GASCH, District Judge.
Plaintiffs filed the complaint in this case in two parts: part I is styled as a derivative action; part II as a class action. This matter came on for hearing on defendants' motions: (I) for summary judgment on count one of plaintiffs' complaint; (II) for an order requiring plaintiffs to amend their pleadings to eliminate allegations as to the representation of absent persons and allowing them to proceed in their individual capacities only; and (III), in the alternative, for an order determining and limiting the class and directing notice to the members of the class.
It is alleged that plaintiffs are minority stockholders in the Equity Annuity Life Insurance Company (EALIC) a variable annuity insurance company organized under Title 35 of the District of Columbia Code. Defendant Variable Annuity Life Insurance Company of America (VALIC) is similarly organized under Title 35 of the District of Columbia Code. EALIC and VALIC, nationwide competitors, are leaders in the relatively new and expanding field of variable annuity insurance.
Defendant American General Insurance Company of Houston, Texas, (American General), a Texas corporation qualified to do business in the District of Columbia, allegedly is a holding company which controls five life insurance companies and seven fire and casualty companies. It owns minority interests in three other life insurance companies. During the years relevant here, American General owned 34.3% of EALIC's capital stock. Persons associated with American General owned an additional 25.8% of EALIC's capital stock creating a combined control of approximately sixty percent.
Defendant Woodson is the president and a director of both American General and EALIC.
Five of EALIC's eleven directors are directors or officers of American General or its affiliated companies. Defendant Woodson owns 9,753 shares of EALIC's stock.
Rapid expansion diminished VALIC's capital. This brought pressure from the Superintendent of Insurance for the District of Columbia on VALIC to seek additional capital. American General, acting through President-Director Woodson, was responsive to VALIC's search and an agreement was established between them on May 5, 1967. Under part one of the agreement American General would purchase 1,325,000 shares (50%) of VALIC's capital stock for $12,735,000 ($9.61 per share) and VALIC would arrange to have Woodson become a director and chairman of the Board of VALIC. Under part two of the agreement and conditioned on the completion of part one of the agreement, American General, again acting through Woodson, would cause EALIC to sell all of its business, 250,000 capital shares, to VALIC in return for 250,000 shares of VALIC (quoted at 20 5/8 to 21 1/8 on 5/4/67).
It is generally alleged that Woodson, in effect wearing several "hats" at the same time, engineered these transactions from all sides without regard for EALIC's stockholders and with only the interests of American General, his true principal, in mind. Part two of the agreement has not been consummated. EALIC is still in existence.
Under Rule 56 of the Federal Rules of Civil Procedure, defendants may prevail on their motion for summary judgment of count one of plaintiffs' complaint only if it appears from the entire record that there is no genuine issue as to any material fact and only if on the undisputed facts the defendants are entitled to a judgment as a matter of law. In order to put the issue in focus, local rule 9(h) requires the movant to submit with his Rule 56 motion a particular statement of the material facts as to which there is no dispute. No rule 9(h) statement has been filed. Rather, the defendants have requested the Court to consider a recitation of "uncontroverted facts" appearing in their briefs in support of these motions as the statement required by rule 9(h).
To the extent possible the Court has done that.
Plaintiffs, however, have challenged defendants' version of the material facts both in general and in the particular. "If one thing is clear about the case at bar, it is that material facts and the inferences to be drawn therefrom are in issue."
The Court agrees. Moreover, in this case it appears that the legal issues will in part turn on elements such as fiduciary duties, duties of loyalty and conflicts of interest, which elements require for their just resolution a scrutiny of the inferences to be drawn from the facts and from those presenting them.
In regard to antitrust litigation the Supreme Court has stated:
We believe that summary procedures should be used sparingly in complex * * * litigation where motive and intent play the leading roles, the proof is largely in the hands of the alleged conspirators, and hostile witnesses thicken the plot. It is only when the witnesses are present and subject to cross-examination that their credibility and the weight to be given their testimony can be appraised. Trial by affidavit is no substitute for trial by jury which so long has been the hallmark of 'even handed justice.' * * *
For these reasons the Court is at this time, on this state of the record, reluctant to find the material facts undisputed and accordingly, denies this part of defendants' motion for summary judgment.
Alternatively, the defendants have requested the Court to treat their motion as one in the nature of a motion to dismiss. Defendants argue that regardless of the facts, or assuming arguendo that the facts plaintiffs allege are true, defendants are entitled, as a matter of law, to a dismissal of count I of the complaint on either of two theories.
First, defendants argue that plaintiffs are now, on the eve of the consummation of the challenged corporate transactions, precluded from bringing this action since, rather than earlier seeking an injunction, they "deliberately chose to forego any type of equitable proceeding to prevent the consummation * * * of the transaction, choosing instead to protect their interests by suit for damages on behalf of the individual stockholders."
The Court is unable on the complex and factually contradicted record before it to find either that the plaintiffs made such a decision or, even in the event they did, that such a decision would preclude them from changing their strategy from negotiation on personal claims to suit on both personal and derivative claims.
It appears that this is a matter within the discretion of the Court.
Noting the plaintiffs allege that they sought all reasonable remedies within the corporate structure and that another stockholder, James K. Sullivan, unsuccessfully sought an injunction in Civil Action 1807-67 to prevent the holding of the stockholders meeting at which the agreement now challenged was subsequently allegedly approved, at this stage, the Court will not on this ground deny the plaintiffs the opportunity to proceed.
Second, defendants assert that plaintiffs cannot maintain a derivative action "[because] it is clear that attacks by minority shareholders upon mergers or sales of assets ratified by the shareholder majority involving assertions of direct injury to the minority shareholders and do not injure the corporation as such * * *."
While this proposition has support among the authorities, it is not a statement which the Court would characterize as "clear" or dispositive of the issue.
Thus, plaintiffs' complaint is not limited to grievances of the minority against the majority. To compel a dismissal here, defendants' statement of the law would have to comprehend that attacks by minority shareholders upon mergers or sales of assets ratified by the majority can " only " be assertions of direct injury. As a general proposition that is incorrect.
The operative word implied in defendants' statement is * * * attacks * * * " which " involve assertions of direct injury. As indicated earlier, the Court cannot at this stage find the facts which would bring this case within the theory defendants assert.
Moreover, defendants' theory assumes particular facts, such as the lawfulness of the ratification, which, while they may be true, have not at this stage of the proceeding been established.
In a variation of this argument, defendants assert that the same injury cannot be both personal and derivative.
To the extent this means that the same single injury arising from the breach of a single duty cannot be both personal and derivative, this is probably correct.
Here, however, as will be more fully developed later, there is not one but several duties allegedly breached and not one but several injuries claimed. Again, defendants imply that plaintiffs "realistically" only have one grievance. Again, the Court will not at this stage ignore that which plaintiffs state as their grievances and argue as their theories. To do that would be "unrealistic."
Defendants cite several cases which indicate that where there has been a sale of the corporate assets or a merger, derivative claims will not lie since logically and practically there is no entity remaining from which a claim may be derived.
Here defendants assert the total assets of the corporation have been transferred and that it has filed a Form 966 Information Return for Corporate Dissolution or Liquidation with the Internal Revenue Service. This position has some merit where a court is in a position to view the facts "realistically" and when the proceedings reach the stage in which the court assumes an active role.
Plaintiffs, however, on whose allegations the Court must now depend, maintain that, although EALIC is no longer operating fully, it has not ceased to exist because the challenged transactions were suspended at the outset of this suit.
Skillfully, defendants have pressed the broader argument that regardless of, or assuming, plaintiffs' factual allegations, the theories of plaintiffs' complaint do not meet the general test of derivative claims.
Defendants place particular emphasis on whether the relief sought is relief which would inure directly to the corporation (a derivative action) or whether the relief would go directly to the stockholder (a personal or primary action).
Plaintiffs, it is argued, are merely minority stockholders who do not object to the challenged transaction except insofar as they may not receive as much for their individual shares as they would hope to.
The relief they propose is not that the corporation be returned to its full operating capacity, but rather that they receive more, personally, for their stock.
Plaintiffs, on the contrary, maintain that the test of whether an action is derivative or primary is not phrased in terms of the relief sought but turns on whether the injury to be redressed is one to the corporation or to the individual stockholder.
Moreover, they argue, their statements as to relief were merely suggestions and that they favor any form of relief which will compensate the injuries.
Both statements of the test are partially correct. A review of the authorities indicates that courts have wide discretion in interpreting whether a complaint states a derivative or primary action.
The tests suggested by scholars and variously applied by other courts have been stated as broadly as: whether the injury is to the corporation directly,
or to the stockholder personally;
whether the injury results from the breach of a duty owed to the corporation or to the stockholder personally;
and whether the relief sought would go to the corporation directly or to the individual stockholder.
To be useful, therefore, these general statements must necessarily be supplemented by the results of cases.
In this connection precedent indicates that it is the existence and implications of "duties" which are the paramount considerations. Thus, it has been held that the same set of facts may give rise to several claims, some of which are personal and some of which are derivative
when there are duties owing both to a corporation and to a stockholder personally.
Similarly, because directors as well as dominant stockholders stand in a fiduciary relationship to the corporation,
derivative suits may be maintained to remedy breaches of the duties arising from those relationships.
Moreover, where a suit is logically derivative in nature but, for instance, the overwhelming majority of the stockholders have also breached a duty perhaps in one of their dual capacities as directors and stockholders, courts have fashioned corporate relief which benefits only the minority, personally.
Thus, focusing on the existence and implications of duties as the keys to proper characterization, considering the available options indicated by the precedents noted above and treating where necessary the facts alleged by the plaintiffs as true, the Court has examined the theories which appear to be asserted by plaintiffs' complaint to determine whether, as a matter of law, and under modern pleading
they may assert derivative causes of action.
In their complaint and motion in opposition to defendants' motion for summary judgment, plaintiffs allege that Director-President Woodson engaged in a course of conduct which necessarily produced a "conflict of interests" and which resulted in damage to EALIC. It is clear that a director owes a fiduciary duty to his corporation because of his position of special trust.
The often quoted standard related by Judge Cardozo is applicable here:
"Many forms of conduct permissible in a workaday world for those acting at arms length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honestly alone, but the punctilio of an honor most sensitive, is the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions."