Miller v. Loft, Inc.

• Decision Date: 06 March 1931
• Citation: 153 A. 861,17 Del.Ch. 301
• Court: Court of Chancery of Delaware
• Parties: ALFRED R. MILLER, Intervenor complainant, v. LOFT, INCORPORATED, a corporation of the State of Delaware, and CHARLES G. GUTH, defendants

153 A. 861

17 Del.Ch. 301

ALFRED R. MILLER, Intervenor complainant, v. LOFT, INCORPORATED, a corporation of the State of Delaware, and CHARLES G. GUTH, defendants

Court of Chancery of Delaware, New Castle

March 6, 1931

BILL TO SET ASIDE A CONTRACT alleged to have been induced by fraud and to cancel certain shares of stock alleged to have been fraudulently obtained by the defendant Guth from Loft, Inc.

The bill alleges that on or about July 31, 1929, the contract in question was entered into by Guth on the one side and Loft Inc., on the other. The substance of the contract provided that Guth should sell and Loft, Inc. should purchase the entire capital stock of one hundred thousand shares of Mavis Candies, Inc., a Delaware corporation. The consideration to be paid was to be determined by totalling five items, viz (1) $ 200,000 representing prepaid advertising and the good-will of Mavis Candies, plus (2) the value of manufactured goods of Mavis on hand on July 31, 1929, at the wholesale price less thirty-three and one-third per cent plus (3) the cost of raw materials and inventory of Mavis on hand on the same date, plus (4) the appraised value of such portion of the machinery and fixtures of Mavis as Loft, Inc. should find desirable to use in its Long Island City factory and plus finally (5) $ 60,000 representing secured notes in that amount to be endorsed to Loft, Inc.

The consideration was thus to be ascertained at a time later than the contract's execution.

It was moreover agreed to be paid not in cash, but in shares of stock of Loft, Inc., at eleven dollars and seventy-five cents per share.

The consideration was in due course calculated to be $ 595,631.00 and Loft, Inc., issued and delivered to Guth 50,692 shares in payment thereof.

The bill charges that the execution of the contract by Loft, Inc., was induced by fraudulent representations made by Guth, and further that Guth perpetrated certain frauds in connection with the ascertainment of the total of the consideration to be paid, whereby Loft, Inc., was induced to issue shares of stock to him in excess of the number which but for such frauds he would have received.

Loft, Inc., has been subjected to a rather bitter internal controversy between rival factions seeking its control. One of these factions was headed by Guth, now president, and the other by Miller, the former president. See Duffy v. Loft, Inc., ante p. 140, 151 A. 223; post p. 376, 152 A. 849. When this controversy was pending, with the Miller officers in control, the present suit was instituted in the name of Loft, Inc., as complainant against Guth, defendant. After the litigation over the control was determined in favor of Guth and his board of directors took control of the corporation, Miller petitioned this court to intervene in the pending bill against Guth. He showed his interest as a stockholder and alleged the futility of a continuance of the suit with the corporation as complainant, the corporation being controlled by directors and officers who were partisans of the defendant Guth. By stipulation of the parties, Miller was permitted to intervene, with the understanding that he should file an amended bill in which he as intervenor should stand on the record as complainant and Loft, Inc., should be shifted to the side of the defendant with Guth. This stipulation was made in order to obviate the necessity of filing a new bill.

The bill now before the court was thereafter filed as an amended bill.

The defendants have demurred on several grounds which in so far as is necessary are noticed in the ensuing opinion.

Demurrer to the whole bill sustained.

Ayres J. Stockly, of the firm of Hastings, Stockly & Morris, and Richard B. Tippett, of Baltimore, Md., for intervening complainant.

George N. Davis and Clarence A. Southerland, of the firm of Ward & Gray, and Charles C. Keedy, and Arthur F. Driscoll, of the firm of O'Brien, Malevinsky & Driscoll, of New York City, for defendants.

OPINION

THE CHANCELLOR

One ground of demurrer is that the bill fails to show that any demand was ever made upon the board of directors of Loft Inc., to institute suit upon any of the causes of action alleged in the bill to exist, and that it does not appear from the bill that such demand would be futile. The rule is well settled in this State that if by reason of hostile interest or guilty participation in the wrongs complained of, the directors cannot be expected to institute suit, or if a suit is instituted it is apparent that the directors would not be the proper persons to conduct it, no demand upon them to institute suit is requisite to enable a stockholder to sue in behalf of the corporation. Sohland v. Baker, 15 Del.Ch. 431, 141 A. 277, 58 A. L. R. 693; Baker v. Bankers' Mortgage Co., 14 Del.Ch. 427, 129 A. 775; Fleer v. Frank H. Fleer Corp., 14 Del.Ch. 277, 125 A. 411; Harden v. Eastern States Public Service Co., 14 Del.Ch. 156, 122 A. 705; Roberts, et al., v. Kennedy, et al. 13 Del.Ch. 133, 116 A. 253; Ellis v. Penn Beef Co., 9 Del.Ch. 213, 80 A. 666. The circumstances which constitute an excuse for failure to demand that the directors bring suit ought generally to be set out in the bill. Such excusing circumstances are not set forth in this bill. But the stipulation entered into by the parties by which a pending bill filed in the name of the corporation by authority of its board of directors was agreed to be converted into a bill by the complainant as an intervening stockholder in his derivative right, saves the bill in its converted form from any objection on the ground that the complaining stockholder has failed to allege the excusing circumstances which entitle him to sue.

Another ground of demurrer is directed to the manner in which the allegations of fraud are made. In paragraph four of the bill, it is charged that the amount of consideration to be paid to Guth was calculated on representations made by Guth which were false, known to Guth to be false, unknown by Loft, Inc., to be false and made by Guth to induce Loft, Inc., to enter into the contract. This allegation cannot stand the test of a demurrer. In the first place, there is a failure to allege that Loft, Inc., relied on the allegedly false representations, an allegation which is essential. In the next place, what the representations were is not shown. Fraud cannot be alleged in any such general manner. Good pleading requires sufficient particularization to inform the party charged with fraudulent representations of the nature of the representations relied upon. Paragraph 4 (c) of the bill is also objectionable because it fails to allege that the representations alleged to be false were relied upon by Loft, Inc. For the same reason paragraphs 4 (e) and 4 (f) of the bill are objectionable. Paragraph 4 (g) which is objected to as defective for want of particularization, etc., when treated as it should be, as an addendum to paragraph 4 (b), which seems to me to be sufficient in point of form, would appear to be without objection.

What pertinency paragraphs 7 and 8 have to the case made by the bill, I cannot see. Paragraph 7 refers to certain alleged facts concerning Mavis Candies, Inc., which arose after Loft, Inc., became its sole owner and while Guth was its manager under contract with Loft, Inc. But those facts, if they all be conceded to be true, have nothing whatever to do either with the circumstances surrounding the execution of the contract sought to be rescinded or with the calculations by which the amount of stock deliverable to Guth under that...