Meltzer v. Atlantic Research Corporation

• Decision Date: 09 April 1964
• Docket Number: No. 9201.,9201.
• Citation: 330 F.2d 946
• Parties: Samuel MELTZER, Appellant, v. ATLANTIC RESEARCH CORPORATION et al., Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

330 F.2d 946 (1964)

Samuel MELTZER, Appellant, v. ATLANTIC RESEARCH CORPORATION et al., Appellees.

No. 9201.

United States Court of Appeals Fourth Circuit.

Argued January 23, 1964.

Decided April 9, 1964.

Sidney B. Silverman, New York City (Ewell G. Moore, Jr., and Rutherford Day, Washington, D. C., and Rosenfeld & Silverman, New York City, on brief), for appellant.

Armistead L. Boothe, Alexandria, Va. (James W. Crowley and Ira P. Barsky, Alexandria, Va., Louis Koutoulakos, Arlington, Va., John A. Beck, Charles S. Rhyne, Thomas P. Brown, III, Ganson Purcell, E. Ladd Thurston and Courts Oulahan, Washington, D. C., on brief), for appellees.

Before BRYAN and BELL, Circuit Judges, and MICHIE, District Judge.

ALBERT V. BRYAN, Circuit Judge.

This derivative suit by shareholder Samuel Meltzer against the Atlantic Research Corporation and its then five directors was dismissed by the District Court on the ground that the plaintiff had failed first to demand of the directors "such action as he desires" of the corporation — that is to sue for recovery of losses it suffered from the alleged misfeasance or nonfeasance of the directors. This exaction of the plaintiff was predicated on Rule 23(b), Fed.R. Civ.P. reading pertinently as follows:

"The complaint in a secondary action shall also set forth with particularity the efforts of the plaintiff to secure from the managing directors or trustees and, if necessary, from the shareholders such action as he desires, and the reasons for his failure to obtain such action or the reasons for not making such effort."

Appealing, the shareowner contends that a demand would have been in vain and, indeed ineffectual if granted. We agree.

The complaint was filed on behalf of all the other shareholders. As the decision was passed on a motion to dismiss or for summary judgment, the allegations of the plaintiff are to be treated as admitted or as not genuinely in issue. So taken, they depict such misfeasance by two directors — Arch C. Scurlock and Arthur W. Sloan — and such nonfeasance by the other three as to demonstrate the emptiness of resort to them.

Scurlock and Sloan, according to the complaint, own 418,790 and 372,530 shares of Atlantic's common stock, that is 21% and 18%, respectively. It further averred that together with the other three defendant directors, Scurlock as director and president, and Sloan as vice-president and director, dominated Atlantic.

Plaintiff, a beneficial holder of stock since 1960, commenced the present action on November 13, 1962 and on January 3, 1963 filed an amendment, here treated as the complaint. He charges that on October 10, 1962 the Securities and Exchange Commission suspended the trading of Atlantic's stock on the American Stock Exchange because of the publication by Atlantic of false financial statements, including the failure to disclose certain unauthorized diversions of corporate moneys.

The misapplications were alleged as committed in 1962 and prior years. The first was the loan of $3,900,000 by Atlantic at the instance of Scurlock to "certain intermediaries". The censure is: that he had borrowed upon nearly all of his stock in Atlantic; that the market price of this stock began to decline sharply in June 1961; that as the price fell the value of the investment of the individual defendants decreased; and that in order to prevent further dwindling of their investments and to prevent shrinkage of Scurlock's security for his loans, with possible foreclosure by sale of his Atlantic shares, Scurlock and the other defendant directors determined to support the market price of Atlantic's shares. This was accomplished, the complaint declares, through the loans of $3,900,000, as the intermediaries were to use the proceeds to buy Atlantic shares on the market. This process was compleated with the pledge of the newly purchased shares to Atlantic as security for the notes representing the $3,900,000.

In addition to citing Scurlock as using Atlantic's funds to defray his living, entertainment and personal traveling expenses, the complaint goes on to tax him and the other defendant directors with financing other companies in which Scurlock and Sloan were largely interested; and that these funds were used to acquire and improve land of these companies which in turn leased them to Atlantic on unfavorable terms. The complaint submits that all of these transactions were effected or brought about by Scurlock and Sloan and were participated in, or negligently tolerated by, the other defendant directors.

Injury to Atlantic is summarized in this way: that the false publication with resulting suspension by the S. E. C. of market trading in its shares gravely impaired the credit of Atlantic; that the security for the loans of $3,900,000 is substantially less in value than their face amounts; that the loans were illegal, as they were made by Atlantic to acquire its own stock; that this employment of these moneys — said to be 20% of its total assets — withdrew that sum from the intended aims of the corporation; and that these loans, as well as the appropriation of Atlantic's funds to the use of the other companies in which Scurlock and Sloan were interested, constituted "a waste and spoliation of Atlantic's assets".

None of the acts or apathy of the defendants as pleaded was denied. The defense is that the directors have taken all the rehabilitative measures which could be required of them by the corporation, and this action proves the wisdom of the prerequisite of a demand before suit. The only denial is the averment of the insecurity of the loans of $3,900,000.

In this background, demand of the directors that the corporation recapture these loans and appropriations, as well as recover damages suffered by the corporation,...