Schwartz v. Romnes

• Decision Date: 26 March 1973
• Docket Number: No. 72 Civ. 3196.,72 Civ. 3196.
• Citation: 357 F. Supp. 30
• Parties: Donald E. SCHWARTZ, as the General Guardian for Pamela B. Schwartz, a Minor, in a derivative capacity as a shareholder of American Telephone and Telegraph Company, Plaintiff, v. H. I. ROMNES et al., Defendants.
• Court: U.S. District Court — Southern District of New York

357 F. Supp. 30

Donald E. SCHWARTZ, as the General Guardian for Pamela B. Schwartz, a Minor, in a derivative capacity as a shareholder of American Telephone and Telegraph Company, Plaintiff, v. H. I. ROMNES et al., Defendants.

No. 72 Civ. 3196.

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

March 26, 1973.

Norwick, Raggio & Jaffe, New York City, for plaintiff.

Davis, Polk & Wardwell, New York City, for the individual defendants; Lawrence E. Walsh, Philip C. Potter, Jr., and George A. Bermann, New York City, of counsel.

Royall, Koegel & Wells, New York City, for defendant Yes for Transportation; Richard N. Winfield and James M. McMahan, New York City, of counsel.

Kenneth J. Lucey, New York City, for defendant New York Telephone Co.

John S. Luckstone, New York City, for defendant American Telephone and Telegraph Co.

ROBERT L. CARTER, District Judge.

OPINION AND ORDER

The plaintiff moves as a shareholder of American Telephone and Telegraph Company (ATT) to compel the return of $50,000.00 which New York Telephone Company (N.Y. Telephone), a wholly-owned subsidiary of ATT, contributed to "Yes for Transportation" (YFT), a not-for-profit corporation. It is admitted that the $50,000.00 was "intended for use and was used by said corporation in effectuating the corporate purpose of Yes for Transportation . . . which included support for the approval of the transportation bond issue which appeared as a proposition on the election ballot on November 2, 1971." (Affidavit of Kenneth J. Lucey, dated September 8, 1972.)

The plaintiff contends that the contribution was unlawful in that it was prohibited by § 460 of the New York Election Law, McKinney's Consol.Laws, c. 17, and § 107 of the New York Public Service Law, McKinney's Consol.Laws, c. 48. He further contends that in authorizing the payment the directors of N.Y. Telephone breached their duty to conduct the corporation's business in a lawful manner, and that this breach gave rise to a right of action on the part of the shareholder.

The defendants claim that the contribution was lawful and that its prohibition would be unconstitutional; that there is no "private right of action" under which the shareholder may challenge the expenditure; and that the plaintiff failed to meet the demand requirements of Rule 23.1 of the Federal Rules of Civil Procedure. Each of them has defended the expenditure without alleging any distinction between the responsibilities of the various classes of defendants.

I find that the directors and officers of N.Y. Telephone and ATT are liable for the unlawful use of corporate funds for a political purpose. Plaintiff is granted summary judgment as to those defendants. However, plaintiff has failed to establish that defendant YFT has acted unlawfully or that it had, or breached, any duty to the shareholders of ATT. Therefore, YFT's motion for summary judgment in its favor is granted.

§ 460 OF THE NEW YORK ELECTION LAW

§ 460 provides that:

"No corporation or joint-stock association doing business in this state, except a corporation or association organized or maintained for political purposes only, shall directly or indirectly pay or use or offer, consent or agree to pay or use any money or property for or in aid of any political party, committee or organization, or for, or in aid of, any corporation, joint-stock or other association organized or maintained for political purposes, or for, or in aid of, any candidate for political office or for nomination for such office, or for any political purpose whatever, or for the reimbursement or indemnification of any person for moneys or property so used. Any officer, director, stockholder, attorney or agent of any corporation or joint-stock association which violates any of the provisions of this section, who participates in, aids, abets or advises or consents to any such violation, and any person who solicits or knowingly receives any money or property in violation of this section, shall be guilty of a misdemeanor." (emphasis added)

The only reported judicial interpretation of this statute is found in Pecora v. Queens County Bar Association, 46 Misc.2d 530, 260 N.Y.S.2d 116 (Sup.Ct., Queens Co., 1965). In that action the plaintiff sought to enjoin the Bar Association from endorsing judicial candidates found by it to be "qualified." The endorsement was alleged to be both ultra vires and unlawful. The court first found that the endorsement of judicial candidates was not only within the corporate powers of the Bar Association, but specifically sanctioned and encouraged by § 11(7) of the Membership Corporations Law (setting forth the corporate purposes of a bar association), Canon 2 of the Canons of Professional Ethics, Judiciary Law Appendix (stating the duty of the Bar to support the election or appointment of suitable judicial candidates) and the by-laws of the Bar Association.

With regard to the claim of unlawfulness, the court found that the statute, viewed in light of its purpose—the elimination of "political influence secured through financial contributions by large corporations and insurance trusts" (260 N.Y.S.2d at 122)—should not be held to prohibit bar association endorsement of judicial candidates. The court had some difficulty in getting around the broad language of the statute. It was, thus, careful to limit its decision to the facts before it:

"The Bar Association's activity was for a `political purpose' only in the very narrow sense that a candidate for judicial office in this State may be said to be a candidate for political office. But the Bar Association's endorsement does not refer to any political party and the Bar Association is obligated to campaign actively for the election of any judicial candidate who alone is endorsed, whatever his political affiliation. To say, under such circumstances, that the Bar Association used its money for or in aid of a candidate for political office or for any political purpose whatever, within the meaning of a criminal statute, would be completely to ignore the professional duty to the public which the Bar Association was attempting to discharge.

"Aside from the foregoing, even momentary reflection as to the results possible under a contrary interpretation of the statute lends support to the conclusion reached. For example, a literal interpretation would render criminal the activity of newspaper and religious corporations which `directly or indirectly' frequently `pay or use' their `money or property for or in aid of' candidates `for political office or for nomination for such office.' But that would stifle expression which is constitutionally protected. This court can give the statute no such meaning or effect." 260 N.Y.S.2d at 123.

The plaintiff has focused on the Pecora finding that the purpose of § 460 was "to eliminate political influence secured through financial contributions by large corporations," and defendants have focused on the court's attempt to characterize the Association's activity as not being for a "political purpose." In my judgment the Pecora court correctly described one of the principal purposes of § 460, but its interpretation of the phrase "political purpose" does not preclude a finding that the section was meant to prohibit contributions made to influence the outcome of referenda. See Smith v. Higinbothom, 187 Md. 115, 48 A.2d 754 (1946), in which it was held that a statute which explicitly prohibited a corporation from contributing "directly or indirectly . . . to aid, promote or influence the success or defeat of any candidate, or of any measure or proposition submitted to a vote at a public election . . . Acts of 1945, Ch. 934, Sec. 157" (cited at p. 759) was inapplicable to a Bar Association which collected voluntary contributions with which it disseminated literature in support of "sitting judges" who were opposed in their bids for reelection.

Much of defendants' argument that support of the transportation bond issue was not "political" rests upon their interpretation of Olivieri et al. v. YFT (Sup.Ct., N.Y.Co., 23408/71). The Olivieri case involved an attempt to require YFT to file a report of campaign receipts, expenditures and contributions in accordance with § 321 of the Election Law. § 321 applies only to expenditures by a "political committee" as that term is defined in § 320:

"The term `political committee,' under the provisions of this article, means any committee or combination of three or more persons co-operating to aid or to promote the success or defeat of a political party or principle, or of any proposition submitted to vote at a public election; or to aid or take part in the election or defeat of a candidate for public office or to aid or take part in the election or defeat of a candidate for nomination at a primary election or convention, including all proceedings prior to such primary election, or of a candidate for any party position voted for at a primary election, or to aid or defeat the nomination by petition of an independent candidate for public office; but nothing in this article shall apply to any committee or organization for the discussion or advancement of political questions or principles without connection with any election or to a national committee organized for the election of presidential or vice-presidential candidates."

The Olivieri complaint was dismissed on the strength of the New York Court of Appeals ruling in Vannier v. Anti-Saloon League, 238 N.Y. 457, 144 N.E. 679 (1924) that a corporation was not a "committee" within the meaning of §§ 320 and 321.¹ The question of whether YFT was a "political committee" or a corporation organized to influence the outcome of an election has no bearing on the liability of N.Y. Telephone for its contribution to the YFT effort. It must also be noted that the language of § 320 makes clear the legislature's intention that the Election Law regulate contributions "to promote the success or defeat of . . . any proposition submitted...