Altman v. Central of Georgia Railway Company

• Decision Date: 29 September 1965
• Docket Number: Civ. A. No. 547-65.
• Parties: Oscar L. ALTMAN et al., Plaintiffs, v. CENTRAL OF GEORGIA RAILWAY COMPANY et al., Defendants.
• Court: U.S. District Court — District of Columbia

254 F. Supp. 167

Oscar L. ALTMAN et al., Plaintiffs, v. CENTRAL OF GEORGIA RAILWAY COMPANY et al., Defendants.

Civ. A. No. 547-65.

United States District Court District of Columbia.

September 29, 1965.

Victor A. Altman, Washington, D. C., for plaintiffs.

Gerhard A. Gesell, Bingham B. Leverich and Covington & Burling, Washington, D. C., John B. Miller and Hitch, Miller, Beckmann & Simpson, Savannah, Ga., for defendants Central of Georgia Ry. Co. and D. W. Brosnan.

ROBINSON, District Judge.

This is a class action brought by two owners of shares of the preferred stock of a foreign corporation seeking an order compelling the declaration and payment of dividends thereon for four past years, and directing a good faith determination of dividend policy for future years.

One of the plaintiffs is a citizen of the District of Columbia, and the other a citizen of New Jersey. Defendant Central of Georgia Railway Company (Central) is a Georgia corporation maintaining an office in the District, and the remaining defendants are the members of its board of directors.¹ Preferred stockholders, under Central's charter, are entitled to receive annual fixed percentage dividends out of and to the extent of available net income, and unpaid dividends are cumulative to a specified maximum.

In 1963, Southern Railway Company² (Southern) became the owner of nearly all³ of Central's combined common and preferred stock in consequence of activities for its acquisition extending from 1960. Subsequently, Central and Southern, though remaining separate corporations, combined substantial portions of their operations with a view to improvements in their services and the realization of economies for both companies.

Central has not paid any dividends on its preferred stock for four years, 1960 through 1963. The plaintiffs claim that it had net income available for payment of such dividends during each of these years, and that its directors acted arbitrarily in refusing to do so.

The defendants moved to dismiss the action, after which the plaintiff asked leave to join Southern as an additional party defendant. It is to these motions, and the grounds respectively asserted in their support, that the Court now addresses itself, altering the chronological order of the motions and the grounds somewhat to facilitate discussion.

I

Although the plaintiffs seek to compel the declaration of corporate dividends, only one of Central's 21 directors resides and has been served within the District of Columbia. From aught that appears, it is improbable that personal jurisdiction can be acquired over any of the rest. Deeming a quorum of the directors⁴ to be parties indispensable to this action, the defendants urge that the Court cannot proceed.

The question is one of first impression here, and divergent results have been reached elsewhere. In Schuckman v. Rubenstein,⁵ judicial authority was considered to be "limited to a judgment in personam⁶ against the members of the board,"⁷ and it was accordingly held that "jurisdiction over only two of the nine directors in this case made it impossible for the court to render an effective decree. At least three other directors were indispensible parties to the suit."⁸ Similarly, in Tower Hill Connellsville Coke Co. v. Piedmont Coal Co.,⁹ it was concluded that "any effort on the part of the court below to direct the payment of any specific dividends * * * would be an effort to control the management of that company, and could not be done without making its officers and directors parties."¹⁰

On the other hand, in Kroese v. General Steel Castings Corp.,¹¹ where the suit involved only three of twelve corporate directors, the Court, disputing that "the case is as easily settled as the mechanical application of this well-settled rule about jurisdiction in personam would settle it,"¹² pointed out that "when a court steps in and orders the payment of a dividend, the corporate affairs have reached the point where the judgment of the directors is no longer controlling. The set of facts presented is such that the court substitutes its judgment, based on a rule of law, for the ordinary business judgment of those in charge of the business enterprise."¹³ Consequently, said the Court, "in such a case, even though individual directors are joined as parties, they are not called upon to exercise any business discretion. The case has passed that point. * * * The duty of a corporation to pay dividends then and there has been imposed by the judgment of the court, not by the ayes and nays of the members of the board,"¹⁴ and since the corporation had assets within the Court's jurisdiction, it perceived no difficulty in making its decree effective. In similar fashion, it was held in Doherty v. Mutual Warehouse Co.,¹⁵ that since "the corporation is the party from whom any dividends that may be declared must be recovered,"¹⁶ "the district court has jurisdiction to compel the declaration of dividends even in the absence of a majority of the board of directors."¹⁷

The views last expressed find additional support in other decisions,¹⁸ and in commentaries on the question,¹⁹ and they are adopted here. The corporation is already before the Court, and despite the fact that it owns no property in this jurisdiction, an effective and enforceable decree can yet be made. "To doubt its effectiveness is to doubt the power of a court of equity when wielded by a chancellor with legal imagination. * * * Equity courts have known for a long time how to impose onerous alternatives at home to the performance of affirmative acts abroad as a means of getting those affirmative acts accomplished."²⁰

II

As ground for their motion for leave to add Southern as a party defendant, the plaintiffs point to the size of its stock ownership and from this argue that it "is in effective control of" Central and has caused Central "arbitrarily" not to pay dividends on its preferred shares.

The complaint is cast in terms of a classic stockholders' action against Central and its directors. Neither it, nor the plaintiffs' sole affidavit supporting the motion, charges Southern with any wrongdoing or impropriety, or indicates any action by it contributing to Central's failure to declare the dividends. Nor is any relief whatsoever sought against Southern in the complaint. Given maximum breadth, the plaintiffs' claim is no more than that Central's directors established dividend policy with the fact in mind that from 1960 to 1963 Southern was endeavoring to acquire, and since 1963 it has owned, the bulk of Central's stock.

This, at most, gives cause for complaint only against Central and its directors. Southern's ownership of the stock is perfectly legal,²¹ and there is nothing to suggest that it has in any way attempted to use its power to dictate or influence action by Central's directors. If simply because of Southern's anticipated and actual stockholdings those directors decided not to declare dividends, the responsibility is theirs alone.

It is elementary that the complaint must state "a claim showing that the pleader is entitled to relief"²² against a party and this complaint does not involve Southern in the dispute. The claim stated

"* * * must show that the claimant is `entitled to relief.' That is to say, the claim for relief must indicate the existence of a cause of action. By cause of action in this context is meant a claim that facts exist which, under our legal system, are recognized as entitling the claimant to judicial action in vindication of a right or in remedying a wrong. * * * Courts are not authorized to require a party defendant to defend against a `cause' not recognized by law as involving the vindication of a legal right or the remedying of a legal wrong."²³

But the claim stated here "has not set forth either the acts or omissions on which it relies nor the theory it advances as a basis for liability"²⁴ against Southern. Nor does it, as to Southern, "indicate clearly the defendants against whom relief is sought and the basis upon which the relief is sought against the particular defendants."²⁵ Under even the liberal standards by which the complaint here must be viewed, it asserts no case against Southern.

The prayer of the complaint, it is repeated, is limited to relief against Central and its directors, and does not mention Southern at all. But the plaintiffs have suggested that Southern might be ordered to vote its stock in such manner that Central will declare dividends on its preferred shares. This power, however, resides in Central's directors, not its stockholders, and any action the latter, qua stockholders, might take in this regard would be completely ineffective.²⁶ It is the directors who are "to administer the corporate affairs for the common benefit of all the stockholders,"²⁷ including Southern as well as others.

Southern could, of course, so vote its stock when directors are elected that candidates committed to declaring such dividends might be placed in office. But no case had been found to support the proposition that leverage for a declaration of corporate dividends may be supplied through an order running against a stockholder, not alleged to have itself committed a legal violation, as to how its stock must be voted. Judicial decrees remedying legal wrongs operate directly upon the wrongdoers, and not upon parties innocent of legal offense even to reach those guilty of the wrongdoing. The relief the plaintiffs wish may be afforded, if it is otherwise proper to do so, by an order directed against the corporation that is already here, and no justification for Southern's joinder appears.²⁸

Were the plaintiffs' difficulty on their motion a matter potentially correctable by amendment, their request for leave to amend would invoke a broad discretion. But at the hearing, counsel for the plaintiffs made it plain that they stand on the complaint as drawn insofar as Southern is concerned, and that no amendment is desired. Since the...