Chasin v. Gluck

• Decision Date: 26 August 1971
• Citation: 282 A.2d 188
• Parties: Rose B. CHASIN, Plaintiff, v. Maxwell H. GLUCK et al., Defendants.
• Court: Court of Chancery of Delaware

Page 188

282 A.2d 188

Rose B. CHASIN, Plaintiff, v. Maxwell H. GLUCK et al., Defendants.

Court of Chancery of Delaware, New Castle County.

Aug. 26, 1971.

Reargument Denied Sept. 22, 1971.

Joseph A. Rosenthal, of Cohen, Morris & Rosenthal, Wilmington, and Harry C. Chashin of Marcus & Levy, Paterson, N.J., for plaintiff.

Bruce M. Stargatt and Jack B. Jacobs of Young, Conaway, Stargatt & Taylor, Wilmington, for the individual defendants.

MARVEL, Vice Chancellor:

Plaintiff, who concededly has been a stockholder of what was formerly known as A. S. Beck Shoe Corporation (now Beck Industries, Inc.) since February 7, 1962, sues derivatively for the alleged benefit of the defendant corporation. Her complaint named as defendants the directors of Beck as of the time of the matters complained of, and she sought relief from such directors of the defendant corporation for the loss sustained by it as a result of alleged breaches of fiduciary duty on the part of such defendants. However, the only directors who remain as parties defendant to this action are Maxwell H. Gluck and Saul Schiff, and the sole relief now sought is the recovery from said defendants of losses sustained by Beck by reason of the alleged failure of such defendants to cause Beck to demand timely payment of amounts owed the latter by Grayson-Robinson Stores, Inc., or to require Grayson to make such payments on time.

The background to the present litigation is briefly as follows. On December 4, 1961, Grayson-Robinson Stores, Inc., a nationally known department store chain, acquired a 51% Stock interest in A. S. Beck shoe Corporation at a cost to Grayson of $4,900,000. Earlier, in November of 1960, the defendant Maxwell H. Gluck, had acquired a dominating position in the affairs of Grayson as the result of the purchase by him of 29% Of its common stock. At a special stockholder's meeting held on December 19, 1960, Mr. Gluck then caused the election board of directors of such corporation. board of directors such corporation.

Thereafter, on December 15, 1961, at a special meeting of stockholders of Beck, a new board of directors for such corporation was elected which included seven Grayson directors as well as a personal friend of Mr. Gluck's out of a board of twelve, thereby giving the latter a dominating position in the affairs of Beck. Such control was later strenghtened when an independent director, namely Herbert C. Lee, resigned from the Beck board.

Another member of the Beck board during the time of the matters complained of was the defendant Saul Schiff. However, such defendant's election as a director of Beck did not depend on the influence of the defendant Gluck, Mr. Schiff's directorship being attributable to his 10,000 shares of stock of Shoe Company of America, of which he was also a director, such corporation having owned 51% Of the stock of Beck from 1946 until the purchase of such stock by Grayson in December, 1961.

Grayson has traditionally operated a chain of department stores, which stores, as of mid-1962, were located in thirty-five states. Beck, having become interested in such stores as possible places for the sale of Beck's shoes and other products, in early 1961 made overtures to Grayson for the setting up of such an arrangement. As a result of negotiations, renting arrangements were ultimately agreed on between the two corporations, under the terms of which Beck agreed to market its products in designated areas of Grayson's stores in return for which the latter would receive a percentage of the profits made on sales of Beck's products. Grayson also undertook to supply maintenance and the like for such shopping centers. Such forms of lease, as noted above, were first entered into in 1961 and granted Beck the right to lease, eventually through subsidiaries, space in a number of Grayson stores. By early August 1962, Beck, through subsidiaries, was operating thirty-three so-called concessions in Grayson stores.

Under the terms of such leases, sales of Beck's shoes and other products were to be made by Grayson employees, the proceeds of such sales then being mingled with Grayson's own receipts. In certain of the Grayson stores, however, Beck provided supervisory personnel. The contracting parties further agreed that at the end of each month the sales attributable to Beck products were to be totalled and the net amount due Beck remitted to it, said remittances consisting of the receipts from gross sales of Beck products in Grayson stores minus the percentage allocable to Grayson for rent, maintenance and the like, as provided by the terms of the leases. In the case of the leases specifically in issue, net receipts, as above computed, were to be remitted to Beck by the tenth of each month. Such forms of lease continued to be used into 1962.

The record in this case discloses, however, that Beck did not receive net receipts due it from sales of its shoes in Grayson's stores during the first part of the year 1962, and it is in fact conceded by the present individual defendants that Grayson permitted its indebtedness to Beck to accumulate to the sum of $233,856.76, representing amounts due Beck from January 1, 1962 to August 14, 1962. However, the affairs of Grayson are now being administered in a chapter XI bankruptcy proceeding instituted on August 12, 1962, and the likelihood of any recovery by Beck of moneys due it from Grayson in such proceeding appears to be remote, the referee in bankruptcy for the United States District Court for the Eastern District of New York having determined on July 22, 1963 that the amount here in issue is merely an unsecured claim against the bankrupt of which type of claim there are many.

Plaintiff, in seeking relief from the present individual defendants, basically relies on the theory that such defendants, as directors of Beck, having allowed the indebtedness of Grayson to Beck improperly to accumulate, thereby breached their fiduciary duty to their corporation. It is alleged that because of their positions of authority in Grayson and Beck and their domination of the other officers and directors of Beck, they either had personal knowledge, or were, at the least, constructively aware of Grayson's increasingly drastic financial problems and nonetheless failed to act in time to protect Beck's interest. It is alternatively argued that such defendants were at the least guilty of negligence in not avoiding, or at least mitigating, Beck's loss resulting from Grayson's financial troubles, which eventuated in bankruptcy.

Plaintiffs pray for an order holding the individual defendants at bar accountable not only for the unrecovered indebtedness of Grayson to Beck but also for the sum of $3,685 spent for legal fees in a futile attempt to establish Beck's claim as being on a firmer basis than that of an unsecured creditor in Grayson's chapter XI bankruptcy proceeding, the referee in bankruptcy in such proceeding having found that a trust as to such funds did not exist in Beck's favor.

Defendants contend, on the other hand, that their actions in regard to Beck's claim against...