Danmar Associates v. Porter
| Decision Date | 03 October 1984 |
| Docket Number | Civ. No. H-76-146 (PCD). |
| Citation | 43 BR 423 |
| Parties | DANMAR ASSOCIATES, et al. v. Donald J. PORTER, et al. |
| Court | U.S. District Court — District of Minnesota |
COPYRIGHT MATERIAL OMITTED
Alden C. Harrington, John Boyajian, Boyajian, Coleman & Harrington, Providence, R.I., for cross-claim plaintiff Sheldon Hart.
Richard Cirillo, William Koegel, Rogers & Wells, New York City, for outside directors E. Clayton Gengras, Ralph A. Hart, Eli Shapiro, Roger C. Wilkins.
RULING ON PENDING MOTIONS
All that remains in this action, originally brought nearly nine years ago as a securities fraud class action, are claims of misrepresentation or fraudulent inducement to contract and breach of contract alleged by cross-claimant, Sheldon Hart (Hart), against defendants E. Clayton Gengras (Gengras), Ralph A. Hart (R. Hart), Eli Shapiro (Shapiro), and Roger C. Wilkins (Wilkins).
Pending are:
The motions will be treated seriatim.
This case was commenced on September 24, 1975, by plaintiffs who had purchased securities of National Telephone Company (the Company) between May 22, 1974, and July 10, 1974, and claimed to have sustained damages as a result of fraudulent misrepresentations and omissions which inflated and distorted the market for the Company's securities. Defendants included the Company's entire board of directors, its senior officers, its wholly-owned subsidiary, two banks in the Company's lending consortium, and the Company's independent auditor during the period in question.
Two months prior to the commencement of this action, on July 10, 1975, the Company filed for protection under Chapter XI of the United States Bankruptcy Act. On April 9, 1976, the proceedings were changed by the bankruptcy court from a Chapter XI reorganization to a Chapter X proceeding and a trustee in bankruptcy was appointed. In July 1977, the trustee in bankruptcy commenced an action in this court sounding in a variety of common law tort theories against the Company's entire board of directors, certain senior officers, its independent auditor, and its outside attorneys. In May 1978, this court approved the trustee's final plan of reorganization, terminating the bankruptcy proceedings. In 1982, the trustee's action was settled as to all defendants except one, as to whom the case was voluntarily dismissed. With the court's approval, the trustee executed a general release on behalf of the estate of the bankrupt company and final judgment was entered. The release ran in favor of defendants here.
Meanwhile, this action proceeded parallel to the bankruptcy proceeding and the trustee's lawsuit. In January 1979, the Company's outside counsel was added as a defendant. In March 1979, Sheldon Hart, the president, treasurer, chief executive officer, chief accounting officer, chairman of the board of directors, and majority shareholder of the Company, from its formation in 1971 until approximately mid-1975, filed a counterclaim against the class plaintiffs and cross-claims against the Company's four outside directors, Gengras, R. Hart, Shapiro, and Wilkins, the Company's independent auditors, and its outside counsel. In 1981, this court approved a settlement of the class plaintiffs' allegations against all defendants to the class action except Hart. In November 1983, the court approved a stipulation for the dismissal of Hart's cross-claim against the Company's outside counsel. His cross-claim against the auditors appears to have been resolved.
After the foregoing scenario, Hart's cross-claim against the outside directors is thus the only matter that remains.
As set forth in an amended cross-claim dated December 22, 1980, and filed March 12, 1981, the essence of Hart's claims against the outside directors are that they violated duties owed Hart and the Company, thereby causing the Company's eventual insolvency and bankruptcy and ensuing damage to Hart. For each count of his cross-claim, he seeks compensatory damages in the amount of $8.5 million, allegedly the market value of his stockholdings before they lost all value due to the Company's insolvency and eventual bankruptcy, and punitive damages in the amount of $25 million, plus interest and attorney's fees. Hart's theory or theories have had the nature of a "moving target," (Reply Memorandum in Support at 7) a fact partially explained, and not wholly excused, by Hart's successive representation by at least three separate counsel and a not inconsiderable stint as a pro se plaintiff.
Count I of the amended cross-claim sets forth, in fifty-seven paragraphs, Hart's allegations that the outside directors, acting in furtherance of their personal and their banks' several interests, conspired during the Company's period of financial crisis to cause its insolvency and eventual bankruptcy. A series of secret agreements, fraudulent misrepresentations, fraudulent inducements to act and to contract, and other purported machinations are alleged and characterized as violative of the outside directors' duties owed to the Company and to Hart as a fellow director, majority shareholder, and contracting party.
Count II, incorporating by reference all the allegations in Count I, is styled as a class-count, by which Hart purports to represent all stockholders of the Company as of May 20, 1975, except those purchasing stock on or after May 22, 1974, seeking damages for the loss of all value of their shareholdings as alleged in Count I. No certification of such a class was ever sought or obtained.
Count III, expanding upon Count I, alleges that the Voting Agreement Hart and the outside directors signed on June 12, 1975, was actually a voting trust. Hart alleges that he signed this agreement under duress, that it only partially memorialized an earlier oral agreement regarding control and management of the Company, and that the defendants violated their duties and obligations under the agreement or agreements, causing damages including the loss of the market value of his stock, the loss of his good name, and the loss of his ability to vote his shares to prevent the same.
"Alternative Count III" treats the document as a voting agreement, alleging that it was entered into under duress, in bad faith by virtue of fraudulent inducements, and thereafter was breached, destroying the value of Hart's stock and preventing him from acting to avoid the same.
To grant a motion for summary judgment there can be no "genuine issue as to any material fact" and the moving party must be "entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Schwabenbauer v. Board of Educ., 667 F.2d 305, 313 (2d Cir.1981). "The burden is on the moving party to demonstrate the absence of any material factual issue genuinely in dispute." American Int'l Group, Inc. v. London American Int'l Corp., 664 F.2d 348, 351 (2d Cir.1981), quoting Heyman v. Commerce & Indust. Ins. Co., 524 F.2d 1317, 1319-20 (2d Cir.1975). Moreover, there must be no controversy as to inferences which may be drawn from the facts of record. Phoenix Savings & Loan, Inc. v. Aetna Cas. & Sur. Co., 381 F.2d 245, 249 (4th Cir.1967). In determining whether or not there is a genuine factual issue in the case, the court must "resolve all ambiguities and draw all reasonable inferences against the moving party." Schwabenbauer, 667 F.2d at 313; see also United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962) (per curiam); Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir. 1980). However, one against whom summary judgment is sought cannot rely on factually unsubstantiated conclusory allegations to sustain a claim that questions of fact exist. 6 Moore's Federal Practice, § 56.222 (2d ed. 1982). "Concrete particulars" are thus necessary to ward off summary judgment. Securities & Exchange Comm'n v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir.1978), quoting Dressler v. The MV Sandpiper, 331 F.2d 130, 133 (2d Cir.1964). See generally Donnelly v. Guion, 467 F.2d 290, 291 (2d Cir.1972).
The outside directors have moved for summary judgment upon all claims in the amended cross-claim dated December 22, 1980. Their motion is based narrowly on Hart's pleadings and testimony and on documents either filed of record in this court or prepared by and on behalf of Hart. In so doing, defendants have sought to eliminate any factual disputes and to present the question of Hart's entitlement to relief as one of law. (Memorandum in Support at 9).
Hart has conceded (Opposition Memorandum at 2, n. 2) that he may not pursue allegations of breach of the outside directors' duties to the corporation. Such wrongs may only be redressed in a suit by or on behalf of the corporation, not in a stockholder's action in his own name, on his own behalf. 13 W. Fletcher, Corporations, § 5913 at 318-19 (1980). When a corporation comes under the protection of the bankruptcy court and a trustee is appointed, the trustee accedes to all of the corporation's putative rights and is vested with sole and exclusive authority to maintain actions to redress alleged injuries to the corporation and, through the corporation, to the shareholders. Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 245, 84 L.Ed. 281...
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