Goldboss v. Reimann

• Decision Date: 04 August 1943
• Parties: GOLDBOSS v. REIMANN et al.
• Court: U.S. District Court — Southern District of New York

55 F. Supp. 811

GOLDBOSS v. REIMANN et al.

District Court, S. D. New York.

August 4, 1943.

Sabath, Perlman, Goodman & Rein of Chicago, Ill., and Samuel L. Chess, of New York City (Samuel L. Chess, of New York City, Theodore E. Rein, of Chicago, Ill., and Murray Ratner, of New York City, of counsel), for plaintiff.

Root, Clark, Buckner & Ballantine, of New York City (Arthur A. Ballantine, of New York City, of counsel), for defendants Lawrence W. Schmidt and others.

Parker & Duryee, of New York City, for defendant Quarterly Income Shares, Inc.

BRIGHT, District Judge.

The defendants Lawrence W. Schmidt, Bernard E. Lawson, Ross Beason, Maryland Sponsers, Inc., Administrative and Research Corporation (New York) and American Depositor Corporation who, with the defendant Quarterly Income Shares, Inc., are the only defendants served with process or who have voluntarily appeared herein, move under Rule 56(b) of the Rules of Civil Procedure, 28 U.S.C.A. following section 723c, for summary judgment in their favor, alleging that there is no genuine issue as to any material fact, that the second amended complaint fails to state a claim upon which relief can be granted, that the stockholders of Quarterly Income Shares, Inc. (for whose benefit this action is purportedly brought) ratified the contracts which it is alleged were improperly entered into, that plaintiff by reason of her ratification is estopped from maintaining this action, and that the six year statute of limitations is a complete bar. Plaintiff in a separate motion seeks under Rule 34 a discovery and inspection, and under Rule 30 for an examination of the defendants.

A motion for summary judgment, before issue joined, was made by the same defendants in January 1942. Plaintiff then requested a continuance of that motion in order to permit her, pursuant to Rule 56(f), to take the testimony of defendants or others to present facts to justify her position and to oppose defendants' motion. An order was then made, striking out portions of the amended complaint, denying defendants' motion for summary judgment without prejudice to a renewal thereof after issue joined and after plaintiff had had a fair opportunity to take depositions and make discovery; but it was provided that such procedure must be promptly and diligently conducted by her. 44 F.Supp. 756.

After the entry of that order, a second amended complaint was filed on March 20, 1942 and the answer thereto of the moving defendants was filed on April 13, 1942. On May 9, 1942, a stipulation was entered into between the parties under which defendants agreed to produce and permit plaintiff to inspect and copy all books, records, financial statements, etc. which might be called for by plaintiff, insofar as they were in the possession or control of the respective defendants and represented evidence material to any matter involved in the action and were not privileged; and if at any time during the discovery it appeared that it could not proceed pursuant to the agreement, the stipulation would not prejudice and the rights of either party would be determined as if no stipulation had been entered into. The defendants' motion now before the court was noticed for October 27, 1942, and the plaintiff's for March 19, 1943.

The action is a derivative one, brought by a stockholder, owning thirty shares of common stock of the defendant Quarterly Income Shares, Inc., acquired on January 16, 1934, on behalf of herself and all other owners and holders of such stock, similarly situated. The relief demanded is, (1) that defendants account for all their acts and doings in relation to that corporation, and particularly with reference to all financial matters appertaining thereto, including all fees, salaries, commissions and other compensation, received by them or derived from the sale, exchange or manipulation of its stock or of any securities owned by it; (2) for the appointment of a receiver and the stay of any and all actions or proceedings which might interfere with his management and possession; (3) for an injunction restraining defendants from selling or disposing or in any manner interfering with the property of Quarterly; (4) that the court direct the calling of a meeting of stockholders for the purpose of electing directors who will not be controlled by the defendants; and (5) for such other relief as equity may require.

The cause of action attempted to be alleged is not different from that which was considered in my previous opinion. It is based upon an alleged conspiracy between the defendants to cause Quarterly to be incorporated by them, and to cause themselves to be elected as officers and directors and in control thereof, without the necessity of any considerable investment of their personal funds, under a certificate of incorporation containing certain exculpatory clauses protecting the defendants against dealings between themselves and corporations controlled by them, pursuant to which conspiracy Quarterly entered into two contracts, one an underwriting agreement dated December 12, 1932 between it and Administrative and Research Corporation (Maryland) now the defendant Maryland Sponsers, Inc. and hereinafter called the Maryland Corporation, also controlled by the defendants, and two, a management advisory contract dated August 23, 1934 between Quarterly and Administrative and Research Corporation (New York), hereinafter called Administrative of New York, also controlled by them, for the purpose and under both of which the individual defendants received allegedly exorbitant and unconscionable salaries, fees and secret profits. As a part of the conspiracy, it is also alleged that the Maryland Corporation controlled by the individual defendants, contracted for the wholesale distribution of Quarterly shares with Ross Beason & Co. Inc. and Ross Beason & Company of California, both organized by the defendant Ross Beason, and in which he was a majority stockholder, and with Smith, Burris & Co. Inc., of which Cedric H. Smith was an officer, and which three last mentioned corporations owned all or practically all of the capital stock of the Maryland Corporation and wholesaled said shares to retail brokers for resale to the public. It is further claimed that the defendants made false and misleading representations that the Maryland Corporation was not controlled by or under common control with Quarterly, that no remuneration would be paid to its officers and directors and that in the judgment of the Board of Directors of Quarterly, the management contract of 1934 with Administrative of New York would be advantageous and desirable, the cost of such service would be limited, and the basis of compensation would be an incentive to preserve and increase the asset value, and that the service corporation was one in which the board had complete confidence. It is also charged that the defendants did not make a full and honest disclosure of the facts at the time when the management and advisory contract was authorized; that although they stated no remuneration was paid to officers and directors of Quarterly, yet provision for such payment was provided for in the management contract with Administrative of New York by which that corporation would pay such remuneration.

It will thus be seen that the second amended complaint is based upon an alleged conspiracy, consummated by the two contracts mentioned, and what the defendants did under them; it being claimed that these agreements were made by the defendants with themselves without an adequate revelation of the facts to the stockholders, that by their intercorporate and interlocking affiliations, they were enabled to and did make profits in matters in which they were charged with a fiduciary relationship, and in matters which could just as well have been handled without the intervention of the contracts, because the same individuals in each corporation conducted the affairs of all.

As a partial defense, the moving defendants plead that the Maryland Corporation which, prior to December 1932 had been engaged in the business of sponsoring and creating so-called investment trusts and distributing their shares to the investing public, in that month sponsored the incorporation of Quarterly for the purpose of selling and distributing its shares which would represent an investment having some of the features of fixed trusts, but being in certain respects an improved and better kind of investment; that there were inserted in the certificate of incorporation provisions expressly authorizing Quarterly to enter into contracts with the Maryland Corporation for the sale and distribution of the capital stock of Quarterly, and that the validity of such contracts should not be affected by the fact that the directors or officers of Quarterly were directors or officers or otherwise interested in the Maryland Corporation; that by the underwriting agreement of December 12, 1932, the Maryland Corporation was to receive as commission on sales nine and one-half per cent. of the net asset value of the stock sold, which was equivalent to approximately eight and two-thirds per cent. of the selling price, of which the Maryland Corporation actually received as its gross share about one and one-sixth per cent., retailers received five per cent., and the wholesalers Smith Burris & Company and the two Beason Corporations two and one-half per cent; that the sale and distribution of the stock were terminated on February 28, 1935, and there were sold 25,800,000 shares to more than thirty-one thousand investors, for which Quarterly received in excess of $32,000,000, the Maryland Corporation $489,000, the wholesalers $862,000, and the retailers about $1,790,000, all of which moneys were received more than six years prior to the institution of this action; that Quarterly took steps which were reasonably calculated to inform each of the persons who purchased the stock, of the material facts with reference to...