Lowell Wiper Supply Co. v. Helen Shop, Inc.

• Citation: 235 F. Supp. 640
• Parties: LOWELL WIPER SUPPLY CO., Charlotte S. Feinberg, and Doris Ashapa, Plaintiffs, v. The HELEN SHOP, INC., John J. Blesch, Veronica Berman, M. James Spitzer, Veronica Berman and John J. Blesch, as Executors under the Last Will and Testament of Sidney Berman, Deceased, and Spitzer & Feldman, a Partnership, Defendants.
• Decision Date: 02 November 1964
• Court: U.S. District Court — Southern District of New York

235 F. Supp. 640

LOWELL WIPER SUPPLY CO., Charlotte S. Feinberg, and Doris Ashapa, Plaintiffs, v. The HELEN SHOP, INC., John J. Blesch, Veronica Berman, M. James Spitzer, Veronica Berman and John J. Blesch, as Executors under the Last Will and Testament of Sidney Berman, Deceased, and Spitzer & Feldman, a Partnership, Defendants.

United States District Court S. D. New York.

November 2, 1964.

Golden, Wienshienk, Rosenthal & Mandel, New York City, for plaintiffs, Albert J. Rosenthal, Ralph Wienshienk, Simon Eilenberg, New York City, of counsel.

Spitzer & Feldman, New York City, for defendants.

WEINFELD, District Judge.

This is essentially a stockholders' derivative action with jurisdiction based upon diverse citizenship. The Helen Shop, Inc., for whose benefit the action is brought, is a Tennessee corporation. The two individual plaintiffs are citizens of Massachusetts, and the third plaintiff, Lowell Wiper Supply Co., is a Massachusetts corporation. All the defendants are citizens of the State of New York. Sidney Berman, the dominant and controlling stockholder of The Helen Shop, Inc., who died in 1959, was also a citizen of New York, as are his executors who are named as defendants.

The defendants move pursuant to Rule 12(b) (6) of the Federal Rules of Civil Procedure to dismiss the First, Second and Sixth causes of action on the ground that the plaintiffs were not stockholders at the time of the transactions complained of, and upon the further ground that the claims are barred by the applicable statute of limitations. Dismissal is also sought of the Third cause of action upon the ground that the issues presented thereunder were considered by the courts of Tennessee and decided adversely to the plaintiffs. The parties have submitted affidavits as permitted under Rule 12(b) (6) and the motion is treated as one for summary judgment.

THE FIRST AND SECOND CAUSES OF ACTION

The principal claims center about certain primary leases of property in Memphis, Tennessee, where The Helen Shop, Inc. has conducted its business since 1945. The essence of the charge is that Berman, who was the promoter and the chief executive officer of the corporation until his death, in conspiracy with other defendant stockholders, directors and officers, improperly availed himself of a corporate opportunity. In substance, the complaint alleges that the primary leases were taken by Berman, as lessee, who then sublet the premises to The Helen Shop, Inc., as tenant, and upon expiration renewed them at excessive rentals, thereby profiting over a period of years in breach of his fiduciary duty to the corporation.

In the first cause of action the claim is that under the law of Tennessee the subleases between Berman, as a fiduciary, and the corporation are void and recovery is sought of all the rentals paid to him. In the second cause of action the claim is that under the law of Tennessee the subleases are voidable and recovery is sought of the excess of the fair rental value of the premises. The complaint further alleges that John J. Blesch, another officer and director, in each year received ten per cent of the alleged excessive rentals in furtherance of the conspiratorial purpose and to induce him to violate his fiduciary duty to attack the subleases. The complaint omits dates and other relevant information, but the extensive affidavits submitted by the parties in support of and in opposition to the motion reveal the following:

In April 1944 Berman leased premises in Memphis, Tennessee, and purchased a specialty shop which the landlord had conducted on the premises. This lease was for ten years, to August 1954, with two ten-year renewal options. He operated the business as sole proprietor until February 1, 1945, when he sold and transferred it and its assets to The Helen Shop, Inc., which he had caused to be incorporated shortly before. He also sublet the premises to the corporation for a term of ten years. In consideration of the transaction, he received corporate stock. In 1946, Berman individually obtained a lease of the adjacent property and in turn sublet it to The Helen Shop, Inc. for a term ending August 1954, so that both subleases expired on the same date. The primary leases to Berman were at fixed dollar rentals, whereas the subleases from him to the corporation were on a percentage of net sales.

None of the plaintiffs was a stockholder of the corporation when it entered into the subleases. Plaintiff Feinberg became a shareholder in 1947 and plaintiff Ashapa in 1952. Lowell Wiper Supply Co., the corporate plaintiff, was not registered as the owner of stock until 1957, although it was a pledgee of the stock as collateral for a loan which it made in October, 1953.

Rule 23(b) of the Federal Rules of Civil Procedure provides that in a derivative suit the plaintiff must allege he was "a shareholder at the time of the transaction of which he complains * * *."¹ The plaintiffs, recognizing the force of the rule, disavow they are asserting any claims based on the 1945 and 1946 subleases entered into before they became stockholders, although they allege that the corporation was overreached in those transactions. What they do charge is that the corporation was again overreached by Berman, aided by his alleged co-conspirators, in entirely independent transactions, on August 14, 1954 when, upon the expiration of the subleases they were renewed for ten-year terms at allegedly exorbitant rentals greatly in excess of those paid by Berman under his primary leases.² Even as so restricted to the August 1954 renewals, the defendants contend that all three plaintiffs then lacked contemporaneous ownership and hence this action must fall. They do not dispute the standing under Rule 23(b) of the two individual plaintiffs who were stockholders of record when the subleases were renewed in August 1954; they do, however, challenge the right of the corporate plaintiff to join with them to prosecute this suit since it did not become a stockholder of record until 1957.

Whether the corporate plaintiff has the necessary status to maintain this action under Rule 23(b) must be determined by the law of Tennessee, the state of incorporation of The Helen Shop, Inc.³ The rule in Tennessee is that "the transfer and assignment of certificates of stock in a corporation, either by absolute sale or by way of pledge or security for debt, passes to the vendee or pledgee the title thereto."⁴ In 1953 the corporate plaintiff had loaned $50,000 to one Shapiro who, as collateral security, pledged 350 shares of preferred stock of The Helen Shop, Inc. which were deposited with his attorney as escrow holder. In September 1954 physical possession of the certificates so pledged, as well as certificates for additional shares, were delivered to the corporate plaintiff when a demand note was substituted for Shapiro's matured note and the arrangement formalized. While it is true that the actual delivery of the certificates was not made until September 1954, one month after the sublease renewals, the fact is that the corporate plaintiff had been the pledgee of 350 shares since the 1953 loan transaction and was still the pledgee when the renewal lease was executed in August 1954. It is clear, therefore, that under the law of Tennessee it held title from the time the shares were first pledged; indeed, such was the holding of the Tennessee courts in a proceeding involving these very litigants.⁵ Accordingly the corporate plaintiff also possesses the necessary status under Rule 23(b) to maintain the first and second causes of action directed against the 1954 renewal of the subleases.

Thus the issue on defendants' motion is narrowed to their contention that these causes of action are barred by the applicable statute of limitations.⁶ The defendants assert that the claims accrued on August 14, 1954, when the subleases were entered into and this action having been commenced in August 1963, more than nine years thereafter, they are time-barred since the limitation statute most favorable to plaintiffs is six years. On the other hand, the plaintiffs contend that the alleged excessive rental payments under the 1954 subleases were continuing wrongs, each payment representing a separate wrong so that, as stated by them, they are "entitled to secure relief for those transactions which have occurred" within the applicable limitation period, whether it be six or three years. They make the further contention that the defendants are estopped from raising any limitation defense by reason of their misstatements of fact and concealment of the corporate transactions here under attack.

Whether these causes of action, involving as they do the internal affairs of a Tennessee corporation and arising there, are time-barred must be determined in accord with the body of law which would be applied by New York, the forum state in this diversity suit.⁷ Pursuant to New York's public policy of affording its resident-defendants the benefit of the shortest applicable period of limitation, New York would apply its "borrowing statute" and bar this suit if the limitation period had run either here or in Tennessee.⁸ Relevant to this determination are not only the statutory period itself, but "all its accouterments," including tolling doctrines and rules governing accrual of causes of action.⁹ The defendants do not contend that Tennessee prescribes a shorter limitation period and acknowledge that New York is the more restrictive of the two jurisdictions. Accordingly we first consider whether these causes of action are barred under New York law.

Our initial inquiry concerns the date on which the causes of action accrued, for that is when the statutory period begins to run.¹⁰ Claims accrue in New York when the plaintiff first acquires the right to seek a judicial remedy.¹¹ Here, the corporation was wronged on August 22, 1954, when the subleases were renewed to its detriment and to the profit of one owing it a...