Shearin v. E.F. Hutton Group, Inc.

• Decision Date: 01 March 1994
• Docket Number: No. 9861,9861
• Citation: 652 A.2d 578
• Court: Court of Chancery of Delaware
• Parties: 9 IER Cases 1317 K. Kay SHEARIN, Plaintiff, v. The E.F. HUTTON GROUP, INC., a Delaware corporation, and E.F. Hutton & Company Inc., a Delaware corporation, and E.F. Hutton Trust Company, a Delaware corporation and, Shearson Lehman Hutton Inc., a Delaware corporation and, SLBP Merger Sub., Inc., a Delaware corporation, Defendants. Civ. A. . Submitted:

Page 578

652 A.2d 578

9 IER Cases 1317

K. Kay SHEARIN, Plaintiff, v. The E.F. HUTTON GROUP, INC., a Delaware corporation, and E.F. Hutton & Company Inc., a Delaware corporation, and E.F Hutton Trust Company, a Delaware corporation and, Shearson Lehman Hutton Inc., a Delaware corporation and, SLBP Merger Sub., Inc., a Delaware corporation, Defendants.

Civ. A. No. 9861.

Court of Chancery of Delaware New Castle County.

Submitted: March 1, 1994.

Decided: June 7, 1994.

Revised: Dec. 8, 1994.

K. Kay Shearin, pro se plaintiff.

Anne C. Foster, Richards, Layton & Finger, Wilmington, for defendants.

OPINION

ALLEN, Chancellor.

Pending is a motion to dismiss the complaint and a cross motion to amend the complaint to add new matters. The litigation arises out of a course of action leading to the March 1986 firing of plaintiff from her position as Legal Counsel and Vice President of E.F. Hutton Trust Company ("Hutton Trust"), a Delaware limited purpose trust company chartered under Title 5 of the Delaware Code.

This suit was filed in April 1988. It purports to allege four causes of action, each of which is explained below. The gist of the complaint is that Hutton Trust was used inappropriately (i.e., beyond its statutory powers and deceptively) by its parent E.F. Hutton Group, Inc. and its affiliate, E.F. Hutton, Inc., and that plaintiff sought to disclose this fact to the Hutton Trust board of directors. It is alleged that this stance made her very unpopular with senior management of Hutton Trust and legal officers of its affiliate. They tried, it is claimed, to force her to be silent, and when she would not be quiet these individuals defamed her by making false statements among themselves and to the Hutton Trust board, and by submitting an allegedly false document to regulators under her signature. As a result she was fired by Hutton Trust. She claims damages for defamation; for breach of her employment contract; and for interference with her contract of employment.

Unrelated to these central claims arising from the termination of her employment, plaintiff also seeks to assert rights of Hutton Group, Inc. shareholders arising out of a 1988 merger between Hutton Group, Inc., and a subsidiary of Shearson Lehman Brothers Holdings, Inc. That merger converted the Hutton Group stock holdings of all public shareholders into the right to receive cash or notes. Lastly, the motion to amend the complaint would add a confusing welter of allegations falling into six or seven theories of recovery including a claim to indemnification payments and for subornation of perjury.

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Ms. Shearin, who is a member of the bar of this State, started out to make a federal case of her firing. She sued Hutton Group, Hutton Trust and others in United States District Court for the District of Delaware, alleging that the operations of Hutton Trust constituted a racketeering enterprise in violation of the federal Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1962(a) (1970). The allegation in that action stated most simply was that Hutton Trust was a sham organization used to allow Hutton Inc. to charge its customers for both brokerage and trust administrative services, while having no trustee services actually performed by Hutton Trust. In her federal action plaintiff alleged that she was injured (her employment terminated) as a result of a conspiracy to operate this "racket."

This Court of Chancery action was stayed pending the outcome of the federal litigation. In that action the district court initially dismissed the complaint, holding that plaintiff had no standing to litigate the claim that charges to Hutton, Inc. and Hutton Trust's customers were excessive or fraudulent. The Court of Appeals for the Third Circuit reversed. See 885 F.2d 1162 (1989). Upon remand trial was held by the district court, after which the court found that plaintiff had not proven that defendants had formed a racketeering enterprise. The complaint was dismissed. The United States District Court apparently declined to rule on plaintiff's state law theories of recovery because defendant did not consent to a post trial amendment of the pleadings that the parties apparently thought necessary. I assume without deciding that the district court's election not to address these state law claims leaves these issues open for adjudication in this court.

The stay of this action was thereafter lifted. Defendants have moved to dismiss the complaint. I turn first to a description of the complaint as filed.

I.

The complaint is structured around four purported "causes of action." The first purported cause of action alleges that in effect Hutton Trust was operated as a sham and that plaintiff was ultimately fired (and defamed) because she would not go along with it. More specifically it is alleged that:

1. Hutton, Inc.'s account executives would "set the fee for Hutton Trust's services" and hold "trust assets" at a Hutton, Inc. branch office; the account executive would accept additional contributions to the trust and make "whatever investments he chose" (p 12) and make distributions to the beneficiary, "all without authorization from the trustee...." (p 12) This was done with the concurrence of Hutton Trust's CEO. (p 13)

2. Plaintiff was ordered by Hutton Trust's CEO to "implement AE's (Hutton, Inc. account executive's) administrative decisions" but she refused, thinking to do so would violate Rules of Professional Conduct. (pp 15-16) Instead she notified "Hutton Trust management." (p 16)

3. As a consequence certain individuals employed by Hutton, Inc. "defamed Plaintiff at diverse times by oral and written statements to third [unidentified] parties ... including Hutton Trust's Directors, that Plaintiff had indeed performed improper acts ... in administering the personal trusts." (p 16)

4. Because of these untrue allegations ... Hutton Trust's Board of Directors ratified (C.E.O.) Abbes's reduction of Plaintiff's compensation and then, on March 6, 1986, his termination of her employment...." (p 17)

5. "Plaintiff has no adequate remedy at law for the damages Defendants will continue to do to her professional reputation...." (p 20)

The second purported cause of action revisits the loss of employment and the alleged defamation. It alleges different facts, however. Under these pleadings (assuming their truth, as I do on this motion) one learns:

1. Ms. Shearin served as the Secretary to the investment committee of Hutton Trust. (pp 22, 25)

2. Mr. Abbes (Hutton Trust's CEO) directed her to make corporate minutes "as brief and as vague as possible" (p 26) even omitting [presumably material] matter (p 27) or changing minutes once they were approved. (p 28)

3. "After Plaintiff's memorandum to the Board of Directors dated 4 November 1985 ... Mr. Abbes forbade Plaintiff to communicate with Hutton's management." (p 29)

4. "When Plaintiff [nevertheless] continued to communicate with Hutton Trust's other Directors "she was advised by [other Hutton Trust & Hutton, Inc. officers] that such insubordination was grounds for termination of her employment. (p 30)

5. Hutton, Inc. employees told the Hutton Trust board that Plaintiff's refusal to accept Abbes's opinion as to her ethical responsibility was itself unethical. (p 32)

6. Mr. Bochat a member of Hutton, Inc.'s legal staff told Abbes that "Plaintiff could not raise issues of professional responsibility ... because she had accepted employment as an attorney [for the Trust Company] when she had not yet been admitted to the bar of Delaware." (p 33) This was incorrect and Mr. Bochat "must have known it." (p 34)

7. As a result Abbes "ordered Plaintiff on or about 30 January 1986 to stop acting as Trust Counsel and Corporate Secretary."

8. This constitutes defamation and interference with contractual relationship.

The third purported cause of action alleges that:

1. Mr. Abbes and Mr. Hitchcock "instructed Plaintiff to remove documents ... before bank examiners came ..." and not to talk to bank examiners except in the presence of Mr. Abbes or Mr. Hitchcock. (p 38)

2. Plaintiff refused. (p 39) But Mr. Abbes made "material misrepresentations to them ... making it appear that Plaintiff was a party to the fraud on bank examiners."

3. "Hutton" falsified the information above Plaintiff's signature on a Form U-4 (Uniform Application for Security Industry Registration or Transfer) and submitted that forged form to securities' regulators...." (p 40)

4. Mr. Abbes and others "submitted to the United States District Court for the District of Columbia false information about Hutton Trust" (p 42) ... "it would have appeared that Plaintiff, as Hutton Trust's lawyer, was at least partly responsible for them...." (p 43)

5. "By making it appear that Plaintiff was a party to these misrepresentations.... Defendants portrayed Plaintiff in a false light that damaged her ... reputation and exposed her to legal liability." (p 44)

The fourth purported cause of action arises out of a proposed (since effectuated) merger between an affiliate of Shearson Lehman Brothers Holding, Inc. and Hutton Group, Inc. While the count contains none of the allegations necessary to plead a class action under Rule 23, it apparently is meant as a stockholders' (as opposed to derivative) action. The allegations are in summary as follows:

1. In January 1988 Shearson acquired 85.8% of Hutton Group, Inc.'s common stock in a public tender offer at $29.25 cash per share. (p 47)

2. The second step of this transaction is [was] to be a merger in which the remaining public shareholders of Hutton Group would [have] received $29.25 principal amount of Shearson's 10 3/4% senior subordinated notes.

3. "The real value of Hutton's shares is more than $29.25, but Shearson has been able to acquire shares at that price because the trading price has been depressed by Hutton's legal liability for conduct alleged herein." (p 49) (emphasis added).

4. "Shearson will enjoy a...