Court Opinion

ID: 8920749
Source: CourtListenerOpinion
Date Created: 2022-11-27 06:13:39.080195+00
Date Added: 2024-06-11T17:09:17.241740
License: Public Domain

FRIENDLY, Circuit Judge,
concurring and dissenting:
I am in full agreement with so much of Judge Meskill’s opinion as reverses the judgment dismissing the complaint for failure to comply with the pleading requirements of F.R.Civ.P. 23.1. However, I would go beyond this and hold that, since the further amended complaint was before the court of virtue of defendants’ consent, see infra, the requirements of Rule 23.1 were met and that the complaint should be reinstated. This will avoid the need for the further determinations by the district court directed by the majority, each of which, if adverse to the plaintiffs, could be the subject of an appeal. The papers before us show that this case was within the futility exception, and plaintiffs should be permitted to get on with the action without further hassling over a procedural point whose outcome is foreordained.
The complaint here, originally unverified, had to be prepared in haste in order to effect service on defendant Meyers, who was served on February 3, 1982, while temporarily in New York. It was superseded *1021within the month by a verified amended complaint which cured the lack of verification, changed some dates and added a few allegations. The majority characterize this as the complaint and I shall do likewise.
The complaint set forth ten causes of action. It alleged that in April 1981 Meyers “instructed the other members of M.S. I.’s Board of Directors to vote to issue all of the remaining authorized common shares of M.S.I., 2,950 of which are Class A Voting common and 670 of which are Class B Non-Voting common”; that on April 26, 1981, defendants Meyers, DeLuca, Thomas, and Kelly voted to authorize the acceptance of subscriptions at $1 per share; that one of the subscriptions was by Meyers for 2,020 shares of the voting common; that the book value of MSI stock was approximately $11 per share and that its market value, determined by a capitalization of projected earnings, was approximately $30 per share; that Meyers failed to disclose that his purpose was to dilute the value of the shares of other stockholders by allowing him to increase his holdings at a price substantially below both book and market value; that in September or October 1981 Meyers caused MSI to pay him a 3% commission on its total revenues for the fiscal year ended June 30, 1981, to which the other directors voiced no objection; that in August or September 1981 Meyers caused MSI to use corporate funds to acquire a vacation condominium in Maryland for Meyers’ personal interest and that the other directors voiced no objection to this; that in 1978, 1979 and 1980 MSI paid Meyers for expenses not incurred; that from the formation of MSI in 1978 through 1980 Meyers authorized and caused MSI to issue checks which were not for its corporate purposes but for his personal interest; and that he caused the books and records of MSI to be kept at his personal residence in violation of New York Business Corporation Law § 624. When the allegations with respect to futility quoted or referred to in the majority opinion are read in the light of these other allegations, I am not so sure as my brothers that they are insufficient.
However, it is unnecessary to debate this since the court had before it plaintiffs’ motion for leave to file a further amended complaint, accompanied by affidavits, and the defendants’ opposing affidavits. It could be argued that, in view of the minor nature of the first amendment, the further amended complaint was in practical effect a first amendment, which, under F.R.Civ.P. 15(a), is allowable as a matter of course at any time before a responsive pleading is filed. However, we need not consider this since defendants’ counsel did not oppose the grant of leave to file the further amended complaint. J.App. at 72-73. Under the plain terms of F.R.Civ.P. 15(a) this was thus before the court, without need for any action on its part, apd we should treat the case on that basis. See Fern v. United States, 213 F.2d 674, 677 (9 Cir.1954).
The further amended complaint contained several additional allegations. One was that as a result of requests made during the first nine months of 1980 by plaintiffs Raster and Frank, then directors of MSI, to obtain a review of the corporation’s books and records, Meyers, acting “as a director and dominating shareholder”, removed them as directors at the November 15, 1980, stockholders’ meeting and named his own set of directors without the formality of a vote. Another new paragraph alleged a meeting between Raster, Frank and their attorney, on the one hand, and Meyers and MSI’s attorney, the defendant DeLuca, on the other, at Friendship International Airport in Baltimore at which “[a]ll the relief sought in this complaint was discussed and demanded.” The paragraph in the verified amended complaint concerning the issuance of the 2,020 shares of common stock to Meyers was modified to allege that Meyers failed to disclose to the outside director, Kenedy, and to the stockholders that MSI had recently been awarded a $780,000 service contract, which was approximately 2% times the previous year’s revenues, and that the corporation’s unaudited 1980 financial report did not reflect a three-year $3,000,000 service contract which, if properly accrued, would have established a sig*1022nificantly higher book value. Plaintiffs alleged, alternatively, that even if Meyers did disclose the contract to the other directors, his “total domination and control over them precluded their exercise of independent business judgment” in pricing the newly issued shares.
The district court also had before it the affidavit of Charles G. Raster, submitted by plaintiffs in opposition to the motion to dismiss the verified amended complaint and in support of their cross-motion for leave to file the further amended complaint.1 This amplified the allegation in the further amended complaint concerning the November 15, 1980, stockholders’ meeting as set out in the margin.2 Raster also alleged, “There can be no doubt that Meyers, either single-handedly or with the imprimatur of his other hand-picked directors (the ‘Meyers group’), determines all MSI policy”, and that since the November 15, 1980, stockholders’ meeting there had been only one directors’ meeting, held on April 26, 1981, in Gatlinburg, Tennessee, the locus of a nuclear industry convention during which MSI was awarded the $780,000 service contract mentioned above. The affidavit continued:
Meyers also said that since he owned a majority of the voting stock, he could do whatever he wanted. He said that if the other directors did not agree with him, he would vote in new directors. These statements have been repeated to me, by Meyers, on numerous prior and subsequent occasions. Meyers has told me that MSI is “his company” and he can do with it as he pleases.
Another. paragraph amplified on the December 21, 1981, meeting at the Baltimore airport.
Also pertinent was an affidavit of the single independent director, Renedy, offered by counsel for the defendants, likewise filed a year before the decision of the district court. This stated, inter alia, that he had received no agenda for the April 26, 1981, directors’ meeting at Gatlinburg, which he was unable to attend; that he did not receive a copy of the minutes until June; that the minutes contained a resolution establishing a committee including himself to form an employee and executive compensation plan; that he called defendant DeLuca to arrange a luncheon to discuss such a plan as well as other financial matters; that DeLuca did not appear, called later to apologize, said he would reschedule the meeting, but never did so; and that between the April 26, 1981, board meeting and February 5, 1982, when Rene-dy resigned, writing to MSI that he “had no desire to serve on a Board which apparently had no function”, there had been no meetings and Renedy had received no correspondence from the company. He had no knowledge of the purchase of the condominium and the commission arrangements for Meyers alleged in the complaint, and knew nothing of the stock purchases except as revealed in the minutes of the April *102326, 1981, board meeting, which he received in June.
I have no quarrel with the decision in Elfenbein v. Gulf & Western Industries, Inc., 590 F.2d 445 (2 Cir.1978) (per curiam), that the futility allegations in the complaint there at issue were insufficient. Gulf & Western and later Stelux owned only 27% of Bulova’s stock and had only two nominees on its eleven-member board. Lewis v. Graves, 701 F.2d 245 (2 Cir.1983), also involved a publicly held company. So far as concerned the Stock Plans claims, six of the eleven directors were disinterested. With respect to the Babcock stock acquisition and merger, the court found itself unable to understand how McDermott’s acquisition of another company was so important to the directors’ preservation of their positions as to render demand on them futile; the case might have gone otherwise if the claims had concerned opposition to a hostile tender offer for McDermott. Plaintiffs’ allegations here bear no resemblance to those held insufficient in those cases. MSI was a closely held corporation, which, on plaintiffs’ allegations, was completely dominated by Meyers, who controlled almost 72% of its voting stock before and over 70% after the transaction here challenged, added and subtracted directors without the slightest compliance with corporate procedures, dispensed with directors’ meetings, made no effort to inform directors of what was going on, and regarded himself as the corporation. We said in Brody v. Chemical Bank, 517 F.2d 932, 934 (2 Cir.1975), that
[t]he very purpose of the “demand” rule is to give the derivative corporation itself the opportunity to take over a suit which was brought on its behalf in the first place, and thus to allow the directors the chance to occupy their normal status as conductors of the corporation’s affairs. In re Kauffman Mutual Fund Actions, 479 F.2d 257, 263 (1st Cir.), cert. denied, 414 U.S.' 857, 94 S.Ct. 161, 88 L.Ed.2d 107 (1973).3
The “normal status” of MSI’s directors, as sufficiently alleged in the further amended complaint, not to speak of the affidavits, was to serve not as “conductors of the corporation’s affairs” but as rubberstamps for Meyers. The Third Circuit has said that “the court, in determining whether demand is necessary, should consider whether a demand on the directors would be likely to prod them to correct a wrong.” Lewis v. Curtis, 671 F.2d 779, 786, cert. denied, 459 U.S. 880, 103 S.Ct. 176, 74 L.Ed.2d 144 (1982). Even if one could conjure up the possibility that one of MSI’s directors chosen by Meyers would have had the moral stamina to challenge action which had been taken at Meyers’ behest or which Meyers had taken without their approval, an effort requiring an imagination stronger than mine, the plaintiffs’ allegations negate any likelihood of the challenge’s success. This too is an essential ingredient of the necessity for a demand. Action is futile if it is “incapable of producing any result”. Random House Dictionary of the English Language 576 (1966). If ever there were a case for applying the futility exception recognized in Cathedral Estates v. Taft Realty Corp., 228 F.2d 85, 88 (2 Cir.1955), for cases “where the directors and controlling shareholders are antagonistic, adversely interested, or involved in the transaction attacked”, this is it. As was said long ago in Young v. Alhambra Mining Co., 71 Fed. 810, 812 (C.C.N.D.Ill.1895), quoted with approval in 3B Moore, Federal Practice 1123.1.19 at 23.1-89 (1982): “Every sensible man, out of a court of justice, knows (that a demand under the circumstances) would never be complied with.”
It may be, of course, that plaintiffs’ allegations with respect to Meyers’ domination of the MSI board are unfounded, although defendants do not suggest that they are and Kenedy’s affidavit, introduced by *1024them, makes this unlikely. However, any such possibility would not justify dismissal under F.R.Civ.P. 12(b)(6) for failure to state a claim on which relief can be granted.4 This ease has been pending for more than two years; it is time to get on with it. I would reverse with instructions to reinstate the further amended complaint.

. Although it has been said that the "normal procedure" in considering a motion to dismiss for failure to comply with F.R.Civ.P. 23.1 "is to look solely to the allegations of the complaint", see, e.g., DePinto v. Provident Security Life Ins. Co., 323 F.2d 826, 830 (9 Cir.1963), cert. denied, 376 U.S. 950, 84 S.Ct. 969, 11 L.Ed.2d 970 (1964), that very case sanctioned reliance on evidence taken by the district court to support a showing of futility. In a case like this, where inspection of an affidavit, filed over a year before the decision of the motion, would have imposed no inconvenience or delay, the district court should have considered this before ordering dismissal since, at the very least, the affidavit shows what could be alleged in a still further amendment.

. • Soon after my review of the books, Meyers told Frank and me that he was exercising his control over MSI to replace us as directors. At the shareholders' meeting held November 15, 1980, Meyers announced that thereafter, MSI would have five directors and that he would "name" Batiste DeLuca, Frank L. Kelly, E.L. Thomas and himself to the board. Significantly, no formal vote was taken — Meyers just announced the result. In an attempt at what I believe to be appeasement of the shareholders other than Meyers, Meyers said that he would abstain from voting to elect the fifth director, allowing the other shareholders— who constituted in the aggregate a minority of all voting shares — to choose Brian P. Kenedy to be a member of the board of directors.

. In the Kauffman case Judge Aldrich, after noting that "in each instance the self-interested, affiliated directors-defendants constitute less than a majority of the board”, went on to say, “Were there a majority, this is a particularity from which a conclusion of control might follow.” 479 F.2d at 264.

. In Daily Income Fund, Inc. v. Fox, — U.S. -, - n. 8, 104 S.Ct. 831, 837 n. 8, 78 L.Ed.2d 645 (1984), the Supreme Court left open the question whether Rule 23.1 "itself, as a matter of federal procedure, makes demand on directors the predicate to a proper derivative suit in federal courts or whether any such obligation must instead be found in applicable substantive law.”