DeVan v. United States

• Decision Date: 20 July 1943
• Parties: DEVAN et al. v. UNITED STATES et al.
• Court: U.S. District Court — District of New Jersey

50 F. Supp. 992

DEVAN et al. v. UNITED STATES et al.

District Court, D. New Jersey.

July 20, 1943.

Henry Swartz and Meyer Kraushaar, both of New York City, for plaintiffs.

Shelton Pitney and Blair Reiley, both of Newark, N. J., for corporate defendants.

William Piel, Jr., of New York City, for United Stores Corporation.

Charles M. Phillips, U. S. Atty., and Thorn Lord, Asst. U. S. Atty., both of Trenton, N. J., Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe and Homer R. Miller, Sp. Assts. to the Atty. Gen., for defendant, United States.

Hermon H. Hill and Arthur Roland, both of Washington, D. C., for Bureau of Internal Revenue.

MEANEY, District Judge.

The plaintiffs as shareholders of Tobacco Products Corporation of Delaware, hereinafter called the Delaware Corporation, filed a complaint against the United States of America and the Tobacco Products Corporation of New Jersey, hereinafter called the Jersey Corporation, a corporation wholly owned by the Delaware Corporation and United Stores Corporation, hereinafter called Stores Corporation, a corporation owning a majority of the stock in the Delaware Corporation. The suit is brought in their own behalf and in the behalf of all other shareholders similarly situated.

The Commissioner of Internal Revenue made an assessment for income taxes against the Jersey Corporation for 1935 in the sum of $4,967,890.40. The Collector of Internal Revenue collected on account thereof $725,638.27 by levy. The Government in addition to the claim for the balance against the Jersey Corporation had a possible transferee assessment claim against the Delaware Corporation involved herein. After the Government seized the tax, the Jersey Corporation was without assets. The Delaware Corporation directors and shareholders voted to dissolve their Corporation in September, 1939. As a step in the dissolution, the Stores Corporation instituted an action in the Court of Chancery of the State of Delaware for the appointment of a receiver of the Delaware Corporation. A receiver was appointed by the Court and he took possession of all the assets of the Delaware Corporation, amongst them being all the stock of the Jersey Corporation.

The plaintiffs' contention is that the receiver of the Delaware Corporation has a cause of action against the Government for the return of the $725,638.27. They have made demands upon the receiver to start suit and cause the board of directors of the Jersey Corporation to institute similar proceedings. They claim to have demanded of the directors of the Jersey Corporation that they start a similar suit. The receiver after negotiation with the Government decided that he did not have a valid or subsisting claim against the Government and that it would be in the best interests of the Delaware Corporation that the claim for refund be relinquished since the Government was willing to forego all claims for the balance of the tax against all the parties involved herein. When this matter was brought before the Court of Chancery of Delaware, it made an order directing the abandonment of the claim. At that time the plaintiffs were given an opportunity to object to that procedure and to call attention to the merits of their own views. An appeal from that order has never been taken.

A prior complaint by one of the present plaintiffs and by predecessors in title of the other present plaintiffs against the Jersey Corporation (Wachsman v. Tobacco Products Corporation of New Jersey, D.C., 42 F.Supp. 174) was dismissed by the District Court. On appeal to the Circuit Court of Appeals, 3rd Circuit, (Wachsman v. Tobacco Products Corporation of New Jersey, 129 F.2d 815) the dismissal was upheld on the ground that the plaintiffs had not made prior demand for corporate action; the dismissal on that ground rendered it unnecessary for the court to decide the other questions involved. The plaintiffs in the present suit have endeavoured to meet the issue raised by the Circuit Court of Appeals.

In review, then, the plaintiffs as shareholders of the Delaware Corporation bring this action to recover monies which the Government received from a levy upon the Jersey Corporation in which the plaintiffs hold an interest based upon the fact that the Delaware Corporation is a stockholder in the Jersey Corporation. They bring this action after another tribunal has ordered abandonment of the claim. They ask this court to appoint a receiver for the Jersey Corporation with the view of having him distribute the monies recovered from the Government.

A motion has been made by the Government to strike the complaint.

Upon the facts set forth above, three very distinct questions present themselves for adjudication. First, will the court entertain a suit which is tantamount to a collateral attack upon a state tribunal? Second, has the United States consented to be sued by the present plaintiffs by virtue of 28 U.S.C.A. § 41 which authorizes inter alia suits for the recovery of taxes erroneously or illegally collected? Third, is it possible to get relief herein on a claim which is derivative?

The plaintiffs are shareholders of the Delaware Corporation which is in receivership under the authority of section 4408 of the Revised Code of the State of Delaware. It must be conceded that the Court of Chancery of Delaware was vested with full power to appoint a receiver for the Delaware Corporation. It also has been made clear that a receiver is the "universal successor of the corporation * * * the representative of its personality and powers after its life has been extinguished." Clark v. Williard, 292 U.S. 112, 54 S.Ct. 615,...