Surowitz v. Hilton Hotels Corporation

Citation342 F.2d 596
Decision Date11 March 1965
Docket NumberNo. 14653.,14653.
PartiesDora SUROWITZ, individually and on behalf of all other similarly situated shareholders of Hilton Hotels Corporation, Plaintiff-Appellant, v. HILTON HOTELS CORPORATION, a corporation, et al., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

COPYRIGHT MATERIAL OMITTED

Richard F. Watt, Alan J. Altheimer, Walter J. Rockler, David R. Kentoff, Lionel G. Gross, Howard L. Kastel, Cotton, Watt, Rockler & Jones, Altheimer, Gray, Naiburg, Strasburger & Lawton, Chicago, Ill., for plaintiff-appellant.

Samuel W. Block, Albert E. Jenner, Jr., Keith F. Bode, Raymond, Mayer, Jenner & Block, Chicago, Ill., for defendant-appellee, Henry Crown.

Don H. Reuben, A. Leslie Hodson, Lawrence Gunnels, Chicago, Ill., for defendants-appellees, Hilton Hotel Corp.

William J. Friedman, Stanley R. Zax, Friedman, Koven, Salzman, Koenigsberg, Specks & Homer, Chicago, Ill., for individual defendants-appellees other than Henry Crown.

Before CASTLE, Acting Chief Judge, SWYGERT, Circuit Judge, and MERCER, District Judge.

MERCER, District Judge.

Plaintiff, Dora Surowitz, prosecutes this appeal to review an order of the court below dismissing her complaint in a stockholder's derivative suit.1

Plaintiff, the owner of 100 shares of the capital stock of defendant, Hilton Hotels Corporation, filed this suit on behalf of herself and all other shareholders similarly situated praying certain relief against the individual defendants as hereinafter delineated. The defendants named in the complaint are Hilton Hotel Corporation, Hilton Credit Corporation, and certain individuals who are officers and directors of Hilton Hotels.

The complaint charged that the individual defendants had defrauded Hilton Hotels of large sums of money in violation of their fiduciary obligations under state law and in violation of the Securities Act of 1933 and the Securities and Exchange Act of 1934. Such fraudulent acts are alleged to have been done through two transactions. In the first of those transactions it is alleged that the individual defendants, as the officers and directors of Hilton Hotels, caused that corporation to offer to purchase and to purchase 300,000 shares of its own common stock at inflated prices. It is further alleged that over 100,000 of such shares were sold to the corporation by various officers and directors of the corporation.2 The second transaction alleged is that the individual defendants, as officers and directors of Hilton Hotels, had caused that corporation to offer to purchase and to purchase approximately 1,058,000 shares of Hilton Credit Stock, including over 631,000 shares held by various officers and directors of the Hotels corporation, also at inflated prices.3 The complaint further charged that Hilton Hotels thus was caused to expend approximately $12,000,000 of which approximately $4,800,000 was paid to certain of the officers and directors who are named as defendants.

The theory of the complaint is that the two stock purchase transactions above described had no proper corporate purpose, but that the same were intended by the individual defendants to enable certain of their number, particularly the defendants, Conrad N. Hilton and Henry Crown, and members of the families of those defendants, to sell shares of their stock to the corporation at a higher price than they could have obtained on the market.4 It further alleged that the individual defendants made or caused to be made numerous false and misleading statements, in that they failed to disclose relevant information to the shareholders of Hilton Hotels related to their own activities in the furtherance of the alleged scheme. It is further alleged that those acts were done at a time when the individual defendants knew, or had reason to know, that the business affairs of Hilton Hotels were in such condition that a substantial drop in the value of the shares of that corporation was imminent.

All letters of transmittal, notices and offers submitted to the shareholders in the two transactions are attached to the complaint as exhibits.

The complaint alleged that the individual defendants, in presenting the offers to purchase the stock above mentioned, concealed from the Corporation and the shareholders thereof the true reasons for making the offers, and that, with respect to both the purchase of the Hilton Hotels shares and the Hilton Credit shares, the individual defendants failed to disclose to the Hotels Corporation and its shareholders that they, the individual defendants, had engaged in activities designed artificially to inflate prices of the subject shares for the purpose of their scheme and plan to profit at the expense of the Hotels Corporation.

The complaint was in eleven counts, the first six of which were based upon the transaction for the purchase of the Hilton Hotels shares. Of those six counts, two of the counts charged certain of the defendants with the violation of the general corporation laws of the State of Delaware, while the other four counts charged all of certain of the individual defendants with the violation of Section 10(b) of the Securities and Exchange Act of 1934,5 Section 17(a) of the Securities Act of 1933,6 Sections 9(a) (4) and 9(e) of the Securities and Exchange Act of 1934,7 and Section 12(2) of the Securities Act of 1933.8

Of the five counts relating to the transaction for the purchase of shares of Hilton Credit, one count charged certain of the defendants with violation of the general corporation laws of the State of Delaware, while the other four counts charged some, or all, of the individual defendants with the violation of Section 10(b) of the 1934 Act, Section 17(a) of the 1933 Act, Sections 9(a) (4) and 9(e) of the 1934 Act, and Section 12(2) of the 1933 Act.

With respect to the Hotels Corporation stock purchase, the complaint prayed for a judgment against the individual defendants for the damages sustained by the corporation because of their allegedly illegal acts, and that they make restitution to the corporation for its losses. The five counts related to the purchase of Hilton Credit shares prayed for a judgment against the individual defendants for the damages sustained by Hilton Hotels because of that transaction, and that the individual defendants be required to account to the Hotels Corporation for all profits, gains and benefits realized by them as a result of their allegedly illegal acts and breach of their fiduciary duty.

The complaint was signed by certain of plaintiff's attorneys, and was verified by the affidavit of plaintiff. On that affidavit plaintiff swore that certain of the allegations of the complaint were true. She verified a majority of the allegations of the complaint upon information and belief.

On February 25, 1964, after the complaint was filed, but prior to the filing of any answer thereto, the defendants, pursuant to an order of the court below, took the deposition of plaintiff. At that deposition the defendants' attorneys inquired of the plaintiff as to the basis for swearing that certain of the allegations were true. She replied to those questions that she "did not know" and "did not know anything about it." She was then questioned relative to the factual basis of a number of the specific allegations made on information and belief. In each instance she answered, in effect, that she didn't understand it, and couldn't explain it, and that she did not know. Upon the stipulation of counsel, the general question was then asked as to whether plaintiff knew any facts at all upon which she based the allegations made on information and belief, to which she answered, "I don't know. I can't give you no facts because I don't understand it."

She identified her signature on a letter of protest mailed to the corporation over her name, but when shortly thereafter she was asked upon what basis she had alleged that she had made a protest to the corporation of the stock purchase offer, she replied, "I don't know" and "I don't know nothing about it." At one point in the deposition she replied, "I have no information because my son-in-law, Irving Brilliant I left it to him, and he was the one that knew all about it."

In response to questions from her own attorney she stated that she had turned the transmittal letter and the offer to purchase Hilton Hotels stock, and other letters relative to that transaction, over to Mr. Brilliant, who had brought the protest letter to her and asked her to sign it and that she had signed it. She further stated that Mr. Brilliant had brought her the complaint and explained it to her whereupon she had signed it. She further stated at one point that Brilliant had said that "He would like to take action" and that, "He said he would take care of it * * *. I left it to him."

On the same day, following the taking of plaintiff's deposition, the defendants served notice on plaintiff that they would, on the following day, February 26, 1964, move to dismiss the complaint on the ground that it was a sham pleading and on the further ground that the plaintiff, Dora Surowitz, was not a proper plaintiff.9 At the hearing on February 26, leave was given to the defendants to file plaintiff's deposition, and plaintiff was given fifteen days to file whatever documents she deemed appropriate in opposition to the motion to dismiss.

Within the fifteen days allowed, plaintiff filed the affidavits of Mr. Brilliant and of Walter J. Rockler, one of plaintiff's attorneys.

The affidavit of Brilliant stated that he had a legal education, but that he worked as a professional investment counselor; that, as of December, 1962, members of his immediate family owned more than 2350 shares of Hilton Hotels common stock; that he had purchased one hundred shares of Hilton Hotels stock for the plaintiff on August 1, 1957; that in December, 1962, plaintiff brought him the papers relating to the offer of Hilton Hotels to buy a part of its own stock,...

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