Coleman v. Johnston
| Decision Date | 22 December 1981 |
| Docket Number | 81 Civ. 6509 (RWS). |
| Parties | Delbert W. COLEMAN and WNC Corporation, Plaintiffs, v. Paul A. JOHNSTON, Johnston Industries, Inc., and John Does 1-12, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Saxe, Bacon & Bolan, P. C., New York City, for plaintiffs; Roy M. Cohn, Filip L. Tiffenberg, New York City, of counsel.
Fried, Frank, Harris, Shriver & Jacobson, New York City, for defendant Paul A. Johnston; Leon Silverman, New York City, of counsel.
The plaintiffs Delbert W. Coleman ("Coleman") and WNC Corporation ("WNC") brought this action against Paul A. Johnston ("Johnston") and J. Johnston Industries, Inc. ("JII") and John Does 1-12 ("the director defendants") in the Supreme Court of the State of New York, County of New York on October 20, 1981 and obtained a temporary restraining order containing provisions, among others, barring Johnston and JII from transferring any assets. The action was removed to this court on the grounds of diversity, the temporary restraint expired, and Coleman and WNC have moved for a remand. The motion will be denied for the reasons set forth below.
Coleman is a citizen of Illinois and the sole shareholder of WNC which is a Delaware corporation with its principal place of business in Chicago. Johnston alleges that he is a citizen of North Carolina and is the sole shareholder and chief executive officer of JII, a Delaware corporation, with its principal place of business in New York. Certain of the director defendants are alleged by Coleman and WNC to be New York residents. Diversity therefore exists between Coleman and WNC on the one hand and Johnston but not between Coleman and WNC, and JII and the director defendants. At issue therefore is whether JII and the directors are nominal defendants and their joinder is unnecessary, "collusive" or "fraudulent," thereby not defeating diversity. See Salem Trust Co. v. Manufacturers' Finance Co., 264 U.S. 182, 189-90, 44 S.Ct. 266, 267, 68 L.Ed. 628 (1924); Tedder v. F.M.C. Corp., 590 F.2d 115 (5th Cir. 1979); Saxe, Bacon & Bolan, P.C. v. Martindale Hubbell, Inc., 1980-81 Trade Cases ¶ 63,758 at 78,042, 521 F.Supp. 1046 (S.D.N.Y.1981); Sands v. Geller, 321 F.Supp. 558, 561 (S.D.N.Y.1971); American Mfrs. Mut. Ins. Co. v. Manor Invest. Co., 286 F.Supp. 1007, 1010-11 (S.D.N.Y.1968); 14 C. Wright, A. Miller & Cooper, Federal Practice and Procedure § 3723 at 606 & n.47 (1976 ed. and 1981 Supp.).
The dispute between the parties centers on an agreement dated April 24, 1981 as extended on May 29, 1981, signed by Coleman, WNC and Johnston, under which Johnston undertook under certain terms and conditions to sell his shares of stock in JII to Coleman and WNC ("the contract"). According to the complaint, on September 9, 1981 Johnston informed Coleman and WNC that he would not perform the contract on the closing date of October 1, 1981 and in fact the closing did not occur. This litigation resulted in which Coleman and WNC seek to compel the transfer of JII stock and to obtain control over the corporation.
The complaint sets forth five causes of action. The first, although initially only against Johnston, in the amended complaint, alleges a claim for specific performance against Johnston and JII. The second cause of action seeks damages against Johnston for his failure to perform the contract. The third, fourth and fifth causes of action are against all the defendants, and the third alleges that "all of the above-mentioned defendants, and each of them were members and agents of an illegal and fraudulent conspiracy the purpose of which was to wrongfully induce Coleman to relinquish to Johnston and Industries JII his formula and plan to make Industries JII a more profitable and valuable company, thus benefitting Johnston." Certain acts are alleged to have occurred over the summer in which the individual defendants or some of them participated which led Coleman to make certain disclosures, at a time when the defendants knew that Johnston intended to terminate the contract without transferring his shares of JII to Coleman and WNC. The relief sought under the third cause of action is specific performance and declaration that the shares of JII in Johnston's hands are null and void. The fourth cause of action seeks compensatory damages of $12 million and punitive damages of $30 million. The fifth cause of action seeks an accounting for any moneys paid by JII to Johnston from September 9 to the date of the transfer of the shares.
As to the first cause of action, the issue presented is whether or not JII is a nominal or unnecessary party. JII is not a party to the contract, and the contract by its terms deals with the sale of stock held by Johnston. Indeed the only role for the corporation in the event of the success of Coleman and WNC on the merits of the dispute would be to perform the ministerial act of transferring the shares upon the books of the corporation. As counsel for Johnston pointed out, were it otherwise, every dispute over stock ownership would require the presence of the issuing corporation. Fortunately the issue has been faced and resolved by other courts whose decisions are hereby relied upon. Salem Trust Co. v. Manufacturers' Finance Co., 264 U.S. 182, 189-90, 44 S.Ct. 266, 267, 68 L.Ed. 628 (192...
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