Doyle v. Milton

• Decision Date: 03 April 1947
• Citation: 73 F. Supp. 281
• Parties: DOYLE et al. v. MILTON et al.
• Court: U.S. District Court — Southern District of New York

73 F. Supp. 281

DOYLE et al. v. MILTON et al.

District Court, S. D. New York.

April 3, 1947.

M. Victor Leventritt, of New York City, for plaintiffs.

Satterlee, Warfield & Stephens, of New York City, for defendants.

RIFKIND, District Judge.

The defendants in this stockholders' action move for summary judgment dismissing the complaint.

The corporate defendant, The Equity Corporation, is organized under the laws of Delaware and is registered as an investment company with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, 15 U.S.C. A. § 80a — 1 et seq. The individual defendants are directors, officers or employees of Equity, and all the individual defendants collectively constitute the management of the corporation.

In the Fall of 1946, the management formulated a plan of recapitalization for Equity and, in order to carry this plan into effect, the board of directors called a special meeting of the stockholders to be held on December 3rd, 1946. In connection with this meeting the management transmitted a proxy statement and a form of proxy to the stockholders.

This action was commenced on November 27, 1946, and on November 30th an amended complaint was filed. It is unnecessary to recite the allegations of the amended complaint except to indicate that it declared in two causes of action, first, a claim that the management's proxy material violated Regulation X-14 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a et seq., and, secondly, that the control of the Equity Corporation was unduly concentrated in Messrs. Milton and Huntington, two of the defendants, through their ownership of approximately 25% of the common stock of Oceanic Trading Company, Inc. which in turn owned 21.97% of outstanding common shares of the Equity Corporation, and that such pyramiding was in violation of § 1(b) (4) of the Investment Company Act of 1940, 15 U.S.C.A. § 80a—1(b) (4). The amended complaint prayed for a temporary and permanent injunction restraining the defendants from holding the special stockholders meeting, from soliciting proxies by the use of the management proxy material, from voting any proxies executed by stockholders to whom the management's proxy material had been sent and from voting the more than one million shares of Equity common stock owned by Oceanic Trading Company, Inc.

The defendants filed an answer denying the material allegations of the amended complaint. Thereafter, an application for temporary injunction was heard and denied and, upon appeal, the denial was affirmed.

Plaintiffs then obtained leave of court to file a supplemental complaint and although that pleading has not in fact yet been filed and served, I shall, on consent, treat the motion for summary judgment as addressed to that pleading.

The supplemental complaint is divided into four causes of action, and the first cause of action is further subdivided into five separate counts. The first cause of action alleges that the plaintiffs are the owners of shares of common stock of The Equity Corporation and that the action is brought on behalf of all common stockholders similarly situated with the plaintiffs. As a jurisdictional allegation, plaintiffs declare that they are citizens of the State of Illinois, that none of the defendants is a citizen of Illinois and that the action arises under the Securities Exchange Act of 1934.

Plaintiffs further allege that defendants have engaged and are about to engage in acts and practices which constitute violations of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a et seq., and of rules and regulations of the Securities and Exchange Commission made and promulgated under said Act, and specifically in violation of § 14(a) of said Act, 15 U.S.C. A. § 78 n(a), and of Regulation X-14 of the S.E.C. The alleged violation consists of soliciting proxies for a meeting of stockholders by means of proxy material which, it is asserted, violates Rule X-14a-5 in that it is false and misleading.

The second cause of action alleges that Messrs. Milton and Huntington, defendants herein, own 25% of the common stock of Oceanic Trading Co., Inc., a Panama corporation, which in turn owns 21.97% of the outstanding common shares of the Equity Corporation and that such control is unduly concentrated through pyramiding and is contrary to the national public interest and the interest of investors as declared by the Congress in § 1(b) (4) of Investment Company Act of 1940, 15 U.S.C.A. § 80a — 1(b) (4); that Messrs. Milton and Huntington will continue to exercise such control unless enjoined; and that defendant Milton has admitted that the true purpose of the plan of recapitalization is to assure and perpetuate the control of said Milton and his associates over the management of the Equity Corporation.

The third cause of action realleges all of the preceding allegations of the complaint and further alleges that unless enjoined the defendants Milton and Huntington will inequitably and in fraud of the corporation and its stockholders cause the Equity Corporation to amend its charter and to issue the shares of preferred stock contemplated by the plan of recapitalization in furtherance of their personal schemes and for their personal benefit to the irreparable damage and injury of the plaintiffs, the common stockholders.

The fourth cause of action realleges all of the preceding allegations of the complaint and further alleges that the defendants Milton and Huntington in furtherance of their personal gain and benefit and in fraud of the corporation have caused the corporation to utilize the time and energy of its officers and to expend its funds in the formulation of the plan and in the solicitation of proxies for which defendants Milton and Huntington are under a duty to account for the waste of corporate assets involved.

The relief prayed for is in brief as follows:

I. A temporary restraining order, pending the determination of a motion for a preliminary injunction, directed against (a) the exercise of any power conferred by any proxy; (b) the holding of the special meeting of stockholders called for December 3, 1946, or any adjournment thereof; (c) the use of the mails or other means to solicit proxies.

II. A preliminary injunction directed against (a) the exercise of any power conferred by any proxy; (b) the holding of the special meeting of stockholders called for December 3, 1946, or any adjournment thereof; (c) the use of the mails or other means to solicit proxies, without correcting misleading statements and omissions, and without adjourning the special meeting pending the resolicitation of proxies.

III. A final judgment for the relief sought under II.

IV. A temporary restraining order restraining Milton and Huntington from voting the shares of Equity owned by Oceanic upon the plan of recapitalization.

V. A preliminary injunction for the relief set forth under IV.

VI. A final judgment for the relief sought under IV and V.

VII. A final judgment enjoining defendants from amending the charter of Equity so as to provide for the issuance of new preferred stock pursuant to the plan of recapitalization and from issuing said stock.

VIII. A final judgment directing Milton and Huntington to account to Equity for expenses paid by Equity in connection with the proxies and the plan.

No temporary injunction having been granted, as hereinabove stated, a special meeting of the stockholders of Equity was held on December 17, 1946, and was continued until December 23rd. At that meeting proxies obtained by the management and the opposition were voted. The management's plan of recapitalization was adopted and the certificate of incorporation of the corporation was amended. On December 30, 1946, under the Securities Act of 1933, 15 U.S.C.A. § 77a et seq., a registration statement was filed for the new securities contemplated under the plan of recapitalization. At the time of the hearing upon this motion the plan was in process of execution.

Insofar, therefore, as the complaint seeks to enjoin solicitation of the proxies, the voting of the proxies, the holding of the meeting, and the amendment of the charter, it is now moot. It does not follow that the entire complaint states only a moot claim. First, the question is open as to what relief the court might grant with respect to the use of proxies obtained by false and misleading proxy material; and, secondly, the court can still grant relief with respect to the requested disfranchisement of the Oceanic Corporation; and, thirdly, the court may still give relief with respect to the last cause of action, that requiring the defendants Milton and Huntington to account for the waste of assets incurred in connection with the solicitation of the proxies.

The last word of the Circuit Court of Appeals of this Circuit with respect to summary judgment is contained in its opinion in Dixon v. American Telephone & Telegraph Company, 2 Cir., 159 F.2d 863. I take the law to be that a motion for summary judgment will not lie where entertaining such a motion would constitute a trial by affidavits of issues of fact; that where there are issues of fact, summary judgment cannot be granted...