Boyd v. Bell
Decision Date | 29 June 1945 |
Citation | 64 F. Supp. 22 |
Parties | BOYD v. BELL et al. |
Court | U.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.
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:
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 ...
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