Boyd v. Bell

Decision Date29 June 1945
Citation64 F. Supp. 22
PartiesBOYD v. BELL et al.
CourtU.S. District Court — Southern District of New York

Abraham L. Pomerantz, of New York City (I. Gainsburg and Samuel Gottlieb, both of New York City, of counsel), for plaintiff.

Gerald J. Dean, of New York City, for defendant Northeastern Water Co.

BRIGHT, District Judge.

The defendant, Northeastern Water Company, asks an order requiring plaintiff to give security in the sum of $5,000 in accordance with section 61-b of the General Corporation Law of the State of New York, Consol.Laws N.Y. c. 23.

This is a derivative action, brought by plaintiff as stockholder of Northeastern, a Delaware corporation, against that company, the individual defendants, its directors, and the Tidebel Company, for an accounting and other relief, it being alleged that in December 1943, Northeastern owned 11,000 shares of preferred stock of the Tide Water Power Company, that the said directors in that month entered into a conspiracy to cause Northeastern, for an inadequate consideration, to transfer said stock to the defendant Bell, in order to enable him to profit therefrom, at the expense of Northeastern. It is further alleged that in that same month, Bell organized the Tidebel Corporation, all of whose voting common stock has been and still is owned, directly or indirectly, by Bell, and to whom the Tide Water stock was transferred, that the true nature of the transaction was fraudulently concealed from Northeastern's stockholders, and, as a result, Bell has been enabled to become a director and officer of Tide Water and to receive substantial salaries, fees and other emoluments from it, for all of which plaintiff has no adequate remedy at law.

Plaintiff is the record holder of two shares of $4 prior preferred stock of Northeastern, which has presently outstanding 247,611 shares of common stock; 48,652 shares of $2 preferred, and 57,858 shares of $4 preferred stock. The moving affidavit states that the value of plaintiff's two shares is less than $50,000. Under the charter of Northeastern, its directors shall be indemnified by their corporation against any costs and expenses which may reasonably and properly be imposed upon them in connection with any action in which they may be named as defendants, by reason of any action taken or omitted by them, as officer or director, exclusive of costs or expenses incurred in relation to matters as to which they shall be finally adjudged in such action to be liable for negligence or misconduct in the performance of duty. The power so to provide in the charter is conferred by section 2 (section 2034) of chapter 65 of the Revised Code of Delaware, 1935.

Plaintiff opposes on the grounds, (1) that the provisions of the New York law are inapplicable to suits in federal courts, being procedural and not substantive; (2) if substantive and applicable, are unconstitutional, being in contravention of the 5th and 14th amendments and Article 1, § 10, of the Constitution of the United States; and (3) if said section is substantive and constitutional, in view of the clear culpability of the defendants in the matters criticized in the complaint, the relief sought should not equitably be granted.

This action was commenced on April 20, 1945. Two days before that, the provisions of the General Corporation Law relating to reimbursement of directors, officers and employees of corporations for expenses incurred in connection with the defense of actions such as this, were, to some extent changed, and, in part, were embodied in a new article to be known as Article 6-A Laws of 1945, chapter 869. Section 61-b was amended, but only in respect to changing the section previously therein referred to, from 61-a, as it was when enacted, to section 64. As so amended, it read at the time of the commencement of this action:

"§ 61-b. Security for expenses. In any action instituted or maintained in the right of any foreign or domestic corporation by the holder or holders of less than five per centum of the outstanding shares of any class of such corporation's stock or voting trust certificates, unless the shares or voting trust certificates held by such holder or holders have a market value in excess of fifty thousand dollars, the corporation in whose right such action is brought shall be entitled at any stage of the proceedings before final judgment to require the plaintiff or plaintiffs to give security for the reasonable expenses, including attorney's fees, which may be incurred by it in connection with such action and by the other parties defendant in connection therewith for which it may become subject pursuant to section sixty-four of this chapter, to which the corporation shall have recourse in such amount as the court having jurisdiction shall determine upon the termination of such action. The amount of such security may thereafter from time to time be increased or decreased in the discretion of the court having jurisdiction of such action upon showing that the security provided has or may become inadequate or is excessive."

Section 64 therein referred to, provides, in substance, that any person made a party to any such action by reason of the fact that he, his testator, or intestate, is or was a director, officer or employee of a corporation, shall be entitled to have his reasonable expenses, including attorneys' fees, assessed against the corporation, at the request of which he served as such director, officer or employee, upon court order, in the manner, and to the extent provided by subsequent sections of Article 6-A, except in relation to matters as to which it shall be adjudged in such action that such officer, director or employee is liable for negligence or misconduct in the performance of his duties.

The first question is whether section 61-b is substantive or procedural.

The right of the stockholder to bring a derivative action to right wrongs allegedly caused by directors or officers of a corporation of which he is a stockholder, is not a creature of statute, and it has existed independently of any statute for a great many years. Brinckerhoff v. Bostwick, 88 N.Y. 52, Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827.

It is pretty well conceded in the decisions upon the subject of whether a matter is substantive or adjective, that is procedural, that the line between them is very hazy. A definition applicable in all cases would be impossible. No better illustration of that can be given than appears from the very recent decision of the United States Supreme Court in Guaranty Trust Co. v. York, 65 S.Ct. 1464. Attempts at definition have been made. Thus, in Holland on Jurisprudence, 13 Ed., it is said at page 90 that law "defines the rights which it will aid, and specifies the way in which it will aid them. So far as it defines, thereby creating, it is `Substantive Law.' So far as it provides a...

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9 cases
  • State ex rel. Weede v. Bechtel
    • United States
    • Iowa Supreme Court
    • December 16, 1952
    ...without requital. The plastic remedy of an equitable lien is adequate in such a case to prevent a failure of justice'; Boyd v. Bell, D.C., 64 F.Supp. 22; Slutzker v. Rieber, 132 N.J.Eq. 412, 28 A.2d 528; Mann v. Luke, Sup., 44 N.Y.S.2d 202; Masholie v. Salvator, 182 Misc. 523, 46 N.Y.S.2d 5......
  • Beneficial Industrial Loan Corp. v. Smith
    • United States
    • U.S. Court of Appeals — Third Circuit
    • September 22, 1948
    ...in substance to that of Aspinook Corporation v. Bright, 2 Cir., 165 F.2d 294, and directly contrary to decisions such as Boyd v. Bell, D.C.S.D.N.Y., 64 F.Supp. 22, and the other authorities cited to the point in 165 F.2d at page 295. Cf. Donovan v. Queensboro Corporation, D.C.E.D.N.Y., 75 F......
  • Craftsman Finance & Mortgage Co. v. Brown
    • United States
    • U.S. District Court — Southern District of New York
    • November 17, 1945
    ...sound discretion of the Federal Judge, under Rule 34 of our local Civil Rules. See the opinion of Judge Bright of this Court in Boyd v. Bell et al., 64 F.Supp. 22. If the stockholder's charges are serious, specific and appear to have merit, the Court's discretion should not be exercised in ......
  • State v. Birmingham
    • United States
    • Arizona Supreme Court
    • June 4, 1964
    ...113 Utah 205, 192 P.2d 589, 593; Occidental Life Ins. Co. of California v. Kielhorn, D.C.Mich., 98 F.Supp. 288, 292, 293; Boyd v. Bell, D.C.N.Y., 64 F.Supp. 22, 24. A right to appeal is part of the substantive law of the state. It can only be given or denied by constitution or the legislatu......
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