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FLEISHER DEV. CORP. v. HOME OWNERS WARRANTY CORP.

October 24, 1986

FLEISHER DEVELOPMENT CORPORATION, ET AL., Plaintiffs,
v.
HOME OWNERS WARRANTY CORPORATION, ET AL., Defendants



The opinion of the court was delivered by: GASCH

 I. STATUS OF THE CASE

 This case follows on the heels of Fleisher Development Corporation, et al. v. Home Owners Warranty Corporation, et al., No. 85-1766, slip op. (D.D.C. Jun. 17, 1986) (" Fleisher I "). In Fleisher I, the Court denied the motion of the defendants, Home Owners Warranty Corporation, et al. ("HWC"), *fn1" to dismiss or transfer the case brought by the plaintiffs, Fleisher Development Corporation, et al. ("Fleisher"). The Court granted the defendants' motion to dismiss Counts I, III and IV of the complaint. However, the Court refused to grant the defendants' motion to dismiss Count II of the complaint, which sought an order granting the plaintiffs the right to inspect HWC's members list, corporate books and records. The Court suggested that

 
The issue of plaintiffs' rights to inspect the books of the corporate defendants should more properly be resolved in a motion for summary judgment.

 Fleisher Development Corporation, et al., at 11. The Court made this suggestion because several key issues of law were not briefed in Fleisher I : whether the plaintiffs have a right of inspection under the applicable law; whether the plaintiffs who made a demand for inspection asserted a "proper purpose"; whether the right to inspect the books of a nonstock corporation extends to the books of its wholly-owned subsidiaries; and whether the plaintiffs who did not make a demand for the books, records and membership list are barred by lack of standing. The Court today addresses these questions.

 II. FACTS

 HOW is incorporated in the District of Columbia, and its principal office is likewise in the District. Through HOW, the Home Warranty Corporation administers a homeowners warranty program for the benefit of member-builders like the plaintiffs. Enrollees in the HOW program warrant that the homes they build are free from specified defects for specified periods of time. Through the use of trademarks and advertising, HOW promotes the warranty program as a sales tool for its members.

 Members are also eligible to obtain insurance covering the cost of repair or replacement, within specified periods of time, resulting from certain defects in the warranted homes. This service is provided by Home Warranty Corporation's second subsidiary, the HOW Insurance Company ("HOWIC"). HOWIC, like its parent, is incorporated in Delaware and has its principal office in the District of Columbia.

 The instant action arose in 1983 when several of the plaintiffs *fn2" made demand upon the defendants, by a written document, under oath, requesting permission to inspect the books, records, and membership lists of all the defendant corporations. The plaintiffs' request embraced, inter alia, the following items: a current list of the builder-members of HWC, minutes from each meeting of the Board of Directors, and Executive Committee, annual meeting, and all special meetings of the builder-members from January 1, 1983; copies of all financial information filed with the federal government, Delaware, and New Jersey from January 1, 1983; lists of all the officers and directors of HWC and all distributions paid to these officers and directors since January 1, 1983; and finally, any reports filed with regulatory bodies, any reports prepared by certified public accountants, and a list of enrolled builder-members' capital contributions. See Letter from Thomas A. Paparone (member-builder) to Hamilton H. Boykin (Secretary of HWC) (April 16, 1985).

 The plaintiffs grounded their request to inspect HWC's corporate books and records on their desire to achieve the following objectives:

 
(a) To apprise the undersigned Builder Member of the financial and operating condition of the Mutual Company namely Home Warranty Corporation (and its subsidiaries) of which it is a member. (b) To allow the undersigned Builder Member to ascertain whether or not the Mutual Company of which he is a member, namely Home Warranty Corporation and its subsidiaries, are being prudently managed, particularly with regard to its fiscal affairs; (c) To allow the undersigned Builder Member to ascertain whether the rates being charged to Builder Members (whether on a progressive scale or not) are being applied uniformly to Builder Members; (d) For such other purposes as may be legal and proper.

 Id. Alternatively, to support their request to inspect HWC's membership list, the plaintiffs wrote, "The list of Builder Members is requested solely for purposes of communicating with other Builder Members concerning the Corporation's affairs." Id. In both cases, each plaintiff who made demand claimed that it was acting in good faith. To assure the defendants that all information released would be protected, each plaintiff agreed that,

 
The undersigned Builder Member warrants and agrees that it will not disclose such information to any party other than to (1) its officers, attorneys, and/or accountants or (2) to such court or courts as may be appropriate; or (3) to such other Builder Members of Home Warranty Corporation as may have a common interest in the well-being of said corporation, the name of which will be supplied in advance to Home Warranty Corporation and which, likewise agreed to keep such information confidential. . . . The information herein requested will not be disclosed to any competitors of Home Warranty Corporation.

 Id.

 Though HWC claimed to be ready, willing and able to comply with requests for information, supported by a proper purpose, the corporation rejected all of the plaintiffs' requests for inspection. The requests were denied on the ground that all the purposes articulated by the plaintiffs were deficient.

 III. DISCUSSION

 A. Jurisdiction

 The present controversy is in federal court on the basis of diversity jurisdiction, 28 U.S.C. ยง 1331. In diversity cases, a federal court is bound to apply the state law of the jurisdiction in which it resides to resolve substantive issues, Erie Railroad Company v. Tompkins, 304 U.S. 64, 78, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), and a state's choice of law rules is a substantive issue under Erie. Klaxon Company v. Stentor Electric Manufacturing Company, 313 U.S. 487, 496-97, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). The District of Columbia has adopted the governmental interest analysis approach to resolve choice of law questions. Williams v. Williams, 390 A.2d 4, 5 (D.C. 1978). This approach requires a court "to evaluate the governmental policies underlying the applicable conflicting laws and to determine which jurisdiction's policy would be most advanced by having its law applied to the facts of the case under review." Id. at 5-6.

 Notwithstanding this general approach, such balancing cannot be undertaken when the Supreme Court requires a court to refuse jurisdiction for some special reason. In Rogers v. Guaranty Trust Company of New York, 288 U.S. 123, 77 L. Ed. 652, 53 S. Ct. 295 (1933), the Supreme Court held as follows:

 
It has long been settled doctrine that a court -- state or federal -- sitting in one State will as a general rule decline to interfere with or control by injunction or otherwise the management of the internal affairs of a corporation organized under the laws of another State but will leave ...

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