Schuckman v. Rubenstein

• Decision Date: 12 December 1947
• Docket Number: No. 10493.,10493.
• Citation: 164 F.2d 952
• Parties: SCHUCKMAN v. RUBENSTEIN et al.
• Court: U.S. Court of Appeals — Sixth Circuit

164 F.2d 952 (1947)

SCHUCKMAN v. RUBENSTEIN et al.

No. 10493.

Circuit Court of Appeals, Sixth Circuit.

December 12, 1947.

COPYRIGHT MATERIAL OMITTED

Maurice J. Dix, of New York City (Henry A. Rocker, of Cleveland, Ohio, and Maurice J. Dix, of New York City, on the brief), for appellant.

Arthur L. Dougan, of Cleveland, Ohio (Arthur L. Dougan, of Cleveland, Ohio, and J. Malcolm Strelitz, of Marion, Ohio, on the brief; Jones, Day, Cockley & Reavis, of Cleveland, Ohio, and Strelitz, Dowler & Halberstein, of Marion, Ohio, of counsel), for appellees.

Before HICKS, McALLISTER and MILLER, Circuit Judges.

MILLER, Circuit Judge.

The appellant, Lucille Schuckman, appeals from an order dismissing her complaint by which she sought a judgment requiring the defendants-appellees as directors of the Marion Power Shovel Company to declare dividends on preferred stock owned by her in the appellee-company.

The complaint, filed on January 3, 1947, states that the plaintiff, a citizen and resident of New York, is the owner of shares of the 7% preferred stock of the Marion Power Shovel Company, an Ohio corporation; that the individual defendants constitute seven out of nine of the directors of the company; that the defendants, Gracely, Grant, Montrose, Rubenstein and Strelitz are citizens and residents of Ohio, the defendant Hewitt is a citizen and resident of New Jersey, the defendant Pell a citizen and resident of Connecticut, and that the two remaining directors, Diefenbach and Terry, who are not made parties-defendant, are citizens and residents of New York. Jurisdiction is claimed through diversity of citizenship and the amount in controversy. It further alleges that there was an authorized issue of 31,000 shares of 7% preferred stock, of which approximately 13,291½ shares have been retired under a plan put into effect by the company's directors, leaving presently outstanding 17,778½ shares; that under the company's charter provisions the holders of preferred stock are entitled to receive, when and as declared by the Board of Directors, dividends at 7% per annum payable quarterly, which dividends are cumulative; no dividends were paid on the preferred stock from October 1, 1930 to July 1, 1943, when a 1¾% dividend was paid; that from October 1, 1943 to the date of filing the action no dividends were paid, and that dividends on the said preferred stock for 64 quarters remain unpaid amounting to $112 per share; that during the periods in which no dividends were declared or paid on the preferred stock the company had surplus profits and earnings available for said dividends, but that said surplus profits and earnings were diverted to the elimination of the company's obligations prior to the company's common stock, which was owned or controlled by the individual defendants and the other directors in order to enhance the common stock and put it on a dividend basis, and that the company's directors, of which the defendants constituted a majority, fraudulently, in bad faith, and wrongfully refused to declare and pay dividends on the preferred stock, except on conditions that would benefit the holders of the company's common stock to the injury of the holders of the preferred stock. The complaint states that no relief was sought against the directors as individuals but that the action was prosecuted on behalf of the appellant and all other preferred shareholders similarly situated against the directors in their capacity as directors of the company for the purpose of compelling the declaration and payment of dividends on the company's outstanding 7% preferred stock.

The defendants, Gracely, Montrose, Strelitz, and the Company moved to dismiss the action for the reasons (1) there was no diversity of citizenship between plaintiff and defendants, (2) because the complaint failed to state a claim against the defendants, and (3) because the Court lacked jurisdiction over the persons of the defendants in an action of this type. In support of this motion they filed the affidavit of M. Virden, the Secretary of the Company, stating that Montrose's resignation as a director was accepted on January 6, 1947, prior to any knowledge of the affiant of the institution of the suit, and that the vacancy in the board of directors had not been filled; the affidavit of Rubenstein stating that he was and had been for 10 years a resident of Massachusetts; and the affidavit of Grant stating that he was and had been for 10 years a resident of New York. This motion was sustained on grounds 2 and 3 and the Court entered the order dismissing the complaint.

Although the District Court based its ruling on the second and third grounds stated in the motion to dismiss, it appears that the ruling should be sustained also on the first ground stated in the motion, namely, lack of diversity of citizenship. The complaint alleged that the defendant Grant was a resident of the State of Ohio, which furnished diversity of citizenship between him and the plaintiff. This allegation was put in issue by the motion to dismiss and the affidavit filed by the defendants-appellees that Grant was a resident of New York. Upon the issue so raised the burden of proof rested upon the appellant, which burden was not met. It was not only incumbent upon the appellant to properly allege the necessary jurisdictional facts but where the jurisdictional issue was raised to also prove their existence in order to maintain the action. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 56 S.Ct. 780, 80 L.Ed. 1135; KVOS, Inc. v. Associated Press, 299 U.S. 269, 57 S.Ct. 197, 81 L.Ed. 183; Thomson v. Gaskill, 315 U.S. 442, 62 S.Ct. 673, 86 L.Ed. 951. It is well settled that when federal jurisdiction is grounded on diversity of citizenship such diversity of citizenship must exist between all the plaintiffs on the one hand and all the defendants on the other. Indianapolis v. Chase National Bank, 314 U.S. 63, 62 S.Ct. 15, 86 L.Ed. 47. If one of the defendants is an indispensable party to the action, and his joinder in the suit destroys diversity of citizenship, he must nevertheless be joined as a party with the resulting loss of jurisdiction by the trial court. Baltimore & Ohio R. v. Parkersburg, 268 U.S. 35, 45 S.Ct. 382, 69 L.Ed. 834. Even where a defendant, being a citizen of the same state of which one of the plaintiffs is also a citizen, is not an indispensable party, but nevertheless a proper party, his joinder as a defendant by the plaintiff destroys the necessary diversity of citizenship. Although this defect can be remedied in the trial court by permitting the action to be dismissed as to such defendant, such action can not be taken in the Appellate Court, where the case is controlled by the record made during the trial. Levering & Garrigues Co. v. Morrin, 2 Cir., 61 F.2d 115; Dollar S. S. Lines v. Merz, 9 Cir., 68 F.2d 594; International Ladies Garment Workers Union v. Donnelly Garment Co., 8 Cir., 121 F.2d 561; Alderman v. Elgin, J. E. R. Co., 7 Cir., 125 F.2d 971. See also Continental Insurance Co. v. Rhoads, 119 U.S. 237, 7 S.Ct. 193, 30 L.Ed. 380; Halsted v. Buster, 119 U.S. 341, 7 S.Ct. 276, 30 L.Ed. 462. Although this rule does not apply when such a defendant is merely a nominal or formal party, in which cases his joinder may be disregarded, yet in the present case Grant was at least a proper party to the action, regardless of whether or not he was an indispensable party. His joinder as a defendant and the failure to at any time dismiss the action as to him destroys the diversity of citizenship necessary to give the District Court jurisdiction.

Considering, however, the other grounds of the motion, a preliminary question arises with respect to how many of the nine directors are before the court in this action. Appellant claims that four of them, namely, Gracely, Strelitz, Rubenstein and Montrose, are subject to the court's jurisdiction. Appellees contend that only Gracely and Strelitz are before the court; that Rubenstein is a non-resident who was not served with process and has not entered his appearance; and that Montrose's resignation as a director before he was served with process eliminated him as a director defendant. We agree with the appellees.

It is clear that Rubenstein is not before the court unless his appearance was entered by the filing of his affidavit by other defendants in support of their motion to dismiss. Rubenstein did not join in the motion. This does not constitute "submission through conduct," as claimed by appellant within the ruling in Freeman v. Bee Machine Co., 319 U.S. 448, 453, 63 S.Ct. 1146, 1149, 87 L.Ed. 1509. In that case the defendant was personally served in a state court action in Massachusetts and after its removal to the federal court entered a general appearance and filed a counterclaim. Although he then returned to Ohio and was not physically present in Massachusetts, yet he was still before the court in its disposition of an amended complaint filed after he left Massachusetts. The Court properly held that having invoked the jurisdiction of the court by filing the counterclaim, he was subject to its jurisdiction for all phases of the suit. The participation in the trial of a case by a nonresident defendant as a witness for another party does not enter his appearance to the action. First Regular Baptist Church v. Allison, 304 Pa. 1, 154 A. 913. See also Brown v. Van Keuren, 340 Ill. 118, 172 N.E. 1; Cahill-Swift Mfg. Co. v. Hayes, 97 Kan. 740, 156 P. 735.

The acceptance by the Board of Directors of Montrose's resignation as a director on January 6, 1947 terminated his status as a director. It seems clear as a general rule, in the absence of statutory restrictions or limitations in the by-laws of a corporation, that a director may resign and discontinue his status as a director before the expiration of the term for which he was elected. We are of the opinion that Section 8623-55 of the Ohio General Code providing that the Articles...