Harris v. Carter
| Decision Date | 03 February 1989 |
| Docket Number | No. 8768,8768 |
| Citation | 582 A.2d 222 |
| Parties | Fed. Sec. L. Rep. P 95,254, 16 Del. J. Corp. L. 785 Michael R. HARRIS, Plaintiff, v. Donald J. CARTER, Frederic E. Mascolo, Robert Lee Ager, Tom Devaney, Jean Demunck, Paul Johnson, Frank Jeffett, Murphy Martin, William J. Hendrix and Atlas Energy Corporation, Defendants. Civ. A. . Submitted: |
| Court | Court of Chancery of Delaware |
ALLEN, Chancellor.
Two distinct groups of defendants have moved to dismiss the Amended and Supplemental Complaint in this action, ("amended complaint"). They assert (1) that the action was not properly instituted as the derivative action it purports to be (2) that the amended complaint does not state a claim upon which relief may [16 Del. J. Corp. L. 789] be granted and (3) with respect to certain defendants, that the court lacks personal jurisdiction over them.
Certain of the legal issues presented are novel questions under our law and they arise in a case of some factual and procedural complexity.
For the reasons that follow I conclude that the relevant pleadings excuse pre-suit demand upon the board of directors of Atlas Energy Corporation, the corporation on whose behalf the amended complaint is said to be filed. Thus I conclude that the motion to dismiss for failure to comply with the requisite of Rule 23.1 must be denied (see pp. 228-232). I conclude as well that the amended complaint does state a claim upon which relief may be granted against those defendants who are alleged to have negligently sold control of Atlas to a buyer who allegedly looted the corporation (see pp. 232-236). Lastly I conclude that all defendants have properly been served with process pursuant to our director consent statute, 10 Del.C. § 3114, and thus the motion to dismiss for want of personal jurisdiction should be denied (see p. 232).
The litigation arises from the negotiation and sale by one group of defendants (the Carter group 1) of a control block of Atlas stock to Frederic Mascolo; the resignation of the Carter group as directors and the appointment of the Mascolo defendants 2 as directors of Atlas, and, finally, the alleged looting of Atlas by Mascolo and persons associated with him. Insofar as the Carter defendants are concerned it is alleged that they were negligent and that their negligence breached a duty that, in the circumstances, they owed to the corporation. It is not claimed that they stand as an insurer of the corporation generally, but that the specific circumstances of their sale of control should have raised a warning that Mascolo was dishonest. The claims against Mascolo are more conventional: effectuation of self-dealing transactions on unfair terms. The Mascolo group is principally Messrs. Mascolo and Ager. They are two of the four alleged co-conspirators [16 Del. J. Corp. L. 790] who orchestrated the wrongs alleged. The other two named co-conspirators--a convicted felon named Riefler and a lawyer named Beall--were not named as defendants since they are not amenable to service of process in the jurisdiction.
Plaintiff is a minority shareholder of Atlas. He brought this action after the change in control from the Carter group to the Mascolo group had occurred. The action was brought originally as a class action to enjoin a transaction that plaintiff alleged would constitute a breach of the directors' fiduciary duty; to rescind certain transactions effected by the Mascolo group; and, to collect damages from the Mascolo group. In addition the original complaint sought to collect damages from the Carter defendants for an alleged breach of a duty of care to minority shareholders in connection with the sale of control of Atlas to Mascolo.
The transaction that was sought to be enjoined in the original pleading was abandoned without any judicial action. Thereafter, following discovery, plaintiff filed the amended complaint. The amended complaint for the first time purported to assert claims derivatively on behalf of Atlas.
In general the claims asserted against the Carter group in the amended complaint are of two types. More significantly it is alleged that the Carter group, qua shareholders, owed a duty of care to Atlas to take the steps that a reasonable person would take in the circumstances to investigate the bona fides of the person to whom they sold control. 3 It is said that the duty was breached here, and that if it had been met the corporation would have been spared the losses that are alleged to have resulted from the transactions effected by the board under the domination of Mascolo. There is no allegation that the Carter group conspired with Mascolo. Indeed the Carter group did not sell for cash but for shares of common stock of a corporation that plaintiff claims was a worthless shell and which was later employed in the transactions that are said to constitute a looting of Atlas. Thus, accepting the allegations of the complaint, they suggest that the Carter group was misled to its own injury as well as the injury of Atlas and its other shareholders. This claim was set forth, [16 Del. J. Corp. L. 791] albeit as a direct claim and perhaps less elaborately, in the original pleading.
The second claim against the Carter defendants relates to a $100,000 payment made by Atlas after the change in control. It is alleged this amount was paid to a broker who acted for the Carter group in connection with the sale of its Atlas stock. It is thus said to constitute a corporate waste. 4
With respect to the second group of defendants--the Mascolo defendants--the amended complaint alleges a series of complex corporate transactions effectuated once Mascolo took control of Atlas, and claims that those transactions wrongfully injured Atlas (see p. 226 infra ).
The amended complaint alleges that demand upon the board of directors pursuant to Rule 23.1 of our rules of procedure is excused in this instance because:
Atlas' directors at the time this action was instituted were neither disinterested nor independent. They were all nominees of the Mascolo group.
It alleges that following the filing of the original complaint Mascolo "transferred [his] Atlas stock to [one] Devaney ... placing Devaney and/or his nominees in control of Atlas" p 32(a). It does appear to allege that Devaney later caused a self-dealing transaction to be done, 5 but does not allege that it was on terms that were unfair to the corporation. Thus the pleadings refer to a change in board control between the date of the filing of the original complaint and the date of the filing of the amended complaint. Moreover, the amended complaint contains no allegations that demand on the new (Devaney controlled) board would be futile.
The amended complaint seeks appointment of a receiver, rescission, and damages.
The facts as alleged are involved. As alleged they appear as follows.
[16 Del. J. Corp. L. 792] The Company
Atlas Energy Corporation is a Delaware corporation which, before Mascolo acquired control of it, engaged in oil and gas exploration and production. It conducted its business primarily through the acquisition of oil and gas properties which were resold to drilling programs. It then acted as sponsor and general partner of the drilling programs.
The Carter group, which collectively owned 52% of the stock of Atlas, and Mascolo entered into a Stock Exchange Agreement dated as of March 28, 1986. That agreement provided that the Carter group would exchange its Atlas stock for shares of stock held by Mascolo in a company called Insuranshares of America ("ISA") and contemplated a later merger between ISA and Atlas. ISA was described in the preamble to the Stock Exchange Agreement as "a company engaged in the insurance field by and through wholly-owned subsidiaries." The Stock Exchange Agreement contained representations and warranties by Mascolo to the effect that ISA owned all of the issued and outstanding capital stock of Pioneer National Life Insurance Company and Western National Life Insurance Company. It is alleged that those representations were false. ISA did not own stock in either company and had no insurance subsidiaries.
In the course of negotiations, the Mascolo group furnished the Carter group with a draft financial statement of ISA that reflected an investment in Life Insurance Company of America, a Washington corporation ("LICA"). No representation concerning LICA was made in the Stock Exchange Agreement, however. The existence of a purported investment by ISA in LICA was fictitious. It is alleged that the draft ISA financial statement was sufficiently suspicious to put any reasonably prudent business person on notice that further investigation should be made. Indeed Atlas' chief financial officer analyzed the financial statement and raised several questions concerning its accuracy, none of which were pursued by the Carter group.
The Stock Exchange Agreement further provided that Mascolo would place in escrow 50,000 shares of Louisiana Bankshares Inc. 8% cumulative preferred stock, $10 par value. It was agreed that if Atlas consummated an exchange merger for all of the outstanding common stock of ISA on agreed upon terms within 365 days of the date of the Stock Exchange Agreement, the bank stock would be [16 Del. J. Corp. L. 793] returned to Mascolo. If no merger took place within...
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