Gostin v. Nelson
| Decision Date | 18 December 1962 |
| Docket Number | Civ. A. No. 2123. |
| Parties | Irving GOSTIN, Plaintiff, v. Jules NELSON and Josef Hoffman, d/b/a Merit Associates, and Individually, Defendants. |
| Court | U.S. District Court — District of Delaware |
Irving Gostin, plaintiff, pro se.
Jules Nelson, defendant, pro se.1
Plaintiff, Gostin, sued defendants Nelson and Hoffman, doing business as Merit Associates, and individually, for breach of contract. Plaintiff has moved for an interlocutory summary judgment adjudicating defendants' liability, leaving open for later determination the amount thereof. The motion is based upon the verified complaint, plaintiff's affidavit, and a certified copy of portions of the record in Gostin v. Nelson et al., in the Supreme Court of New York, Bronx County. Nelson opposes the motion by his verified answer and an affidavit.
Plaintiff is a citizen of New York, and Nelson is a citizen of Delaware. The complaint alleges that Hoffman is a citizen of Florida; the answer alleges that he is deceased. Neither Hoffman nor Merit Associates, as such, has been served with process. Neither are indispensable parties. The action will be considered as if Nelson were the sole defendant. The amount in controversy exceeds, exclusive of interest and costs, the sum of $10,000.
Jurisdiction exists under 28 U.S.C. § 1332(a) (1).
The verified complaint alleges: Prior to December 8, 1955 plaintiff and Nelson each owned 50% of the stock of Supermarket Consultants, Inc., a New York corporation. On December 8, 1955 Nelson, in a letter to plaintiff, acknowledged that he was holding as trustee for the plaintiff one-half of his (Nelson's) 50% interest in a partnership, Merit Associates, in which Hoffman held the other 50% interest, and agreed that a Pennsylvania corporation would be formed to take over the assets of the partnership, and that Supermarket Consultants, Inc., would receive one-half of the issued stock of the Pennsylvania corporation; that is, the shares issuable to plaintiff and Nelson. Hoffman also so agreed although his name does not appear upon the letter of December 8, 1955. Subsequently, Merit Associates, Inc., was organized under the laws of Pennsylvania, acquired the partnership assets, and Nelson and Hoffman each received 50% of its stock.
The complaint charges that the defendants breached their contract in two respects: first, by refusing, willfully and without cause, to assign Nelson's stock interest in the Pennsylvania corporation to Supermarket Consultants, Inc.; and second, by assigning to a corporation jointly owned or controlled by defendants, in excess of $100,000 due to the Pennsylvania corporation from Northern Industrial Chemical Company, a Massachusetts corporation, under a contract which it had made with the partnership.2
Lastly, the complaint alleges that in litigation between the same parties in the Supreme Court of New York a judgment and findings of fact and conclusions of law were entered which conclusively establish most of the allegations of the complaint.3
The complaint prays for (a) an accounting of profits received by Nelson from the partnership from December 8, 1955 until the date of its winding up; (b) an accounting by Nelson of all monies obtained by him by reason of his stock interest in the Pennsylvania corporation; (c) an adjudication that Nelson holds in trust for the benefit of Supermarket Consultants, Inc., one-half of the monies which the accounting discloses to be owed by him; (d) payment of damages by Nelson in the amount of $100,000, or such amount as to the Court seems just, to Supermarket Consultants, Inc., to compensate it for the conversion by Nelson of the stock of the Pennsylvania corporation and of funds from Northern Industrial Chemical Company, Inc.; and (e) such other and further relief as appears to be proper.
Preliminarily, consideration must be given to the theory of the complaint. The relief prayed for is intended to inure directly to Supermarket Consultants, Inc. That company is referred to on p. 2 of plaintiff's affidavit of October 20, 1961 as the "third party beneficiary" of the contract between Nelson and the plaintiff. If the relief sought should be granted, plaintiff would benefit only indirectly by reason of his stock interest in Supermarket Consultants, Inc. In short, the relief prayed for may be appropriately granted only in a stockholders derivative action.
There are at least two reasons why the action cannot be so considered. In the first place, the complaint fails to contain the allegations required by F.R. Civ.P. 23(b) for the maintenance of such an action. Secondly, Supermarket Consultants, Inc., the direct beneficiary of the relief sought, has not been named as a defendant. In a stockholders derivative action, a joinder of the corporation for whose benefit the suit is brought is essential. 13 Fletcher's Corporations § 5997 (Rev. Ed. 1961).
Despite these deficiencies which foreclose derivative relief, no reason appears why the action cannot be viewed as one in which plaintiff seeks a money judgment in his own favor. After all, the complaint alleges that defendants made a contract with plaintiff which they breached. The fact that Supermarket Consultants, Inc., was to be the immediate beneficiary of performance under the contract, may have given it the right to sue directly or have provided plaintiff with a remedy on its behalf. The possibility of these remedies, however, is not inconsistent with the existence of a remedy running to plaintiff individually when the contract was made with him and defendants' duty to him was violated. 13 Fletcher's Corporations §§ 5916, 5921 (Rev. Ed. 1961). The fact that derivative relief is prayed for is no bar to the granting of personal relief, if under the facts and the law plaintiff is entitled thereto. F.R.C.P. 54(c).
So that the question must be faced whether the record discloses any genuine issue as to a material fact, and if not, whether plaintiff is entitled, as a matter of law, to a judgment that defendant is liable to him. F.R.C.P. 56(c).
The verified answer filed by Nelson alleges in substance the following defenses:
1. The agreement sued upon is without consideration. The answer alleges that Nelson's assignment to the plaintiff of his partnership interest, his declaration of trust in favor of plaintiff with respect to that interest, his agreement to form a Pennsylvania corporation to take over the assets of the partnership and to issue one-half of the stock of the Pennsylvania corporation to Supermarket Consultants, Inc., were all based upon plaintiff's promise to transfer to him 50% of certain options to acquire the outstanding stock of Supermarket Toys, Inc., a New York corporation, and the plaintiff never carried out his part of the agreement.
2. The agreement sued upon cannot be enforced because Hoffman never agreed to it.
3. The defendants have been prevented from performing the agreement because no stock of the Pennsylvania corporation was issued to them, and counsel for the corporation has refused to permit such shares to be issued for the asserted reason that the corporation never received any consideration to support their issuance.
In addition to these specific defenses the answer denies generally that the contract between plaintiff and defendants was breached;4 that Nelson and plaintiff owned 50% of the stock of Supermarket Consultants, Inc.,5 that defendants assigned the proceeds of the Northern Industrial Chemical Company to a corporation owned or controlled by either of them,6 and that the findings of fact and conclusions of law of the Supreme Court of New York are conclusive with respect to the allegations of the answer alleging failure of consideration.
One further defense appears from a letter dated August 8, 1958 from Morris Stern, counsel and secretary of the Pennsylvania corporation, to Nelson, which is attached to Nelson's affidavit of November 15, 1961. The letter states in effect that Nelson and Hoffman agreed with a creditor of the partnership that no stock in the Pennsylvania corporation would be issued until such time as the indebtedness of the creditor had been paid, or in the alternative, if stock of the Pennsylvania corporation should be issued to Nelson, it would be immediately assigned by him to Hoffman. The contents of the letter were incorporated by reference in Nelson's affidavit.7
This is the second time that the rights of the parties under the contract of December 8, 1955 have been litigated. On November 27, 1957 plaintiff brought an action in the Supreme Court of New York, Bronx County, against Nelson and Hoffman doing business as Merit Associates. As in the instant case, Hoffman was not served and only Nelson defended.
The allegations of the complaint in New York, with inconsequential variations, were identical to those in the pending complaint. The New York complaint prayed for a judgment (1) directing defendants to specifically perform the agreement of December 8, 1956, (2) setting aside the assignment "of Nelson's interest in the Northern Industrial Chemical Company" contract to defendants' own controlled corporation, (3) directing Nelson to assign to Supermarket Consultants, Inc., his 25% interest of Merit Associates, the partnership, and the 25% interest therein which he held in trust for plaintiff, and (4) granting injunctive and general relief. Nelson's answer denied generally the allegations of the complaint. On April 14, 1958 the case was tried without a jury before The Honorable Henry Clay Greenberg, a Justice of the Supreme Court of New York. Both plaintiff and Nelson were represented by counsel.
On June 10, 1958 Judge Greenberg filed his oral opinion, findings of fact, conclusions of law, and judgment. In his oral opinion Judge Greenberg said:
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