Jacobson v. General Motors Corporation

• Decision Date: 02 February 1938
• Citation: 22 F. Supp. 255
• Parties: JACOBSON v. GENERAL MOTORS CORPORATION et al. WINKELMAN et al. v. SAME.
• Court: U.S. District Court — Southern District of New York

22 F. Supp. 255

JACOBSON v. GENERAL MOTORS CORPORATION et al.

WINKELMAN et al. v. SAME.

District Court, S. D. New York.

February 2, 1938.

Charles Winkelman, of New York City (Arthur Berenson and Bernard Berenson, both of Boston, Mass., of counsel), for plaintiffs.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (J. Harry Covington, Dean G. Acheson, and Charles A. Horsky, all of Washington, D. C., and Bertram F. Willcox, David Sher, and Ralph M. Carson, all of New York City, of counsel), for defendants.

KNOX, District Judge.

Two stockholders' suits have been brought by plaintiffs, attacking the so-called bonus plan and other methods of supplemental compensation used by General Motors from March, 1918, to 1936, as ultra vires, fraudulent, and illegal. The Winkelman action was originally brought in the Supreme Court of New York county, removed, and consolidated with the Jacobson case, already pending here.

Invoking Equity Rule 27, 28 U.S.C.A. following section 723, defendants seek to strike from the complaints the allegations referring to acts prior to May 27, 1929, on the ground that that is the earliest date as to which plaintiffs can allege and prove ownership of their stock.

Equity Rule 27, 28 U.S.C.A. following section 723, provides as follows:

"Every bill brought by one or more stockholders in a corporation against the corporation and other parties, founded on rights which may properly be asserted by the corporation, must be verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains, or that his share had devolved on him since by operation of law, and that the suit is not a collusive one to confer on a court of the United States jurisdiction of a case of which it would not otherwise have cognizance. It must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action, or the reasons for not making such effort."

It will be seen that the foregoing is a composite of four distinct requirements: (1) Verification; (2) ownership of stock at time of transactions under attack; (3) denial of collusion; and (4) prior demand or its equivalent. The first and third requirements have been construed in the light of the original purpose of the rule to prevent collusive resort to the federal jurisdiction. Cf. Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827. They have, therefore, been held inapplicable to cases removed from the state courts (Maeder v. Buffalo Bill's Company, C.C., 132 F. 280; Earle v. Seattle, L. S. & E. R. Co., C.C., 56 F. 909; Evans v. Union Pacific Railroad Co., C.C., 58 F. 497), or involving merely a federal question, Ball v. Rutland R. Co., C.C., 93 F. 513; Kimball v. Cedar Rapids, C.C., 99 F. 130.

Prior demand or its equivalent, on the other hand, is a universally accepted principle of equity and has been applied in most federal cases, regardless of their origin or nature. Watts v. Vanderbilt, 2 Cir., 45 F.2d 968; Wathen v. Jackson Oil & Refining Company, 235 U.S. 635, 35 S.Ct. 225, 59 L.Ed. 395; Davis & Farnum Manufacturing Company v. Los Angeles, 189 U.S. 207, 23 S.Ct. 498, 47 L.Ed. 778. Contra, however, Evans v. Union Pacific Railroad Company, supra. Relaxation of the rule where the corporate managers are antagonistic is grounded in equity, not on the fact that collusion in such cases is impossible.

Defendants here contend that the second part of the rule, relating to the time of stock ownership, is likewise an equitable principle, and applies even where no possibility of collusion is present. Express support for this position is found in Venner v. Great Northern Railway Co., C.C., 153 F. 408, and Hitchings v. Cobalt Central Mines Company, C.C., 189 F. 241, where this court unequivocally applied the requirement of contemporaneous ownership to cases removed from the state court. The same has been done in other districts. Reilly v. Fuhrmann & Schmidt Brewing Co., D.C., 13 F.Supp. 361; Church v. Citizens' Street Railway Co., C.C., 78 F. 526; Robinson v. West Virginia Loan Company, C.C., 90 F. 770.

So far as I know, there is no specific holding to the contrary.

In Dimpfell v. Ohio & Mississippi Railroad Co., 110 U.S. 209, 3 S.Ct. 573, 28 L.Ed. 121, the Supreme Court of the United States seems to have given to this portion of the rule a status equal to that of prior demand as a principle of equity when it said:

"And it does not appear that the complainants owned their shares when these transactions took place. For aught we can see to the contrary, they may have purchased the shares long afterwards, expressly to annoy and vex the company, in the hope that they might thereby extort, from its fears, a larger benefit than the other stockholders have received or may reasonably expect from the purchase, or compel the company to buy their shares at prices above the market value. Unfortunately, litigation against large companies is often instituted by individual stockholders from no higher motive."

And in Taylor v. Holmes, 127 U.S. 489, 8 S.Ct. 1192, 1193, 32 L.Ed. 179, it said:

"Although there is in the bill a declaration that the two complainants are owners of a majority of the stock of the Gold Hill Mining Company, there is no statement as to when or how they became such, or whether they were such stockholders during the times that injuries were inflicted, of which they now complain, in regard to the taking possession of the property by the defendants, or whether they became stockholders afterwards. In short, there is no such averment of their relation to the corporation, or of their interest in the matter about which they now seek relief, as brings this action within the principle of the decisions of this court upon the subject. Hawes v. Oakland, 104 U.S. 450 26 L.Ed. 827."

To the same effect is the opinion in Venner v. Great Northern Railway Co., 209 U.S. 24, 28 S.Ct. 328, 52 L.Ed. 666.

While these decisions may be rested on other grounds, and in particular on noncompliance in each instance with the requirement of prior demand, the dicta quoted tend to show that contemporaneous ownership is a basic principle of equity in federal stockholders' suits. A substantial number of states are in accord (Home Fire Insurance Company v. Barber, 67 Neb. 644, 93 N.W. 1024, 60 L.R.A. 927; 108 Am.St.Rep. 716; Alexander v. Searcy, 81 Ga. 536, 8 S.E. 630, 12 Am.St.Rep. 337; Boldenweak v. Bullis, 40 Colo. 253, 90 P. 634; Clark v. American Coal Company, 86 Iowa 436, 53 N.W. 291, 17 L.R.A. 557, and other cases cited, Fletcher, Cyc. Corp., Section 5981), although the rule, which prevails at common law, in England and in New York, (Seaton v. Grant, L.R. 1867 2 Ch.App. 459; Pollitz v. Gould, 202 N.Y. 11, 94 N.E. 1088, 38 L.R. A.,N.S., 988, Ann.Cas.1912D, 1098. See, also, 21 H.L.R. 195, 202), is to the contrary.

In this district, an anomaly exists in that the requirement in question has been expressly held inapplicable to cases removed from the state court on the ground...