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MANN-PALLER FOUND. v. ECONOMETRIC RESEARCH

July 25, 1986

THE MANN-PALLER FOUNDATION, INC., Plaintiff,
v.
ECONOMETRIC RESEARCH, INC., Defendant



The opinion of the court was delivered by: HARRIS

STANLEY S. HARRIS, U.S.D.J.

 MEMORANDUM OPINION

 This matter is before the Court on defendant's motions to strike plaintiff's jury demand and for summary judgment. In deciding a motion for summary judgment, the Court looks beyond the pleadings and may take into consideration affidavits, depositions, answers to interrogatories, and admissions on file, together with affidavits. Fed. R. Civ. P. 56(c). Upon careful consideration of the pleadings and the entire record herein, the Court grants the motion for summary judgment, which renders moot the motion to strike the jury demand.

 Background

 Plaintiff, The Mann-Paller Foundation, Inc. (MPF), is a Maryland non-stock charitable and educational corporation whose principal place of business is in the State of Maryland. Defendant, Econometric Research, Inc. (ERI), is a Delaware corporation offering professional services as its principal business with its principal place of business in the District of Columbia. Jurisdiction of this Court is based on diversity. 28 U.S.C. § 1332 (1982).

 MPF owns 35.4 percent of the outstanding shares of stock of ERI. The stock was donated to MPF on December 20, 1984, by Allan Paller, one of the four initial MPF stockholders. Dr. Stephan Michelson, the president of ERI and currently its sole director, owns 63.6 percent of the stock of ERI, and is ERI's majority stockholder. *fn1"

 In response to plaintiff's complaint, ERI states that ERI has never declared or paid a dividend to any shareholder. Defendant claims that the sum paid to Dr. Michelson represented compensation owed to Dr. Michelson, rather than a distribution of dividends. Therefore, defendant claims, there is no debt owing to plaintiff.

 According to defendant's statement of the case, the compensation amount was determined according to a formula developed by ERI's independent accountants and adopted by ERI's board on July 26, 1983. ERI paid to Dr. Michelson the sum of $347,745, representing a portion of his accrued and deferred compensation as established under the formula, on January 8, 1985. On February 13, 1985, Dr. Michelson, the majority stockholder of ERI, ratified the compensation formula and the payment made thereunder by a Written Consent of Majority Stockholder pursuant to Del. Code Ann. tit. 8, § 228(a). ERI also states that the requisite notice of the taking of corporate action without a meeting of less than unanimous written consent, required by the statute, was given to the non-consenting stockholders, including MPF.

 Discussion

 The arguments presented by the parties supporting and opposing both the motion to strike the jury demand and the motion for summary judgment center on the nature of the payment at issue. The disposition of both motions depends on that characterization.

 In the motion to strike the jury demand, defendant argues that plaintiff's action is one seeking to compel the payment of a dividend, an action which is purely equitable. Plaintiff, in opposition, supports its demand for a jury trial by arguing that the payment made to Dr. Michelson, although labeled "compensation" by ERI, was actually a distribution of corporate profits. Therefore, a de facto dividend has been declared and distributed to ERI's majority stockholder. Plaintiff complains that a debt of their pro rata portion of that dividend resulting from its ownership of defendant's stock is owing to them. This action, plaintiff contends, seeks to recover a money judgment from ERI, which is a traditionally legal type of relief, giving rise to the right to a jury trial.

 In its motion for summary judgment, defendant argues that plaintiff is challenging the payment as not properly authorized by appropriate corporate action either through proper approval or adoption by the Board of Directors, or proper ratification by the shareholders of ERI. Defendant argues that the payment was properly authorized, and even if it was not, Delaware law does not allow improper compensation to an employee-shareholder to be treated as a dividend. Defendant argues that plaintiff may not challenge the allegedly improper compensation in an individual action, but rather may only proceed in a shareholder derivative action. In the motion to strike the jury demand, defendant argues that plaintiff's action is one to compel a dividend.


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