Topik v. Catalyst Research Corporation

• Citation: 339 F. Supp. 1102
• Decision Date: 22 March 1972
• Docket Number: Civ. No. 70-1228-M.
• Parties: Rolf TOPIK et al. v. CATALYST RESEARCH CORPORATION et al.
• Court: U.S. District Court — District of Maryland

339 F. Supp. 1102

Rolf TOPIK et al. v. CATALYST RESEARCH CORPORATION et al.

Civ. No. 70-1228-M.

United States District Court, D. Maryland.

March 22, 1972.

J. Earle Plumhoff, Towson, Md., James V. Joy, Jr., and Robert M. Reagan, New York City, for plaintiffs.

Lewis A. Noonberg and Paul V. Niemeyer, Baltimore, Md., and Edmund K. Trent, Pittsburgh, Pa., for all defendants except Electronics Aids, Inc.

JAMES R. MILLER, Jr., District Judge.

Memorandum Opinion and Order

This is a stockholders derivative suit arising from the merger of a Maryland corporation with a Delaware corporation. Federal jurisdiction is founded on diversity of citizenship under 28 U.S.C. § 1332 and an amount in controversy which are not disputed.

I

Plaintiffs are individual stockholders of a former Maryland corporation named Electronic Aids, Inc. (herein referred to as E.A. Maryland). E.A. Maryland was incorporated in March of 1958 with the purpose of selling mechanical teaching aids. In 1965 Mine Safety Appliances, Inc., a Delaware corporation with its principal place of business in Pittsburgh, Pennsylvania (herein referred to as M.S.A.), purchased 70% of the outstanding shares of E.A. Maryland in order to make E.A. Maryland a subsidiary of M.S.A.'s preexisting subsidiary, Catalyst Research Corporation (herein referred to as C.R.C.). C.R.C. is a Maryland corporation with its principal place of business in Baltimore.

Pursuant to an agreement of August 7, 1970, E.A. Maryland was merged into Electronics Aids, Inc. of Delaware (herein referred to as E.A. Delaware), a pre-existing wholly owned subsidiary of American Standard, Inc., a Delaware corporation (herein referred to as A.S.I.). E.A. Maryland announced a stockholders meeting would be held on September 10, 1970 in Baltimore, to ratify the August 7, 1970 Agreement. The stockholders special meeting was held and the merger approved and executed over the objection of the plaintiffs. Subsequently on October 28, 1970 this suit was instituted by the plaintiffs as individual stockholders and on behalf of all other stockholders of E.A. Maryland.

The second count of the complaint¹ is against C.R.C., M.S.A., and five individual defendants for breach of fiduciary duty arising from their control and management of E.A. Maryland. The individual defendants, as will be more fully explored below, were directors and/or officers of E.A. Maryland and have filed motions to quash service and dismiss the complaint on the ground that they do not have sufficient nexus with Maryland to sustain in personam jurisdiction over them in this court. Service on the five individual defendants was made pursuant to Article 75, section 78, Annotated Code of Maryland (1969 Replacement Volume). However, counsel for all parties agree that service should have been made under the Maryland Long Arm statute, Article 75, section 96, Annotated Code of Maryland, supra.² Accordingly, this court will look to the Maryland Long Arm statute, as tempered by applicable Supreme Court decisions, to determine the issue. The individual defendants, Hulme, Deike, Carville, Merry, and Ryan, each filed an affidavit in connection with their motion. Supplemental affidavits were filed by Frank E. Foote, secretary of E.A. Maryland and C.R.C., and by Edward Hoopes, Esq., counsel for M.S.A. and C.R.C. Under Rule 12(c), F.R.Civ.P., the motions to dismiss will be considered as motions for summary judgment.

All five of the individual defendants are residents of Pennsylvania, and at no time have any of them been Maryland residents. Deike, Ryan, and Merry have been and are presently directors of M.S.A., and all of the individual defendants have been and are presently officers of M.S.A. Each defendant has been and is presently a director of C.R.C. and Dieke and Hulme have been officers of C.R.C.

All defendants were directors of E.A. Maryland at the time of the August 7, 1970 agreement and the subsequent merger. Carville and Merry were never officers of E.A. Maryland and Deike is described as an officer in his capacity as Chairman of the Board. Ryan was President of E.A. Maryland from September 4, 1964 until March 31, 1970 when Hulme became President and remained in the office until the merger.

No meeting of stockholders or directors of M.S.A. was ever held in Maryland. C.R.C.'s annual stockholders meetings were held in Baltimore, Maryland, and generally each individual defendant attended all of these meetings. Immediately following the annual meeting of stockholders of C.R.C. a board of directors meeting was also held in Baltimore to elect corporate officers for the following year with each defendant generally attending all of these meetings. The affidavits allege that no E.A. Maryland business was transacted at the C.R.C. Baltimore meetings. The routine C.R.C. corporate decisions were made at monthly C.R.C. board of directors meetings held in Pittsburgh, Pennsylvania.

Annual stockholders meetings of E.A. Maryland were held in Baltimore, Maryland and each was followed by a board of directors meeting where the primary purpose was to elect officers for the following year. With the exception of Ryan, each of the defendants generally attended all of these annual meetings. Ryan attended all but the last series of annual meetings which were held on March 31, 1970. Monthly board of directors meetings were held in Pittsburgh, Pennsylvania for dealing with the every day corporate affairs. A special stockholders meeting of E.A. Maryland was held in Baltimore on September 10, 1970 which approved the merger with E.A. Delaware.³ Following the special stockholders meeting a final E.A. Maryland board meeting was held in Baltimore on the same day. A C.R.C. board of directors meeting was then held to authorize the transfer of C.R.C.'s 700,000 shares of E.A. Maryland stock to E.A. Delaware. All of the defendants attended each of the September 10 meetings except Ryan who was consistently absent.

The uncontradicted affidavit of Frank F. Foote, secretary of E.A. Maryland, states that a board of directors meeting of E.A. Maryland was held in Pittsburgh, Pennsylvania on August 6, 1970. At that meeting the August 7, 1970 agreement was discussed and approved. Counsel for M.S.A. and C.R.C. state that the August 7 agreement was executed by the respective signatories thereto in New York, New York and in Pittsburgh, Pennsylvania.

Foote's first supplemental affidavit established that no payments of money or property, as compensation for attending directors meetings or otherwise, was given to any of the five individual defendants in their positions as directors and/or officers of C.R.C. or E.A. Maryland.

II

The burden of alleging and proving jurisdictional facts rests upon the plaintiff. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 56 S.Ct. 780, 80 L.Ed. 1135 (1936); Malinow v. Eberly, 322 F.Supp. 594, 600 (D.Md. 1971); Hare v. Family Publications Service, Inc., 334 F.Supp. 953 (D.Md. 1971).

If in personam jurisdiction exists here over the individual non-resident defendants, its basis rests on the Maryland Long Arm Statute. Article 75, section 96, Annotated Code of Maryland (1969 Replacement Volume as amended) states in part:

"(a) A court may exercise personal jurisdiction over a person, who acts directly or by an agent, as to a cause of action arising from the person's

"(1) Transacting any business in this State;

* * * * * *

"(3) Causing tortious injury in this State by an act or omission in this State;

"(4) Causing tortious injury in this State by an act or omission outside the State if he regularly does or solicits business, engages in any other persistent course of conduct in this State or derives substantial revenue from food or services used or consumed in this State;"

* * * * * *

Application of the Maryland Long Arm statute involves two steps. Haynes v. James H. Carr, Inc., 427 F.2d 700, 703 (4th Cir.), cert. denied, 400 U.S. 942, 91 S.Ct. 238, 27 L.Ed.2d 245 (1970). First, the statute itself must be interpreted to determine if, in light of the facts in this case, service of process over the non-resident directors is authorized by the statute. This court is bound by authoritative interpretations of the Maryland Long Arm statute by the Court of Appeals of Maryland. Shealy v. Challenger Mfg. Co., 304 F.2d 102, 104 (4th Cir. 1962). Second, if service is within the bounds of the statute, this court must then determine whether said service violates the due process clause of the Constitution. In deciding the constitutional issue, this court must follow decisions of the Supreme Court, and where the Supreme Court has not spoken, the Fourth Circuit. Piracci v. New York City Employees' Retirement System, 321 F.Supp. 1067 (D.Md.1971).

Count II of the complaint alleges that the individual defendants breached their fiduciary duties in allowing E.A. Maryland to repay loans to C.R.C. which depleted E.A. Maryland's working capital and thereby lowered the value of the corporation generally and for the purposes of the merger valuation. Undenied are defendants' assertions that any such decisions, as to the merger or repayment of loans, were made in Pittsburgh, Pennsylvania and not in Baltimore, Maryland. The cause of action against the individual defendants does not arise from their transacting any business in this state, therefore, and as a result jurisdiction cannot be based on Article 75, section 96(a) (1).

Plaintiffs argue that section 96 (a) (3) provides a basis for in personam jurisdiction because certain acts of the corporate employees of E.A. Maryland and C.R.C. took place within the State of Maryland which implemented the decisions of the individual defendants relating to the repayment of the loans. These acts, say the plaintiffs, constitute acts of the individual defendants acting through agents in Maryland which caused tortious injury in Maryland, thereby coming within the ambit of § 96(a) (3). The difficulty with this argument is that the tort with which...