Cohen v. Industrial Finance Corporation

• Citation: 44 F. Supp. 491
• Parties: COHEN v. INDUSTRIAL FINANCE CORPORATION et al.
• Decision Date: 15 January 1942
• Court: U.S. District Court — Southern District of New York

44 F. Supp. 491

COHEN v. INDUSTRIAL FINANCE CORPORATION et al.

District Court, S. D. New York.

January 15, 1942.

Bondy & Schloss, of New York City (Eugene L. Bondy, of New York City, of counsel), for complainant.

Jay Leo Rothschild, of New York City (Walter S. Beck, of New York City, of counsel), for defendants.

LEIBELL, District Judge.

This is a suit by a stockholder of Industrial Acceptance Corporation against two corporations, Industrial Finance Corporation and Morris Plan Corporation which are alleged to have conspired to deprive Industrial Acceptance Corporation of its working capital, to transfer its liquid assets to Industrial Finance Corporation for investment in Morris Plan Corporation and thus to put Industrial Acceptance Corporation out of business. The latter corporation is a nominal defendant.

Defendants move under Rule 12, Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, to dismiss the complaint herein on the ground that the plaintiff stockholder does not have the legal capacity to sue because of an alleged failure to comply with a provision of Rule 23(b) F.R.C.P. and on the further ground that the complaint does not state facts sufficient to constitute a cause of action.

Plaintiff's attorneys, opposing the motions, contend that she has fully complied with Rule 23(b) by pleading with great particularity valid reasons for not making a demand upon the managing directors of Industrial Acceptance Corporation that they bring the suit for the relief demanded herein.

The complaint alleges that "Acceptance" was engaged in the business of financing automobile purchases; that from the year of its organization 1924 until 1929, the year of the last published report of its transactions, the approximate annual volume of business transacted by "Acceptance" varied between $68,000,000 and $87,000,000; that the average annual net income of "Acceptance" for such period was approximately $875,000.

The gravamen of the complaint is the alleged conspiracy by defendants "Finance" and "Morris Plan".

Paragraphs 20 and 21 state:

"20. In or about the year 1930 or 1931 the defendants IFC and MPC agreed, planned and conspired with each other to deprive defendant IAC of its working capital; to transfer its liquid assets to defendant IFC for the purpose of investing the same largely as a holding company in the stock of MPC; to render defendant IAC unable to continue its profitable business theretofore conducted and to reap for themselves, the defendants IFC and MPC, the profits theretofore earned by defendant IAC; to transfer its activities to defendant MPC and other subsidiaries of defendant IFC and to leave defendant IAC wholly impotent to conduct business and to earn profits for its stockholders.

"21. In pursuance of such agreement, plan and conspiracy, in or about the year 1930 or 1931 a contract was made by and between defendant IFC and defendant IAC whereby defendant IAC agreed to grant to defendant IFC a revolving line of credit without security to an aggregate total of Three million ($3,000,000.) dollars and further agreed to accept in whole or partial repayment of an indebtedness which might at any time be owing by defendant IFC to defendant IAC under the said agreement Second Preferred stock of defendant IAC, valuing the said stock, for purposes of such payment, at the price which defendant IAC would be obliged to pay therefor to the holders thereof upon a dissolution or a liquidation of defendant IAC."

The line of "credit" was later increased to $6,000,000 and the interest was reduced from 6% to 1%.

It is alleged that at the time of the execution of the transactions complained of, at least thirteen of the seventeen directors of "Acceptance" were also directors of "Finance", and that the president, vice-president, secretary and assistant secretary of "Finance" held the same offices in "Acceptance". It is also alleged that after these transactions had been completed, "Finance" continued to dominate "Acceptance", by the device of electing controlled employees and nominees of "Finance" to the Board of directors of "Acceptance"; that this was possible because "Finance" owned or controlled from 85% to 90% of the voting stock of "Acceptance". All the outstanding second preferred stock of "Acceptance" is also owned by "Finance".

The complaint further alleges that "Finance" so successfully consummated the conspiracy to siphon all the assets of "Acceptance" into "Finance" and "Morris Plan" that the amount of commercial paper, in which "Acceptance" dealt, declined from $35,000,000 in 1930 to less than $175,000 at the end of 1932.

The complaint alleges that these acts greatly damaged "Acceptance" and especially its first preferred stockholders. It is also alleged that actions have been brought by stockholders of "Acceptance" to secure redress for the wrongs alleged in the complaint but that those actions were caused to be settled and discontinued without profit to "Acceptance" by the directors of "Acceptance".

Paragraph 18th of the complaint alleges: "18. At all times beginning at latest with the year 1930 up to the present, the actions of the board of directors of defendant IAC have been wholly dominated and controlled by defendant IFC through the election to the board of defendant IAC of an overwhelming majority of directors who were also directors of defendant IFC up to the year 1937 and thereafter of directors who were employees and nominees of defendant IFC; and the control of defendant IFC over defendant IAC was so complete that defendant IAC had no volition, power or capacity independent of the volition, power and capacity of defendant IFC."

The plaintiff herein concededly made no demand herself upon the directors of "Acceptance" to institute the present suit. Instead the complaint alleges such a demand was rendered unnecessary and futile because of facts pleaded with considerable particularity.

The complaint states:

"34. Heretofore, demands were made upon the board of directors of defendant IAC and each of them that they cause defendant IAC to rescind the aforesaid fraudulent agreement and recover from defendant IFC the amount of over Six million ($6,000,000.) dollars in which it was then indebted to defendant IAC and to take other measures for the protection and advantage of defendant IAC and its stockholders, including the relief prayed for by the present action; but no action has been taken by the defendant IAC or its directors for the relief requested in such demands; and actions have been brought by stockholders of the defendant IAC to secure redress for the wrongs alleged herein but such actions have been caused by the defendant IAC and its directors to be settled and discontinued without benefit to the defendant IAC.

"35. In or about the year 1937, by reason of the acts hereinbefore specified, defendant IAC had become so inactive that all except one of the directors common to both of the boards of defendant IAC and defendant IFC ceased to act as directors of defendant IAC and thereupon defendant IFC caused to be elected to the board of directors of defendant IAC various subordinate employees in the control of, and subservient to, the board of directors of defendant IFC and such board of directors so elected has been with substantial identity of membership the board of directors of defendant IAC from the year 1937 to the present time.

"36. The board of directors of defendant IAC at the present time is substantially the same board of directors as that to which the aforesaid demands were addressed.

"37. The present board of directors of defendant...