Kane v. Central American Mining & Oil, Inc.

• Decision Date: 27 November 1964
• Citation: Kane v. Central American Mining & Oil, Inc., 235 F. Supp. 559 (S.D. N.Y. 1964)
• Parties: Joseph J. KANE and John J. Kane, individually, and as stockholders of Central American Mining & Oil, Inc., suing on behalf of themselves and for the benefit of said corporation and all other stockholders of said corporation, Plaintiffs, v. CENTRAL AMERICAN MINING & OIL, INC., Robert Guadano, Bernard Guadano, and Fred Menna, Defendants.
• Court: U.S. District Court — Southern District of New York

235 F. Supp. 559

Joseph J. KANE and John J. Kane, individually, and as stockholders of Central American Mining & Oil, Inc., suing on behalf of themselves and for the benefit of said corporation and all other stockholders of said corporation, Plaintiffs, v.CENTRAL AMERICAN MINING & OIL, INC., Robert Guadano, Bernard Guadano, and Fred Menna, Defendants.

United States District Court S. D. New York.

November 27, 1964.

COPYRIGHT MATERIAL OMITTED

Marks & Marks, New York City, for plaintiffs; David L. Marks, New York City, of counsel.

O'Brien, Driscoll & Raftery, New York City, appearing specially for defendants; Arthur F. Driscoll, William D. Friedmann, Gabriel Kaszovitz, New York City, of counsel.

WEINFELD, District Judge.

This essentially is a stockholders' derivative action brought on behalf of Central American Mining & Oil, Inc., a Panamanian corporation, hereinafter called CAMO, charging the defendants, who are its principal officers, sole directors and majority stockholders, with fraud, waste, mismanagement and diversion of a corporate opportunity.

The second amended complaint, the subject of the defendants' motion to dismiss, contains three separate counts which are based substantially upon the following allegations:

That plaintiffs, John J. and Joseph J. Kane, are the owners of 58,000 of the more than 7,000,000 shares of common stock issued by CAMO, which was incorporated under the laws of the Republic of Panama; that in 1961, shortly after its incorporation, CAMO acquired, indirectly through a corporate shell controlled by the defendants, a large mineral concession in the Republic of Honduras for a consideration of $40,900 in cash and 1,005,000 shares of its common stock; that by this transaction the defendants improperly arrogated CAMO's corporate opportunity unto themselves; further, that at or about the time the concession was acquired, CAMO issued 2,000,000 shares of common stock to one O. R. Seagraves and 2,000,000 shares to the defendant, Robert Guadano, for which the latter paid no or an inadequate consideration; that thereafter Guadano, to gain control of the corporation and to oust O. R. Seagraves, caused another 2,000,000 shares to be issued to his brother, Bernard Guadano, also a defendant, for which no or an inadequate consideration was paid; that in July 1961 CAMO assigned part of its Honduran concession to Pure Oil Company in return for $450,000 cash ($50,000 of which was held in escrow) and for a share of Pure Oil's profits; that the defendants misappropriated a substantial portion of the $400,000 received on that transaction; and further, that the defendants, corporate and individual, filed with the Securities and Exchange Commission a registration statement covering the public distribution of 7,500,000 shares of CAMO stock, including the Guadanos' 4,000,000, at up to $5.00 per share, and if the registration statement is declared effective, the Guadanos, who acquired their shares for no or an inadequate consideration, will be the main beneficiaries of the distribution, whereas the proceeds should properly accrue to the benefit of CAMO.Additional allegations appropriate to the theory of each separate count are set forth.

The three separate counts are as follows: The first, predicated upon diversity of citizenship, charges violations of the Articles of Incorporation and of Panamanian law.It alleges that the plaintiffs are citizens of the State of Texas, that the individual defendants are citizens of the State of New York, and that the corporation is doing business in that State and has conducted meetings there.The second count alleges liability under Section 10(b) of the Securities Exchange Act of 1934¹andRule 10b-5,² promulgated thereunder by the Securities and Exchange Commission, jurisdiction resting on Section 27 of the Act.³The third count, based upon allegations of the first and second counts, rests upon the doctrine of pendant jurisdiction.

Plaintiffs seek the return to the corporation of the 4,000,000 shares issued to the defendants, Robert and Bernard Guadano, the removal of the three individual defendants from their corporate posts, and an accounting with respect to the sums received in connection with the Pure Oil Company transaction.

The defendants move under Rule 12(b) of the Federal Rules of Civil Procedure for dismissal of the complaint on the following grounds:

(1) lack of jurisdiction over the person of the defendants;

(2) lack of jurisdiction of the subject matter;

(3) improper venue;

(4) insufficiency of service of process;

(5) failure to join an indispensable party; and

(6) failure to state a claim upon which relief may be granted.

In the event of denial of their motion, they further move that plaintiffs post security for expenses and damages pursuant to the New York Business Corporation Law⁴ and for costs as nonresident plaintiffs.⁵

The parties have submitted affidavits in support of and in opposition to the motion and that branch which seeks dismissal of the complaint for failure to state a claim is treated as one for summary judgment.⁶

The extensive contentions of the parties, which in some respects overlap, make it desirable initially to consider the second count, the nondiversity and federally based claim, since if it withstands dismissal the disposition of the two remaining counts falls in place.

The principal thrust of the defendants' position, broadly stated, is that CAMO is a Panamanian corporation; that it is not found, present, nor doing business in this State; that even if, contrary to their contention, diversity jurisdiction exists, the basic claim asserted by the plaintiffs involves the internal affairs of a foreign corporation, as to which the New York courts would decline jurisdiction⁷ and finally, that New York State, in applying its conflict of laws rule, would be guided by the law of Panama, under which plaintiffs were required, but failed, to qualify as contesting stockholders, and accordingly would bar relief.⁸

The plaintiffs, on the other hand, while challenging these contentions, which involve sharply disputed fact issues, contend that in any event the second count states a claim upon which relief may be granted and satisfies subject matter jurisdiction, venue and process requirements.

I.THE FEDERAL CLAIM

JURISDICTION

The nub of this claim is that the defendants, in causing CAMO to issue to the Guadanos 4,000,000 shares for no or an inadequate consideration, "employed a device, scheme and artifice to defraud, and engaged in acts which operated and would operate as a fraud and deceit upon the defendant corporation and its stockholders"; that in so doing, the defendants used "means and instrumentalities of interstate commerce and the mails" in violation of Section 10(b) of the 1934 Act.⁹The complaint alleges, in connection with the sale of securities, various acts in violation of the statute and rule as part of the scheme to defraud, as follows: That the defendants used the United States mails (1) to notify stockholders of a special meeting, designed to give defendants control of the corporation, and to facilitate the sale and issuance of stock to themselves for an inadequate or for no consideration, thus depriving the corporation of a valuable asset; (2) to notify stockholders of special meetings held within the Eastern and Southern Districts of New York for the purpose of reporting that the sale and issuance of the aforesaid stock was proper, thus discouraging further objection to the transaction; (3) to send letters to stockholders concerning corporate activities, which letters were designed in part to lull the stockholders into a false sense of security and safety concerning their investments; (4) to file with the SEC a registration statement covering the proposed sale to the United States public of 7,500,000 shares of common stock at $5.00 per share in order to reap substantial profits for themselves which should have inured to the benefit of the corporation.

The defendants' position is that, even though cloaked in the garb of 10(b) violations, the asserted claim is nothing more or less than one involving the internal affairs and management of a Panamanian corporation and the determination of whether the stock issued to the Guadanos was for a proper consideration.Accordingly, they contend that Count II fails to state a claim upon which relief may be granted, their theory being that Section 10(b)andRule 10b-5 are restricted to fraud in connection with national securities exchanges or with public distributions of stock and were not intended to reach private securities transactions only incidental to a basic charge of ordinary corporate mismanagement or wrongdoing — in short, that no "Federal question" is presented.

This position, and corollary ones, repeatedly urged from the inception of the 1934 Act, have not gained acceptance.It is no longer open to question that a corporation which is fraudulently induced to issue stock for no or inadequate consideration is a defrauded "seller" under the statute;¹⁰ that a shareholder may assert the corporation's claim derivatively,¹¹ and that as long as the jurisdictional requirements as to the use of the mails and instrumentalities of commerce are properly pleaded as they are in the instant case, it matters not that the securities transaction was private.¹²

Accordingly, the Court holds that the statute is properly invoked and that Count II states a claim thereunder.Section 27 of the 1934 Act¹³ vests in the Federal courts exclusive jurisdiction of all such suits or actions to enforce any liability or duty created under the Act and the rules and regulations promulgated thereunder.Hausman v. Buckley,¹⁴ strongly pressed by the defendants, where our Court of Appeals, in a diversity case, complied with the forum state's rule against interference in the internal affairs of a foreign corporation, is inapposite.Moreover, the fact that the complaint contains allegations which...