Goldstein v. Groesbeck

• Decision Date: 07 April 1944
• Docket Number: No. 264.,264.
• Citation: 142 F.2d 422
• Parties: GOLDSTEIN v. GROESBECK et al.
• Court: U.S. Court of Appeals — Second Circuit

142 F.2d 422 (1944)

GOLDSTEIN v. GROESBECK et al.

No. 264.

Circuit Court of Appeals, Second Circuit.

April 7, 1944.

Abraham L. Pomerantz, of New York City (William Rosenfeld and Milton Paulson, both of New York City, on the brief), for appellant.

Louis Connick, of New York City (Simpson, Thacher & Bartlett, Robert H. O'Brien, Benjamin C. Milner, III, and Richard Hawkins, all of New York City, on the brief), for appellees C. E. Groesbeck and others.

Ralph M. McDermid, of New York City (Reid & Priest and James L. Boone, all of New York City, on the brief), for appellee American Power & Light Co.

Ralph M. McDermid, of New York City (Reid & Priest and James L. Boone, all of New York City, and Armstrong, Kramer, Morrison, Roche & Duffy, of Phoenix, Ariz., Loftin, Anderson, Scott, McCarthy & Preston, of Miami, Fla., Caldwell, Downing, Noble & Garrity, of Kansas City, Mo., and Gillette, Nye, Harries & Montague, of Duluth, Minn., on the brief), for appellees Central Arizona Light & Power Co., Florida Power & Light Co., Kansas Gas & Electric Co., and Minnesota Power Co.

Before L. HAND, CHASE, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

Defendant Electric Bond & Share Company, hereinafter called EBS, is a New York corporation which is the top holding company of a large nationwide public utilities system. Among other things it owns the controlling interest in and dominates defendant American Power & Light Company, an intermediate holding company incorporated in Maine, which controls and dominates, in turn, the four defendant operating companies, Central Arizona Light & Power Company, an Arizona corporation, Florida Power & Light Company, a Florida corporation, Kansas Gas & Electric Company, a West Virginia corporation, and Minnesota Power Company, a Minnesota corporation. Plaintiff, a citizen of Massachusetts and minority shareholder of American, brings this action on behalf of American's four operating companies to compel defendants, EBS, Ebasco Services, Inc., a New York corporation, and certain officers and directors of the latter companies, to account for profits received by Ebasco under service and construction contracts made with the operating companies in violation of § 4(a) (2) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79d(a) (2). This section made it unlawful, after December 1, 1935, for any "holding company" not registered under the Act "directly or indirectly * * * by use of the mails or any means or instrumentality of interstate commerce, to negotiate, enter into, or take any step in the performance of, any service, sales, or construction contract undertaking to perform services or construction work for, or sell goods to, any public-utility company or holding company."

The circumstances surrounding the contracts involved in this appeal date back to 1935, when officials of EBS, faced with the terms of the new Act, decided to contest its constitutionality and to ignore its provisions by omitting to register thereunder. Nevertheless, as a hedge against a possible declaration of constitutionality by the Supreme Court, they caused the organization of Ebasco and of Phoenix Construction Company, another New York corporation later merged into Ebasco, for the express purpose of taking over EBS's service and construction contracts with its various operating companies. The contracts which are now before us resulted from these transactions, the object of which, of course, was to escape the mandate of § 4(a) (2) of the Act on the ground that Ebasco and Phoenix were not "holding companies," but merely servicing companies. The operating companies made payments to Ebasco under these contracts from 1935 until April, 1938, when EBS finally registered under the Act, after the decision in Electric Bond & Share Co. v. S. E. C., 303 U.S. 419, 58 S. Ct. 678, 82 L.Ed. 936, 115 A.L.R. 105, upholding the constitutionality of the Act. It is these payments which plaintiff seeks to recover for the corporations making the payments.

In the District Court the operating companies and certain of the individual defendants moved for dismissal on the ground that, as to them, the venue of the action was not properly laid in the Southern District of New York. These motions the court granted as to all but two individual defendants, in an opinion which rested basically on the premise that a "double derivative" shareholder's action, i. e., one where the plaintiff was not a shareholder of the injured corporation, but only of a shareholder which had itself refused to sue, was not recognized in the federal courts or in the controlling venue statutes. 42 F. Supp. 419. The remaining defendants thereupon moved to dismiss the complaint in that (1) it failed to state a cause of action; (2) there was no jurisdiction in the District Court, because the Act vests primary or exclusive jurisdiction in the Securities and Exchange Commission; and (3) indispensable parties, the operating companies, were no longer before the court. These motions were also granted as to all defendants in two judgments entered at the same time below, but solely on the ground that the operating companies were indispensable parties who were no longer before the court. Plaintiff appeals from these judgments and also assigns error in the earlier order dismissing certain of the defendants.¹ Hence there are two distinct problems before us: first, whether double derivative suits can be maintained in the federal courts and whether the venue below was correct; and second, but only if we decide the first issues in plaintiff's favor, the further question of the sufficiency of the complaint, which was not passed upon by the District Court. Only four of American's sixteen subsidiaries originally named as defendants were served with process. Companion cases which by stipulation of the parties await the outcome of this appeal concern other intermediate holding companies and their operating subsidiaries, so that, as it appears, substantially all the companies in the Bond and Share System are involved directly or indirectly in this litigation.

Initially, we think it clear that a stockholder can maintain a double derivative action in the federal courts. We so held in United States Lines v. United States Lines Co., 2 Cir., 96 F.2d 148, 151, where we stated, "The justification for allowing a double derivative suit like the present to be maintained is that both the original corporation that is said to have suffered wrong and its shareholder corporation which had the right to bring a derivative suit were in the control of those charged with inflicting the corporate injury." See also Birch v. McColgan, D.C.S.D.Cal., 39 F.Supp. 358, 366; Piccard v. Sperry Corp., D.C.S.D.N. Y., 30 F.Supp. 171; and Wachsman v. Tobacco Products Corp. of New Jersey, D.C. N.J., 42 F.Supp. 174, 177, affirmed 3 Cir., 129 F.2d 815, 816; and compare Missouri-Kansas Pipe Line Co. v. United States, 312 U.S. 502, 508, 61 S.Ct. 666, 85 L.Ed. 975. Such appears also to be the general view, Holmes v. Camp, 180 App.Div. 409, 167 N.Y.S. 840; Carter v. Producers' & Refiners' Oil Co., 164 Pa. 463, 30 A. 391; Glenn, The Stockholder's Suit, 33 Yale L.J. 580, 586; 50 Harv.L.Rev. 963, and to be quite within the spirit of equity. A shareholder's suit in essence is nothing more than a suit by a beneficiary of a fiduciary to enforce a right running to the fiduciary as such; a double derivative suit is one in which the beneficiary is in his turn a fiduciary, and as such refuses to enforce the right which is his as beneficiary of the first fiduciary. And there is nothing in Federal Rule 23(b), 28 U.S.C.A. following section 723c, to change the law of the United States Lines case. As we have just had occasion to point out in Galdi v. Jones, 2 Cir., 141 F.2d 984, Federal Rule 23(b) is only a scrupulous re-enactment of the old equity rule established in Hawes v. City of Oakland, 104 U.S. 450, 26 L.Ed. 827 — originally Equity Rule 94, later Equity Rule 27, 28 U.S.C.A. § 723 appendix. This is, therefore, an action to enforce a shareholder's "secondary right" brought by one entitled under the prevailing rules of equity to bring it under the circumstances disclosed.

Granted the right to sue, therefore, we think that venue in the Southern District of New York was proper. The Utility Act has its own provisions for venue which apparently are designed to be all-inclusive in actions involving it and which plaintiff satisfies. Section 25, 15 U.S.C.A. § 79y, provides that "any suit or action to enforce any liability or duty created by" the Act may be brought "in the district wherein any act or transaction constituting the violation occurred" or "in the district wherein the defendant is an inhabitant or transacts business." The present action is surely to enforce a duty created by the Act, since but for the Act the payments under the service and construction contracts would be innocuous enough; and the words "any liability or duty" are clearly broad enough to include any breaches of duty causing injury or loss to private persons. See Baird v. Franklin, 2 Cir., 141 F.2d 238. Enough appears in the record to show for present purposes at least that some of the violations complained of occurred within the district. Defendants' objection that plaintiff's affidavits alleging occurrence of some of the violations within the district were hearsay, and hence inadmissible, is not completely true, in any event, but seems unimportant, for the hearsay consists of references to standard and well known sources, borne out in fact in matter recently before us in the record in Electric Bond & Share Co. v. S. E. C., 2 Cir., 92 F.2d 580, affirmed 303 U.S. 419, 58 S.Ct. 678, 82 L.Ed. 936, 115 A.L.R. 105;² and defendants have tendered no issue on the matter. Further, we do not see why the ordinary rule that improper venue is a matter of defense does not apply; the mere fact that the requirement is contained in a statute also granting jurisdiction...