Source: http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19820107_0000017.SNY.htm/qx
Timestamp: 2017-08-17 21:40:13
Document Index: 125645887

Matched Legal Cases: ['§ 36', '§ 36', '§ 36', '§ 36', '§ 36', '§ 36', '§ 36', '§ 13', '§ 80', '§ 36', '§ 36', '§ 36', '§ 36', '§ 36']

DEAN WITTER REYNOLDS INTERCAPITAL INC., Dean Witter Reynolds Organization Inc., and InterCapital Liquid Asset Fund, Inc., Defendants
Defendants move pursuant to Fed.R.Civ.Pr. 12(c) to dismiss the complaint on the ground that plaintiffs have failed to make a demand on the directors of the Fund or to plead justification for failing to do so. Defendants contend that Fed.R.Civ.Pr. 23.1 requires such action. Plaintiffs move to amend the complaint to add the allegations that the suit is not a collusive one to confer jurisdiction which the court would not otherwise have (Proposed Amended Complaint P 2) and that no demand was made upon the directors of the Fund because "this action is brought under Section 36(b) of the Act, and plaintiffs have an absolute right under that statute to maintain the action." (Proposed Amended Complaint P 20). *fn1"
Defendants contend that the requirements of Rule 23.1 are applicable even to suits brought under § 36(b) of the Investment Company Act and emphasize that three courts have recently so ruled: Markowitz v. Brody, 90 F.R.D. 542 (S.D.N.Y.1981); Weiss v. Temporary Investment Fund, Inc., 516 F. Supp. 665 (D.Del.1981); Grossman v. Johnson, 89 F.R.D. 656 (1981) (D.Mass.1981). These courts have generally reasoned that nothing in the legislative history reveals a Congressional intent to abrogate the demand or excuse the requirements of Rule 23.1 and that, where it is not alleged that a majority of the directors are not independent of the Adviser, the demand requirement satisfies the policy underlying Rule 23.1 of giving the directors an opportunity to investigate and remedy any shortcomings themselves, thus possibly avoiding the need for litigation. Although the directors cannot block a § 36(b) action, in contrast to their power with respect to ordinary derivative suits, it is maintained that the demand requirement nevertheless accords the directors an opportunity to take action in response to the complaints.
While the question is close, we agree with plaintiffs that in this case a demand on the directors of the Fund would be futile and therefore the demand requirement is excused under the terms of Fed.R.Civ.Pr. 23.1. It is clear at least at this stage of the litigation that the directors in fact disagree with plaintiffs' contention that the fee is excessive. In the answer, the Fund alleges that the "independent directors of the Fund made a thorough examination of the reasonableness and fairness of the fees. After considering all of the pertinent facts and with full knowledge of their responsibilities under the Investment Company Act, the independent directors approved the fee schedule." (Complaint P 15). Accordingly, it presently appears that a demand would be futile. See Galfand v. Chestnutt, 402 F. Supp. 1318 (S.D.N.Y.1975), aff'd, 545 F.2d 807 (2d Cir. 1976), cert. denied, 435 U.S. 943, 98 S. Ct. 1524, 55 L. Ed. 2d 540 (1976). To require a dismissal of the complaint and a demand at the present time would result only in the empty gesture of a demand and the inability of plaintiffs to recover for the Fund the allegedly excessive fees paid one year prior to the commencement of the present complaint. Such an outcome would frustrate the purposes of § 36(b).
Moreover, while we need not reach the issue in light of our holding that the demand requirement is excused as futile in this case, we are inclined to agree with plaintiffs that a demand on the directors of the Fund was not intended to be a prerequisite to suit under § 36(b). The language of § 36(b) itself provides little guidance on this question. As Judge Friendly has recently noted, " "The language of subsection (b) is a lesson in the art of studied ambiguity in drafting of statutes,' " Fogel v. Chestnutt, -- - F.2d -- at -- (2d Cir. December 17, 1981) slip op. at 488, quoting Jennings & Marsh, Securities Regulation: Cases and Materials, at 1396-97 (4th ed. 1977). Although the literal terms of Rule 23.1 would include derivative suits under § 36(b), two important features distinguish the § 36(b) suit from ordinary derivative suits and suggest the inapplicability of the demand requirement. First, unlike the ordinary derivative suit, the directors here have no power to terminate the suit. While other provisions, such as § 13(a)(3) of the Act, 15 U.S.C. § 80a-13(a)(3), leave open the issue whether independent directors of an investment company may terminate a derivative suit, see Burks v. Lasker, 441 U.S. 471, 483-86, 99 S. Ct. 1831, 1839-41, 60 L. Ed. 2d 404 (1979), § 36(b) "expressly" prevents "board action from cutting off derivative suits ... charging breach of fiduciary duty with respect to adviser fees." Id. at 484, 99 S. Ct. at 1840 (footnote omitted). Indeed, § 36(b) does not expressly authorize the investment company to bring suit; "(i)t thus appears that in enacting Section 36(b) Congress assumed that the directors of an investment company would be antagonistic toward, and unlikely to prosecute, an action against the Fund's advisers ..." Boyko v. Reserve Fund, Inc., 68 F.R.D. 692, 694 (S.D.N.Y.1975). *fn2" Since the directors cannot prevent plaintiffs' suit nor does the statute provide directors the right to institute suit, the basis of the demand requirement in the ordinary derivative action, that "the complaining plaintiff should not be able to attempt to control corporate management without first requesting appropriate action by the directors ...", 3B Moore's Federal Practice P 23.1.14(4), p. 23.1.39, does not appear to apply logically in the context of a § 36(b) suit.
Second, § 36(b) expressly limits recovery of excessive fees to fees paid up to one year prior to the commencement of suit. However, the demand requirement implies that the directors be given a reasonable time in which to investigate the matter and to determine if the complaints are meritorious. In light of the delay inherent in such a process, application of the demand requirement to § 36(b) suits would have the anomalous result of preventing full recovery of excessive fees paid to advisers while the directors considered whether they had acted against the interests of the shareholders in approving the fees in the first place. There is no reason to believe that Congress intended such an outcome.
Accordingly, defendants' motion to dismiss the complaint is denied. Plaintiffs' motion to amend their complaint is granted. *fn3"