Xerox Corp. v. Genmoora Corp.

• Decision Date: 17 November 1989
• Docket Number: No. 88-1446,88-1446
• Citation: 888 F.2d 345
• Parties: XEROX CORPORATION, Derivatively As A Shareholder of The Genmoora Corp. Plaintiff-Appellant, v. GENMOORA CORP., et al., Defendants, Michael J. Collins, Norman E. Brinker, Thomas W. Barton and Bruns Grayson, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 345

888 F.2d 345

15 Fed.R.Serv.3d 104

XEROX CORPORATION, Derivatively As A Shareholder of The

Genmoora Corp. Plaintiff-Appellant, v. GENMOORA CORP., et al., Defendants, Michael J. Collins, Norman E. Brinker, Thomas W. Barton and Bruns Grayson, Defendants-Appellees.

No. 88-1446.

United States Court of Appeals, Fifth Circuit.

Nov. 17, 1989.

A.B. Conant, Jr., David M. Pruessner, William B. Chaney, Shank, Irwin, Conant, Lipshy & Casterline, Dallas, Tex., Barry Jay Kesselman, Stamford, Conn., for plaintiff-appellant.

David C. Godbey, Robert H. Mow, Jr., Hughes & Luce, Dallas, Tex., for Collins and Barton.

Kenneth E. Carroll, Robert L. Blumenthal, Carrington, Coleman, Sloman & Blumenthal, Dallas, Tex., for Brinker and Grayson.

Appeal from the United States District Court for the Northern District of Texas.

Before BROWN, JOHNSON and DAVIS, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

In this shareholder derivative suit, Xerox challenges a series of transactions among the current sole director and four ex-directors of the Genmoora Corporation (Genmoora). It alleges that these transactions depleted the corporation's assets and resulted in the failure to fund a Liquidating Trust Fund established to receive the proceeds of a sale of all of Genmoora's assets to Moore Business Forms, Inc. (Moore). ¹ The trial court dismissed Xerox's derivative suit under F.R.Civ.P. 12(b)(6) for failure to allege injury and alternatively granted summary judgment in favor of four of the ex-directors, finding they had not breached their fiduciary duties. At the request of the ex-directors, the trial court acted under F.R.Civ.P. 54(b) to convert these to final orders on May 23, 1988. We reverse, finding that: (1) The trial court's dismissal was in error. Xerox sufficiently pleaded injury. (2) The trial court abused its discretion in denying Xerox's Request for Continuance before the summary judgment and its Motion for Reconsideration of the grant of summary judgment and for Leave to Amend its Complaint in light of the additional evidence which Xerox had put before the court at that time.

I. How It All Began

Genmoora used to operate a series of retail stores. But in 1984, it sold nearly all of its assets to Moore Business Forms, Inc. and planned to liquidate. To effectuate its liquidation, Genmoora created a Liquidating Trust Fund in July, 1985 to receive the cash proceeds from the sale and liquidation of Genmoora's remaining assets and to conserve these funds for their eventual distribution to shareholders. Norman E. Brinker (Brinker), Bruns Grayson (Grayson), Michael J. Collins (Collins), and Thomas U. Barton (Barton)--collectively the ex-directors--all became trustees of the liquidating trust.

The Shell Game

In the game that was about to unfold, these ex-directors played important roles, but Joseph T. Verdesca (Verdesca) ²--director, shareholder and President of Genmoora--was the kingpin. He also controlled or owned other entities involved in this case. Verdesca's true nature was known to the ex-directors. In a November 1984 letter Collins wrote to Brinker and Grayson references were made to Verdesca's incompetence and fraud in dealing with Genmoora's Board of Directors and shareholders.

Bottom line, it seems obvious to me that we are dealing not only with gross incompetence but also massive fraud as it relates to Joe Verdesca and his dealing with the Board of Directors and the shareholders.

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I am totally convinced that Joe depreciated our asset through out and out fraud at best (with other financial questions yet to be answered about other funds and what he has done with them).

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Currently, no one is looking after our interests, no one representing the Board, no one the shareholders. Joe is consciously stalling so he can get his hands on his unearned part of the funds. It would be totally irresponsible of us to give Joe a penny before we have fully investigated his culpability. ³

Despite this knowledge, the ex-directors resigned and in a complex series of transactions orchestrated by Verdesca sold their shares to another Verdesca company, International Computer Clearing, Inc. (ICCI), on September 24, 1985. ⁴ The end result of these machinations was that the Liquidating Trust was allegedly never funded.

A jury could have determined that this is how it worked. The first step was for all the directors, except Verdesca, to resign. This occurred on September 24, 1985. This left Verdesca as the sole director of Genmoora on September 24. Being in sole command, he was then able to issue a corporate resolution authorizing Genmoora to loan $3,100,000.00--which represented practically all of the proceeds from the sale of assets to be held by the trustees for the benefit of all shareholders--to ICCI of which Verdesca is the President and sole shareholder. The loan was represented by ICCI's promissory note dated September 24, 1985 ostensibly backed by a security agreement of the same date. The security was something else. It consisted solely of ICCI's 1,566,905 shares of Genmoora stock. ⁵ All of those shares were purchased by ICCI from Brinker and Collins on September 24, 1985, ⁶ so they were the direct beneficiaries of Verdesca's well laid plan to get trust funds into the hands of the directors, not all the shareholders.

II. Where, Oh Where is the Record?

An important issue in this case is just what is the record at significant points in the procedural history. The evidence proffered by Xerox clearly meets the requirements of the Rule that, "[t]he original papers and exhibits filed in the district court, the transcript of proceedings, if any, and a certified copy of the docket entries prepared by the clerk of the district court shall constitute the record on appeal in all cases." F.R.A.P. 10(a).

Although much of the evidence was not before the district court at the time it entered its February 10 dismissal and summary judgment, the case was not yet over. The trial court was obliged to consider Xerox's motion for reconsideration of the order of February 10 and Xerox's request for leave to amend its complaint. There is absolutely nothing to the contention, raised by the ex-directors, that some of these orders are not reviewable by this court because Xerox may have referred to them, in its notice of appeal, by less than their full names. Our review of the final order, which is unquestioned, clearly encompasses the prior orders leading up to it. ⁷

Refusal to grant reconsideration is tested under an abuse of discretion standard, but the Judge has to consider judicially the record as it exists at the time of the motion for reconsideration not just as it existed at the time of the initial ruling. Likewise our review comprehends the record at both stages.

Barton and Collins moved after oral argument to supplement the record pursuant to F.R.A.P. 28(j). ⁸ By their motion, Barton and Collins seek to inform this court that in the related case of Genmoora Corp. v. Moore Business Forms, Inc., No. CA3-85-0144-T (Moore I), ⁹ Genmoora has won a judgment in excess of $3,000,000.00. ¹⁰ The materials presented by the ex-directors certainly do not fall within F.R.A.P. 28(j) which is a vehicle for presenting, without argument, legal authority. This court simply takes notice of the fact that the information was presented without deciding its relevance. The information is not receivable as a fact to establish the theory the ex-directors argued in their motion. We also uphold our earlier denial of Xerox's request to supplement the record pursuant to F.R.A.P. 10(e) with facts it failed to present to the district court.

III. Summary Judgment and Dismissal on Pleadings

This case comes to us on appeal after the trial court, ruling on motions by the ex-directors, ¹¹ dismissed both for (1) failure to state a claim upon which relief could be granted because Xerox failed to allege it or Genmoora suffered any injury, ¹² and (2) an alternative total summary judgment as to the four ex-directors under F.R.Civ.P. 56(c) because Xerox failed to carry its burden of showing that the ex-directors were involved in the making of any loans to ICCI, Leopard's Head or any other entity controlled by Verdesca. ¹³ These were later made final judgments by the trial judge under F.R.Civ.P. 54(b). Both the dismissal and the grant of summary judgment are reviewed de novo by an appellate court. ¹⁴

Did Xerox Allege an Injury? And What if it Didn't

In its Memorandum Order, the trial judge held:

After carefully reviewing the plaintiff's complaint, the court has found no allegation that the loans are now uncollectible, or that they will not be paid when they become due. Under the law of the Fifth Circuit, an injury is a prerequisite to a justiciable case. See, e.g., Lewis v. Knutson, 699 F.2d 230, 236 (5th Cir.1983). Thus, because the plaintiff has failed to allege any injury, dismissal is warranted. ¹⁵

This ruling was treated by the parties, and apparently the trial judge, as a dismissal for "failure to state a claim upon which relief can be granted" under F.R.Civ.P. 12(b)(6). This failed to properly distinguish between Rules 12(b)(1) and 12(b)(6).

A failure to allege injury on the face of a complaint deprives the plaintiff of standing which is needed to satisfy Article III's case or controversy requirement. ¹⁶ This is a jurisdictional question which must be resolved as a preliminary matter. Under the Federal Rules of Civil Procedure, standing challenges are dealt with by motion under F.R.Civ.P. 12(b)(1) or on the court's own motion. ¹⁷ In making such a determination,

both the trial and reviewing courts must accept as true all material allegations of the complaint, and must construe the complaint in favor of the complaining party.... At the same time, it is within the trial court's power to allow or to require the plaintiff to supply, by amendment to the complaint or by affidavits, further particularized allegations of fact deemed supportive of plain...