224 F.2d 753 (2nd Cir. 1955), 198, Subin v. Goldsmith
|Docket Nº:||198, 23348.|
|Citation:||224 F.2d 753|
|Party Name:||David L. SUBIN, Plaintiff-Appellant, v. A. Philip GOLDSMITH, Abraham Feinberg, Benjamin Hinerfeld, F. Stafford Cleary, J. A. C. Mueller, T. H. Mueller, J. J. Murphy, William B. Terry, G. H. Carr and Julius Kayser & Co., a New York Corporation, Defendants-Appellees.|
|Case Date:||June 03, 1955|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued February 15, 16, 1955.
[Copyrighted Material Omitted]
Hays, St. John, Abrahamson & Schulman, New York City (Osmond K. Fraenkel, Seymour M. Heilbron, New York City, David W. Niesenbaum, Philadelphia, Pa., and Irwin Karp, New York City, of counsel), for plaintiff-appellant.
Ferris, Adams & Creidy, New York City, for appellee Goldsmith.
Gainsburg, Gottlieb, Levitan & Cole, New York City, for appellees, Feinberg and Hinerfeld.
Parker, Chapin & Flattau, New York City, for appellees, Mueller et al.
Alvin McK. Sylvester, Samuel Gottlieb, George A. Ferris and Joseph Levy, New York City (of counsel).
Before FRANK and MEDINA, Circuit Judges, and BRENNAN, District Judge.
FRANK, Circuit Judge.
Plaintiff, a stockholder of defendant Julius Kayser & Co., filed a complaint on August 12, 1954, seeking an injunction against that company and the individual defendants who are its directors, from holding a stockholders' meeting to be held on August 20, 1952, to approve a contract for the purchase by Kayser of most of the assets of Diamond Hosiery Corp. Plaintiff moved for a preliminary injunction; the judge denied the motion. The stockholders' meeting was held and there the contract was approved by holders of a majority of the shares. Plaintiff then filed an amended complaint. A copy of that amended complaint is set forth in the Appendix to this opinion.
The amended complaint contained five counts. The first four allege violations of a federal statute. Count V alleges a non-statutory wrong. On defendants' motions, the judge dismissed Counts I, II, III and IV for failure to state causes of action, and entered summary judgment dismissing Count V. Plaintiff has appealed.
All three members of this panel of the court agree on affirmance as to the dismissal
of Count II. Judge Brennan and I agree that there must be a reversal as to Count V; Judge Medina dissents in this respect, for reasons stated in his separate opinion. For reasons also stated in Judge Medina' opinion, a majority of this panel holds that the judgment of dismissal of Counts I, III and IV must be affirmed. For reasons I shall state below, I agree as to Count I. But I dissent as to Counts III and IV for reasons stated in a separate opinion, infra. It is convenient to begin with Count V.
1. Count V
Count V is a derivative claim on behalf of defendant Kayser & Co. Through incorporation by reference of other parts of the complaint, it sufficiently alleges (1) diversity of citizenship and the necessary jurisdictional amount, (2) that plaintiff was a shareholder at the time of the transaction of which he complains, (3) that the action is not collusive, and (4) that it would have been futile to make a demand upon the Board of Directors to bring the suit. 1 These allegations satisfy the jurisdictional requirements and Fed.Rules Civ.Proc. rule 23(b), 28 U.S.C.A.
This count further alleges that the Kayser company, on July 22, 1954, entered into a contract with Diamond Hosiery Corporation for the purchase by Kayser of the assets of Diamond; that this contract was made 'at the instigation and direction of' defendants Goldsmith, Feinberg and Hinerfeld, who are directors of Kayser; that these three defendants dominate and control the Kayser Board of Directors and its management, through their control of three companies, Diamond, Hillcrest and Hamilton, which together are the controlling stockholders of Kayser (so that Goldsmith, Feinberg and Hinerfeld thus control both the buyer and seller under the Kayser-Diamond contract); that the purchase by Kayser of the Diamond assets will constitute an improper and wasteful expenditure of Kayser's funds which will be detrimental to it and will be solely for the benefit of Goldsmith, Hinerfeld and Feinberg; that the Diamond assets are not needed by Kayser and are not worth the price paid for them; and that the contract imposes on Kayser a burdensome lease, the lessor under which is a company in which Goldsmith, Feinberg and Hinerfeld have a large interest.
Those allegations state a valid derivative action. See, e.g., Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 84 L.Ed. 281; Sage v. Culver, 147 N.Y. 241, 247, 41 N.E. 513; Perlman v. Feldman, 2 Cir., 219 F.2d 173. We see no reason why greater particularity of allegations should be required in a stockholders' derivative action than in many another sort of action such as, e.g., one for accounting, or for treble damages because of an anti-trust law violation, as to which see, e.g., Package Closure Corp. v. Sealright Co., 2 Cir., 141 F.2d 972, 978.
Defendants did not move for dismissal of this Count for failure to state a cause of action. They did move for summary judgment. The judge granted their motion. We think he erred.
In support of their motion, defendants introduced four affidavits. 2 Two of them were by defendants' lawyers; so far as they bear at all on Count V, they were not based on 'personal knowledge, ' and therefore do not suffice under F.R.C.P. 56(e). 3 A third affidavit, by an accountant,
contained nothing which related in any way to this Count.
The fourth affidavit was that of defendant Feinberg, only a portion of which related to this Count. That portion consists of his opinion and his statements about the views of the other directors. If at a trial he were to testify, his opinion as a director would be admissible. But, without evidence of the views of the other directors, his opinion alone would not support a directed verdict, or judgment, for the defendants; nor would his testimony concerning their views, since such testimony would be hearsay and consequently not 'competent' evidence. 4 Therefore his affidavit was insufficient under F.R.C.P. 56(e).
Even if, however, we disregarded that objection, Feinberg's affidavit could not support the summary judgment. The pertinent facts stated in that affidavit are as follows: The Kayser directors believed and decided that the acquisition of the Diamond business would benefit Kayser. Among the benefits were these: There would result a 50% increase in the gross business of Kayser interests; the addition of the Diamond business will treble Kayser's volume of hosiery business; Kayser will obtain the services of Goldsmith who has been outstandingly successful in the hosiery business; Kayser will acquire an excellent merchandising and selling organization; the addition of the Diamond business will round out the line of Kayser's products; Feinberg estimates conservatively that the absorption of the Diamond business will make possible savings which will add a minimum of $700, 000 to Kayser's annual earnings before taxes, and this figure should go higher when overlappings of the two organizations are eliminated as the directors are confident they will; Kayser will get the benefit of some $500, 000 of unfilled orders. We shall assume, arguendo, that Feinberg's affidavit, if taken as true, completely contraverted the allegations of Count V. But we have held that, in such a derivative stockholders' suit-- especially as to facts peculiarly within the knowledge of the defendants-- plaintiff is entitled to a trial at which he may cross-examine the defendants and at which the trial judge can observe their demeanor in order, thereby, to evaluate their credibility.
See Fogelson v. American Woolen Company, 2 Cir., 170 F.2d 660. It was a derivative suit seeking to enjoin the company and its directors from carrying out a proposed pension plan. The defendant company moved for a summary judgment. In support of the motion, it filed the affidavits of all the directors, in which each swore that he had participated in the decision of the Board of Directors and had done so because he thought it for the best interest of the company; these directors, who made such affidavits, included a former Governor of Massachusetts, a former Governor of the Federal Reserve Board, a former Assistant Secretary of the Treasury. 5 The trial judge granted the motion on the ground that these affidavits showed an exercise of judgment by the Board of Directors with which a court should not interfere. See, D.C., 79 F.Supp. 291. We reversed, saying, per Judge Swan, [5A] 170 F.2d at 622: 'Courts are properly reluctant to interfere with the business judgment of corporate directors; they do so only if there has been so clear an abuse of discretion as to amount to legal waste. See McQuillen v. National Cash Register Co., 4 Cir., 112 F.2d 877, 884, certiorari denied 311 U.S. 695, 61 S.Ct. 140, 85 L.Ed. 450. In setting up a retirement
pension plan, the decision of the directors to fund past service benefits by a single lump-sum payment rather than by instalment payments over a term of years, will normally be conclusive. So also will their decision as to the desirability of applying a percentage formula uniformly to all employees' salaries without imposing a limitation in dollars upon the maximum pension payable to high salaried officers. In the case at bar the adoption of these features results in giving the president an annual pension for life of more than $54, 000 a year while the employee receiving the next largest pension will receive only $7, 285. The complaint alleges that the very purpose of the proposed lump-sum payment to a pension trustee is to secure to the president his large pension free from the hazard of future...
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