Sheehan v. Municipal Light & Power Co.

• Decision Date: 24 July 1945
• Docket Number: No. 293.,293.
• Citation: 151 F.2d 65
• Parties: SHEEHAN et al. v. MUNICIPAL LIGHT & POWER CO. et al.
• Court: U.S. Court of Appeals — Second Circuit

151 F.2d 65 (1945)

SHEEHAN et al. v. MUNICIPAL LIGHT & POWER CO. et al.

No. 293.

Circuit Court of Appeals, Second Circuit.

July 24, 1945.

COPYRIGHT MATERIAL OMITTED

Samuel Hershenstein, of New York City, for appellants.

Harold H. Corbin, of New York City, for appellees.

Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

L. HAND, Circuit Judge.

The plaintiff¹ appeals from a judgment dismissing her complaint upon the merits in a representative action brought on behalf of a corporate defendant which we shall call "Longacre," and of which she asserts that a second corporate defendant, which we shall call "Inter-City," held all the shares. The plaintiff claims as a shareholder in "Inter-City," and the action is one of the kind which has come to be known as "double derivative." It is based upon the premise that a judgment taken against "Longacre" in the District Court for the Southern District of New York in the winter of 1922 was void, or at least voidable, for reasons that will appear, and that with it the sale in execution which followed should be rescinded. The jurisdiction of the district court was ancillary; it depended upon a court's power to set aside its own judgment; it cannot depend upon diversity of citizenship, because the plaintiff is a resident of New York, as are the defendants: "Longacre," the Consolidated Edison Corporation, which we shall call "Edison," and the Manhattan-Bronx Power Corporation. The defendants "Inter-City," and a corporation, which we shall call "Municipal," are the only parties which are non-residents. The transactions which ended in the judgment sought to be vacated were complicated, and it will be necessary to describe them in some detail.

In the year 1887, the Common Council of the City of New York granted a franchise to use the city streets to lay electric conduits and wires; and this was later conveyed by several mesne transfers to "Longacre," which was incorporated in 1903. All of "Longacre's" shares were apparently owned by a corporation, which we shall call "Manhattan"; but for some reason, which the record does not disclose, the plaintiff's husband, John C. Sheehan, apparently had, or later acquired, a substantial interest in the franchise, and in 1912 she acquired from him as a gift her interest, as a shareholder in "Inter-City." Since 1903 when "Longacre" acquired the franchise, it had been trying to exploit it; but these efforts had always proved unsuccessful, and by 1912 it had piled up a deficit of about $342,000; in addition it had executed a mortgage on the franchise in the face value of $500,000. In spite of this discouraging record, in that year a banker named Fisk apparently seeing an opportunity of profit, entered into a contract with "Manhattan," in August of that year. In the transactions which followed Fisk was later succeeded by a banker named Leach; and the plaintiff insists, and we shall assume for argument, that by this succession Leach substituted himself for all purposes in place of Fisk. It will be clearer to disregard Fisk altogether, and speak as though Leach had been the only party concerned from the beginning. The contract provided that a new company should be incorporated, which turned out to be "Inter-City," and which was to execute a mortgage of $10,000,000, to be secured by the shares of "Longacre." It also provided for an issue by "Inter-City" of $3,500,000 of income bonds to be secured by $5,000,000 of the mortgage bonds just mentioned. Of the income bonds, "Manhattan" was to receive $1,500,000; Sheehan, $1,000,000; $850,000 were to be put in the hands of trustees; and Leach was to receive the balance, $150,000. The contract also provided for the issue of $10,000,000 of common shares to be put in a voting trust, the certificates of ownership to go: $2,000,000 to Sheehan, and $8,000,000 to Leach. Of the $850,000 of bonds the trustees were to reserve $500,000 to redeem, so far as possible, the mortgage bonds issued by "Longacre," and the balance were to refund "Longacre's" floating indebtedness, which, as we have seen, was nearly $350,000. Leach promised to subscribe for $50,000 of the income bonds, and that "Inter-City" should "execute and deliver its agreement to purchase" $50,000 of such bonds upon the first of each of the months of January, February, March, May, July, and October, 1913. This promise was literally meaningless; a company which "purchased" its own bonds even though the proceeds were held by trustees to apply against its unfunded debts would merely pay those debts. The only meaning that can be assigned to the language is that "Inter-City" was to float $300,000 of its income bonds during the year 1913. "Inter-City" was similarly "from time to time" to "purchase" other income bonds — out of the $500,000 held to refund the "Longacre" bonds — and use the proceeds to pay the interest on the "Longacre" bonds. Finally, at any time within a year after "Inter-City" had redeemed, or paid, all the income bonds, it was to have an option to buy all the "Longacre" shares from "Manhattan" for $25,000.

This contract was in part at any rate carried out: that is, "Manhattan" received $1,500,000 of the income bonds; and Sheehan, $1,000,000. It does not however appear whether Leach got $150,000 of the bonds, whether any part of the $850,000 reserved for trustees was ever issued, or whether Leach ever took up his subscription of $50,000. "Longacre's" deficit continued steadily to increase: at the end of 1917, it was about $746,000. This had demanded financing meanwhile, which had been done by Leach upon "Longacre's" notes, the total of which in 1917 came to about $590,000. In that year the plaintiff — her husband had then died — turned in $740,000 of her income bonds for a like par value of preferred shares of "Inter-City," and Leach turned in his "Longacre" notes just mentioned for $852,900 in preferred shares. Whether, if he had received the $150,000 in bonds as provided in the contract of 1912, he turned these in as well, does not appear. The plaintiff asserts that he received $262,900 in preferred shares without consideration; but the judge found that there was no evidence to support this, and we have been unable to find any in the record. We shall return to this when we come to discuss the law. In 1920 "Manhattan" turned in its bonds — $1,500,000 — for a like amount of preferred shares. The judge found that all the income bonds had been redeemed for preferred shares in 1917; but — aside from the difference in the year just mentioned — we have been unable to find any evidence in the record of the fate of the $260,000 which Sheehan had received, and which the plaintiff did not turn in. In spite of this hiatus in the evidence, we shall assume with the plaintiff that, at least by 1920, all the income bonds had been retired, and that "Inter-City" had a year within which to take up its option on the "Longacre" shares by paying $25,000.

The deficit of "Longacre" continued to increase after 1917, and by the end of 1922 had become more than $1,223,000. This also required financing, and from 1917 forward this was by means of advances by "Municipal" which by November, 1922, had lent to "Longacre" more than $277,000, for which it took notes. "Municipal" was a New Jersey corporation, with 37,000 shares outstanding: of these Leach owned 25,525; his brother, 9250; Olmstead, a director in Leach's corporation, 2220; and the rest were held as qualifying shares. By 1922 Leach had become unwilling to advance any more money, and on November 4, of that year, he so told "Inter-City" through one, Lasher, who was at once secretary of "Municipal" and "Inter-City" and treasurer of "Longacre." That is to say, Lasher wrote a letter, so advising Durning, "Inter-City's" president, and managing clerk for the firm of lawyers who represented "Inter-City." On November 21, 1922, "Municipal" began the action against "Longacre" in the United States District Court for the Southern District of New York, which resulted in the judgment that it is the purpose of the present action to vacate. This was brought upon the notes — $277,000 — which "Municipal" held, and jurisdiction depended upon the fact that "Municipal" and "Longacre" were corporations organized in different states — New Jersey and New York. The summons was served upon Lasher, as treasurer of "Longacre"; "Longacre" defaulted, and judgment was entered for the full amount on December 20, 1922. We may assume for argument that such a judgment, obtained by default, upon notice only to Lasher and Durning, would not have been valid as against any outside interest, such as the plaintiff's, if she had not been told and if there had been any defence to it.

The plaintiff did have notice that Leach would put up no money, and that he meant to proceed to enforce the notes which "Municipal" was holding. Durning identified copies of a number of letters produced from the files of his firm, all facsimiles, though addressed to various shareholders of "Inter-City," among them the plaintiff. These were dated December 5, 1922; advised the addressees that Leach would advance no more money; that an action on the notes had been begun; that judgment would end the value of "Longacre" shares — "Inter-City's" only asset —; and they called for a meeting on the 8th. There was sufficient evidence of the posting of these letters to satisfy § 695 of Title 28 U.S.C.A. Durning testified that each copy bore a mark which he recognized and which showed that, following the practice of his office, the original had been posted.² In further confirmation of this was the production of the original of one of the letters which had been returned because not delivered. One, Maher, an attorney in the firm which represented "Municipal" also testified that on November 21, 1922 — the day that the action was brought — the plaintiff with her lawyer called upon him, and asked that the action might be delayed. In an effort to meet this the plaintiff...