Wallace v. Motor Products Corporation

• Decision Date: 06 April 1928
• Docket Number: No. 4823.,4823.
• Citation: 25 F.2d 655
• Parties: WALLACE v. MOTOR PRODUCTS CORPORATION et al.
• Court: U.S. Court of Appeals — Sixth Circuit

25 F.2d 655 (1928)

WALLACE v. MOTOR PRODUCTS CORPORATION et al.

No. 4823.

Circuit Court of Appeals, Sixth Circuit.

April 6, 1928.

Alfred Lucking, of Detroit, Mich. (Lucking, Hanlon, Lucking & Van Auken, of Detroit, Mich., on the brief), for appellant.

Leo M. Butzel and Sherwin A. Hill, both of Detroit, Mich. (Warren, Cady, Hill & Hamblen, of Detroit, Mich., and Hoyt A. Moore, of New York City, on the brief), for appellees.

Before DENISON, MACK, and MOORMAN, Circuit Judges.

MOORMAN, Circuit Judge.

The Motor Products Corporation, which was organized in 1916, was reincorporated under the laws of New York in 1923, with an authorized capital stock of 130,010 shares of no par value, 67,500 shares of which were common stock and 62,510 preferred. The preferred stock was entitled to annual dividends of $4 a share, and could be redeemed at any time, upon thirty days' notice, at $50 a share and accrued dividends. No dividends could be paid on the common stock so long as any preferred stock remained outstanding. The right to elect directors was vested in the common stock alone, but, if there was default in the payment of dividends on the preferred stock for nine months, the right to elect a majority of the directors passed to the holders of the preferred stock. In all other matters both classes of stock had voting power, except in proceedings to increase the number of common shares, with respect to which voting power was vested in the holders of the common stock alone.

At the time of this reincorporation, the company issued $6,750,000 of 6 per cent. sinking fund debentures, payable in 1943. By January of 1926 it had purchased and retired $3,500,000 of these debentures and all but 30,614 shares of its preferred stock. There were then outstanding 65,203 shares of common stock. In the meantime plaintiff had acquired 970 shares of the common stock, which he still owns.

In January of 1926 a new corporation was formed under the laws of New York, with an authorized capital of 30,614 shares of preferred stock and 200,000 shares of common stock, both without par value. The new company acquired the name, assets, and good will of the 1923 corporation, paying for the preferred stock of that company an equal number of shares of preferred stock in the new company and for the common stock two shares of common stock in the new company for one share of the old. The preferred stock, which was redeemable at $60 a share and accrued dividends, was not given any voting power in the affairs of the corporation, but carried cumulative dividends of $5 a share per annum, to be paid in preference to dividends on the common stock. 19,594 shares of the common stock were set aside to be issued to the employees of the corporation at a price of not less than $30 a share, to be paid for upon such terms as the board of directors might deem proper, directors of the company who were also employees being eligible to acquire the stock. The charter of the 1923 corporation had provided for the issuing of 5,000 shares of common stock to employees of the corporation, but had provided that it could not be issued to an employee who was at the same time a director.

Appellant did not exchange his stock in the old company for stock in the new, but, on behalf of himself and all other holders of common stock (in the old corporation), brought this suit in the state court of Michigan against the new company, its directors, and certain of its stockholders residing in Michigan, to cancel and set aside the proceedings by which the new company was organized, and to restore the common stockholders of the old corporation to the position that they had occupied prior to the rein corporation. Injunctions restraining and enjoining the defendants from proceeding or taking any steps under the charter of the new corporation were asked. A temporary restraining order was issued in the state court, after which, on petition of the corporation, the suit was removed to the United States court on the ground that there was a separable controversy between the plaintiff and the corporation. Motion to remand to the state court was made and denied, and, on motion of the corporation, the restraining order issued in the state court was vacated and the bill dismissed.

The claim of the plaintiff is that the directors of the old company and the defendant stockholders, being personally interested in increasing the value of the preferred stock in that company to the detriment of the common stockholders, formed the new company so that they could repurchase at a reduced price the common stock in the old company which they had theretofore sold, and so that their preferred stock in the old company might be exchanged for an equal number of preferred shares in the new company of much greater value, and that, because of this interest of these individual defendants, and their lack of good faith in organizing the new company, the proceedings taken to effect its organization constituted a fraud upon the holders of the common stock of the old company.

The question that was considered by the lower court on the motion to remand was whether there was such a separable controversy between the plaintiff, a citizen and resident of Michigan, and the corporation, a citizen of New York, as entitled the latter to remove the cause to the United States court. The bill prayed primarily "that the court, by its decree, cancel, rescind, and set aside all steps and proceedings of whatsoever name or nature that may have been taken to effect and consummate said plan of reorganization." As incidental relief it asked that the corporation and the individual defendants be restrained and enjoined: (1) From using the assets of the corporation to retire, redeem, or purchase any of its preferred stock at more than $50 a share; (2) from declaring or paying dividends on the preferred stock in excess of $4 a share per annum; (3) from declaring or paying any dividend on the common stock until all of the preferred stock had been retired; (4) from using the assets of the corporation for retiring, redeeming, and purchasing any of the outstanding 6 per cent. debentures; (5) from accepting any further stock for exchange or transfer under the reincorporation; (6) from taking further steps of any nature to effect or consummate the plan of reorganization; (7) from selling or disposing of any of the 19,594 shares of common stock set aside for sale to employees; and (8) that the court restore all the stockholders of the corporation (presumably the corporation of 1923) to the positions they occupied prior to the reincorporation. The relief sought against the individual defendants was that they be enjoined from selling or disposing of any of their stock in the Motors Product Corporation (presumably the 1926 corporation); that they account for all profits which they had realized from the reincorporation; that they be required to pay to plaintiff the damages that he had sustained because of their unlawful acts in creating it; and that their stock be subjected to the payment of any such damages awarded.

It was said in Geer v. Mathieson Alkali Works, 190 U. S. 428, 23 S. Ct. 807, 47 L. Ed. 1122, that a suit "may, consistently with the rules of pleading, embrace several distinct controversies. * * * And, when two or more causes of action are united in one suit, there can be a removal of the whole suit on the petition of one or more of the plaintiffs or defendants (now only the defendants) interested in the controversy, which if it had been sued on alone would be removable." The primary object of the suit before us was to cancel, rescind, and set aside the proceedings taken to organize the corporation of 1926. The bill sets up two causes of action — one against the new corporation to annul its charter and to enjoin certain acts which it alone could do and upon which it alone might have been sued; the other against the individual defendants for damages sustained as a result of their unlawful acts as directors and stockholders of the old corporation, and for certain incidental injunctional relief, for which they alone were responsible. These were separable actions. To such a suit the authorities¹ cited by appellant are not applicable. It is controlled, we think, by the principles announced in Geer v. Mathieson, supra, and Venner v. Southern Pacific Co. (2 C. C. A.) 279 F. 832, in which latter...