Sargent v. Genesco, Inc., Civ. T. No. 71-197.

• Decision Date: 28 January 1972
• Docket Number: Civ. T. No. 71-197.
• Citation: 337 F. Supp. 1244
• Parties: Richard J. SARGENT et al., Plaintiffs, v. GENESCO, INC., et al., Defendants.
• Court: U.S. District Court — Middle District of Florida

337 F. Supp. 1244

Richard J. SARGENT et al., Plaintiffs, v. GENESCO, INC., et al., Defendants.

Civ. T. No. 71-197.

United States District Court, M. D. Florida, Tampa Division.

January 28, 1972.

Larry Helm Spalding, Sarasota, Fla., Hardy, Peal, Rawlings & Werner, New York City, H. Gordon Brown, Clearwater, Fla., Richard A. Bokor, Tampa, Fla., for plaintiffs.

Fox, Burton, George & Loeffler, P. A., Clearwater, Fla., for Clayton B. Burton.

Charles F. Clark, of Macfarlane, Ferguson, Allison & Kelly, Tampa, Fla., for Goodbody & Co., Walston & Co., Inc., Ladd Dinkins & Co., First Alabama Securities, Inc., Kohlmeyer & Co., McCarley & Co., Inc., Powell, Kistler & Co., and Roberts, Scott & Co., Inc.

Donovan, Leisure, Newton & Irvine, New York City, for Genesco, Inc., Genesco Financial Corp., Ernest B. Holt & Richard E. Horch.

Shackleford, Farrior, Stallings & Evans, P. A., Tampa, Fla., for Frank Garcia.

Leonard W. Cooperman, St. Petersburg, Fla., for Leeds Shoes, Inc.

Yado, Keel & Nelson, Tampa, Fla., for Julian Lemus and Jack Chapman.

Albritton, Sessums & Grandoff, Tampa, Fla., for A. G. Edwards & Son, Inc.

Pope & Burton, Tampa, Fla., for Earl G. Brown and William M. Burton.

William T. Keen, Tampa, Fla., for C. Edward Brittain.

Albert I. Gordon, Tampa, Fla., for Stuart S. Golding and Roy Cotarelo.

Trenam, Simmons, Kemker, Scharf & Barkin, Tampa, Fla., for Wm. H. Martin.

Gibbons, Tucker, McEwen, Smith, Cofer & Taub, Tampa, Fla., for Richard Lieb.

Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P. A., Tampa, Fla., for Genesco, Inc., Genesco Financial Corp., Ernest B. Holt and Richard E. Horch.

Harrison, Greene, Mann, Davenport, Rowe & Stanton, St. Petersburg, Fla., and William Gruman, Tampa, Fla., for Ralph A. Buchman, Individually.

ORDER

KRENTZMAN, District Judge.

This came before the Court upon a motion to require plaintiffs to furnish security filed by the defendant, Leeds Shoes, Inc. The motion is made pursuant to Florida Statutes §§ 608.13(14), 608.13(15), F.S.A., and the so-called security-for-expense statute, Fla.Stat. § 608.131,¹ F.S.A. Leeds Shoes, Inc. is a

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corporation organized and existing under the laws of the State of Florida.² The provisions of the statutes apply to Leeds Shoes, Inc.

In support of the motion Leeds has submitted an affidavit of its secretary in which Article VII of the By-Laws of Leeds is set out. This By-Law provides for indemnification by the corporation of directors and officers for expenses incurred in connection with litigation resulting from activities of the board member or officer in his corporate capacity. The By-Law is drawn in substantially the same terms as the statutes cited above. In order for the defendant corporation to be entitled to have plaintiffs furnish security two statutory conditions precedent must be met. First, the plaintiffs must hold less than five percent of the outstanding shares or voting trust certificates of the corporation, or alternatively must hold stock or voting trust certificates which have a value of less than fifty thousand dollars.³ Second, plaintiffs' action must be in the nature of a derivative suit, i. e., an action by a stockholder of a corporation against the corporation to procure a judgment in favor of the corporation.⁴

From the allegations of the complaint it is evident that plaintiffs hold somewhat less than five percent of shares or voting trust certificates in Leeds Shoes, Inc. There are nine named plaintiffs in this action. In paragraph 5 of the complaint it is alleged that these plaintiffs presently hold only about 2520 shares of Leeds Shoes, Inc. In paragraph 13(a) of the complaint it is alleged that on December 12, 1967, there were 1356 record holders of Leeds, who held 749,778 common shares. It is nowhere alleged that less than that number of common shares are now outstanding, and in fact it would appear from the allegations of the complaint that somewhat more than that number are outstanding. It is similarly evident from the allegations of the complaint that plaintiffs' holdings have a value considerably less than fifty thousand dollars. In paragraph 69 of the complaint it is alleged that the present value of Leeds common shares is less than one dollar.

Count IV of the plaintiffs' second amended complaint is a claim for damages under the law of the State of Florida. Plaintiffs seek to state alternative claims as stockholders in Leeds. Under the law of Florida a claim such as that which plaintiffs have attempted to set out in Count IV would be considered a derivative action at least for the purposes of the applying the security-for-expense statute. In Citizens National Bank v. Peters, 175 So.2d 54 (Fla.App. 1965), the Court held that where the gravamen of an action brought by shareholders of a corporation against the corporation is an attack against the directors' handling of corporate affairs, the action is classically one in the right of the corporation, and as such would be considered a derivative action for the purposes of the security-for-expense statute.

Plaintiffs suggest that state security-for-expense laws are not applicable to cases such as the one before the Court. Clearly where the substantive claim before the Court is federal rather than state created, state security-for-expense laws are not to be applied. J. I. Case Co. v. Borak, 377 U.S. 426, 434-435, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), affirming 317 F.2d 838 (7 Cir. 1963); McClure v. Borne Chemical Co., 292 F.2d 824 (3 Cir. 1961), cert. den. 368 U.S. 939, 82 S.Ct. 382, 7 L.Ed.2d 339 (1961). It has also been held that state security-for-expense laws are substantive rather than procedural, and that at least in cases where jurisdiction is grounded upon diversity of citizenship, and the right sued upon is state created, Federal Courts are Erie⁵ bound to apply them. Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949).

The Court's jurisdiction over Count IV of the second amended complaint herein is based upon pendent jurisdiction rather than diversity of citizenship.

However, in determining whether state or federal law is to be applied to a claim, it is the nature of the issue before the Court, not the basis of the Court's jurisdiction which controls.⁶ The Erie doctrine has been applied in numerous instances where jurisdiction was based on other than diversity of citizenship.⁷ Count IV of plaintiffs' second amended complaint is seeking recovery based upon the law of the State of Florida. Indeed plaintiffs have labeled the count "State Law Claim", and the allegations of Count IV are each directed to the laws of the State of Florida. The source of the right sued upon in Count IV is the law of the State of Florida. Under these circumstances, it is the law of the State of Florida which controls, whatever the source of this Court's jurisdiction.

As noted above, the Florida courts would construe Count IV as a derivative cause of action for the purposes of Fla. Stat. § 608.131, F.S.A. The conditions precedent to establish defendant Leeds Shoes, Inc.'s entitlement to have plaintiffs furnish security pursuant to § 608.131 have been met with respect to Count IV, and the defendant Leeds is so entitled.

Defendant Leeds Shoes, Inc. contends, but does not vigorously argue that the security-for-expense statute should be applied to Count III as well as to Count IV. A review of Count III of plaintiffs' second amended complaint has satisfied the Court that the substantive grounds sued upon therein have their origin in Federal securities laws, and not the laws of the State of Florida. The motion of Leeds Shoes will be DENIED insofar as it applies to Count III.

The next question for the Court is the amount of security which should be required. The trial court is vested with considerable discretion under the statute in setting the amount of security in order to effectuate the remedial purposes of the act.⁸ The history of this case already reflects that the litigation will be lengthy and complex. The action was originally filed in the Southern District of New York on May 4, 1970. The action was transferred to this Court in April, 1971. The Court has heard two days of testimony relative to plaintiffs' prayer for entry of a preliminary injunction⁹ and the parties have been directed to submit briefs relative to that issue. Sophisticated motions directed at the sufficiency of the complaint to state a claim for relief are also pending, and shall be scheduled for oral argument. Numerous former and present directors and officers of Leeds Shoes, Inc. have been joined as defendants in this action, and the liability of Leeds under Article VII of its By-Laws, and Fla.Stats. §§ 608.13(14), 608.13(15), F.S.A., could be rather high. Balanced against these factors is the fact that Leeds is entitled to have plaintiffs furnish security relative to only one count of a four count action. Clearly any precise apportionment is difficult, but it is evident that Count IV of plaintiffs' second amended complaint is not the most complicated or the most significant portion of this case. The Court has determined that plaintiffs will be required to furnish security in the amount of $5,000.00. The Court notes that Fla.Stat. § 608.131, F.S.A., provides that the amount of security may be increased or decreased during the pendency of the litigation upon a proper showing.

1 Fla.Stat. § 608.13, F.S.A.

"Every corporation shall, unless otherwise provided by its certificate of incorporation or by law have power...