Tanzer v. Huffines, Civ. A. No. 3166.
| Citation | 314 F. Supp. 189 |
| Decision Date | 22 June 1970 |
| Docket Number | Civ. A. No. 3166. |
| Parties | Deborah TANZER, Plaintiff, v. Robert H. HUFFINES, Jr., Edward Krock, Victor Muscat, Defiance Industries, Inc., American Steel and Pump Corporation, Wright Machine Corporation and B. S. F. Company, Defendants. |
| Court | U.S. District Court — District of Delaware |
COPYRIGHT MATERIAL OMITTED
Irving Morris and Joseph A. Rosenthal, of Cohen, Morris & Rosenthal, Wilmington, Del., Paul L. Ross, Benedict Wolf, and Howard L. Jacobs, of Wolf, Popper, Ross, Wolf & Jones, New York City, of counsel, for plaintiff.
Henry M. Canby and Richard F. Balotti, of Richards, Layton & Finger, Wilmington, Del., William R. Glendon, New York City, of counsel, for defendant Robert H. Huffines, Jr.
David A. Drexler, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., William J. Kenney, of Maguire & Tucker, Washington, D. C., of counsel, for defendant Edward Krock.
Howard M. Handelman, of Bayard, Brill & Handelman, Wilmington, Del., Murray I. Gurfein, and Mel P. Barkan, New York City, of counsel for defendant Victor Muscat.
H. Albert Young and Bruce M. Stargatt, of Young, Conaway, Stargatt & Taylor, Wilmington, Del., for defendant Defiance Industries, Inc.
Plaintiff is a stockholder of the B.S.F. Company (BSF), a Delaware corporation registered under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. (the Act) since September 26, 1962, as a non-diversified closed-end management investment company. She brings this action derivatively for BSF and double derivatively for Wright Machine Corporation (Wright), a wholly owned Massachusetts subsidiary of BSF. Defendants Huffines, Krock, and Muscat are individuals, and defendant Defiance Industries, Inc. (Defiance) is a corporation existing under the laws of the state of Ohio.
Defendants have moved to dismiss the amended and supplemental complaint, and, in the alternative, certain portions of it, for failure to state a claim upon which relief can be granted and for lack of jurisdiction over the subject matter. Fed.R.Civ.P. 12(b) (1) and (6).
The complaint charges that the acts set forth therein violated the Act, in that they constituted:
"* * * an unlawful and wilful conversion of BSF's property, monies and assets by the individual defendants in violation of Section 37 of the Act, as well as gross abuse of trust, gross misconduct, wilful misfeasance, bad faith, gross negligence or reckless disregard of official and contractual duties, in violation of the duties imposed by Sections 1(b) (2), (4) and 36 of the Act." (Complaint ¶72.)
The complaint also asserts that certain of the transactions were violations of Sections 36 and 37 of the Act, of Section 17 of the Act, and of Section 10(b) and 14 of the Exchange Act and regulations promulgated under both acts, and that all of them were violations of state law fiduciary duties.
The transgressions alleged in the complaint commence with defendants' acquisition of control of BSF in August, 1962, and extend over a period of roughly five years. They are numerous and will not be set out in full. The opinions of this Court and the Court of Appeals in earlier proceedings herein provide ample detail, see Tanzer v. Huffines, 287 F.Supp. 273 (D.Del.1968), 408 F.2d 42 (3d Cir. 1969), and 412 F.2d 221 (3d Cir. 1969).
Counsel for defendants present their arguments in two parts, since decision in their favor on their Motion Number One would simplify consideration of the issues raised by Motion Number Two.
Motion Number One urges that BSF has no standing to assert for itself a claim for the alleged excessive salaries, bonuses, and other emoluments paid by the companies of which it was a shareholder. Defendants read plaintiff's complaint to assert a right to recover for BSF's own treasury sums wrongfully drawn from subsidiary corporations. Basic principles of standing and corporate identity discredit such a theory on its face, say defendants, and to the extent that the complaint seeks such a recovery, it should be dismissed. See E. M. Fleischmann Lumber Corp. v. Resources Corp. International, 105 F.Supp. 681 (D.Del.1952); Keenan v. Eshleman, 23 Del.Ch. 234, 2 A.2d 904 (1938); Henry v. General Motors Corp., 236 F.Supp. 854 (N.D.N.Y.1964).
Motion Number Two treats the allegations in the complaint more specifically. Defendants argue first that plaintiff's reliance on Section 36 of the Act is misplaced, for no private right of action is implied therein. They urge that inasmuch as the "causes of action" in the complaint depend on Section 36, the Court has no jurisdiction over them and they are not claims upon which relief can be granted. See Brouk v. Managed Funds, Inc., 286 F.2d 901 (8th Cir. 1961).
Secondly, defendants contend that, if BSF is denied standing in its claims for sums paid by portfolio companies, no allegation remains significant enough to be considered a violation of Section 37 of the Act. Alternatively, if the motion is not granted, the complaint does not spell out such a willful conversion as would be an "indictable offense," necessary to sustain a claim under Section 37.
Thirdly, defendants urge that, since no claim on which relief can be granted has been stated under Sections 36 and 37 of the Act, pendent jurisdiction of the state claims should not be exercised herein. Alternatively, if it be held that claims are stated under the Act, they ask that the Court nevertheless dismiss the state claims, because under United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), the state issues predominate and are better left to state tribunals.
Defendants contend finally in their Motion Number Two that no claims are stated for violation of Section 17 of the Act.
In Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 776, 90 L.Ed. 939 (1945), the Supreme Court said, "Whether the complaint states a cause of action on which relief could be granted is a question of law and just as issues of fact it must be decided after and not before the court has assumed jurisdiction over the controversy." This Court must, therefore, turn first to the attack on its jurisdiction over the subject matter of the controversy.
The complaint seeks relief under the laws of the United States. In The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 25, 33 S.Ct. 410, 411, 57 L.Ed. 716 (1913), the Court said, "The party who brings a suit is master to decide what law he will rely upon, and * * * determines whether he will bring a `suit arising under' the * * * (Constitution or laws) of the United States by his declaration or bill." The claims made here are not immaterial, nor does it appear that they are made for the sole purpose of obtaining federal jurisdiction or that they are frivolous. Although a split of authority exists as to the availability of private actions under the Act in general and Section 36 in particular, the cases largely support plaintiff's position. Brown v. Bullock, 194 F.Supp. 207 (S.D.N.Y.1961), aff'd 294 F.2d 415 (2d Cir. 1961); SEC v. Quing N. Wong, D.C., 42 F.R.D. 599 (1967); Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968); Brown v. Eastern States Corp., 181 F.2d 26 (4th Cir. 1950); V Loss, Securities Regulation 2899. But cf. Brouk v. Managed Funds, Inc., 286 F.2d 901 (8th Cir. 1961); Cogan v. Johnston, 162 F.Supp. 907 (S.D. N.Y.1958).
This Court concludes that it has jurisdiction of the action.1 Since the exercise of pendent jurisdiction may depend on disposition of the claim under federal law, United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), decision on the invocation of pendent jurisdiction herein follows determination of that claim.
A complaint should not be dismissed for insufficiency unless it appears to a certainty that plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim. 2A Moore, Federal Practice ¶ 12.08, pp. 2271-2274. Unless defendants show that the complaint could not support relief under any theory, if all facts alleged were proved and all favorable inferences drawn, the motions must fail.
Defendants do not seriously urge that no private rights are implied or created in the Act. They attack on the theory that in order to state a violation of Section 37, the complaint must set forth a "willful conversion" sufficient to support an indictment and that it has not done so, and that private persons have no right of action under Section 36.
Section 37 reads as follows:
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