In re Penn Central Securities Litigation

• Decision Date: 03 December 1973
• Docket Number: M.D.L. Docket No. 56,Civ. A. No. 71-2838.
• Citation: 367 F. Supp. 1158
• Parties: In re PENN CENTRAL SECURITIES LITIGATION. Byron WILLIAMS et al. v. PENNSYLVANIA COMPANY et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

367 F. Supp. 1158

In re PENN CENTRAL SECURITIES LITIGATION.

Byron WILLIAMS et al. v. PENNSYLVANIA COMPANY et al.

M.D.L. Docket No. 56, Civ. A. No. 71-2838.

United States District Court, E. D. Pennsylvania.

November 19, 1973.

As Amended December 3, 1973.

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Daniel L. Penner, Brooks, Tarlton & Gilbert, Arch B. Gilbert, Ben A. Douglas, Fort Worth, Tex., for plaintiffs.

Pelino, Wasserstrom, Chucas & Monteverde, Tom P. Monteverde, Philadelphia, Pa., O'Melveny & Myers, Warren Christopher, Donald M. Wessling, Los Angeles, Cal., for Pennsylvania Co.

Montgomery, McCracken, Walker & Rhoads, Joseph W. Swain, Jr., Philadelphia, Pa., for Peat, Marwick, Mitchell & Co.

Weil, Gotshal & Manges, Dennis J. Block, Peter Gruenberger, Neal A. Schwarzfeld, Peter D. Standish, New York City, for Glore Forgan Wm. R. Staats, Inc., Glore Staats Corp. and DuPont-Glore-Forgan, Inc.

Hall, Dickler & Howley, Milford Fenster, New York City, for Glore Forgan Staats & Co., and others.

LaBrum & Doak, Edward C. German, Philadelphia, Pa., for David C. Bevan.

Bolger & Picker, Steven R. Waxman, Philadelphia, Pa., for Stuart T. Saunders.

Saul, Ewing, Remick & Saul, Miles H. Shore, Philadelphia, Pa., for William R. Gerstnecker.

William P. Fonville, Dallas, Tex., Joseph R. Austin, Antonio Rossmann, Tuttle & Taylor, Inc., Los Angeles, Cal., Paul J. Bankes, Jr., Zink, Owens & Shinehouse, Philadelphia, Pa., for Great Southwest Corp.

Shearman & Sterling, New York City, for First National City Bank.

James W. Adelman, Adelman & Lavine, Philadelphia, Pa., for E. Clayton Gengras.

Lewis H. Van Dusen, Jr., Drinker Biddle & Reath, Philadelphia, Pa., for Paul A. Gorman and R. Stewart Rauch.

William L. Matz, Philadelphia, Pa., for Chase Manhattan Bank.

Seymour I. Toll, Philadelphia, Pa., for Charles Hodge.

Charles P. Storey, Storey, Armstrong & Steger, Dallas, Tex., for Angus Wynne, Sr.

John L. Hauer, Akin, Gump, Strauss, Hauer & Feld, Dallas, Tex., for Angus Wynne, Jr.

A. M. Herman, Brown, Herman, Scott, Dean & Miles, Fort Worth, Tex., for Amon Carter.

Patrick E. Higginbotham, Coke & Coke, Dallas, Tex., for Robert H. Stewart III.

Robert S. Travis, Cantey, Hanger, Gooch, Cravens & Munn, Fort Worth, Tex., for Murray Kyger.

J. Allen Dougherty, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for Murray Kyger and Robert H. Stewart III.

Michael I. Miller, Terry F. Moritz, Isham, Lincoln & Beale, Chicago, Ill., for James W. Pope and Charles S. Vrtis.

David Berger, David Berger, P. A., Philadelphia, Pa., Alfred S. Julien, Julien, Glasser, Blitz & Schlesinger, New York City, Liaison Counsel for plaintiffs.

Lewis H. Van Dusen, Jr., Drinker Biddle & Reath, Philadelphia, Pa., Liaison Counsel for defendants.

OPINION AND ORDER

JOSEPH S. LORD, III, Chief Judge.

Intervenor-plaintiffs Lawler and Foster ("plaintiffs"), who have filed a Second Amended Complaint on behalf of all plaintiffs, are shareholders of Great Southwest Corporation ("GSC").¹ Plaintiffs allege that defendants, by virtue of numerous acts and omissions, have violated §§ 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U. S.C. §§ 78j and n and Rules 10b-5 and 14a-9 promulgated by the Securities and Exchange Commission under those sections, 17 C.F.R. 240.10b-5 and 17 C.F.R. 140.14a-9, as well as § 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and §§ 4 and 8 of the Clayton Antitrust Act, 15 U.S.C. §§ 15 and 19. They have also brought state law claims under the doctrine of pendent jurisdiction. Some of the claims asserted by plaintiffs are brought derivatively on behalf of GSC; others, for which they have moved for a class action determination, are brought by plaintiffs as purported representatives of a class of GSC shareholders.

This complaint is now the subject of several motions, either filed or joined in by most defendants, to dismiss pursuant to F.R.Civ.P. 12(b)(6) and 12(b)(1), to strike pursuant to F.R.Civ.P. 12(f) and for a more definite statement under F. R.Civ.P. 12(e) and Local Rule 45 of this court. Certain defendants have also moved to dismiss for lack of jurisdiction over the person, improper venue and insufficiency of process, F.R.Civ.P. 12(b)(2), 12(b)(3) and 12(b)(4).

The defendants named in the complaint are: Pennsylvania Company ("Pennco"), a wholly-owned subsidiary of the Penn Central Company; GSC, a Texas-based land development company; Glore Forgan Wm. R. Staats, Inc., an investment banking firm (now known as Glore Staats Corporation) and its alleged successor DuPont-Glore Forgan, Inc. (collectively referred to herein as "Glore"); Glore Forgan Staats & Company ("Glore Forgan Staats"), an Illinois investment partnership; 51 individual defendants who are or have been affiliated with Glore or Glore Forgan Staats, and/or have been distributees of their assets or of GSC capital stock obtained by Glore Forgan Staats as the result of an alleged merger between GSC and Macco Corporation ("Macco"), a California land development corporation, see infra, § III; 14 past directors of GSC; Peat, Marwick, Mitchell & Co. ("Peat, Marwick"), a public accounting firm which certified GSC's financial statements during the period relevant to this litigation; and two banks named only in connection with one common law fraud allegation.

I. Motion to Dismiss all Claims Brought Derivatively on Behalf of GSC for Failure to Comply with F. R.Civ.P. 23.1.

Defendants Gorman and Rauch, joined by defendants Carter, Kyger and Stewart, have moved to dismiss all of plaintiffs' derivative claims for failure to state with the particularity required by Rule 23.1 their reasons for not demanding that the GSC Board of Directors prosecute those claims.

Because "it is normally the directors, not the shareholders, who conduct the affairs of the company," In re Kauffman Mutual Fund Actions, 479 F. 2d 257, 263 (C.A.1, 1973), the directors not the shareholders, ordinarily conduct litigation on the corporation's behalf. In order that the directors may have the opportunity to perform their customary function, a shareholder seeking to press a claim on behalf of the company must first demand that the directors take the action desired. Only in circumstances where the demand would be futile or obviously unavailing is a shareholder excused from making such a demand. See generally Note, "Demand on Directors and Shareholders as a Prerequisite to a Derivative Suit," 73 Harv.L.Rev. 746 (1960); 3B Moore's Federal Practice ¶ 23.1.19 (2nd ed., 1969). It has long been settled law, now codified in Rule 23.1, that a shareholder who fails to make a demand on the directors must allege the reasons for his failure "with particularity." E. g., Hawes v. Oakland, 104 U.S. 450, 461, 26 L.Ed. 827 (1881).

Plaintiffs have not demanded that the directors bring the derivative claims. Their reasons for not demanding action, which moving defendants argue are not stated with sufficient particularity, appear in ¶ 7(c) of the complaint:

"Such demand would be futile. Defendant Pennco has been, at all times material hereto, in complete control and domination of GSC, and its present president and chief executive officer, Victor H. Palmieri, also serves as president and chief executive officer of GSC. The domination and control of GSC by Pennco is one of the primary reasons for the injuries of GSC complained of herein, and thus any demand on a GSC Board of Directors dominated and controlled by Pennco would be futile. GSC officers and directors have failed and refused to disavow the acts herein complained of, and have sought to defeat Plaintiffs' claims, even those asserted on GSC's behalf."

Courts have generally been liberal in excusing demand and have normally applied to Rule 23.1 the flexible standards of modern notice pleading. Liboff v. Wolfson, 437 F.2d 121 (C.A.5, 1971); de-Haas v. Empire Petroleum Co., 435 F.2d 1223 (C.A.10, 1970). However, the First Circuit has recently rejected the liberal approach of other courts, choosing instead to construe Rule 23.1's requirement of particularity as a zone of specificity carved out of the world of modern notice pleading. In re Kauffman Mutual Funds Actions, supra.

"Rule 23.1 is not an ordinary, but an exceptional rule of pleading, serving a special purpose, and requiring a different judicial approach than liberalized notice pleading sanctioned by F. R.Civ.P. 8. * * * It is clear that the `particularity' must appear in the pleading itself; the stockholder may not plead in general terms, hoping that, by discovery or otherwise, he can later establish a case." 479 F.2d at 263.

Even a full acceptance of the First Circuit's reading of Rule 23.1 does not, however, lead inexorably to dismissal of the derivative claims asserted here. The holding of Kauffman relevant to the complaint before us is that "an allegation of domination and control, unsupported by underlying facts, does not satisfy the requirement of particularity." 479 F.2d at 264. Emphasis in original. In Kauffman the underlying facts not only did not support but directly contradicted the plaintiffs' allegations that the board of directors of the mutual funds on whose behalf the plaintiffs sought to sue was under the domination and control of certain investment advisers, named as defendants. The plaintiffs apparently claimed that the board was in the hands of directors affiliated with the defendant investment advisers; the court, however, found that there could not be such domination and control because it was "conceded" that "the self-interested, affiliated director-defendants constitute less than a majority of the membership of the board." Id. Although the First Circuit found the Kauffman complaint defective, it did not hold that simple allegations of domination and control are invariably insufficient. Such allegations, according to Kauffman, may meet the requirements of Rule 23.1 if facts are alleged in the complaint which lend support to the...