Downing v. Howard

• Decision Date: 24 June 1947
• Docket Number: No. 9314.,9314.
• Citation: 162 F.2d 654
• Parties: DOWNING v. HOWARD et al.
• Court: U.S. Court of Appeals — Third Circuit

162 F.2d 654 (1947)

DOWNING v. HOWARD et al.

No. 9314.

Circuit Court of Appeals, Third Circuit.

Argued May 20, 1947.

Decided June 24, 1947.

John F. Davidson, of New York City (William H. Bennethum, of Marvel & Morford, all of Wilmington, Del., and Ralph Bernstein, of New York City, on the brief), for appellant.

Wm. S. Potter, of Wilmington, Del. (Southerland, Berl & Potter, of Wilmington, Del., and Richard Joyce Smith, John J. Burns, Louis Connick, Horace R. Lamb, Edwin F. Blair, and George S. Brengle, all of New York City, on the brief), for appellees George H. Howard et al.

Ralph M. Carson and Allen T. Klots, both of New York City (Richards, Layton & Finger and Caleb S. Layton, all of Wilmington, Del., Thomas B. K. Ringe, of Philadelphia, Pa., and Orison S. Marden and Cleveland C. Cory, both of New York City, on the brief), for appellees George Whitney et al.

Before MARIS, GOODRICH, and KALODNER, Circuit Judges.

GOODRICH, Circuit Judge.

Plaintiff is the owner of shares of United Corporation (of Delaware), hereafter called United. He brought this action in the United States District Court for the District of Delaware on behalf of himself, other shareholders of United, and the Corporation against individuals or, in some instances, their personal representatives, who had been directors of United and certain other persons alleged by plaintiff to have conspired with the directors to the detriment of the Corporation. Most of the individual defendants are neither residents of Delaware nor engaged in business there. Plaintiff, however, says that he is properly in the federal court under § 25 of the Public Utility Holding Company Act of 1935.¹ He concedes that unless he has stated a cause of action "created" by that statute² his action in the District Court of Delaware will not lie.³

There is much general language in plaintiff's amended complaint which sounds in terms of the usual shareholder's action against directors for corporate mismanagement. The defendants argue strenuously that this is the gist of plaintiff's claim and that reference to the Public Utility Holding Company Act of 1935 is simply added as decoration to give a semblance of verisimilitude to the plaintiff's assertion of federal jurisdiction. Contrariwise, we have the plaintiff in the highly unusual situation of stating that his general claim for mismanagement does not state a cause of action at all, but that his real grievance against the defendants is their causing the corporation to violate the Public Utility Holding Company Act of 1935 by compelling action or non-action by United. It is apparent that the question which we have to settle is whether the plaintiff has stated a basis for recovery under the federal statute just mentioned. If he has, the fact that he also asserts a non-federal ground does not lose him his privilege of suing in the federal court.⁴ On the other hand, if the substance of his claim is one based on state law, the reference to the federal statute is not enough to bring him into federal court, unless he has independent grounds for coming there.⁵ We do not have to decide whether the plaintiff has stated an actionable claim of a more or less orthodox shareholders' suit type. We do have to decide whether he has stated a basis for recovery under the Public Utility Holding Company Act of 1935. The District Court concluded that he had not and dismissed his complaint. 68 F.Supp. 6. On this appeal we must, of course, assume all the plaintiff's well pleaded facts to be true.

Plaintiff has alleged three causes of action. We shall deal with the third one first because it is the easiest. In his third cause of action the plaintiff complains that the defendant directors failed to file with the Securities and Exchange Commission a voluntary plan for reorganization of the Corporation as permitted by the Public Utility Holding Company Act of 1935.⁶

The fatal obstacle to the plaintiff's complaint on this score is that the legislation does not require the company to furnish a plan.⁷ A cause of action can hardly be based upon disobedience of the statute when the statute does not require the act, the non-doing of which is complained of by the plaintiff. Plaintiff's complaint, therefore, as to this cause of action stops at this point so far as it is predicated upon liability under the federal statute. If there is possible liability on the part of defendants because they failed to take advantage of such a device as filing a plan, that breach of duty, if any, is a violation of one of the ordinary duties of the directors to exercise proper management. It has nothing to do with the federal statute at all and cannot be a basis for resort to federal court unless the necessary diversity of citizenship existed.⁸ It is quite clear in our minds that the plaintiff has produced nothing in his third cause of action which gives him the slightest basis for a suit in a federal court.

This conclusion necessarily carries with it an approval of the action by the Trial Judge in dismissing the complaint as to all defendants who became directors subsequent to March 28, 1938, the date on which United registered with the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935.

Bearing in mind that any question of proof of the allegations he makes is not now before us, we next come to the more difficult questions raised by the first and second causes of action which plaintiff alleges.

The claim made by the plaintiff in the first alleged cause of action can really be stripped down to a very few words. The provisions of the Public Utility Holding Company statute required United to register with the Securities and Exchange Commission by December 1, 1935.⁹ Due to the action of the then directors, United failed to register and this failure continued until March 28, 1938.¹⁰ During the time in which United failed to register certain securities held by it which had a market value of $194,000,000 on December 1, 1935, depreciated to $107,000,000 by March 28, 1938. This is the loss occasioned by United which the plaintiff says these defendants must make up.¹¹

Section 5 of the statute permits registration by certain holding companies, of which United is one. Section 4 forbids unregistered holding companies to own shares, sell shares, trade shares, and many other things. These restrictions are the penalty¹² provided for failure to register if such registration is required and this penalty provision was before the Supreme Court of the United States in the Electric Bond & Share Co. case, previously cited. Defendants say that the penalty provisions in § 4(a) are just that and no more, that they have nothing to do with private rights one way or the other. Plaintiff says that this is not the case at all and points for support to the general principle that where a statute is enacted for the protection of certain persons those injured by defendants' violation of the statute may recover even though the statute does not in expressed terms provide for a civil action.

For this principle plaintiff cites us to the Restatement of Torts, § 286. This Section and its companion Sections, 287 and 288, present very clearly not only the rule for allowing recovery against one who has done a forbidden act, but also set forth the limitations on such recovery.¹³

It has been held repeatedly that one whose liability creating conduct is the violation of a statute which makes certain conduct a public offense does not, while engaged in such violation, become an insurer against all harm.¹⁴ The situation is not like that of one who, engaged in a felony, unintentionally causes the death of a human being and is, nevertheless, subject to punishment as a murderer. As Dean Thayer pointed out a number of years ago "Criminal conduct which had no effect in causing the injury can no more be a ground of liability than non-causative negligence. In either case the wrongdoing is without legal significance as between the parties."¹⁵ Our statute-breaker is civilly liable only if his law violation causes another harm of the sort which it was the presumed intention of the Legislature to protect against and that injury occurred in a way proscribed by the statute.

We are unwilling to take the position urged by the defendants that the violation of the registration provisions of the statute will never bring about individual liability. Violation has been held liability creating in one situation.¹⁶ It may or may not be in others. This case is decided on a narrower ground. When we examine the plaintiff's allegations and take his statement of facts as true we do not see how he has shown us any basis for recovery against the defendants, even conceding that a different set of facts might entitle him to recover. Section 1(b) of the Act expressly states that the interest of investors in the securities of holding companies are or may be adversely affected "when the growth and extension of holding companies bears no relation to economy of management and operation" but plaintiff has failed to allege that the $87,000,000 loss was due to that reason.¹⁷ Plaintiff correctly states that the statute provides for registration. It is also correct to say that an unregistered company was forbidden to hold shares. Suppose the company had registered. It would still have held the shares. The plaintiff does not, nor could he, allege that the shares would necessarily have been disposed of had the company registered since the statute gave no mandate to a registered company that it must divest itself of the securities. The loss to shareholders in a declining market would have been just exactly the same whether the company was registered or whether the company was not registered. Plaintiff does not allege that the loss in value in United's securities was due to failure to register.¹⁸ We do not see how, in the nature of things, there could be any possible connection between the mere failure to register and the...