Appendix — Terrydale Liquidating Trust v. Barness

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Z) Supreme Court, U.S.

FILED

38 =4 38 SEP 9 1988

No. 88- JOSEPH F. SPANIOL, JR.

In THE

Supreme Court of the United States

OCTOBER TERM, 1988

TERRYDALE LIQUIDATING TRUST,

Petitioner,

-U-

HERBERT BARNESS, JOHN F. BisHop, EpGar H. CHAPPELL,

CuHar.es W. Corsitt, GEorGE S. MANN, BROOKS WALKER,

Jr., Lours W. WALKER, and CHaARLEs M. WILLIAMS,

individually and as Trustees of, and Davip B. BRYANT

as Trustee of, SAN FRANCISCO REAL EsTATE INVESTORS,

and Kerrn L. Brown, individually, and as SAN FRANCISCO

REAL Estate INvesTors, INC.,

Respondents.

APPENDIX TO PETITION

FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SIDNEY BENDER*®

AARON LEWITTES

JANINE L. BENDER

LEVENTRITT LEwITTEs & BENDER

1205 Franklin Avenue

Garden City, New York 11530

(516) 742-4250

Counsel for Petitioners

September 9, 1988 3 * Counsel of Record

TABLE OF CONTENTS

Appendix A, Opinion of the United States Court of

Appeals for the Second Circuit dated May 12,

1988, affirming the judgment of the District Court.

Appendix B, Final Judgment of the United States

District Court, Southern District of New York

(Sand, J.), dated August 28, 1987..........0.0.0.

Appendix C, Judgment of the United States District

Court, Southern District of New York (Clerk),

co | rer reer TTT Terre eee

Appendix D, Decision on the merits of the United

States District Court, Southern District of New

York (Sand, J.), dated August 26, 1986...........

Appendix E, Opinion on motions for summary

judgment of the United States District Court,

Southern District of New York (Sand, J.), dated

og | Per ST err ere ree Tere eer er

Appendix F, Motion for Sanctions, Fees and Costs

against SFREI and its Attorneys ..............4.-

Appendix G, Motion for discovery relating to agree-

ments to make payments on behalf of SFREI for

any legal fees of the former Trustees of TRT,

Michael Gramlich and James Kostoryz, in con-

nection with their deposition and trial testimony.

Appendix H, Affidavit of Douglas M. Kraus, dated

POM TS, TT anctenans tees Sens po eee

Appendix I, Excerpt of Murphy testimony.........

Excerpt of O’Flaherty testimony ......

Excerpt of Stamper testimony.........

Excerpt of Kostoryz testimony ........

Excerpt of M. Gramlich testimony ....

Excerpt of J. Gramlich testimony .....

Excerpt of J.R. Gramlich testimony ...

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ll TABLE OF CONTENTS

Appendix J, Affidavit of Steven M. Umin, dated

abn ee os

Appendix K, Affidavit of David A. Welte, dated

Appendix L, Letter from Rogers & Wells to the

Honorable Leonard B. Sand dated July 31, 1987,

Appendix M, Letter from Landels, Ripley & Diamond

to the Honorable Leonard B. Sand, dated July 30,

Appendix N, Arguments on plaintiff's motions (i)

for sanctions to strike the award of an attorneys’

fee to SFREI and (ii) for discovery on SFREI’s

tampering with plaintiff's witnesses, on August

Bench rulings (Sand, J.) denying plaintiff's mo-

tions on Augant 27, EN. cee

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Appendix A

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 793—August Term 1987

Argued: April 7, 1988 Decided: May 12, 1988

Docket No. 87-7867

TERRYDALE LIQUIDATING TRUST,

Plaintiff-Appellant,

—_—Vi—

HERBERT BARNESS, JOHN F. BISHOP, EDGAR H. CHAP-

PELL, CHARLES W. CORBITT, GEORGE S. MANN,

BROOKS WALKER, JR., LOUIS W. WALKER, and

CHARLES M. WILLIAMS, individually and as Trustees

of, and DAVID R. BRYANT as Trustee of SAN FRAN-

CISCO REAL ESTATE INVESTORS, and KEITH L.

BROWN, individually, and as SAN FRANCISCO REAL

ESTATE INVESTORS, INC.,

Defendants-Appellees.

SAN FRANCISCO REAL ESTATE INVESTORS, INC., a Dela-

ware corporation, successor in interest to San Fran-

cisco Real Estate Investors, a California real estate

investment trust, ;

Counterclaimant and

Third-Party Plaintiff,

TERRYDALE LIQUIDATING TRUST, a New York business -

trust: TERRYDALE REALTY TRUST, a Missouri busi-

ness trust: OLIVER R. GRACE, OLIVER R. GRACE,

JR., EMILIO G. COLLADO, WILLIAM BOLTON, and

ROBERT A. POSNER, individually and as trustees of

TERRYDALE LIQUIDATING TRUST; J. RUSSELL

GRAMLICH, J. HARLAN STAMPER, THOMAS J.

MURPHY, JOHN D. O’FLAHERTY, and JOHN J.

GRAMLICH, individually and as trustees of TERRY-

DALE REALTY TRUST; LINCOLN TOWER BUILDING

Co., a Colorado partnership, SUBDALE CORPORA-

TION, a New York corporation, MORRIS, LARSON,

KING, STAMPER & BOLD, a Missouri professional cor-

poration, HARRY A. MORRIS, ROY A. LARSON,

THOMAS E. KING, J. HARLAN STAMPER, LAWRENCE

R. BOLD, LYNN C. HOOVER, DONALD H. LOUDON,

GORDON N. MYERSON, STEVEN H. GOODMAN,

TOMMY W. TAYLOR, LAURENCE R. TUCKER, DAVID

M. RHODES, ROBERT B. KEIM, JACK W. ISLEY, JR.,

THOMAS R. LARSON, STEVEN G. EMERSON,

GREGORY M. KRATOFIL, JOHN A. KOEPKE, and

JOHN R. COCKLE, individually and as partners of

MORRIS, LARSON, KING, STAMPER & BOLD,

Counterclaimant and

Third-Party Defendants.

Before:

OAKES, MINER, Circuit Judges,

and POLLACK, District Judge.*

. Honorable Milton Pollack, Senior United States District Judge for

the Southern District of New York, sitting by designation.

Appeals from summary judgment order dismissing

claim of aider and abettor liability of purchaser of real es-

tate assets of trust, sold in alleged breach of fiduciary duty

of trustees; and from dismissal after trial of claim for res-

titution from purchaser as constructive trustee; and from

incidental rulings and orders made during the litigation.

Affirmed.

SIDNEY BENDER, Garden City, NY (Aaron

Lewittes, Janine L. Bender, Leventritt

Lewittes & Bender, of Counsel), for

Plaintiff-Appellant.

REX E. LEE, Washington, DC (Gene C.

Schaerr, David Orentlicher, Sidley &

Austin, of Counsel), for Plaintiff-

Appellant.

DOUGLAS M. KRAUS, BARRY GARFINKEL,

New York, NY (Erskine D. Henderson,

Mitchell C. Sockett, Skadden, Arps,

Slate, Meagher & Flom, of Counsel), for

Defendants-A ppellées.

PER CURIAM:

This appeal grows out of six years of litigation stem-

ming from an unsuccessful struggle in 1981 for contro! of

a registered Missouri real estate investment trust, Terry-

dale Realty Trust (‘‘TRT’’).

On January 9, 1981, BCG Associates (‘‘BCG’’), a New

York partnership, made an unsolicited tender offer for

34.7% of the shares of TRT, offering $33.50 per share, in

cash. The purpose of the offeror was to obtain control of

TRT. Had the shares been acquired under the offer, when

added to the 17.9% interest already owned by BCG’s prin-

cipals, it would have given BCG absolute control of TRT.

Allowing for proration of tendered shares, the TRT stock-

holders would have had only a small amount of their

shares purchased for cash, with the remainder being re-

turned to them.

The trustees, believing that the tender offer was not ac-

ceptable, sought to obtain a better offer from BCG, viz.,

an agreement on its part to acquire 100% of TRT’s shares

at the $33.50 price, but BCG refused to amend its offer to

include all shares to TRT. The trustees would not have op-

posed BCG’s tender had it been for all of the TRT shares.

There were substantial disadvantages for TRT’s stock-

holders apparent in BCG’s partial offer, including loss of

TRT’s favorable tax status, a probable decline in market-

ability of its shares, and possibly cessation of its status as a

reporting company under the Federal Securities Laws,

among other things.

The trustees, two of whom were also substantial share-

holders, set about to seek more attractive alternatives for

TRT’s shareholders. They solicited bids from numerous

corporate and real estate investors, including seven of the

largest and most sophisticated realty investors in North

America. The TRT trustees, in essence, put TRT up for

“‘auction’”’ to the highest bidder. None of the sources ap-

proached was willing to offer a transaction which would

yield more than $33.50 to all TRT shareholders. Ulti-

mately, the trustees turned to San Francisco Real Estate

a Ey am

Investors, Inc. (“‘SFREI’’), and negotiations with the lat-

ter ripened into a proposal from SFREI to purchase TRT’s

four Denver office buildings, representing about 80% of

the value of TRT’s assets, a purchase to be made at prices

set forth in recently obtained independent appraisals.

None of the other potential White Knights was willing to

make an offer as attractive as that of SFREI, and the Dis-

trict Court explicitly found that SFREI’s offer was the

best offer available.

TRT made the sale, and the trustees simultaneously

voted to liquidate the trust and declared a liquidating divi-

dend, thereby thwarting the tender offer. An initial liqui-

dating distribution of $24 per share was declared. Over the

next 12 months, a further $9.85 was distributed to TRT

shareholders, bringing the total proceeds of the sale and

liquidation to $33.85 per share for 100% of TRT’s shares.

After the trustees’ decision to sell and liquidate was an-

nounced, BCG extended its tender offer expiration d1te,

and adjusted its offering price to $9.50 per share in order

to take into account the $24.00 per share initial liquidating

dividend. BCG acquired 80,884 shares pursuant to its ex-

tended tender offer, leaving it with approximately 38% of

the outstanding TRT shares. During 1981, BCG continued

to purchase TRT shares through a series of open market

purchases. By January, 1982, BCG had apparently ac-

quired just under 50% of the outstanding TRT shares.

On January 28, 1982, the TRT shareholders approved

the creation of the Terrydale Liquidating Trust (‘“TLT’’),

the named plaintiff and appellant in this action, and

elected as TLT trustees a slate of nominees controlled by

the BCG group. BCG then caused TLT, newly controlled

by what, in essence, was a defeated tender offerer, to be

named plaintiff in this suit (1) against the former trustees

of TRT, charging that they sold the TRT property at dis-

tressed prices to defeat the tender offer in the service of

personal interests of some of the trustees, and (2) against

SFREI, the purchaser of the realty, alleging that it had

aided and abetted the allegedly tainted sale, and in any

event, that it had sufficient notice of the trustees’ alleged

breach of fiduciary duty to warrant the equitable claim of

restitution from SFREI.

In December, 1982, TLT reached a settlement with the

former TRT trustees under which TLT abandoned its law-

suit against them and SFREI remained as the only defen-

dant in the lawsuit.

In June, 1984, SFREI made a motion for summary

judgment, which the District Court granted in part and de-

nied in part. 611 F. Supp. 1006, 1031, 1033 (S.D.N.Y.

1984). The Court found that there was no genuine factual

issue in respect to plaintiff’s claim that SFREI was an

aider and abettor of the alleged breach of fiduciary duty of

the trustees or to the alleged breach of the unanimity pro-

vision of the Declaration of Trust. The aider and abettor

liability claim was therefore properly dismissed on sum-

mary judgment for TLT’s failure to establish the key ma-

terial issue, SFREI’s actual knowledge. Marine Midland

Bank v. Smith, 482 F. Supp. 1279, 1290 (S.D.N.Y. 1979),

aff’d mem., 636 F.2d 1202 (2d Cir. 1980). SFREI’s con-

structive knowledge was an insufficient basis for recovery.

The Court denied summary judgment on an alleged

domination and control issue pertaining to the trustees.

The sale to SFREI required the approval of three of the

five trustees, including two affirmative votes from among

trustees Stamper, Murphy, and O’Flaherty. All trustees

had voted to sell the assets, and the question raised

whether the votes were independent suggested the need of

a factual determination, as stated by the Judge:

Whether the affirmative votes of the non-Gramlich

trustees [the three outsiders] were legally effective and

valid, however, will depend on whether plaintiff can

establish its claim of domination and control by the

Gramlichs. The existence ve/ non of domination and

control, and of SFREI’s notice of same, involve fac-

tual determinations which prevent this Court from

presently resolving the merits of plaintiff’s restitu-

tional claim.

611 F. Supp. at 1033 (footnote omitted).

After a 14-day non-jury trial in 1986, the District Court,

in a comprehensive and well-reasoned opinion, dismissed

TLT’s remaining claims against SFREI on the merits. 642

F. Supp. 917 (S.D.N.Y. 1986).

In considering, evaluating, and determining to make the

sale of the properties, the trustees were found to have mea-

sured up to the standard set in Hanson Trust PLC v. ML

SCM Acquisition Inc., 781 F.2d 264 (2d Cir. 1986), of rea-

sonable diligence in gathering and considering material

information. The ‘‘independent’’ trustees deliberated a

period of days, not hours, before approving the deal. Dur-

ing that time, as the evidence showed, the trustees solicited

extensively for bids for the assets or stock. Unlike Han-

son, the TRT trustees were not presented with ‘‘more or

less a fait accompli.’’ Rather, the trustees, with the assis-

tance of their expert advisors, considered not just the

SFREI proposal, but all available alternatives, and the in-

dependent trustees had called a separate meeting on their

own initiative at which they gave separate consideration to

the available options; they properly concluded that only a

deal struck with SFREI would benefit a// shareholders.

The duty, indeed the obligation, of the TRT trustees

under the circumstances of this case was to maximize the

value for all shareholders, and Judge Sand had ample

basis upon which to conclude that the trustees had met

their duty of care. They were found to have sought, in the

exercise of an informed business judgment, a solution

which would benefit 100% of the shareholders of the

trust, rather than leaving them to be forced into a minority

position in an entity of which BCG had control, and with

little hope of ever realizing the full value of their remain-

ing investment in TRT. TLT never established a prima fa-

cie case for breach of the duty of loyalty or the duty of

care and the burden to defend the transaction as fair and

reasonable never shifted. Norlin Corp. v. Rooney, Pace

Inc., 744 F.2d 255, 264 (2d Cir. 1984); Hanson Trust PLC,

supra, at 277.

The District Court rejected plaintiff’s contention, as

contrary to fact, that the Gramlichs had acted in self-

interest and in bad faith; and it found that the non-

Gramlich trustees had acted independently, reasonably,

and were not dominated and controlled as alleged; and it

found that all the trustees had properly exercised their

duty of care. In voting for the sale under the proposal and

the Plan of Complete Liquidation, it is clear that the trust-

ees fully recognized that they were voting to give up their

positions of control of TRT and any possible benefits that

they might derive from the continued existence of TRT.

The Judge found further that no circumstances existed

which would warrant imposition of a constructive trust,

since there was an absence of SFREI’s actual knowledge

of any alleged breach by the trustees. Incident to this hold-

ing, the Judge resolved the facts as showing that the ap-

proval of the sale and the liquidation of TRT did not

violate the terms of TRT’s Declaration of Trust; that the

sale was under all the facts and circumstances reasonable;

and that SFREI had no reason to investigate the actions of

the trustees or to think that there was any breach by them.

The District Judge went into the values of the properties

sold, giving careful consideration to and weighing the ap-

praisal testimony, and found that the sales had been made

within the current fair market value. SFREI’s offer was

found explicitly to be ‘‘the best offer available’; the Judge

found that there was no ‘‘fire sale,’’ as contended by the

plaintiff, and that SFREI’s expert had given credible and

reliable testimony. On the facts and circumstances in evi-

dence, the Court properly rejected the contrary hindsight

appraisals of TLT’s expert. At hand were accurate reflec-

tions of the property values, especially in view of the long-

term leases held by a number of tenants. Significantly,

SFREI, an independent outsider, had purchased the prop-

erties in an arm’s-length, reasonable, commercial transac-

tion.

The records on the motion for summary judgment and

of the trial satisfy us that Judge Sand’s factual findings

thereon are not clearly erroneous; to the contrary, they are

amply supported by the record and we agree with his con-

clusions and rulings on the law substantially for the rea-

sons given by him therefor.

The requests for Rule 60(b) relief and Rule 11 sanctions

are without any merit whatsoever. The other specifications

of alleged error appealed from have each been examined

and we find that there is no merit in them.

AFFIRMED.

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Appendix B

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

SAME TITLE

FINAL JUDGMENT

82 Civ. 7920 (LBS)

#87, 1578

Upon the opinion of the Court dated November 19, 1984

granting in part defendants’ motion for summary judgment, the

Court’s opinion after trial dated August 26, 1986, the Court’s

opinions dated October 24, 1986 and April 15, 1987, respecting

reimbursement of attorneys’ fees and expenses, and its bench rul-

ings dated August 27, 1987, and upon all of the other papers filed

and proceedings had herein, ‘t is hereby ordered that Final Judg-

ment be entered in this action as follows:

1. The claims of plaintiff Terrydale Liquidating Trust

(“TLT”) against defendant San Francisco Real Estate Investors,

Inc. (“SFREI”) and all of the other defendants herein are dis-

missed with prejudice.

2. The claims of SFREI against counterdefendants and third

party defendants which have not previously been disposed of are

hereby dismissed with prejudice.

3. SFREI shall recover from TLT, and TLT shall pay to

SFREI, the sum of $1,453,847.10, representing SFREI’s reason-

able attorneys’ fees and expenses through August 28, 1987, and

SFREI shall further recover post-judgment interest on such sum

at the rate specified in 28 U.S.C. § 1961 from October 24, 1986 in

the amount of $69,663.51, for a total award of $1,523,510.61.

SFREI shall further recover post-judgment interest on such total

lla

award from the date hereof to the date of payment, pursuant to 28

U.S.C. § 1961. |

Dated: August 28, 1987

New York, New York

Leonard B. Sand

United States District Judge

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Appendix C

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

SAME TITLE

JUDGMENT

A non-jury trial before the Honorable Leonard B. Sand,

U.S.D.J. having begun on June 10, 1986, and at the conclusion of

the trial the Court having reserved its decision; and the Court

thereafter on August 26, 1986, having handed down its OPINION

(#59760), dismissing the complaint, it is,

ORDERED, ADJUDGED AND DECREED: That the

complaint be and it is hereby dismissed.

Dated: New York, N.Y. Raymond F. Burghardt

August 28, 1986 Clerk

PRT ana coma A es A i SF. a wey vy nae RSP fe

Ty aA re et en UMS a

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Appendix D

TERRYDALE LIQUIDATING

TRUST, Plaintiff,

Herbert BARNESS, et al., Defendants.

SAN FRANCISCO REAL ESTATE IN-

VESTORS, INC., Counterclaimant

and Third-Party Plaintiff,

TERRYDALE LIQUIDATING TRUST,

et al., Counterdefendants and Third

Party Defendants.

82 Civ. 7920 (LBS).

United States District Court,

S.D. New York.

Aug. 26, 1986.

Leventritt, Lewittes & Bender, Garden

City, N.Y., for plaintiff; Sidney Bender,

Aaron Lewittes, Janine L. Bender, of coun-

sel.

Skadden, Arps, Slate, Meagher & Flom,

New York City, for defendants; Douglas

M. Kraus, Erskine D. Henderson, Barry H.

Garfinkel, Mitchell C. Sockett, of counsel.

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SAND, District Judge.

Plaintiff, Terrydale Liquidating Trust

(“TLT”), a New York business trust that is

the successor in interest to Terrydale Real-

ty Trust (“TRT”’), brought an action

against San Francisco Real Estate Inves-

tors, Inc. (“SFREI’’) and the individual

trustees of San Francisco Real Estate In-

vestors, seeking to hold them liable as aid-

ers and abettors of an alleged breach of

fiduciary duty and as constructive trustees

of property allegedly sold to them in viola-

tion of the seller’s fiduciary duties and

Declaration of Trust. On November 19,

1984, this Court granted defendants’ mo-

tion for summary judgment in part and

dismissed the claim that they were aiders

and abettors of said breach. Terrydale

Liquidating Trust v. Barness, 611 F.Supp.

1006 (S.D.N.Y.1984) (hereinafter “Terry-

dale”). Both defendants’ and plaintiff's

motions for summary judgment as to plain-

tiff’s equitable claim for restitution were

denied, however, because material ques-

tions of fact existed as to whether there

was a breach of fiduciary obligation or

Declaration of Trust and, if so, whether

defendants had sufficient notice thereby

15a

such that they held the acquired assets as

constructive trustees for plaintiff's benefit.

Id. at 1012. On June 10, 1986, the action

proceeded to trial. For the reasons stated

below, we find that plaintiff also has failed

to establish any liability on defendants’

part with respect to plaintiff's claim for

equitable restitution.

FACTS

This case presents, with some significant

variations, what has become a common

phenomenon in the securities field: efforts

by management to resist and defeat hostile

takeovers by enlisting the aid of a “white

knight” or other inhibitory tactics. Here,

the significant variations relate to both the

nature of the target and the relief sought

as well as the role defendants played in the

subject transaction. First, :the target was

a Missouri Real Estate Investinent Trust

(“REIT”) which, under relevant IRS provi-

sions, would have lost its preferred tax

status and other benefits if five or fewer of

its shareholders owned 50% of its stock.

Second, having settled its claims against

the target’s trustees and having had its

claims for other relief dismissed, plaintiff

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now seeks to impose upon the white

knight—the entity that purchased most of

its assets—a constructive trusteeship over

those assets for the benefit of the target’s

shareholders. Plaintiff premises this claim

on a theory that the purchaser knew or

should have known that the sale constitut-

ed a breach of the TRT Declaration of

Trust and of the target’s trustees’ fiduci-

ary obligation to the target’s shareholders.

Plaintiff has succeeded in establishing that

this Court has personal jurisdiction over

the defendants and subject matter jurisdic-

tion over plaintiff's claim for equitable res-

titution.

The facts underlying this litigation and

its complex procedural history already have

been articulated in several prior opinions.

See Terrydale, 611 F.Supp. at 1012-1014;

see also Terrydale Liquidating Trust v.

Gramlich, 549 F.Supp. 529 (S.D.N.Y.1982);

Bolton v. Gramlich, 540 F.Supp. 822, 827-

30 (S.D.N.Y.1982). Familiarity with these

prior opinions shall be assumed and the

facts will be restated only to the extent

necessary to set forth our findings of fact

and conclusions of law pursuant to F.R.

Civ.P. 52(a).

17a

Briefly, BCG Associates (hereinafter

“BCG”), a New York limited partnership,

commenced an unsolicited tender offer for

160,000 TRT shares at a price of $33.50 per

share. If successful, the offer would have

given BCG virtual majority ownership of

TRT. The TRT trustees decided to pursue

alternatives to BCG’s offer and “met or

otherwise communicated with seven other

bidders for the purpose of soliciting either

a tender offer for all or part of the TRT

shares or an offer to purchase the assets of

TRT. The trustees also attempted, without

success, to persuade BCG to amend its

offer to provide for purchase of all out-

standing TRT shares.” Terrydale, 611

F.Supp. at 1013 (footnote omitted).

After a Canadian company, Unicorp Fi-

nancial Corporation, decided not to enter

into the battle for control of TRT, its presi-

dent, George Mann, notified SFREI (40% of

whose stock was owned by Unicorp) of the

TRT opportunity. SFREI eventually pro-

posed to purchase approximately 80% in

value of TRT’s assets (2.e., four office

buildings located in Denver, Colorado) after

originally expressing interest in acquiring

all of the outstanding TRT shares.

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Several meetings of the TRT trustees .

followed. First, they met as a group on .

February 2, 1981, to consider the SFREI

proposal and other alternatives to the BCG

tender offer. The “independent trustees,”

t.e., those who were not members of the

Gramlich family, met on February 5 and

concluded that the SFREI offer was in the

best interests of all the TRT shareholders.

All of the TRT trustees unanimously ap-

proved the sale of the Denver properties to

SFREI on February 6 and, in addition,

adopted and disclosed a liquidation plan

whereby the proceeds of the SFREI sale

would be distributed to TRT shareholders

along with the remaining trust assets. A

liquidating dividend of $24 per share would

also be distributed on February 23 to all

the TRT shareholders of record as of Feb-

ruary 19.

1. Breach of Fiduciary Duty

In our most recent opinion involving this

litigation, we determined that the business

judgment rule/duty of loyalty analysis was

applicable to the trustees of a REIT. Ter-

rydale, 611 F.Supp. at 1016. We also not- |

ed that plaintiff had submitted sufficient

evidence to create issues of fact regarding

0 On ee ee EE ome nen

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the self-interest of trustees John Gramlich,

J. Russell Gramlich, and J. Harlan Stamp-

er; the Gramlichs’ domination and control

over trustees Murphy, O’Flaherty, and

Stamper (to the extent Stamper was not

otherwise self-interested); and the fairness

and reasonableness of the transactions at

issue. Terrydale, 611 F.Supp. at 1019-32.

Thus, for plaintiff to prevail in its remain-

ing claim against defendants, it must prove

by a preponderance of the evidence, that,

under the applicable analysis, the TRT

trustees breached their fiduciary duty.

Where business trustees have acted

in good faith and have exercised honest

judgment in lawful and legitimate further-

ance of the trust’s purposes, courts will

neither inquire into nor interfere with their

actions. See Norlin Corp. v. Rooney,

Pace Inc., 744 F.2d 255, 264 (2d Cir.1984)

(quoting Auerbach v. Bennett, 47 N.Y.2d

619, 629, 419 N.Y.S.2d 920, 926, 393 N.E.2d

994, 999 (1979)).' This posture of respect is

affiliated with the “duty of care’ prong of

the trustee’s duty to the shareholders—+z.e.,

“the responsibility of a ... fiduciary to

exercise, in the performance of his tasks,

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the care that a reasonably prudent person

in a similar position would use under sim-

ilar circumstances.” Norlin, supra, 744

F.2d at 264; see also Hanson Trust PLC v. |

ML SCM Acquisition, Inc., 781 F.2d 264,

273 (2d Cir.1986). The duty of loyalty, the

second prong of a trustee’s obligation to

shareholders, “derives from the prohibition

against self-dealing that inheres in the fidu-

ciary relationship.” Norlin, 744 F.2d at

264. Once plaintiff has made a prima facie

showing that the trustees had a self-inter-

est in the subject transaction, “the duty of |

loyalty supercedes the duty of care, and )

the burden shifts to the [trustees] to ‘prove

that the transaction was fair and reason-

able to the trust.’"” Norlin, 744 F.2d at

265 (quoting Treadway Companies, Inc. v.

Care Corp., 638 F.2d 357, 382 (2d Cir.1980);

see also Hanson, supra, 781 F.2d at 273.

The Second Circuit has recently written

that “ijt is not enough that [trustees]

merely be disinterested and thus not dis-

posed to self-dealing or other indicia of a

breach of the duty of loyalty.” Hanson,

supra, 781 F.2d at 274. Rather, they also

must meet the standard of due care “with

‘conscientious fairness’”—i.e., they must

a |

~ at eee

2la

make informed decisions after “gathering

and considering material information” with

“reasonable diligence.” Jd. (citation omit-

ted). If they adhere to “ ‘methodologies

and procedures’ [that] are ‘so restricted in

scope, so shallow in execution, or otherwise

so pro forma or halfhearted as to consti-

tute a pretext or sham,’ then inquiry into

their acts is not shielded by the business

judgment rule.” Jd. (quoting Auerbach,

supra, 419 N.Y.S.2d at 929, 393 N .E.2d at

1002-003); but see id. at 285-91 (Kearse,

J., dissenting).

Plaintiff alleges the two Gramlich trust-

ees’ self-interest as predicated upon desired

continued management of the properties

and the receipt of fees and commissions

therefrom as well as their personal debt

situation. Defendants seem to have con-

ceded that the two Gramlich trustees were

“interested” (see Letter of June 30, 1986

from Attorneys for Defendants at 6), but,

more importantly, the remaining trustees

perceived the Gramlichs to be “interested”

and arranged to meet separately to discuss

the SFREI transaction. See, e.g., Tr. 484-

85.

22a

We note, however, that although plaintiff

contends the Gramlichs’ dire financial

Straits prompted their desperation to con-

summate the deal with the ‘white knight’

which led to the sacrifice of the best inter-

ests of the shareholders (see Terrydale,

611 F.Supp. at 1020-21), this does not ap-

pear to have been the case. While it is true

the Gramlichs had a $890,872 loan obli-

gation falling due on February 10, 1981

(td.), J. Russell Gramlich testified that the

payments on the note could have been met

by turning the Gramlichs’ stock over to

BCG at the last moment if “{they] had no

better offer for our stockholders.” Tr.

1419-20. Michael Gramlich apparently

“was in Kansas City with all [of the] stock

ready to tender it to the Grace people in

case this deal didn’t go through with

(SFRE]I].” Tr. 1431. Although this plan

poses certain difficulties regarding John

Gramlich’s and Michael Gramlich’s appar-

ent ignorance of it (see Plaintiff's Supple-

mental Memorandum of Law of July 29,

1986 at 49-52 (‘‘Plaintiff’s Supp. Memo.”’’)),

the Gramlichs’ prior announcement advis-

ing shareholders not to tender their stock,

and possible short-swing profit problems,

23a

15 U.S.C. § 78p(b), it at least indicates that

the Gramlichs were not as ‘‘desperate’’ as

plaintiff intimates. Moreover, J. Russell

Gramlich also testified that his other in-

vestments could have helped cover the

loan. Tr. 1419.

We also reject plaintiff's contention that

the Gramlichs’ self-interest and bad faith

likewise were demonstrated by their deci-

sion to announce the consummation of the

transaction no later than Friday, February

6, 1981. According to plaintiff, the docu-

mentation regarding rent adjustments sup-

ports its view that the closing did not take

place until Monday, February 9, 1981. Pre-

trial Order at Exh. 3B (“Plaintiff TLT’s

Factual Contentions’) 1182; Tr. 602.

Thus, the Gramlich trustees allegedly ac-

celerated the announcement so that the

TRT shareholders would know they would

receive a liquidating dividend and thereby

defeat the BCG tender offer. This acceler-

ation also allegedly prevented BCG from

seeking to enjoin further consummation of

the closing because of the latter’s belief

that the entire deal had been finalized on

February 6, 1981.

24a

In fact, as Stamper testified, a title com-

pany acting as TRT’s agent had received

the proceeds of the sale on February 6,

1981 “and they had held it over the week-

end because they had no means to transmit

it until Monday.” Tr. 595; 600-01. It was

therefore TIRT’s position that it had the

right to declare the dividend on February 6,

1981. Most importantly, however, on the

facts of the case and the state of events at

that time, it seems highly improbable that

any court would have granted BCG injunc-

tive relief.

Assuming the Gramlich’s self-inter-

est, though, “the Board as a whole cannot

be charged with having acted from self-in-

terest where less than a majority are found

to have done so.” Buffalo Forge Co. v.

Ogden Corp., 555 F.Supp. 892, 904 (W.D.

N.Y.) (emphasis added) (citing Treadway,

supra, 638 F.2d at 358), affd, 717 F.2d 757

(2d Cir.), cert. denied, 464 U.S. 1018, 104

S.Ct. 550, 78 L.Ed.2d 724 (1983); but see

Dynamics Corp. v. CTS Corp., 794 F.2d

250, 256 (7th Cir.1986) (a conflict of interest

is not cured by vesting the power of deci-

sion in a board of directors in which insid-

we Rett Ch ee ar

A ae Nar AIT NO a RO a hata te

25a

ers are a minority). We are satisfied as a

factual matter that of the non-Gramlich

trustees, Stamper was not “improperly in-

fluenced by personal considerations or ben-

efits not available to other shareholders

generally” (see Terrydale, 611 F.Supp. at

1022 (citations omitted)) and Murphy,

O’Flaherty, and Stamper were not so domi-

nated and controlled by the Gramlichs that

their independence and financial disinterest

were overcome. /d. at 1022 (citing Aron-

son v. Lewis, 473 A.2d 805, 812 (Del.1984)).

Although it was bad judgment to allow the

personal attorney for the Gramlichs and

TMC, James Polsinelli, Esq., to attend the

independent trustees’ meeting, we find that

Polsinelli’s presence at that meeting did not

undermine the independent trustees’ care-

ful and objective consideration of the

SFREI offer and their primary concern for

the interests of all of the shareholders.’

See text infra.

Lack of self-interest alone, as we already

have noted, is not enough to satisfy a fidu-

ciary’s duty of care. In Hanson, supra,

the Second Circuit reversed the district

court’s denial of a motion for a preliminary

injunction restraining the exercise of a

26a

lock-up option despite the fact that it

agreed that the defendants had not acted

fraudulently, in bad faith or out of self

interest. 781 F.2d at 274. According to

the court, what made out a prima facie

case of a breach of the duty of care, shift-

ing the burden of justification to the de-

fendants, was the failure of the directors

‘to take many of the affirmative directorial

steps that underlie the finding of due

care.” Jd. at 275. For example, the di-

rectors had voted for the lock-up option

with a “paucity of information” after a

three hour meeting, thereby not availing

themselves of the week’s time available

before the tender offer deadline. 781 F.2d

at 271, 275. Moreover, if they had inquired

into the value of the two optioned business-

es (which generated half of the target’s

income but represented only one-third of

the purchase price for the entire company)

rather than “contented themselves with

their financial advisor’s conclusory opinion

that the option prices were ‘within the

range of fair value,’” they would have

learned that the range of fairness had not

been calculated and Goldman Sachs had not

even prepared a written opinion as to the

VS A a teat a eae os

27a

value of the two optioned businesses. /d.

at 275. According to the Second Circuit,

other things evidencing the improper exer-

cise of due care included the fact that the

target’s principal financial advisor indi-

cated that an “orderly sale’ could achieve

higher prices for the optioned businesse. ,

no opinion had been offered as to what

kind of company the target would be with-

out these “core” businesses, and the Board

had failed to ensure the negotiations of

alternative bids and, in essence, rubber-

stamped a proposal engineered by manage-

ment directors holding a potential 15% eq-

uity interest in the arrangement. /d. at

276-77; see also id. at 269-70.

This Court finds that in the instant

case, the trustees properly exercised their

duty of care. The Board in Hanson was

faced with an unsolicited tender offer for

“any and all shares of [the target’s] com-

mon stock’ for a price per share that was

conditionally raised twice without the tar-

get’s request during the course of lever-

aged buyout negotiations between the tar-

get and a third party. 781 F.2d at 270,

272. In contrast, the TRT trustees faced a

partial tender offer replete with potential

28a

disadvantages.* Like the Board in Han-

son, the TRT trustees sought out other

alternatives under tremendous time pres-

sures; however, the latter also unsuccess-

fully sought to negotiate with the tender

offeror for the purchase of ali outstanding

TRT shares while the former ignored the

tender offeror’s “overtures for discus-

sions.” See 781 F.2d at 269, 270.

Although discussions with SFREI did not

develop into a final proposal until approxi-

mately February 5, 1981, the TRT trustees

had been discussing the proposed asset sale

as well as other alternatives since Febru-

ary 2, 1981. Thus, their unanimous vote

for the final proposal on February 6, 1981

followed four days of consideration com-

pared to the three hours in which the inde-

pendent trustees in Hanson for the first

time learned about and approved the new

leveraged buyout merger agreement and

the proposed lock-up option. 781 F.2d at

271; see also Dynamics Corp., supra, 794

F.2d at 256-257 (target’s management an-

nounced its opposition same day unsolicited

tender offer was announced without study-

ing any business or financial implications

of tender offer or consulting with target’s

cow: eet) ee ee

29a

outside directors). Moreover, the transac-

tion at issue in Hanson demanded the

Board’s “heightened duty of care” in order

to ensure that one did not cross the critical

line between a price low enough to lure a

reluctant potential bidder and one lower

than “ ‘reasonable permission w{ould] al-

low.’” 781 F.2d at 276 (emphasis in origi-

nal) (citations omitted). Since no lock-up

option was at issue in the instant matter, a

“heightened duty of care” was not de-

manded.

Plaintiff emphasizes certain factors as

evidencing the TRT trustees’ breach of

their duty of care. These factors relate to

the Graimlichs’ self-interest in defeating the

BCG tender offer and how this self-interest

allegedly led to a sacrifice of the property

at distressed prices. See Plaintiff's Memo-

randum of Law Opposing Defendants’ Mo-

tion to Dismiss, Under the Business Judg-

ment Rule (June 27, 1986) at 7.4 According

to the Second Circuit in Hanson, to the

extent that self-interest impacts upon the

duty of care even after a court has deter-

mined that there was no fraud, bad faith or

self-dealing, it calls upon independent trust-

ees to take “at least some of the prophylac-

30a

tic steps that were identified as constitut-

ing due care in Treadway [, supra ]’’ when

a self-interested management has made the

proposal at issue. Hanson, 781 F.2d at

277. In Hanson, however, on top of its

15% equity interest, management was dis-

cussing a leveraged buyout with the invest-

ment banking concern ultimately hired as

the Board’s advisors before the Board first

met to discuss the unsolicited tender offer,

and it was management and these advisors

who generated a response to the tender

offeror’s raised bid. 781 F.2d at 277. Con-

fusion over whether the law firm Wachtell,

Lipton, Rosen and Katz _ represented

management or the Board, moreover, con-

tinued “{e]ven after [the firm] was formal-

ly retained by the Board.” Jd. Not only

were none of these factors present in the

TRT transaction, but the Gramlichs certain-

ly did not present the independent trustees

with the SFREI proposal “more or less as

faits accompli, which [the independent

trustees] then quite hastily approved.” /d.

The Gramlichs also did not do something

that was appropriately criticized in Dy-

namics Corp., supra, 794 F.2d at 256-257

—hire an investment advisor to prepare a

—_

3la

“fairness opinion” who was to receive a

bonus if the tender offeror lost a proxy

fight.

Even if the Gramlichs’ alleged interests

amounted to the same sort present in Han-

son, a finding of a breach of the duty of

care would not be warranted. In Tread-

way, supra, the directors, among other

things, hired an investment banking firm to

negotiate for them and to assist in evaluat-

ing the various proposals, asked numerous

questions and requested pro forma balance

sheets for the combined company, and con-

ditioned. their approval of the transaction

on obtaining an opinion regarding its fair-

ness. 638 F.2d at 384. Nowhere, however,

nave these actions been prescribed as the

sole means by which this duty can be ful-

filled. See Dynamics Corp., supra, 794

F.2d at 258 (particular methodology used

by target to analyze tender offer would

have been of “little moment” if the defen-

sive tactic adopted had been acceptable be-

cause the court had “no desire to force

boards of directors into a judicialized mode

of proceeding and ... recognize{d] the time

pressure under which the board was oper-

ating”’).

32a

Here, the independent trustees called a

separate meeting pursuant to their own

initiative. See text supra. They also

knew that the cash each shareholder would

receive was approximately the same under

either proposal, but that only a deal struck

with SFREI would benefit ali the share-

holders; > that no other “white knight” was

willing to offer anything above this value;

and that the BCG tender offer might not

only wreak havoc with TRT’s tax status

but also could leave minority shareholders

in a very disfavorable position. The inde-

pendent trustees even considered revaluing

the Denver properties and concluded that

other problems would obviate the predict-

ability and worth of new appraisals, Plain-

tiffs Exh. 14A (e.g., the instability of the

Denver market; the various encumbrances

on the properties; etc.); moreover, the time

exigencies created by the BCG tender offer

mooted this possibility. Finally, by pledg-

ing their approval of the SFREI proposal,

they did not foreclose further bidding for

TRT. See Hanson, 781 F.2d at 264; see

also Dynamics Corp., supra, 794 F.2d at

258. In fact, the BCG tender offer was

instead extended and adjusted to reflect

33a

the liquidating dividend, by January, 1982,

BCG had acquired just under 50% of the

outstanding TRT stock, and a slate of BCG

nominees was elected to serve as trustees

of TLT when it was created on January 28,

1982. Terrydale, 611 F.Supp. at 1014.‘

Even if we found that the TRT

trustees had breached their duty of care,

we would need to determine whether the

shifted burden of proving the fairness and

reasonableness of the transaction has been

met. See Hanson, 781 F.2d at 277. We

find that such is the case.

It should be noted at the outset that the

idea of liquidating TRT was not-first prom-

ulgated as a response to the BCG tender

offer. John Gramlich had been suggesting

liquidation “for a couple of years” (Tr. 205;

see also Tr. 1264) in order to deal with a

problem REITs collectively had been fac-

ing—the undervaluation of their stock.

See Tr. 841; 1237-38; 1843. As Stamper

testified at trial,

[W]e had discussed whether there would

come a time where we had a duty to the

shareholders because of the underlying

value to liquidate and give them their

34a

money back. The reason we had con-

sidered it more than a year before was

because the value of our shares had got-

ten down to somewhere around 12 or 14

dollars, as I recall it, and we wondered

whether it was fair to the shareholders

to just continue giving them dividends at

the level we were able to or whether we

ought to actively consider selling the

properties and giving them their money

back and letting them reinvest in some-

thing else.

Tr. 564. Courts generally have treated

challenged transactions that facilitate plans

which were under consideration before any-

one moved to acquire stock more favorably

than those “cooked up” solely in response

to cuntests for control. See Norlin, supra,

744 F.2d at 265 n. 7; see also Treadway,

supra, 638 F.2d at 383; Crouse-Hinds Co.

v. Internorth, 634 F.2d 690, 703-04 (2d

Cir.1980). Thus, it does not “strain{ } cre-

dulity” to discern merit in the SFREI trans-

action and subsequent TRT liquidation.

Norlin, 744 F.2d at 265.

That such merit conceivably is present is

buttressed by a comparison to Joseph E.

Seagram & Sons, Inc. v. Abrams, 510

35a

F.Supp. 860 (S.D.N.Y.1981). There, a

tender offer prompted the board, once legal

proceedings collapsed, to announce “a pro-

posed buy-out of a small segment only of

stockholders, using the corporate till to ac-

complish this at a price [$15 per share

above the tender offer price] and with a

preferred stock issue in the back-

ground....” 510 F.Supp. at 861. A “fren-

zied search for a competitive third party

offer” had not as yet panned out and “a

proposed selling off of the assets was in

contemplation by a plan to seek the sale of

{the target’s] attractive properties, ... one

of ... which yield[ed] 10% of the corporate

earnings, and to raise more cash to buy in

more stock in that way with the company’s

treasury.” /d. at 861-62. In issuing a

temporary restraining order sought by the

tender offeror, Judge Pollack opined that

{ijt [wa]s inconceivable that an alleged

flourishing enterprise ha{d] authorized its

board to subject ... the company to a

scorched earth policy ... merely to thwart

a change in existing stock ownership which

may end the tenure of the present directors

and key officers of the company.” /d. at

861.

36a

Plaintiff has attempted to show that the

sale of the Denver properties was not fair

to TRT and its public shareholders because

the buildings were grossly undervalued.

Specifically, plaintiff has alleged that the

June 1980 appraisal of the Lincoln Tower

Building prepared by Blain Chase under-

stated its true value as $18,000,000. Plain-

tiff claims that this undervaluation was

evidenced by the November 1982 sale clos-

ing of the same building by Lincoln Tower

Building Company (when values in the Den-

ver office building market were lower) to

Subdale Corporation for $26 million. Plain-

tiff also points to Chase’s “Preliminary Re-

valuation” of the fee in the amount of $24

million on February 2, 1981. Plaintiff fur-

ther claims that Chase, inter alia, utilized

in his June 1980 report a capitalization rate

that was too high and an economic rental

rate that was too low.

With respect to the Petroleum Building,

sold to SFREI for $6,713,000, plaintiff

claims that the revised appraisal of Van

Court & Company (October 1980) over-

looked both a significant change in rental

rates and the sale of the Lincoln Center

Building, the same sale that had prompted

ALE ES 6 0 RR, Bail EE TB DOS Paes dea

ee EE Sete Bon SES Se TCR ee ey ee coe ere te en Nt ake Cone nan tb

37a

Chase’s ‘Preliminary Revaluation” of the

Lincoln Tower Building. Plaintiff also

claims that the market in February 1981,

when TRT sold the Petroleum Building,

was no different than that in December,

1981, when SFREI did a property analysis

and evaluation of its leasehold interest in

the building and valued it at $12,400,000

(“almost double what it paid TRT’’); Jo-

seph J. Blake & Associates received and

concurred with SFREI’s estimate of cur-

rent fair market value. Plaintiff's Exh. 62.

As to the Travelers Building (also known

as the “101 University Building’’), sold to

SFREI for $2,485,000, plaintiff first claims

that TRT itself admitted in January, 1981

that it appraised the building to Mid Ameri-

can Bank at $4 million. Plaintiff also

claims that the May 1980 Van Court &

Company appraisal was obsolete as of Feb-

ruary, 1981 due to the fact that the entire

building became vacant on July 31, 1980,

allowing SFREI to lease the entire building

at the then higher current market rates.

Finally, plaintiff once again compares the

appraisal to SFREI’s own December, 1981

property analysis and evaluation, with

which J. Blake and Associates concurred,

————————

38a

valuing the leasehold interest at $4,950,000.

Plaintiff's Exh. 48. With respect to the

Century Bank Building, plaintiff also

claims that TRT sold its fee interest at a

price substantially below the building’s fair

market value.

Plaintiff's expert witness, Joseph Farber,

MAI, CRE, also estimated the value of the

leasehold estate interests in three of the

subject properties as of February 6, 1981.

Mr. Farber concluded in his report that the

values were as follows: (a) Lincoln Tower

Building —$17,150,000; (b) Petroleum

Building —$11,750,000; (c) Travelers Build-

ing—$3,875,000. Plaintiff's Exh. 662 at 3.

He also concluded that the value of the

third mortgage owned by TRT against the

Lincoln Tower Building was $6,930,000 and

that the value of the leasehold estate inter-

est in this same building may have in-

creased somewhat by the later April 22,

1981 date. Jd.’

We find that the burden of justification

for the transaction has been met primarily

by the introduction of “evidence to rebut

[plaintiff's] extensive evidence that the

[building] prices were undervalued.” Han-

son, 781 F.2d at 277. The Court’s role, of

oe VO ek

39a

course, is not to ascertain “the ‘precise

value’”’ of the buildings. Jd. at 278; cf

Alpert v. 28 William St. Corp., 63 N.Y.2d

557, 483 N.Y.S.2d 667, 675, 473 N.E.2d 19,

26 (1984). Rather, it is to determine wheth-

er the burden of proving that the SFREI

transaction was fair and reasonable has

been met. For example, in Lewts v. S.L. &

E., Inc., 629 F.2d 764 (2d Cir.1980), a share-

holder’s derivative suit where it was al-

leged that the corporation’s assets were

wasted, the Second Circuit held that de-

fendants had failed to prove that the rental

paid for the years 1966-72 was fair and

reasonable. However, although it noted

that defendants’ own evidence supported

plaintiff's suggested fair rental value, the

Court never determined for its own pur-

poses the precise rental rate. /d. at 772.

With respect to the valuation of the four

Denver properties sold to SFREI, this

Court is convinced that the marketplace at

that time was its most faithful indicator.

First, the trustees never quarreled with the

fairness of the BCG price of $33.50 per

share and would have approved the tender

offer if they had been successful at con-

vincing BCG to make it available to all

40a

TRT stockholders. See, e.g., Tr. 144-45;

147; 195-96; 500; 698; 702; 1249-50. Sec-

ond, in Murphy’s words, “at least seven

sophisticated investors [refused] to pay

more than, at least offer [sic] $33 and a

half a share.” Tr. 148; see also Tr. T07-08,

752, 1246-48. As one of the defendants’

expert witnesses testified, a “spotlight”

was on TRT as early as December, 1981

when the Grace people filed a 13D form,

soon followed by a proxy fight and tender

offer. Tr. 1813 (testimony of Jeffrey

Bloomberg, Managing Director of Bear

Stearns & Co.). These events indicated to

the world at large that a public company

was “in play and anyone interested in ac-

quiring assets for [sic] the company is

alerted that the assets or the company will

be available and starts to make inquiry.”

Tr. 1814. Thus, under such circumstances,

interested parties tend to surface and the

offers tend to approximate the current fair

market value. Tr. 1850.

We also do not find any merit in plain-

tiff’s contention that John Gramlich’s

search for a deal at $35 per share (knowing

he would have ‘‘to settle somewhere in

between 35 and 33.50,” Tr. 811) effectively

ius Rabi) attain bette gh

4la

proscribed higher offers. Tr. 1484. Not

only were four of the trustees themselves

in the real estate business (1.e., the Gram- .

lichs, O’Flaherty, and Murphy), making it

extremely doubtful that they would be un-

aware of the trust’s “unburied treasure’

(see text infra), but if the value of the

stock was as high as plaintiff projects,

SFREI would not have been the only bid-

der.

In Hansan, supra, where one of the

businesses was optioned at $350 million,

“one of the first potential ‘white knight’

leveraged buyout firms ... contacted ...

valued [that particular business] at about

$550 million as part of its consideration as

to whether it would make a tender of-

fer....”" 781 F.2d at 279. No such evi-

dence from other prospective bidders was

adduced here. In fact, the principals of

BCG themselves declined to bid for ‘the

very building (Lincoln Tower) plaintiff now

claims was worth at least $24 million when

the Lincoln Tower Building Company of-

fered it to them for approximately $19 mil-

lion on or about February 17, 1981 (the

latter was prepared to first exercise its

option to acquire the building from SFREI).

42a

Pretrial Order at Exh. 10B(i) (“SFREI’s

Proposed Findings of Fact Relating to

Plaintiff’s Claims Against SFREI’”) 1 148-

49: Tr. 1032-35; see also Letter from De-

fendants’ counsel of July 24, 1986 at 8-9.

Defendants’ own expert witness, E. Nel-

son Bowes, MAI, CRE, reviewed the ap-

praisals for the four Denver properties on

which the sale price was based and conclud-

ed that they were reasonable both at the

time they were rendered and on February

6, 1981. We agree with Bowes’ conclusion.

With respect to the Lincoln Tower Building

and Blain Chase’s February, 1981 “Prelimi-

nary Revaluation,’ we agree that even if

one were to characterize it as a new ap-

praisal, others knowledgeable in real estate

may have found it inappropriate to apply

the capitalization rate that had been uti-

lized to appraise the Lincoln Center Build-

ing, a newer, different class building (2.e.,

class A, while Lincoln Tower was class B) ®

situated in a better location. Thus, what-

ever plaintiff's explanation is for Chase’s

subsequent retraction from his February,

1981 “Preliminary Revaluation,” (Pretrial

Order at Exh. 3B (“Plaintiff TLT’s Factual

Contentions”) 102; see also Chase Dep. of

43a

May 16, 1984), the bottom line is that it was

reasonable for the TRT trustees that knew

about it (see, e.g., Tr. 82, 88-89, 556, 816,

829, 832, 835-37; contra Plaintiff's Supp.

Memo. at 1-12) not to have relied upon it.

In fact, Stamper, John J. Gramlich and J.

Russell Gramlich all testified that even if

the Lincoln Tower Building had been worth

$24 million in February, 1981, they would

have voted for the SFREI sale (primarily

because it took all of the shareholders out

for the most money then offered). See Tr.

556-57, 837-39, 1447; see also text infra.

Plaintiff's criticisms of the methodology

and numerical data (e.g., for rental and

capitalization rates, Plaintiff's Exh. 662)

used in the original appraisals of all of the

buildings also have been adequately ad-

dressed by the defendants (see generally

Defendants’ Exh. U (Bowes’ Appraisal Re-

view Four Buildings); Tr. 1872-1986) and

changes in the Denver rental market from

the appraisal dates up until February 6,

1981 seem to have only either compensated

for earlier overvaluations or made minor

differences in the ultimate price. More-

over, what impresses this Court most with

respect to the validity of these original

44a

appraisals is that neither the appraisers nor

the owners themselves, who were valuing

their own property, had any motivation to

misstate the value. See Tr. 1882 (Farber

himself “did not think that there was any

intention of any of these appraisers to in

any manner, shape or form come to a con-

clusion that was made as instructed by a

client’’).

Compared to what the Hanson court

found raised a serious question that the

assets had been significantly undervalued,

the criticisms voiced here, even if justified,

seem minor. See Buffalo Forge, supra,

555 F.Supp. at 905 (noting that valuations

are not an exact science); see also Tr. 1883

(testimony of Joseph Farber) (stating that

real estate appraisal is an art rather than a

mathematical science). In addition to what |

already has been mentioned, the target’s

principal advisor in Hanson (its investment

banker at Goldman Sachs) himself testified

that he had utilized tonnage, “ ‘a lousy way

to value’’”’ one of the optioned businesses

and had employed a very significant mea-

sure of valuation, expected earnings, with

“the two lowest actual and projected earn-

ings years in a ten-year sequence.” 781

Deendispenieteennnl

Wee ee, een 4 ieee a

45a

F.2d at 278. Moreover, using his own

firm’s valuation charts and applying what

he considered appropriate price-earnings

ratios at the evidentiary hearing, he valued

one of the target’s divisions at a minimum

of $70 million above the price it had been

optioned for. /d. at 279; see also id. at 280

n. 10. With regard to the other division

optioned in the Hanson transaction, “ ‘no

document was produced in discovery which

reflect{ed] a valuation or divestiture of [it]

at less than $100 million prior to the grant

of the Lock-Up Option;’” nonetheless, it

was optioned for $80 million. Jd. at 270,

280; see also Dynamics Corp., supra, 794

F.2d at 258-259 (criticizing poison pill that,

among other things, burdened the target

with a new, long-term fixed debt and pre-

cluded a hostile tender offer).

Probably what is most indicative of the

fairness of the SFREI transaction relates

to the Gramlich trustees’ 30% equity inter-

est in TRT. As Bloomberg testified, the

situation at hand did not involve “profes-

sional management [which generally] has a

different axe to grind; [rather, what was

involved was] a trustee group that ha{d] a

great economic interest in maximizing the

46a

value for all shareholders.” Tr. 1822; see

also Tr. 1810. If the assets were truly

undervalued, the Gramlichs would have

been forfeiting a tremendous sum of mon-

ey for nothing in return—ze., “the sale to

San Francisco didn’t carry a golden para-

chute or long-term employment contract so

that [the Gramlichs] would get money as

opposed to other shareholders.” * Tr. 1810,

1822. There is thus lacking a motivation

for allegedly underselling the shareholders.

In essence, the interests of the rest of the

shareholders were on a par with those of

the Gramlichs and everyone concerned re-

ceived the same benefits from the liqui

dation.

BCG’s own refusal to extend its offer to

100% of the available shares or effectuate

any “second step” or “back end” transac-

tion to acquire the shares not purchased

pursuant to the tender offer adds support

to this conclusion. See Tr. 1803-04. So

does the uncertainty of the remaining alter-

natives. For instance, plaintiff contends

that an orderly liquidation in the year fol-

lowing the tender offer would have maxim-

ized the return to TRT shareholders. How-

ever, there was no guarantee that BCG

47a

would choose to liquidate following a suc-

cessful tender offer; it had previously re-

frained from committing itself to such a

course of action and even a decision to

subsequently liquidate may not have been

to the remaining shareholders advantage.

Tr. 1805; Defendants’ Exh. W (Jeffrey

Bloomberg’s Opinion Letter) at 8. If the

TRT trustees had made their own an-

nouncement urging shareholders to reject

the BCG offer in lieu of a planned liqui-

dation one year down the line, moreover,

defeat of the partial tender offer was

equally unlikely. Tr. 1801-02, 1849; see also

Defendants’ Exh. W at 7; Dynamics

Corp., supra, 794 F.2d at 254; Lowenstein,

Pruning Deadwood in Hostile Tukeovers:

A Proposal for Legislation, 83 Colum.L.

Rev. 249, 254, 307-09 (1983). Its success

would have resulted in a less of REIT

status and the resulting diminished value

of the company as well as a fall in the

stock’s market price. See Defendants’

Exh. W at 5-6.

This is mot an instance where the trust-

ees “‘end{[ed] the auction with ... little

objective improvement’ ” or wanted SFREI

“in the picture at all costs.” Hanson, su-

48a

pra, 781 F.2d at 283 (quoting MacAndrews

& Forbes Holdings, Inc. v. Revion, 501

A.2d 1239, 1249 (Del.Ch.), aff'd, 505 A.2d

454 (1985)). Rather, the trustees selected

the best offer available at a time when

some immediate action was mandated. See

Buffalo Forge, supra, 555 F.Supp. at 904.

We have scrutinized the transaction with

great care because we recognized that cer-

tain of its attributes rendered it superrficial-

ly suspect—e.g., the willingness of defend-

ants to purchase the Lincoln Tower Build-

ing subject to a right of first refusal; the

seller's request that the buyer render an

opinion as to the TRT trustees’ ability to

conduct the transaction. See, e.g., Tr.

1300-01; 1320-23; 1391. Nevertheless, in

our view, the transaction has been justified

by the fact that the values at which the

properties were sold to SFREI were fair

and reasonable and the way it served other

important trust and shareholder interests.

See Norlin, 744 F.2d at 267; see also De-

fendants’ Exh. W at 6 and text supra;

Terrydaie, 611 F.Supp. at 1025; Alpert,

supra, 483 N.Y.S.2d at 676, 473 N.E.2d at

27 (transaction must have involved not only

fair dealing and fair price, but must have

49a

treated all shareholders equally). Unlike

the action taken by the directors in Han-

son, this action, viewed in its entirety, “re-

dound{[ed] to the benefit of [TLT] and its

shareholders.” Hanson, 781 F.2d at 281.

2. Knowledge of Breach of

Fiduciary Duty

Even if the TRT trustees had

breached their fiduciary duty, a duty of

restitution could be imposed on SFREI only

if the latter knew or should have known

that a breach had been committed. Terry-

dale, 611 F.Supp. at 1031. In other words,

the defendants can only be held liable as

constructive trustees of the transferred

properties if they knew or should have

known that a breach of fiduciary duty had

occurred. /d. at 1032.'° 7

At trial, we noted the burdén that would

be imposed by holding a _ purchaser

“chargeable with all that goes on in the

inner councils of the seller” simply by vir-

tue of the fact that the former either has

made a bargain purchase or is aware of the

seller’s distress. Tr. 765; see also Terry-

dale, 611 F.Supp. at 1030-31. However,

this is a bridge we need not cross as we are

convinced that if the values of the TRT

50a

properties were such common knowledge

that anyone operating in the market would

or should have known of them, TRT would

have been able to obtain an offer at a

higher price than that proposed by SFREI.

As we have already rejected other explana-

tions offered for the market’s silence, we

conclude that SFREI cannot be presumed

to have known that the TRT trustees had

breached their fiduciary duty."'

Other factors also lead to this conclusion.

As we noted earlier, defendants made cer-

tain “uncontradicted assertions estab-

lish{ing] the basis for their belief in the

reasonableness of the transaction from

TRT’s point of view” (Terrydale, 611

F.Supp. at 1029)—e.g., legitimate reasons

for opposing the BCG tender offer; its

offer to purchase TRT’s assets was higher

than any other offer on a per share basis;

instability of the Denver market and risks

associated with acquiring the TRT proper-

ties derived from “ ‘due on sale provisions,’

necessary renovations, [and] long-term ‘

leases at unfavorable rents.” /d. Thus, to

the extent, if any, that defendants were

required to make an inquiry,'? they fulfilled

their duty and came up with sufficient

5la

facts to reasonably conclude that the trust-

ees had not breached any duty and that

SFREI’s purchase of the assets would be

legitimate. See Pretrial Order at Exh.

10B(ii) (““SFREI’s Proposed Conclusions of

Law Relating to Plaintiff's Claims Against

SFREI’’) 19 112-24 and cases cited therein.

Finally, we have previously noted that

the Restatement (Second) of Trusts “pro-

vides appropriate and helpful guidance in

resolving the issue of notice.” Terrydale,

611 F.Supp. at 1031 n. 44:

Among the circumstances which are or

may be of importance are the following:

(1) whether he knows that the person

with whom he is dealing is in fact a

trustee; (2) the extent to which he has

reason to believe that the person with

whom he is dealing is or may be a trust-

ee ...; (3) the character of‘ the property

dealt with, whether it is land or a chattel

or a chose in action, negotiable or non-ne-

gotiable; (4) whether the transaction is

one in the ordinary course of the busi-

ness of the trustee; (5) whether the

trustee is disposing of the property for

much less than its real value; (6) wheth-

er the third person knows or has reason

52a

to believe that the trustee is dealing with ~ |

the property for his own benefit; (7)

whether the third person is purchasing .

the property or engaging in some other :

transaction with the trustee, as for exam-

ple where he is making a payment or

conveyance to the trustee ... or is acting :

as depository of trust funds ... or is a

corporation registering a transfer of se-

curities ... or is engaged in some other

dealings with the trustee....

Id. (quoting Restatement (Second) of

Trusts § 297, Comment a (1959)).

As defendants point out, factor 5 is ab-

sent as “this is not a case in which the

disparity in price is so overwhelming and

absence of legitimate business purpose so

evident that knowledge of irregularity can

reasonably be presumed.” Terrydale, 611

F.Supp. at 1030-31 (citation omitted); see

also Pretrial Order at Exh. 10B(ii)

(“SFREI’s Proposed Conclusions of Law

Relating to Plaintiff's Claims Against

SFREI”’) 1121. In facet, Joseph Farber’s

testimony confirmed that even if the valua-

tions were understated, they were not so

understated as to inadvertently put any

purchaser on notice. Rental, vacancy and

ici aaeaaaeieienamnema iain

Ce ee aan Cee we ee

53a

operating expense rates within ten percent

of those utilized by Farber, a margin of

error he himself found acceptable, could

lead to appraisal values closely approximat-

ing those obtained by TRT’s original ap-

praisers. See Tr. 1957; 1974.’ Farber also

articulated that “there is room for question

in every appraiser’s interpretation of the

marketplace” (Tr. 1882) and that it was

judgment, neither competence nor method-

ology, which separated his own figures

from those derived by Blain Chase and Van

Court & Company. Tr. 1877, 1881; 1883-

84. Finally, we already have determined

that the market place was the best indica-

tor of valuation and that it reflected the

fairness of the price paid by SFREI. Com-

pare instant case with Rippey v. Denver

United States National Bank, 273 F.Supp.

718 (D.Colo.1967); Estate of Rothko, 84

Misc.2d 830, 379 N.Y.S.2d 923 (1975), de-

cree modified and otherwise aff'd, 56

A.D.2d 499, 392 N.Y.S.2d 870, aff'd, 43

N.Y.2d 305, 401 N.Y.S.2d 449, 372 N.E.2d

291 (1977).

Defendants also note that “the TRT

trustees were not dealing with the Denver

principals for their own account (factor 6)

54a

. and ... SFREI was negotiating ‘an

arm’s length commercial transaction’ in

which [it] had ‘an independent duty to ob-

tain the most favorable terms’ (Factor 7).”

Pretrial Order at Exh. 10B(ii) (“SFREI’s

Proposed Conclusions of Law Relating to

Plaintiff's Claims Against SFREI”) { 121;

see Terrydale, 611 F.Supp. at 1030; 1032-

33. Thus, the inquiry outlined by the Re-

statement (Second) of Trusts provides addi-

tional support for our conclusion that de-

fendants should not be held to have known

that the TRT trustees breached their fiduci-

ary duty (if one assumes that said breach |

has been established).

Conclusion

For the foregoing reasons, this Court

finds that by voting for the transaction

with SFREI and the liquidation plan, the )

TRT trustees breached neither TRT’s Dec-

laration of Trust nor the fiduciary duty

they owed to the REIT’s shareholders.

Even if they had breached this duty, there

would have been no basis upon which to

conclude that the defendants should have

known that such a breach had occurred and

thus held to be constructive trustees of the

55a

subject properties.'* In short, we conclude

that, lacking actual knowledge of any

breach (see note 10 supra ), no circumstanc-

es existed here (e.g., extreme undervalua-

tion of assets) which would warrant imposi-

tion of liability as a constructive trustee.

Complaint dismissed.

SO ORDERED.

1. See also Wolgin v. Sirnon, 722 F.2d 389, 393

(8th Cir.1983). As we already have concluded,

Missouri law is applicable in the instant case.

Terrydale, 611 F.Supp. at 1015. However, “[tJo

the extent that no directly applicable Missouri

precedents exist,” we utilize the law from other

jurisdictions for guidance. /d.; see also id. at

1018.

2. We also find credible the independent trust-

ees’ testimony on this matter. Murphy, for in-

stance, testified that he did not recall Polsinelli

having made any comments and that his pres-

ence had not at all affected Murphy's thinking.

Tr. 160, 191. O'Flaherty, who himself called for

the meeting, testified that Polsinelli had asked

Stamper whether or not he could attend the

meeting and that Stamper told Posinelli it

would probably be all right. Tr. 510. O’Flaher-

ty, in line with his duty as chairman of the

meeting, questioned Polsinelli's presence, but

“had great trust in Mr. Stamper’s judgment.”

56a

Id. O'Flaherty also did not recall Polsinelli’s

making any particular statements at the meet-

ing. /d.; see also Tr. 512. Although Stamper

__ “signed the minutes for the meeting which said,

‘As the attorney for the Gramlich family, Mr.

Polsinclli believed that the Gramlichs would

have preferred that the trust purchase Stern

warrants’ ” (Tr. 750), he, too, considered Polsi-

nelli's presence “immaterial.” Tr. 678, 682.

Moreover, we note that even if the comments

made by Polsinelli at this meeting accurately

portray his role as one of urging adoption of the

SFREI plan, our conclusion remains unaltered.

See Plaintiff's Exh. 14A (in addition to what is

stated above regarding the Stern warrants, Pol-

sinelli commented twice during the meeting

that other potential buyers would not pay what

SFREI was offering and stated once that they

had to “take a hard look at whether or not we

should liquidate”).

3. In fact, in Hanson, the Board seems never to

have made any determination regarding the ad-

vantages or disadvantages of the unsolicited

tender offer. See 781 F.2d at 268. In the

month before the tender offer was first an-

nounced at a price of $60 per share, moreover,

the target’s stock was trading at below $50 per

share. /d.

4. The Court reserved decision on defendants’

motion on June 30, 1986. Tr. 1489.

57a

5. Plaintiff alleges that in Dynamics Corp., supra,

the Seventh Circuit rejected a similar justifica-

tion proffered by management. There, CTS’s

contention that the tender offer could not be

considered fair when Dynamics was seeking

only 17.9 percent of the shares was rejected

because (a) since Dynamics already owned 9.6

percent of the shares, every fifth shareholder

would get the price it now offered, and (b) all

the shareholders benefited ex ante due to the

fact that the announcement of the tender offer

caused the stock’s price to rise. Dynamics

Corp., supra, 794 F.2d at 257. The Seventh

Circuit did admit, however, that “some stock-

holders would not have known about the move-

ment in the price and some who did know

would adhere to a buy-and-hold strategy, and so

not sell.” /d. Finally, as we already have not-

ed, all of this would have been of “little mo-

ment” to the Seventh Circuit if the adopted

defensive tactic had been “a plausible measure

for maximizing shareholder wealth.” /d.

6. Since we have held that the independent trust-

ees were not so dominated and controlled by

the Gramlichs that their affirmative votes for

the SFREI transaction and the liquidation plan

were rendered invalid, we conclude that the sale

to SFREI was not in violation of TRTs Declara-

tion of Trust, Article III, § 14. Terrydale, 611

F.Supp. at 1012, 1032-33; see note 10 infra.

7. See also Plaintiffs Memorandum of Law Cov-

ering SFREI Liability and Duty of Restitution of

July 17, 1986 at note 7.

58a

Plaintiff also alleged at trial that the availabil-

ity of below-market financing on the properties

added value to the transaction and should have

been recognized in the cash component of sales

proceeds received by the seller. Plaintiff's Exh.

663 (Report prepared by David Kaplan, Senior

Vice President of The Harlan Company, Inc.);

see also Tr. 1540-43. It is unlikely, however,

that after negotiating with a lender over poten-

tial assumption of a mortgage with a due on

sale clause (negotiations involving payment to

the lender, thereby raising the interest rate) that

the buyer would reward the seiler with a higher

purchase price. Tr. 1543-46. More important-

ly, however, buyers could choose to take what

they would have to pay up front to assume the

mortgage to open a CD and utilize the consider-

able interest so generated. See Tr. 1560-65.

Down the road, those buyers could refinance at

a more favorable rate, id.; thus, they would still

have the lump sum available to them that others

who had purchased the below-market financing

could never recoup. Tr. 1568.

8. According to Mr. Farber, there is no definitive

description of class A and class B buildings and

what is usually meant when these terms are

utilized is how a given building competes with

others “of the same genre on the same floor

plate and the same elevating [sic] system.” Tr.

1997-98 (“the basic definition of a class A build-

ing is how does his rent compare with his com-

petition”). He also stated that the age of the

building would not preclude it from falling into

the class A category and that the Lincoln Tower

a — s”.hCU

59a

Building, although constructed in 1965, was a

class A building. Tr. 1998-99.

Although we accept that this may be the view-

point of some appraisers, we cannot find any

reason to criticize the viewpoint of others in the

real estate business who do see age as one of the

decisive factors in valuation. Moreover, it ap-

pears that it was not only the class differential

which led defendants’ expert, E. Nelson Bowes,

to conclude that the Lincoln Center Building

was not a good comparable for the Lincoln

Tower Building. See Defendants’ Exh. U at 16-

17; Tr. 1645-47; 1653.

9. Plaintiff intimates that the management fees

and commissions received by TMC after the

asset sale and liquidation (Terrydale, 611

F.Supp. at 1019) were a “material benefit” not

available to other shareholders. See Pretrial

Order at Exh. 3B (“Plaintiff TLT’s Factual Con-

tentions”) 19; see also Tr. 1822. However, if

the properties were truly valued as plaintiff al-

leges, the Gramlichs would have ‘suffered a tre-

mendous loss by opting instead for these fees

and commissions. Moreover, one of defend-

ants’ experts testified at trial that he had “looked

at the fees involved [and] these people were not

overpaying themselves when they adopted the

plan of liquidation.” Tr. 1822 (testimony of

Jeffrey Bloombery).

10. In our most recent prior opinion, we noted

that SFREI's actual knowledge of a breach of

Lesieeasiniaas a _

60a

duty must be proven in order to sustain plain-

tiffs claim of aiding and abetting. Terrydale,

611 F.Supp. at 1027. We dismissed the claim

because no genuine issue had becn created “re-

garding SFREI's alleged knowledge of the un-

fairness and lack of business purpose surround-

ing the sale and liquidation transaction.” /d. at

1028. Furthermore, since we have concluded

that there was no violation of TRTs Declaration

of Trust (see note 6 supra), defendants cannot

be held as “constructive trustees” under the the-

ory that they “should have known” that the

independent trustees were dominated and con-

trolled by the Gramlichs, rendering their votes

for the transaction invalid. Terrydale, 611

F.Supp. at 1033. Thus, in order to impose a

duty of restitution on SFREI, plaintiff really

must prove that SFREI should be presumed to

have known that a breach of fiduciary duty had

been committed. See Pretrial Order at Exh.

10B(ii) (“SFREI's Proposed Conclusions of Law

Relating to Plaintiffs Claims Against SFREI")

7 109.

11. Our conclusion would be the same whether

or not we accepted plaintiffs contention that

under Missouri law, “defendants have the bur-

den of proving that they took the propertics

with no notice of the breaches of trust.” See

Plaintiffs Memorandum of Law Covering

SFREI Liability and Duty of Restitution of July

17, 1986 at 22 and cases cited thercin; but see

Pretrial Order at Exh. C (“SFREI's Contentions

with Respect to Disputed Factual Matters”) 75

(alleging that plaintiff bears burden of proof on

issue of defendant's constructive notice).

6la

12. See Restatement (Second) of Trusts, § 297,

Comment a—

“A third person has notice of a breach of trust

not only when he knows of the breach, but

also when he should know of it; that is when

he knows facts which under the circumstanc-

es would lead a reasonably intelligent and

diligent person to inquire whether the trustee

is a trustee and whether he is committing a

breach of trust, and if such inquiry when

pursued with reasonable intelligence and dil-

igence would give him knowledge or reason

to know that the trustee is committing a

breach of trust.”

(Emphasis added). See also text infra.

13. Because of this conclusion, we need not de-

termine certain issues raised by the parties at

trial—e.g.. whether individual SFREI trustees

should be dismissed as defendants; if SFREI

still had to pay for the value of the Lincoln

Tower Building even though it was transferred

pursuant to a 60-day option-to-purchase and

SFREI made no profits on the sale.

62a

Appendix E

TERRYDALE LIQUIDATING

TRUST, Plaintiff,

Herbert BARNESS, John F. Bishop, Ed-

gar H. Chappell, Charles W. Corbitt,

George S. Mann, Brooks Walker, Jr.,

Louis W. Walker, and Charles M. Wil-

liams, individually and as Trustees of,

and David R. Bryant as Trustee of, San

Francisco Real Estate Investors, and

Keith L. Brown, individually, and San

Francisco Real Estate Investors, Inc.,

Defendants.

SAN FRANCISCO REAL ESTATE IN-

VESTORS, INC., a Delaware corpora-

tion, successor in interest to San Fran-

cisco Real Estate Investors, a Califor-

nia real estate investment trust, Coun-

terclaimant and Third-Party Plaintiff,

TERRYDALE LIQUIDATING TRUST, a

New York business trust; Terrydale Re-

alty Trust, a Missouri business trust;

Oliver R. Grace, Oliver R. Grace, Jr.,

Emilio G. Collado, William Bolton, and

63a

Robert A. Posner, individually and as

Trustees of Terrydale Liquidating

Trust, Counterdefendants and Third-

Party Defendants.

No. 82 Civ. 7920 (LBS).

United States District Court,

S.D. New York.

Nov. 19, 1984.

Leventritt, Lewittes & Bender, Garden

City, N.Y., for plaintiff; Sidney Bender,

Garden City, N.Y., of counsel.

Skadden, Arps, Slate, Meagher & Flom,

New York City; Landels, Ripley & Dia-

mond, San Francisco, Cal., for defendants;

Douglas M. Kraus, Barry H. Garfinkel,

Erskine D. Henderson, New York City,

Harvey L. Leiderman, San Francisco, Cal.,

of counsel.

SAND, District Judge.

Plaintiff, Terrydale Liquidating Trust :

(hereinafter ‘“TLT’’), a New York business

trust, brings this action against San Fran-

cisco Real Estate Investors, Inc. and the

individual trustees of San Francisco Real

Estate Investors, seeking to hold them lia-

64a

ble as aiders and abettors of an alleged

breach of fiduciary duty and as construc-

tive trustees of property sold to them in

violation of the seller’s fiduciary duties and

Declaration of Trust.' Defendants have

moved for summary judgment pursuant to

F.R.Civ.P. 56. Plaintiff has cross-moved

for partial summary judgment pursuant to

F.R.Civ.P. 56 on the issue of liability.

For the reasons detailed below and ap-

plying Missouri law, we conclude that, af-

ter extensive discovery, plaintiff is unable

to show that defendants had actual knowl-

edge of an alleged breach of fiduciary

duty. We therefore grant defendants’ mo-

tion for summary judgment in part and

dismiss the claim that they were aiders and

abettors of said breach. Concluding, how-

ever, that material questions of fact exist

as to whether there was a breach of fiduci-

ary obligation or Declaration of Trust and,

if so, whether defendants had sufficient

notice thereof such that they held the ac-

quired assets as constructive trustees for

plaintiff’s benefit, we deny defendants’ mo-

tion for summary judgment as to plaintiff's

equitable claim for restitution. Plaintiff's

motion for partial summary judgment is

also denied.

65a

FACTS

Plaintiff is a successor in interest to Ter-

rydale Realty Trust (hereinafter ‘“TRT’’), a

Missouri real estate investment trust?

(hereinafter “REIT’’) which was the entity

in existence at the time of the conduct at

issue in this case. Defendant SFREI, Inc.

was formerly a California REIT, known as

San Francisco Real Estate Investors,

whose acts (and the acts of its trustees) are

relevant to the instant action. San Francis-

co Real Estate Investors and its trustees

shall be collectively referred to as

“SFREI.”

The instant case arises out of the actions

of TRT trustees taken in response to an

unsolicited tender offer for TRT shares.’

On January 9, 1981, BCG Associates (here-

inafter BCG”), a New York limited part-

nership in which third-party defendants

William Bolton, Oliver Grace, Jr., and Rob-

ert Posner are general partners, com-

menced an unsolicited tender offer for 160,-

000 TRT shares, or approximately 34.7% of

its outstanding shares, at a price of $33.50

per share. This offer, if successful, would

have given BCG virtual majority ownership

of TRT.‘ According to the BCG Offer to

66a

Purchase, the offer was made in order to

obtain control of TRT and to defeat pro-

posed amendments to its Declaration of

Trust. The offer was set to expire on

February 10, 1981.

On January 19, 1981, the TRT trustees

met to consider the BCG tender offer.°

After discussing both the merits of, and a

number of perceived problems with, the

BCG offer, the trustees decided to continue

to pursue alternatives to the offer. Ac-

cording to the minutes of a subsequent

meeting of TRT trustees, TRT met or oth-

erwise communicated with seven other bid-

ders for the purpose of soliciting either a

tender offer for all or part of the TRT

shares or an offer to purchase the assets of

TRT. The trustees also attempted, without

success, to persuade BCG to amend its

offer to provide for the purchase of all

outstanding TRT shares.®

Just prior to this meeting of TRT trus-

tees, TRT was contacted by George Mann,

president of Unicorp Financial Corporation,

a Canadian company which owned approxi-

mately 40% of SFREI. Mann expressed

Unicorp’s interest in making a tender offer

for at least some portion of TRT shares.’

67a

After considering the opportunity to bid for

TRT shares, Unicerp decided not to enter

into the battle for control of TRT. Mann,

however, notified SFREI of the opportunity

to acquire TRT shares.* Discussions en-

sued between representatives of TRT and

SFREI. Although SFREI was initially in-

terested in acquiring all of the outstanding

TRT shares, SFREI eventually proposed

instead to purchase approximately 80% in

value of TRT’s assets, specifically, four

office buildings located in Denver, Colora-

do. The TRT trustees met on February 2,

1981 to consider the SFREI proposal, as

well as to review various other alternatives

to the BCG tender offer. An additional

meeting of “independent” trustees, 7.e.,

those who were not members of the Gram-

lich family (see n. 5 supra), was held on

February 5; at this meeting, the trustees

concluded that the sale of the Denver prop-

erties to SFREI was in the best interests of

all TRT shareholders. On February 6, the

sale to SFREI was unanimously approved

by all of the TRT trustees. In addition, the

trustees adopted and disclosed a plan to

liquidate the trust and to distribute the

proceeds of the SFREI sale, along with the

68a

remaining trust assets, to TRT sharehold-

ers. The trustees also announced that a

liquidating dividend of $24 per share was to

be distributed on February 23 to all TRT

shareholders of record as of February 19.

After the trustees’ decision to sell and

liquidate was announced, BCG extended its

tender offer expiration date to February 19

and adjusted its offering price to $9.50 per

share in order to take account of the $24

per share liquidating dividend. BCG ac-

quired 80,884 shares pursuant to its tender

offer, leaving it with 208,629 shares, or

approximately 38% of the outstanding TRT

shares. During 1981, BCG continued to

purchase TRT shares through a series of

open market purchases. By January 1982,

BCG had apparently acquired just under

50% of outstanding TRT shares. An addi-

tional liquidating dividend of $9.50 was dis-

tributed to TRT shareholders on January

12, 1982. On January 28, 1982, the TRT

shareholders approved the creation of

TLT ® and elected a slate of BCG nominees

to serve as trustees of TLT.'® The instant

lawsuit ensued.

69a

Plaintiff's claims are essentially two-fold.

First, plaintiff seeks to hold defendants

civilly liable as aiders and abettors; specifi-

cally, plaintiff claims that the TRT trustees

breached their fiduciary duties by selling

and liquidating the trust property for alleg-

edly self-interested reasons and at alleg-

edly “fire sale’ prices, and that SFREI

knowingly and substantially assisted the

trustees in this endeavor. Second, plaintiff

seeks to hold defendants accountable as

constructive trustees; specifically, plaintiff

claims that the sale and liquidation, in addi-

tion to being tortious, were performed

without obtaining the necessary approval

allegedly required by the TRT Declaration

of Trust, and that SFREI had “notice” of

the TRT trustees’ breaches of fiduciary

duty and trust. As relief for the above

cluims, plaintiff seeks (1) an accounting

from SFREI for losses suffered by TRT on

the sale of TRT properties, damages, ex-

penses and SFREI profits earned from the

properties; and (2) a return to the “status

quo ante.” '! On February 18, 1983, this

Court denied defendants’ motion to dismiss

the complaint. On February 28, 1984, this

70a

Court denied defendants’ motion for sum-

mary judgment without prejudice to renew-

al upon completion of further discovery.

Discovery was thereafter conducted during

which numerous depositions were taken

and numerous documents were produced.

The instant motions ensued.

DISCUSSION

A. Applicable Law

A federal court exercising diversi-

ty jurisdiction must apply the substantive

law of the forum in which it sits. rie

R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct.

817, 82 L.Ed. 1188 (1938). This includes

the forum state’s choice of law rules.

Klaxon Co. v. Stentor Electric Manufac-

turing Co., Inc., 313 U.S. 487, 61 S.Ct.

1020, 85 L.Ed. 1477 (1941). Since the in-

stant case involves the activities of a Mis-

souri real estate investment trust whose

Declaration of Trust designated Missouri

law as applicable, we conclude that Missou-

ri law should be applied. See Skolnik v.

Rose, 55 N.Y.2d 964, 434 N.E.2d 251, 449

N.Y.S.2d 182 (1982). To the extent that no

directly applicable Missouri precedents ex-

ist, we shall refer to the law of other

jurisdictions for guidance.

7la

B. Standard of Review

Summary judgment may be granted only

when it appears to the court that there is

“no genuine issue as to any material fact

and that the moving party is entitled to a

judgment as a matter of law.” Fed.R.

Civ.P. 56(c). A court “cannot try issues of

fact but can only determine whether there

are issues of fact to be tried.” Katz v. The

Goodyear Tire and Rubber Co., 737 F.2d

938, 244 (2d Cir.1984) (quoting Empire

Electronics Co. v. United States, 311 F.2d

175, 179 (2d Cir.1962) (emphasis in origi-

nal)). In addition, the court must resolve

all ambiguities and draw all reasonable in-

ferences against the moving party. /d.

Thus, where “the party against whom sum-

mary judgment is sought comes forth with

affidavits or other material .... that gener-

ates uncertainty as to the true state of any

material fact, the procedural weapon of

summary judgment is inappropriate.” /d.

(quoting Quinn v. Syracuse Model Neigh-

borhood Corp., 613 F.2d 438, 445 (2d Cir.

1980)). Summary judgment is to be grant-

ed only where the court “is convinced as a

matter of law that the suit can have only

one possible outcome.” Reliance Insur-

72a

ance Co. ». Barron’s, 442 F.Supp. 1341,

1344 (S.D.N.Y.1977).

C. Theories of Liability

l. Aider and Abettor Liability

[3.4] A person may be liable, as an

aider and abettor, for the tortious conduct

of another if the person “knows that the

other’s conduct constitutes a breach of

duty and gives substantial assistance or

encouragement to the other so to conduct

himself.”’” Restatement (Second) of Torts

§ 876 (1982). Although Missouri courts

have apparently not expressly adopted the

Restatement formulation of civil aider and

abettor liability,'? this standard has been

applied in other jurisdictions in cases in-

volving alleged breaches of fiduciary duty,

see Marine Midland Bank v. Smith, 482

F.Supp. 1279, 1290 (S.D.N.Y.1979), a/ffad,

636 F.2d 1202 (2d Cir.1980); Gilbert v. Bag-

ley, 492 F.Supp. 714, 735 (M.D.N.C.1980),

common law fraud, see Keller v. Coyle, 499

F.Supp. 1031, 1033-34 (E.D.Pa.1980), see

also Kranzdorf v. Green, 582 F.Supp. 335

(E.D.Pa.1983) (applying similar standard in

fraud case), and securities fraud, see Ed-

wards & Hanly v. Wells Fargo Securities

73a

Clearance Corp., 602 F.2d 478, 483 n. 5 (2d

Cir.1979); Landy v. Federal Deposit In-

surance Corp., 486 F.2d 139, 162-64 (3d

Cir.1973), cert. denied, 416 U.S. 960, 94

S.Ct. 1979, 40 L.Ed.2d 312 (1974). Its use

in the instant case is thus considered appro-

priate. Under this standard, plaintiff must

demonstrate three elements in order to im-

pose aider and abettor liability on SFREI:

(1) a breach of fiduciary duty by TRT trus-

tees; (2) knowledge of this wrongdoing by

SFREI; and (3) substantial assistance or

encouragement provided by SFREI to the

TRT trustees. We will consider these ele-

ments in turn.

a. Breach of Fiduciary Duty

In order to determine whether a breach

of fiduciary duty has occurred, this Court

must first determine the standard under

which the TRT trustees’ conduct should be

evaluated. Specifically, we must determine

whether the business judgment rule/duty

of loyalty analysis—one which is frequent-

ly employed in evaluating the acts of corpo-

rate directors taken in response to an unso-

licited tender offer or takeover bid—is ap-

plicable to the trustees of a REIT." Mis-

74a

souri courts do not appear to have ad-

dressed this issue.

For several reasons, this Court con-

cludes that the business judgment

rule/duty of loyalty analysis should be ap-

plied. First, a number of courts have ap-

plied the business judgment rule to the

activities of REIT trustees. See San

Francisco Real Estate Investors v. REIT

of America, [1982 Transfer Binder] Fed.

Sec.L.Rep. (CCH) 198,874, at 94,555-56

(D.Mass. Nov. 17, 1982) (enactment of by-

law allegedly designed to limit concentra-

tion of REIT share ownership and block

unsolicited tender offers), affd in part

and rev'd in part on other grounds, 701

F.2d 1000 (1st Cir.1983); see also Unicorp

Financial Corp. v. First Union Real Es-

tate Equity and Mortgage Investments,

515 F.Supp. 249, 256 (S.D.Ohio 1981) (apply-

ing similar analysis to activities of REIT

trustees); cf Hasan v. Clevetrust Realty

Investors, 729 F.2d 372 (6th Cir.1984) (ter-

mination of shareholder derivative action

by REIT special litigation committee).

[6] Second, the trustees of a REIT are

functionally more similar to corporate di-

rectors than to ordinary trustees. See 16A

75a

Fletcher Cyclopedia of the Law of Private

Corporations § 8249, at 619 (R. Eickhoff

rev. ed. 1979). Indeed, whereas ordinary

trustees are obligated to preserve and con-

servatively invest trust property, the prof-

it-making responsibilities of a business

trustee inevitably entail the exercise of

business judgment similar to that of a cor-

porate director. See Plymouth Securities

Co. v. Johnson, 335 S.W.2d 142, 149 (Mo.

1960). The functional similarity and shared

characteristics of business trusts and cor-

porations—centralized management, trans-

ferable ownership in the form of shares,

continuity of life, separate and distinct le

gal existence, a charter-like declaration of

rights and obligations, and a profit-making

purpose—has been recognized. See Mor-

rissey v. Commissioner, 296 U.S. 344, 56

S.Ct. 289, 80 L.Ed. 263 (1935); State Strect

Trust Co. v. Hall, 311 Mass. 299, 41 N.E.2d

30, 33 (1942). A REIT in particular is, in

all respects other than tax treatment, func-

tionally indistinguishable from a corpora-

tion. See Stand.Fed.Tax Rep. (CCH)

1 4099F.015, at 46,493 (1982) (a REIT, “in

addition to central management, must pos-

sess all other necessary attributes that

would, except for REIT Code provisions,

76a

cause it to be taxed as a corporation’”’).

Based on these considerations, it is appro-

priate to judge the conduct of REIT trus-

tees by the standards generally applied to

corporate fiduciaries.

Third, the TRT Declaration of Trust is

not inconsistent with the application of the

business judgment rule/duty of loyalty

analysis. The Declaration of Trust gives

the trustees discretion substantially similar

to that of corporate directors. See TRT

Declaration of Trust, Art. III, § 1. In addi-

tion, the trust liability provision is similar

to the Missouri business judgment rule.

Compare TRT Declaration of Trust, Art.

Ill, § 15 (“No Trustee shall be individually

or personally liable to any Shareholder, oth-

er Trustee or any other Person for any

errors of judgment er for any action taken

or omitted in good faith ... Nothing con-

tained in the Declaration, however, shall

protect any Trustee against liability to the

Trust, or the Shareholders for action taken

or omitted by him in bad faith or for his

willful misfeasance or reckless disregard of

his duties or his own gross negligence.”)

with Leggett v. Missouri State Life Insur-

ance Co., 342 S.W.2d 833, 851 (Mo.1960)

77a

(courts will not interfere with internal

management of corporation except in cases

of fraud, bad faith, breach of trust, gross

mismanagement, or ultra vires acts). And

although both the TRT Declaration of

Trust and Missouri law indicate that a busi-

ness trust is not a corporation, see TRT

Declaration of Trust, Art. I, § 3; Manu/fac-

turers’ Finance Trust v. Collins, 227 Mo.

App. 1120, 58 S.W.2d 1004 (1933) (business

trust, unlike corporation, need not acquire

license to do business), these sources do

not address either the standard to apply in

examining the conduct of business trustees

or the relevance of REIT status, as op-

posed to an ordinary business trust, in this

regard.

Fourth, the challenged conduct in this

case more closely resembles the conduct of

corporate directors faced with an unsolic-

ited tender offer, rather than a classic case

of trustee malfeasance, i.¢., engaging in

transactions with the trust on unfair terms

and with self-interested motives. Cf Bee-

dle v. Campbell, 100 F.2d 798 (8th Cir.)

(trustee’s secret purchase of trust property

deed constitutes breach of duty), cert. de-

nied, 307 U.S. 631, 59 S.Ct. 835, 83 L.Ed.

——

78a

1514 (1939); Kotimsky v. Lubin, 62

F.Supp. 710 (E.D.III.1945) (business trust

promoter/director liable for breach of fidu-

clary duty based on non-arm’s-length trans-

action with trust entered into for personal

gain); TRT Declaration of Trust, Art. III,

§ 3(n) (dealings between trust and trustees

governed by Missouri equity law regarding

fiduciary obligations).

Finally, the practical similarity be-

tween the standards governing trustees

and corporate directors has been recog-

nized. Thus, when either directors or trus-

tees engage in self-dealing or enter into a

transaction in which they have a conflict of

interest, the transaction will be upheld only

if the fiduciary involved can demonstrate

the fairness and reasonableness of the

transaction. See Morrissey ». Curran, 650

F.2d 1267, 1274-75 & n. 7 (2d Cir.1981). To

the extent that a stricter fiduciary standard

may be appropriate in judging the conduct

of business trustees, see 13 Am.Jur.2d

Business Trusts § 61, at 424 (1964) (rela-

tionship, between business trustees and

beneficiaries is comparable to, but more

confidential than, relationship between cor-

porate directors and corporation); see also

79a

McDaniel v. Frisco Employees’ Hospital

Association, 510 S.W.2d 752, 756-57 (Mo.

Ct.App.1974), we believe that this notion

may best be incorporated in our application

of the business judgment rule analysis it-

self. See pages 1017-1027 infra. We will

thus carefully look to determine whether

the trustees have acted with disinterest and

“scrupulous good faith,” McDaniel, supra,

510 S.W.2d at 758, and if not, whether the

challenged sale and liquidation transactions

were fair and reasonable to the trust and

its shareholders.

Although we are unable to find

relevant Missouri precedent for judging the

acts of directors or business trustees taken

in response to an unsolicited takeover bid,

the precedents governing the business

judgment rule in general provide a helpful

starting point. Under Missouri law, al-

though courts will typically not interfere

with the internal management of a corpora-

tion, they will do so where the directors or

trustees act in bad faith or engage in

fraud, breach of trust, gross mismanage-

ment or ultra vires acts. Leggett, supra,

342 S.W.2d at 851; Broski v. Jones, 614

S.W.2d 300, 304 (Mo.Ct.App.1981) (courts

80a

will not interfere where directors exercise

business judgment fairly and honestly).

Indeed, in circumstances involving the dis-

position of corporate assets or corporate

dissolution, corporate fiduciaries are held

to a standard of “scrupulous good faith in

the fiduciary role as guardians of the cor-

porate welfare.” McDaniel; supra, 510

S.W.2d at 758 (trustees of incorporated

nonprofit association); Gieselmann v.

Stegeman, 443 S.W.2d 127 (Mo.1969) (di-

rectors are in position of “highest trust and

confidence” and “utmost good faith” is re-

quired in exercise of powers). Consistent

with this obligation, such fiduciaries cannot

exercise their power in order to satisfy

their own self-interest. See Emergency

Patient Services, Inc. v. Crisp, 602 S.W.2d

26, 28 (Mo.Ct.App.1980) (directors prohibit-

ed from making ‘any self-serving disposi-

tion of [corporate assets] against the inter-

ests of the corporation’); Johnson v.

Duensing, 351 S.W.2d 27 (Mo.1961); ac-

cord Norlin Corp. v. Rooney, Pace Inc.,

744 F.2d 255, 264-265 (2d Cir.1984); Greer

Inv. Co. v. Booth, 62 F.2d 321, 325 (10th

Cir.1932) (business trustees must manage

assets for benefit of shareholders and not

8la

“with an eye to their personal advantage or

profits”). Such self-interest is demonstrat-

ed when directors or trustees enter into a

transaction in order to acquire a benefit not

shared by shareholders generally. See

Gieselmann, supra; Cheff v. Mathes, 241

Del.Ch. 494, 199 A.2d 548, 554-55 (1964);

accord Buffalo Forge Co. v. Ogden Corp.,

555 F.Supp. 892, 904 (W.D.N.Y.1983), aff'd,

717 F.2d 757 (2d Cir.), cert. denied, —

U.S. ——, 104 S.Ct. 550, 78 L.Ed.2d 724

(1983).

When fiduciaries act in further-

ance of their own self-interest or for other

improper motives, the duty of loyalty im-

posed upon fiduciaries requires them to

demonstrate the fairness and reasonable-

ness of their actions. See Norlin, supra,

at 264-265.'5 Retention of control, while

often a motive for directors’ opposition to

unsolicited takeover bids, is not the only

illegitimate purpose which will shift the

burden to the directors to justify their acts.

See Buffalo Forge, supra, 555 F.Supp. at

904; cf. Gieselmann, supra, 443 S.W.2d at

136. Moreover, this self-interest need not

be the sole motive for the fiduciaries’ acts,

82a

see Mobil Corp. v. Marathon Oil Co.,

[1981-1982 Transfer Binder] Fed.Sec.L.

Rep. (CCH) 198,375, at 92,285 (S.D.Ohio

Dec. 7, 1981), rev'd on other grounds, 669

F.2d 366 (6th Cir.1981); Treadway Compa-

nies, Inc. v. Care Corp., 638 F.2d 357,

382-84 (2d Cir.1980), particularly where the

alleged basis for self-interest is a readily

identifiable and sizable financial interest,

as in the instant case.'® Under this stan-

dard, even if there are legitimate business

reasons for the directors’ acts, the director

must demonstrate the fairness and reason-

ableness of a challenged transaction if the

complaining party shows that the director

was in fact motivated by self-interest in his

or her conduct. See Mobil, supra; cf. Buf-

falo Forge, supra, 555 F.Supp. at 904.

Plaintiff advances several bases for a

finding of trustee self-interest. These ar-

guments will be discussed in turn for pur-

poses of determining whether any issues of

material fact remain with respect to plain-

tiff’s claim.

Plaintiff alleges that trustees

John Gramlich and J. Russell Gramlich act-

ed in a self-interested manner by virtue of

83a

the Gramlich family’s ownership interest

in, and control of, TMC, the manager of the

trust properties.'7 Plaintiff has submitted

sufficient evidence to create an issue of

fact in this regard. TMC received $529,525

in management fees and commissions for

the year ended September 30, 1981 and

additional fees through February 5, 1982.

Of the 1981 amount, $395,754 was received

subsequent to the TRT sale and adoption of

its liquidation plan; $283,254 was received

in connection with the transfer of trust

assets during the 1981 fiscal year. Plain-

tiff has produced some evidence to indicate

that preservation of the TRT/TMC relation-

ship was of concern to the Gramlichs. Al-

though this concern was expressed primari-

ly with respect to a proposed tender offer

by Unicorp, a transaction that was never

consummated, it still sheds light on the

motives of the trustees at the time of the

BCG tender offer.'* Even the sale and

liquidation plan eventually adopted by the

trustees enabled the Gramlichs to preserve

the TMC management relationship for al-

most a full year. Indeed, the TRT trustees

had apparently discussed with SFRIsI the

possibility that TMC would continue to

84a

manage the trust properties; it is reason-

able to infer that the Gramlichs foresaw or

at least believed that this relationship’s

continuation was possible.'® And although

the amounts received by TMC prior to its

termination as trust manager were admit-

tedly less than that which it would have

received had TRT continued in operation,

the trustees may reasonably have foreseen

a significantly more rapid termination of

the TMC management agreement had BCG

succeeded in gaining control of TRT. See

Ex. A, SFREI’s Requests for Admissions

(BCG Offer to Purchase), at 11. The trus-

tees’ decision to sell the trust assets was

apparently instrumental in defeating the

BCG tender offer and thus avoiding imme-

diate termination of the management

agreement.”° These circumstances and the

reasonable inferences which can be drawn

therefrom, combined with the motive or

intent-based inquiry which is entailed in

determining whether a director or trustee

was sufficiently influenced by personal in-

terests, create a triable issue of fact. See

Schwartz v. Marien, 37 N.Y.2d 487, 335

N.E.2d 334, 373 N.Y.S.2d 122, 128 (1975).

While we express no opinion as to the

persuasiveness of this evidence of potential

85a

self-interested conduct or of defendants’

evidence to the contrary, issues of fact

nevertheless remain.

Plaintiff further alleges that the Gram-

lichs’ decision to oppose the BCG offer and

sell TRT assets to SFREI was influenced

by a $890,872 loan obligation falling due on

February 10, 1981.24 Plaintiff has produc-

ed evidence that the Gramlichs had insuffi-

cient assets to pay off the loan (or that

they would have had to utilize relatively

illiquid personal assets in order to dis-

charge the loan obligation) and that the

sale of TRT shares held by the lender as

collateral was subject to SEC Rule 144’s

restrictions on the sale either of securities

by “affiliates” of the issuer or of ‘‘restrict-

ed securities.” There is some evidence to

indicate that the ability of the Gramlichs to

satisfy the loan obligation may have been

of some concern to the bank, see Plaintiff's

Ex. 262 (letter from Mid-American Bank to

John Gramlich, Sept. 25, 1980); the deposi-

tion testimony of John Gramlich does not

dispel all doubt as to whether this sizable

loan obligation influenced the Gramlichs in

their decision to oppose the BCG offer and

86a

sell the trust assets. In addition, even if

the collateralized shares were actually free

of restrictions on their sale, it is presently

unclear whether the Gramlichs were aware

of this at the time of the challenged trans-

actions. The existence of the loan obli-

gation thus raises a triable issue of fact

regarding the Gramlichs’ alleged self-inter-

est.

Defendants argue that the

Gramlichs’ loan obligation cannot be a ba-

sis for a finding of self-interest since the

liquidating dividends paid by TRT were dis-

tributed equally to all TRT shareholders.

Defendants contend that many TRT share-

holders may have had outstanding loan ob-

ligations and that the trustees and non-

trustee shareholders were thus similarly

benefitted by the decision to sell and liqui-

date. It is true that a finding of self-inter-

est is not warranted where the allegedly

special benefits are available to all share-

holders. See Buffalo Forge, supra, 555

F.Supp. at 904. Here, however, defendants

have failed to produce any evidence that

other shareholders in fact had obligations

of even remotely similar size and timing

which could be satisfied by the payment of

87a

a liquidating dividend, or that the Gram-

lichs knew that this was indeed the case.

Cf. id. (directors’ approval of merger not

based on self-interest in obtaining tax bene-

fits where evidence showed that directors

knew many shareholders would benefit

from tax-free nature of transaction). In-

deed, there is little reason to even presume

that TRT shareholders were similarly sad-

dled with sizable and imminent personal

financial obligations, unlike the more gen-

erally applicable capital stock tax benefit in

Buffalo Forge. Defendants’ argument

that TRT share dividends received by the

Gramlichs would have been sufficient to

pay the interest expense on the loan is also

not dispositive. Even if defendants’ argu-

ment is numerically accurate, the essence

of plaintiff's claim of self-interest is based

on the Gramlichs’ desire to generate funds

sufficient to liquidate the loan and thus

avoid paying interest expense altogether.

In short, we cannot presently conclude that

the Gramlichs’ loan obligation played no

role in their decision to sell TRT assets and

liquidate the trust.

Plaintiff also alleges that J.

Harlan Stamper was motivated by self-in-

88a

terest in his decision-making based on his

membership in the law firm of Morris, Lar-

son, King, Stamper & Bold, counsel to

TRT. Plaintiff argues that Stamper’s deci-

sion to oppose the BCG tender offer and to

approve the sale and liquidation plan were

tainted by the fact that his firm stood to

preserve, at least temporarily, its relation-

ship due to the former decision and receive

substantial legal fees with respect to the

latter. Defendants argue that these facts,

as a matter of law, do not constitute self-in-

terest. This Court has previously held, in

related litigation, that the above facts were

sufficient to demonstrate a “financial stake

. in the transaction” which prevented the

other disinterested trustees’ knowledge

from being attributed to the trust in order

to avoid a finding of deception. See Bol-

ton v. Gramlich, 540 F.Supp. 822, 838-39

(S.D.N.Y.1982) (quoting Maldonado 1.

Flynn, 597 F.2d 789, 793 (2d Cir.1979)).*?

It is far from clear that this finding ren-

ders Stamper self-interested in the instant

case a fortiori, given the differing pur-

poses for which the determination of self-

interest is being made. A director or trus-

tee is not disloyal merely because he or she

has an indirect financial interest in a partic-

89a

ular transaction; disloyalty or lack of good

faith is demonstrated by evidence that the

fiduciary was improperly influenced by per-

sonal considerations or benefits not avail-

able to other shareholders generally. See

Crouse-Hinds Co. v. InterNorth, Inc., 634

F.2d 690, 702-03 (2d Cir.1980); pages 1018-

1019 supra. Although the issue is a close

one, we are presently unable to determine

the extent to which this “financial stake” in

fact influenced Stamper in his decision to

oppose the BCG offer. Although the

record reveals that Stamper appears to

have given the transaction fairly thorough

and objective consideration, the extent of

financial benefit accruing to his firm as a

result of the opposition to the BCG bid and

the sale of assets to SFREI,™ as well as his

own recognition of potential self-interest,

see Plaintiff's Ex. 14A, p. 86, create an

issue of fact with respect to the possibility

of self-interested conduct.*!

Finally, plaintiff claims that the

independence and financial disinterested-

ness of trustees Stamper (to the extent he

was not otherwise self-interested), Murphy,

and O'Flaherty was overcome by the Gram-

lichs’ domination and control of TRT. In

90a

order to sustain a claim of domination and

control, a party must allege facts ‘“mani-

festing ‘a direction of corporate conduct in

such a way as to comport with the wishes

or interests of the corporation (or persons)

doing the controlling.’" Aronson v. Lew-

is, 473 A.2d 805, 812 (Del.1984) (quoting

Kaplan v. Centex Corp., 284 A.2d 119, 123

(Del.Ch.1971)); cf McFarland v. Memorex

Corp., [1979-1980 Transfer Binder] Fed.

Sec.L.Rep. (CCH) 1 97,368, at 97,462 (N.D.

Cal. May 14, 1980) (“{C]ontrol ... means

the possession, direct or indirect, of the

power to direct or cause the direction of

the management and policies of a person,

whether through the ownership of voting

securities, by contract or otherwise.”)

(quoting 17 C.F.R. § 230.405(f) (1984)).

While mere stock ownership, without more,

does not constitute domination and control,

see Aronson, supra, 473 A.2d at 815-17

(directors who owned 47% of stock and who

personally selected other directors did not

dominate and control), plaintiff has produc-

ed sufficient evidence to create an issue of

fact in this regard. Plaintiff has produced

evidence that other trustees were quite

concerned with the goals and interests of

9la

the Gramlichs, that they expressed reserva-

tions about the sale of TRT assets, that

they were unaware of certain significant

aspects of the sale to SFREI, and that

these trustees believed that it was neces-

sary to conduct (and did conduct, on Febru-

ary 5, 1981) a meeting in the Gramlichs'

absence in order to consider the SFREI

proposal. In addition, plaintiff notes that

even at this meeting of “independent” trus-

tees, the Gramlichs’ attorney was present

to represent their interests. In addition,

plaintiff has produced evidence that this

alleged dominating influence of the Gram-

lichs over trust management was simply a

continuation of their prior influence over

the trustees. See Plaintiff's Ex. 14A. This

evidence is by no means. overwhelming,

particularly in light of the fairly thorough

and ubjective consideration which the non-

Gramlich trustees appear to have given the

SFREI transaction. The line between mere

influence over other trustees and domina-

tion of trust management is not an easy

one to demarcate. But in view of the

factors discussed above, the determination

of whether this line was crossed must be

made at trial. See Aronson, supra, 473

92a

A.2d at 815-16; cf Treadway, supra, 638

F.2d at 383-84 (appeal of final judgment)

(no claim nor any evidence of domination

and control by self-interested director).

Because the present record

suggests potential self-interested conduct

by a majority of the TRT trustees, cf

Treadway, supra, 638 F.2d at 383,2> sum-

mary judgment cannot be granted based on

the presumption of the business judgment

rule. The Missouri state law standards of

good faith and disinterestedness are fairly

rigorous ones, and several bases for self-in-

terest and disloyalty have been asserted.

This Court’s ability to resolve this issue

would be enhanced by a factual inquiry

into the extent to which the trustees’ al-

leged financial interests and domination ac-

tually influenced their decisions to oppose

the BCG tender offer, sell the trust assets

to SFREI, and liquidate the trust.

Assuming that plaintiff succeeds

in demonstrating self-interested conduct by

the trustees, the trustees must then demon-

strate that the challenged transactions

were fair and reasonable to TRT and its

shareholders. There appears to be consid-

93a

erable variation among courts which have

applied this general standard in the context

of takeover battles, including a require-

ment that a compelling business purpose be

demonstrated, see Klaus v. Hi-Shear

Corp., 528 F.2d 225, 233-34 (9th Cir.1975);

a careful inquiry into the substantive fair-

ness of the transaction, see Mobil, supra,

(1981-1982 Transfer Binder] Fed.Sec.L.

Rep. (CCH) at 92,274, 92,285; a search to

determine the “independent legitimacy” of

the transaction in addition to the alleged

business purposes for opposing the tender

offer, see Norlin, supra, at 265-267; anda

search for a proper or rational business

purpose for the transaction. See Johnson

v. Trueblood, 629 F.2d 287, 292-93 (3d Cir.

1980), cert. denied, 450 U.S. 999, 101 S.Ct.

1704, 68 L.Ed.2d 200 (1981); see also

Treadway, supra, 638 F.2d at 381. The

instant case is also somewhat complicated

in that the opposition to the tender offer

consisted of the sale and liquidation of the

target, rather than the mere securing of a

higher bidder for the target’s stock. While

this fact by no means renders the transac-

tion more suspect or inherently unfair, it

requires this Court to consider a number of

94a

interrelated and potentially inconsistent

factors in determining the fairness and rea-

sonableness of the transactions at issue.

In so doing, we will consider both the sub-

stantive fairness of the transactions as well

as the purposes for which they were con-

summated.”6

Plaintiff’s allegation of unfairness rests

primarily on the purported “fire sale’

prices at which the TRT assets were sold.

Plaintiff has submitted evidence that the

properties sold to SFREI had been reap-

praised, four days prior to the sale, at

amounts far in excess of both the sales

price and prior appraisals of the proper-

ty;*7 that changes in real estate market

conditions rendered the 1980 appraisals of

TRT assets obsolete; 78 that an unexpired

right of first refusal on the most valuable

building significantly reduced the amount

that TRT could obtain for its sale at the

time of the BCG offer; and that the trus-

tees could foresee significant increases in

the value of TRT assets at the time the

property was sold. Plaintiff also suggests

alternative courses of action which, in its

view, would have been far more reasonable

95a

and profitable for TRT and its sharehold-

ers.”9

Defendants offer an abundance of rea-

sons in justification of the trustees’ acts.

Primary among them are: (1) the potential

loss of TRT’s favorable tax status as a

REIT had the BCG tender offer been suc-

cessful; (2) the potential loss of TRT's

share listing on NASDAQ (and thus a dle-

cline in marketability and value); (3) the

shareholders’ loss of the benefit of report-

ing and disclosure provisions of the Securi-

ties and Exchange Act; (4) the favorable

comparison of the liquidating dividends

paid to all TRT shareholders, totalling

$33.50, with either the BCG tender offer of

$33.50 for approximately 34% of the TRT

shares, or any other offer for TRT shares

or assets; (5) the relative ineffectiveness of

trustee passivity, i.¢c., merely recommend-

ing that shareholders not tender their

shares to BCG;*' and (6) a fervent objec-

tion to plaintiff's method of valuing TRT’s

assets as of February, 1981."

We do not believe the issues

raised by the parties can properly be re-

solved at this stage of the litigation. Of

primary concern is the dispute surrounding

96a

the value of TRT assets both at the time of

sale and for the then-foreseeable future.

While perhaps it is not necessary to deter-

mine the precise value of TRT assets as of

February 6, 1981 in order to properly re-

solve the fairness and reasonableness is-

sue, cf Mobil, supra, [1981-1982 Transfer

Binder] Fed.Sec.L.Rep. (CCH) at 92,274 (de-

nial of preliminary injunction), plaintiff has

produced evidence suggesting that the sale

of TRT assets occurred at a price and time

which rendered the transaction seriously

deficient from an economic viewpoint. Cf.

Bolton v. Gramlich, supra, 540 F.Supp. at

840 n. 25. Resolution of the factual dis-

putes surrounding the value of TRT assets

is of significant consequence to plaintiff's

claim and cannot properly be decided at

this time.™

Plaintiff also raises factual questions

with respect to the significance of other

factors surrounding the BCG tender offer.

The effect of TRT’s loss of REIT status is

unclear, in light of the decreased earnings

and anticipated losses and increased ex-

penses of TRT both before and after the

sale, see, eg., Plaintiff's Ex. 2, 291;

97a

see also Plaintiff’s Reply, at 30 (noting

five-year renewal of leases for 40% of

Lincoln Tower Building space at rates well

below fair rental value), the trustees’ own

uncertainty regarding the significance of

REIT status, see Plaintiff's Ex. 14A, and

the fact that other tender offers were con-

sidered which involved the same potential

for loss of REIT status, see Plaintiff’s Ex.

486.4 In addition, the fact that the poten-

tial consequences of a BCG tender offer

were thoroughly considered by the trustees

is not dispositive of our inquiry; if the

presumption of good faith and disinterest-

edness is overcome, our task will be to

evaluate not only the purposes for which

the trustees acted but the fairness of the

transactions themselves. See Norlin, su-

pra, at 267 n. 13; Mobil, supra.*

We recognize the reluctance of courts to

intrude into the decision-making processes

of business fiduciaries faced with develop-

ments of major import which demand fairly

immediate response. Nevertheless, several

considerations weigh against resolution of

the breach of fiduciary duty issue at this

preliminary stage. The disparity in price

98a

and fair market value asserted by plaintiff

distinguishes this case from others in

which directors’ decisions in response to

tender offers were found to be fair and

reasonable. Cf Buffalo Forge, supra, 555

F.Supp. at 905 (sale of treasury stock);

Mobil, supra, [1981-1982 Transfer Binder]

Fed.Sec.L.Rep. (CCH) at 92,274 (granting

of stock and asset purchase options). The

extraordinary nature of the instant trans-

actions also supports a determination made

only after the aforementioned factual is-

sues are resolved. Cf Joseph E. Seagram

& Sons, Inc. v. Abrams, 510 F.Supp. 860

(S.D.N.Y.1981) (issuance of temporary re-

straining order enjoining directors from liq-

uidating company in response to unsolicited

tender offer). Finally, we recognize that

the principal cases in which courts have

upheld directors’ responses to hostile take-

over bids have been decided in circumstanc-

es where findings of fact were first made.”

While defendants may ultimately succeed

in demonstrating the propriety of the TRT

trustees’ conduct, we are presently unwill-

ing to conclude that Missouri courts would

refuse, as a matter of law, to hold the

trustees liable under the circumstances of

the instant case.

99a

b. Knowledge

In order to sustain a claim of

aiding and abetting, plaintiff must demon-

strate evidence of SFREI’s knowledge of

wrongdoing by the TRT trustees. Actual

knowledge of a breach of duty is required;

mere suspicion or even recklessness as to

the existence of a breach is insufficient.

See Marine Midland Bank, supra, 482

F.Supp. at 1290 (breach of fiduciary duty);

Kransdorf, supra, 582 F.Supp. at 337-38

(fraud and mismanagement); Restatement

(Second) of Torts § 876, Comment on

Clause (b); cf Harmsen v. Smith, 693 F.2d

932, 943 (9th Cir.1982) (securities law), cert.

denied, —- U.S. ——, 104 S.Ct. 89, 78

L.Ed.2d 97 (1983); Edwards & Hanly, su-

pra, 602 F.2d at 485 (same): The burden of

demonstrating actual knowledge, although

not insurmountable, is nevertheless a

heavy one. Especially where the alleged

aider and abettor owes no fiduciary duty

to, or has no confidential relationship with,

the injured party, cf Armstrong v. McA/-

pin, 699 F.2d 79, 91 (2d Cir.1983); Wood-

ward v. Metro Bank of Dallas, 522 F.2d

84, 97 (5th Cir.1975); A.L. Federman &

Co. v. Greenberg, 405 F.Supp. 1332, 1336-

100a

37 (S.D.N.Y.1975), liability cannot be im-

posed absent a showing that the defend-

ants had actual knowledge of tortious con-

duct by the primary wrongdoer. In this

connection, it is important to recognize that

the nature of liability sought to be imposed

with respect to this claim is not merely the

return of the TRT assets sold to SFREI, cf

pages 1031--1033 infra, but affirmative

monetary relief for SFREI's role in the

alleged wrongdoing. Actual knowledge,

not mere notice or unreasonable unaware-

ness, is therefore essential. See Metge v.

Baehler, 577 F.Supp. 810, 824 (S.D.Iowa

1984) (summary judgment) (inference that

party had strong suspicion of other party’s

fraud not sufficient to support inference of

actual knowledge); Wright ». Schock, 571

F.Supp. 642, 663 (N.D.Cal.1983) (aliegation

that bank “must have known” of broker's

alleged securities fraud insufficient to de-

feat summary judgment motion on aider

and abettor claim).

Plaintiff must produce evidence of

SFREI’s knowledge not only of the objec-

tive unfairness and unreasonableness of

the instant transaction, but also of facts

10la

and circumstances demonstrating that the

trustees acted in furtherance of their own

self-interest. Even under the stringent.

standards of summary judgment, plaintiff

has failed to produce evidence creating a

genuine issue of fact on this issue. It may

be conceded that SFREI may have known

of the Gramlichs’ interest in TMC and of

their efforts, through negotiations with Un-

icorp and SFREI itself, to maintain it. It

may be conceded, though the evidence is

relatively sparse, that SFREJ had similar

knowledge with respect to the Gramlichs’

loan obligation.** Whether or not SFREI

knew of the Gramlichs’ alleged self-inter-

ested conduct, however, the evidence fails

to establish any genuine basis for finding

that SFREI knew of Stamper’s alleged self-

interested conduct or of the Gramlichs’ do-

mination of the other trustees. Although

SFREI apparently knew that Stamper’s

law firm performed legal services for TRT,

they knew of neither his own ambiguous

expression of potential conflict-of-interest,

nor of his, alleged interest in selling TRT

assets rather than obtaining a tender offer

for TRT shares. Indeed, the financial ben-

efits received by Stamper’s law firm inci-

dent to the sale of TRT assets were the

102a

result of SFREI’s own inability to engage

in a tender offer for TRT shares.** We

recognized earlier that Stamper’s alleged

self-interest presented a difficult. question,

and was predicated on inferences which,

under somewhat similar circumstances,

have been firmly rejected. See pages

1021-1022 supra. Even assuming such

self-interested conduct could conceivably be

shown, SFREI's actual knowledge of this is

simply not supported by evidence in the

record.

A lack of evidence similarly undermines

plaintiff's claim that SFREI knew of the

Gramlichs’ domination and control. While

SFREI knew that TMC managed TRT prop-

erties and that TMC was owned primarily

by the Gramlichs, no showing has been

made that SFREI knew of the Gramlichs’

domination and control of the other trus-

tees in their conducting of trust business.

The record fails to indicate SFREI’s aware-

ness of any of the aforementioned factors

which give rise to factual issues regarding

domination and control. See pages 1022-

1023 supra. Although the determination

of whether domination and control by the

Gramlichs in fact occurred will depend in

103a

significant part on the trustees’ own im-

pressions of the manner in which trust

business was conducted, there is no evi-

dence indicating that SFREI had actual

knowledge of the existence of such domina-

tion. As noted previously, whether SFREI

should have realized this possibility or was

perhaps unreasonable in failing to recog-

nize it is relevant only to SFREI’s potential

restitulional duty to plaintiff, not to

SFREI's potential liability as an aider and

abettor. Thus, even if reasonable inferenc-

es could support a finding that SFREI ac-

tually knew of the Gramlichs’ various self-

interested motives for their conduct, sim-

ilar inferences with respect to the non-

Gramlich trustees are far too attenuated to

create a genuine factual issue.

Absent knowledge of self-inter-

ested conduct by a majority of the TRT

trustees, SFREI’s actual knowledge of the

alleged unfairness of the challenged trans-

actions is insufficient to subject it to aider

and abettor liability. In any event, the

voluminous submissions of both parties fail

to create «a genuine issue regarding

SFREI's alleged knowledge of the unfair-

104a

ness and lack of business purpose sur-

ruunding the sale and liquidation transac-

tions. SFREI may have believed (though

they strongly dispute) that the trustees

were exercising poor business judgment;

such a possibility, however, is insufficient

to establish knowledge of all the necessary

elements of the breach of duty alleged in

the instant case. Plaintiff's evidentiary

submissions suggest that SFREI had a

strong basis for believing that the 1980

appraisals were obsolete, knew that the

transaction was extremely favorable for

SFREI, knew that the purchase of proper-

ties with outstanding rights of first refusal

was unusual and would have resulted in a

discounted selling price, and was aware of

the generally favorable trend in real estate

values at the time (the benefit of which

was being taken from TRT shareholders).

Defendants have countered with evidence

indicating that SFREI knew of the many

legitimate reasons for opposing the BCG

tender offer—risks which were expressly

disclosed in BCG’s Offer to Purchase, that

it knew its offer to purchase TRT assets

was higher, on a per share basis, than any

other offer for TRT properties or shares,

and that it believed the price paid for TRT

105a

assets was reasonable in view of the other

offers that had been made, the various

risks associated with the acquisition of the

property which may have impeded its mar-

ket value (i.¢, “due on sale” provisions,

necessary renovations, long-term leases at

unfavorable rental rates), and the alleged

instability of the Denver real estate market

at the time. In addition, plaintiff does not

allege that defendants had any knowledge

of the February 2, 1981 revaluations of

TRT assets which were computed at the

TRT trustees’ request. The above eviden-

tiary submissions are by no means incon-

sistent or irreconcilable, but this very fact

reveals the inadequacy of plaintiff's actual

knowledge claim: even assuming plaintiff's

assertions are true, defendants’ uncontra-

dicted assertions establish the basis for its

belief in the reasonableness of the transac-

tion from TRT’s point of view. Whether

one set of factors noted above should have

prevailed over the other in the minds of

SFREI trustees is relevant only to whether

SFREI should have been aware of the pos-

sible unfairness of the transaction; it does

not, however, establish the requisite knowl-

edge for aider and abettor liability. Cf

ia aaa

106a

Restatement (Second) of Torts § 876, Com-

ment on Clause (b) (aider and abettor liabil-

ity imposed where person “knowingly gives

substantial aid to another who, as_ he

knows, intends to do a tortious act’’)."

In addition to the above analysis,

several other considerations reveal both the

potentially far-reaching consequences and

general inappropriateness of imposing aid-

er and abettor liability in these circum-

stances.'' Primary amony them is the in-

disputable fact that no duty, fiduciary or

otherwise, existed between the parties in

the instant case. Indeed, SFREI had a

duty to its own shareholders to aggressive-

ly pursue economically favorable transac-

tions, rather than shield or warn TRT

shareholders of the consequences of their

own trustees’ decisions. Ch Grumman

Allied Industries, Inc. v. Rohr Industries,

Inc., 748 F.2d 729, 739 (2d Cir.1984) (seller

of $55 million worth of assets has no duty

to disclose material facts to buyer since

parties had no fiduciary relationship). The

absence of such a duty distinguishes this

case from many in which aider and abettor

liability has been alleged and supports the

107a

imposition of the stringent actual knowl-

edge requirement. See Armstrong, supra,

699 F.2d at 91; see also Landy, supra, 486

I’.2d at 162-63 (citing Restatement defini-

tion); Jngenito v. Bermec Corp., 441

F.Supp. 525, 5338-34 (S.D.N.Y.1977). In es-

sence, plaintiff seeks to impose affirmative

liability on business managers who, at

worst, may have failed to reasonably exer-

cise their own business judgment in evalu-

ating the benefits and risks of a particular

commercial transaction to shareholders of

the other contracting party, where abso-

lutely no fiduciary duty or confidential rela-

tionship existed between these managers

and the allegedly injured shareholders.

The record simply does not raise a genuine

issue as to the presence of the significantly

higher degree of culpability which is neces-

sary to impose aider and abettor liability in

the instant case.

The nature of wrongdoing alleged

in this case also supports a requirement

that a party actually know that a breach of

fiduciary duty is intended and consummat-

ed. Transactions which may appear rea-

sonable at the time they are entered into

may, upon more considered and deliberate

108a

reflection, prove to be objectively unreasun-

able. However, to impose affirmative lia-

bility on a purchaser in a commercial trans-

action without concrete evidence of both its

knowledge of the self-interest or bad faith

of the seller and its unavoidable awareness

of the transaction’s substantive unfairness

or lack of business purpose would disrupt

commercial activity in a manner wholly in-

consistent with the purposes of aider and

abettor liability. Cf Woodward, supra,

522 F.2d at 97 (aiding and abetting securi-

ties fraud) (“[T]he knowledge requirement

implicates the type of document labelled a

security. Where, as in this case, the con-

clusion that a security even exists is highly

questionable, the assistance must be clear-

ly and intentionally directed toward aiding

the fraud. Any other rule would wreak

havoe with all commercial relationships, a

result we do not desire.”); J/T v. Cornfeld,

619 F.2d 909, 922 (2d Cir.1980) (existence of

knowledge element depends on theory of

primary wrongdoing). The facts and per-

missible inferences may support a finding

that SFREI should have been alert to the

possibility of self-interest or unreasonably

ignored this possibility; to interpret such

109a

facts as a basis for inferring actual knowl-

edge of improper motives and objective un-

reasonableness would impose a burden of

second-guessing on parties such as SIREI

which is wholly unwarranted in the context

of commercial transactions. While an un-

reasonable disregard or constructive notice

of facts constituting a breach of duty may

support an equitable restitutional obli-

gation in these circumstances, the policies

underlying such a duty do not justify, at

least in these circumstances, the imposition

of a duty in tort giving rise to civil liability.

See Armenian Hotel Owners, Inc. v. Kul-

hanjian, 96 So.2d 146 (Fla.1957).*?

Finally, the transaction at issue in-

volved no facially or overtly illicit benefit to

SFREI which might enable this Court to

infer actual knowledge of a breach of duty

by the TRT trustees. Cf JIT v. Cornfeld,

supra, 619 F.2d at 921-22. The alleged

disproportion between property value and

purchase price, even if demonstrated at

trial, was simply of a different character—

the fruits of an arm’s-length commercial

trans: tion in which the alleged aider and

abettor had an independent duty to obtain

110a

the most favorable terms. In addition, this

is not a case in which the disparity in price

is so overwhelming and absence of legit-

imate business purpose so evident that

knowledge of irregularity can reasonably

be presumed. Cf Norlin, supra, at 264~

268 (incumbent directors’ creation of di-

rector-controlled ESOP and issuance of cor-

porate stock to ESOP, effectively giving

directors voting control over nearly a ma-

jority of corporation’s shares, likely consti-

tutes breach of fiduciary duty since no real

consideration received by corporation for

newly issued shares and ESOP created

solely to preserve directors’ control).

Finally, the circumstances in which the

challenged conduct occurred further illus-

trates the inappropriateness of imposing

aider and abettor liability in this case.

Courts have been loath to impose liability

on business managers for acts taken in

response to hostile takeover attempts. The

reluctance to impose similar liability on

non-fiduciary third parties in such circum-

stances is at least as compelling. Defend-

ants have produced plentiful evidence of

SFREI’s knowledge of both the benefits to

llla

TRT of the challenged transactions and the

negative consequences of a successful BCG

tender offer. Plaintiff's factual submis-

sions, even favorably viewed, fail to sup-

port the conclusion that SFREI not only

acted unreasonably in its evaluation of the

reasonableness of these transactions but

also actually knew that the precise opposite

was true.

In sum, given the absence of genuine

factual issues, and in view of the aforemen-

tioned considerations, the imposition of the

potentially drastic and far-reaching liability

sought in the instant case is totally unwar-

ranted. Accordingly, defendants’ motion

for summary judgment with respect to

plaintiff's aider and abettor liability claim

is granted.”

2. Duty of Restitution

Plaintiff’s attempt to impose a duty of

restitution on SFREI is predicated on two

grounds.

First, plaintiff seeks to hold

SFREI accountable pursuant to the eq-

uitable rule that a purchaser of property

takes it subject to a duty of restitution if

the purchaser has notice that the transfer

112a

by the seller constitutes a breach of fiduci-

ary duty. See, e.g.. Wallace v. Malooly, 4

Ill.2d 86, 122 N.E.2d 275, 282 (1954); B./.

McAdams, Inc. v. Boggs, 439 F.Supp. 738,

752 (Ii.D.Pa.1977); Restatement of Restitu-

tion § 201 (1937). A party has notice of a

breach of duty if it knows or should know

that such a breach has been committed.

See Restatement of Restitution § 174; cf

Restatement (Second) of Trusts § 297(a)

(1959)."* As we have already noted, issues

of fact remain with respect to the breach of

fiduciary claim. See pages 1018-1027 su-

pra. It would also be premature to decide

whether SFREI should have known of the

trustees’ alleged self-interest and the sub-

stantive unfairness of the transaction to

TRT. Both parties have produced evidence

which, if uncontroverted, indicates either

that SFREI had reason to suspect such a

breach of duty or that SFREI had a reason-

able belief that the trustees were entirely

justified in their actions. This determina-

tion can best be made after the factual

issues surrounding the alleged breach of

fiduciary duty are resolved at trial.

Second, plaintiff argues that the TRT

trustees’ purported authorization of both

1l3a

the sale and liquidation was ineffective and

in violation of the TRT Declaration of

Trust. Because the trustees were alleg-

edly “interested” in the sale and _ liqui-

dation, plaintiff argues that they were un-

able to exercise the voting power which

was necessary to effectuate these transac-

tions. SFREI’s notice of such trust viola-

tions, it is argued, renders it liable as a

constructive trustee of the transferred

property.

The TRT Declaration of Trust states that

a decision to liquidate the trust must be

approved by either a majority vote of the

shareholders ‘or by the unanimous action

of all of the Trustees in office.’ TRT

Declaration of Trust, Art. VI, § 1. The

Declaration of Trust also provides that ‘‘all

... transactions in which any [Trustee, of-

ficer or manager has] any direct or indirect

interest shall be approved by a majority of

the Trustees, including a majority of the

Trustees who are not Affiliated with the

Manager.” Jd. Art. III, § 14.

Resolution of plaintiff’s claim

requires a distinction to be drawn between

the potentially self-interested motivations

of trustees which subject them to liability

1l4a

for breach of fiduciary duty and the direct

interest in a transaction which disqualifies

them from voting. Regardless of whether

trustees were improperly motivated, for fi-

nancial reasons or otherwise, to approve

the sale and liquidation and thus are to be

deprived of the good faith presumption of

the business judgment rule, this potential

for self-interest is insufficient to deprive

the trustees of their contractual or legal

power to vote. Plaintiff’s authorities es-

tablish only the equitable rule disqualifying

directors or trustees from voting in mat-

ters in which their interests are directly

adverse to those of the corporatien or

trust, where the voting fiduciary is a party

to the very transaction requiring fiduciary

approval. See, e.g., Weiss Medical Com-

plex, Lid. v. Kim, 87 ULApp.3d 111, 42

[1l.Dee. 250, 254, 408 N.E.2d 959, 963 (1980)

(director disqualified from voting to re-

move restrictive covenant from employ-

ment contracts, including his own); CGiese/-

mann, supra, 443 8.W.2d at 1384-386 (di-

rector disqualified from voting to issue

stock to himself and to cause corporation to

pay him for legal services which he ren-

dered to it); Von Schrader v. Cornet, 3

1l5a

S.W.2d 706 (Mo.1927) (beneficiary unable to

authorize his purchase of land from trus-

tees); All v. Rich Hill Coal Min. Co., 119

‘Mo. 9, 24 S.W. 223 (1893) (sale of land by

director to corporation); Christy v. Lac-

lede-Christy Clay Products Co., 253 S.W.

106, LO07 (Mo.Ct.App.1923) (director disqual-

ified from voting ayainst abolishing his sta-

tus as corporate officer); 16A Fletcher Cy-

clopedia of the Law of Private Corpora-

tions § 8257, at 619 (R. Eickhoff rev. ed.

1979) (“ywenerally speaking, a trustee’s per-

sonal adverse interest disables him to vote

in matters affected thereby”) (citing case

involving business trustee’s attempt to ap-

prove trust’s payment of claim to himself).

A comparable transaction in the instant

case—for example, a trustee voting to in-

crease his compensation for trustee servic-

es rendered—would be barred under this

principle. See Ex.B, SFREI’s Requests for

Admissions (minutes of 1/19/81 TRT Trus-

tees meeting), at 14 (noting abstention of

trustees Murphy and O’Flaherty from vote

lo increase their compensation). Unless

otherwise specifically provided, however,

the trustees’ indirect receipt of financial

benefits pursuant to preexisting, previous-

ly authorized contractual relationships is

1l6a

not the type of interest which disqualifies

_ them from voting on trust matters." In

any event, the Declaration of Trust pro-

vides its own specific limitation on trustee

approval of sales transactions in which

such indirect interests exist: these transac-

tions require majority approval, including a

majority of non-Gramlich trustees. Sce

TRT Declaration of Trust, Art. III, § 14.

Since the Gramlichs did have an “indirect”

interest in the sale to SFREI, this transac-

tion required the approval of three of five

trustees, including two affirmative votes

from among trustees Stamper, Murphy,

and O'Flaherty.” All trustees voted to sell

the TRT assets to SFREI. Whether the

affirmative votes of the non-Gramlich trus-

tees were legally effective and valid, how-

ever, will depend on whether plaintiff can

establish its claim of domination and con-

trol by the Gramlichs. The existence re/

non of domination and control, and of

SFREI’s notice of same," involve factual

determinations which prevent this Court

from presently resolving the merits of

plaintiff's restitutional claim.

Accordingly, both plaintiff's and defend-

ants’ motions for summary judgment with

117a

respect to SFREI’s restitutional liability

are denied.

CONCLUSION

For the reasons discussed above, defend-

ants’ motion for summary judgment is

granted in part and denied in part, and

plaintiff's motion for partial summary

judgment is denied.

SO ORDERED.

Jurisdiction is based on diversity of citizen-

ship under 28 U.S.C. § 1332 (1982). Plaintiff is

a New York business trust; defendant SFREI,

Inc. is a Delaware corporation and the individu-

al trustees are citizens of California, Canada,

Colorado, Massachusetts and Pennsylvania.

2. TRT was a qualified real estate investment

trust within the relevant provisions of the Inter-

nal Revenue Code, 26 U.S.C. §§ 856-860 (1982).

Under these provisions, a qualified REIT is

taxed only on its undistributed income and capi-

tal gains; distributed income is taxed only at the

shareholder level.

3. The events giving rise to this lawsuit have

been the basis of prior litigation before this

Court. See Terrydale Liquidating Trust v. Gramt-

lich, 549 F.Supp. 529 (S.D.N.Y.1982) (action by

TLT against TRT trustees, SFREI and others for

violation of federal securities laws); Bolton v.

Gramilich, 540 F.Supp. 822 (S.D.N.Y.1982) (ac-

118a

tion by defeated tender offeror against TRT

trustees, SFREI and others for violation of [fed-

eral securities laws). Familiarity with these de-

cisions is assumed.

4. Determinations of percentage share ownership

are complicated by the existence of warrants to

purchase 221,800 TRT shares; warrants to pur-

chase 115,937 TRT shares had been exercised as

of January 8, 1981. See Defendants’ Ex.A,

SFREI's Requests for Admissions (BCG Offer to

Purchase), at 2.

The following schedule provides a summary

of BCG'’s share ownership, both including and

excluding the outstanding warrants which had

been exercised prior to the BCG tender offer:

Refore Tender offer,

tender offer if fully subscribed

shares 123,245 (26.7%) * 160,000 (34.7%) °

warrants 4,500 -

total 127,745 (22.1%) ** 160,000 (27.877) °°

After tender offer,

if fully subscribed

shares 283,245 (61.4%) °

warrants 4,500

total 287,725 (49.9%) °*

* based on 461,064 outstanding shares as of 12/16/80

** based on 577,001 shares (461.964 outstanding shares,

and exercise of warrants to purchase 115,937 TRT

shares)

sala er

119a

| 5. The trustees of TRT at the time of the chal-

lenged events were J. Russell Gramlich (an ap-

proximately 19.6% sharcholder); John G. Gram-

lich, his son (who, together with Michael J.

Gramlich, his brother, and James A. Kostoryz,

his brother-in-law, owned directly and through

other organizations approximately 8.8% of

TRTs shares); J. Harlan Stamper, whose law

firm was counsel to TRT; Thomas J. Murphy,

and John D. O'Flaherty. The Gramlich family

also owned approximately 68% of Terrvdale

Management Corporation (hereinafter “TMC”"),

a corporation which reccived management and

brokerage fecs for services performed in con-

nection with the managing of TRT propertics.

6. BCG considered offering to issue bonds with a

fair market value of $33.50 in exchange for the

remainder of the outstanding TRT shares. See

Defendants’ Ex. B, SFREI's Requests for Admis-

sions (minutes of 1/19/81 TRT Trustces meet-

ing), at 3-4. This proposal was apparently sub-

sequently modified to include terms less favor-

able to TRT. See Defendants’ Ex. C, SFREI's

Requests for Admissions (minutes of 2/2/81

TRT Trustees meeting), at 5-6.

7. Plaintiff's Ex. 486 indicates that the Unicorp

offer involved the possible acquisition of 300,-

000 TRT shares.

8 Mann was a member of SFREI's Board of

Trustees.

120a

9. TLT, a liquidating trust, was created in ac-

cordance with § 337 of the Internal Revenue

Code as successor to the remaining undistrib-

uted assets of TRT.

10. The plaintiff in this action is thus, in effect,

the “defeated” tender offeror.

11. Plaintiff does not seek the return of (1)'the

Lincoln Tower Building, which was subsequent-

ly acquired by Subdale Corporation pursuant to

the exercise of a right of first refusal which its

parent, the Lincoln Tower Building Corpora-

tion, possessed with respect to TRT’s sale of the

building, or (2) liquidating distributions re-

ceived by non-trustee shareholders of TRT.

12. Missouri aider and abettor cases involve ei-

ther criminal conduct, see, e.g., Helming v. Ad-

ams, 509 S.W.2d 159, 162 (Mo.Ct.App.1974), or

physical intentional torts, see, e.g., Knight v.

Western Auto Supply Co., 239 Mo.App. 643, 193

S.W.2d 771 (1946). Both of these cases, how-

ever, articulate a standard for determining aider

and abettor liability which has been adopted in

the civil context, see, eg., IIT v. Cornfeld, 619

F.2d 909, 922 (2d Cir.1980), and has been har-

monized with the Restatement standard. Sce

Landy v. Federal Deposit Insurance Co., 486 F.2d

139, 163-64 (3d Cir.1973), cert. dented, 416 U.S.

960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974); Ment-

delsohn v. Capital Underwriters, Inc., 490

F.Supp. 1069 (N.D.Cal.1979).

12la

13. Although we conclude for reasons staied

herein that summary judgment should be grant-

ed on plaintiff's aider and abettor claim because

of the absence of actual knowledge by the al-

leged aider and abettor, we discuss the breach

of fiduciary duty element in detail because of its

relevance to the restitutional claim as to which

summary judgment is denied.

14. Defendants appear to assume that this mode

of analysis is appropriate. Plaintiff's briefs are

devoted largely to a refutation of defendants’

analysis of the business judgment rule as ap-

plied to the facts of this case, rather than a

challenge to the applicability of this mode of

analysis in general. Plaintiff does, however,

note at one point that the trustees are subject to

the duties imposed on trustees generally, see

Plaintiff's Reply Brief, at 67-68, thus at least

suggesting that a stricter standard should apply.

15. Missouri courts have applied a similar stan-

dard to transactions involving self-dealing be-

tween the fiduciary and the corporation. See,

e.g., Ramacciotti v. Joe Simpkins, Inc., 427

S.W.2d 425 (Mo.1968). Yet, if plaintiff estab-

lishes that the trustees’ decision to sell and liqui-

date trust assets was founded on considerations

of personal profit or self-interest, this would

also appear to be sufficient grounds for impos-

ing a burden of justification on the trustees.

indeed, a similar standard has been applied in

the context of corporate takeover battles. See,

e.g., Norlin Corp. v. Rooney, Pace Inc., 744 F.2d

255, 264-265 (2d Cir.1984); Treadway Cumpa-

nies, Inc. v. Care Corp., 638 F.2d 357, 382 (2d

122a

Cir.1980); Mobil Corp. v. Marathon Oil Co.,

[1981-1982 Transfer Binder] Fed.Sec.L.Rep.

(CCH) 198,375, at 92,284 (S.D.Ohivo Dec. 7,

1981), rev'd on other grounds, 669 F.2d 366 (6th

Cir.1981). We thus consider it appropriate to

apply this standard to the instant case.

16. A somewhat more deferential standard has

been applied where retention of control is the

alleged basis for self-interest. See, e.g., Panter v.

Marshall Field & Co., 646 F.2d 271, 294 (7th Cir.)

(impermissible motives must predominate),

cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70

L.Ed.2d 631 (1981); Johnson v. Trueblood, 629

F.2d 287, 293 (3d Cir.1980) (sole or primary

purpose must be to retain control), cert. denied,

450 U.S. 999, 101 S.Ct. 1704, 68 L.Fd.2d 200

(1981). This standard is considered appropriate

where retention of control is an alleged motive

since such a motive is virtually inherent in acts

undertaken in opposition to a hostile bidder;

thus, courts require more than an allegation of

control as “a” motive for the director's acts, lest

the business judgment rule be rendered mean-

ingless in such circumstances. This rule, how-

ever, has been subject to less deferential applica-

tion, see Mobil, supra, [1981-1982 Transfer

Binder] Fed.Sec.L.Rep. (CCH) at 92,284-85; see

also Norlin, supra, at 265 (business judgment

rule inapplicable where directors “shown to

have a self-interest in the transaction at issue”),

and has even been criticized for its leniency.

See Panter, supra, 646 F.2d at 304 (Cudahy, J.,

dissenting); Jo/tnson, supra, 629 F.2d at 301

(Rosenn, J., dissenting). In any event, because

123a

Missouri courts require a fairly convincing

showing of fiduciary good faith, and since the

alleged self-interest in this case is primarily the

specific financial benefits arising from the sale

and liquidation transactions, evidence that this

interest was a significant motivating factor un-

derlying the trustees’ conduct should be suffi-

cient. Cf. Klaus v. Hi-Shear Corp., 528 V.2d 225,

233-34 (9th Cir.1975); Mobil, supra, [1981-1982

Transfer Binder] Fed.Sec.L.Rep. (CCH) at 92,-

285 n. 55.

17. As of November 1980, John Gramlich owned

145 shares of TMC (30.5%), Michael Gramlich

owned 145 shares (30.5%), and James Kostoryz.

(John Gramlich’s brother-in-law) owned 35

shares (7.4%). John Gramlich was president of

TMC and J. Russell Gramlich, his father, was

Chairman of the Board. Sce Plaintiffs Bricf in

Opposition to Defendants’ Motion for Summary

Judgment (hereinafter “Plaintiff's Bricf’), at 6.

18. Additional circumstantial evidence of the

Gramlichs’ potential self-interest can be found

in the decision of other trustees to hold a special

meeting on February 5, 1981, one day before the

sale to SFREI, “in the absence of J. Russcll

Gramlich and John J. Gramlich because the

independent Trustees did not have a substantial

interest in the Trust or Terrydale Management

Corporation and therefore could be more objec-

tive with regard to the possible sale of assets

and liquidation of the Trust, which were being

considered by the Trustees.” See Ex. C, SFREI's

Requests for Admissions (minutes of 2/5/81

TRT Trustees meeting), at 15.

124a

19. We thus reject defendants’ contention that

plaintiff essentially asks this Court to presume

self-interest based on the existence of the TMC

contract, a presumption which has been rejected

with respect to a director's retention-of-control

motive. See Crouse-Hinds Co. v. InterNorth,

Inc., 634 F.2d 690, 702-03 (2d Cir.1980). In

Crouse-Hinds, the court rejected a claim of self-

interest since the target directors had negotiated

a merger with a white knight (and thus pre-

served their positions) prior to the announce-

ment of the hostile tender offer. Jd. at 703.

The instant case is factually distinguishable.

In addition to submitting evidence in opposi-

tion to plaintiff's claim, defendants argue that

the TRT shareholders’ approval of the TMC

management agreement precludes a finding of

self-interest. Defendants refer to the TRT Proxy

Statement, dated January 8, 1982, which dis-

closes the amounts received by TMC during

fiscal year 1981 in connection with its services

as trust manager. However, this proxy state-

ment does not establish the shareholders’ ap-

proval of either the TMC contract or the sale to

SFREI and simultaneous adoption of a liqui-

dation plan; the proxy statement relates only to

the creation of TLT and the selection of TLT

trustees. In any event, plaintiff's claims of un-

fairness and self-interest, if established at trial,

would appear to eliminate the effectiveness of

shareholder ratification in the instant case. See

Saigh v. Busch, 396 S.W.2d 9, 22 (Mo.Ct.App.

1965), cert. denied, 384 U.S. 942, 86 S.Ct. 1465,

16 L.Ed.2d 541 (1966).

125a

20. We thus reject defendants’ argument that the

trustees, in voting to sell and liquidate the trust

and thus eventually terminate the TMC/TRT

relationship, cannot be found to have acted out

of self-interest. As noted above, the trustees

still could have reasonably foreseen that their

decision would undermine, as it in fact did, the

success of the BCG tender offer and thus insure

the continuation of the TRT/TMC relationship

for a considerable period of time; an unop-

posed offer would likely have led to a signifi-

cantly more rapid termination of this relation-

ship. In addition, defendants give insufficient

weight to the fact that the sale itself generated

substantial fees for TMC. We thus reject de-

fendants’ characterization of these financial ad-

vantages us merely temporary benefits. Cf.

Treadway, supra, 638 F.2d at 387-88 (on peti-

tion for rehearing) (directors’ pre-meryer sale of

stock to white knight not made for purpose of

retaining control even though directors re-

mained in office pending consummation of

merger).

21. John Gramlich, together with his brother and

brother-in-law, borrowed this amount in No-

vember of 1980 in order to pay for the acquisi-

tion of 36,737 TRT shares. These shares, along

with an additional 25,000 TRT shares owned by

J. Russell Gramlich, were held by the bank as

security for the loan. See Plaintiff's Ex. 3.

22. In Bolton, this Court distinguished Maldona-

do v. Flynn, 597 F.2d 789 (2d Cir.1979), in which

126a

the Second Circuit held that a director appoint-

ed to an independent investigation committee

was not “interested” simply because his law

firm was counsel to the committee, a circum-

stance which supposedly may have “motivated

him to curry favor” with the interested parties.

On remand, the district court held that the fact

that the law firm was to be paid for its work did

not support an inference that the lawyer was

“somehow predisposed to a particular determi-

nation of the matter before the Committee.”

Maldonado v. Flynn, 485 F.Supp. 274, 283 (S.D.

N.Y.1980) (Weinfeld, J.) (implication dismissed

as “a non sequitur and hardly worthy of com-

ment”), revd on other grounds, 671 F.2d 729 (2d

Cir.1982). Unlike Maldonado, however, where

the firm apparently was to receive legal fees

regardless of the committee's decision as to

whether or not to discontinue a derivative ac-

tion, Stamper stood to benefit only if the trus-

tees voted to oppose the tender offer and, more

specifically, if the trust assets were sold. But cf.

Panter, supra, 646 F.2d at 294 (no inference of

self-interest drawn where target company di-

rector’s investment banking firm performed

work for company).

23. Stamper’s law firm was paid $215,188 during

the year ended September 30, 1981 for general

legal services performed for TRT and for servic-

es relating to the purchase and sale of TRT trust

properties. It is unclear what portion of this

amount was earned subsequent to the sale to

SFREI; nor is it clear whether, and to what

extent, Stamper’s firm earned fees subsequent to

the above date.

127a

24. As noted previously with respect to the

Gramlichs, this Court cannot conclude at this

stage that Stamper's knowledge that his decision

would eventually lead to the termination of the

TRT/law firm relationship precludes a finding

of self-interested conduct. See fn. 20 supra.

25. Plaintiff raises an additional basis for finding

that the trustees acted in their own self-interest.

In our view, it cannot withstand careful scruti-

ny. According to plaintiff, the Gramlichs al-

leged desire to oppose the BCG tender offer and

thus avoid being “locked in as a minority” was

apparently based on its concern that the market-

ability of their stock would be diminished as a

consequence of possible delisting of TRT shares

from the National Association of Securities

Dealers Automated Quotation (NASDAQ) Sys-

tem, and on the possible loss of TRT’s REIT

status—the likely consequences of a successful

BCG tender offer. These consequences, how-

ever, would have befallen a/l TRT shareholders

who chose not to tender their shares; thus, the

trustee and non-trustee shareholders’ interests

were consistent and legitimate in this respect.

In addition, there is no evidence to indicate that

additional restrictions on the sale of the Gram-

lichs’ shares, see Plaintiff's Brief, at 12 (discuss-

ing restrictions imposed by SEC Rule 144 on

sale of TRT shares by “affiliates” of TRT or of

“restricted securities’), actually motivated the

Gramlichs to approve the sale of TRT assets;

such restrictions, assuming they in fact applied,

presumably existed prior to the BCG offer and

may well have continued to apply even after the

sale to SFREI. Thus, to the extent that the

128a

above consequences are said to constitute an

independent basis for finding self-interest, this

argument is rejected.

26. Such an analysis is consistent with the rigor-

ous standard of good faith and fair dealing

imposed on directors under Missouri law, see

page 1018 supra; there is also some au-

thority suggesting that a valid business purpose

will not shield directors from liability where the

terms and other actions of the directors bespeak

unfairness. See Johnson v. Duensing, supra, 351

S.W.2d at 32 (directors’ sale of treasury stock

undertaken to raise working capital held a

breach of fiduciary duty where sale enabled the

sellers and buyers to acquire majority owner-

ship, was made at price below fair market val-

ue, and was made without effort to obtain high-

est possible price for stock). In addition, the

rational business purpose standard has been the

subject of some dispute, nainely, that such a

standard effectively reapplies the deference of

the business judgment rule even where the rule

has presumably been rendered inapplicable and

the burd

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