Klotz v. Consolidated Edison Co. of New York, Inc.

• Citation: 386 F. Supp. 577
• Decision Date: 23 December 1974
• Docket Number: No. 74 Civ. 2911.,74 Civ. 2911.
• Parties: Rose KLOTZ, on behalf of herself and all other stockholders of Consolidated Edison Company of New York, Inc., Plaintiffs, v. CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

386 F. Supp. 577

Rose KLOTZ, on behalf of herself and all other stockholders of Consolidated Edison Company of New York, Inc., Plaintiffs, v. CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., et al., Defendants.

No. 74 Civ. 2911.

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

December 23, 1974.

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Howard S. Klotz, New York City, for plaintiffs; Malcolm S. Taub, New York City, of counsel.

Cahill, Gordon & Reindel, New York City, for defendants, Con Ed & Charles F. Luce; William E. Hegarty, Warren H. Colodner, Russell T. Lewis, New York City, of counsel.

Adrian P. Burke, Corp. Counsel, New York City, for defendants; Samuel J. Warms, Robert J. Metzler, II, New York City, of counsel.

Peter H. Schiff, Albany, N. Y., for Public Service Commission of the State of New York; David Schechter, New York City, of counsel.

WHITMAN KNAPP, District Judge.

Plaintiff, the owner of 1000 shares of Consolidated Edison common stock, brings this derivative action against the members of the Public Service Commission of the State of New York (the PSC) and the Finance Administrator of the City of New York to obtain on behalf of Con Edison $1.5 billion in damages and certain declaratory relief with respect to the acts of the defendants. Con Edison and its trustees — most of whom have not been served — are named as nominal defendants in the action.

Plaintiff bases this action on the Fourteenth Amendment to the Constitution, and on the Civil Rights statute, 42 U.S.C. § 1983. In essence, she alleges that as a result of certain illegal action by the defendants, Con Edison has been placed in a precarious financial position, has been forced to omit the payment of a quarterly dividend on its common stock, and has experienced a drastic decline in the market value of such stock. The core allegations are that the Public Service Commissioners, acting under color of state law, have followed and continue to follow a confiscatory rate-making policy with respect to Con Edison. Plaintiff claims that the rates which the defendant commissioners allow Con Edison are "inadequate for it to earn a reasonable rate of return on the value of its property" (Complaint, ¶ 13), and thus the commissioners have deprived the corporation of the use of its property without just compensation (Complaint, ¶ 18). Besides damages, plaintiff seeks a declaration that the rate-making policies of the PSC violate the Fourteenth Amendment.

Plaintiff's claim against the City Finance Administration is somewhat analogous to its claim against the commissioners. Although she does not identify the precise local tax she is challenging, she alleges upon information and belief that approximately one-third of Con Edison's billings represent a tax on its customers "which defendant Con Ed surreptitiously collects for New York City" (Complaint, ¶ 25). Furthermore, she charges that the unidentified tax affects only Con Edison, is invidiously discriminatory, and therefore deprives Con Edison of property without due process of law (Complaint, ¶¶ 25-29). In addition, she alleges that the Public Service Commissioners permit Con Edison to collect this discriminatory tax, and that this tax is a significant factor in the PSC's confiscatory rate-making policies and procedures. With respect to the finance administrator, plaintiff seeks a declaration that this unspecified tax is unconstitutional.

As already noted, Con Edison and its trustees are named as nominal defendants. Plaintiff does not allege any independent cause of action against the corporation or its directors. Thus, there are no allegations of fraud, self-interest or double-dealing. Plaintiff states, as is appropriate, that she duly demanded of the trustees that they institute suit in the name of the corporation and that this demand was refused. Her complaint does state that the trustees of Con Edison have followed "a long standing and continuing policy of quiet accommodation and appeasement of state and local officials" (Complaint, ¶ 41), and that the trustees "have yielded without resistance in general to the aforesaid illegal confiscatory rate-making policies and procedures, and, in particular, to the aforesaid individously sic discriminatory tax" (Complaint, ¶ 42).

It is, of course, axiomatic that in a derivative action, the claims which the complaint presents to the court are not plaintiff's own, but rather the corporation's. Plaintiff cannot have any greater rights than would be accorded the corporation. Thus, if the complaint is dismissed as to the PSC and the City Finance Administration, it would be dismissed in its entirety.

All of the defendants in this action — including Con Edison and its chairman — have filed motions to dismiss the complaint. For the reasons stated below, the defendants' motions should be granted and the complaint should be dismissed in its entirety. This conclusion is based on two independent legal theories, which will be treated separately.

I. Plaintiff Lacks Standing to Prosecute this Action

Defendants Consolidated Edison and its chairman Charles Luce move to dismiss the entire complaint on the ground that plaintiff lacks standing to prosecute this action. These defendants maintain that the decision whether to institute this action lies solely within the business judgment of Con Edison's management and trustees. These defendants contend that since plaintiff has not claimed that the management and trustees have been guilty of improper motive or bad faith in failing to bring an action against the other defendants, the business judgment rule would deprive plaintiff of standing in this matter.

It is beyond dispute that normally the decision of corporate directors whether or not to assert a cause of action held by the corporation rests within the sound business judgment of the management. This principle was enunciated by Justice Brandeis for a unanimous Supreme Court in United Copper Securities Co. v. Amalgamated Copper Co. (1917) 244 U.S. 261, 37 S.Ct. 509, 61 L.Ed. 1119. In that case, the directors of a corporation had refused to bring an antitrust action against a third party. The court stated (at 263-264, 37 S.Ct. at 510):

"Whether or not a corporation shall seek to enforce in the courts a cause of action for damages is, like other business questions, ordinarily a matter of internal management, and is left to the discretion of the directors, in the absence of instruction by vote of the stockholders. Courts interfere seldom to control such discretion intra vires the corporation, except where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relation which prevents an unprejudiced exercise of judgment . . .."

Indeed, if the rule were otherwise, any stockholder, no matter how small his interest, could usurp the authority of those who have been chosen to manage the corporation. As the Third Circuit declared in Ash v. International Business Machines, Inc. (3rd Cir. 1965) 353 F.2d 491, 493, cert. denied, 384 U.S. 927, 86 S.Ct. 1446, 16 L.Ed.2d 531:

". . . a stockholder's derivative action, whether involving corporate refusal to bring antitrust suits or some other controversial decision concerning the conduct of corporate affairs, can be maintained only if the stockholder shall allege and prove that the directors of the corporation are personally involved or interested in the alleged wrongdoing in a way calculated to impair their exercise of business judgment on behalf of the corporation, or that their refusal to sue reflects bad faith or breach of trust in some other way."

See, also Hawes v. City of Oakland (1881) 104 U.S. 450, 26 L.Ed. 827; Swanson v. Traer (7th Cir. 1957) 249 F.2d 854; Stadin v. Union Electric Co. (8th Cir. 1962) 309 F.2d 912, cert. denied, 373 U.S. 915, 83 S.Ct. 1298, 10 L. Ed.2d 415; Kemper v. American Broadcasting Cos. Inc. (S.D.Ohio 1973) 365 F.Supp. 1272; Miller v. American T & T Corp. (E.D.Pa.1973) 364 F.Supp. 648; Issner v. Aldrich (D.Del.1966) 254 F.Supp. 696.

Applying these principles to the case at bar leads inexorably to the conclusion that plaintiff lacks standing to prosecute this action. Her complaint is barren of allegations that the directors of Con Edison have breached their fiduciary duty or that they stand in any sort of dual relationship so as to be unable to exercise unprejudiced judgment. The complaint merely accuses the trustees of following a policy of "quiet accommodation and appeasement of state and local officials" and of having "yielded, without resistance" to the claimed illegal confiscatory rate-making policies and procedures. Such charges are not enough to avoid the bar of the business judgment rule. As Con Edison indicated in its letter to plaintiff rejecting her demand that the corporation institute suit on its own behalf, the directors felt that litigation at this time would be counter-productive, especially since Con Edison had applied to the PSC for another rate increase. Rather than bring a lawsuit with a small probability of success, the directors, exercising their judgment, felt that a better approach would be to make more frequent rate applications to the PSC. In the absence of allegations of fraud, self-interest, or other misconduct of a breach of trust nature, this court should not at the instigation of one shareholder interfere with that judgment of the corporate officers.

While not arguing with the general theory of the business judgment rule, plaintiff maintains that this action fits within an exception to the rule which, plaintiff claims, permits shareholders to bring actions against public officials. She relies exclusively on an opinion by Chief Justice Hughes in Ashwander v. Tennessee Valley Authority (1936) 297 U.S. 288, 56 S.Ct. 466, 80 L.Ed. 688, and the cases cited therein. For the reasons stated below, we find Chief Justice Hughes' opinion inapplicable to the situation at bar.

Ashwander involved an attempt by preferred stockholders...