Lawson v. Baltimore Paint and Chemical Corporation

Citation298 F. Supp. 373
Decision Date16 April 1969
Docket NumberCiv. No. 18497.
PartiesSeward N. LAWSON, William H. Peirce, and Warren A. Risk v. BALTIMORE PAINT AND CHEMICAL CORPORATION, a body corporate of the State of Maryland, Edward Krock, Victor Muscat, Robert L. Huffines, Jr., A. Alex Shuford, Roy M. Cohn and Defiance Industries, Inc., a body corporate of the State of Ohio.
CourtUnited States District Courts. 4th Circuit. United States District Court (Maryland)

Richard D. Rosenthal and David Freishtat, Baltimore, Md., for plaintiffs.

Decatur H. Miller and John Martin Jones, Jr., Baltimore, Md., for defendant Shuford.

George W. McManus, Jr., Baltimore, Md., for other defendants.

THOMSEN, Chief Judge.

This is a shareholders' derivative suit brought by three shareholders of Baltimore Paint and Chemical Corporation (Corporation), five of its directors and former directors, and one of its shareholders. Corporation was incorporated in Maryland and has its principal office and place of business in Baltimore. Federal jurisdiction is founded on diversity of citizenship and amount in controversy, which are not disputed. Venue in this Court exists by virtue of 28 U.S.C.A. § 1401.

The original complaint was filed on June 23, 1967, against Corporation and Roy M. Cohn, Edward Krock, Victor Muscat and Robert L. Huffines, Jr. The amended complaint was filed on December 19, 1967, adding A. Alex Shuford and Defiance Industries, Inc. (Defiance) as additional defendants.

The amended complaint alleges in great detail that at some time prior to January 1, 1961, defendants Krock, Muscat and Huffines formed a plan and conspiracy for acquiring, directly or indirectly, for their personal benefit, effective control of a "multitude of corporations," including Corporation; that pursuant thereto those three and others who from time to time joined them in the conspiracy, including defendants Shuford and Cohn, acquired control of Corporation and caused it to make payments to them in the form of unjustified salaries, legal fees and reimbursement of expenses, and to engage in other transactions, wasting Corporation's assets. The amended complaint contains eight "causes of action," each dealing with a different transaction or series of transactions, alleged to have been carried out as part of the general plan and conspiracy.

Each defendant except Corporation has moved to dismiss the amended complaint and each cause of action alleged therein against him1 on several grounds, including: (1) failure to meet the requirements of Rule 23.1, F.R.Civ.P., (2) laches, and (3) failure to state a claim upon which relief can be granted. Corporation has moved to strike all or parts of the complaint for similar reasons. Each defendant except Corporation has also moved to quash the service of process on him on the ground that he was not properly served under applicable law.2

Rule 23.1

Rule 23.1, F.R.Civ.P., entitled "Derivative Actions by Shareholders," requires that the complaint shall allege "that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law." This is also the substantive law of Maryland. Eisler v. Eastern States Corp., 182 Md. 329, 35 A.2d 118 (1943).

The amended complaint alleges that two of the plaintiffs became shareholders of Corporation in December 1964; the other plaintiff became a shareholder in December 1965. They have held varying amounts of stock since those dates, as they bought and sold shares from time to time. One of the plaintiffs has continuously held his original shares since December 1964.

Many of the transactions in the first, fourth and fifth causes of action, and all of the transactions in the second, third, sixth, seventh and eighth causes of action took place before December 1964. Each defendant except Corporation has moved to dismiss the amended complaint and each cause of action alleged therein against him for failure to comply with the requirement of Rule 23.1, quoted above.

Plaintiffs seek to prevent such dismissals by alleging in paragraph 2 of the amended complaint that each plaintiff was a shareholder of Corporation "at the time of each transaction complained of which occurred on or after the date he acquired his stock, and, with respect to any events alleged herein which occurred prior to that date, was a shareholder of Corporation at the time of the culminating transaction or transactions, with respect to which such events are alleged, giving rise to a liability or liabilities herein asserted."

Plaintiffs rely on Rule 9(a) and (c) to support their argument that this allegation is a sufficient compliance with Rule 23.1. That argument cannot prevail against the specific requirement of Rule 23.1 quoted above.

It is true that the amended complaint alleges facts sufficient to show that the plan and conspiracy formed by defendants Krock, Muscat and Huffines is still in existence, and that defendants Cohn and Defiance joined and still are participants therein. On the other hand the amended complaint itself shows that most of the transactions alleged to have been entered into before December 1964 were in fact consummated before December 1964.

There have been few if any reported decisions dealing with Rule 23.1, which became effective in July 1966. But earlier cases state the controlling principles. See particularly, McQuillen v. National Cash Register Co., 22 F.Supp. 867 (D. Md.1938), aff'd 112 F.2d 877, 882 (4 Cir. 1940); Matthews v. Headley Chocolate Co., 130 Md. 523, 100 A. 645 (1917); Eisler v. Eastern States Corp., 182 Md. 329, 35 A.2d 118 (1943); Weinhaus v. Gale, 237 F.2d 197 (7 Cir. 1956); Levitan v. Stout, 97 F.Supp. 105 (W.D.Ky. 1951); Henis v. Compania Agricola de Guatemala, 116 F.Supp. 223 (D.Del. 1953), aff'd 210 F.2d 950 (3 Cir. 1954); Pergament v. Frazer, 93 F.Supp. 9 (E.D. Mich.1949).

The amended complaint alleges that defendant Shuford ceased to be a director of Corporation before August 31, 1964, and does not allege that he had anything to do with Corporation after he ceased to be a director. The entire complaint must therefore be dismissed as against Shuford.

With respect to the other defendants, the applicable legal principles must be applied to the several causes of action alleged in the amended complaint. The first cause of action alleges that various defendants were elected directors, members of the executive committee and officers each year, and voted excessive salaries to themselves. Although the claims based on salaries voted and paid before December 1964 are barred, the claims based on salaries voted and paid after December 1964 are not barred. The first cause of action should not be dismissed.

The second and third causes of action are based upon allegations that in 1963 defendants terminated the services of Albert A. Shuger as president of Corporation, because of the personal spite of defendant Krock, and elected another man—not alleged to be a co-conspirator —in his place; that Shuger obtained a judgment against Corporation in 1966 based upon his discharge, which was settled thereafter; and that the discharge of Shuger caused a deterioration in the profits of Corporation. Shuger was discharged before December 1964, and no grounds for relief have been alleged based upon any wrongful conduct of the defendants in defending Shuger's suit or settling the judgment entered therein or upon any action or inaction of his successor. The second and third causes of action are barred and must be dismissed.

The fourth and fifth causes of action are based upon fees paid to defendant Cohn's law firm and expenses refunded to Krock, some of which were paid or refunded after December 1964, pursuant to the plan and conspiracy. Those causes of action should not be dismissed.

The sixth and seventh causes of action are based upon purchases by Corporation of shares in Synkoloid Company and B. S. F. Company, respectively. The purchases are alleged to have been made before December 1964, pursuant to the plan and conspiracy, and are alleged to have caused a waste and diversion of corporate assets, requiring Corporation to incur additional expense of borrowings which would not otherwise have been necessary. It is alleged that the shares of Synkoloid have become worthless and that the shares of B. S. F. have greatly decreased in value; but it does not appear from any of the material now before the Court when those events occurred. Plaintiffs do not allege that the retention of the investments, as distinguished from the original purchases, has been wrongful. The motion to dismiss the sixth and seventh causes of action will be granted, with leave to plaintiffs to amend within 30 days.

The eighth cause of action alleges that some of the B. S. F. shares which had been purchased by Corporation were improperly sold in August 1962 to the Employees Retirement System Fund established by Corporation, thereby giving the Fund a claim against Corporation, impairing Corporation's good will, and damaging its relationship with its employees. Since the damage to Corporation is alleged to have resulted solely from the sale of the B. S. F. stock before any of the plaintiffs became shareholders of Corporation, the eighth cause of action must be dismissed.

Evidence of transactions before December 1964 may be admissible to show the origin and course of the alleged plan and conspiracy and dealings by and between the defendants. The motion filed by Corporation to strike the amended complaint in toto or in the alternative to strike many of its allegations on the ground that they are immaterial and impertinent will be denied.

Laches

The doctrine of laches supports the rulings indicated above, but would not support the denial of any other claims without additional facts.

Defendants, except Shuford, are not entitled to have the entire amended complaint dismissed for failure to state a claim upon which relief can be granted.

Service of Process

Each of the defendants except...

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