This is a stockholder’s derivative action. The complaint alleges the individual defendants have dominated the corporate defendant by diverting its earnings and assets to themselves, and utilizing their positions of trust as officers and directors in fraud of stockholders. Defendants challenge the adequacy of the complaint as to whether the modus operandi by which such control was acquired and the methods by which the fraudulent diversion of assets occurred are sufficiently spelled out with detail. Defendants filed six motions based upon various grounds. In view of the several points raised at argument and in the briefs, each motion will be treated and ruled on in the manner following:
Motion No. 1. This motion requests dismissal of the complaint under Rule 12(b) (6) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, on the ground that the complaint fails to state a claim upon which relief can be granted.
Motion No. 2. This motion asks that Paragraphs 12-29, except 21, be stricken as vague and not giving rise to any cause of action cognizable in equity.
Motion No. 3. This motion deals with Rule 23(b) and points to a failure of allegation that “plaintiff was а shareholder at the time of the transaction of which she complains.”
Motion No. 4. This motion seeks to strike allegations with respect to issuance of stock to the individual defendants on the ground of laches.
Motion No. S. This motion, involving matters contained in Paragraphs 14 and 23 which have to do with profits illegally obtained, seeks to strike such paragraphs as the relief is likewise barred by laches.
Motion No. 6. The last motion is filed under Rule 12(f) on the ground that all of the Paragraphs of the complaint are immaterial and scandalous.
1.
Defendants attack under Rule 23(b) Paragraphs 5, 6, 7, 8, 9, 10,13 and 14, dealing with the acquisition by defendant H. V. Noll of a majority of the voting stock without consideration.
The issuance of the voting stock to this defendant was sometime аfter February 15, 1928, and before January 8, 1929. Plaintiff acquired her stock at a later date, i. e., between March, 1929, and July, 1930. At the argument it was urged that Erie Railroad Co. v. Tomp
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kins,
Rule 23(b) puts in issue “the authority of the plaintiff to maintain” his complaint. Cf. Illinois C. R. Co. v. Adams,
While I hold that Rule 23(b) is applicable, and no relief may be had by the present plaintiff for the acts which occurred prior to the acquisition of her shаres, I nevertheless refuse to strike the-paragraphs covered by the motion as these-paragraphs establish a background against which other acts of the individual defendants may be judged. Dederick v. North American Co., D.C.,
2. Paragraph 21 complains of the methods of conducting annual elections *957 held im the past and prays that an election may be ordered. The complaint alleges that common stockholders havе been denied notice of stockholders’ meetings. Moreover, it charges that the annual meeting held on January 19, 1942, was illegal.
Apart from the power to appoint a master to supervise an election, and aside from statute, there is no jurisdiction in this court to order an election of directors of a Delaware corporation. Fletcher, Corрorations, pp. 234, 262. In fact, the Delaware Court of Chancery restricts its jurisdiction in cases of this kind, unless the action is instituted pursuant to the state remedial statute. Lippman v. Kehoe Stenograph Co.,
Paragraph 21 will be stricken and the relief sought therein denied.
3. Paragraphs 13, 15, 27, 28 and 29 charge the individual defendants with fraudulent conduct. Defendants contend that thesе allegations violate Rule 9(b) in that “the circumstances constituting [the] fraud” are not stated with particularity.
These paragraphs allege breaches of the individual defendants’ fiduciary duties toward the corporate defendant. While fraud must be alleged with particularity under Rule 9(b), it is only necessary to allege ultimate facts and not evidence. While these parаgraphs do not allege fraud with fine particularity, the omission is not fatal. If defendants are unable to file a responsive pleading, relief is available to them under Rule 12(e); and other rules are available if they cannot properly prepare for trial. See Levenson v. B. & M. Furniture Co., Inc., 2 Cir.,
Defendants’ motion to these paragraphs is denied.
4.
Paragraphs 25 and 26 complain of fаilure of defendants to send annual reports to stockholders.
I have been unable to find any requirement in the Delaware law that annual reports must be issued. In answer to plaintiff’s request that she be permitted to have the information which she would ordinarily have received in such annual reports, there is no jurisdiction in either the state or federal court of chancery to grant a complainant the right to inspect books and records when there is an adequate remedy at law by mandamus in the state court. Harden v. Eastern States Public Service Co.,
Defendants’ motion to strike these paragraphs will be granted.
5.
Profits taken by the individual defendants from the sale of the corporate defendant’s stock as allegеd in Paragraph 14.
The substance of this allegation is that one of the individual defendants, H. V. Noll, through a controlled corporation, sold and distributed the corporate defendant’s securities to his own profit. Such profit is not alleged to have been excessive or fraudulent. In the absence of an allegation of fraud, the court will not substitute its judgment for that of the directоrs who determined that the profit taken by H. V. Noll was reasonable and legitimate. Toebelman et al. v. Missouri-Kansas Pipe Line Co., D.C.Del.,
6.
Paragraph 23 alleges defendant H. V. Noll purchased corporate defendant’s stock at low market prices and
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sold such shares to the corporation at book value which was higher than the market.
Plaintiff has alleged the trаnsactions with as much particularity as is possible. It may be after she utilizes discovery techniques she will have more information. For the purpose of defendants’ present motion, I conclude the allegations in Paragraph 23 sufficient. Where defendant H.
V.
Noll is alleged to have taken for himself the corporate opportunity of purchasing the corporate defendant’s stock from brokers at prices ranging between 50^ and
75‡
a share and reselling such shares to the corporation for $4 and $9 a share, the burden is on defendant Noll to justify such a transaction. Loft, Inc. v. Guth,
In any event, defendants argue that, assuming H. V. Noll guilty of fraud, the acts complained of occurred more than three years before the institution of the present аction, and while this action is essentially one for an accounting the three year statute of limitations which would bar a legal remedy should bar any equitable relief under the doctrine of laches.
4
Such was the view of the Delaware Court of Chancery in Bush v. Hillman Land Co.,
“Mere lapse of time, without any change in position making the action of a Court unfair and inequitable, seldom constitutes laches, barring the relief sought by a bill. Bovay et al. v. H. M. Byllesby & Co., Del. Ch.,
7.
Paragraphs 16-18 allege defendant H. V. Noll doing business as General Administration Co. made an illegal profit in connection with supervision and auditing of the corporate defendant and its subsidiaries.
Keenan v. Eshleman,
8.
Paragraphs 19 and 20 complain of salary paid defendant H. V. Noll.
The allegation here is that H. V. Noll in the early dаys received a salary of $1,200 a year and that he is now receiving $10,-000. There is no allegation, however, that the latter amount is excessive; and I am unable to indulge in the presumption that it is so excessive as to point to constructive fraud. In Koplar v. Warner Bros. Pictures, D.C.Del.,
9. Paragraph 22 deals with certain loans made by the corporate defendant to defendant H. V. Noll. While the рaragraph alleges that the loans in question have been repaid, it states further that the sums borrowed by H. V. Noll were used to buy securities of the corporate defendant “at prices far below the face amount or book value thereof” and that thereafter the securities were sold to the corporate defendant “at par * * * and at * * * book value.” These allegations point to a personal profit for Noll’s benefit. True, there is no specific allegation of fraud, but if the loans have been repaid in an improper manner and should be deemed to have been repaid only to the extent of the market prices of the securities, the profit to Noll should be fully explained and justified at trial. Especially is this so in view of other allegations in the complaint which allege H. V. Noll’s dominant position as an officer and director of the corporate defendant’s affairs. Defendants’ motion as to this paragraph denied.
10. Paragraph 24 alleges that defendant W. R. Noll purchased stock from the corporate defendant and when the transaction was сhallenged he returned the shares and cancelled the purchase. If there was anything improper in the purchase of the stock by this defendant, he corrected the situation when the transaction was questioned. This matter is, therefore, moot as against this defendant. Defendants’ motion as to this paragraph granted.
11.
The complaint seeks the appointment of a receiver pendente lite.
The allegations of the whole complaint relate to past misconduct. As I have indicated before, some paragraphs of the complaint state a good cause of action, but this does not mean that the drastic remedy by receivership should be granted in the absence of a plain showing of some threatened loss or waste of the corporate defendant’s assets. Gordon v. Washington,
An order in conformity with the foregoing may be submitted.
Notes
Blair v. F. H. Smith Co.,
See Moore’s Federal Practice, p. 2250 et seq. and 1942 Cum.Supp., p. 7 et seq., and eases cited for differences in view among the several federal courts on the-scope of Rule 23(b).
Judge Charles E. Clark, “The Tompkins case and the Federal Rules”, Journal of the American Judicature Society, February, 1941.
Whether the federal courts are bound to follow state law on the question of laches was posed but left unanswered in Dunn v. Wilson & Co., D.C.Del.,
Plaintiff’s argument that she should not be barred by laches as she did not know the facts as alleged until recently is met by defendants’ assertion that, as this action was brought on behalf of the corporate defendant, it is immaterial when plaintiff acquired knowledge of the facts, citing Arn v. Dunnett, 10 Cir.,
However, the allegations of the complaint point to domination and control by defendants. Quaere: where a corporate defendant in this type of suit is dotamated by individual defendants, should the statute of limitations be applied as a guide in determining the application of the doctrine of laches until after such domination and control cease. See Michelson v. Penney, 2 Cir.,
The authorities are divided as to whether the statute of limitations and laches questions may be raised on a motion to dismiss. See Holmberg v. Hannaford, D.C.,