permissible under the antitrust laws of the United States. Hughes thereupon undertook to comply with Mr. Hooper’s request. During the course of their prior representation for the Association, Leahy and Hughes had both had extensive experience with the provisions of the Capper-Volstead Act, 7 U.S.C. § 291 , et seq.

The provisions of this Act immunized farm cooperatives from certain strictures of the antitrust laws, and in considering the question both Hughes and Leahy resolved that, because of the Act’s special provisions for farm cooperatives, the acquisition was not objectionable from an antitrust standpoint. On April 14, 1954, Hughes appeared before the board of directors and, after a full discussion of the legal aspects of the acquisition, advised the board that he and Leahy were of the opinion that the purchase of Embassy would not be a violation of the antitrust laws. On April 14, 1954, the board of directors acting upon the advice of counsel and management, after appraisal of the property and after a thor ⁶²⁹ ough discussion on all aspects of the transaction, authorized the Association to purchase Embassy. It was contemplated by them that the purchase would be financed through the $2 million loan from the Baltimore Bank for Cooperatives, a $500,000 loan from some fifteen participating banks and $1,750,000 which would be raised directly by the members of the Association through their subscribing to Association Certificates of Indebtedness.

These certificates were in fact loans to the Association by its members and were to be interest-bearing, paying 5 percent from the date of issuance. They were to have a minimum maturity date of five years and a maximum redeemable date of twelve years. The purchase was to be almost 100 percent “financed” and provisions were made to secure a rapid curtailment of the debt. For the purpose of informing the membership on the purchase of Embassy and for soliciting producer subscriptions to the Certificates of Indebtedness “District Meetings” in all producer districts were called by the Association.

All members were informed by notice of these meetings. At these meetings directors and management explained in detail the reasons for the purchase, the benefits expected to be derived from the purchase, the price being paid for Embassy, the method of financing the purchase, the method of retiring the indebtedness and the method of pricing the milk which went into Embassy until the indebtedness was retired. The plan received the enthusiastic endorsement of the membership with over 1,000 producers subscribing to Certificates of Indebtedness. The proposed plan of operation for Embassy if it were acquired by the Association initially took into account that the milk which would be shipped there would otherwise have gone into ⁶³⁰ Class III surplus use at a Sealtest milk plant in Frederick, Maryland.

In shipping this milk to Sealtest for Class III surplus use, the Association never received the full Class III price since Sealtest extracted certain handling charges and required the Association to build storage tanks for the milk, at its own expense. The Association was at the mercy of Sealtest when it shipped milk to them at Frederick. The plan as presented to the membership for the pricing of Association milk which would be shipped to Embassy assured that the producers would receive more than they would have received if their milk had been sold for surplus use. The difference between the increased price which the members received and the Class I price would initially be used to retire the bank indebtedness which arose from the acquisition of Embassy.

Although the profits from the operation of Embassy were to be used to retire the indebtedness, the profit figure was also added as a credit to the members’ revolving fund for that particular year. Each member’s revolving fund certificate would reflect the net profits from the Embassy operation which were based upon the price at which the Association sold the milk to Embassy, until such time as the bank indebtedness was completely discharged. At the time of the acquisition of Embassy the members of the Association were fully informed of the appraisals which the board had had made of Embassy, the approximately $4 million investment the Association proposed to make in Embassy, the method of pricing the milk to be sold to Embassy, and the profits which would be added to the revolving fund as a result of this price adjustment. On May 26, 1954, the Association entered in ⁶³¹ to an agreement with Ward for the purchase of Embassy.

The terms of this agreement provided that the Association would purchase all assets for $2.5 million; assume a mortgage on Embassy’s fixed assets of $440,815.21; and pay to the seller the balance due on all accounts and notes receivable to be determined as of the closing date. The agreement provided for an initial payment of $1 million to be made by July 1, 1954, and the remainder as soon thereafter as practicable but in any event no later than July 31, 1954. If the Association voluntarily defaulted on the July 1 payment, it was to pay Ward $200,000 in liquidated damages. On June 7, 1954, Hughes received a telephone call from Mr. Ambler Moss, the attorney for Ward.

Moss stated that he had received a letter of inquiry from the Antitrust Division of the Department of Justice concerning the proposed purchase and that he had made an appointment for himself and Hughes to meet with lawyers of the Antitrust Division. On June 8 Hughes and Moss went to the Department of Justice and were informed by Mr. Joseph Saunders and other attorneys that the Department had not taken any position on the propriety of the acquisition; they merely desired information. Hughes and Moss answered questions propounded by the Department’s attorneys. Hughes informed them that the agreement had been signed on May 26 and that it called for the initial payment to be made on July 1 and that if the Association voluntarily defaulted they would subject themselves to liquidated damages.

At the June 8 conference it was agreed that the Antitrust Division would send the Association a questionnaire asking for further information. The questionnaire was sent and the an ⁶³² swer was delivered in person to Saunders on June 15 at approximately 4 p.m. Hughes also delivered a copy of the May 26 agreement between the Association and Embassy. Saunders again inquired as to what the time element was, and Hughes set forth the provisions requiring the payment of $1 million on July 1 with the liquidated damage clause of $200,000.

At this time Saunders informed Hughes that if the Department of Justice found the transaction “objectionable it would get in touch with the Association between now and July 1 and that if [the Association] were not advised between now and then of any objections [it] could assume that there were none.” Saunders suggested that Hughes could call around the 24th or 25th of June if he wanted to ease his mind and Hughes agreed to do this. At no time during the discussion was Hughes (or Moss) advised that the Department considered the acquisition to be a violation of the antitrust laws. On June 25 Hughes telephoned Saunders to “obtain the Department’s decision as to the proposed deal.” Saunders responded that certain statements which Ward had made in the newspapers prevented the Department’s giving him a decision for two or three weeks. Hughes drew to Saunder’s attention the provision of the agreement requiring the $1 million payment on July 1, and Saunders indicated he thought the Association should make an effort to extend the date of payment.

Hughes indicated he did not think the owners of Embassy would agree to this. Immediately after the telephone call to the Department on June 25, Hughes consulted with Herbert Bergson, Esq., and Herbert Borkland, Esq., of the firm of Bergson & Borkland. Berg ⁶³³ son, the former Assistant Attorney General in charge of the Antitrust Division, told Hughes that he concurred in general counsel’s opinion that the transaction was immunized by the provisions of the Capper-Volstead Act and that the Association would not be violating the antitrust laws if it acquired Embassy. On June 28, 1954, Hooper, on behalf of the Association, wrote to the Honorable Stanley N. Barnes, the Assistant Attorney General in charge of the Antitrust Division, stating that the Association, under its contract, was obligated to make the $1 million payment but that in view of the Department’s interest the Association was making the payment in escrow.

This letter was delivered in person by Hughes to Mr. Barnes at the Department. The Association never received a response to this communication. On July 8 Hughes, Moss and Ward again went to the Department of Justice for a conference on the proposed acquisition. The attorneys from the Department asked more questions, but at no time did they suggest to counsel for the parties to the transaction that the Department considered the acquisition to be a violation of the antitrust laws.

On July 13, 1954, Hughes, along with Messrs. Moss and Ward attended another conference at the Department of Justice. No suggestion was made at this conference that the Department considered the acquisition to be a violation of the antitrust laws. Having heard no objection from the Department of Justice, as they were told they would if the Department considered the transaction in violation of the law, the Association consummated the purchase of Embassy on July 26, 1954, by making the ⁶³⁴ payments provided for in the May 26, 1954 agreement.

The Association paid, once accounts receivable were valued, approximately $3,890,-000 for Embassy. In the afternoon of July 26, 1954, Saunders attempted to call Hughes but was unable to complete the call because Hughes and Leahy were in a conference. Saunders left word. Approximately 14 hour later Saunders’s secretary called to say that the call was cancelled.

The following day, July 27, Hughes called Saunders who stated that he had cancelled the call when he learned that the transaction had been consummated. Hughes said he would be happy to come down to the Department and fill in the details, and he subsequently received a telephone call that he could do so at 3 p.m. on that day. At this meeting the attorneys for the Department indicated to Hughes that they were “a little surprised” that they had not been advised that the transaction had been consummated. They were reminded by Hughes that the Department was to have advised the Association “if it found anything objectionable and that not having heard from them [he] assumed that nothing was in fact objectionable;” Saunders “conceded” that if the Department had found anything wrong, it was to have advised the Association, and they proceeded to a further discussion relating to the Ward producers, the Capper-Volstead Act and the operation of retail dairies by cooperatives.

It was not until November 21, 1956, some two years and four months after the purchase and on the day suit was filed challenging the propriety of the acquisition, that the Association was first informed that the Department had taken a position on the matter; namely, that the acquisition was a violation of the antitrust laws. ⁶³⁵ We find in the chancellor’s opinion nothing inconsistent with the adopted findings of fact set forth above. Indeed, he further found that the “price paid was a fair and reasonable price”; that counsel relied upon “are most able in the field” of antitrust litigation; that Leahy (now deceased) was “prominent not only locally but nationally [and he had been] dean of a law school in Washington, an outstanding trial lawyer and one of the most able and respected members of the District of Columbia Bar”; that Hughes’s credentials are “most impressive”; that Bergson is a former Assistant Attorney General who had been in charge of the Antitrust Division; that Borkland had had a prominent position in the Antitrust Division. He found also that the directors were fully briefed by counsel; that the decision to acquire Embassy was a business decision and that there was “no basis for the contention that the directors’ mistake constituted gross or culpable negligence.” THE ACQUISITION OF RICHFIELD The second of the “series of acts” arises out of the purchase of the Richfield Dairy Corporation and Simpson Brothers, Inc., trading as Wakefield Model Farms Dairy (Richfield). The findings of fact adopted by the chancellor, with minor editing, follow.

The Association had for a considerable period of time been supplying fluid milk to Richfield. The Association considered these customers to be of great value to the Association since they were purchasing approximately 12,000 gallons a day of its Class I milk. The Association had, however, experienced difficulty in collecting its milk bills since Richfield had been experiencing difficulty meeting its overall financial commitments. As a result the board of directors watched very closely the financial operations of Richfield insofar as they affected its ability to ⁶³⁶ pay the Association, and considered the purchase of Richfield.

Because of the concern over the financial condition of Richfield and the necessity for maintaining the continuing market for Class I milk the board of directors asked the then general counsel, Hughes, and special antitrust counsel, Messrs. Bergson and Borkland to consider the legality of the acquisition by the Association of Richfield. On June 13, 1957, Bergson and Borkland submitted their written opinion to the board of directors that the acquisition of Richfield would be unobjectionable from an antitrust standpoint. Counsel commented that “ [t] he act of the Association in taking over Richfield is not part of a program of development or expansion; it is primarily a salvage operation designed to prevent a very substantial loss.

The fact that the acquisition will furnish additional volume to Embassy in no way detracts from this basic consideration.” In considering the possible purchase of* Rich-field the board was advised that it had been recently approached by a number of nationally operated dairies such as Foremost, Beatrice Creamery, National Dairies and also local concerns such as Thompsons, Alexandria Dairy Products, Giant Food Stores who had expressed an interest in possibly purchasing Richfield. Because of the worsening financial condition of Richfield, the increase in the amount of money owed by it to the Association, the Association’s desire to protect this debt, and the Association’s desire to protect the 12,000-gallon-a-day Class I sales to Richfield, the board of directors on June 14, 1957, after a full discussion of the legal, financial and other aspects of the problem, ⁶³⁷ resolved to purchase the capital stock of Rich-field. At the time of the proposed acquisition of Richfield the Association was already in civil litigation with the Department of Justice over the Embassy acquisition. The board of directors, at all times pertinent to discussion of Rich-field, sought to obtain from the Department clearance of the Richfield acquisition.

Edgar A. Wren, Esq., the attorney for Richfield, had previously secured a clearance for the sale of Rich-field. He requested the Department to “revitalize” this clearance on behalf of the Association. Mr. Joseph Saunders of the Department had, however, advised Wren that because of the pending Association litigation the request had not been considered. Mr. Saunders advised Wren, who in turn advised the Association, that the “parties were free to take whatever action they wish.” On December 6, 1957, the Association purchased the entire capital stock of Richfield for $375,000.

At the time of the purchase Richfield was indebted to the Association in the amount of $556,681.93. It was recited in the contract that Richfield was unable to meet any payments on this indebtedness and that the only way the debt could ever possibly be paid would be through the integration of the Richfield operations into the existing Embassy operation of the Association. In the Annual Report for the year 1957, the membership of the Association was advised as follows: “On December 6, 1957, * * * Richfield * * * [was] acquired and incorporated into the Embassy operations. * * * [It was] acquired by the Association in order to protect its own ⁶³⁸ financial interest * * * and will be disposed of as real estate.” Subsequent to the acquisition of Richfield its operations were merged into the existing Embassy operation. Approximately $750,000 in fixed assets were acquired in the purchase.

The Association sold outright certain land which Richfield had owned for slightly over $50,000 and also sold Richfield’s stock in the Washington Bottle Exchange at a gain of $52,000. Prior to its acquisition Richfield purchased approximately 80 percent of its milk from the Association. When purchased, its volume was 12,000 gallons per day, which represented sales of $379,000 per month and $5,000,000 per year. To develop a similar capacity at a similar plant in Newport News, Virginia (Marva Maid), the Association expended $2,500,000.

The cost to the Association of the capital stock of Richfield was $375,000. It was always the intention of the board to “write-off” the stock of Richfield once the assets of those dairies were transferred to the books of Embassy. When the assets were transferred, the stock became valueless, but the assets which were then on the books of the Association maintained their value thereafter and were reflected in Embassy statements. The annual financial report of the Fluid Milk Division (Embassy) for the year ended December 31, 1958, shows a book value of $4,090,447.-51.

In arriving at this book value, the accountants reflected the “charge-off of accounts and notes receivable of and investment in Richfield $803,544.66.” This figure was deducted before the accountants arrived at the book value for 1958. The $803,544.66 charge-off was, therefore, reflected in the subsequent computation of ⁶³⁹ the “net gain” on the sale of Embassy since that computation was based on the December 31,1960 current book value of the Division. The charge-off would not be again deducted in 1960 since it took place in 1958 and was, therefore, already reflected in the 1960 figure. The 1958 charge-off was reported in the financial reports which were published in the Annual Report for 1958 and distributed to the membership.

On January 9, 1959, the board approved a Finance Committee resolution to reduce the cost of the Richfield stock from $375,000 to zero, which reflected the transfer of the assets to the books of the Fluid Milk Division. We do not see, in the chancellor’s opinion, anything inconsistent with the adopted findings of fact in respect of Richfield. The chancellor observed that it (the Richfield purchase) “has been assailed by the * * * [appellants] as being sheer and gross negligence because at that time antitrust proceedings were already pending.” He went on to say: “We recall, however, an unequivocal communication from Mr. Bergson in the record in this case that in his judgment this acquisition was protected by the Capper-Volstead law. It was on the basis, so far as the legalities are concerned, of his opinion that it went forward, and Judge Holtzoff’s decision sustained the purchase. “As to the business aspects of it, as to the business judgments exercised by the defendant directors, it appears to the court that at the time they made this acquisition, while we may now debate its wisdom, on the basis of the facts as they appeared to them, this cannot be said to be a grossly and culpably negligent! decision for them to have made.

They made it at a price which was not an unreasonable price. They ⁶⁴⁰ made it at a time when the customers of that particular dairy represented a substantial segment of the market. To them undoubtedly it seemed that this was, especially in the light.of the fact that the company was in debt substantially to the Association, that this was conceivably a way of protecting themselves in acquiring not only a dairy and its customers but also its physical properties. This was not an indiscreet or unwise decision.

We may quarrel with it now many years after the fact, but the court cannot say as a matter of fact or certainly as a matter of law that the acquisition of Richfield-Wakefield was a mistake of negligent or grossly negligent proportions.” THE EMBASSY SALE Next in the “series of acts” complained of is the sale of Embassy. The findings of fact adopted by the chancellor are set forth below, virtually without editing. On November 21, 1956, the United States Department of Justice filed a civil suit against the Association alleging that the acquisition of Embassy violated §§ 2 and 3 of the Sherman Act and § 7 of the Clayton Act. 15 U.S.C. §§ 2 , 3, 18. Judge Alexander Holtzoff of the United States District Court for the District of Columbia dismissed the § 2 Sherman Act charge but after a trial held that the acquisition violated § 3 of the Sherman Act and § 7 of the Clayton Act. 167 F. Supp. 45 (1958) ; 167 F. Supp. 799 (1958) ; 168 F. Supp. 880 (1959).

The United States filed an appeal in the form of a Jurisdictional Statement in the Supreme Court of the United States, from the District Court’s refusal to grant certain requested relief and the dismissal of the § 2 Sherman Act charge. The Associa ⁶⁴¹ tion filed a cross-appeal, and the Supreme Court noted probable jurisdiction on both appeals and consolidated the cases for argument and consideration. 360 U. S. 927 (1959). On May 2, 1960, the Supreme Court upheld Judge Holtzoff’s findings of antitrust violations and also vacated the judgment on the § 2 Sherman Act question and remanded the case to the District Court for a new trial on that issue. From the time of the filing of the complaint in the District Court, through the pretrial proceedings, the full trial on the merits, the response to the Government’s appeal in the Supreme Court, the filing of a cross-appeal in the.

Supreme Court, the preparation of briefs, the presentation of oral argument, the subsequent compliance with the Court’s order and the continuous conferences with the Department of Justice, the Association paid Messrs. Bergson & Borkland, special antitrust counsel, $128,224.40 for legal fees, printing of briefs and disbursements for the six-year period covering 1957 to 1962. On May 3, 1960 the Association immediately wrote to all members informing them of the Supreme Court’s decision. Secretary-Treasurer and General Manager Hooper informed the members that “we respectfully differ with the Court but as good citizens we will obey, with good grace, its decision” and sell Embassy as the court had ordered.

At the May 5, 1960 board of directors meeting Messrs. Hughes, Bergson and Borkland explained the Supreme Court’s decision to the board. The board considered “the different possibilities of disposing of the Embassy Dairy property” and the board authorized management to “secure an appraisal of Embassy Dairy ⁶⁴² for guidance in its future disposition.” On July 8, .I960, the Plant Committee- passed a resolution in the form of a policy directive which instructed management, in disposing of the Embassy operation, to steer away from assurances that the Association would stay out of the retail milk business and not to effect a sale of Embassy which would limit the Association’s right to sell its members’ milk in any way not prohibited by the orders of the United States District Court. On July 15, 1960, Messrs.

Hughes, Bergson and Borkland discussed with the board the policy to be followed in disposing of the assets of the dairy and the board approved the Plant Committee’s resolution of July 8 with respect to the policy directive that management should follow in conducting negotiations. On August 9 Hooper sent a memorandum to counsel setting forth certain questions he wanted answered so as to “guide [him] in the necessary actions in connection with the Embassy Dairy decree.” On August 24, i960 Messrs. Hughes and Borkland answered this memorandum, stating in relevant part that in disposing of the dairy the Association could: (1) refuse to give a non-compete agreement; (2) could give a partial non-compete agreement; (3) that the Association was required to sell Embassy as a “going concern” so as to restore competition as it existed prior to their purchase of Embassy; and (4) that the Association could, if it wished, acquire land and build its own dairy in the metropolitan area. On October 10, Marshall and Stevens, Incorporated, independent appraisal engineers, hired by Hooper at the board’s direction, submitted ⁶⁴³ to the Association a preliminary report on the fair market value of the fixed assets of Embassy.

They advised the Association that the fixed assets carried a value of approximately $3,216,000. This included the Richfield assets which had been put on Embassy’s books, but not those the Association had sold and also did not include accounts receivable. On October 24, Marshall and Stevens submitted their final report, and it showed an appraised value of $3,-261,000 for fixed assets. On July 13 J. Ridgely Parks, the manager of Embassy, on behalf of himself and other management employees had written to Mr. Hooper expressing an interest in purchasing the dairy for $2,500,000.

This offer was below the price the board and management expected to be able to secure for the assets of the dairy and no other proposal was ever received from this group. Commencing in the early summer of 1960, numerous businessmen, attorneys, accountants and other interested parties, many apparently brokers, contacted Hooper and expressed interest in the dairy property. Hooper responded to all inquiries and conducted correspondence and conversations with the interested parties with a view toward further stimulating their interest in the dairy. With the exception of Mr. Park’s offer and two- other offers, one made in late October and one in early November, none of the other parties who had expressed an interest in the dairy made any offers to purchase it.

In early October of 1960 Hooper became aware of the interest of Irving D. Berger in purchasing Embassy. Berger was personally known to Hooper as a man of very substantial means in his own right and also was the son-in-law of one Garfield Kass, also a very well-to-do and reputable businessman. ⁶⁴⁴ On October 24, 1960 Berger and his attorney, Mr. Oliver McGuire, met with Hooper. Berger advised Hooper that they wished to make an offer to purchase the dairy and conveyed to Hooper an offer which Hooper in turn conveyed to the Plant Committee. On October 28, 1960 the Plant Committee passed a resolution stating that the offer of Berger should be rejected.

At the October 28 board meeting, however, after a full discussion of Berger’s offer and his interest in the dairy, it was resolved by the board that “Mr. Berger’s offer to purchase Embassy Dairy should be accepted in principle with the proviso that the president appoint a committee including Mr. Hooper and Mr. Remsberg as members to negotiate further as to more favorable price and terms if possible and that the committee be empowered to close the deal.” Under the orders of the United States District Court the Association was required to dispose of the dairy by June 20, 1961. Hooper, because of the profits being made from operation of the dairy, wanted to hold on to it as long as possible. Berger, however, had indicated that he considered his offer to be bona fide and in light of the District Court’s orders was disposed to report to Judge Holtzoff that the Association was not complying with the Court’s orders. Accordingly, negotiations for the sale continued.

Once it became obvious that Berger had a bona fide interest in purchasing the dairy, the Association management and board members undertook independent efforts to evaluate his financial condition and standing. Their investigation showed a very substantial net worth and excellent financial rating. On October 24 Hooper noted in a memorandum that after his conference with Berger he checked with the Riggs Na ⁶⁴⁵ tional Bank and was advised that Berger had assets of over $20,000,000 and was half-owner of the Seven Corners Shopping Center in Virginia. On October 27, 1960, Mr. Giles Miller, President of the Culpeper National Bank and a member of the board and Plant Committee, received a reply from Mr. James F. Bridges, a vice president of the Riggs National Bank of Washington, to his inquiry on Berger’s financial standing, Miller was informed that Berger was a “gentleman of high character and integrity, and he is possessed of considerable means.

We regard him as being entirely responsible for his business commitments. * * * Because of the size of his net worth, his endorsement on a note would add considerable strength. [W] e are pleased to recommend Mr. Berger to you.” Berger was also requested to submit a financial statement, and he did so. On November 2, Berger appeared with his attorney Mr. McGuire before a Special Committee of the board of directors wherein his original offer and an Association counterproposal were discussed. The Special Committee proposed the submission of a new offer to Berger, and on November 3 Berger responded with a counterproposal which accepted the terms as proposed by the Special Committee on November 2, except for the fact that Berger refused to have his wife, because of her own independent wealth, also endorse any notes given by his corporation in the transaction. He also assigned different values to different items, but agreed to pay $3,-250,000, plus accounts receivable.

The terms of sale as accepted by Berger were $2,355,000 for the physical assets, cash of the business, $150,-000 for good will, $745,000 for a five-year non-compete agreement, plus accounts and notes receivable would be paid to the Association. ⁶⁴⁶ On November 3 a meeting of the Special Committee of the board charged with responsibility for tihe sale was held via a telephone conference call to consider Berger’s amended proposal. During the course of the negotiations Berger had offered as security to the Association either a lien on the assets of the dairy or his personal endorsement on all notes given in the transaction. The Special Committee determined that, in view of Berger’s financial statement and reputation, the assurance which had been given by the Riggs National Bank, and the undesirable location of some Embassy property, the transaction could be best secured through Berger’s personal endorsement and guarantee of all notes. The Committee discussed Berger’s refusal to have his wife endorse the notes and finally determined to accept Berger’s offer, with his endorsement as security, provided that Hooper once again received adequate assurances from Berger’s bank references.

Acting on these instructions, Hooper contacted Mr. Roland Carr, the senior vice president of Riggs National Bank; Mr. Bridges, the vice president of Riggs National Bank; and Mr. Russell Bolton, treasurer of the National Savings and Trust Company, and in each instance he received adequate assurances as to Berger’s ability to pay. Accordingly, Hooper set up procedures for the execution of an agreement. On November 4, 1960, an agreement between Metropolitan Food Corporation, Inc. (Metropolitan) and the Association was signed wherein, subject to the approval of Judge Holtzoff, the dairy was purchased for a price of (once accounts receivable were valued) $4,261,870.70. This price was in excess of the appraised value of the dairy.

The sale to Metropolitan, a corporation headed by Berger, was made on the following terms: ⁶⁴⁷ (1) at the time of settlement a cash payment to the Association in an amount equal to the cash in banks and on hand of the dairy; (2) a single $250,000 non-interest bearing note due six months from date of settlement; (3) a single non-interest bearing note in an amount equal to the notes and accounts receivable to the dairy due twelve months from the date of settlement (determined to be $773,455.-53);and (4) a single note for $3,000,000 bearing interest at the rate of 5 percent per annum due fifteen years from the date of settlement; interest to be paid semi-annually, principal to be paid semi-annually in twenty-five successive installments of $100,000 each and a final balloon payment of $500,000; the first installment was to become due two years after the date of settlement. All notes were to be unconditionally endorsed by Irving D. Berger, and the effective date of settlement was to be January 1,1961. On October 27 Hooper had received a letter from Mr. Bruce Philipson wherein he expressed interest, on behalf of an unnamed client, in the acquisition of Embassy. On November 2, 1960, Philipson tendered an offer on behalf of his unnamed client in the amount of $4,000,000.

It is not known on what date this offer was received by Hooper. At no time during Hooper’s contacts with Philipson did Philipson indicate who his client was. Hooper and the entire board considered this a very critical part of the negotiations since the Association was most concerned with insuring that once it sold Embassy it would continue to be able to sell its producers’ milk to the purchaser of the dairy. Not knowing who Philipson represented Hooper was not in a position ⁶⁴⁸ to determine if he could insure that Embassy would continue to purchase its milk from the Association.

In reporting to Judge Holtzoff on its efforts at sale the Association had stated that it “refused to negotiate with any broker or agent * * * unless such broker or agent would reveal the identity of his principal * * Berger, on the other hand, had given assurances that if he bought Embassy he would continue to buy from the Association. These assurances were in fact honored and to this day the Association continues to retain this customer. The agreement between Metropolitan and the Association for the sale of Embassy was approved by Judge Holtzoff. The parties thereafter proceeded to final settlement with an official settlement date of January 1,1961.

In the January edition of the Maryland and Virginia Milk Producers News, a monthly house organ sent to every member of the Association, a report on the “Sale of Embassy Dairy” was made to each member. The first sentence of said report reads as follows: “The sale of Embassy Dairy to the Metropolitan Food Corporation, headed by Mr. Irving D. Berger, a substantial and influential Washington businessman * ? *.” The article continued, “[i]n summary, however, the sale figure for Embassy Dairy would be $3,-250,000 plus the exact net amount of accounts receivable, and cash in banks * * *.” In the 41st annual report of the Association for the year ended December 31, 1960, the secretary-manager reported to the membership that “[a]s you have read in previous issues of The NEWS Embassy was sold to a local lousiness man on January 1, 1961 for the sum of $3,250,-000 plus the amount of cash on hand and the value of accounts receivable. This resulted in a ⁶⁴⁹ gain of approximately $450,000 whieh becomes a part of the Members’ Revolving Reserve Fund.” He also reported in a separate section dealing with the “Antitrust Case” “that [i]n compliance with the court’s order, Embassy Dairy was sold effective January 1, 1961, to Mr. Irving D. Berger, a Washington businessman. Further information on the sale of Embassy has been included in other parts of your Annual Report.” During the period of Association ownership of Embassy $5,173,892.12 in profits was realized from the Embassy operation.

As a result of the sale to Berger $465,794.41 in net gains was also realized by the Association. The chancellor’s opinion contains nothing inconsistent with the findings of fact set forth above. The following excerpts from his opinion indicate that he made additional findings: “Parenthetically, we do not agree that this was a fruitless appeal. Monies had to be expended, of course, in counsel fees, but these eminent counsel recommended to the Association’s directors that this Association had more than a 50-50 chance.

As a matter of fact, we recall in the communications of the manager that they had a better than 90 percent chance of reversing Judge Holtzoff. “This is not a situation where inexperienced counsel are making irresponsible recommendations to a client, but eminent counsel are making it on the basis of the record then made. It seems to the court that the appeal was properly pursued.” ❖ * ❖ “When we read the bill of complaint and the Court of Appeals opinion in this case, [we] had no idea who Mr. Berger was. In the trial in this action we have heard and have had him identi ⁶⁵⁰ fied as a man of very substantial means living and doing business in the District of Columbia, receiving the highest recommendation of the Riggs National Bank of Washington, D. C., one of the most responsible financial institutions in the area, if not the country, a recommendation made to Mr. Hooper, made to Mr. Miller, who himself was a banker and who ik a correspondent of the Riggs National Bank. We have information here with respect to this man’s assets aggregating $20 million, and we know from the testimony in this case that he is related to a family of wealth, the son-in-law of Mr. Garfield Kass, and together with Mr. Kass having developed the Seven Corners Shopping Center, a very substantial commercial enterprise in nearby Virginia. “So it must be said that, with respect to this man, his signature was indeed better than a lien on the property, and we so find in this case. “It may well have been that the directors should have obtained not only his signature as an endorser, but, also, a lien on the property.

That was not the option available by the purchaser. It wasn’t made available to the directors. They had their option and they chose to get his signature and, as the record shows, they protected themselves with respect to a waiver of the wife’s dower interest.” 4 THE $500,000 DISCOUNT ALLOWED ON THE NOTES ENDORSED BY BERGER The fourth in the “series of acts” claimed to be “culpable mismanagement in the affairs of the Association” ⁶⁵¹ is the discount allowed to Eastern Food Products, Inc. (Eastern), the successor to Metropolitan, in consideration of the prepayment in full of the notes endorsed by Berger. The findings of fact adopted by the chancellor are set forth below.

Shortly prior to August 12, 1963, Hooper learned through newspaper articles in the Washington papers that Berger had made provisions for the sale of the assets of Embassy to the Southland Corporation of Dallas, Texas. On August 12, 1963, Hooper wrote to Berger stating that the Association was concerned and interested in knowing how this transaction was going to affect the $2.8 million note which was still due the Association from the sale of Embassy to his interests. Hooper received a prompt reply from Mr. Oliver McGuire, Berger’s attorney, stating that the interests of the Association “have not been jeopardized,” and that “Mr. Berger and Eastern Food Products, Inc. are able to and, in my opinion, will meet their respective obligations to the Association when due.” Hooper brought this matter to the immediate attention of Mr. J. Homer Remsberg, the Association president, who told him he too was concerned. On August 15, 1963, a conference took place between Hooper, Berger and McGuire.

The parties concerned themselves with the sale of the Embassy assets to the Southland Corporation and the Association’s rights under the note it held. Berger advised Hooper that Eastern had never defaulted on any payments to the Association and that the Association could continue to expect all payments to be made in full when they became due. Berger further stated that he was under no legal obligation to anticipate pay ⁶⁵² ments and intended to meet them in accordance with the terms of the note. At this conference, or at another earlier conference between the parties, Berger suggested to Hooper that had he been willing to consider an early payment of the note he would require a $1,000,000 discount for so doing.

Hooper flatly rejected such a proposal. On August 19, Edward L. Merrigan, the then general counsel of the Association, wrote to McGuire requesting full details of the transaction and further information as to how the Association’s interests had been protected. On the same date McGuire responded to Merrigan’s letter setting forth the details of the transaction, which required the final payment of monies to Eastern by October 1, 1963. He further stated that the Association could expect to retain Embassy as a Class I fluid milk customer and that Eastern could now either discharge the note to the Association or make the payments when they-became due.

McGuire pointed out to Merrigan that the Association still possessed Berger’s guarantee of the note and that when the Association took this note its “only real security was the integrity, responsibility and ability of Mr. Berger, and the situation remains unchanged.” On September 3 Merrigan again wrote to McGuire asking that arrangements be made at the earliest date to discharge the $2.8 million note “in whole or substantial part, out of the cash proceeds of sale of the assets which your client acquired from the Association.” McGuire responded on September 5 that his clients had no legal obligation to discharge the note until payments became due, but that they would be willing to consider any proposal along the lines of anticipating the note which the Association ⁶⁵³ would care to make. McGuire also pointed out that a very “substantial discount would be required to induce his clients to discharge the note” because “cash in hand is worth substantially more than cash deferred over a period of twelve years, considering comparative interest rates and the inflationary processes at work.” On September 6 Berger himself wrote Rems-berg, concerning the fact that he would be willing to anticipate the note for a substantial discount but also warning the Association that he was under no legal obligation to prepay a note which was not in default and that if the Association attempted to bring pressure to bear on him through institution of legal proceedings that such a suit would be unsuccessful and he would take appropriate counteraction if any damage were done to his credit or standing in the community. General counsel Merrigan gave full consideration to the Association’s legal position on this matter. He was of the opinion, and so advised the board, that the maintenance of a suit against Eastern as the maker and/or Berger as the guarantor, would have little chance of success.

In arriving at this determination, he considered the fact that: (1) all payments under the existing note (and prior existing notes) had been met when due and owing; (2) at the time of the sale of the assets to Southland, the note was not in default and the next payment was not due until January 1,1964; (3) there was no evidence to indicate that either Eastern or Berger personally were not in sound financial positions so as to enable them to continue to meet their obligations, indeed the evidence was to the contrary; ⁶⁵⁴ (4) the Bulk Sales Act afforded the Association no remedy against Eastern or Berger which would in any way enable the Association to secure prepayment of the note. With respect to the Bulk Sales Act, the Association had received notice of the sale prior to August 12, when Hooper wrote to Berger’s attorneys. McGuire had also informed Merrigan that final payment would not be made until October 1, 1963, at which time the transaction would be closed. The Bulk Sales Act then in effect, 28 D.C. Code § 1701 et seq.

(1961 ed.), did not give the Association a remedy against Eastern or Berger on the note. This act only allowed a transaction to be set aside for failure to notify third party creditors of the sale. It did not give to creditors a right of prepayment of existing debt and the Association had in fact received notice of the proposed sale. More importantly, Embassy was currently purchasing 7 million dollars worth of milk per year from the Association and this volume could be lost through the filing of a specious claim.

On September 13, Merrigan appeared before the Finance Committee of the board and discussed all problems raised by Eastern’s sale of Embassy to Southland. After discussion of the matter the Finance Committee passed a resolution authorizing Merrigan to enter into negotiations for the purpose of attempting to prevent any dissipation of the funds which were now available to Eastern and to take such legal action, with the prior approval of the president, which he thought might be proper or necessary to prevent the dissipation of these funds. Merrigan also appeared before the full board of directors on this same day and discussed with the ⁶⁵⁵ board the problems arising from the sale by Eastern. The resolution passed by the Finance Committee was approved by the board of directors.

Thereafter, a series of meetings and correspondence transpired among Berger, McGuire, Merrigan and Remsberg wherein the parties exchanged various proposals and counterproposals respecting the parties’ legal rights and the amount of discount which would be given if Berger agreed to cause Eastern to prepay the existing $2.8 million note. At this time all payments on the note had been met and it had been reduced from $3,000,000 to $2,800,000. Berger’s final offer to the Association was a discount of $500,000 for immediate payment of the note. Merrigan advised the Board that a suit against Berger could have disastrous consequences since at the time the Association was selling Embassy approximately $7 million worth of milk per year.

To have risked the loss of this customer by filing a tenuous suit without the possibility of securing the payment of the note was, in the opinion of general counsel, and he so advised the board of directors, an unwise step to take. He also advised the board that any action against the financial standing or credit of Berger, a man of the highest financial respect in the Washington community, could expose the Association to a very serious countersuit unless the action was successful. In his opinion, the Association had no legal rights to secure prepayment of the note and he so advised the board. At a Finance Committee meeting and the subsequent board of directors meeting on October 10, 1963, the directors considered the matter of Berger’s final offer of $500,000.

Merrigan advised them that this was Berger’s last offer and ⁶⁵⁶ would involve the immediate payment of $2.3 million plus interest instead of the eventual payment over a 12-year period of $2.8 million plus interest. Merrigan noted that the note was not in default and informed the board that in his opinion as general counsel Mr. Berger was under no legal obligation to prepay the note. He also informed the board that he had discussed the matter with his brother, a bank president in New Orleans. After full consideration he advised the board that in his opinion the immediate payment of $2.3 million would be of substantial benefit to the Association.

Giles Miller, Upton Gladhill, Edward Norman and J. Homer Remsberg testified that they computed, arithmetically, the value of $2.3 million immediately as compared to $2.8 million paid over twelve years. They also testified that the board considered the fact that the Association was preparing to borrow money for construction of a new plant in Newport News, Virginia, and also in connection with payments on the'1957 Revolving Fund Certificates. They testified immediate cash payment by Berger would obviate the necessity of borrowing this money and the directors took this into consideration during their discussion. After a full discussion of the entire transaction and taking into consideration the opinion of general counsel and those members of the board who had particular banking expertise, namely Messrs.

Miller, Gladhill and Norman who were all bank officers or directors, the board voted to accept $2.3 million in full settlement of the outstanding debt of Eastern of $2.8 million to the Association. On October 14, 1963, the Association accepted the payment of $2.3 million, plus interest, in ⁶⁵⁷ full discharge of the outstanding indebtedness of Eastern to the Association. The payment and discount was reflected on the Association’s books and was reported by the auditors, Wayne Kendrick & Co., in the Association’s financial statement for the year ended December 31, 1963 as “discount allowed on prepayment of Eastern Food Products, Inc. note — $500,000,” which financial statement was published in the 44th Annual Report for the year ended December 31st, 1963. For the purpose of informing the membership Merrigan prepared an 18-page statement dealing not only with the discount but the entire Embassy matter from the Association’s purchase of it in 1954 through the discount on the note.

This statement was presented to the membership, along with the Dugan Investigation Report, at district meetings in the spring of 1964. The chancellor, in his opinion, took notice of the fact that Berger, at the time, had in his possession “millions of dollars in cash as a result of the sale” of Embassy to Southland. He said “the situation was disturbing [to the directors of the Association] even though Berger was a man of great wealth and reputation” but, he added, “Berger was plainly anxious to avoid the possibility of a suit clearly suggested by Merrigan.” As he expressed it “should they wait out the period of time for the payment of the notes [absent a lien on Embassy’s assets] * * * or press for some other solution?” He went on to say: “Among the circumstances they considered were the facts that they were faced with the necessity for substantial borrowings that year and the next year in connection with the revolving fund certificates, and something in the area of $1 million that year in connection with Mar ⁶⁵⁸ va-Maid and other operations; and on the basis of their best business judgment they considered that getting substantially paid then was much better than waiting for the period of time to which we have referred.” THE HARRISON DAIRY PRODUCTS ACQUISITION, THE DUGAN INVESTIGATION, THE HOOPER AND ROBINSON SETTLEMENTS, AND DISCLOSURE TO THE MEMBERSHIP The final items in the “series of acts” said by the appellants to constitute fraud and culpable mismanagement will be treated under this heading since there is something of an overlap in this regard. The findings of fact adopted by the chancellor, with some editing, are set forth below.

In the spring of 1961 Hooper discussed with several members of the board the possibility of the Association selling its milk products on the Florida market. One of the Association’s largest customers in the Florida market, Galloway West, had recently entered into an arrangement to purchase its supply from the Borden Company, and Hooper was anxious to continue to sell Association products in Florida. Hooper learned that the Florida Milk Commission would not, however, issue a permanent permit to an out-of-state cooperative. They would only issue individual shipment permits.

J. Homer Remsberg, the then president of the Association, had a conversation with Hughes, the Association’s general counsel, in the spring of 1961 “regarding * * * selling products in Florida.” This conversation was “not on the subject” of Hooper and Robinson setting up a private corporation but rather dealt with the inability of the Association to get a permit for ⁶⁵⁹ the Florida market. Hughes was told by Rems-berg to look after the Association’s interests. In late July of 1961 Remsberg found an undated letter on his desk from Hooper in which Hooper sought to review with him “the organization of the distributing corporation * * * Robinson and I have set up to handle Association products as well as some local products in Jacksonville, Florida.” The statements and representations in the letter were subsequently joined in by Arthur V. Robinson, who also signed the letter. The letter stated that Robinson, Hooper and members of their families were the beneficial owners of the capital stock of this distributing corporation.

Hooper stated in the letter that it was his intention to be on record so that if the Association felt the maintenance by them of the corporation was not in the best interests of the Association they would sell their stock to the Association at whatever the fair market value might be. Robinson agreed with these representations. Although Remsberg recalled discussion of the Florida market prior to receipt of the undated letter, he never had a discussion with Hooper or Robinson, wherein he was advised by either that they were setting up a personal corporation in Florida. Remsberg had never approved of such a corporation, and the board had never authorized one.

After receiving the undated letter, Remsberg called Hooper into his office for a conference. He informed him that his and Robinson’s ownership of Harrison Dairy Products (Harrison) was, in his opinion, a “pure conflict of interest” and that as president of the Association he would have to “take it [the ownership matter] ⁶⁶⁰ to the board” and that in his opinion it “cannot be.” On August 7, 1961, Remsberg received an eight-page letter from Hooper, which also dealt with Hooper’s and Robinson’s ownership of Harrison in Jacksonville, the distributing corporation he had referred to in the prior letter. The first member of the board of directors with whom Remsberg discussed Hooper’s revelations on Harrison was F. Upton Gladhill. The discussion took place sometime in late July along the side of the road near Gladhill’s pea field.

Remsberg explained to Gladhill what he had come to learn about the ownership of Harrison, and Gladhill informed Remsberg that he too thought the matter should be brought to the attention of the members of the board at the next meeting. At the Plant Committee meeting on August 10, 1961, an executive session was held wherein Remsberg brought the members of the Plant Committee up to date on what he had learned about Hooper’s and Robinson’s ownership of Harrison. The matter was further discussed at subsequent board meetings and a decision was made by the directors that the situation could not continue as it was and that the possible purchase of Harrison should be explored. Subsequent to the disclosure of Hooper’s and Robinson’s interests in Harrison, Hooper advised Remsberg that he was scheduled to appear before the Florida Milk Commission.

The appearance, he suggested, could only be made in his capacity as an officer of a Florida corporation, and he also deemed it in the Association’s interest for him to do so. Conversations, with Robinson on the possible purchase also took place. ⁶⁶¹ At the board of directors meeting of January-12, 1962, the board passed a resolution authorizing the Executive Committee to go to Jacksonville, Florida, to make a first-hand inspection of the Harrison operation. On February 1, 1962, the Executive Committee met at the Harrison plant in Florida for the purpose of inspecting the facilities. What they saw was a “going dairy concern.” It was a small plant, well kept, with an inventory of powdered and sterile milk, and several employees were present and working.

The overall impression was one of substantial activity at the facility. On February 9, 1962, the Executive Committee recommended to the board that the Association purchase Harrison. On the same day the board approved the Executive Committee resolution. In approving the purchase of Harrison, on terms to subsequently be determined, the board of directors took into account the personal inspection trip by members of the Executive Committee and their report that the operation was a “going concern.” They also considered the elimination of the conflict-of-interest situation, which they believed the operation of Harrison presented.

The board was also aware of the potential Florida market for Association products which Harrison was apparently serving. Remsberg requested Edward L. Merrigan, an attorney who had been doing work for the Association, to represent the Association in drawing up the final papers for the sale of Harrison. Remsberg took this step to insure protection of the Association’s interest since Hughes, the then general counsel, had been involved in the initial chartering of Harrison. Remsberg gave