Molasky ex rel. Clayton Corp. of Del. v. Lapin

• Decision Date: 16 November 1965
• Docket Number: No. 32150,32150
• Citation: 396 S.W.2d 761
• Parties: Allan MOLASKY ex rel. CLAYTON CORPORATION OF DELAWARE, Plaintiff-Appellant, v. Aaron S. LAPIN, Marcus Lipsky, and Clayton Corporation of Delaware, Defendants-Respondents.
• Court: Missouri Court of Appeals

Page 761

396 S.W.2d 761

Allan MOLASKY ex rel. CLAYTON CORPORATION OF DELAWARE Plaintiff-Appellant, v. Aaron S. LAPIN, Marcus Lipsky, and Clayton Corporation of Delaware, Defendants-Respondents.

No. 32150.

St. Louis Court of Appeals, Missouri.

Nov. 16, 1965.

Goldenhersh, Goldenhersh, Fredericks, Newman & Lane, Samuel J. Goldenhersh, St. Louis, for plaintiff-appellant.

Melvin L. Hertzman, St. Louis, for defendants-respondents.

DOERNER, Commissioner.

This is a derivative action by a minority stockholder to require the majority stockholders to account to the corporation for profits alleged to have been realized by them, and losses claimed to have been sustained by the company, resulting from the sale of certain stock to the corporation. Plaintiff procured service of process on the individual defendants by an attachment of their stock in an unrelated corporation. Defendant Lapin appeared specially and moved to dissolve the attachment. The trial court sustained the motion and quashed the attachment and garnishment issued pursuant thereto against defendant Lapin. Thereafter the court denied plaintiff's motion for default and inquiry against defendant Lipsky for lack of jurisdiction over him, dissolved the attachment and garnishment as to him, and ruled that the order be treated as a final order in the case. Plaintiff appealed to the Supreme Court, which held that it lacked appellate jurisdiction and transferred the cause to this court, 384 S.W.2d 613.

In brief, plaintiff alleged in his petition that Lapin and Lipsky, owners of a majority of the outstanding common voting stock of Clayton Corporation of Delaware (joined as a nominal party defendant under Civil Rule 52.04(a), V.A.M.R.), conceived the plan, scheme and conspiracy of foisting on Clayton Corporation the stock which they and their associates owned in another corporation, Development Research, Inc., for $1,250,000 plus additional considerations; that Lapin and Lipsky contemplated that they would use their domination and control of the board of directors of Clayton Corporation to effect approval of the transaction and pay over to defendants and their associates, 'a sum substantially in excess of the value of the shares of stock of said Development Research, Inc. owned by said defendants and their associates'; that the payment of the consideration was not the result of arm's length bargaining but was dictated by Lapin and Lipsky to serve their personal interests and that of their associates at the expense of Clayton Corporation; that the fair and reasonable value of the stock of Development Research, Inc., 'was substantially less than the sum paid for same and was therefore unfair to Clayton Corporation of Delaware and unduly favorable to the stockholders of Development Research, Inc. and more particularly, the defendants and their associates'; that it constituted a fraud and a gift and waste of the assets of Clayton Corporation; that the individual defendants acted recklessly, negligently and carelessly and are liable to account for all losses sustained by Clayton Corporation as a result thereof; and that 'The exact amount of said losses is unknown to plaintiff and can be ascertained only upon an accounting in this action.' It was further alleged that plaintiff was a minority stockholder of Clayton Corporation at the time of the transactions complained of and continues to be; that the members of the board of directors of the corporation were nominated and caused to be elected by the individual defendants, and that all of the directors were dominated and controlled by the individual defendants to such an extent that a demand by the plaintiff that the board bring this action would have been futile; and that plaintiff brings the action for himself and on behalf of all other shareholders similarly situated. The prayer was that the individual defendants be required to account to Clayton Corporation for all profits and gains obtained by them and for all losses and damages sustained by the corporation by reason of the transactions, '* * * not in excess of $1,250,000'; that plaintiff be awarded his reasonable costs and disbursements, including reasonable attorneys' and accountants' fees; and 'That plaintiff have such other, further and different relief as the Court may deem just and proper in the premises.'

The trial court dissolved the attachments against the individual defendants, '* * * for the reason that a derivative shareholder's suit can lie only in equity, and attachment is not available in an equity action.' Plaintiff does not dispute the court's ruling that in an equity suit service may not be obtained upon a nonresident defendant by an attachment. Civil Rule 85.01, V.A.M.R.; State ex rel. Auchincloss, Parker & Redpath, Inc. v. Harris, 349 Mo. 190, 159 S.W.2d 799. And in his brief he concedes that, 'Prior to 1943, it was mandatory that the jurisdiction in a case similar to that in the case at bar, be in equity. * * *' In view of this concession that what has come to be known as a stockholder's derivative action, at least until 1943, could be maintained only in equity we need not elaborate on the origin and development in equity of such a suit however tempting that subject may be. ¹ The significance of plaintiff's reference to the year 1943 is to be found in the contention in his brief that, 'Section 507.070(2), R.S.Mo.1959, adopted by the Missouri Legislature in 1943, converted derivative shareholders' actions and class actions into actions at law. * * *' Basing his argument on this premise, plaintiff asserts that his action was one at law, ans that the court therefore erred in dismissing it on the grounds that a shareholder's derivative action would lie only in equity.

Section 507.070(2), RSMo 1959, V.A.M.S., was enacted by the General Assembly in 1943 as one of the provisions of our (then) new Code of Civil Procedure. Laws 1943, p. 353, Sec. 19(b). It has since been superseded by Civil Rule 52.08(b), V.A.M.R., which as promulgated by our Supreme Court reads:

'In an action brought to enforce a secondary right on the part of one or more shareholders in an association, incorporated or unincorporated, because the association refuses to enforce rights which may properly be asserted by it, the petition shall aver that the plaintiff was a shareholder at the time of the transaction of which he complains or that his share thereafter devolved on him by operation of law. The petition 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.'

The origin of the Rule, the reasons for its adoption, and its historical development effectively refute plaintiff's argument that a shareholder's derivative suit was thereby converted into an action at law. The inception of the Rule is to be found in Hawes v. City of Oakland, 14 Otto (104 U.S.) 450, 26 L.Ed. 827, decided in 1881. In an earlier case, Dodge v. Woolsey, 18 How. (59 U.S.) 331, 15 L.Ed. 401, decided in 1855, the Supreme Court had upheld the equity jurisdiction of the Federal court in an action by a nonresident stockholder against an Ohio corporation and Ohio taxing officials to enjoin the payment and collection of a tax claimed to be unconstitutional. As pointed out by Moore in his Federal Practice, 2nd Ed., Vol. 3, Sec. 23.15, the Dodge case was followed by a number of cases in which it appeared that collusive attempts were made to foist jurisdiction on the Federal courts through the device of having a nonresident stockholder bring the action against the corporation and the third party in order to obtain the requisite diversity of citizenship. As a means of negating such collusion, the court, after enumerating various examples of a shareholder's bona fide action, stated (104 U.S. 460, 461):

'But, in addition to the existence of grievances which call for this kind of relief, it is equally important that before the...