_________________________________________
Samuel H. Sloan et al,
Plaintiffs,
92 Civil 748 VW
-against-
Frederick H. Murphy et al,
Defendants
_________________________________________
MOTION TO VACATE DEFAULT JUDGMENT AND FOR A PRELIMINARY INJUNCTION
PLEASE TAKE NOTICE that upon the annexed affidavit of Samuel H. Sloan, sworn to this 13th day of July. 1992, the undersigned hereby moves this court for an order vacating the default judgment entered in this case which dismissed the complaint and further moves for an order of preliminary injunction restraining and enjoining the defendants from doing any act in further of a plan of dissolution of the corporation pending final determination of this case.
DATED: July 13, 1992
Respectfully submitted,
Samuel H. Sloan
50 Broad St., Suite 2266
New York, NY 10004
(212) 388-2869
TO: Tom Palmer
Knox Rickson
1999 Harrison Street
Oakland, Cal.
Lynn Loveall, pro se
Manufacturers Hanover Trust
50 California St., Suite 1000
San Francisco, CA 94111
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
_________________________________________
Samuel H. Sloan et al,
Plaintiffs,
92 Civil 748 VW
-against-
Frederick H. Murphy et al,
Defendants
_________________________________________
AFFIDAVIT IN SUPPORT OF MOTION TO VACATE DEFAULT JUDGMENT AND FOR A PRELIMINARY INJUNCTION
Samuel H. Sloan, being duly sworn, deposes and says:
1. I am a plaintiff in the above entitled action. I make this affidavit in support of a motion for an order vacating the default judgment entered in this case which dismissed the complaint and for an order of preliminary injunction, restraining and enjoining the defendants from doing any act in further of a plan of dissolution of the subject corporation, pending final determination of this case.
2. I understand that this court has entered an order dismissing this action by default. I wish to inform the court that I have never received any copy of the order of this court from the defendants. Mr. Tom Palmer, representing certain of the defendants (it is not clear exactly who he represents, other than himself) has my address in both Berkeley, California and in Chigasaki, Japan, but it is clear that he has never mailed a copy of this court's decision to either address. For this reason, I ask that the order of this court be vacated and the case reinstated, and on the further grounds that the default judgment was obtained via fraud and misconduct.
3. First, allow me to state that regardless of whether this court vacates its judgment of not, the underlying cause of action will not go away so easily. It is clear from certain threatening letters which we have received that the defendants to this action are getting ready to sue us over the same facts which are the subject of the suit here. The dismissal of this action is the result of a misconception by this court of the underlying nature of this action. Tom Palmer, in his motion papers to this court, has characterized this as a shareholder's derivative suit. This is not the case. I am not claiming that I am personally a shareholder of Holden-Day, Inc., although Orsden Capital Corporation, which is my corporate alter-ego, is incidentally a shareholder of 1000 shares. Rather, I am claiming that I am the President of Holden-Day, Inc., having been duly elected by the directors of Holden-Day, Inc. at a meeting of the majority stockholders which took place on January 6, 1992 at exactly 2:05 PM Pacific Time and that, at the same meeting, my first act as the new President of Holden-Day was to fire Mr. Tom Palmer and remove him from any connection with Holden-Day.
4. After the commencement of this lawsuit, which took place on February 13, 1992, Tom Palmer and Frederick H. Murphy filed, illegally, a certificate of dissolution of the corporation with the Secretary of Corporations of the State of California. According to their letters, this act of dissolving the corporation took place on or about February 28, 1992, prior even to their filing of a motion with this court. I contend that this act of filing a certificate of dissolution of the corporation was illegal, null and void and without effect. I contend that the corporation still exists, that I am the president, and that the funds which Tom Palmer and Fred Murphy have removed from the corporate bank accounts, which comprise almost the entire liquid assets of the corporation, have been looted illegally. I therefore demand that these funds be restored.
5. What has happened is that Mr. Murphy has caused to be mailed by defendant Manufacturers Hanover Trust a check in the amount of twenty cents per share to all stockholders of record. However, Mr. Murphy has been caught in his own trap. On January 7 and 8, 1992, Mr. Murphy tendered 205,000 of his own shares, which constituted the control block of the corporation, to me and to Mr. Richard Bozulich. It is because of his act of tendering the control block of his shares to me and to Mr. Richard Bozulich that I contend that I am now the President of Holden-Day. What happened is that when Mr. Murphy caused to be mailed a check for twenty cents per share to all stockholders of record, he naturally assumed that he would be receiving a check for $41,000 for his own 205,000 shares.
6. However, Mr. Murphy was wrong. The agent, when it received the dividend check, correctly concluded that this $41,000 did not belong to Mr. Murphy, because Mr. Murphy had tendered his shares to me. Therefore, this $41,000 was credited to my account, because I am the legal owner of these shares, which is the reason why I am the actual President of Holden-Day.
7. This has got Mr. Murphy "screaming like a stuck pig", as they say. Mr. Murphy has, throughout this protracted matter, always been one who wants to "have his cake and eat it too." I could provide a long list of examples of this. For example, on January 9, 1992, Mr. Murphy caused to be issued to himself a check in the amount of $34,000 for "severance pay". Nevertheless, he claimed still to be the ongoing President of Holden-Day. He also simultaneously issued to himself a salary check as President. At the same time, he demanded that I also pay him the 40 cents per share for the 205,000 shares which he tendered, but stated that regardless of whether I paid him or not, he would still remain the President of Holden-Day and there was no way for him to be ousted. He had, in fact, placed a stop transfer with the transfer agent on shares which he had tendered to me.
8. The assertions made by Mr. Murphy can readily be recognized as ridiculous by anyone fully familiar with the facts of this case. However, "ridiculous" is also the word which has characterized the way in which Mr. Murphy has run this corporation for the entire last thirty years. From what I am able to determine, the very starting up of this corporation back in 1961 was done illegally. Mr. Murphy has often stated that this was a "Regulation A" offering. However, in reality, as far as I have been able to determine, no Regulation A documents were ever filed with the S.E.C. This was a so-called "interstate offering", of a type which was always of questionable legality, and is now considered to be absolutely illegal. Mr. Murphy simply published a tombstone ad in the newspapers, which made it appear that this was a legal stock offering, and collected the money, without any prospectus whatever, during a period of "hot new issues." This was illegal. California was and is one of the toughest states in the United States with regard to its "blue sky" laws. It is almost impossible for a "start-up" corporation, as Holden-Day was at the time, to make an initial public offering in California.
9. What obviously happened was that this initial stock offering, which was for only 248,000 shares at $1 (one dollar) per share, was so small that it sort of slipped through the cracks and was overlooked by the state and federal regulators. By the time that anybody found out what had happened, Mr. Murphy had already spent the money he had received from his initial public offering and it was too late to give the money back. Therefore, the entire matter was overlooked. Later on, Holden-Day voluntarily became a 12(g) reporting company, although it was never big enough to be required to do so. It is now clear that the reason for this was so that the company would file 10-K registration statements on an annual basis, to try to mitigate the fact that it never filed the forms required by S.E.C. Regulation A.
10. However, as a result becoming a 12(g) reporting company on a voluntary basis, Holden-Day also became subject to the S.E.C.'s tender offer rules. This is the reason why I was able to file a tender offer with the S.E.C. "The chickens have come to roost" as they say. Mr. Murphy got away with an illegal stock offering back in 1961, but this subjected him to a tender offer in 1991 from which otherwise he would have been immune.
11. I have recounted this history to show that Mr. Murphy is not a "babe in the woods", as he often appears to be. It is easy to assume upon meeting Mr. Murphy for the first time that he is simply a bumpkin who doesn't know what he is doing. In fact, however, I have found him to be wily, crafty and a very dangerous opponent.
12. I will skip the facts of this case which are recounted in the complaint, except to complain about the fact that I suspect that this court has never read the complaint because, had it done so, it would have rejected some of the ridiculous assertions made by Mr. Palmer out of hand.
13. Looking at the motion to dismiss filed by Mr. Tom Palmer, it can be seen that he never states who he represents. He states that "defendants move to dismiss". Which defendants? Exactly which defendants are appearing in this action? Remember that a motion to dismiss is only binding on those defendants which have appeared. Anybody who did not appear, did not get the benefit of a motion to dismiss, when and if granted.
14. This is a typical crafty maneuver by Tom Palmer. He files a motion to dismiss on behalf of unnamed defendants. If he wins, that's wonderful. If he looses, they will say that they never appeared and are not bound by the results of the motion. Again, he wants to "have his cake and eat it too."
15. Literally construed, one would assume from his papers that Tom Palmer is claiming to represent all of the defendants. However, is it possible that a fly-by-night lawyer like Tom Palmer is representing Manufacturers Hanover Trust, one of the world's largest banks? Surprisingly, later on Manufacturers Hanover Trust filed a pro se appearance by its Vice-President, Lynn Loveall, who is not a lawyer. Does this also mean that Tom Palmer suddenly has acquired as a client Hambrecht & Quist, a major stock brokerage firm?
16. Again, this is a typical Tom Palmer maneuver. Tom Palmer has apparently bamboozled Manufacturers Hanover Trust and Hambrecht & Quist just as he has bamboozled this court and the stockholders of Holden-Day.
17. For example, Tom Palmer states in his motion to dismiss that I filed a similar action in the California Superior Court, County of Alameda, which was dismissed, and therefore that I should have known better than to file a case in this court. However, the case in California Superior Court has never been dismissed. That case is still pending. Tom Palmer never filed anything in that court. He never appeared at all, except to go down to the courthouse and talk to a lady about the case. I am just getting ready to file a motion for a default judgment against him in that case.
18. What happened there is that I twice filed or at least attempted to file an ex-parte motion for a temporary restraining order to enjoin the threatened dissolution of Holden-Day. Mr. Palmer went down to the ex-party clerk's office and spoke to the legal researcher there. He told the legal researcher that I was a very bad person and this and that. However, he never filed anything in writing. As a result the legal researcher handed my motion papers back to me and did nothing. We never spoke to the judge. No order was ever entered.
19. I have found this manner of conducting court out in California to be very strange. You do things funny out there. In New York, with which I am familiar, if a party submits a motion to the court, the first thing which happens is that the motion is file stamped. After that, it is never returned to the submitting party. It goes to the judge or it goes in the file. In California, it twice happened to me that I submitted a motion to the court and it was later on returned to me. This would be impossible in any other court in America that I know about.
20. The end result is that Tom Palmer appeared physically in the courthouse, but never filed a notice of appearance on paper. He has undoubtedly told the other defendants to that lawsuit, just as he has told this court, that the case was dismissed. However, Tom Palmer himself undoubtedly knows better. His office is only about four blocks from the Alameda County Courthouse. He could easily check the file and find out that the case is still pending. He does not do so because he does not want to appear in that case.
21. Another point in the instant case concerns service of process. Tom Palmer claims that the defendants were not properly served. However, in support of this assertion, we have only his unsworn statement. None of the defendants who were actually served (or not served) have filed an affidavit.
22. In reality, the defendants were served fully in accordance with Rule 4(c)(2)(C)(iv) of the Federal Rules of Civil Procedure. In the case of Frederick Murphy, the fact is that Holden-Day, being located in one of the worst neighborhoods in Oakland, had a security system which made it impossible for any unwelcome visitor to enter. For this reason, the summons and complaint were sent to them by certified mail, return receipt requested. There was nothing wrong with this. The return receipt was signed by Luna Seyller, the secretary of Holden-Day, and retrained to us.
23. Regarding the other defendants, Tom Palmer states that I personally left off the complaint at their homes. The fact is that I have never been to the home address of any of the defendants. However, the complaint was mailed, again in accordance with the Federal Rules of Civil Procedure, to the home address of several of the former officers and directors of Holden-Day.
24. I never personally served Tom Palmer. He wasn't there. In his case, service was made upon a person of suitable age and discretion, namely the receptionist at his law office. This is a standard method of service. There is nothing wrong with this.
25. Again, it should be emphasized that Tom Palmer, in filing his motion to dismiss on the grounds of lack of adequate service of process, doesn't say who he is representing. Usually, if one files such a motion and the motion is denied, he is stuck in the case.
26. It is clear that Tom Palmer has defrauded this court and that therefore the default judgment should be vacated. It is to be noted that I always refer to this as "Tom Palmer's motion". One reason for this is that in view of the fact that I am the President of Holden-Day, it is clear that Tom Palmer cannot represent that corporation. However, a further reason is that since the commencement of this tender offer on November 1, 1991, there have been a barrage of illegal actions by Tom Palmer. Tom Palmer has threatened me physically on a number of occasions, the first of which was on November 12, 1991 and took place in the Holden-Day office. Tom Palmer is also always threatening to file some sort of charges against me and have me arrested. However, his main illegal acts have been that of stonewalling. After we announced our tender offer on November 1, 1991, Tom Palmer and Holden-Day were required by the rules of the S.E.C. to do certain things in accordance with strict time limits. However, instead, Tom Palmer simply ignored out tender offer and pretended that it did not exist. This is sometimes known as the "Nancy Reagan defense" ("Just Say No"). However, Tom Palmer went much further than is legally permitted. He held a special meeting of stockholders and voted their proxies in favor of a plan to dissolve the corporation, without informing the stockholders of out superior tender offer. This has specifically been declared illegal in the case of In Re Anderson, Clayton Securities Litigation, 519 Atlantic Reporter Second 669 and 680 (Delaware 1986)
27. The end result of this illegal action by Tom Palmer is that Holden-Day has been liquidated at twenty cents per share, whereas we were (and still are) willing to pay forty cents per share. This leads to a very interesting point. Mr. Murphy is by far the largest stockholder of Holden-Day. Therefore, he should be enthusiastic about being paid 40 cents per share rather than twenty cents per share. Why did he fight us tooth and nail at every step of the way?
28. I think that I have discovered the reason. The last Holden-Day balance sheet contains an item of "inventory" valued at $9,000. However, I have discovered that this represents 22,900 books in the warehouse. The average Holden-Day college textbook retails at more than $40 per book. Therefore, this asset has a potential worth of more than $800,000.
29. The objection will immediately be made that much of this constitutes "dead stock", books which are out of date. However, that is not really true. When I was in the offices of Holden-Day, I observed them selling books every day. More importantly, this sum of 22,900 books represents nearly 100 titles and Holden-Day still has the rights to those titles. Once the books go out of print, after the passage of six months, Holden-Day is required to return the rights to the authors. In the meantime, however, Mr. Murphy is allowed to sell the rights to other publishers.
30. This is not a minor matter. The reason why Holden-Day had money in the bank in 1991 for almost the first time in its corporate existence when we filed our tender offer is that Holden-Day had just completed two major sales of book rights. It sold the rights to ten books to McGraw Hill for $1,200,000 and then sold the rights to ten more titles to Prentice Hall for $500,000. These sales for a total of $1,700,000 allowed Mr. Murphy for the first time in ten years to pay the back royalties he owed to his authors. This is the reason why he suddenly decided that he wanted to liquidate the corporation in November, 1991. Previously, he could not liquidate because there was nothing to liquidate. Holden-Day had no money in the bank. As soon as Holden-Day got money from those two sales, Murphy suddenly decided to liquidate under a plan of liquidation under which at the end, he would personally own all of the 22,900 books in the warehouse plus the rights to the one hundred titles which had not gone out of print.
31. Finally, regarding the contention that these books are all out of date, the fact is that college textbooks do not go out of date so easily. For example, Holden-Day has a math textbook by Professor Henry Helson. This is a "new" book, one of the last books published by Holden-Day. However, the problems and examples in that textbook are exactly the same problems and examples which Professor Henry Helson gave me when I took Math 1A from him as a freshman at the University of California at Berkeley in Math in 1962! I still remember them well. Math has not changed that much in 30 years. Only the cover and the format has changed a little bit.
32. Moreover, the hundred titles to which Holden-Day still has the book rights (it had more than two hundred books in print in 1988), represent 30 years of building up the corporation. It would not be so easy for another book publisher to come out with a new line of books. Most Holden-Day books are in the area of Mathematics, Chemistry, Physics, Biology, Economics, Computer Science and Operations Research. Another publisher cannot duplicate this so easily.
33. I am reminded of my own situation back in 1975. I had a stock brokerage company known as Samuel H. Sloan & Co. When I went out of business, I had a "worthless box" of securities, which every broker has. These were stocks in companies which were out of business and their shares were no longer trading and where deemed worthless. However, some of them came back to life later on. One stock in my "worthless box", I sold in 1976 for $46,000. For about the next ten years, I made five or ten thousand dollars every year just selling shares in my worthless box. In fact, I made more money in the long run on my worthless box after I went out of business than I made while I was in business. This worthless box of, at that time, 200 securities is mentioned in the United States Supreme Court case which I won entitled S.E.C. v. Samuel H. Sloan, 436 U.S. 103 (1978). (The end of this story that in about 1985, somebody stole my worthless box, which was actually a suitcase. I suspect my brother, who knew its value and who constantly files lawsuits against me and my mother.)
34. Similarly, Mr. Murphy, under his plan of liquidation, will get the rights to more than 100 books. Only Mr. Murphy has any idea of what these rights are worth. However, it can be stated with a great deal of confidence that they are worth more than $9,000, the price which Mr. Murphy will presumable pay for them under his plan of liquidation. At one point, Mr. Murphy offered to pay me $10,000 for the rights to just eight of those books, assuming that I took over Holden-Day.
35. This fully explains why Mr. Murphy prefers to liquidates his corporation at twenty cents per share rather than sell it to us at 40 cents per share. In effect, he gets to keep that balance of 20 cents per share and put it in his own pocket. The question before this court is: Is this legal?
36. The other question is: what to do now. Mr. Murphy and Tom Palmer filed a certificate of dissolution with the California Secretary of Corporations about two weeks after I filed this lawsuit. I did not think that they would have the nerve to do this, but I was wrong. They have now removed all of the funds from the corporate bank accounts and dispersed most of the liquid assets. We, however, contend that Mr. Murphy had no right to do this because he was no longer the President of Holden-Day. Therefore, we want to undo what he has done as much as possible. Since he has already mailed twenty cents per share to the stockholders, we would therefore pay the balance of twenty cents per share, except for Murphy's shares. Murphy has already looted the corporate assets to the extent of paying himself $48,000 in severance pay, to which he was not entitled.
37. At present, it is impossible to know what the financial condition of Holden-Day is. This has always been the problem. This tender offer has been a bit like playing a game of three card monte. We have no way of knowing whether the card we draw is red or black. Only Mr. Murphy knows the answer to that question.
38. Now, Mr. Murphy's lawyer has indicated that they want to sue me because of the $41,000 payment to Mr. Murphy which is being held up by my actions. I feel that they should file a counterclaim in this existing suit, which they obviously don't want to do. They will want to avoid the San Francisco federal court altogether, to get away from this suit which I have filed against them.
39. The problem with this situation from the beginning his been the high cost of legal fees to fight this case. A normal initial retainer for a lawyer to appear in a tender offer case is $100,000. The entire assets of Holden-Day are less than that which would be consumed in a full legal battle. This fact is what has protected Mr. Murphy from being sued by his own disgruntled stockholders and non-paid authors over these many years.
40. For these reasons, I believe that the default judgment should be vacated and the case reopened. In addition, a preliminary injunction should be issued against the defendants to stop them from looting the assets of the corporation.
WHEREFORE, it is respectfully prayed that this court vacate the default judgment which dismissed this action and that it issue an order of preliminary injunction to stop the further dissolution and liquidation of the corporation, pending a final determination of this action.
_______________________________
Samuel H. Sloan
Sworn to before me this day of July, 1992
________________________ NOTARY PUBLIC
Samuel H. Sloan, being duly sworn, deposes and says that he served a copy of the within motion and affidavit in support by mailing a true copy of the same to
Tom Palmer
Knox Rickson
1999 Harrison Street
Oakland, Cal.
Lynn Loveall, pro se
Manufacturers Hanover Trust
50 California St., Suite 1000
San Francisco, CA 94111
_______________________________
Samuel H. Sloan
Sworn to before me this day of July, 1992
________________________
NOTARY PUBLIC