# Appendix — Gould v. Alleco, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1990
- **Citation:** 493 U.S. 1058

## Text

FILED
DEC 7 3583

(0)
8 9 - 9 2 4 Supreme Court, U.S,
No.

Supreme Court Of The ¥eited Shales

OCTOBER TERM, 1989

DAVID P. GOULD, et al.,

Petitioners,

ALLECO, INC., et al.,

Respondents.

ON WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

APPENDIX TO PETITION
FOR WRIT OF CERTIORARI

David Reed Burton
Attorney at Law

306A Hampton Plaza

300 East Joppa Road
Towson, Maryland 21204
(301) 583-9030

Counsel for the
Petitioners

TABLE OF CONTENTS

Appendix

Denial of Petition for Rehearing

by the United States Court of

Appeals for the Fourth Circuit
(September 8, 1989).....eeeeeeeees A-1

Opinion of the United States Court
of Appeals for the Fourth Circuit
{August 16, 1989) eeeeeee eeeeveeeee 7 -B-l

Transcript of Opinion in the

United States District Court for

the District of Maryland

(September 6, 1988).......eeeeeeees C-1

Opinion of the United States
District Court for the
District of Minnesota
(August 16, 1989)... .cccccccccccecs D-1

Petition for Bankruptcy in the

United States Bankruptcy Court

for the District of Maryland

(October 10, 1989)... ceeeeceeees E-1

Statutory Provisions

Maryland Code Annotated,
Corporations, Section 2-301...... .-F-1

Maryland Code Annotated,
Corporations, Section 2-309........G=l

Maryland Code Annotated,
Corporations, Section 2-312 eeeeeee -H-1

Maryland Code Annotated,
Corporations, Section 3-412........ I-1

Federal Rules of Civil Procedure
Rule ON EE a a ok |

Federal Rules of Civil Procedure
Rigle@ 23(@) cccccccscccccccvcccccccecs K-1l

Federal Rules of Civil Procedure
PER SOLE) ccccccvcccscceccccvcccces L-l

APPENDIX A

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 88-3637
DAVID P. GOULD, et al
Plaintiffs - Appellants

Vv.

ALLECO, INC., et al
Defendants - Appellees

No. 88-3638
In Re: LAWRENCE I. WEISMAN, et al
Appellants

LEONARD ROBINSON, et al
Plaintiffs - Appellees

Vv.

ALLEGHENY BEVERAGE CORP., et al

On Petition for Rehearing with Suggestion
for Rehearing in Banc

The appellant’s petition for
rehearing and suggestion for rehearing in
banc were submitted to this Court. As no
member of this Court or the panel
requested a poll on the suggestion for
rehearing in banc, and

As the panel considered the petition
for rehearing and is of the opinion that
it should be denied,

IT IS ORDERED that the petition for
rehearing and suggestion for rehearing in
banc are denied.

Entered at the direction of Judge
Hall with the concurrence of Judge Ervin
and Judge Wilkinson.

For the Court,

A-2

APPENDIX B

\

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 88-3637

DAVID P. GOULD, et al
Plaintiffs - Appellants

versus

ALLECO, INC., et al
Defendants - Appellees

No. 88-3638

In ré: LAWRENCE I. WEISMAN, et al

Appellants
LEONARD ROBINSON, et al
Plaintiffs - Appellees
versus
ALLEGHENY BEVERAGE CORP., et al
Defendants - Appellees

B-1

Appeal from the United States District
Court for the District of Maryland, at
Baltimore. Frederic N. Smalkin, District
Judge (CA-88-2399) (C/A 86-2309-S)

Argued: Decided:
April 13, 1989 August 16, 1989

Before ERVIN, Chief Judge, and HALL and
WILKINSON, Circuit Judges.

David Reed Burton for Appellant. Bruce
K. Cohen (MEREDITH & COHEN, P.C. on
brief) Stephen Howard Glickman (Leslie A.
Blackmon, ZUCKERMAN, SPAEDER, GOLDSTEIN,
TAYLOR & KOLKER; A. Raymond Randolph,
Daniel I. Prywes, PEPPER, HAMILTON &
SCHEETZ; Steven A. Allen, DAVIS, WEIKEL
& ALLEN on brief) for Appellees.

HALL, Circuit Judge:

Lawrence I. Weisman and two others

appeal from the denial of a motion to

intervene in Robinson v. Allegheny

Beverage Corporation, CA No. S-88-2399
(D. Md.) and from the order approving a

class settlement of the same case.
Weisman also appeals from the district
court’s refusal to address his objections
to the settlement proposal. The district
court determined that the motion to
intervene in the class action was not
timely filed and that the appellants
lacked standing to object to the proposed
Class settlement or to intervene in the
action itself. Finding that the district
court correctly decided each of these
issues, we affirm.
I.
In July, 1986, Allegheny Beverage

Corporation was sued by Robinson and six

other persons who-had purchased Allegheny
stock during a prior thirteen-month
period. The complaint claimed violations
of federal securities laws and state
common law for alleged fraud by the
company’s officers in inflating the
stock’s price. Robinson was consolidated
with two other similar actions, and
almost two years of litigation culminated
in a proposed “Stipulation of Settlement”
which was presented to the district court
on May 17, #1988. This proposal
contemplated payment of $6.95 million to
the plaintiff class. The court
preliminarily approved the settlement,
certified the class for settlement
purposes, scheduled a hearing for
September 6, 1988, to consider the
fairness of the proposal, and set August
1, 1988, as the deadline for the filing
of objections by class members to the

proposal. Notice of the settlement was

mailed to each member of the class and
was published in the Wall Street Journal.

No class members objected to the
settlement but Weisman, an Allegheny
bondholder, filed an "opposition" in
August 1 on behalf of all owners of bonds
issued by the company. The crux of
Weisman’s objection was that bonds, whose
rights to payment he alleged to be
superior to the rights of stockholders,
would be harmed because the Robinson
settlement would dilute the conversion
value of the bonds by depleting the
company’s assets. The company and the
named plaintiffs filed responses to the
objection; Weisman, however, failed to
reply although given the opportunity to
do so.

On August 15, 1988, Weisman and five
others filed a complaint in the district
court against the company and thirty-

three other defendants claiming, among

B-5

other things, $200 million in
compensatory damages and $500 million in
punitive damages for alleged violations
of federal securities law. Gould v.
Alleco, Inc.\1 C/A No. B88-2399 (D. Md.).
On August 24, the district court notified
all parties in both cases that any
requests for injunctive relief in the
Robinson case would be entertained at the
September 6 settlement hearing.

On September 2, the Gould plaintiffs
filed a 155-page amended complaint which
included a request to enjoin the Robinson
settlement. The basis of the request was
the Gould plaintiffs’ contention that
payment of the settlement would impair
the company’s ability to satisfy any
judgment which might be rendered against

\l In the intervening period between
the filing of the Robinson complaint and
the Gould complaint, Allegheny Beverage
Corporation changed its name to Alleco,
Inc.

B-6

it in Gould.

Moments before the commencement of
the September 6 hearing, counsel for the
Robinson parties were served with copies
of the amended Gould complaint and with
a motion by Weisman and two other Gould
plaintiffs to intervene in the Robinson
case and to delay the approval of the
settlement. After extended argument, the
district court denied the motion to
intervene on the grounds that it was
untimely under Fed. R. Civ. P. 24(b) and,
alternatively, that the would-be
intervenors lacked standing. The court
disposed of Weisman’s August 1 objection
to the settlement on the grounds that
Weisman was not a member of the class
and, therefore, had no standing to
object. The court then approved the
settlement and noted that such action
mooted any claims for injunctive relief

against approval sought by the Gould

B-7

plaintiffs.\2
This appeal followed.

II.

On appeal, the appellants contend
that the lower court erred in ignoring
Weisman’s objections to the settlement
proposal and in denying the motion to
intervene on standing and timeliness
grounds. Weisman and the other
intervenor-appellants also address the

merits of the settlement proposal.

\2 Although the notice of appeal in
88-3637 states that the Gould plaintiffs
were appealing from the lower court’s
"September 6, 1988, denial of a
preliminary injunction and other relief
with respect to the proposed settlement, "
the appellants’ brief in this
consolidated appeal does not address the
lower court’s actions regarding Gould.
Thus, the lower court’s denial of the
relief requested in Gould, i.e., to
enjoin the settlement or to appoint a
receiver, is affirmed. We note that the
complaint in Gould was subsequently
dismissed on the ground that it violated
Fed. R. Civ. P. 8(a) (short and plain
statement).

B-8

Because our resolution of the
intervention/objection issues is
completely dispositive, however, we do
not reach the issue of the propriety vel
non of the settlement itself.

The lower court held that Weisman
had no standing to intervene or to
object. Although both the August 1
objection and the intervention motion had
identical purposes, i.e. to delay or halt
the Robinson settlement, resolution of
each requires a slightly different
analysis. We begin with a discussion of
the August 1, 1988, "opposition" or
objection filed by Weisman on behalf of
himself and other bondholders.

A.

Fed. R. Civ. P. 23(e) requires that
notice of any proposed settlement of a
class action be given to "all members of
the class in such manner as the court

directs." No one argues that the manner

B-9

of notice was deficient in any respect;
Weisman, however, contends that his
August 1, 1988, "opposition" to the
settlement should have required the court
to reach the merits of his objection. We
disagree. The plain language of Rule
23(e) clearly contemplates allowing only
class members to object to settlement
proposals. Kusner v. First Penn Corp.,
74 F.R.D. 606, 610 n.3 (E.D. Pa. 1977),
aff'd 577 F.2d 726 (3rd Cir. 1978);
Jenson v. Continental Financial Corp.,
591 F.2d 477, 482 n.7 (8th Cir. 1979).
Beginning from the unassailable premise
that settlements are to be encouraged, it
follows that to routinely allow non-class
members to inject their concerns via
objection at the settlement stage would
tend to frustrate this goal. Were the
rule as Weisman contends, every objection
from a non-class member would trigger an

examination by the court of the effects

B-10

of the proposal on the objector. Kusner,
at 611. We cannot conceive that the
drafters of the Rules intended to permit
such eleventh-hour expansion of class
actions. We hold, therefore, that non-
class members have no standing to object,
pursuant to a Rule 23(e) notice directed
to class members, to a proposed class
settlement. Interjection of the opposing
views of non-class members should proceed
via intervention under Rule 24.\3 We
proceed, then, to a discussion of the
motion by the Weisman intervenors.
B.

Rule 24(a)(2), “Intervention of

Right," requires the court to allow

intervention when, upon timely

\3 Our ruling regarding the lack of
standing of non-class members to object
to proposed settlements should not be
read to restrict the trial court’s
authority to consider or even solicit the
views of non-parties to proposed class
settlements.

B-11

application,
° the applicant claims an
interest relating to the
property or transaction which
is the subject of the action
and the applicant is s0
situated that the disposition
of the action may as 4a
practical matter imkpair or
impede the applicant’s ability
to protect that interest unless
the applicant’s interest is
adequately represented by
existing parties.
Thus, in addition to timeliness,
intervention is dependent on the moving
party’s fulfillment of three
requirements: interest, impairment of
interest and inadequate representation.

3B J. Moore, Moore’s Federal Practice,
24.07(a) (2d ed. 1987); United Guar. Res.
Ins. Co. v. Philadelphia Sav. Pund, 819
F.2d 473, 474 (4th Cir. 1987). The
district court’s denial of the
intervention motion for failure to meet
these requirements will only be disturbed
if an abuse of discretion is found.

Virginia v. Westinghouse Elect. Corp.,

B-12

542 F.2d 214, 216 (4th Cir. 1976);

Aluminum Co. v. Utilities Comm. of State

of N.C., 713 F.2d 1024, 1025, n. 1 (4th

Cir. 1983); Southern Christian Leadership
v. Kelley, 747 F.2d 777, 779 (D.C. Cir.
1984); contra Mothersill D.I.S.C. Corp.
v. Petroleos Mexicanos, S.A., 831 F.2d

59, 61-62 (Sth Cir. 1987) (district
court’s conclusions about Rule 24(a) (2)
requirements other than timeliness are
questions of law and reviewable de novo);
Getty Oil Co. v. Dept. of Energy, 865
F.2d 270 (Em. App. 1988) (adopting a
"sensible blend” of standards of review).

In analyzing whether the Weisman
intervenors meet these requirements, we
will assume that their interests, such as
they are, were not "adequately
represented by existing parties." It is
on the interest requirement of Rule 24(a)
that the Weisman intervenors come up

short. We interpret the district court’s

B-13

use of the term standing to implicate
Rule 24’s interest requirement.

Cases involving non-class members’
attempts to intervene and/or object to
settlements are few, and the courts
usually reject the outsiders’ attempts to
enter the litigation during the
settlement phase. See e.g., Kusner, 74
F.R.D. 606; Jones v. Amalgamated Warbasse
Houses, Inc., 97 F.R.D. 355, 360
(E.D.N.Y. 1982), aff'd 721 F.2d 881 (2nd
Cir. 1983), cert. denied, 466 U.S. 944
(1984); Quad Graphics, Inc. v. Pass, 724
F.2d 1230 (7th Cir. 1983). Weisman
sought to intervene in Robinson under
Rule 24(a)(2), and there is no indication
that this rule is not applicable to class
actions. Therefore, we reject the
blanket proposition advanced by the
appellees that the bondholders, solely by
virtue of their non-inclusion in the

Robinson class, have no standing as a

matter of law to intervene to insure that
their interests are protected. ZG ia,
rather, on the facts of this case upon
which our decision rests. -

The motion to intervene incorporated
by reference the complaint in Gould (the
three would-be intervenors were also
among the six plaintiffs in Gould).
Reduced to its essence, the grounds
asserted in support of the motion are
these: (1) according to the terms of the
debenture instrument, the intervenors, in
their capacity as bondholders, have a
superior interest in Alleco’s assets to
that of the Robinson plaintiffs; and (2)
as Gould plaintiffs, they have potential
judgment claims against Alleco, full
payment of which would be impaired if the
Robinson settlement is permitted to
proceed. Thus, the motion concludes,

"just allocation of the claims against

Alleco, Inc. requires that the

Intervenors be permitted time to
demonstrate to this Court a just and
effective process for handling priority
of claims among those pursuing relief
from Alleco, Inc.”

The bond indenture does limit
Alleco’s right to declare dividends and
to make distributions on capital stock
under certain circumstances. What the
appellants fail to appreciate is that the
Robinson plaintiff class is not composed
of stockholders qua stockholders; rather,
these plaintiffs sued on the basis of
alleged fraud related to their purchase
of stock during a specific period in the
past. The settlement fund represents
damages, not stock distributions. The
fact of prior stock ownership does not
serve to bring the settlement within the
indenture restrictions.

The Gould complaints sought damages

and other relief for federal securities

law violations and various state fraud
violations. The gist of the argument is
that payment of the $6.95 million
settlement would deplete the assets of
Alleco to the prejudice of the Gould
plaintiffs in the event they were
successful in their suit. Merely
claiming a general interest in Alleco’s
assets based on a speculative recovery in
an unrelated civil action does not,
however, satisfy Rule 24’s requirement
that the claim be "relating to the
‘property or transaction which is the
subject of the action." If the
intervenor’s theory is correct, every
proposed settlement would be subject to
derailment as ieee as a potential
judgment creditor decided to intervene.
Kusner, 74 F.R.D. at 611. In a sense,
every company’s stockholders,
bondholders, directors and employees have

a stake in the outcome of any litigation

B-17

involving the company, but this alone is
insufficient to imbue them with the
degree of "interest" required for Rule
24(a) intervention. On the facts
presented by this record, we find that
the lower court did not abuse its
discretion by ruling that the intervenors
had an insufficient interest for Rule
24(a) purposes.
Itt.

The district court also determined
that the intervention motion should be
denied on the grounds that it was not
timely filed. Both intervention of right
and permissive intervention require
“timely application." Fed. R. Civ. P.
24(a), (b). The Supreme Court has held
that this timeliness requirement is
determined by a court in the exercise of
its discretion and that a ruling will not

be disturbed on appeal unless this
discretion is abused. NAACP v. New York,

B-18

413 U.S. 345, 365-66 (1973). This

Circuit has stressed the importance of

timeliness and the wide discretion

afforded the district courts. Brink v.
DaLesio, 667 F.2d 420, 428 (4th Cir.
1981). The Weisman motion is outside
even the most indulgent standard of
timeliness.

The courts are in general agreement
regarding the considerations relevant to
determinations of the timeliness of an
intervention motion. A reviewing court
should look at how far the suit has
progressed, the prejudice which delay
might cause other parties, and the reason
for the tardiness in moving to intervene.

Commonwealth of Pa. v. Rizzo, 530 F.2d
501, 506 (3rd Cir. 1976)(, cert. denied,

Fire Officers Union v. Pennsylvania, 426

U.S. 921 (1976); Vv Vv. , $i1
F.2d 303, 305 (8th Cir. 1975). Each of

these considerations militates against

B-19

the motion. We will discuss each in
turn.

The initial complaint in Robinson
was filed on July 23, 1986, more than two
years prior to the filing of the
intervention motion. Two years of
extensive litigation and settlement
negotiations culminated in the settlement
proposal presented to the court on May
17, 1988. Three and one-half months
later, at the last possible moment, the
intervention motion was filed. The
tardiness of the motion is the strongest
reason supporting its denial.

In United Airlines, Inc. v.
McDonald, 432 U.S. 385 (1977), the

Supreme Court held that a putative class
member 's post-judgment motion to
intervene, for the sole purpose of
appealing the court’s earlier denial of
Class certification, was timely because

it was filed within the time permitted

B-20

for appeal of the judgment. fThe Court
emphasized that intervention prior to the
entry of final judgment would have served
no purposs whatsoever and would have
tended to frustrate Rule 23's goal of
judicial economy. Id. at 394 n.15. The
Court also pointed out that, prior to the
intervention request, the intervenor
reasonably relied on the named class

representatives to protect her interests.
Id. at 394. Similarly, in Fleming v.

Citizens for Albermarle, 577 F.2d 236.

(4th Cir. 1978), cert. denied 439 U.S.
1071 (1979), this Court’s reversal, for

abuse of discretion, of the lower court’s
denial of intervention was based on the
dispatch with which the intervenor-
applicants made their motion relative to
the point at which it became clear that
their interests were not being adequately
represented by the existing defendants.

Here, the intervenors cite United |

B-21

Airlines and Fleming for the proposition
that even post-judgment intervention may

be allowed. However, they do not contend
that intervention at an earlier point
would have served no purpose or that the
tardiness of their motion was a result of
prior reliance on one or more of the
parties in Robinson. While last-second
or even post-judgment intervention may be
proper in some cases, the Weisman
intervenors are unable to demonstrate
that this is such a case.

The second component of the
timeliness analysis, prejudice to the
non-intervening parties, similarly works
against the would-be intervenors. The
intervention motion, if granted, would
likely have required substantial
additional litigation. In addition to
the delay in the disbursal of the
settlement funds which would have ensued

had intervention been permitted, two

B-22

bao thi

provisions in’ the "Stipulation of
Settlement" would have acted to prejudice
the Robinson plaintiff class if the
intervenors had been permitted to
litigate. First, the settlement provided
for the payment of attorneys’ fees from
the $6,950,000 settlement fund itself.
Therefore, additional litigation would
have acted to eat away at the plaintiffs’
share of the fund as their legal fees
rose. Secondly, the stipulation provided
that interest on the fund would only
accrue to the plaintiffs’ benefit after
the court had approved the settlement.
The effect of intervention, then, and the
resulting delay in court approval of the
settlement would have acted to
effectively reduce the value of the fund.
Further delay, then, clearly would have
prejudiced the plaintiff class.

The third consideration guiding the

court’s exercise of discretion is the

B-23

reason for the tardiness of the motion.
Weisman, admittedly the motivating force
behalf all of the various assaults on the
settlement, alleged that his illness was
the reason for the last-second filing.
Weisman’s health problems, however, did
not interfere with his ability to file,
as attorney of record as well as a
plaintiff, the 102-page Gould complaint
(plus 1,835 pages of exhibits) on August
15, 1988, and the 155-page "First
Amended Complaint" on September 2, 1988.
Moreover, the August 1 objection to the
settlement was filed on his behalf by
attorneys from a different law firm than
his co-counsel in Gould. The fact that
he is a lawyer himself, with at least two
law firms retained by him for this and
related litigation, belies his argument
that illness alone should excuse his
last-second filing. Thus, under all the

circumstances of this case, we cannot say

B-24

that the lower court abused its
discretion in denying the motion to
intervene as untimely filed.

For the foregoing reasons, we affirm
the district court’s denial of the motion
to intervene on the alternative grounds
of lack of sufficient interest (standing)
as well as untimeliness. We further
affirm the district court’s ruling that

Weisman lacked standing to object to the

proposed Robinson settlement.
AFFIRMED.

B-25

APPENDIX C

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

LEONARD ROBINSON, et al *
Vv. * Civil Action

ALLEGHENY BEVERAGE * No. S-86-2309
CORP., et al

z*eweekrekx*«#k*keekrek® k

The above-entitled matter came on
for hearing before the Honorable Frederic
Smalkin, commencing at 11:15 a.m. on

September 6th, 1988, at Baltimore,

Maryland.

APPEARANCES

On behalf of the Plaintiffs:
Steven A. Allen, Esquire

Bruce K. Cohen, Esquire
Lawrence Lederman, Esquire

On behalf of the Defendant Lapides and

Alleco, Inc.:

A. Raymond Randolph, Esquire

C-]

On behalf of the Plaintiffs Weisman,
Marks, Inc., and Day:

Paul Sandler, Esquire

David Freishtat, Esquire
Dolph Schmidt, Esquire

On behalf of Defendant Allegheny Beverage
Corporation:

Mark Garfinkle, Esquire
Leslie A. Blackmon, Esquire
Stephen A. Glickman, Esquire

JULIE TRIMMELL BILLUPS, OFFICAL REPORTER

C-2

THE COURT: I don’t think he meant
to bring down Rule 11 on you and I don’t
take his remarks as doing that.

All right. Motion for intervention
and delay of settlement is denied. The
reasons are as follows:

First, I find that Rule 24 does not
give standing to any of the parties that
are seeking to intervene, that is
Weisman, Marks and Day, standing to
intervene as a matter of right. I find
that to say that a shareholder who is not
a member of the class or a general
creditor or trade creditor or a holder of
a debt instrument can intervene with
regard to the fairness hearing portion of
a class action settlement is not an
appropriate construction of Rule 24. I
don’t think it allows any such thing. -

Obviously, anybody who has any

interest at all in the financial health

of the corporation has some kind of
interest in what its bottom line is. It
is going to be affected by any one of a
number of things, including settlements
of litigation, and I think the policy
towards an amicable resolution of
litigation strongly outweighs the right
of somebody to come in and say well, in
the future my stake in the corporation
might be diminished because they might
have less cash than if the conclusion,
which is that if the case went to trial
the corporation might be hit for millions
and millions and hundreds of millions of
dollars in damages and be devastated,
including punitive damages which would
not necessarily be covered by insurance;
so I think that the reed on which
intervention as a matter of right is
sought under Rule 24 is far too thin to
support it under any recognized

interpretation of the rule as I see it.

, judgment is entered
in favor of Schroder on its
Third Counterclaim and against
Alleco, Service America, Lapides

and LP, declaring that LP’s

acquisition on September 14,

1988 of Alleco’s publicly-held
common stock through a tender
offer by LP, the merger of
Alleco with and into LP on
October 18, 1988, and -the
dissolution of the surviving
corporation and the distribution
of its assets to Lapides on
November 8, 1988, constituted a
repudiation of Alleco’s
obligations under the Debentures
and under the Indenture, dated
as of September 1, 1985, between
Alleco and the original trustee,
First Trust Company, Inc., and
a breach of the _ covenants
contained in Section 5.05 of the
Indenture, giving rise to an
Event of Default under the
Indenture and permitting

Schroder properly to give

written notice of default and to

declare the principal of all the
Debentures and the interest
accrued thereon to be
immediately due and payable.

3. The motion of Service America
Corporation for summary judgment is
DENIED with respect to the counterclaims
of IBJ Schroder Bank & Trust Company, and
GRANTED with respect to the counterclaims
of Salomon Brothers, Inc., and Salomon’s
counterclaims are DISMISSED; and

4. The second and fourth
counterclaims of Schroder’s First Amended
and Supplemental Complaint and
Counterclaims are dismissed without
prejudice pursuant to Fed. R. Civ. P.
41(a)(2).

Date: FRANCIS E. DOSAL,

CLERK
Aug. 16, 1989

LS/ Patricia J. Sabin
(by) Patricia J. Sabin,
Deputy Clerk

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
THIRD DIVISION

Alleco, Inc., Civil File No.

3-87-0802
Plaintiff,

Vv.

IBJ Schroder Bank & Trust Company,
as Successor Trustee,

Defendant,
and

Salomon Brothers, Inc.,

Intervenor.
wee nn ee MEMORANDUM
ORDER
Salomon Brothers, Inc.,
Intervenor/
Counterclaim
Plaintiff,

Vv.

Alleco, Inc. and Service
America Corporation,

Counterclaim
Defendants.

IBJ Schroder Bank & Trust Company,

Defendant/
Counterclaim
Plaintiff,

Vv.
Alleco, Inc., et al

Counterclaim
Defendants.

George M. von Mehren, Esq., Squire,
Sanders & Dempsey, 1800 Huntington
Building, Cleveland, OH 44115; E.
Timothy McAuliffe, Esq., Coudert
Brothers, 1627 I Street NW, Washington,
DC 20006; R. Walter Bachman, Esq.,
Lindquist & Vennum, 4200 IDS Center, 80
South Eighth Street, Minneapolis, MN
55402; and Richard A. Kaplan, Esq.,
Popham, Haik, Schnobrich & Kaufman, Ltd.,
3300 Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, MN 55402, on behalf
of Alleco, Inc., Lapides Corporation, and
LP Acquisition Corp.

James B. Loken, Esq., Faegre & Benson,
2200 Norwest Center, 90 South Seventh
St., Minneapolis, MN 55402; and Arthur
S. Linker, Esq., Roseman & Colin, 575
Madison Ave., New York, NY 10022, on
behalf of IBJ Schroder Bank & Trust

Company.

Christine B. Pendry, Esq., Davis, Polk &
Wardwell, One Chase Manhattan Plaza, New
York, NY 10005; and Charles Quaintance,
Jr., Esq., Maslon, Edelman, Borman &
Brand, 1800 Midwest Plaza, Minneapolis,

MN 55402, on behalf of Service America
Corporation.

Timothy D. Kelly, Esq., Kelly & Berens,
P.A., 3720 IDS Center, 80 South Eighth
St., Minneapolis, MN 55402, on behal®£ of

Fidelity Management and Resource Company,
amicus curiae.

In September 1985, Allegheny
Beverage Corporation issued $105 million
in 9-1/2% Convertible Senior Subordinated
Debentures Due 2010. This dispute
focuses on the interpretation of the
Debenture Certificates and the
accompanying Indenture. Within three
years after these Debentures\1l were
issued, the company changed its name to
Alleco, Inc., sold off its operating
subsidiaries, and dissolved.

Alleco sold its final subsidiary,

\l Alleco las issued other
debentures which are not relevant to this
proceeding. Hereinefter, any reference
to the term Debenturs with an upper case
"D" refers to Alleco’s 9-1/2% convertible
debentures due 2010.

Service America Corporation, via a
leveraged buy-out in December 1987.
Service America, now a wholly-owned
subsidiary of Servam Corporation, assumed
the payment obligations on the
Debentures. One of the issues before
this court is whether Alleco has been
released from its payment obligation by
Service America’s assumption and
subsequent events.

Service America did not assume the
Debentures’ conversion obligation. This
remained with Alleco. Alleco’s
controlling shareholder, Martin Lapides,
commenced a tender offer for Alleco
common stock in July 1988. This tender
offer, accomplished through LP
Acquisition Corporation, resulted in the
merger of Alleco and LP Acquisition on
October 18, 1988. A supplemental
indenture provided, pursuant to section

15.06 of the original Indenture, that all

Debenture holders retained the right to
receive $465 for each $1,000 in Debenture
principal in lieu of the right to convert
to the now extinct Alleco common stock.
Lapides dissolved Alleco on November
8, 1988. He assumed Alleco’s assets and
liabilities. However, he did not assume
any obligations under the Debentures and
Indenture. The other two issues before
the court are whether the tender offer,
merger and dissolution violated the
antidilution provisions of the Indenture,
and whether the dissolution released
Alleco from the conversion obligation.
The court finds, for the reasons
stated below, that Alleco remains liable
for the payment and conversion
obligations of the Debentures, and that
the LP tender offer violated an explicit
covenant of the Indenture. Therefore,
Alleco’s motion for summary judgment is

denied, the motion of IBJ Schroder Bank

D-9

v

& Trust Company for summary judgment is
granted, and Service America’s motion for
summary judgment is denied as to
Schroder’s counterclaims, and granted as
to the counterclaims of Salomon Brothers,
Inc.

Procedural background

Alleco commenced this action on
November 30, 1987 against the original
trustee, First Trust Company. Alleco
seeks a declaration that it was released
from the payment obligation when Service
America assumed that obligation.

Salomon Brothers, Inc., which owns
$18,575,000 principal amount of the
Debentures, obtained permission to
intervene, and filed a counterclaim
seeking, inter alia, a declaration that
Alleco remains liable for the payment
obligation, and that Alleco is in default
by the terms of the Indenture.

In May 1988, IBJ Schroder Bank &

D-10

Trust Company succeeded First Trust as
trustee, and was also substituted as the
defendant in this action. Schroder filed
a counterclaim seeking a declaration that
Alleco has not been released from its
payment obligation.

The Lapides-sponsored tender offer
for Alleco stock was announced on July
13, 1988. Shortly thereafter, Schroder
notified Alleco that it believed that the
proposed tender offer, merger, and
dissolution would constitute a —-" of
Alleco’s obligations under the Indenture.
In response, Alleco filed an amended and
supplemental complaint seeking, inter
alia, a declaration that the proposed
transactions would not violate the
Indenture, and that the surviving
corporation would be released from all
obligations under the Debentures and
Indenture.

Following this court’s denial of

D-11

Schroder’s motion to preliminarily enjoin
the Alleco tender offer, Schroder filed
an amended answer and counterclaim which
essentially mirrors the additional
declaratory relief sought by Alleco in
its supplemental complaint.

Now before the court are cross-
motions for summary judgment. Alleco,
with its affiliated companies, LP
Acquisition Corporation and Lapides
Corporation [hereinafter collectively
referred to as Alleco] seek a declaration
from this court that the various
transactions noted above conformed with
the terms of the Debentures and
Indenture, as supplemented.

Schroder seeks summary judgment on
its claims that Alleco remains obligated
to honor both the payment and conversion
obligations of the Debentures, and that
the merger and dissolution constitute

events of default as that term is defined

Oe

by the Indenture, as supplemented.

Schroder seeks summary judgment on
its claims that Alleco remains obligated
to honor both the payment and conversion
obligations of the Debentures, and that
the merger and dissolution constitute
events of default as that term is defined
by the Indenture. Salomon joins in this
motion.

Service America, a counterclaim
defendant, seeks summary judgment against
the claims of Schroder and Salomon.

PACTS

Prior to 1981, Alleco was solely a
beverage company. Between 1981 and 1985,
the company acquired businesses in food
service, laundry service, building
maintenance, and retail office furniture.
In May 1985 it sold its beverage
operations and acquired Servomation
Corporation. Alleco’s smaller food

service operations were consolidated with

Dai

Servomation to form Service America.

The Debentures were issued in
September 1985. Between December 1986
and July 1987, Alleco sold its building
maintenance, laundry service, and retail
office furniture subsidiaries for $86.5
million. The proceeds were used
principally to pay down bank debt.
Alleco paid no dividend and made no
distributions to shareholders following
these sales.

In May 1987, Alleco entered into a
stock purchase agreement for the sale of
its Service America subsidiary. The
purchasing entity, SAC Acquiring
Corporation, was a wholly-owned
subsidiary of Servam Corporation, which
was owned by certain senior management of
Service America and other investors.

In order to facilitate this sale,
Alleco commenced a tender offer for the

redemption of the Debentures, including

D-14

a five percent premium. This offer fell
apart following the October 1987 stock
market crash. Alleco and Servam then
arranged for Service America to assume
the Debentures.

The sale of Service America took
place on December 2, 1987. By means of
a lovenseudl buyout, SAC paid $345 million
in cash, and took over payments on the
$105 million in Debentures. Along with
that sale, Alleco, SAC, and First Trust
executed a First Supplemental Indenture
which provided that SAC would assume the
payment obligation. By terms of the
Second Supplemental Indenture, executed
the same day, this duty was assumed by
Service America. Responsibility for the
Debenture’s convertibility remained with
Alleco.

Alleco believed that the terms of
the original Indenture entitled Alleco to

@a release from any payment obligation

D-15

once Service America assumed that duty.
Accordingly, Alleco wanted the First
Supplemental Indenture to provide for
that release. First Trust did not agree
with Alleco’s interpretation of the
Indenture, and refused to execute a
supplemental indenture which explicitly
released Alleco.

The First Supplemental Indenture
left unresolved the issue of Alleco’s
release. Alleco filed this action in
order to obtain a declaration that it had
bene released.

Following the Service America sale,
Alleco had approximately $130 million in
cash which it intended to commit to other
lines of business. Morton Lapides,
Alleco’s chairman of the board and chief
executive officer held 21.6% of Alleco’s
equity through a family holding company,
Lapides Corporation. Lapides also
controlled a special class of stock which

D-16

allowed him to elect a majority of
Alleco’s board. In May 1988, Lapides
began to pursue a plan for the purchase
of the Alleco common stock not held by
Lapides. This resulted in the July 1988
tender offer by LP Acquisition
Corporation, a Lapides subsidiary, for
Alleco common stock at $10 per share.
The offering document for the tender
outlined the planned merger of Alleco and
LP, and the eventual dissolution of
Alleco and distribution of its assets to
Lapides. This "Offer to Purchase
states:
In connection with such
dissolution, the assets and
liabilities of [Alleco] would
be assumed by Lapides, and
Lapides would continue’ to
operate the business of
[Alleco]. Lapides also intends
to assume all of the Company’s
obligations under the
indentures covering its”
outstanding subordinated
indebtedness (other than the
Convertible Debentures) and to

pay such indebtedness...in
accordance with the terms of

the indentures.

Linker aff., Ex. R at 14.

LP purchased the outstanding Alleco
common stock for $67.5 million. Lapides
contributed $2.5 million, and LP obtained
a $65 million bridge loan from two banks.
On October 18, 1988, LP and Alleco merged
via a statutory short form merger. The
bridge loan was then repaid using
Alleco’s own funds.

That same day, Alleco, Service
America and Schroder, as successor
trustee, executed a Third Supplemental
Indenture. This supplement provided that
the Debentures would be convertible into
cash pursuant to the formula established
in Article Fifteen cf the original
Indenture. In other words, the right to
convert to Alleco stock became the right
to exchange each $1,000 in Debenture
principal for $465 in cash. The Third

Supplemental Indenture also reiterated

that “the holder of any Debenture shall
have the right, at his option, at any
time prior to the close of business on
September 1, 2010..." to make the
conversion to cash, subject only to the
Company’s right to redeem the Debentures.
Lapides aff., Ex., 18 at 7-8. The
surviving corporation, which changed its
name to Alleco, Inc. retained the
responsibility to honor the conversion
rights.

On October 21, Lapides notified all
Debenture holders that Alleco would be
voluntarily dissolved. Following
dissolution, Lapides disclaimed any
responsibility for the Debentures. All
interest installments have been paid when
due by Service America. Lapides takes
the position that the conversion right
expired shortly after Alleco dissolved.

ANALYSIS

The court’s jurisdiction over this

D-19

matter is based on 28 U.S.C. Section
1332, and venue is proper in this
district.

As is often the case in a
declaratory judgment action, the facts
giving rise to this cause of action are
not in dispute. The dispute concerns the
application of the parties’ contract--the
Debentures and the Indenture--to the
transactions described above.

The Eighth Circuit observed in Trnka
v. Elance Products Co., 709 F.2d 1223,
1227 (8th Cir. 1983), that “disputes
involving the interpretation of
unambiguous contracts are appropriate
cases for the entry of summary judgment."
This is particularly true when the
interpretation of a standardized document
like an indenture is involved. Sharon
Stee] Corp. v. Chase Manhattan Bank,
N.A., 691 £.2D 1039, 1048 (2D cIR. 1982),

CERT. DENIED, 460 u.s. 1012 (1983). The

D-20

BO AEE (BG) BE eee

parties do not contend, and the court
does not find, that the contract is
ambiguous. Its interpretation is quite
properly a matter of law. Id.

The term “debenture” refers to a
long-term unsecured debt security, issued
pursuant to an indenture, and with an
indenture trustee. The relationship
between the issuer (debtor) and the
debenture holders (lenders) is a matter
of contract. The obligation to repay the
debt runs directly from the issuer to the
holders, and the other rights conferred
by the indenture run from the issuer to
the trustee for the benefit of the
holders. v. Roc Int’l -
642 F.2d 929, 941-42 (5th Cir. April
1981), cert. denied, 454 U.S. 965 (1981).

Convertible debentures, while
primarily debt securities, contain an
equity option. The conversion right is

separate and distinct from the debt, and

D-21

aa

has its own ascertainable value. [Id. at
942 (quoting American Bar Found.,
Commentaries on Indentures 522-23).

Before the court are three issues
concerning Alleco’s relationship with its
Indenture Trustee and with its Debenture
holders: first, whether Alleco has been
released from its obligation to make
payments on the Debentures; second,
whether the LP tender offer and
subsequent dissolution breached the terms
of the Indenture; and third, whether the
conversion feature of the Debentures has
been extinguished.
I. Payment obligation

Alleco contends that it was
discharged from its payment obligation
when Service America became the successor
obligor under the First and Second
Supplemental Indentures. Alternatively,
Alleco argues that it was released upon

its dissolution pursuant to section 12.02

D-22

of the Indenture.

Schroder responds that the original
trustee, First Trust, never agreed to a
novation, and therefore Alleco was not
released from its payment obligation.
Further Schroder contends that Alleco has
not been released from this obligation
because the Debenture certificates make
no provision for Alleco’s substitution or
release.

It is elementary contract law that
substitution and release are separate
events. Substitution does not discharge
the obligor. Without a novation the
obligee retains all rights against the
obligor.

[O}ne who is bound to any

performance whatever...cannot

by any act of his own, or by

any act in agreement with any

other person than...the one to

whom his performance is due,
cast off his own liability and
substitute another’s liability.

If this were not true, obligors

could free themselves of their
obligations by the’ simple

D-23

expedient of assigning them....
(Tjhe performance of the third

party is the act of the
promisor, who remains liable
under the contract and
answerable in damages if the
performance be not in strict
fulfillment of the contract.

Crane Ice Cream Co. v. Terminal Freezing
& Heating Co., 147 Md. 588, 128 A. 280,
283 (1925).

The Debenture holders and_ the
Trustee entered into this contract in
reliance on Alleco’s promise to perform
its obligations. Because there is no
authority in the law of contract for
Alleco’s unilateral release from these
obligations, Alleco’s only grounds for
release is the terms of the contract.

Article Twelve of the Indenture
provides for the sale or merger of
Alleco. Specifically, section 12.01
states that "nothing contained in this
Indenture or in any of the

Debentures...shall prevent any sale,

D-24

conveyance or lease...of all or
substantially all of the property\2 of
the Company, to any other
corporation...." This allowance for
corporate flexibility, however, is
conditioned on the proviso that:

The Company hereby covenants
and agrees, that upon any such
consolidation, sale, merger,
conveyance or lease, the due
and punctual payment of the
principal of and premium, if
any, and interest on all of the
Debentures, according to their
tenor and the due and punctual
performance and observance of
all of the Covenants and
Conditions of this Indenture to
be performed by the Company,

\2 Whether the sale of Service
America represented “substantially all"
of Alleco’s property is a matter
vigorously disputed by the parties.
However, this issue does not create a
material factual dispute because its
resolution is irrelevant to the outcome
of the case. For purposes of this
motion, the court accepts Alleco’s
contention that the sale of Service
America constituted the sale of
substantially all of Alleco’s assets.

Indenture (Lapides aff. Ex. 1), Section
12.01 at 83.

D-25

shall be elxpressly assumed, by

supplemental indenture

satisfactory in form to the

Trustee...by the corporation

which shall have acquired or

leased such property.

In other words, Alleco agreed that
any successor corporation would assume
all covenants and conditions of the
Indenture, and that the form of the
assumption must be acceptable to the
Trustee. Section 12.01 does nct mention
release. Indeed, there is nothing in the
Indenture which would require the Trustee
to release Alleco following that sale.
Alleco could not negotiate a release from
First Trust, and since First Trust’s
refusal is not inconsistent with the
terms of the Indenture, this court has
absolutely no grounds for imposing a
novation.

Alleco argues, alternatively, that
it was released from the payment

obligation upon its dissolution, as

D-26

allowed under section 12.02 of the
Indenture.\3 This section requires the

successor to assume all of Alleco’s

\3 Section 12.02 of the Indenture
provides in relevant part: Successor
- In case

of any such consolidation, merger, sale,
conveyance or lease and upon the
assumption by the successor corporation,
by supplemental indenture, executed and
delivered to the Trustee and satisfactory
in form to the Trustee, of the due and
punctual payment of the principal of a
premium, if any, and interest on all of
the Debentures and the due and punctual
performance of all of the covenants and
conditions of this Indenture to be
performed by the Company, such successor
corporation shall succeed to and be
substituted for the Company, with the
same effect as if it had been named
herein as the party of the first part...

In the event of any such
consolidation, merger, sale, conveyance
or lease, the person named as_ the
"Company" in the first paragraph of this
Indenture or any successor which shall
thereafter have become such in the manner
prescribed in this Article Twelve may be
dissolved, wound up and liquidated at any
time thereafter and such person shall be
released from its liabilities as obligor
and maker of the Debentures and from its
obligations under this Indenture.

Lapides aff. Ex. 1 at 84.

D-27

obligations for these Debentures, and
then allows Alleco to be released from
these obligations upon its dissolution.
The only provision for the release of
Alleco from its obligations for these
Debentures is found in this section.
Following the sale of Service
America, Alleco remained liable to the
Debenture holders for any failure of
Service America to make payments.
Further, Alleco explicitly covenanted in
the First Supplemental Indenture to honor
the conversion cbligation of the
Debentures. Lapides aff., Ex. 6, Section
3 a 6. That is, the Debentures
continued to be convertible to Alleco
common stock per the agreed formula.
Alleco also explicitly covenanted in the
First Supplemental Indenture to continue
to be bound by Section 5.05 of the
Indenture. Id. Section 4(d) at 12.

Section 5.05 prohibits Alleco from, inter

D-28

eee ah ee oe en eS ee eee eee

ok tpcitiy“s Wnt a

alia, redeeming any shares of its capital
stock unless certain financial criteria
were first satisfied.

The court finds, based on the
language of section 12.02 that a
condition precedent to Alleco’s release
was the assumption by Service America of
all covenants and conditions of the
Indenture. The section requires the
execution of a supplemental indenture by
which a successor corporation assumes the
due and punctual payment of principal,
premium, if any, and interest, "and the
due and punctual performance of all the
covenants and conditions of this
Indenture to be performed by the
Company...." The section then allows for
a release upon dissolution. There is no
provision for a partial release.

As noted above, Service America did
not assume certain major obligations.

Not having met thé requirement that the

D-29

:

successor assume all obligations, there
is no reason to consider what follows --
release. This section, and sections like
it, provide issuers with flexibility. In
return, such sections assure the holders
that the issuer will provide for its
covenants. This dispute is a case in
point. Alleco arranged for Service
America to make payments, but made no
provision for its conversion obligation.
In fact, Alleco repudiated that
obligation. This is precisely the type
of misconduct against which section 12.02
was intended to protect.

In conclusion, because Alleco failed
to provide a successor to assume all of
its obligations, it is not entitled to a
release of any of its obligations.
Alleco remains accountable for the due
and punctual payment of the principal,
premium, if any, and interest on the

Debentures.

D-30

Schroder contends that Alleco cannot
be released from the payment obligation
because the Debenture certificates make
no provision for Alleco’s release.
Alleco responds that the Debentures
require "the Company” to make payments,
and that Article Twelve of the Indenture
defines the conditions under which a
successor may become “the Company."

Alleco does not dispute that the
Debentures fail to provide the holders
with any notice of Alleco’s potential
release or the circumstances under which
such release may be obtained. In fact,
each Debenture states:

No reference herein to the

Indenture and no provision of

this Debenture or of the

Indenture shall alter or impair

the obligation of the Company,

which is absolute and

unconditional, to pay the
principal of any premium and
interest on this Debenture at

the place, at the respective

times, at the rate and in the

coin or currency herein
prescribed.

D-31

Lapides aff. Ex. 1 at 5.

Further, the Debentures provide only
one definition of “Company”:

ALLEGHENY BEVERAGE CORPORATION,

a corporation duly organized

and existing under the laws of

the State of Maryland (herein

called the “Company")....

Id. at 1. The document gives no notice
that a party other than Alleco may take
over the duties of the obligor.

These Debentures are a “certificated
security” under section 8-102(1)(a) of
the Maryland Commercial Code. Section 8-
202(1)(c) allows such a security to
incorporate the terms of an indenture by
reference, but only “to the extent that
the terms referred to do not conflict
with the terms stated on the certificated
security...." Here, the Indenture’s

provisions for substitution and release

are, by omission, inconsistent with the

D-32

terms of the Debenture.\4 In sum,

regardless of the above interpretation of
Article Twelve of the Indenture, any
Claim of release is ineffective because
of Alleco’s failure to disclose this
possibility on the face of the
Debentures.

II. Tender Offer and Merger

Pursuant to a successful tender

\4 The comments accompanying the
American Bar Association’s
Simplified Indenture are consistent with
the commercial code. The model
indenture’s section on mergers,
consolidations or sales does not provide
for the release of the original issuer.
According to the comments:

Issuers objecting to such
continuing liability, or
concerned that such liability
may make it difficult to
liquidate (or to proceed as an
investment company) following
a sale of assets, should change
the last paragraph of this

Section and eonsider
appropriate summary disclosure
in the form of Security.

, Section 5.01

Model Simplified Indenture
comment 6, 38 Bus. Law. 741, 791 (1982)
(emphasis added).

D-33

offer, LP Acquisition Corporation

purchased the outstanding shares of
Alleco common stock for $67.5 million.
The two companies merged, and the new
company was named Alleco, inc. The
following day, Alleco repaid a bridge
loan of $65 million taken out by LP to
finance the purchase of Alleco common
stock. There is no dispute that the
funds used to repay this loan were assets
of the former Alleco, Inc. prior to the
merger.

Schroder contends that this series
of transactions violated section 5.05(a)

of the Indenture\5. This section allows

\5 Section 5.05(a) provides:

Restrictions on Dividends and

Redemption of Capital Stock.
No dividend whatever shall be
declared or paid not shall any
distribution be made on any
capital stock of the Company
(except in shares of capital
stock of the Company), nor
shall any shares of capital

D-34

Alleco to pay dividends or, make

distributions to shareholders, or to
redeem its capital stock only if the
companay can first satisfy cértain
financial requirements.

Alleco does not contend that it
satissfied the requirements of section
5.05 at the time of the tender offer. It

contends that the section does not apply

stock of the Company. be
acquired or redeemed by the
Company or any Subsidiary,
unless after giving effect to
such dividend, distribution,
acquisition or redemption, the -
aggregate payments for all such
purposes subsequent to June 30,
1985 would not exceed the sum
of (A) 50% of the Net Income of
the Company (determined on a
cumulative basis) for’ the
period commencing July 1, 1985
and ending or the last day of
the immediately preceding
calendar month (or in the event
that such Net Income
(detscmined on a cumulative
basis) is a negative amount,
100% of such Net Income); (B)
the aggregate of the net
proceed received by the Company
from the sale for cash or other

D-35

because LP, not Alleco, purchased

Alleco’s common. stock. In essence,
Alleco asks the court to ignore the
substance of these transactions, and look
only at their form.

Such sections are common. They
protect debenture holders from the
dissipation of corporate assets to

shareholders, thus maintaining the

property (including issuance in
any merger, consolidation or
similar transaction) or shares
of its capital stock subsequent
to September 1, 1985; (C) the
aggregate of the net proceeds
received by the Company from
the issuance of the Debentures
or the issuance of sale of any
other debt obligation of the
Company, which Debentures or
debt obligation shall have been
converted into shares of Common
Stock of the Company after
September 1, 1985; and (D)
$12,000,000.00

Lapides aff. Ex. 1 at 40. As noted
previously, Alleco reaffirmed its
obligations under this section in the
First Supplemental Indenture, Section
4(d).

D-36

capacity of the issuer to make payments
and preventing the issuer from diluting
the value of a conversion feature. If
the court were to accept Alleco’s
argument, then sections like 5.05 would
provide little or no protection for
debenture holders. According to Alleco,
establishing a shell corporation is all
that is necessary to sidestep an
obligor’s promise to maintain its assets.

LP’s tender was in effect a self-
tender. Alleco cash was used to purchase
Alleco shares. As a result of these
transactions, Alleco’s primary
shareholder received a huge distribution
of Alleco assets. This is precisely the
result intended by lLapides when he
initiated the tender offer, and this is
precisely the conduct which section 5.05
prohibits.

If sections like 5.05 are to have

any meaning, courts must consider the

D-37

substance of the disputed transaction.
"(W)hat cannot be legally done in one act
does not necessarily become legal when
the act is split up into various steps,
all seeking and attempting to do in final

result, what the one act might have

accomplished." In re Associated Gas &
Elec. Co., 61 F. Supp. 11, 28 (S.D. N.Y.
1944) (issuer violated indenture by
executing many partial sales of assets in
derogation of covenant to not sell
substantially all of its assets), aff'd,
149 F.2d 996 (2d. Cir.), cert. denied sub
nom., 326 U.S. 736 (1945). See also
Mayor of Baltimore v. Bio Gro Systems,
Inc., 300 Md. 248, 477 A.2d 783, 787
(1984) (city cannot do indirectly what it
is prohibited from doing directly).

In sum, the tender offer and merger

violated the terms of section 5.05.

D-38

‘ |

Under section 7.01(d)\6 of the Indenture,

\6 Section 7.01 of the Indenture
provides in relevant part:

° In case one or
more of the following Events of
Default...shall have occurred and be
continuing: |

(d) failure on the part o: the
Company duly to observe or
perform any other of _ the
covenants or agreements on the
part of the Company in the
Debentures or in this Indenture
continued fora period of sixty
days after the date on which
written notice of such failure,
requiring the Company to remedy
the same, shall have been given
to the Company by the Trustee,
or to the Company and the
Trustee by the holders of at
least twenty-five percent in
aggregate principal amount of
the Debentures at the time
outstanding;

then and in each and every such case,
unless the principal of all of the
Debentures shall have already become due
and payable, either the Trustee or the
holders of not less than twenty-five
percent in aggregate principal amount of
the Debentures then outstanding
hereunder, by notice in writing to the
company (and to the Trustee if given by

D-39

Alleco’s failure to honor section 5.05
constitutes an event of default.
III. Conversion Obligation

The Third Supplemental Indenture,
executed on October 18, 1988 following
the merger of LP and Alleco, provides
that “each Debenture shall be convertible
into, and only into, cash in the manner
provided in Article Fifteen of the
Amended Original Indenture, as amended
and supplemented by this Third
Supplemental Indenture.” lLapides aff.,
Ex. 18 at 7. Section 15.06 of the

original Indenture provides for the

Debentureholders), may declare
the principal of all the
Debentures and t he interest
accrued thereon to be due and
payable immediately, and upon
any such declaration the same
shall become and shall be
immediately due and payable,
anything in this Indenture or
in the Debentures contained to
t he se ee oe ee er Oe ee
notwithstanding....

Lapides aff., Ex. 1 at 46-47.

D-40

da a Da a)

convertibility of the Debentures in the
event of a merger or similar transaction.
It requires the successor coporation to
execute a supplemental indenture
"providing that each Debenture shall be
convertible into the kind and amount of
shares of stock and other securities or
property or assets (including cash)..."
which the holder would have received had
he converted such Debentures immediately
prior to the merger. Lapides aff., Ex.
1 at 93-94. |

LP offered $10 cash for each share
cf Alleco common stock, and the
Debentures are convertible to 46.5 shares
of Alleco common stock. Therefore, the
Third Supplemental Indenture transformed
the conversion feature into the right to
receive $465 cash for each $1,000 in
Debenture principal. This supplement
also reaffirmed section 15.01 of the

Indenture concerning each Debenture

D-41

holder’s right to convert at any time
prior to the close of business on
September 1, 2010, subject only to the
company’s right to redeem the Debentures
prior to that date. Lapides aff., Ex. 18
at 7-8.

Alleco contends that the conversion
feature was extinguished upon Alleco’s
dissolution. However, there is
absolutely nothing in the original
Indenture or the supplements which allows
the company or a successor to repudiate
its conversion obligation. Section 12.02
of the Indenture provides for a release
upon dissolution if a successor has
assumed all obligations and covenants
under the Indenture. No successor
assumed the conversion obligation.

Alleco argues that section 15.10 of
the Indenture provides grounds for the
extinguishing of its conversion

obligation. However, this section is

D-42

nothing more than a notice provision. It
simply allows holders to exercise their
conversion rights prior to certain
events, including a dissolution. It does
not provide any warning to holders of the
possible loss of their conversion rights
upon dissolution. Lapides aff. Ex. 1 at
95-96.

A corporation cannot obtain a
release from its obligations by means of
a voluntary dissolution, especially when
& purpose of the dissolution is the
avoidance of an undesirable contract.
16A Fletcher’s Cyclopedia of
Corporations, Section 8120 at 375-76
(1988 rev. ed.). Such is the case here.
The offering document for the LP tender
revealed Lapides’ intent to repudiate all
obligations to these Debenture holders
following Alleco’s dissolution.

The Indenture explicitly provides

that the right to convert is exercisable

D-43

until the year 2010. The repudiation of
this right is without foundation in the
parties’ contract. In sum, Alleco
remains liable for the convertibility of
these Debentures, per its undertaking in
Article Fifteen of the Indenture, as
supplemented by the Third Supplemental
Indenture.
Iv. Other Matters

Schroder asks the court to dismiss
without prejudice its second and fourth
counterclaims. Its second counterclaim,
seeking to enjoin the LP tender offer,
merger, and dissolution, is now moot.
The fourth counterclaim alleges
violations of the Maryland Uniform
Fraudulent Conveyances Act. Md. Com.
Code Ann., Subsection 15-201 et seg.

Alleco objects, arguing that instead
of dismissal the court should grant
Alleco summary judgment against these

counts. Alleco’s argument is that since

D-44

Alleco has been released form its
obligations on these Debentures, the
holders are no longer creditors of
Alleco. If not creditors, therefore,
they can have no claim under the Act.
However, since Alleco has not been
released, the holders remain creditors of
Alleco. Summary judgment, therefore, is
not warranted.

The decision to grant a voluntary
dismissal, pursuant to Fed. R. Civ. P.
41(a)(2), is a matter committed to the
sound discretion of the trial court.
Holmgren _v. Massey-Ferguson, Inc., 516
F.2d 856, 8567 n.1 (8th Cir. 1972).
Given the developments since Schroder
filed its counterclaim, these two counts
now encompass issues and parties beyond
this litigation. The court, therefore,
will grant Schroder’s motion to dismiss
these counts without prejudice.

Based on the stipulation of the

D-45

parties, and pursuant to Fed. R. Civ. P.

24, Salomon Brothers, Inc. was permitted
to intervene as a party defendant in
January 1988. Salomon filed
counterclaims seeking declaratory relief
similar to that sought by Schroder,
seeking certification of a class, and
seeking imposition of a constructive
trust on Service America’s assets.

Salomon filed its counterclaims
prior to Schroder’s appointment as
successor trustee. Salomon has since
indicated its satisfaction with
Schroder’s protection of the Debenture
holder’s interests. Correspondingly,
Salomon has been less vigorous in its
pursuit of its counterclaims.

The "no action" clause of the
Indenture, section 7.04\7 restricts the

rights of holders of less than twenty-

\7 Lapides aff., Ex. 1 at 51-52.

D-46

parties, and pursuant to Fed. R. Civ. P.
24, Salomon Brothers, Inc. was permitted
to intervene as a party defendant in
January 1988. Salomon filed
counterclaims seeking declaratory relief
similar to that sought by Schroder,
seeking certification of a class, and
seeking imposition of a constructive
trust on Service America’s assets.

Salomon filed its counterclaims
prior to Schroder’s appointment as
successor trustee. Salomon has since
indicated its satisfaction with
Schroder’s protection of the Debenture
holder’s interests. Correspondingly,
Salomon has been less vigorous in its
pursuit of its counterclaims.

The "no action" clause of the
Indenture, section 7.04\7 restricts the
rights of holders of less than twenty-
five percent of the aggregate principal

amount of the Debentures to bring suit on

D-47

five percent of the aggregate principal
amount of the Debentures to bring suit on
theiir own. Salomon holds approximately
19% of the Debentures principal. Under
this section, therefore, Salomon may
bring suit only to enforce its right to
payment or its conversion right.
Accordingly, Salomon’s counterclaim for
class certification and constructive
trust are dismissed for failure to comply
with the terms of section 7.04.

Service America has made all
payments when due. Salomon counts
related to payment, therefore, fail to
state a claim. In any event, these
Claims have been fully presented by
Schroder as trustee. Salomon has pled no
count related to the conversion right.
In sum, two of Salomon’s counterclaims
are barred by the terms of the Indenture,
and the counts on which direct action is

permitted fail to state a clain.

D-48

CONCLUSION

Though complicated by the amount in
controversy, this is a relatively simple
case. Alleco and its controlling
shareholder have flaunted the Indenture,
and have pursued these schemes with utter
disregard for the rights of the Debenture
holders. This conduct violated numerous
terms of the Indenture. Consistent with
Article Seven of the Indenture, Alleco
has defaulted on its obligations to its
Debenture holders.

Accordingly, IT IS ORDERED that:

1. The motion of Alleco, Inc., LP
Acquisition Corporation, and Lapides
Corporation for summary judgment is
DENIED;

2. The motion of IBJ Schroder Bank
& Trust Company for summary judgment is
GRANTED, as follows:

a. Judgment is entered in favor

of Schroder and against Alleco,

D-49

Service America, Lapides and LP,
dismissing with prejudice the
original Complaint and the First
Amended and Supplemental
Complaint in this matter,

b. Further, judgment is entered
in favor of Schroder on its
First Counterclaim and against
Alleco, Service America, Lapides
and LP, declaring that Alleco is
not released from liability for
the payment of principal and
interest on Alleco’s 9-1/2%
Convertible Senior Subordinated
Debentures Due 2010 in the
principal amount of $105
million, and

c. Further, judgment is entered
in favor of Schroder on its
Third Counterclaim and against
Alleco, Service America, Lapides

and LP, declaring that LP’s

D-50

acquisition on September 14,
1988 of Alleco’s publicly-held
common stock through a tender
offer by LP, the merger of
Alleco with and into LP on
October 18, 1988, and the
dissolution of the surviving
corporation and the distribution
of its assets to Lapides on
November 8, 1988, constituted a
repudiation of Alleco’s
obligations under the Debentures
and under the Indenture, dated
as of September 1, 1985, between
Alleco and the original trustee,
First Trust Company, Inc., and
a breach of the covenants
contained in Section 5.05 of the
Indenture, giving rise to an
Event of Default under the
Indenture and permitting

Schroder properly to give

D-51

written notice of default and to
declare the principal of all the
Debentures and the interest
accrued thereon to be
immediately due and payable.

3. The motion of Service America
Corporation for summary judgment is
DENIED with respect to the counteclaims
of IBJ Schroder Bank & Trust Company, and
GRANTED with respect to the counterclaims
of Salomon Brothers, Inc., and Salomon’s
counterclaims are DISMISSED; and .

4. The second and fourth
counterclaims of Schroder’s First Amended
and Supplemental Complaint and
Counterclaims are dismissed without
prejudice pursuant to Fed. R. Civ. P.
41(a)(2).

D-52

LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: August 16, 1989.

Paul A. Magnuson
United States
District Judge

D-53

APPENDIX E

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND

IN RE: *

ALLECO, INC. * Case No.
Debtor * 894 2987

Debtor’s Employer Tax *

Identification No.
52-1158079 *
*

* * * * * *

INVOLUNTARY CASE: CREDITORS’ PETITION

1. Salomon Brothers Inc., New York
City, New York; Fidelity Magellan Fund,
Boston, Massachusetts; Mutual Series Fund
Inc., Short Hills, New Jersey, (through
its portfolio funds: Mutual Shares Fund,
Mutual Qualified Fund, and Mutual Beacon
Fund) are creditors of Alleco Inc.
("Alleco" or the "Debtor", which terms
include the entities set forth in the
caption and their predecessors in
interest) of Allegheny Circle, Cheverly,
Prince George’s County, Maryland 20781,

holding claims against the Debtor, not

=

contingent as to liability and not
subject to bona fide dispute, amounting
in the aggregate, in excess of the value
of any lien held by them on the Debtor’s
property securing such claims, to at
least $5,000.

IBJ Schroder Bank & Trust Company
("Schroder* or "Indenture Trustee") of
One State Street, New York, N.Y. 10004 is
the successor indenture trustee, having
succeeded First Trust Company, Inc. as
trustee, under an Indenture dated as of
September 1, 1985 (which, together with
Supplemental Indentures thereto, will be
referred to herein as the "Indenture" )
between Allegheny Beverage Corporation
(now Alleco) and First Trust Company,
Inc. pertaining to the issuance of
$105,000,000 of 9-1/2% Convertible Senior
Subordinated Debentures Due 2010 (the "9-

1/2% Debentures").

The nature and amount of

petitioners’ claims are ag follows:
A. Salomon Brothers Inc is the
holder of $18,525,000 principal

amount of the 9-1/2% Debentures.

Mutual Shares Fund is the holder of

eetants

$5,095,000 principal amount of the
) 9-1/2% Debentures. Mutual Qualified
| Fund is the holder of $2,200,000
principal amount of the 9-1/2%
pebicnitieiciien. Mutual Beacon Fund is
the holder of $948,000 principal
amount of the 9-1/2% Debentures.

B. As described more fully below
and in the Memorandum and Order of
U.S. District Court Judge Paul A.
| Magnuson dated August 16, 1989 (a
copy of which is attached hereto as
Exhibit A) issued in the case of

Alleco Inc. v. IBJ Schroder Bank &

Trust Company, et al., United States
District Court for the District of

Minnesota, Third Division, Civil

E-3

File No. 3-87-0802 (the "Declaratory
Judgment Action"), Alleco has
defaulted under the Indenture.

C. In May 1987, Alleco entered into
an agreement to sell what was then
the last of its operating
subsidiaries by selling it via a
leveraged buy-out to another entity
for cash and the assumption of
certain obligations (the "Sale
Transaction"). Alleco asserted that
after the Sale Transaction it would
no longer be liable on its payment
obligations to the holders of the 9-
1/2% Debentures. Holders of the 9-
1/2% Debentures advised ALleco that
following the proposed Sale
Transaction, Alleco would remain
liable on such payment obligations.
Alleco responded on November 30,
1987 by instituting the Declaratory

Judgment Action. On December 2,

1987, Alleco closed the _ Sale
Transaction.

D. On July 13, 1988, Alleco
announced a series of transactions,
including a certain tender offer,
merger and dissolution, pursuant to
which, Alleco was to pay to Alleco
shareholders $65,000,000 in cash to
retire substantially all of the
outstanding stock (the "Repurchase
Transactions") but for the stock
held directly and indirectly by
Alleco’s Chairman, Morton Lapides.
Schroder and certain holders of the
9-1/2% Debentures advised Alleco
that the proposed Repurchase
Transactions would violate the
covenant in the Indenture
restricting dividends and
redemptions of capital stock, and
would constitute an event of default

under the Indenture. Between

September 14, 1988 and November 9,
1988, Alleco consummated the
Repurchase Transactions.

E. Counterclaims and amended and
supplemental complaints, responsive
pleadings, and cross-motions for
summary judgment were filed in the
Declaratory Judgement Action,
bringing squarely before the U.S.
District Court the issues of (i)
whether Alleco continued to be
liable to the holders of the 9 1/2%
Debentures after the Sale
Transaction, and (ii) whether the
Repurchase Transactions violated the
Indenture.

F. By Memorandum and Order dated
August 16, 1989, U.S. District Court
Judge Paul A. Magnuson determined
that Alleco and its controlling
shareholder "flaunted the Indenture,
and have pursued these schemes with

E-6

utter disregard for the rights of
the Debenture holders”. Judge
Magnuson concluded that Alleco
“violated numerous terms of the
Indenture", and is thereby in
default under the Indenture covering
the 9-1/2% Debentures. (Exhibit A,
pages 25-26.)

G. On September 11, 1989, Schroder
issued notice to ALleco declaring
the entire principal of the 9-1/2%
Debentures and accrued interest
thereon to be in default and to be
due and payable immediately, and
delivered demand for payment to
Alleco. A copy of the Notice of
Acceleration and Demand for Payment
is attached hereto as Exhibit B. In
consequence of such defaults and
Notice, the entire $105,000,000 in
principal under the 9-1/2%

Debentures, and accrued interest

E-7

thereon, is currently due and
payable.

H. The obligations currently due
and payable to the petitioners as
described above remain unpaid at the
date of this Petition.

2. The Debtor’s principal place of
business has been within this district
for the 180 days preceding the filing of
this petition.

3. The Debtor is a person against
whom an order for relief may be entered

under Title 11, United States Code.

4. The Debtor is generally not
paying its debts which are not subject to
bona fide dispute as they become due as
indicated by the following:

A. The Debtor has failed to pay

$105,000,000 in principal, plus

E-8

accrued interest thereon, currently
due and payable to the petitioners
and the other holders of the 9-1/2%
Debentures, despite demand therefor.
B. The most recent of Debtor’s
financial statements available to
petitioners appears in Form 10-Q
filed by the Debtor with the
Securities and Exchange Commission
dated August 11, 1989 (attached
hereto is Exhibit C). It contains,
inter alia, an unaudited condensed
consolidated balance sheet of Alleco
dated June 30, 1989 (the “Balance
Sheet"), at pages 5-6 of Exhibit C;
a condensed consolidated statement
of operations for the nine-months
ended June 30, 1989 (The “"Nine-
Month" Operating Statement), at
pages 7-8 of exhibit C; and a
condensed consolidated statement of

cash flows for the nine-months ended

E-9

June 30, 1989 (the "Nine-Month Cash
Flow Statement"), at pages 9-10 of
Exhibit C.

(i) The Balance Sheet reflects
aggregate assets in the amount of
$101,666,000, and aggregate
liabilities of $92,848,000, without
including among the liabilities the
$105,000,000 currently due and
payable under the 9-1/2% Debentures.
As noted in the second paragraph of
page 2 of Exhibit C (amplified under
the heading "Extraordinary Items" at
page 4 of Exhibit C), Alleco prepaid
and retired certain debentures on
July 14, 1989 (two weeks after the
date of the Balance Sheet) at a cost
of $24,563,000, thereby effectively
reducing the current liabilities of
Alleco by $24,563,000 and apparently
reducing its cash by a like amount

of $24,563,000. FPurthermore, Note

E-10

fc a a a lS : a

eo, wend

|

Alleco debt in default and unpaid to
the petitioners and the other
holders of the 9-1/2% Debentures
constitutes 70% of the outstanding
debts of Alleco. It is likewise
evident that Alleco’s aggregate
assets of $77,103,000 are
substantially less than the
$105,000,000 currently due and
payable to the 9-1/2% Debenture
holders, and that debtor’s aggregate
liabilities exceed its aggregate
assets by over $70,000,000.

(ii) The Nine-Month Operating
Statement reports a loss of
$1,138,000 on aggregate revenues of
$16,502,000. Of the aggregate
revenues reported by Alleco,
$4,102,00 is a non-recurring income
tax refund, which, if not received
during that nine-month period, would
have increased the nine-month loss

to $5,240,000.

E-11

Alleco debt in default and unpaid to
the petitioners and the other
holders of the 9-1/2% Debentures
constitutes 70% of the outstanding
debts of Alleco. It is likewise
evident that Alleco’s aggregate
assets of $77,103,000 are
substantially less than the
$105,000,000 currently due and
payable to the 9-1/2% Debenture
holders, and that debtor’s aggregate
liabilities exceed its aggregate
assets by over $70,000,000.

(ii) The Nine-Month Operating
Statement reports a joss of
$1,138,000 on aggregate revenues of
$16,502,000. Of the aggregate
revenues reported by Alleco,
$4,102,00 is a non-recurring income
tax refund, which, if not received
during that nine-month period, would

have increased the nine-month loss

E-12

to $5,240,000.

(iii) The Nine-Month Cash Flow
Statement shows a decrease in "Cash
and cash equivalents" from
$194,816,000 at the beginning of the
period to $35,361,000 at the end of
the period. If the post-June 30,
1989 debenture prepayment
($24,563,000) described above is
deducted from the June 30, 1989
figure, it is evident that the drop
in "Cash and cash equivalent" is
from $194,816,000 at the beginning
of the period to $10,798,000 at the
end.

C. As described in Paragraph 4B(i)
above, Debtor has pre-paid an
antecedent debt of $24,563,000 to
holders of certain debentures on
July 14, 1989, a payment which
constitutes a preference within the

meaning of 11 U.S.C. Section 547

E-13

since a petition under Title 11,
United States Code has been filed
within ninety days of that payment
(see Exhibit C, pages 2 and 4).

D. Between September 14, 1988 and
October 18, 1988, Alleco distributed
to common stockholders $65,000,900
in the Repurchase Transactions (more
fully described on pages 7-9 of
Exhibit A), which violated the
restriction against dividends and
redemption of capital stock in
petitioner's 9-1/2% Debenture
Indenture, a transaction determined
by District Judge Magnuson (Exhibit
A, pages 17-20) to have violated the
Indenture. The described Repurchase
Transactions appear to be a series
of transactions avoidable under the
provisions of 11 U.S.C. Section 548.
WHEREFORE, petitioners prays that an

ordexs of relief be entered against

F-14

td i Ie tate ABs Ml PRE eh Wi Ea laa ly TMi Tes ble

Alleco Inc. under chapter 7 of Title 11
of the United States Code.

Nathan B. Feinstein
Piper & Marbury

36 South Charles Street
Baltimore, MD 21201
(301) 576-1900

Attorney for Petitioners

Of Counsel:

Wachtell, Lipton, Rosen & Katz
299 Park Avenue

New York, New York 10171
(212) 371-9200

E-15

APPENDIX F

Maryland Code Annotated,
Corporations
Section 2-301

Section 2-301. “Insolvent” defined.

In this subtitle "insolvent" means
that a corporation:

(1) Has debts which exceed the fair
value of its assets; or

(2) Is unable to meet its debts as
they mature in the ordinary course of its
business. (An. Code 1957, art. 23,
Sections 32, 37; 1975, ch. 311, Section
2.)

F-1

APPENDIX G

Maryland Code Annotated,
Section 2-303

Section 2-309. Dividends.

(a) General rule. - If declared by
its board of directors and unless
contrary to a restriction contained in
its charter, a corporation may pay
dividends on its shares in cash,
property, or its own stock, subject to
the provisions of this section.

(b) Restrictions on declaration or
payment. - A dividend may not be declared
or paid if:

(1) The corporation is insolvent
or the payment would cause the
corporation to become insolvent; or

(2) The corporation’s stated
capital is impaired or the payment would
impair its stated capital.

(Cc) Dividend from source other than
earned surplus. - If a dividend is paid

G-1

from any source other than earned
surplus, the source of the dividend shall
be disclosed not later than at the time
of payment to the stockholders who
receive it.

(d) Dividend on junior class. -
Capital surplus paid with respect to 4
class of stock may not be used for the
payment of dividends on any class of
stock junior to it.

(e) Stock dividend. - (1) A split-up
or division of issued shares into a
greater number of shares of the same
class without any change in the aggregate
amount of stated capital is not a stock
dividend within the meaning of this
section.

(2)(i) If a dividend is payable
in a corporation’s own stock with par
value, the shares shall be issued at par
value and, at the time the dividend is

paid, the corporation shall transfer from

G-2

surplus to stated capital an amount equal
to the aggregate par value of the shares
to be issued.

(ii) The corporation may
transfer any additional amount from
earned surplus to capital surplus as the
board of directors determines.

(3)(i) If a dividend is payable
in a corporation’s own stock without par
value, the board of directors shall adopt
at the time the dividend is declared a
resolution which sets the amount to be
attributed to stated capital with respect
to the shares and, at the time the
dividend is paid, the corporation shall
transfer the amount from surplus to
stated capital.

(ii) The corporation may
transfer any additional amount from
earned surplus to capital surplus as the
board of directors determines.

(iii) The amount per share of

G-3

stock transferred to stated capital and
any amount transferred to capital surplus
shall be disclosed not later than at the
time of payment to the stockholders who
receive the dividend.

(4) A dividend payable in shares
of one class of a corporation’s stock may
not be declared or paid to the holders of
shares of another class of stock unless
the payment has been:

(i) Approved by the board of
directors under the charter; or

(ii) Approved at a meeting of
stockholders by the affirmative vote of
a majority of all the votes entitled to
be cast on the matter of each class
entitled to vote on it.

(f) Dividend by corporation entitled
to depletion allowance. - A corporation
which is substantially engaged in the
exploitation of any mine, timber, oil

well, gas well, patent, or other wasting

asset, or in the development and
ownership of real property, or organized
substantially for the purpose of
liquidating a specific asset may
distribute the net income derived from
the exploitation of the wasting asset or
from the real property, or the net
proceeds derived from the liquidation
without making any deduction or allowance
for the depletion of the asset or the
depreciation of the real property
incidental to the lapse of time,
consumption, wear, liquidation, or
exploitation if:

(1) Adequate provision is made
for debts and liabilities, other than
stated capital, and for the aggregate
preferential amount payable in the event
of voluntary liquidation to the holders
of stock which has preferential rights;
and

(2) Notice that no deduction or

G-5

allowance has been made for the depletion
or depreciation is given not later than
the time of payment to stockholders
receiving the dividend. (An. Code 1957,
art. 23, Section 37; 1975, ch. 311,
Section 2; 1978, ch. 277.)

APPENDIX H

Maryland Code Annotated,
Corporations
Section 2-312

Section 2-312. Disposition of acquired
stock.

Unless its charter provides
otherwise, if a corporation acquires its
own stock, other than convertible shares
surrendered to it or stock acquired for
retirement, it may hold, sell, or
otherwise dispose of the stock for any
corporate purpose as determined by the
board of directors. (An. Code 1957, art.
23, Section 32; 1975, ch. 311, Section
as)

H-1]

APPENDIX I

Maryland Code Annotated,

Corporations
Section 3-412

Section 3-412. Distributions to
stockholders in voluntary dissolution.
(a) Notice to stockholders to prove
interest. - If a Maryland corporation is
voluntarily dissolved and assets are
available for distribution to
stockholders, the director-trustees or
receiver may notify the stockholders to
prove their interests within a specified
time at least 60 days after the date of
the notice. The notice shall be mailed
to each stockholders at his address as it
appears on the records of the corporation
and published at least once a week for
three successive weeks in a newspaper of
general circulation published in the
county in which the principal office of
the corporation is located. The date of

the notice is the later of the date of

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mailing or the date of first publication.

(b) Distribution of pro rata shares.
- After the expiration of the time
specified in the notice, the director-
trustees or receiver may distribute to

each stockholder who has proved his

interest his proportionate share of the
assets, reserving the shares of those who
have not proved their interests.
Thereafter, the director-trustees or
receiver may incur reasonable expenses in

locating the remaining stockholders and

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securing proof of interests from them and
may charge the expenses against the funds

undistributed at the time the expenses

are incurred. From time to time the
director-trustees or receiver may
distribute a proportionate share to any

stockholder who has proved his interest

iC AN bis Ret LLY pik PL ARH oe A Tere =r

since the prior distribution.
(c) Final distribution. - No earlier

than three years from the date of the

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ST eT mE es

original notice, the director-trustees or
receiver may distribute all surplus
assets remaining under his control to
those stockholders who have proved their
interests and are entitled to
distribution. After final distribution,
the interest of any stockholder who has
not proved his interest is forever barred
and foreclosed.

(d) Unclaimed assets. - (a) Any
assets remaining unclaimed 60 days after
the final distribution, whether through
failure or inability of the postal
authorities to deliver the distribution
checks or for any other reason is
presumed abandoned and shall be reported
to the abandoned property unit of the .
State Comptroller’s office in accordance
with Title 17 of the Commercial Law
Article, the Maryland Uniform Disposition
of Unclaimed Property Act.

(2) The director-trustees or

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receiver are released and discharged from
all further liability in the matter on
payment or delivery of all unclaimed
assets to the abandoned property unit of
the State Comptroller’s office. (An. Code
1957, art. 23, Section 83; 1975, ch. 311,
Section 2; 1976, ch. 387, Section 1;
1977, ch. 529.)

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APPENDIX J

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Federal Rules of Civil Procedure
Rule 19
Rule 19. Joinder of Persons Needed for
Just Adjudication.

(a) PERSONS TO BE JOINED IF
FEASIBLE. A person who is subject to
service of process and whose joinder will
not deprive the court of jurisdiction
over the subject matter of the action
shall be joined as a party in the action
if (1) in the person’s absence complete
relief cannot be accorded among those
already parties, or (2) the person claims
an interest relating to the subject of
the action and is so situated that the
disposition of the action in the person’s
absence may (i) as a practical matter
impair or impede the person’s ability to
protect that interest or (ii) leave any
of the persons already parties subject to
a substantial risk of incurring double,

multiple, or otherwise inconsistent

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obligations by reason of the claimed
interest. If the person has not been so
joined, the court shall order that the
person be made a party. If the person
should join as a plaintiff but refuses to
do s0, the person may be made a
defendant, or, in a proper case, an
involuntary plaintiff. If the joined
party objects to venue and joinder of
that party would render the venue of the
action improper, that party shall be
dismissed from the action.

(b) DETERMINATION BY COURT WHENEVER
JOINDER NOT FEASIBLE. If a person as
described in subdivision (a)(1)-(2)
hereof cannot be made a party, the court
shall determine whether in equity and
good conscience the action should proceed
among the parties before it, or should be
dismissed, the absent person being thus
regarded as indispensable. The factors

to be considered by the court include;

first, to what extent a judgment rendered
in the person’s absence might be
prejudicial to the person or those
already parties; second, the extent to
which, by protective provisions in the
judgment, by the shaping of relief, or
other measures, the prejudice can be
lessened or avoided; third, whether a
judgment rendered in the person’s absence
will be adequate; fourth, whether the
plaintiff will have an adequate remedy if
the action is dismissed for nonjoinder.

(Cc) PLEADING REASONS FOR NONJOINDER.
A pleading asserting a claim for relief
shall state the names, if known to the
pleader, of any persons as described in
subdivision (a)(1)-(2) hereof who are not
joined, and the reasons why they are not
joined.

(d) EXCEPTION OF CLASS ACTIONS.
This rule is wuitent to the provisions of

Rule 23.

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APPENDIX K

Federal Rules of Civil Procedure
Rule 23(e)
Rule 23. Class Actions.

(e) DISMISSAL OR COMPROMISE. A
class action shall not be dismissed or
compromised without the approval of the
court, and notice of the proposed
dismissal or compromise shall be given to
all members of the class in such manner

as the court directs.

APPENDIX L

Federal Rules of Civil Procedure
Rule 26(c)

Rule 26. General Provisions Governing
Discovery.

(c) PROTECTIVE ORDERS. Upon motion
by a party or by the person from whom
discovery is sought, and for good cause
shown, the court in which the action is
pending or alternatively, on matters
relating to a deposition, the court in
the district where the deposition is to
be taken may make any order which justice
requires to. protect a party or person
from annoyance, embarrassment,
oppression, or undue burden or expense,
including one or more of the following:
(1) that the discovery not be had; (2)
that the discovery may be had only on
specified terms and conditions, including
a designation of the time or place; (3)
that the discovery may be had only by a

method of discovery other than that

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selected by the party seeking discovery;
(4) that certain matters not be inquired
into, or that the scope of the discovery
be limited to certain matters; (5) that
discovery be conducted with no one
present except persons designated by the
court; (6) that a deposition after being
sealed be opened only by order of the
court; (7) that a trade secret or other
confidential research, development, or
commercial information not be disclosed
or be disclosed only in a designated way;
(8) that the parties simultaneously file
specified documents or information
enclosed in sealed envelopes to be opened
as directed by the court.

If the motion for a protective
order is denied in whole or in part, the
court may, on such terms and conditions
as are just, order that any party or
person provide or permit discovery. The
provisions of Rule 37(a)(4) apply to the

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award of expenses incurred in relation to

the motion.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_0748%3A2. Public record. Not legal advice.