Jones v. Equitable Life Assurance Society of US

• Citation: 409 F. Supp. 370
• Decision Date: 14 February 1975
• Docket Number: No. 73 Civ. 1701.,73 Civ. 1701.
• Parties: Millicent JONES, Plaintiff, v. The EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES et al., Defendants.
• Court: U.S. District Court — Southern District of New York

409 F. Supp. 370

Millicent JONES, Plaintiff, v. The EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES et al., Defendants.

No. 73 Civ. 1701.

United States District Court, S. D. New York.

February 14, 1975.

Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiff; Eric L. Keisman, New York City, of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendants The Equitable Life Assur. Soc. of United States, Thomas F. Murray, Donald R. Waugh, Jr., Howard E. Thomas, Grant Keehn, Walter R. Knortz; Jay H. Topkis, Cameron Clark, New York City, of counsel.

Davis, Polk & Wardwell, New York City, for defendants Thomas M. Macioce, Robert C. Tyson, John C. Whitehead; Henry L. King, Mark L. Austrian, New York City, of counsel.

Milbank, Tweed, Hadley & McCloy, New York City, for defendant The Equitable Life Mortgage and Realty Investors; Edward J. Reilly, Richard Tufaro, New York City, of counsel.

WYATT, District Judge.

This is a motion for various forms of relief (to be separately considered) by defendants The Equitable Life Assurance Society of the United States (Life), Murray, Waugh, Thomas, Keehn, and Knortz; by defendants Macioce, Tyson and Whitehead; and by defendant The Equitable Life Mortgage & Realty Investors (the Trust). Affidavits have been submitted by defendants Waugh and Whitehead. Defendant Tyson, a movant, died after service of notice of the motion and on consent of plaintiff the action has been dismissed as to him.

It is undisputed that the Trust was organized as a Massachusetts business trust (Mass.Ann.Laws C. 182, § 1 and following (1969)) under a Declaration of Trust executed September 15, 1970. For a brief description of such a trust, see Dewing, The Financial Policy of Corporations (5th ed.) 70-73. Interestingly, such a trust was employed originally because under the mortmain statutes, corporations could not hold real estate for investment.

Life is a large, old, and well known mutual insurance company. Life sponsored the organization of the Trust and has acted as its investment adviser under an Advisory Contract (the Contract). Life is registered as an investment adviser under Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-1 and following; "the Act"). Averments to the contrary in the complaint were admitted at oral argument to be in error.

The Complaint

Plaintiff sues as a shareholder of the Trust. The complaint states eight separate claims, each called (presumably from state court practice) a "cause of action". The action was commenced on April 17, 1973.

The first four claims are brought derivatively for the benefit of the Trust. The last four claims are brought for a class, the shareholders of the Trust, but at oral argument counsel for plaintiff agreed that these four claims should be dismissed.

The first claim avers that Life controls the trustees of the Trust, that the Contract is illegal because Life is not registered under the Act (as noted above, this is conceded to be an error), that the Contract is unfair and provides for excessive compensation, and that defendants have violated the Act in that they have engaged in fraud.

The second claim is that the Trust bought its initial portfolio from Life, that there was self dealing, that the price was unfair to the Trust, and that the profits to Life were unlawful because they were more than the compensation called for under the Contract.

The third claim is that Life caused the Trust to make loans to Allied Stores, that these loans were unfair and fraudulent, and that they were made because a trustee was president of Allied Stores.

The fourth claim is that Life has not given good advice to the Trust, has kept the best investments for itself, and has thus violated the Contract.

The complaint is not well drawn and violates Fed.R.Civ.P. 8(a) in that there is no "short and plain statement of the claim." Jurisdiction seems to be based on the Act and also on pendent jurisdiction but which claims are thought to arise under the Act and which are pendent state law claims is never explained. The best guess has to be that the pleader attempts to invoke both jurisdictional grounds for each claim.

It is noted that the Trust, for whose benefit the first four claims are purportedly brought, is itself a movant for dismissal. Inquiry as to this position was made at oral argument. The response is remembered as having been that the best interests of the Trust would not be served by setting aside the Advisory Contract, as plaintiff demands, because this would mean—among other things— loss of the advice of and connection with Life and loss of the right of the Trust to use the word "Equitable" in its name.

I. Want of Subject Matter Jurisdiction

Movants assert that the Act does not confer jurisdiction over actions by private persons for damages or for an accounting. While movants make arguments of substance for this position and District Courts in Florida and California have sustained it, Judge Metzner has recently held that a private action for damages may be brought under the Act. Bolger v. Laventhol, and others, 381 F.Supp. 260 (S.D.N.Y.1974). See Note, Securities-Investment Advisers Act of 1940—Private Right of Action for Damages Allowed Against an Investment Adviser and His Accountant, 18 Fordham Law Rev. 493 (1974). On the basis of Judge Metzner's opinion, the motion in this aspect is denied.

II. Failure to Make Demand on Trustees or Shareholders

A. Trustees

The action was commenced on April 17, 1973.

According to a moving affidavit, not opposed or disputed by plaintiff, there were nine trustees when the action was commenced. Three of these (Murray, Waugh, Thomas) were affiliated with Life; six of these (Adams, Crow, Macioce, Tyson, Whitehead, Witcoff) were not affiliated with Life. Of the nine trustees described, eight were named as individual defendants; Witcoff was not named as a defendant.

No demand that an action be brought was made by plaintiff on the Trustees.

Rule 23.1 of the Federal Rules of Civil Procedure requires that the complaint in a derivative action allege "with particularity" the efforts made by plaintiff to obtain the desired action from the directors or "comparable authority" (such as trustees) and the reasons "for not making the effort".

In the complaint at bar, the reason for not making any demand on the trustees is said (para 25) to be that it would have been futile because the trustees are "dominated and controlled" by Life, and because "the trustees are themselves defendants in this action".

It seems evident that no facts are averred in the complaint to show that those trustees not affiliated with Life were under the control of Life. There is the mere statement of conclusion of plaintiff, which is not sufficient. Brody v. Chemical Bank, 482 F.2d 1111 (2d Cir.), cert. denied, 414 U.S. 1104, 94 S.Ct. 737, 38 L.Ed.2d 559 (1973); In re Kauffman Mutual Fund Actions, 479 F.2d 257, 263 (1st Cir.), cert. denied, 414 U.S. 857, 94 S.Ct. 161, 38 L.Ed.2d 107 (1973); Greenspun v. Lindley, 44 A.D.2d 20, 352 N.Y.S.2d 633 (1st Dept. 1974).

It is true that all but one of the independent trustees are themselves named as defendants in the action, but surely the strong policy of Rule 23.1 cannot be satisfied by simply adding the trustees as defendants. The real defendant is Life, which is amply able to respond to any judgment. The addition of the trustees, certainly the unaffiliated trustees, must have been with the hope that thereby Rule 23.1 could be satisfied.

At the time this action was commenced, six of the then nine trustees had no connection with Life (the Declaration of Trust provides (Section 3.3) that not more than 49% of the trustees (or of any "investment Committee") may be "affiliates" of Life).

The demand normally required by Rule 23.1 is not, in my view, excused merely because the independent trustees are joined as defendants and without any averments to show any conflict of interest or bias on their part. In the Brody and Kauffman cases, above cited, it does not appear that the independent directors (trustees) were defendants. In the Greenspun case, above cited, the independent trustees were defendants and the Court found that this did not excuse a demand on them. Indeed, the Greenspun case is virtually the same case as that at bar; the fact background and the complaints appear to be substantially the same, the only differences being that another insurance company was the investment adviser in Greenspun and another Massachusetts business trust was involved.

The opinion of Judge Tyler in Papilsky v. Berndt, 59 F.R.D. 95 (S.D.N.Y.1973) does seem to reach a conclusion contrary to the Brody, Kauffman, and Greenspun decisions. There are some distinguishing differences, particularly in that the complaint before Judge Tyler averred that control by the affiliated directors was due to their "strategic positions" on the Board. The Court of Appeals did not decide whether Judge Tyler was correct or not but dismissed the appeal. 503 F.2d 554 (May 24, 1974); CCH Fed.Sec.L. Rep. ¶ 94,575. The Court of Appeals, in so doing, specifically stated: ". . . of course we do not reach the merits". The Court of Appeals for the First Circuit did consider Judge Tyler's opinion and referred to it in the Kauffman opinion, observing that the authorities cited by Judge Tyler "do not, in fact, support the decision" (479 F.2d at 266, fn. 6). As already indicated, the Brody decision of the Court of Appeals for this Circuit seems to require that a demand be made by plaintiff in the case at bar.

With one exception, there is nothing averred which would suggest any self-dealing, self-interest, personal gain, or selfish motive on the part of the independent trustees. For all that appears, they are, have been, and will be, faithful to the interests of the Trust. Giving the most liberal interpretation to the complaint, the independent trustees are charged with no more than approval and...