Pomerantz v. Clark

• Decision Date: 30 November 1951
• Docket Number: 51-260,51-185,50-929,Civ. A. No. 50-615,51-79,50-624,51-67,51-132,51-74,51-98,51-415.,51-261
• Citation: 101 F. Supp. 341
• Parties: POMERANTZ v. CLARK et al., and eleven other cases.
• Court: U.S. District Court — District of Massachusetts

101 F. Supp. 341

POMERANTZ v. CLARK et al., and eleven other cases.

Civ. A. Nos. 50-615, 50-624, 50-929, 51-67, 51-74, 51-79, 51-98, 51-132, 51-185, 51-260, 51-261, 51-415.

United States District Court D. Massachusetts.

November 30, 1951.

Julius Levy, 295 Madison Avenue, New York City, Harold Brown, Boston, Mass., Matthew Cohen, Boston, Mass., Pomerantz, Levy, Schreiber & Haudek, New York City, Leo Sontag, Holtz & Rose, Bernard Kaplan, Max Singer, Paul G. Counihan, Meyer A. Moscow, Jacob Shactman, and Frank A. Silver, all of Boston, Mass., of counsel, for plaintiffs who argued in opposition to motions to dismiss.

Charles B. Rugg, Thomas H. Mahony, Boston, Mass., Rowland Long, Springfield, Mass., Daniel Lyne, Harold Taylor, H. Le-Baron Sampson, John M. Hall, and Edward C. Park, all of Boston, Mass., Bingham, Dana & Gould, Choate, Hall & Stewart, Lyne, Woodworth & Evarts, Ropes, Gray, Best, Coolidge & Rugg, and Withington, Cross, Park & McCann, all of Boston, Mass., of counsel, for defendants who argued in favor of motions to dismiss.

WYZANSKI, District Judge.

Motions to dismiss complaints for failure to state a cause of action have been filed by all defendants in twelve companion cases. These cases involve similar charges brought by minority policyholders against directors of two insurance companies and other persons alleged to have participated in corporate loans said to have been improper and unlawful. The reasons why these motions must be granted can be most conveniently stated by selecting for this opinion the typical motion filed by Sidney W. Winslow, Jr., one of the defendants in Civil Action No. 50-625, Pomerantz v. Clark et al.

Pomerantz's complaint alleges that he, being a citizen of New York, is a policyholder of the John Hancock Mutual Life Insurance Company, a mutual life insurance corporation organized under the laws of Massachusetts, of which defendant Winslow, a citizen of Massachusetts, is a director. Pomerantz, suing on behalf of all other policyholders similarly situated, charges Winslow, many of his co-directors and others with liability because of their part in the making of a loan of $3,500,000 to Texmass Petroleum Corporation and a loan of at least $332,938 to Petroleum Reserve Corporation. John Hancock is joined as a defendant.

The principal allegations of the complaint are that Texmass was insolvent at the time of the loan; that John Hancock received inadequate security; that the directors failed to obtain independent appraisals of the value of the security; that Winslow and his co-directors failed to follow customary and proper investigatory procedures; that the loan was made in violation of the insurance laws of Massachusetts, specifically because it was made to an insolvent company, was largely on unimproved real property and was in excess of two-thirds of the fair market value of the improved real property; that the loan was made at lower than prevailing interest rates; and that the loan was made for the purpose of bailing out and otherwise assisting relatives and business associates of the directors. Similar allegations are made about the loan to Petroleum.

The complaint alleges in Paragraph 28 that demand on the directors to bring this suit would be futile because the defendant-directors constitute an overwhelming majority of the present board of John Hancock. And the complaint in Paragraph 29 avers that "Demand on the members and policyholders of John Hancock to bring this suit would be futile because:

"(a) Under the laws of Massachusetts and the charter and by-laws of John Hancock, the directors and officers and not the policyholders manage the affairs of the Company, including the bringing of actions for it. The policyholders as a body cannot by resolution manage the Company or compel its management to bring suit.

"(b) Compliance by John Hancock's management with a policyholders' resolution to bring this action would leave the conduct of the action in hostile hands and the action could not be properly prosecuted.

"(c) Efforts to secure action by John Hancock's policyholders would require a proxy fight with the management. There are several million policyholders of John Hancock who live in all parts of the world and the expense of communicating with them would be prohibitive."

Pomerantz asks that Winslow and the individual defendants be ordered to pay over to John Hancock $1,500,000 and interest upon condition that John Hancock transfers to them so much of the Texmass loan as remains unpaid. He also seeks other forms of relief.

The only issue which requires consideration is whether on his allegations plaintiff is authorized to prosecute for the benefit of John Hancock a claim upon which the complainant admits he did not give the policyholders acting in a corporate meeting an opportunity to pass before he sued.

Since the jurisdiction of this court is founded upon the diversity of citizenship of the parties, plaintiff's complaint, to be valid, must state a cause of action cognizable in the state courts of Massachusetts. Erie R. Co. v. Tompkins, 304 U. S. 64, 58 S.Ct. 817, 82 L.Ed. 1188. Thus, in a policyholder's derivative action brought in this District against the directors of a Massachusetts corporation and those alleged to have confederated with them in wrongdoing, plaintiff's complaint must meet the requirements of the substantive law of this Commonwealth. Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079. Cf. Cohen v. Beneficial Loan Corp., 337 U.S. 541, 556 lines 8-10, 69 S.Ct. 1221, 93 L.Ed. 1528; Ragan v. Merchants Transfer & Warehouse Co., 337 U.S. 530, 533, 69 S.Ct. 1233, 93 L.Ed. 1520; Steinberg v. Hardy, D.C.D.Conn., 90 F.Supp. 167. This prerequisite is in addition to, though consistent with, the prerequisite that plaintiff must meet the requirements of an adjectival nature stipulated in Rule 23 of the Federal Rules of Civil Procedure, 28 U.S. C.A. Cohen v. Beneficial Loan Corp., supra.

For many years the substantive law of Massachusetts has been that, except where immediate action is required, Brewer v. Proprietors of Boston Theatre, 104 Mass. 378, 392-394 or there is no impartial internal corporate forum to which he can resort, Von Arnim v. American Tube Works, 188 Mass. 515, 74 N.E. 680, a member of a corporation has no cause of action of a derivative nature unless prior to suit he laid his complaint first before the directors if they were not disqualified and then before the members of the corporation if they were not disqualified to take action against those whom he alleges have wronged the corporation. Dunphy v. Traveller Newspaper Association, 146 Mass. 495, 16 N.E. 426; Bartlett v. New York, New Haven and Hartford R. R. Co., 221 Mass. 530, 538, 109 N.E. 452; S. Solomont & Sons Trust, Inc. v. New England Theatres Operating Corp., 326 Mass. 99, 93 N.E.2d 241.

The fundamental basis of the rule is the Massachusetts view that neither an individual member nor a court is usually best fitted to determine whether it is to the interest of a corporation publicly to enforce corporate claims even if those claims are founded on plainly unlawful conduct participated in by corporate officers or directors. Solomont's case supra; Brewer's case supra. A disinterested internal organ of the corporation has the advantage of familiarity with the enterprise, with those who have conducted it and with the record of success or failure. Moreover, it is the internal organs that the member voluntarily chose as his partners in decision when he freely contracted to join their association. Unless it can be shown that each available internal organ is biased, or refused to hear evidence, or acted unreasonably, or in some other manner was disqualified, the courts of Massachusetts will not act at the suit of a minority member. He is remitted to the directors or, if they are disqualified, to the members as a body as the appropriate tribunal to decide not only if a derivative claim has merit but if the corporate welfare is best promoted by suing upon it. Solomont's case.

In the instant case the first question is whether plaintiff was entitled to sue before he made demand upon the directors. Plaintiff asserts that such resort was unnecessary because a majority of them were charged with wrongdoing. To this defendant replies that the accused might withdraw from a directors' meeting leaving a disinterested quorum competent to act for the corporation. Whether such a quorum could be expected to weigh impartially a charge against their accused colleagues is a problem which has not been squarely settled in Brewer's, Von Arnim's or any other Massachusetts case. It seems to be more difficult to determine the Massachusetts state rule on this than on other determinative issues in the instant case. Hence for present purposes I shall assume,...