DeVAN v. TOBACCO PRODUCTS CORPORATION

• Decision Date: 02 June 1937
• Citation: 19 F. Supp. 714
• Parties: DeVAN v. TOBACCO PRODUCTS CORPORATION OF DELAWARE et al.
• Court: U.S. District Court — Southern District of New York

19 F. Supp. 714

DeVAN v. TOBACCO PRODUCTS CORPORATION OF DELAWARE et al.

District Court, S. D. New York.

June 2, 1937.

Kraushaar & Klapper, of New York City (Meyer Kraushaar, of New York City, of counsel), for plaintiff.

Sullivan & Cromwell, of New York City (Inzer B. Wyatt, of New York City, of counsel), for defendant United Stores Corp.

LEIBELL, District Judge.

Plaintiff's motion to remand is granted.

Plaintiff, a citizen of New York and a stockholder of Tobacco Products Corporation of Delaware (having purchased 100 shares in October, 1935), sues in equity on behalf of himself and other stockholders similarly situated and on behalf of the corporation, naming as defendants the corporation itself, certain of its directors, and the United Stores Corporation, also a Delaware corporation. The cause of action against the directors of the Tobacco Products Corporation of Delaware is to hold them accountable for their acts as directors, "for their official conduct, including any mismanagement, waste, dissipation of assets, betrayal of trust, negligence, acts of omission or commission in the management and disposition of the funds and property committed to their care or otherwise in the performance of their duties." The claim against United Stores Corporation is alleged to be based upon its participation in certain acts of the directors and its co-operation with them in consummating certain transactions that are alleged to be fraudulent or otherwise unlawful, all to the damage of Tobacco Products Corporation of Delaware in which plaintiff is a stockholder.

The suit was removed to this court from the New York Supreme Court on petition of the defendant United Stores Corporation, which alleged that the complaint discloses a separate controversy involving more than $3,000 between plaintiff and said petitioner, who are citizens of different states, to which controversy the individual defendants are not necessary or proper parties and that it can be wholly determined without their presence. The pertinent part of 28 U.S.C. § 71 (28 U.S.C. A. § 71), reads as follows: "And when in any suit mentioned in this section there shall be a controversy which is wholly between citizens of different States, and which can be fully determined as between them, then either one or more of the defendants actually interested in such controversy may remove said suit into the district court of the United States for the proper district."

From an analysis of the bill of complaint, in so far as it affects the United Stores Corporation, we are constrained to conclude that no separable controversy wholly between plaintiff and defendant United Stores Corporation is pleaded.

1. United Stores Corporation, organized June, 1929, owns a majority of the common stock of Tobacco Products Corporation of Delaware which was organized about November, 1931. The officers and directors of both corporations are practically the same. (Par. 4 of complaint.) The individual defendants, as such officers and directors, controlled both corporations. Further, all of the common stock (the voting stock) of United Stores Corporation was deposited under a voting trust agreement of which four of the ten individual defendants were, with another individual, the voting trustee, "and as a result of said voting trust agreement the said defendant United Stores Corporation was completely dominated and controlled by the individual defendants." (Par. 11 of complaint.) Apparently the control of United Stores Corporation under the voting trust agreement gave the individual defendants, who were trustees of the voting trust, control also of Tobacco Products Corporation of Delaware, because United Stores Corporation owned a majority of the stock of that corporation. (Par. 25 of complaint and Exhibit A to complaint, par. entitled "Effect of the Plan.")

In his complaint plaintiff charges the individual defendants with acts of malfeasance and misfeasance as directors of Tobacco Products Corporation of Delaware, practically from the inception of said corporation. Tobacco Products Corporation of Delaware, after its organization in November, 1931, had as its principal assets (1) a large block of stock of United Cigar Stores Corporation and (2) all the common stock of Tobacco Products Corporation of New Jersey. Some of the alleged illegal acts of the director defendants, as set forth in the complaint, relate to the reorganization of the United Cigar Stores Corporation in this court. The individual defendants are charged with having adopted a resolution, as directors of United Cigar Stores Company of America, by which that corporation was placed in bankruptcy. Paragraph 37 of the complaint reads as follows: "Upon information and belief, that the filing of said petition in bankruptcy against the United Cigar Stores Company of America was part of a plan participated in by the individual defendants and others wherein and whereby the defendant United Stores Corporation might, at the expense of stockholders of defendant Tobacco Products Corporation of Delaware and of the general public, and at the expense of landlord creditors of the United Cigar Stores Company of America, effect a reorganization of said United Cigar Stores Company of America and obtain control of the assets of said United Cigar Stores Company of America, to the profit of the said defendant United Stores Corporation and of the individual defendants George K. Morrow and Frederick K. Morrow, and that the said plan involved the creation of a panic in the stock market in connection with the $10,000,000 bond issue and rendered worthless the common stock of the United Cigar Stores Company of America to the detriment of the defendant Tobacco Products Corporation of Delaware and its stockholders."

The complaint alleges (par. 38) that, after the filing of said petition in bankruptcy, the defendant United Stores Corporation acquired not less than $4,083,000 of the said bond issue of Cigar Stores Realty Company (a subsidiary of United Cigar Stores Co. of America) at prices far below their intrinsic value, and that one of the defendants, George K. Morrow, and his wife similarly acquired some of that bond issue. The complaint also alleges that in the reorganization proceedings of United Cigar Stores (under § 77B of the Bankruptcy Act, as amended 11 U.S.C.A. § 207) certain creditors objected to the claims of defendant United Stores Corporation and of said individual defendant and his wife, based on said bond ownership, and that in order to satisfy the objectors a deal was made whereby "the defendants did sell and dispose of the holdings of the said defendant Tobacco Products Corporation of Delaware in the United Cigar Stores" as part of the plan of reorganization of United Cigar Stores, for $512,713.39, although said stock was carried on the books of Tobacco Products Corporation of Delaware for almost $8,000,000 and would have been worth that sum "had it not been for the unlawful and improper acts of the individual defendants and the defendant United Stores Corporation." (Par. 43 of complaint.) The complaint then alleges (par. 44) "that as a result of said transaction the defendant United Stores Corporation earned a substantial profit on its investment, but the defendant Tobacco Products Corporation of Delaware sustained a very heavy and substantial loss" and (par. 45 of complaint) "that the said loss was not occasioned by an error of judgment, but because of the gross negligence, waste, breach of trust of the individual defendants in which the defendant United Stores Corporation participated and profited."

For the purposes of the present motion the allegations of the bill of complaint must be taken at their face value. Torrence v. Shedd, 144 U.S. 527, 12 S.Ct. 726, 727, 36 L.Ed. 528. In its petition removing this suit to this court the defendant United Stores Corporation asserted that the claim involving $4,083,000 of bonds of Cigar Stores Realty Corporation was part of a separate controversy wholly between plaintiff and the petitioner. In my opinion the claim, pleaded in the allegations of the complaint that I have just summarized, is a joint claim against the individual defendants and the United Stores Corporation, based upon the alleged joint illegal conduct of all the defendants — at least, so it is pleaded. "The cause of action is the subject-matter of the controversy, and that is for all the purposes of the suit, whatever the plaintiff declares it to be in his pleadings." Torrence v. Shedd, supra.

2. One of the assets of Tobacco Products Corporation of Delaware, immediately after its organization, was the entire common stock of Tobacco Products Corporation of New Jersey. That common stock of the New Jersey corporation represented in effect the equity in the commuted value of a lease of tobacco brands, etc., to the American Tobacco Company, over and above the amount of a bond issue of the New Jersey company, which was in effect a first lien on the proceeds of the lease. (Pars. 15, 30 of complaint.) This equity was estimated to be at least the sum of $1,175,454.98 when the Tobacco Products Corporation of Delaware and the Tobacco Products Corporation of New Jersey were formed (par. 30 of complaint); but when the American Tobacco Company in January, 1935, exercised its right to commute the balance of the...