Fogelson v. American Woolen Co., 61
| Decision Date | 10 November 1948 |
| Docket Number | No. 61,Docket 21090.,61 |
| Citation | 170 F.2d 660 |
| Parties | FOGELSON et al. v. AMERICAN WOOLEN CO, Inc., et al. |
| Court | U.S. Court of Appeals — Second Circuit |
Schwartz & Frohlich, of New York City (Louis D. Frohlich, Herbert P. Jacoby and Lawrence C. Gibbs, all of New York City, of counsel), for appellants.
Patterson, Belknapp & Webb, and Hays, Wolf, Schwabacher, Sklar & Epstein, all of New York City (Robert P. Patterson, Edwin D. Hays, Milton Klein, Ambrose L. Cram, Jr. and Jules H. Enrich, all of New York City, of counsel), for appellee.
Before L. HAND, Chief Judge, and SWAN and CHASE, Circuit Judges.
This is an action brought by two stockholders of American Woolen Company, Inc., against the corporation and four of its directors to enjoin the defendants from putting into effect a proposed "Retirement Income Plan" for the corporation's salaried employees.1 Federal jurisdiction rests upon diversity of citizenship.
The proposed plan, which is set forth in the complaint, contemplates that it shall be put into effect as of January 1, 1948, fixes the retirement age at 65, and sets up a percentage formula for determining the "retirement income" or pension to be paid annually by the corporation to an employee after his retirement. The percentage formula takes into account the employee's salary and length of service both before and after the effective date of the plan. The plan is to be administered by means of a pension trust and it is proposed to pay into this trust at once $4,657,292 to fund that part of the pensions based on past services of employees. The president of the corporation will be eligible for retirement on June 1, 1949, and under the plan will thereafter be entitled to receive an annual pension of $54,220 for life. The complaint alleges, upon information and belief, that such a pension is "excessive and unconscionable"; that the purpose of funding past service benefits by a single payment is to insure to the president that he will receive such pension irrespective of business vicissitudes which may hereafter overtake the corporation; and that the proposal to fund past service benefits by a single payment, instead of in instalments over a term of years, disregards the custom and usage of other companies with respect to retirement income plans, and disregards the inadequate cash position of the defendant which during 1947 obtained a bank loan of $10,000,000 that still remains unpaid. The prayer of the complaint is for an injunction against setting up the aforesaid Retirement Income Plan and from paying out to any pension trustee the said sum of $4,657,292.
After filing its answer denying the charges of improper motive and asserting that the directors promulgated the proposed plan in the exercise of their honest business judgment and that the majority stockholders, as well as the Commissioner of Internal Revenue, have approved it, the defendant moved under Rule 56 of the Federal Rules of Civil Procedure, 28 U.S.C.A. for summary judgment on the ground that the complaint fails to state a claim upon which relief can be granted because the plaintiffs seek to enjoin corporate action with respect to a matter of internal management upon which the business judgment of the directors is conclusive. The motion was heard upon the pleadings, together with supporting and opposing affidavits, and was granted, the district judge expressing the opinion that there was "no colorable reason to disturb the exercise by the directors of their judgment and discretion in the discharge of their duties." The sole issue upon the appeal is whether the case should have been sent to trial rather than decided summarily.
The appellants do not contend that the defendant cannot lawfully establish a retirement pension plan for its salaried employees; their objection is to three specific features of the proposed plan, which they assert will cause the plan, if put into effect, to constitute a waste of corporate assets. These features are: (1) the proposal to fund past service benefits by a single payment instead of by instalment payments extending over a term of years; (2) the failure to set a reasonable "ceiling" in dollars, limiting the maximum pension payable annually to any one individual; and (3) the proposal to pay the president so large an annual pension after his retirement.
Courts are properly reluctant to interfere with the business judgment of corporate directors; they do so only if there has been so clear an abuse of discretion as to amount to legal waste. See McQuillen v. Nat. Cash Register Co., 4 Cir., 112 F.2d 877, 884, certiorari denied 311 U.S. 695, 61...
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