Weinhaus v. Gale

• Decision Date: 26 September 1956
• Docket Number: No. 11695.,11695.
• Citation: 237 F.2d 197
• Parties: Karol WEINHAUS, Plaintiff-Appellant, v. Willis GALE et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

237 F.2d 197 (1956)

Karol WEINHAUS, Plaintiff-Appellant, v. Willis GALE et al., Defendants-Appellees.

No. 11695.

United States Court of Appeals Seventh Circuit.

September 26, 1956.

Harry R. Booth, John O'C Fitzgerald, Joseph Keig, Sr., Chicago, Ill., for appellant.

Sam Alschuler, Aurora, Ill., Charles A. Bane, Chicago, Ill., for appellees.

Before DUFFY, Chief Judge, and MAJOR and LINDLEY, Circuit Judges.

MAJOR, Circuit Judge.

This action was commenced by plaintiff June 13, 1955, against ten named individual defendants, to recover the sum of $6,500,000, under circumstances subsequently set forth. Jurisdiction was predicated upon diversity of citizenship, with the requisite amount in controversy. The complaint was twice amended and plaintiff appeals from an order of the District Court entered November 30, 1955, dismissing the complaint as amended for failure to state a cause entitling plaintiff to the relief sought.

Insofar as material to the main question for decision the complaint alleged that plaintiff, on August 10, 1954, was the joint owner of eleven shares of the common stock of Northern Illinois Gas Company (hereinafter referred to as the Gas Company), which was engaged in the business of purchasing, supplying and delivering gas to consumers. Prior to February 9, 1954, Commonwealth Edison Company (hereinafter referred to as Edison) owned the property subsequently conveyed to the Gas Company. At or about that time the individual defendants, directors of Edison, as a result of a conspiracy designed to defraud future owners of shares of the Gas Company, committed the following acts: (1) organized the Gas Company; (2) caused the Gas Company to assume the obligation represented by certain outstanding bonds of Edison; (3) caused the Gas Company to issue Edison 5,892,484 shares of common stock of the Gas Company of a par value of $5, (4) caused the Gas Company to sell to Edison on February 9, 1954, "100,000 shares of its 5% convertible preferred shares (convertible into 10 shares of common stock of the `Gas Company' at any time after February 1, 1957) for a price of $10,000,000.00, which the defendants then knew was worth not less than $16,500,000.00 with the design and purpose of giving to `Edison' an unconscionable profit of $6,500,000.00 and of defrauding the `Gas Company' and its future stockholders, collectively, of $6,500,000.00"; (5) on February 1, 1955, Edison sold all of such preferred shares for $16,500,000, thereby receiving a profit of $6,500,000, which should have gone to the Gas Company, and (6) controlled the board of directors of Edison, and also of the Gas Company from the time of its organization. The complaint further alleged that the defendants well knew that the sale of the shares of preferred stock by the Gas Company to Edison was for the purpose and design of giving Edison an unconscionable profit and of defrauding the Gas Company and its future stockholders; that plaintiff was a stockholder of the Gas Company at the time of the sale of the preferred stock by Edison; that defendants were under a fiduciary duty to the plaintiff and her class to reinvest the Gas Company with the unconscionable profit realized by Edison from the sale of such preferred stock and that the defendants failed to perform their duty in that respect. It was further alleged that the outstanding common stock of the Gas Company was held by more than 100,000 persons and that plaintiff brought the suit "as a class action for herself and all other stockholders of the `Gas Company' similarly situated."

By an amended complaint, filed September 7, 1955, the Gas Company was made a party-defendant. For the purpose of considering the main question before us, we think it unnecessary to set forth the allegations of the amended complaint. In the main it contained a more detailed description of the conspiracy originally alleged and facts designed to excuse plaintiff from making a demand upon the Gas Company, and the individual defendants as its directors, that suit be brought by the Gas Company for whose benefit any recovery would inure. On November 21, 1955, plaintiff by leave of court amended her complaint as follows, "Plaintiff was on and after January 1, 1954 the co-owner of 10 or more shares of stock of the Commonwealth Edison Company."

It is evident that this is a shareholder's derivative suit controlled by Rule 23(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A., which provides so far as here material: "In an action brought to enforce a secondary right on the part of one or more shareholders in an association, incorporated or unincorporated, because the association refuses to enforce rights which may properly be asserted by it, the complaint shall be verified by oath and shall aver (1) that the plaintiff was a shareholder at the time of the transaction of which he complains * * *."

The principal question on this appeal is whether plaintiff was a shareholder of the Gas Company at the time of the transaction of which she complains. The District Court, in deciding this issue adversely to plaintiff, in a memorandum opinion stated: "The complaint, as amended, does not show plaintiff to have been a shareholder at the time of the transaction of which complaint is made, although plaintiff argues that the transaction constituted a continuing wrong in that no effort was made to undo its effects. On the contrary, it appears to the Court that the sale of stock, of which plaintiff complains, was a finished transaction prior to the date on which plaintiff became a shareholder."

Another issue raised on this appeal is that the District Court erred in failing to grant plaintiff a hearing on certain interrogatories directed to two of the individual defendants and to require answers thereto prior to ruling on defendants' motion to dismiss. An examination of such interrogatories discloses that answers thereto would not have...