741 F.2d 410 (D.C. Cir. 1984), 83-1597, Cowin v. Bresler
|Citation:||741 F.2d 410|
|Party Name:||Daniel COWIN, Appellant, v. Charles S. BRESLER, et al.|
|Case Date:||August 07, 1984|
|Court:||United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit|
Argued Jan. 17, 1984.
[Copyrighted Material Omitted]
Appeal from the United States District Court for the District of Columbia (Civil Action No. 80-02330).
Jerome M. Congress, New York City, with whom Herbert E. Milstein, Washington, D.C., was on the brief, for appellant.
Theodore R. Mann, S. Mark Werner, Philadelphia, Pa., with whom Judah Best and Howard Stahl, Washington, D.C., were on the brief, for appellees.
Before WRIGHT, WILKEY and BORK, Circuit Judges.
Opinion for the Court filed by Circuit Judge BORK.
BORK, Circuit Judge:
Bresler & Reiner, Inc. is a publicly-owned company incorporated in the State of Delaware and engaged in the development and management of residential and commercial properties in the District of Columbia. In late 1980, Daniel Cowin, a Bresler & Reiner shareholder, sued the company and its directors on his own behalf. Cowin has a minority interest in the company. The individual directors-appellees, with their families, own in excess of 79% of the company's stock. Appellees Bresler and Reiner together hold more than 70% of the company's outstanding shares, and their control of the corporation is undisputed.
The thrust of Cowin's charges is that the appellees have manipulated the business for their personal profit at the expense of the minority shareholders. The complaint alleges numerous instances of corporate mismanagement, fraud, and self-dealing, all in breach of the common law fiduciary duty owed by the directors of the company to the appellant as a shareholder. Several of the challenged transactions involve deals between the company and certain limited partnerships in which the appellees, including Bresler and Reiner, have significant interests. The complaint also charges Bresler and Reiner with forcing the company to engage in a stock repurchase program at a time when the company was in default on its notes payable and having severe cash flow problems. Cowin alleges that appellees used, and are still using, the repurchase plan to "severely limit[ ] the public market for trading in Company stock"; according to appellant, their ultimate intent is to "covert[ ] the Company to a private corporation owned solely by" them for their own benefit. Brief for Plaintiff-Appellant at 14. To remedy the alleged common law violations, Cowin seeks damages for the diminished value of his stock and injunctions against the allegedly wrongful transactions. He also requests the appointment of a receiver to liquidate the company for his benefit and the benefit of the other shareholders.
The remainder of the complaint charges appellees with violations of the federal securities laws, primarily in connection with the transactions detailed above. Specifically, Cowin claims that Bresler and Reiner caused the company to "disseminate reports to the public shareholders which were materially deceptive" and concealed material information in violation of Rule 10b-5 and section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982). Brief for Plaintiff-Appellant at 15. The complaint also charges appellees with violating section 14(a) of the 1934 Act, 15 U.S.C. Sec. 78n(a) (1982), by causing the company to issue deceptive proxy materials. Cowin seeks to require the disclosure of
the material concealed in alleged violation of the Act and, among other things, to invalidate the elections for directors based on the alleged proxy violations.
Appellees moved promptly to dismiss the complaint. They also sought, and received from the district court, an order barring all discovery pending disposition of the motion to dismiss. As a result, no discovery was permitted during the proceedings below.
In its first order, entered December 23, 1981, the district court ruled that while Cowin could legally seek the appointment of a receiver for a solvent corporation in his individual capacity, he had failed to allege the "extreme circumstances showing imminent danger of great loss" necessary to support such drastic relief. Cowin v. Bresler, No. 80-2230, mem. op. at 3 (D.D.C. Dec. 23, 1981); Record Excerpts ("R.E.") at 32. The court then dismissed appellant's common law claims because, in its view, both federal and common law required Cowin to "bring ... a derivative suit to recover damages for a decline in the value of stock" due to alleged corporate mismanagement and fraud. Id. at 35. The court would "not permit [Cowin] to elevate form over substance in order to escape the requirements of a derivative suit merely by attaching an unjustified request for the appointment of a receiver ... to his complaint." Id. at 36.
The district court also dismissed most of appellant's Rule 10b-5 claims. 1 Relying on Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), the court held that the "reincorporation [into federal securities law claims] of [Cowin's] common-law claims for breaches of fiduciary duties as well as the alleged 'nondisclosures' ... must be dismissed as unsuccessful attempts to create a 10b-5 cause of action out of claims of corporate mismanagement." R.E. at 40. Certain other alleged securities law violations were dismissed for lack of specificity under Fed.R.Civ.P. 9(b). R.E. at 40 n. *, 42-43. The court did not dismiss Cowin's section 14(a) proxy disclosure claims, however, nor did it dismiss that portion of appellant's Rule 10b-5 claims that did not "integrally relate[ ] to [the] allegations of the nondisclosure of certain breaches of fiduciary duty." R.E. at 44-45.
Appellees answered those portions of the complaint that survived the lower court's order and moved for summary judgment on the section 14(a) claim. In its second order, entered April 21, 1983, the district court granted summary judgment for appellees on that claim, holding that Cowin had no standing to challenge, on an individual basis, the allegedly misleading nature of proxy solicitations because he had not personally relied on them. 2
This appeal followed. 3
We agree with the district court's holding that appellant's common law claims for damages and injunctive relief must be pursued, if at all, on a derivative basis. 4 Both case law and sound policy support this conclusion. In Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del.1970), plaintiff shareholder charged that Getty Oil had, among other things, forced its wholly-owned subsidiary to purchase oil from Getty at an inflated price. Delaware's highest court characterized this claim as one "seek[ing] money damages for improper management" and held that such claims belonged to the corporation and not to its minority stockholders:
When an injury to corporate stock falls equally upon all stockholders, then an individual stockholder may not recover for the injury to his stock alone, but must seek recovery derivatively in behalf of the corporation.
Id. at 249 (emphasis added). The court concluded that "[m]ismanagement which depresses the value of stock is a wrong to the corporation; i.e., the stockholders collectively, to be enforced by a derivative action." Id. See also Crane Co. v. Harsco Corp., 511 F.Supp. 294, 304 (D.Del.1981); Elster v. American Airlines, Inc., 34 Del.Ch. 94, 98-99, 100 A.2d 219, 222 (1953). 5
The logic of Bokat is compelling. Claims of corporate mismanagement must be brought on a derivative basis because no shareholder suffers a harm independent of that visited upon the corporation and the other shareholders. Because each shareholder has been injured in proportion to his equity ownership, "each will be made whole if the corporation obtains compensation or restitution from the wrongdoer." Empire Life Insurance Co. v. Valdak Corp., 468 F.2d 330, 335 (5th Cir.1972). A contrary rule "would authorize multitudinous litigation and ignore the corporate entity." Sutter v. General Petroleum Corp., 28 Cal.2d 525, 530, 170 P.2d 898, 901 (1946). See also Brooks v. Land Drilling Co., 564 F.Supp. 1518, 1521 (D.Colo.1983); 13 W. Fletcher, Cyclopedia on the Law of Corporations Sec. 5911 (Perm. ed. 1980). Requiring derivative enforcement of claims belonging in the first instance to the corporation also prevents an individual shareholder from incurring a benefit at the expense of other shareholders similarly situated. See 13 W. Fletcher, supra, Sec. 5915, at 323.
This general rule is the law of several jurisdictions. 6 There are, however,
certain circumstances in which a shareholder may proceed against his company on an individual basis. In Elster v. American Airlines, Inc., the Delaware chancery court stated:
There are cases, of course, in which there is injury to the corporation and also special injury to the individual stockholder. In such cases a stockholder, if he should so desire, may proceed on his claim for the protection of his individual rights rather than in the right of the corporation. The action would then not constitute a derivative action.
A fair reading of the "special injury" cases shows that a personal cause of action is properly pursued in two situations--where the allegedly wrongful conduct violates a duty to the complaining shareholder independent of the fiduciary duties owed that party along with all other shareholders, or, where the conduct causes an injury to the shareholders distinct from any injury to the corporation itself. In cases of the first sort, the complaining shareholder may sue as an individual only because he stands, and has been injured in his relationship to the corporation, in a capacity other than that of a...
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