Rare Earth, Inc. v. Hoorelbeke

• Decision Date: 15 July 1975
• Docket Number: No. 74 Civ. 3402 (JMC).,74 Civ. 3402 (JMC).
• Citation: 401 F. Supp. 26
• Parties: RARE EARTH, INC., Plaintiff, v. Peter HOORELBEKE and Michael Urso, Defendants. Peter HOORELBEKE and Michael Urso, Third-Party Plaintiffs, v. Gilbert BRIDGES et al., Third-Party Defendants.
• Court: U.S. District Court — Southern District of New York

401 F. Supp. 26

RARE EARTH, INC., Plaintiff, v. Peter HOORELBEKE and Michael Urso, Defendants.

Peter HOORELBEKE and Michael Urso, Third-Party Plaintiffs, v. Gilbert BRIDGES et al., Third-Party Defendants.

No. 74 Civ. 3402 (JMC).

United States District Court, S. D. New York.

July 15, 1975.

COPYRIGHT MATERIAL OMITTED

Emil, Kobrin, Klein & Garbus, New York City (Martin Garbus and Paul C. Kurland, New York City, of counsel), for plaintiff and third-party defendants Bridges and Guzman.

Guazzo, Silagi & Craner, P. C., New York City (Caesar C. Guazzo and Stephen E. Klausner, New York City, of counsel), for defendants and third-party plaintiffs.

OPINION AND ORDER

CANNELLA, District Judge:

Rare Earth, Inc., is not, as one might surmise, an organization dedicated to environmental activism or the preservation of our natural resources. Rather, it is the corporate entity formed by a group of rock and roll musicians who publicly perform as "RARE EARTH". From this group "comes the dissonant chord"¹ of an intracorporate battle for control resulting from a schism among the band members in July, 1974.

Predicating jurisdiction on the Lanham Act,² the two resultant corporate factions ask the Court to decide which individuals may continue to publicly perform as "RARE EARTH". For the reasons expressed in this opinion, we conclude that shareholders Bridges and Guzman possess a controlling interest in Rare Earth, Inc. However, because of the failure of these persons to conform to the dictates of Michigan law, we find that the plaintiff, Rare Earth, Inc., may not obtain the affirmative relief sought in this proceeding. Accordingly, both the complaint and the counterclaims-third-party complaint will be dismissed.

THE UNDERLYING FACTS

"RARE EARTH" is a rock and roll performing group which has recorded several record albums and which enjoys national prominence in rock music circles. The group was organized in the late 1960s and originally consisted of five performers. A sixth member, Edward Guzman, later joined the band.

As the Rare Earth group gained national exposure and the revenues it derived from concerts and recordings increased, the "RARE EARTH" name became a valuable asset. As a result, counsel, Henry Baskin, suggested that a corporation be formed. In July, 1970, the plaintiff, Rare Earth, Inc., was incorporated under Michigan law. 50,000 shares of capital stock were authorized in the articles of incorporation and 1,200 shares were subscribed to by the band members. As to 1,000 of these shares, it is conceded that the five original band members each received 200 shares. As to the remaining 200 shares, the parties vigorously dispute whether Edward Guzman ever became their lawful owner.

As time passed three of the original members departed from the Rare Earth group and three new performers were engaged to replace them. It is not disputed that two of the departing members severed all ties with the group and transferred their stock back to the corporation. However, the litigants disagree dramatically concerning the present status in the corporation of the third, Kenneth Folcik.

The Rare Earth group, consisting of two original members, Hoorelbeke and Bridges, as well as Guzman and the three replacement performers, continued to perform as a unit until July, 1974. However, at that time, the group divided into two factions, each of which now claims control of the corporation and the right to perform as "RARE EARTH". The first faction consists of Bridges, Guzman and two others; the second, of defendants Hoorelbeke and Urso. The Bridges-Guzman faction has presently placed itself in control of the corporation and currently performs as "RARE EARTH". The Hoorelbeke faction challenges this position and claims a majority interest in the corporation and the right to use the "RARE EARTH" mark. The differing views entertained by these individuals has resulted in this litigation.

In a nutshell, both factions concede that Bridges and Hoorelbeke each owns 200 shares of Rare Earth, Inc. In dispute between them is whether Guzman and Folcik are presently shareholders. The Bridges-Guzman faction asserts that Guzman owns 200 shares of Rare Earth, Inc. and that Folcik does not; thus they claim control of 400 of 600 outstanding shares of the corporation. Hoorelbeke, on the other hand, claims that Folcik remains a shareholder and that he, Hoorelbeke, is the voting trustee for the Folcik shares. This claim, when coupled with Hoorelbeke's assertion that Guzman is not a stockholder, allegedly places working corporate control in his grasp. We discuss the merits of the two contested positions infra (Point IV), and note for present purposes only that each challenged claim of stock ownership turns upon a construction of Michigan law (either the Michigan Business Corporation Act or Article 8 of the Michigan Uniform Commercial Code). Thus, plaintiff's counsel is quite accurate when he states:

this matter concerns the determination of one straight-forward issue. This issue is who owns the right to use the trademark "Rare Earth" in connection with (1) rock and roll music public entertainment performances; (2) the sale of records and tapes; and (3) for all legitimate purposes. By stipulation it was agreed that all of the rights in the trademark "Rare Earth" are owned by plaintiff corporation Rare Earth, Inc.... Therefore, the only issue for this Court is who owns the stock in the plaintiff corporation.³

THE PRESENT LITIGATION

The plaintiff, Rare Earth, Inc., commenced this action on August 5, 1974 by filing a complaint alleging both Lanham Act and pendent state law claims. The first count of the complaint recites what may be termed the § 43(a), 15 U.S.C. § 1125(a), litany: infringement, confusion, deception of the public, palming off, false advertising, false designation of origin, false representation and description in commerce, unfair competition and loss of good will. Almost immediately thereafter, on August 26, 1974, the corporation succeeded in obtaining a temporary restraining order from Judge Owen. In essence, this order (1) prohibited the institution of lawsuits relating to Rare Earth, Inc. or the mark "RARE EARTH" and stayed all pending actions; (2) restrained defendant Hoorelbeke from representing the extent of his share ownership in Rare Earth, Inc. to the musical entertainment community; and (3) enjoined the defendants "from taking any action or making any announcement to the musical entertainment field which would tend to interfere with the continued public performance of the Rare Earth group." On September 5, 1974, Judge Conner extended the temporary restraining order until September 13th and on September 11th, in order that they might enjoy adequate pretrial discovery, the parties stipulated that the restraining order be continued in effect until such time as we had decided plaintiff's application for a preliminary injunction. See, Fed.R.Civ.P. 65(b).

In October, 1974, the defendants filed an answer in which numerous affirmative defenses and counterclaims are asserted. The first counterclaim independently places jurisdiction upon § 43(a) of the Lanham Act⁴ and is a mirror image of the plaintiff's federal claim. Subsequently, with leave of this Court, the defendants filed a third-party complaint which joins four of the present members of the Rare Earth group, Bridges, Guzman, Olson and Monette as defendants on the counterclaims. See, Fed.R.Civ.P. 13(h).

On December 3, 1974, we commenced a hearing on plaintiff's application for a preliminary injunction. During the preceding months the parties had engaged in extensive and vigorous discovery⁵ which prompted us to order that "the trial of the action on the merits to be advanced and consolidated with the hearing of the application." Fed.R.Civ. P. 65(a) (2). An advisory jury was empanelled pursuant to Fed.R.Civ.P. 39(c), and it was ultimately asked to consider one of the factual disputes at issue.⁶ The trial was concluded on December 6, 1974 and, thereafter, the parties submitted post-trial and supplemental post-trial memoranda to the Court.

DISCUSSION

I

The plaintiff's complaint must be dismissed, albeit without prejudice. In their third affirmative defense (Answer ¶ 5), the defendants assert that "Neither a majority of the directors nor of the shareholders of Rare Earth, Inc., voting at a duly constituted meeting, authorized counsel to be retained or to initiate suit." (Emphasis added.) Although not for the precise reasons advanced, we find this position well founded in law and fact.

The defendants couch their present challenge in terms of the ultra vires doctrine. However, that doctrine, which is severely restricted in application by Michigan statute (Mich.Comp. Laws Ann. § 450.1271), clearly does not pertain to the facts at bar. See also, Madison National Bank v. Lipin, 57 Mich.App. 706, 226 N.W.2d 834, 838 (1975) ; 7 Michigan Law & Practice Encyclopedia, Corporations § 349 at 302. "An ultra vires act has been defined as an act beyond the scope of the powers of a corporation, as defined by its charter or articles of incorporation" and, under Michigan law, "it has generally been said that `except in cases where the rights of the public are involved, the plea of ultra vires ... will not be allowed where it will not advance justice, but will accomplish a legal wrong.'" 7 Michigan Law & Practice Encyclopedia, Corporations § 348 at 300-01. Mich.Comp.Laws Ann. § 450.1261 provides that "A corporation ... shall have power in furtherance of its corporate purposes to ... (b) Sue and be sued in all courts and participate in actions and proceedings, judicial, administrative, arbitrative or otherwise, in like cases as natural persons." See also, 7 Michigan Law & Practice Encyclopedia, Corporations § 461 at 376. In view of the dictates of the corporate-power-to-sue statute, supra, the ultra vires doctrine, on its face, does not apply and the Court need not inquire into the equities of its...