Cohen v. Young

• Decision Date: 14 April 1942
• Docket Number: No. 8861.,8861.
• Citation: 127 F.2d 721
• Parties: COHEN v. YOUNG et al.
• Court: U.S. Court of Appeals — Sixth Circuit

127 F.2d 721 (1942)

COHEN v. YOUNG et al.

No. 8861.

Circuit Court of Appeals, Sixth Circuit.

April 14, 1942.

Meyer Abrams, of Chicago, Ill. (Harris W. Wienner, of Detroit, Mich., on the brief), for appellant.

Grant L. Cook and Charles A. Wagner, both of Detroit, Mich., for appellees.

Cook, Smith, Jacobs & Beake, of Detroit, Mich., on the brief, for appellee Leonard A. Young and others.

Miller, Canifeld, Paddock & Stone, of Detroit, Mich., on the brief, for appellee United States Steel Corporation and another.

Butzel, Eaman, Long, Gust & Bills, of Detroit, Mich., on the brief, for appellee Isaac C. Forcheimer.

Robert S. Marx, Lawrence I. Levi, and Carl Runge, all of Detroit, Mich., on the brief, for appellee Lucille K. Levy and others.

Before ALLEN, MARTIN, and McALLISTER, Circuit Judges.

ALLEN, Circuit Judge.

Two questions are presented by this appeal:

(1) Whether a stockholder objecting to the compromise of a corporate cause of action in a derivative suit brought by other stockholders is entitled to participate in the action without being joined as a party plaintiff and has the right to introduce evidence in support of his objections; and

(2) Whether in a class action approval by the court upon the sole ground that it is recommended by reputable attorneys of a compromise agreed upon by all parties of record, one stockholder objecting, is an exercise of sound judicial discretion.

The action was instituted in 1935 by a stockholder of the L. A. Young Spring and Wire Corporation, which was organized under the laws of Michigan, on behalf of himself and all others similarly situated, to enforce the rights of the corporation against certain officers and other defendants. The complaint alleges that Leonard A. Young, as president of the corporation, and certain of its officers, directors, and employees had illegally obtained an aggregate of nearly a million dollars by personal borrowings from the corporation, and that Young and others had fraudulently caused the corporation to release these obligations and surrender valuable collateral which had been given as security therefor. Admissions in the various answers gave support to the charges but the case lay dormant until 1939 when amendatory and supplemental complaints were filed which alleged that Young, acting in violation of law had procured other sums from the corporation, amounting to more than a million dollars, by means of fraudulent contracts, an additional personal loan of $750,000, exorbitant salary and expense account allowances, royalty and bonus payments, and other unlawful expenditures of corporate funds for Young's personal benefit. United States Steel Corporation and the American Steel & Wire Company of New Jersey were joined as defendants and charged with receiving money known to have been unlawfully procured by Young from the corporation and with making illegal loan and rebate arrangements with Young in consideration of his procurement of contracts for the purchase of seventy-five per cent of the corporation's steel requirements from the United States Steel Corporation or its subsidiaries. Additional concessions in the answers to the various amendatory and supplemental complaints, in the reply to a request for admissions, and in answers to interrogatories disclosed that there was no substantial dispute that the various transactions between Young and the corporation had actually occurred, and two extensive reports of an accountant, made under oath and based upon an examination of the corporate books and records, tended to indicate that the transactions were unlawful and fraudulent as charged.

Negotiations for settlement were commenced several months before the case was pressed for trial in 1940 and were finally discussed with the court. The proposition involved here was that Young should pay to the corporation $275,000 in cash, should assign to it certain patents, and should cancel certain royalty agreements, and that in consideration therefor all liabilities of Young and the other defendants to the corporation should be released and discharged, and the suit be dismissed with prejudice.

Under Rule 23(c) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, a secondary class suit may be compromised with the approval of the court after notice to stockholders in the form directed by the court. In compliance with this rule an order to show cause why the proposed settlement should not be approved was served upon all stockholders, including the appellant, a resident of Chicago, Illinois. On May 29, 1940, the date set for hearing, appellant appeared by his attorney, opposed the proposed settlement, and filed a petition to intervene as plaintiff. Attorneys for plaintiffs and for other stockholders already permitted to intervene as parties, at the hearing stated in open court that they would not agree to the proposed settlement until proof was given of the insolvency of Young. The case was continued until June 29, 1940. Upon that date plaintiffs' attorneys stated in open court that a signed statement had been submitted to them by Young and an investigation had been made by auditors which convinced them of his insolvency and that they therefore agreed to the settlement proposed. Appellant's counsel stated that he had seen the auditors' report only the day before, and that he desired to examine it more carefully. He objected to the proposed settlement and to the dismissal of the case with prejudice, upon the ground that the question of insolvency was based upon the current value of the corporation stock and that if the market improved, Young would become solvent. He asserted that the $275,000 payment provided for in the settlement barely covered interest chargeable to the money borrowed from the corporation, and claimed that the settlement should include yearly bonuses received and to be received in the future by Young. He also contended that the payment of $275,000 cash should be distributed as a dividend to the stockholders, but that Young should be denied any participation therein.

Neither Young's statement as to his alleged insolvency nor the auditors' report upon which the consent to the compromise of attorneys formerly objecting thereto was based, was introduced in evidence, nor included in the record. The court recognized that appellant was ready to proceed with evidence in support of his objection, but approved the compromise upon the sole ground that it was recommended by the attorneys of record. Appellant's petition to intervene as plaintiff was denied in a separate entry. A decree approving the compromise settlement and ordering that upon full performance of its terms the suit be dismissed with prejudice was then entered. Appellant did not appeal from the order denying the petition to intervene as plaintiff, but appeals from the final decree.

At the outset we are met by a motion to dismiss the appeal upon the ground that appellant is not a party to this cause and hence has no standing in this court. It is pointed out that no appeal was taken from the denial of the petition to intervene as plaintiff. The appellees also rely upon Rule 23(b) of the Rules of Civil Procedure as conclusively showing that the petition to intervene was properly denied because the proffered petition did not aver that the appellant was a shareholder at the time of the transaction of which he complains or that his share thereafter devolved on him by operation of law. While the petition to intervene does not contain such averments it is conceded that important transactions, involving the sale to the corporation of alleged obsolete and worthless machinery and agreements to pay royalties to Young for the use of patents actually belonging to the corporation, which were relied upon in the two supplemental complaints filed March 7, 1939, and August 29, 1939, respectively, occurred after the appellant acquired his stock.

We think that Rule 23(b) does not require nor authorize dismissal of the appeal. Assuming that the court did not err, in absence of a request from appellant, in proffering no opportunity to amend and therefore rightly dismissed the petition to intervene as party plaintiff because it did not set forth the date upon which appellant's stock was acquired, this fact is not decisive. The class suit was not filed by appellant. If it had been, clearly appellant would...