Schy v. Susquehanna Corporation, No. 17393.

• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)
• Writing for the Court: KNOCH and CUMMINGS, Circuit , and GORDON
• Citation: 419 F.2d 1112
• Parties: Maurice H. SCHY, Appellant, v. The SUSQUEHANNA CORPORATION, a Delaware corporation, Samuel M. Ferguson, M. M. Hardin, H. F. Korholz, J. Earle May, Hugh C. Michels, Aksel Nielsen, D. W. Reeves, R. C. Schenk and N. F. Tisdale, Jr., Appellees.
• Docket Number: No. 17393.
• Decision Date: 27 January 1970

419 F.2d 1112 (1970)

Maurice H. SCHY, Appellant,
v.
The SUSQUEHANNA CORPORATION, a Delaware corporation, Samuel M. Ferguson, M. M. Hardin, H. F. Korholz, J. Earle May, Hugh C. Michels, Aksel Nielsen, D. W. Reeves, R. C. Schenk and N. F. Tisdale, Jr., Appellees.

No. 17393.

United States Court of Appeals Seventh Circuit.

January 5, 1970.

Rehearing Denied January 27, 1970.

419 F.2d 1113

COPYRIGHT MATERIAL OMITTED

419 F.2d 1114

Ira S. Kolb, Adolf Loeb, Chicago, Ill., for appellant; Schwartz, Cooper & Kolb, Chicago, Ill., of counsel

M. M. Jacobs, Robert Mansell, Chicago, Ill., Charles S. Rhyne, Washington, D. C., for appellees.

Before KNOCH and CUMMINGS, Circuit Judges, and GORDON, District Judge.

MYRON L. GORDON, District Judge.¹

This action was brought for equitable relief from an alleged violation of § 14(a) of the Securities and Exchange Act, 15 U.S.C. § 78n, and the applicable regulation. The district court dismissed the complaint with prejudice and denied leave for the plaintiff to file an amended complaint.

The plaintiff is one of 9,145 stockholders of the Susquehanna Corporation. In his complaint, he has alleged that Susquehanna issued a false and misleading proxy statement on March 29, 1967. The purpose of that statement was to obtain stockholder approval of a proposed new issue of Susquehanna preferred stock. The plaintiff claimed that Susquehanna failed in the proxy statement of March 29 to inform stockholders of a planned merger with Atlantic Research Corporation and of the intended use of the new preferred stock to carry out such merger.

Although a majority of the shares outstanding were voted to approve the new stock issue, no preferred shares were issued pursuant to the proxy statement of March 29. On August 2, 1967, the board of directors of Susquehanna approved a merger with Atlantic Research Corporation; on October 18, 1967, the plaintiff filed his complaint.

On October 26, 1967, Susquehanna and Atlantic issued a joint proxy statement. Like Susquehanna's proxy statement of March 29, this joint proxy statement also sought authorization for a new issue of preferred stock. The proxy statement also outlined the stock's contemplated use in effectuating the merger of the two companies, and it fully described the terms of the proposed new issue of the stock and of the merger. It further described, in ample detail, the plaintiff's pending law suit. At the oral argument of this appeal, the plaintiff's counsel acknowledged that the joint proxy statement was accurate and complete. On November 27, 1967, the stockholders approved

419 F.2d 1115

the plan described in the joint proxy statement dated October 26 by a vote of 80.8% to 0.42%

The plaintiff filed a motion for summary judgment which he thereafter withdrew but later renewed. The defendants also filed a motion in which they applied for an order that the plaintiff could not maintain his action as a class action and also to dismiss on the ground that the plaintiff had failed to seek redress from the stockholders before instituting his action.

Following a hearing on the defendant's motion, the district judge rendered an oral opinion granting such motion on the grounds stated in the motion and on the additional ground, raised at the oral argument, that the plaintiff, as a matter of law, was unable to show any damage resulting from the alleged fraudulent proxy statement. Later, a judgment was entered dismissing the action on the merits.

The plaintiff owns 100 shares of Susquehanna stock. He is an attorney and has aided in preparation of this suit. He has an arrangement with his attorneys whereby he will share in the attorneys' fees should be prevail in the action.

I. PROBLEMS OF MOTION PRACTICE

The plaintiff contends that the defendants' motion could not be construed as a motion under rule 12(b) (6) to dismiss for failure to state a claim upon which relief can be granted. For that reason, he argues, the motion could not be treated as a motion for summary judgment under rule 12(b). We reject this contention.

The defendants' motion charged that the plaintiff's suit was premature for failure to seek redress within the corporation. Prematurity may be raised on a motion to dismiss under rule 12(b) (6), but a dismissal granted upon this ground alone must be without prejudice. Tademy v. Scott et al., 157 F.2d 826, 828 (5th Cir.1946); Van Horn v. State Farm Mutual Automobile Insurance Co., 283 F.Supp. 260, 261 (E.D.Mich.1966), affirmed 6 Cir., 391 F.2d 910.

In addition, a motion to dismiss based upon a lack of damages, may properly be treated as a motion to dismiss under rule 12(b) (6). In Premier Malt Products Co. v. Kasser, 23 F.2d 98, 99 (E.D.Pa.1927), the court observed:

"There must be both the injuria and the damnum to give a legal cause of action, and this remains true notwithstanding the legal fiction of nominal damages. Indeed, this truth made the legal fiction logically necessary."

Accord, Citrin v. Greater New York Industries, 79 F.Supp. 692, 694-695 (S.D. N.Y.1948); Package Closure Corporation v. Sealright Co., 4 F.R.D. 114, 116 (S.D.N.Y.1943). The plaintiff states that defendants were not entitled to raise the question of damages at the hearing on their motion. The matter of damages would appear to have been improperly raised at the hearing as a ground for...