Surowitz v. Hilton Hotels Corporation

• Decision Date: 07 March 1966
• Docket Number: No. 161,161
• Parties: Dora SUROWITZ, etc., Petitioner, v. HILTON HOTELS CORPORATION et al
• Court: U.S. Supreme Court

383 U.S. 363

86 S.Ct. 845

15 L.Ed.2d 807

Dora SUROWITZ, etc., Petitioner,

v HILTON HOTELS CORPORATION et al.

No. 161.

Argued Jan. 20, 1966.

Decided March 7, 1966.

Rehearing Denied April 18, 1966.

See 384 U.S. 915, 86 S.Ct. 1333.

Richard F. Watt, Chicago, Ill., for petitioner.

Samuel W. Block, Chicago, Ill., for respondents.

Mr. Justice BLACK delivered the opinion of the Court.

Petitioner, Dora Surowitz, a stockholder in Hilton Hotels Corporation, brought this action in a United States District Court on behalf of herself and other stockholders charging that the officers and directors of the corporation had defrauded it of several million dollars by illegal devices and schemes designed to cheat the corporation and enrich the individual defendants. The acts charged, if true, would constitute frauds of the grossest kind against the corporation, and would be in violation of the Securities Act of 1933,¹ the Securities Exchange Act of 1934,² and the Delaware General Corporation Law. ³ Summarily stated, the detailed complaint, which takes up over 60 printed pages, charges first that defendants conceived and carried out a deceptive plan under which the Hilton Hotels Corporation through a formal 'offer' mailed to all the stockholders, purchased from them some 300,000 shares of its outstanding comm- mon stock, that these defendants manipulated the stock's market price to an artificially high level and then at this inflated price sold some 100,000 shares of their own stock to the corporation, and that the effect of this offer and purchase was to reduce the corporation's working capital more than $8,000,000 at a time when its financial condition was weak, and the funds were badly needed to run the corporation's business. The second deceptive scheme charged in the complaint was that the same defendants, all of whom were stockholders of the Hilton Credit Corporation, caused the Hilton Hotels Corporation to purchase, also at an artificially high price more than a million shares of Hilton Credit Corporation stock, paying about $3,441,000 for it, of which over $2,000,000 was personally received by the defendants. The complaint was signed by counsel for Mrs. Surowitz in compliance with Rule 11 of the Federal Rules of Civil Procedure which provides that 'The signature of an attorney constitutes a certificate by him that he has read the pleading; that to the best of his knowledge, information, and belief there is good ground to support it; and that it is not interposed for delay.' Also pursuant to Rule 23(b) of the Federal Rules, the complaint was verified by Mrs. Surowitz, the petitioner, who stated that some of the allegations in the complaint were true and that she 'on information and belief' thought that all the other allegations were true.

So far as the language of the complaint and of Mrs. Surowitz's verification was concerned, both were in strict compliance with the provisions of Rule 23(b) which states that a shareholder's complaint in a secondary action must contain certain averments and be verified by the plaintiff.⁴ Notwithstanding the sufficiency of the complaint and verification under Rule 23(b), however, the court, without requiring defendants to file an answer and over petitioner's protest, granted defendants' motion to require Mrs. Surowitz to submit herself to an oral examination by the defendants' counsel. In this examination Mrs. Surowitz showed in her answers to questions that she did not understand the complaint at all, that she could not explain the statements made in the complaint, that she had a very small degree of knowledge as to what the lawsuit was about, that she did not know any of the defendants by name, that she did not know the nature of their alleged misconduct, and in fact that in signing the verification she had merely relied on what her son-in-law had explained to her about the facts in the case. On the basis of this examination, defendants moved to dismiss the complaint, alleging that '1. It is a sham pleading, and 2. Plaintiff, Dora Surowitz, is not a proper party plaintiff. * * *' In response, Mrs. Surowitz's lawyer, in an effort to cure whatever infirmity the court might possibly find in Mrs. Surowitz's verification in light of her deposition, filed two affidavits which shed much additional light on an extensive investigation which had preceded the filing of the complaint. Despite these affidavits the District Judge dismissed the case holding that Mrs. Surowitz's affidavit was 'false,' that being wholly false it was a nullity, that being a nullity it was as though no affidavit had been made in compliance with Rule 23, that being false the affidavit was a 'sham' and Rule 23(b) required that he dismiss her case, and he did so, 'with prejudice.'

The Court of Appeals affirmed the District Court's dismissal, saying in part:

'We can only conclude, as did the court below, that plaintiff's verification of the complaint was false because she swore to the verity of alleged facts of which she was wholly ignorant.' 342 F.2d, at 606.

The Court of Appeals reached its conclusion that the case must be dismissed under Rule 23(b) and Rule 41(b) despite the fact that the charges made against the defendants were viewed as very serious and grave charges of fraud and that 'many of the material allegations of the complaint are obviously true and cannot be refuted.' 342 F.2d, at 607. We cannot agree with either of the courts below and reverse their judgments. We do not find it necessary in reversing, however, to consider all the numerous arguments made by respondents based on the origin, history and utility of Rule 23, and of derivative causes of action and class suits. No matter how much weight we give to the function of the Rule and of class action proceedings in protecting corporate management against so-called 'nuisance' or 'strike suits,' we hold that the Rule cannot justify dismissal of this case on the record shown here.

At the time the District Court dismissed and the Court of Appeals approved, there were pending before those courts not merely the complaint, the verified statements by counsel and by Mrs. Surowitz, and the depositions of Mrs. Surowitz, but, as noted above, two affidavits, one signed by Mrs. Surowitz's attorney in this case, Mr Walter J. Rockler, and the other signed by her son-in-law, Mr. Irving Brilliant, had been submitted in response to the defendants' motion that the complaint be dismissed. These affidavits, as well as Mrs. Surowitz's deposition, are a part of the record before us here and we shall now state the facts as they are illuminated by these affidavits.

Mrs. Surowitz, the plaintiff and petitioner here, is a Polish immigrant with a very limited English vocabulary and practically no formal education. For many years she has worked as a seamstress in New York where by reason of frugality she saved enough money to buy some thousands of dollars worth of stocks. She was of course not able to select stocks for herself with any degree of assurance of their value. Under these circumstances she had to receive advice and counsel and quite naturally she went to her son-in-law, Irving Brilliant. Mr. Brilliant had graduated from the Harvard Law School, possessed a master's degree in economics from Columbia University, was a professional investment advisor, and in addition to his degrees and his financial acumen, he wore a Phi Beta Kappa key. In 1957, six years before this litigation began, he bought some stock for his mother-in-law in the Hilton Hotels Corporation, paying a little more than $2,000 of her own money for it. He evidently had confidence in that corporation because by 1960 he had purchased for his wife, his deceased mother's estate, a trust fund created for his children, and Mrs. Surowitz some 2,350 shares of the corporation's common stock, at a cost of about $45,000 in addition to one of the corporation's $10,000 debentures.

About December 1962, Mrs. Surowitz received through the mails a notice from the Hilton Hotels Corporation announcing its plan to purchase a large amount of its own stock. Because she wanted it explained to her, she took the notice to Mr. Brilliant. Apparently disturbed by it, he straightway set out to make an investigation. Shortly thereafter he went to Chicago, Illinois, where Hilton Hotels has its home office and talked the matter over with Mr. Rockler. Mr. Brilliant and Mr. Rockler had been friends for many years, apparently ever since both of them served as a part of the legal staff representing the United States in the Nuremberg trials. The two decided to investigate further, and for a number of months both pursued whatever avenues of information that were open to them. By August of 1963 on the basis of their investigation, both of them had reached the conclusion that the time had come to do something about the matter. In the meantime the value of the corporation's stock had declined steadily, and in August the corporation failed to pay its usual dividend. In October, while a complaint was being prepared charging defendants with fraud and multiple violations of the federal securities acts and state law, Mr. Rockler met with defendants' lawyers. This conference, instead of producing an understanding merely provided Mr. Brilliant and Mr. Rockler with information, not previously available to them, which increased their grave suspicions about the corporation's stock purchase and its management. For instance it was learned at this meeting that at the time of the stock purchase the president and chairman of the board of Hilton Hotels Corporation had purchased for an unusually high price over 100,000 shares of the corporation's stock from several trusts established by a vice president and director of the corporation. Finally, in December, or almost exactly one year after the corporation had submitted its questionable offer to purchase stock from...