Duane v. Altenburg

• Decision Date: 10 January 1962
• Docket Number: No. 13402.,13402.
• Citation: 297 F.2d 515
• Parties: James J. DUANE, Jr., et al., Plaintiffs-Appellants, v. Walter P. ALTENBURG et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

297 F.2d 515 (1962)

James J. DUANE, Jr., et al., Plaintiffs-Appellants, v. Walter P. ALTENBURG et al., Defendants-Appellees.

No. 13402.

United States Court of Appeals Seventh Circuit.

January 10, 1962.

Sidney L. Garwin, New York City, Richard Orlikoff, Chicago, Ill., Norman Annenberg, New York City, for appellant.

Richard J. Walsh, Robert O. Case, Chicago, Ill., Norville, Walsh & Case, Chicago, Ill., of counsel, for appellees Altenburg and others.

William J. Friedman, John W. Day, Chicago, Ill., Friedman, Mulligan, Dillon & Urist, Chicago, Ill., of counsel, for appellee Webcor, Inc.

Before HASTINGS, Chief Judge, and CASTLE and KILEY, Circuit Judges.

CASTLE, Circuit Judge.

Plaintiffs-Appellants, James J. Duane, Jr. and Margaret W. Duane, doing business as James J. Duane & Co., bring this appeal from an order of the District Court which granted motions made by the defendants-appellees¹ to dismiss plaintiffs' complaint and amended complaint. This diversity action is a stockholders' derivative suit brought by plaintiffs as stockholders of Webcor, Inc., against the defendants to recover for alleged wrongs committed by them against Webcor.

Except for allegations of plaintiffs' ownership of stock in Webcor, that plaintiffs are residents of New York, are general partners doing business as James J. Duane & Co., and bring the action derivatively, all allegations of the complaint and amended complaint are made on information and belief.

The complaint alleges purchases and sales of products between Webcor and Dormeyer Corporation and the purchase of certain real property by Webcor from Dormeyer. It seeks that defendants be required to account to Webcor for their profits and Webcor's damages and that the real estate purchase be cancelled and rescinded. The amended complaint² adds a Count II concerning Webcor's purchase of the stock of Dormeyer for 290,000 shares of Webcor common stock, seeks to enjoin such transfer, to require a similar accounting to Webcor by defendants, and that a trust for the benefit of Webcor be impressed upon the stock of Dormeyer.

The complaint states that plaintiffs are informed and believe that defendant Haffa and his family own 20% of Webcor's outstanding stock, the remainder being widely held by more than 3000 stockholders, and that by reason of such stock ownership Haffa dominates and controls Webcor, chooses its officers and directors, who, at the times mentioned were subservient to the wishes and directions of Haffa, were controlled and dominated by him and determined the policies of Webcor in order to benefit Haffa without regard to the best interests of Webcor; that the majority of Webcor's directors are dependent upon Haffa for their tenure and for their salaries either as employees of Webcor or employees of Dormeyer, a corporation owned by Haffa and his family, and another director is president of a company which does business with corporations owned and controlled by Haffa and his family and that in or about 1955 Haffa entered into a plan and conspiracy with the then directors, joined in by defendants who thereafter became directors, to permit Haffa, his family and corporations they owned and controlled to buy from and sell to Webcor properties and products to the profit of Haffa, his family and corporations controlled by them, and to the detriment of Webcor.

After setting forth these preliminary allegations the complaint charges that in 1958, Haffa caused the board of directors to authorize the purchase of certain realty referred to as the Bellwood-Berkeley property from Dormeyer for $725,000.00 and such purchase was made by Webcor on August 25, 1958; that the fair market value of said property on that date "did not exceed $180,000.00". It is further charged that during the years 1956-1959, Webcor purchased materials, services and equipment in the approximate amount of $3,878,000.00 from corporations owned and controlled by the Haffa family "at excessive prices" and which "could and should have been obtained by Webcor at prices far below the prices paid"; that during the same period Webcor sold to Dormeyer and other corporations owned and controlled by Haffa and his family materials and equipment in the approximate amount of $1,855,000.00 and that said sales "were made at inadequate prices." Count II charges that pursuant to the plan and conspiracy previously mentioned Haffa caused Webcor in November 1960 to purchase all of the stock of Dormeyer from Haffa, his wife and sisters, for 290,000 shares of Webcor computed at $12.50 per share, a total acquisition price of $3,625,000.00, although Dormeyer since 1955 had constantly and consistently lost money, had an earned surplus deficit of $529,495.00, and a carry forward loss of $1,875,000.00; that the purchase price paid by Webcor for the Dormeyer stock "is excessive" and "a fair and adequate price for all of the Dormeyer stock is not in excess of $2,000,000.00"; and that the transaction is illegal as effecting a corporate merger in violation of Ill.Rev. Stat.1959, ch. 32, § 157.61 et seq.

It is alleged that because of their knowledge of and participation in the transactions alleged, and their control and domination by Haffa, a demand upon the directors of Webcor to bring the action would be futile and is therefore excused, and that under the law of Illinois demand upon the stockholders of Webcor to bring the action is not required or, in any event, is excused as being futile under the circumstances alleged.

Defendants' motions to dismiss assert, in substance, that the complaint fails to state a claim upon which relief can be granted in that it fails to show a conspiracy among the directors of Webcor, or their or Webcor's domination by Haffa or by Haffa and his family; fails to show that any of the transactions referred to were fraudulent, improper, or contrary to the best interests of Webcor; and fails to allege facts which would excuse failure to make application to the directors and to the stockholders for redress of the alleged grievances or for action in conformity with plaintiffs' wishes.

After hearing oral argument on the motions to dismiss the District Court entered an order "that the defendants' motions to dismiss Counts I and II are granted, and the plaintiffs' complaint and amended complaint are hereby dismissed". It is from this order that plaintiffs appeal.

Plaintiffs' assertions that the trial court erred are based on their contentions that under Illinois law they are entitled on the circumstances alleged, to maintain a stockholders' derivative suit without making a demand either upon the directors or stockholders of Webcor; that the allegations of the complaint are sufficient to state claims upon which relief can be granted for fraud consisting of violations of fiduciary duty; and that a summary judgment was granted despite the existence of genuine issues of material facts.

Both plaintiffs and defendants assume that the District Court's disposition of the matter involved the grant of a summary judgment for the defendants with respect to the plaintiffs' alleged claim covering the Bellwood-Berkeley property transaction. But there is nothing in the record to so indicate. The District Court did not enter any judgment for defendants. The only order it entered was an order dismissing the complaint. And it is only by treating plaintiffs' appeal as an election by them to stand on their complaint, waiving request for leave to amend, that we can regard the order appealed from as a final appealable order. Asher v. Ruppa, 7 Cir., 173 F.2d 10.

Affidavits were presented to the District Court. But these affidavits relate to factors such as the...