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REITER v. UNIVERSAL MARION CORP.

April 23, 1959

Julius H. REITER et al., Plaintiffs,
v.
UNIVERSAL MARION CORPORATION et al., Defendants



The opinion of the court was delivered by: HOLTZOFF

This is a motion by the defendants in a derivative stockholders' action for a stay of proceedings until the disposition of a similar suit brought by other stockholders of the same corporation and pending in the Supreme Court of the State of New York, New York County. This action is brought by minority stockholders of the Universal Marion Corporation in behalf of the corporation, for the purpose of redressing certain wrongs alleged to have been committed by the individual defendants against the defendant corporation.

This action was filed on October 11, 1957. Specifically, it challenges the validity of two transactions involving the defendant corporation and seeks to set aside the consequences of those two transactions. The first transaction that is being assailed is a purchase by the defendant corporation of certain capital stock of a corporation known as Merritt, Chapman & Scott Corporation. The second transaction that is questioned in this action is a purchase by the defendant corporation of certain assets of Southern Pipe & Supply Company. In each instance, it is charged that the price paid was excessive and that, therefore, the transactions, in effect, constituted a fraud upon the corporation.

 A judgment for money damages in favor of the corporation is sought against the individual defendants who are claimed to have been majority stockholders of the defendant corporation and to have dominated the company and caused it to consummate these transactions, thereby deriving certain benefits for themselves and damaging the corporation. It is important to observe that the principal individual defendants, that is, the stockholders charged with misfeasance have not been served in this action although they are named as defendants and have never appeared. Apparently, they are not subject to the jurisdiction of this Court.

 A short time prior to the institution of the action here involved, other stockholders of the defendant corporation instituted a similar action challenging the same transactions in the Supreme Court of the State of New York for New York County. That action was commenced on September 25, 1957, about two weeks or more prior to the institution of the action in this Court. Consequently, the New York Court first obtained jurisdiction of this controversy. Three other actions were filed in the Supreme Court of the State of New York for New York County, seeking similar relief at the behest of other minority stockholders. Eventually, all four New York actions were consolidated. All of the defendants appeared in the New York action so that the New York Court has jurisdiction of all of the defendants named.

 On February 13, 1959, the parties to the New York action executed a settlement agreement settling and compromising the grievances of the corporation against the individual defendants. One of the terms of the proposed settlement is that the defendant corporation was to receive the Merritt, Chapman & Scott stock at a substantially lesser price than that at the original sale. In accordance with the New York practice, the proposed settlement may not be effectuated unless and until it is approved by the Court. Accordingly, on March 3, 1959, the New York Court made an order appointing a referee to conduct a hearing as to the fairness, reasonableness and adequacy of the proposed settlement.

 The referee held hearings on the matter, after giving notice to all interested parties, on March 18 and March 20, of this year. At the conclusion of the session on March 20, the hearings were closed and decision reserved. It is stated by the parties that a decision and report of the referee is expected to be filed by him sometime during the week of April 26.

 Counsel for the plaintiffs in this action received notice of the hearing before the referee and was accorded an opportunity to be heard but, for reasons which he deemed sufficient, he declined to take advantage of the opportunity. The record indicates that the proposed settlement agreement is intended to settle the entire controversy involved in the New York action as between the corporation and the individual defendants. This is the same controversy that is involved in the action pending in this Court. In view of the imminence of the decision of the New York Court on the question whether or not the action in New York should be settled, as proposed, it seems appropriate that the action in this Court should be stayed until the pending proceeding in New York is disposed of.

 There are a number of reasons which lead the Court to that conclusion. It must be borne in mind that a derivative stockholders' action is brought for the benefit of the corporation. The minority stockholders sue in behalf of the corporation and as representatives of the corporation. The actual beneficial plaintiff in such a suit is the corporation itself. Both the New York action and the action in this Court are, therefore, brought for the benefit of the corporation and the plaintiff stockholders are merely the instruments for asserting the cause of action because the corporation is said to be under the domination of the offending stockholders. The situation is much the same as though the corporation brought several suits for the same relief against the same parties, one suit in this Court and another in the New York Court.

 The New York suit was brought first and is about to come to a final conclusion. An examination of the complaints in the New York action and in the action in this Court indicates that, although the two pleadings are phrased differently because no two persons draw documents in the same phraseology, the transactions that are assailed and the relief prayed for are substantially the same. The claims for relief or the causes of action are, in effect, the same in both the New York and the District of Columbia suits. Obviously, since the corporation is the beneficial plaintiff in both suits, orderly procedure would require that there should be only one trial. The New York action was not only instituted first but is also coming to a final consummation prior to the District of Columbia suit.

 So far as the individual defendants are concerned, even if they were guilty of oppression or fraud, they are, nevertheless, entitled not to be harassed by being required to try the same cause of action twice. If the cause of action is validly compromised in one action, it will affect all pending stockholders' action involving the same transactions. In order to make certain that the compromise, if any, that is consummated will be bona fide, fair, reasonable and adequate, it is subject to the approval of the Court in New York, which may not be given except after hearings have been held before a referee. Finally, complete relief cannot be extended to the corporation in this action since the individual defendants against whom a money judgment is sought for the benefit of the corporation have not been served in this action and have not appeared here. They are parties to the New York suit.

 Since the hearings on the merits of the compromise have already been held and the referee is about to render his report to the Court and it is reasonable to assume that final hearing on the merits of the proposal will be held before the Court within a reasonable time, it would be improvident to proceed with the trial of the action in this Court until the New York proceeding is terminated, especially since, if the compromise is approved, the present suit will also fall as well as the New York suit. The Court has to consider not only the expense that would be caused to the parties involved by an unnecessary trial but also the unnecessary consumption of the time of this Court which could be accorded to other litigants. Obviously, however, the stay should be subject to the condition that the proceeding in New York should not be unreasonably delayed.

 It is urged, however, in opposition to the motion for a stay that a prior motion for a stay has been made and denied. This contention merits serious consideration. At the outset, it must be noted, as a general principle of law, that in this Circuit an interlocutory ruling in a civil action does not constitute res judicata as concerns subsequent proceedings in the same action and the doctrine of the 'law of the case' is not applicable to such an interlocutory order, Marks v. Frigidaire Sales Corp., 60 App.D.C. 359, 54 F.2d 974.

 Originally, on December 9, 1958, the motion for a stay, such as is asked here, was granted by Judge Tamm. He apparently felt that a stay was appropriate in view of the fact that the New York Court had first obtained jurisdiction of the controversy. At that time, it should be noted, however, the settlement agreement that has been heretofore mentioned had not been entered into and, for all that appeared, the New York action would have had to be tried in due course. The plaintiffs then applied to the United States Court of Appeals for the District of Columbia Circuit for leave to file a petition for a writ of mandamus against Judge Tamm, in effect, seeking an appellate review of the order made by Judge Tamm in which he granted the stay. On February 26, 1959, the Court of Appeals allowed the petition for leave to file an application for a writ of mandamus. Its decision was in a rather unusual form. No opinion was written. ...


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