Rosenfeld v. Schwitzer Corporation

• Decision Date: 16 March 1966
• Citation: 251 F. Supp. 758
• Parties: Abe ROSENFELD, Plaintiff, v. SCHWITZER CORPORATION, William Wallace Corporation, the Dyson-Kissner Corporation, Charles H. Dyson, Franklin H. Kissner, Howard V. Scott, Glenn O. Kidd, James A. McLean and Robert E. Palmer, Defendants.
• Court: U.S. District Court — Southern District of New York

251 F. Supp. 758

Abe ROSENFELD, Plaintiff, v. SCHWITZER CORPORATION, William Wallace Corporation, the Dyson-Kissner Corporation, Charles H. Dyson, Franklin H. Kissner, Howard V. Scott, Glenn O. Kidd, James A. McLean and Robert E. Palmer, Defendants.

United States District Court S. D. New York.

February 17, 1966.

On Motion for Reargument March 16, 1966.

Graubard & Moskovitz, New York City, for plaintiff. Philip Kazon, Michael H. Greenberg, New York City, of counsel.

Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendants. James E. Nickerson, New York City, of counsel.

FREDERICK van PELT BRYAN, District Judge:

This is a derivative and representative action brought by an alleged stockholder of the nominal defendant Schwitzer Corporation, an Indiana corporation with its principal place of business in that State. Plaintiff, Abe Rosenfeld, is a resident of Indiana. The corporate defendants Dyson-Kissner Corporation (Dyson-Kissner) and its subsidiary William Wallace Corporation (Wallace) are Delaware corporations with their principal places of business in New York. The individual defendants, all directors and officers of Wallace, are residents of either New York or Connecticut.

Jurisdiction is asserted to rest upon diversity of citizenship, 28 U.S.C. § 1332, and upon § 14 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78n(b); 28 U.S.C. § 1331.

Defendants have moved (1) for summary judgment on the ground that plaintiff has no standing to maintain the action, and in the alternative (2) for a separate trial on the issue of plaintiff's standing to sue, or (3) for renewal of a stay of the proceedings in this action pending the final determination of a similar stockholders' suit brought by plaintiff's brother in the United States District Court for the Southern District of Indiana. A stay previously granted by Judge Levet on condition has now expired.

The complaint here alleges in substance that as a result of a conspiracy between defendants and the members of the Schwitzer family, controlling shareholders of Schwitzer Corporation, the Schwitzers sold their controlling stock at a substantial premium to Dyson-Kissner; that Dyson-Kissner in turn sold the stock to its subsidiary Wallace; and that thereafter Schwitzer was merged into Wallace at terms highly disadvantageous to Schwitzer minority stockholders. As additional consideration for the sale of control, it is alleged that the Schwitzer family stockholders were to receive generous remuneration and retirement benefits from Schwitzer Corporation and the surviving corporation Wallace, and indemnification against claims of the Schwitzer minority from Dyson-Kissner.

The complaint further alleges that on October 30, 1964, at a special meeting of Schwitzer stockholders the merger was approved; the necessary votes were allegedly procured in part through the illegal acquisition of the controlling shares and in part through false and misleading proxy statements in violation of federal law. The complaint seeks to enjoin the merger and to obtain an accounting from the defendants.

Prior to the commencement of this action a similar representative and derivative suit for substantially the same relief was initiated in the United States District Court for the Southern District of Indiana by plaintiff's brother, David Rosenfeld, and another, also alleged stockholders of Schwitzer Corporation. The Indiana action is directed against the members of the Schwitzer family, trustees for them, and various directors of Schwitzer who are residents of Indiana. On the other hand, the action in the case at bar names the Dyson-Kissner-Wallace group as defendants.

1. Summary judgment.

Defendants' motion for summary judgment challenging plaintiff's standing to maintain this action is based on the following facts:

In 1961 plaintiff Abe Rosenfeld purchased 100 shares of Schwitzer Corporation common through the Indiana office of his broker Francis I. DuPont & Co. These shares were never registered in Rosenfeld's name but were held by DuPont in Rosenfeld's margin account, apparently registered in DuPont's name. Rosenfeld was thus the beneficial owner though not the record owner of these shares.

On November 3, 1964, after stockholder approval of the proposed merger between Schwitzer Corporation and Wallace, plaintiff wrote to both Schwitzer and Wallace stating that he objected to the merger and demanding payment for the value of his shares on an appraisal basis pursuant to Indiana statute. The letter stated that it was not to be construed as an election of remedies or as a waiver of any statutory or common law rights of Rosenfeld as a minority stockholder to participate in representative or derivative suits arising out of the merger.

On November 30, 1964, the date the merger became effective, DuPont, as record holder of plaintiff's 100 shares of Schwitzer stock, exchanged such shares for 250 shares of Wallace pursuant to the merger terms. Thereafter, two cash dividends declared by Wallace were received by DuPont and credited to plaintiff's account. On April 27, 1965, subsequent to the commencement of this action, plaintiff sold 200 of his 250 Wallace shares; he apparently still retains the remaining 50 shares. Plaintiff denies that the exchange of the Schwitzer for Wallace shares or the acceptance of dividends from Wallace was done pursuant to his instructions, and claims that these transactions were merely routine steps taken by his broker in the regular course of business.

On the basis of these facts defendants contend in essence that Rosenfeld is not a "shareholder" of Schwitzer entitled to maintain a derivative or representative suit within the meaning of Rule 23(b), F.R.Civ.P. Defendants urge (1) that Rosenfeld, as a mere equitable owner of stock as distinguished from the registered legal owner, has no right to attack the merger, and (2) that Rosenfeld by conduct subsequent to the merger has participated in its fruits, has therefore acquiesced, in the transaction and has lost any rights to object thereto.

Though there is some dispute as to the applicable law determining who is a "shareholder" within the meaning of Rule 23, see 3 Moore, Federal Practice ¶ 23.17, at 3517-18 (1964), in my view the matter of standing to prosecute a derivative or representative action for violation of state law governing corporate affairs "concerns the very nature and quality of a shareholder's substantive rights, power and privileges." Hausman v. Buckley, 299 F.2d 696, 701, 93 A.L.R.2d 1340 (2 Cir. 1962). Thus the question properly should be determined by the law of the interested state, that is to say, the state of incorporation.¹ See Gallup v. Caldwell, 120 F.2d 90 (3 Cir. 1941); Steinberg v. Hardy, 90 F.Supp. 167 (D. Conn.1950); Pikor v. Cinerama Prods. Corp., 25 F.R.D. 92 (S.D.N.Y.1960); Milvy v. Adams, 16 F.R.D. 105 (S.D.N.Y.), remanded 217 F.2d 647 (2 Cir. 1954); Bankers Nat'l Corp. v. Barr, 7 F.R.D. 305 (S.D.N.Y.1954); H. F. G. Co. v. Pioneer Pub. Co., 162 F.2d 536 (7 Cir. 1947) (Lindley, D. J., concurring); 3 Moore, supra, at 3519; Fed.R.Civ.P. 17 (b). See generally Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949).

In the case at bar it follows that Indiana law governs both on the question of (a) whether an equitable owner of stock can pursue a derivative action, see Marco v. Dulles, 177 F.Supp. 533, 551-552 (S.D.N.Y.1959); Steinberg v. Hardy, supra; Milvy v. Adams, supra; and (b) whether plaintiff by his conduct has waived the right to maintain the action,² see Richardson v. Blue Grass Mining Co., 29 F.Supp. 658, 659 (E.D.Ky.1939); Pikor v. Cinerama Prods. Corp., supra; cf. West v. American Tel. & Tel. Co., 311 U.S. 223, 61 S.Ct. 179, 85 L.Ed. 139 (1940); Pomerantz v. Clark, 101 F.Supp. 341 (D.Mass.1951).

(a)

The parties have not cited and I have been unable to find any Indiana case dealing with the standing of an equitable owner of corporate stock to bring a derivative or representative action. I must therefore predict what the courts of that state would hold in this instance. See Steinberg v. Hardy, 90 F.Supp. 167, 169 (D.Conn.1950).

The overwhelming weight of authority supports the view that an equitable owner of shares need not be a stockholder of record in order to institute and maintain a derivative action. E. g., Gallup v. Caldwell, 120 F.2d 90 (3 Cir. 1941); Andrews v. Precision Apparatus, Inc., 217 F.Supp. 679 (S.D.N.Y.1963); Marco v. Dulles, 177 F.Supp. 533 (S.D.N.Y.1959); Steinberg v. Hardy, supra; Craftsman Finance & Mortgage Co. v. Brown, 64 F. Supp. 168 (S.D.N.Y.1945); Richardson v. Blue Grass Mining Co., 29 F.Supp. 649 (E.D.Ky.1939); Baker & Carey, Corporations 673 (3d ed. 1959). It is said that the "protection of the law would hardly be denied to the owner of the substance, meanwhile being accorded to the holder of the shadow." Hurt v. Cotton States Fertilizer Co., 145 F.2d 293, 295 (5 Cir. 1944).

There is every reason to suppose that the Indiana courts if faced with the problem would follow this view. Thus the plaintiff's standing here cannot successfully be challenged on the ground that he is a mere equitable owner of shares.³

(b)

It is generally recognized that a stockholder who has acquiesced or participated in the acts giving rise to his claim has no standing to vindicate the rights of the corporation in a derivative action. See, e. g., Ramsburg v. American Investment Co., 231 F.2d 333, 339-340 (7 Cir. 1956); Liken v. Shaffer, 64 F.Supp. 432 (N.D.Iowa 1946); Pikor v. Cinerama Prods. Corp., 25 F.R.D. 92 (S.D.N.Y. 1960); Frank v. Wilson & Co., 27 Del. Ch. 292, 32 A.2d 277 (1943); Trounstine v. Remington Rand, Inc., 22 Del.Ch. 122, 194 A. 95 (1937); 15 Fletcher, Corporations § 7146 (rev. ed. 1961); 3 Moore, supra, at 3520. This proposition has been accorded cursory recognition in the Indiana case law. E. g., Bradford v. Frankfort, St. Louis & Toledo Rd., 142 Ind. 383, 40 N.E. 741, rehearing denied, 142...