Wachsman v. TOBACCO PRODUCTS CORPORATION

• Decision Date: 28 November 1941
• Docket Number: No. 1288.,1288.
• Citation: 42 F. Supp. 174
• Parties: WACHSMAN et al. v. TOBACCO PRODUCTS CORPORATION OF NEW JERSEY.
• Court: U.S. District Court — District of New Jersey

42 F. Supp. 174

WACHSMAN et al. v. TOBACCO PRODUCTS CORPORATION OF NEW JERSEY.

No. 1288.

District Court, D. New Jersey.

November 28, 1941.

David Friedenberg, of Jersey City, N. J., for plaintiffs.

Milton, McNulty & Augelli, and John Milton, Jr., all of Jersey City, N. J., for defendant.

WALKER, District Judge.

The facts are:¹

1. Plaintiffs are citizens and residents of the State of New York.

2. The defendant, Tobacco Products Corporation of New Jersey² is a corporation incorporated under the laws of the State of New Jersey.

3. The matter in controversy exceeds, exclusive of interest and costs, the sum of $3,000.

4. In 1931 directors of Tobacco Products Corporation of Virginia³, a corporation existing under the laws of Virginia, proposed a reorganization which was consummated on or about February 11, 1932. Virginia pursuant to said plan of reorganization transferred a lease⁴ it had to New Jersey and New Jersey paid therefore by issuing its 6½% debentures in the sum of $35,591,235, to the shareholders of Virginia, among whom was The United Stores Corporation⁵. This left $1,012,544.15⁶ of alleged value for which debentures were not issued and for the $1,012,544.15, New Jersey issued all its capital stock to Tobacco Products Corporation of Delaware, a corporation existing under the laws of Delaware⁷.

5. About the same time Virginia transferred to Tobacco Products its remaining assets in exchange for Tobacco Products assuming the liabilities of Virginia, Tobacco Products issued its shares of common stock to the stockholders of Virginia and Stores became the majority stockholder in Tobacco Products.

6. The cost of acquisition of the lease with the American Tobacco Company as reflected upon the books of New Jersey was $36,603,779.15, although the lease had been carried on the books of Virginia at $4,105,509.81.

7. When Virginia was dissolved no provision was made for the payment of income taxes to the United States Treasury should the lease New Jersey had with American Tobacco Company be commuted.

8. In January, 1935, said lease was commuted by American Tobacco Company and New Jersey received $462,744.15, less than the cost of said lease to it as reflected on its books.

9. On June 8, 1937, the Treasury Department levied and assessed a tax against New Jersey for the year 1935 in the sum of $4,967,890.40, claiming that the defendant had sustained a taxable net profit of $32,150,497.09, on the transfer and commutation of the lease. Subsequently the Treasury Department levied and took over $725,638.27 that New Jersey had on deposit.

10. The defendant Tobacco Products Corporation of New Jersey in September, 1939, filed a claim for refund against the United States claiming the lease had cost them $36,603,779.15, and less than that amount had been realized when the lease was commuted, therefore it did not make a net profit.

11. On October 27, 1939, Stores, as owner of the majority of the stock of Tobacco Products, asked for the appointment of a receiver for Tobacco Products and the Chancery Court of Delaware appointed one Elwyn Evans.

12. The chancellor of the State of Delaware made an order directing the receiver to cause the directors of New Jersey to adopt a resolution abandoning the tax refund claim of New Jersey.

13. The plaintiffs, who are stockholders of Tobacco Products, bring this action on behalf of themselves and other stockholders similarly situated⁸. They ask that the officers and directors of the defendant be enjoined from abandoning New Jersey's claim for refund. They ask also for the appointment of a receiver to prosecute the claim, alleging that the officers and directors of Stores are the same as the officers and directors of New Jersey and Tobacco Products. They contend the statute of limitations has run against Tobacco Products and the negotiations for settlement of the tax claim contemplate that the government keep the $725,638.27 it took from New Jersey and release Stores from transferee liability and release Tobacco Products from transferee liability, if any, all of which will be to the detriment of the stockholders of Tobacco Products.

The matter comes before the court on defendant's motion to dismiss the complaint pursuant to Rule 12(b) of the Federal Rules of Civil Procedure.⁹

Discussion.

On or about September 3, 1939, Tobacco Products called a meeting to be held on October 17, 1939, for the purpose of adopting a resolution reading as follows:

"Resolved that a plan of liquidation for this corporation be and hereby is adopted pursuant to which this Corporation shall be dissolved, its affairs liquidated in dissolution proceedings in accordance with the laws of Delaware, its assets distributed to its stockholders in complete cancellation and redemption of all its stock, and pursuant to which plan the transfer of the property under the liquidation is to be completed as soon as practicable and in any event within a period prior to December 31, 1939." and

"Resolved that in the judgment of the Board of Directors of this Corporation, it is advisable and most for the benefit of Tobacco Products Corporation of Delaware that said Corporation should be dissolved."

The meeting was held, and said resolution adopted, but, instead of conducting a voluntary liquidation, the assets of Tobacco Products were transferred to the State of Delaware and on October 27, 1939, Stores instituted a suit in equity in the Court of Chancery in the State of Delaware as the owner of the majority of the capital stock of Tobacco Products.¹⁰

Tobacco Products appeared in said action and interposed an answer admitting the allegations of the bill. The court appointed one Elwyn Evans, receiver of the assets of Tobacco Products.

The statute by virtue of which the receiver was appointed¹¹ empowers said receiver to collect the debts and property due and belonging to Tobacco Products; it gives him the right to prosecute and defend in the name of the corporation, or otherwise all suits necessary or proper for the purposes aforesaid.

All of the stock of New Jersey is owned by Tobacco Products and said stock passed to the receiver when he qualified. The trust required him to ascertain its value and to take all necessary steps to preserve and if possible, increase its worth.

On August 10, 1940, the receiver presented a petition to the Court of Chancery of Delaware and an order was made by the chancellor directing said receiver to cause the directors of New Jersey to adopt a resolution or resolutions, or such contract or arrangements as necessary, to abandon irrevocably the claims for refund it has filed with the United States Government to recover the $725,638.27, taken on December 7, 1937, by the Deputy Collector of the Fifth New Jersey District on account of the tax assessed against New Jersey on June 8, 1937. The order also directed that the officers of New Jersey carry out such resolution or resolutions or such contract or arrangements, provided any claim for federal income taxes against Tobacco Products, the said receiver, or any stockholder or distributee or transferee of Tobacco Products or of said receiver be abandoned, compromised or otherwise disposed of, to the end that no claim be asserted by the United States of America against New Jersey, Tobacco Products or the receiver or the assets in the hands of said receiver or against any stockholder, distributee or transferee of Tobacco Products or said receiver, and authorizing and empowering such other action or arrangements to be taken or entered into by Tobacco Products as in the receiver's judgment would be advisable for the purpose of settling and disposing of the claims for federal income taxes mentioned in said receiver's petition.

The plaintiffs are stockholders of Tobacco Products, they contend the refund claim of New Jersey is a valid and subsisting claim and no one can profit by New Jersey abandoning said refund claim except Stores, against whom transferee proceedings have been or can be brought for $4,105,509.81, the difference between $725,638.27, the amount taken from New Jersey, and $4,977,890.40, the assessment.

In order to enjoin New Jersey, its officers, directors, counsel and agents from complying with the action taken or to be taken in accordance with the said order of the Court of Chancery of Delaware, the plaintiffs bring this action to enjoin and restrain the officers, directors, counsel and agents of New Jersey from abandoning the claim for refund and for the appointment of a receiver for New Jersey and its assets. The receiver to prosecute said claim for refund and to take such other or further action as may be advisable.

"Ordinarily the question whether or not a corporation shall seek to enforce in the courts, a cause of action against a third party like other business questions is a matter of internal management and is left to the discretion of the directors in the absence of instructions by vote of stockholders. Courts interfere seldom to control such discretion intra vires the corporation, except where the directors * * * stand in a dual relation which prevents an unprejudiced exercise of judgment, and, as a rule, only after application has been made by the stockholders to the governing body, unless it appears that there was no opportunity for such application, and that application would be futile or that the delay involved would defeat recovery."¹²

The considerations which prompt the derivative suit are present when a stockholder of a holding company sues on behalf of the subsidiary company to enforce a right which the directors of both companies have refused to enforce or it is reasonable to believe they will not enforce.¹³

It is such a double derivative suit that the plaintiffs, stockholders of Tobacco Products, the owner of all the stock of New Jersey seek to have a receiver enforce for New Jersey. The uncontradicted allegations that the officers and directors of Tobacco Products and Stores were the same at the time...