Perrott v. United States Banking Corporation

• Citation: 53 F. Supp. 953
• Decision Date: 24 January 1944
• Docket Number: Civil Action No. 277.
• Parties: PERROTT v. UNITED STATES BANKING CORPORATION et al.
• Court: U.S. District Court — District of Delaware

53 F. Supp. 953

PERROTT v. UNITED STATES BANKING CORPORATION et al.

Civil Action No. 277.

District Court, D. Delaware.

January 24, 1944.

COPYRIGHT MATERIAL OMITTED

H. Stanley Lynch (of Morris, Steel & Nichols), of Wilmington, Del., and John N. Platoff, of Union City, N. J., for plaintiff.

Arthur G. Logan and H. Newton White, Jr. (of Logan & Duffy), of Wilmington, Del., for defendants.

LEAHY, District Judge.

This is a stockholder's derivative action. The complaint alleges the individual defendants have dominated the corporate defendant by diverting its earnings and assets to themselves, and utilizing their positions of trust as officers and directors in fraud of stockholders. Defendants challenge the adequacy of the complaint as to whether the modus operandi by which such control was acquired and the methods by which the fraudulent diversion of assets occurred are sufficiently spelled out with detail. Defendants filed six motions based upon various grounds. In view of the several points raised at argument and in the briefs, each motion will be treated and ruled on in the manner following:

Motion No. 1. This motion requests dismissal of the complaint under Rule 12(b) (6) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, on the ground that the complaint fails to state a claim upon which relief can be granted.

Motion No. 2. This motion asks that Paragraphs 12-29, except 21, be stricken as vague and not giving rise to any cause of action cognizable in equity.

Motion No. 3. This motion deals with Rule 23(b) and points to a failure of allegation that "plaintiff was a shareholder at the time of the transaction of which she complains."

Motion No. 4. This motion seeks to strike allegations with respect to issuance of stock to the individual defendants on the ground of laches.

Motion No. 5. This motion, involving matters contained in Paragraphs 14 and 23 which have to do with profits illegally obtained, seeks to strike such paragraphs as the relief is likewise barred by laches.

Motion No. 6. The last motion is filed under Rule 12(f) on the ground that all of the Paragraphs of the complaint are immaterial and scandalous.

1. Defendants attack under Rule 23(b) Paragraphs 5, 6, 7, 8, 9, 10, 13 and 14, dealing with the acquisition by defendant H. V. Noll of a majority of the voting stock without consideration. The issuance of the voting stock to this defendant was sometime after February 15, 1928, and before January 8, 1929. Plaintiff acquired her stock at a later date, i. e., between March, 1929, and July, 1930. At the argument it was urged that Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487, prevents the operation of Rule 23(b), as plaintiff's right to maintain the action is not procedural but substantive. Under the Delaware law¹ a plaintiff is not required to be the owner of shares at the time of the acts complained of in a stockholder's derivative suit. The state law is in conflict, then, with Rule 23(b). Which must give way? While the question was posed by Judge Goodrich in Gallup v. Caldwell, 3 Cir., 120 F.2d 90, it was not answered, although there lurks in that case a suggestion that whether a stockholder of a Delaware corporation bringing action in the federal district court for Delaware to recover for the corporation damages resulting from management's fraudulent acts was limited to those acts which occurred since she became a stockholder, or whether she could complain of those which took place before that time, was to be determined by the law of Delaware. This, at least, appears to be the view of Moore.² Absent a precise holding by the Circuit Court in this circuit, temporarily at least, I have free choice to pass on the question. Judge Clark suggests: "From the nature of the federal rules and the manner of their adoption as a result of long study and careful consideration, a strong presumption should be indulged in that matters included in them as procedural are to be so held by the courts."³ In Summers et al. v. Hearst et al., D.C., 23 F.Supp. 986, 992, the court construed the old Equity Rule 27, 28 U.S. C.A. § 723 Appendix, which was the predecessor of Rule 23(b). This case was decided shortly after Tompkins. The Court said: "If equity Rule 27 is to be modified or revoked in view of Erie Railroad Co. v. Tompkins, it is not the province of this Court to suggest it, much less impliedly to follow that course by disregarding the mandatory provisions of the Rule." Moreover, it must be noted that the Tompkins case was decided on April 25, 1938, and the new Rules became effective on September 16, 1938. Judge Clark's admonition that we should indulge in a strong presumption that Rule 23(b), for example, controls this situation finds support in the fact that the Supreme Court permitted the rule to become effective after its decision in the Tompkins case. It may fairly be said, then, that the Supreme Court intended that the lower federal courts should apply the rule in every case irrespective of state law as it deals with a matter of procedure and not substance.

Rule 23(b) puts in issue "the authority of the plaintiff to maintain" his complaint. Cf. Illinois C. R. Co. v. Adams, 180 U.S. 28, 34, 21 S.Ct. 251, 45 L.Ed. 410. It seems to me the rule does not go beyond procedure. The action is to recover for a wrong suffered by the corporation. Simply because a particular plaintiff cannot qualify as a proper party to maintain such an action does not destroy or even whittle at the cause of action. The cause of action exists until a qualified plaintiff can get it started in a federal court. It is the same as the minor who is struck by the bus. Procedurally, the child is unable to seek redress for the wrong done him in his own person. This does not, however, affect his right of action. Procedural remedies are available by the appointment of a next friend, a guardian ad litem, or a trustee to prosecute the cause of action. The criticism that federal courts will not be dispensing the same justice that could be obtained in a state court in stockholders' derivative actions if Rule 23(b) is applied when in conflict with the state rule, ignores one of the original purposes of promulgating the rule and the evils it attempts to destroy. Cf. Moore, op. cit., pp. 2246-2253, 2250-2253, 2265.

While I hold that Rule 23(b) is applicable, and no relief may be had by the present plaintiff for the acts which occurred prior to the acquisition of her shares, I nevertheless refuse to strike the paragraphs covered by the motion as these paragraphs establish a background against which other acts of the individual defendants may be judged. Dederick v. North American Co., D.C., 2 F.R.D. 353; Summers v. Hearst, supra.

2. Paragraph 21 complains of the methods of conducting annual elections held in the past and prays that an election may be ordered. The complaint alleges that common stockholders have been denied notice of stockholders' meetings. Moreover, it charges that the annual meeting held on January 19, 1942, was illegal.

Apart from the power to appoint a master to supervise an election, and aside from statute, there is no jurisdiction in this court to order an election of directors of a Delaware corporation. Fletcher, Corporations, pp. 234, 262. In fact, the Delaware Court of Chancery restricts its jurisdiction in cases of this kind, unless the action is instituted pursuant to the state remedial statute. Lippman v. Kehoe Stenograph Co., 11 Del.Ch. 412, 418, 102 A. 988, 990; Fleer v. Frank H. Fleer Corp., 14 Del.Ch. 277, 286, 125 A. 411. Section 31 of the Delaware Corporation Law (Rev.Code of Del. of 1935, c. 65, § 2063, p. 473) grants to the Court of Chancery of that state the right to order, or review, an election. This statute merely provides a remedy, and the right "is made a condition of the Chancellor's jurisdiction". Such a remedial right to proceed in a federal court in equity cannot be enlarged by a state statute. Pusey & Jones v. Hanssen, 261 U.S. 491, 43 S.Ct. 454, 456, 67 L.Ed. 763.

Paragraph 21 will be stricken and the relief sought therein denied.

3. Paragraphs 13, 15, 27, 28 and 29 charge the individual defendants with fraudulent conduct. Defendants contend that these allegations violate Rule 9(b) in that "the circumstances constituting the fraud" are not stated with particularity.

These paragraphs allege breaches of the individual defendants' fiduciary duties toward the corporate defendant. While fraud must be alleged with particularity under Rule 9(b), it is only necessary to allege ultimate facts and not evidence. While these paragraphs do not allege fraud with fine particularity, the omission is not fatal. If defendants are unable to file a responsive pleading, relief is available to them under Rule 12(e); and other rules are available if they cannot properly prepare for trial. See, Levenson v. B. & M. Furniture Co., Inc., 2 Cir., 120 F.2d 1009; and Best Foods, Inc., et al. v. General Mills, Inc., D.C.Del., 3 F.R.D. 275.

Defendants' motion to these paragraphs is denied.

4. Paragraphs 25 and 26 complain of failure of defendants to send annual reports to stockholders. I have been unable to find any requirement in the Delaware law that annual reports must be issued. In answer to plaintiff's request that she be permitted to have the information which she would ordinarily have received in such annual reports, there is no jurisdiction in either the state or federal court of chancery to grant a complainant the right to inspect books and records when there is an adequate remedy at law by mandamus in the state court. Harden v. Eastern States Public Service Co., 14 Del.Ch. 156, 122 A. 705; Jefferis v. W. D. Mullen Co., 15 Del. Ch. 144, 132 A. 687; Fletcher, op. cit., § 2250. See, also, Swift v. State ex rel. Richardson, 7 Houst. 338, 6 A. 856, 32 A. 143, 40 Am.St.Rep. 127; State ex rel. DeJulvecourt v. Pan American Co., 5 Pennewill 391, 61 A. 398, ...