In re Krause

Decision Date09 September 1988
Docket NumberBankruptcy No. 85-61962,Adv. No. 86-6032.
Citation114 BR 582
PartiesIn re James Darrel KRAUSE, Debtor. Darwin E. MILLER, individually, Plaintiff, and CLM Insurance Agency, Inc. an Indiana Corporation by Darwin E. Miller, Shareholder, Plaintiff, v. James Darrel KRAUSE, Defendant.
CourtU.S. Bankruptcy Court — Northern District of Indiana




David Foebler, Valparaiso, Ind., for plaintiff.

Roger Farley, Merrillville, Ind., for defendant.



I Statement of Proceedings

Darwin E. Miller, as the original and sole Plaintiff in this adversary proceeding, filed his initial complaint versus the Debtor, James Darrel Krause (hereinafter: "Defendant") on March 24, 1986, alleging that a certain indebtedness by the Defendant to the Plaintiff is nondischargeable pursuant to 11 U.S.C. ž 523(a)(2)(A) and ž 523(a)(6).

On June 24, 1986, the Defendant filed a Motion for Summary Judgment and Motion for Judgment on the pleadings. The Plaintiff filed his answer thereto on July 24, 1986, and the Defendant filed his reply on August 11, 1986.

On September 22, 1986, the Plaintiff filed his affidavit in opposition to the Defendant's motion.

On February 6, 1987, the Court issued its Memorandum Opinion and Order in which it treated the Defendant's motion for a judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c) as a motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6), and sustained the Defendant's motion, but gave the Plaintiff 20 days to plead over.

On February 26, 1987, the Plaintiff Miller individually and CLM Insurance Agency, Inc. (hereinafter: "CLM") by Darwin Miller, an alleged shareholder of CLM as co-plaintiff, filed their first amended complaint praying that the alleged indebtedness of the Defendant to the Plaintiffs is nondischargeable pursuant to 11 U.S.C. ž 523.1 Although, the amended complaint is in one legal paragraph, the various rhetorical paragraphs make allegations under ž 523(a)(2)(A), (4), and (6).

The Plaintiffs allege in their amended complaint that CLM was illegally and improperly dissolved by the Defendant as president and chairman of the Board of CLM, which precluded CLM from bringing this action directly.

On March 12, 1987, the Defendant filed his motion to dismiss the Plaintiffs' amended complaint pursuant to Fed.R.Civ.P. 12(b)(2) and 12(b)(6), a motion for a judgment on the pleadings and a motion to strike.

On April 17, 1987, the Plaintiffs filed their answer to the Defendant's motion for judgment on the pleadings and to dismiss. A hearing was held on said motions on July 7, 1987, wherein arguments were heard and the Court took said motions under advisement, on the motion to dismiss and the motion for judgment on the pleadings. The Plaintiffs stipulated that the Defendant's motion to strike should be granted as to rhetorical paragraph 54 of the amended complaint and it is, SO ORDERED.

The Court takes judicial notice of the record in the Debtor's main case, and finds that the Debtor received his general discharge in bankruptcy pursuant to 11 U.S.C. ž 727 on June 6, 1986, or prior to the filing of the amended complaint on February 26, 1987, in which CLM was purportedly added as a co-plaintiff.


Conclusions of Law and Discussion


Motion to Dismiss Plaintiff CLM for Improper Joinder

The Defendant asserts in his motion to dismiss filed March 12, 1987, that the Plaintiff Miller has improperly joined the alleged co-plaintiff CLM without seeking court approval. The Defendant also asserts that CLM is not a creditor of the Defendant and therefore this Court lacks jurisdiction over CLM. Fed.R.Civ.P. 12(b)(2).

In addition, the Defendant's motion asserts that the Plaintiff Miller cannot bring this action on behalf of the Plaintiff CLM since the Plaintiff Miller is not a stockholder, officer or director of said corporation.

Federal Rule of Civil Procedure 12(b)(2) provides that the defense of lack of jurisdiction over the person can be raised by motion. It should also be noted that pursuant to Fed.R.Civ.P. 12(h)(3), that whenever it appears by suggestion of the parties or otherwise that the Court lacks jurisdiction of the subject matter, the Court may dismiss the action.

Although not referred to by the Defendant in his motion, Fed.R.Civ.P. 24 governing intervention also applies to the putative co-plaintiff CLM's attempt to be added to this adversary proceeding as a co-plaintiff with the sole original Plaintiff Miller, by virtue of the amended complaint filed February 26, 1987. This "amended" complaint is not simply to amend the original complaint filed solely by the Plaintiff Miller in his individual capacity pursuant to Fed. R.Civ.P. 15. As to the alleged co-plaintiff CLM, the amended complaint is an attempted initiation of an original action by CLM as intervenor Plaintiff versus the Defendant on the date of the filing of the purported amended complaint, or February 26, 1987.

Federal Rule of Civil Procedure 24(c), provides that a person desiring to intervene shall serve a motion to intervene upon the parties as provided by Rule 5 stating the grounds therefore, and shall be accompanied by a pleading setting forth the claims or defense for which intervention is sought. This was clearly not done here. Thus, the addition of the purported co-plaintiff CLM to the amended complaint prior to service of a motion to intervene accompanied by a proposed intervenor's complaint was procedurally defective and technically incorrect. The courts have varied in their approach when Fed.R.Civ.P. 24(c) is not complied with procedurally. Some courts strictly construe the requirements of Fed.R.Civ.P. 24(c) while other courts have not required strict compliance with the literal requirements thereof. See, Discussion, 26 Fed. Proc.Lawyer Ed. ž 370, Parties.

In the interest of judicial economy and to avoid the duplication of time and expense by sustaining the Defendant's motion, and in requiring CLM to properly proceed pursuant to Fed.R.Civ.P. 24(c), the Court will treat the amended complaint of February 26, 1987 as it relates to CLM only as a motion by CLM to intervene as co-plaintiff on that date, and will rule thereon.

The Plaintiff Miller alleges at rhetorical paragraph 37, that the Agreement entered into between the Plaintiff Miller and the Defendant on June 1, 1982 (Rhetorical para. 17, Exhibit # 1), whereby the Defendant promised to reconvey the stock in CLM Corp. is a valid and enforceable security agreement pursuant to I.C. XX-X-X-XXX, that the Plaintiff has the status as a secured creditor (Rhetorical paras. 34-39), and thus, the Plaintiff Miller has property rights in the 75 shares of stock transferred by the Plaintiff Miller to the Defendant pursuant to said contract.

Thus, the Plaintiff by his own pleading admits that he is not a true stockholder of CLM, but that he has a security interest in 75 shares of stock of CLM.

At rhetorical paragraph 4 of the amended complaint, the "plaintiff" (apparently the Plaintiff Miller, though there are two co-plaintiff's in the caption to the amended complaint) alleges that he is bringing this action individually, and on behalf of CLM, while at rhetorical paragraph 5 the Plaintiff Miller alleges he was a stockholder at the time of the transaction of which he complains and/or had the equitable rights of stockholder status.

The initial question thus comes down to what "interest", if any, the Plaintiff Miller has in the CLM stock, and if he had an interest therein, whether that interest vested in the Plaintiff Miller the requisite standing to bring this adversary proceeding on behalf of the proposed intervenor-Plaintiff CLM as an alleged "shareholder" of CLM pursuant to Fed.R.Civ.P. 23.1.

The Plaintiff Miller cannot have it both ways. He was either a stockholder of CLM, or he was not a stockholder of CLM at the time of the transactions of which he complains. His own amended pleading asserts a security interest in the stock (rhetorical paras. 34-39), and yet he alleges that he was either a shareholder at the time of the transactions of which he complains and/or had the equitable right to shareholder status (rhetorical para. 5).

Pursuant to Fed.R.Civ.P. 23.1, which was added to the Federal Rules of Civil Procedure in 1966, as made applicable by Bankr.R. 7023.1, "Derivative Proceedings By Shareholders", a derivative action may be brought by one or more stockholders to enforce a right of a corporation, the corporation having failed to enforce a right which may be properly asserted by it. That Rule also provides that the complaint shall be verified, and allege that the Plaintiff was a shareholder at the time of the transaction of which he complains, that the action is not a collusive one to confer jurisdiction on the court, and also allege with particularity the efforts, if any, made by the Plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary from the shareholders, and the reasons for his failure to obtain the action or for not making the effort. The amended complaint is verified and asserts no collusion to confer jurisdiction (rhetorical para. 6).

The term "derivative action" which defines the scope of Fed.R.Civ.P. 23.1 applies only to those actions in which the right claimed by the shareholder is one the corporation itself could have enforced in court. Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984).

A claim pressed by stockholders against directors is not their own, but that of the corporation; the corporation is the real party in interest, the stockholder being at best a nominal plaintiff, and the proceeds belong to the corporation and is bound by the suit. Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970).

A shareholder has no standing to bring a civil action at...

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