Woodcock v. American Inv. Co.

• Decision Date: 16 August 1978
• Citation: 376 Mass. 169,380 N.E.2d 624
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: Aileen E. WOODCOCK et al. 1 v. AMERICAN INVESTMENT COMPANY et al. 2

Page 624

380 N.E.2d 624

376 Mass. 169

Aileen E. WOODCOCK et al.¹ v. AMERICAN INVESTMENT COMPANY et al.²

Supreme Judicial Court of Massachusetts, Suffolk.

Argued March 9, 1978.

Decided Aug. 16, 1978.

Daniel F. Featherston, Jr., Boston, for Aileen E. Woodcock and another.

Verne W. Vance, Jr., Boston (William J. Cheeseman, Boston, with him), for American Inv. Co. and others.

Walter J. Hurley, Boston, for William F. Heath, joined in a brief.

Before HENNESSEY, C. J., and KAPLAN, WILKINS and LIACOS, JJ.

WILKINS, Justice.

The plaintiffs appeal from a judgment dismissing their complaint for failure to state a claim on which relief could be granted. The plaintiffs, residents of Missouri and long-time shareholders of the defendant American Investment Company, a Delaware corporation (company), brought this action on May 31, 1974, against the company and certain of its past and present directors and officers. We affirm the judgment on the ground that the plaintiffs' claims were barred by the statute of limitations.

We summarize the relevant allegations of the amended complaint. On April 27, 1973, counsel for the plaintiffs wrote to the president and chairman of the board of directors of the company about disclosures made in the Massachusetts "small loans" cases concerning the use of the company's funds to bribe officials in Massachusetts and in other States. He asked what legal steps the company had taken to recover these illegally expended funds, and, if the company had taken no action, demanded that the company proceed against six named individuals.³ By letter, dated May 18, 1973, the secretary and general counsel of the company replied that the company had commenced no action against the named individuals. He asked for certain additional information, and stated that without further "facts sufficient to substantiate the serious charges you have made," he could not consider recommending a positive course of action to the company's board of directors. On May 22, 1973, the plaintiffs' counsel answered that the substantiating facts were "contained in the transcripts of the testimony of many witnesses before the Massachusetts Crime Commission, special grand juries, and the Suffolk Superior Court in the course of the, so-called, 'Small Loans Cases.' " He again demanded the institution of suit. On June 26, 1973, the company's secretary and general counsel wrote to counsel for the plaintiffs that at the board's June meeting, the "disinterested 'outside directors', constituting a majority of the Board," voted that "the Board of Directors, having given careful consideration to the matters raised in certain correspondence . . . , believe the suit (the plaintiffs' counsel) demands would not be in the best interest of the Company and declines to bring said suit." ⁴

The complaint alleges that as of September 1, 1975, the company had approximately 10,400 voting stockholders who reside in every State and many foreign countries; that the company's shares are listed for trading on the New York Stock Exchange; that the present directors, officers, and the defendants own or control approximately 10% Of the company's outstanding voting stock; that the plaintiffs do not have sufficient funds to solicit the shareholder votes necessary for a special meeting of stockholders or for a "proxy fight to authorize the conduct of this action"; that in the circumstances "it is almost impossible for any stockholder minority to muster sufficient support for the action sought"; and that any notice to shareholders "would be a pointless and impossibly burdensome task, and should be excused as a condition precedent to the prosecution of this action."⁵

The complaint alleges that during the years 1963 through 1968, agents of the company testified in the "small loans" cases that "large sums of money belonging to . . . (the company and its subsidiaries) were used and converted for criminal, illegal, and Ultra vires purposes," and that the illegal use of corporate funds was "a breech (Sic ) of the fiduciary and other duty owed by the individual defendants and others." The complaint specifically alleged the use of corporate funds, directly or indirectly, to bribe a "Deputy Banking Commissioner of the Commonwealth of Massachusetts," to entertain members of the Commonwealth's Small Loans Regulatory Board, and to bribe members of the Legislature. It further alleged that certain corporate funds had been retained by some of the individual defendants rather than used for the ostensible illegal purposes. The plaintiffs alleged, on information and belief, that individual defendants made similar illegal use of corporate funds in other States as part of a "studied, knowing, sophisticated, wholesale raid on the corporate treasury." The plaintiffs sought the repayment of all funds found to be justly due the corporation.

The defendants filed motions to dismiss on the ground that the amended complaint failed to state a claim on which relief could be granted, relying in part on the claim that the statute of limitations had run before the complaint was filed. These motions were allowed without specification of reasons and, as we have said, judgment was entered accordingly for the defendants.

We start with an analysis of precisely what alleged wrongs to the company lie at the base of the plaintiffs' derivative action. The allegations of the complaint cannot fairly be read as presenting any claim for recovery of any illegal payment or misappropriated corporate funds other than those disclosed in the course of the so called "small loans" cases in Massachusetts. The complaint substantially exceeds the scope of the demand on the directors, which lacks the necessary particularity to support a shareholder derivative action based on other circumstances, such as illegal conduct in other jurisdictions, or an action against any defendant not mentioned in the demand. See 3B Moore's Federal Practice, par. 23.1.19, at 23.1-81 (2d ed. 1978); 7A C.A. Wright & A.R. Miller, Federal Practice and Procedure § 1831, at 377 (1972); 13 W. Fletcher, Cyclopedia of the Law of Private Corporations § 5963, at 360 (rev.perm.ed.1970). See also In re Kauffman Mut. Fund Actions, 479 F.2d 257, 263 (1st Cir.), cert. denied, 414 U.S. 857, 94 S.Ct. 161, 38 L.Ed.2d 107 (1973).

All claims of the company based on tort theories are barred by the then applicable Massachusetts two-year statute of limitations on tort actions. G.L. c. 260, § 2A, inserted by St.1948, c. 274, § 2. See G.L. c. 260, § 2A, as amended by St.1973, c. 777, § 1, which now provides a three-year period for tort actions arising on and after January 1, 1974. Id. § 4. On the allegations, the statute of limitations began to run before the plaintiffs learned of the wrongful acts. Fraudulent concealment which would support a tolling of the statute is not alleged. See G.L. c. 260, § 12. The allegation that the misuse of corporate funds was "criminal, illegal, and Ultra vires " does not support a claim of fraudulent concealment. There are no allegations of positive acts of concealment or of the existence of inherently unknowable causes of action. See Friedman v. Jablonski, 371 Mass. ---, --- n. 3, --- - ---^a 358 N.E.2d 994 (1976); Hendrickson v. Sears, 365 Mass. 83, 90, 310 N.E.2d 131 (1974). Nor is there any basis for a claim of fraudulent concealment by directors who may have had a fiduciary duty to disclose the causes of action. See Samia v. Central Oil Co., 339 Mass. 101, 113, 158 N.E.2d 469 (1959). The corporate wrongs were disclosed in testimony of corporate officers from 1963 through 1968. This allegation rebuts any possible implication that the corporate causes of action were concealed. All the alleged wrongs occurred before 1969, and the action was not commenced until May, 1974. We turn then to the question whether any of the claims alleged is founded in contract.

The plaintiffs assert, without citation of apt authority, or the presentation of any reasoning, that shareholder derivative actions are governed by the six-year contract statute of limitations. G.L. c. 260, § 2. The appropriate statute of limitations appears logically to be that governing the corporate claim which the shareholder pursues derivatively. See 13 W. Fletcher, Cyclopedia of the Law of Private Corporations § 5886, at 231 (rev.perm.ed. 1970); 6 Z. Cavitch, Business Organizations § 119.02(1)(1), at 119-9 (1977). Here, the allegations of the complaint rest on a claim of conversion of funds, plainly a tort claim. Any implication of a breach of contract by any officer or director of the company is belied by the allegation that the misuse of corporate funds was a studied, knowing raid on the corporate treasury which, apart from any tort theory, suggests at the most a contractual arrangement among certain officers and employees calling for the bribing of certain public officials for the benefit of the company. Even a free reading, to which in this respect a complaint in a shareholder derivative action may be entitled under the Massachusetts Rules of Civil Procedure, fails to disclose any claim for breach of contract which the company had against any present or former officer or director.

Even if we were to read the complaint as alleging a corporate claim for breach of contract, it fails to state any breach of contract occurring within six years prior to May, 1974. The disclosures in the "small loans" cases were made by the company's officers during the years 1963 through 1968. The implication is that the wrongdoing, and any consequent breaches of contract, occurred before 1963, and certainly not as late as June through December, 1968 (the only period of the alleged disclosures lying within six years prior to May, 1974). ⁶

The plaintiffs, however, contend that they may rely on the defendants' wrongs committed more than six years prior to May, 1974, because of a tolling of the statute of limitations. As to any such wrongs which were torts, it will be seen...