Marco v. Sachs

• Decision Date: 16 July 1951
• Citation: 201 Misc. 928
• Parties: Ida Marco, as Ancillary Administratrix of The Estate of Harry Marco, Deceased, a Stockholder in Blue Ridge Corporation, on Behalf of Himself and All Other Stockholders Similarly Situated, and on Behalf of Said Corporation, Plaintiff,<BR>v.<BR>Arthur Sachs et al., Defendants.
• Court: New York Supreme Court

201 Misc. 928

Ida Marco, as Ancillary Administratrix of The Estate of Harry Marco, Deceased, a Stockholder in Blue Ridge Corporation, on Behalf of Himself and All Other Stockholders Similarly Situated, and on Behalf of Said Corporation, Plaintiff,

v.Arthur Sachs et al., Defendants.

July 16, 1951.

Hurley, Gray & Kearney for Blue Ridge Corporation and another, defendants.

David M. Palley for plaintiff.

Sullivan & Cromwell for Arthur Sachs and others, defendants.

BARTELS, J.

Motion for substitution of an assignee as a nominal party defendant. This is a stockholder's derivative action based upon alleged wrongs perpetrated on the defendant corporation by the individual defendants as directors. In this case Central States Electric Corporation (hereafter referred to as "Central States"), which is the parent and controlling stockholder of the Blue Ridge Corporation (hereafter referred to as "Blue Ridge"), filed a petition in 1942 in the United States District Court for the Eastern District of Virginia for reorganization under Chapter X of the Bankruptcy Act. (U. S. Code, tit. 11, § 501 et seq.) Thereafter a plan of reorganization of Central States and its subsidiary was consummated which provides, among other things, that (1) Central States will transfer most of its assets to the Blue Ridge Mutual Fund, Inc., a new company, pursuant to an agreement of merger, wherein Blue Ridge would be merged into Blue Ridge Mutual Fund, Inc.; and (2) that prior to the merger, Blue Ridge will segregate and transfer to Ridge Realization Corporation (hereafter referred to as "Realization") certain assets and contingent claims containing, among other things, the claims and demands now being prosecuted in this action on behalf of Blue Ridge. Pursuant to this plan, an assignment was duly executed by Blue Ridge purporting to transfer, sell and assign to Realization all claims which Blue Ridge now has against the codefendants in the present action. It is provided therein that the assignment shall be governed and its terms and provisions shall be construed in accordance with the laws of the State of New York and that Blue Ridge will upon request execute any instruments or further assurances or transfers which may be necessary to confirm the present assignment. Realization also assumes any and all obligations for counsel fees and expenses incurred and unpaid in connection with the prosecution of the action. The assignment was executed in New Jersey on June 13, 1951, for the purpose of saving certain New York State transfer taxes and subsequently, after opposition to this motion, a similar assignment between the parties was executed in New York on June 15, 1951. In exchange for these assets, Realization issued to Blue Ridge 7,422,483 shares of common stock of Realization (which constitute all of its outstanding shares) and Blue Ridge in turn declared a dividend of these shares of Realization to its stockholders at the rate of one share for each share of common stock of Blue Ridge, payable on August 7, 1951. As a result of this transaction all of the shares of the stock of Realization will be owned by the stockholders of Blue Ridge. Accordingly, Realization now moves to be substituted in this action in the place and stead of Blue Ridge, and the plaintiff stockholder has executed a consent to the entry of such an order of substitution.

The movant's position is that the assignment is valid under the laws of the State of New York because it is a grant; that it is a permissible assignment under section 41 of the Personal Property Law (Frisch v. Zelart Drug Co., 180 Misc. 733; Holmes v. Camp, 186 App. Div. 675, affd. 227 N.Y. 635); that the court, under section 83 of the Civil Practice Act relating to the substitution of parties in case of an assignment, should permit the substitution (Titus v. Wallick, 306 U. S. 282); and, moreover, that the transfer of the interest of Blue Ridge is a formal matter in which the codefendants have no concern (Smith v. Zalinski, 94 N.Y. 519).

The codefendants, the directors, oppose this motion on the grounds that the assignment is invalid under the laws of the State of New Jersey; that New York will not recognize the same for reasons of public policy; that Blue Ridge is an indispensable party, and that section 61 of the General Corporation Law bars the substitution because the plaintiff was not a stockholder of Realization at the time of the transaction of which she now complains.

For the purpose of this motion the court will assume, without deciding, that the assignment is valid either in New Jersey or in New York, and that in all events it can be validated in view of the clauses of further assurances contained therein. In addition the court does not believe there is any merit in the contention that section 61 of the General Corporation Law prevents a substitution of the parties, if the same is otherwise permissible. This plaintiff was a stockholder at the time the alleged transaction took place and the only question presented here is whether the corporation may assign its claim against the codefendants and thereafter be eliminated from the action by means of substitution of its assignee. It is not believed that any of the cases relied upon by the parties covers the facts of this particular case.

Substitution of assignees has often been permitted in the usual cases of assignments, where the assignor has denuded himself of all interest in the claim. (See White v. Hardy, 180 Misc. 63, affd. 266 App. Div. 660, and Burrow v. Marceau, 132 App. Div. 797.) But this is not the usual case of a plaintiff who has assigned his claim to a third person and seeks to have the third person substituted in his place as plaintiff. Nor is this a case of a successor by operation of law because Realization is not a successor to Blue Ridge, although Blue Ridge Mutual Fund, Inc., might be deemed such a successor. In this derivative stockholder's action, a court of equity has opened its doors to permit the action to be instigated and controlled by the stockholder as the nominal party plaintiff for the benefit of the corporation as the nominal party defendant. The form of the action is in reality an invention of equity to set in motion the machinery of justice (Holmes v....