Petition for A Writ of Certiorari — Schuckman v. Rubenstein

ILE COPY oe F3 2

IN THE

Supreme Court of the United States

OCTOBER TERM 1947

‘ No. 665

Lucitte ScHUCKMAN,

Petitioner,

Vs.

Lawrence J. Rupenstern, Harvey T. Gracety, Maynarp

E. Montrose, J. Matcotm Srreiitz and Marion Power

SHoveL Company,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR SIXTH CIRCUIT AND SUPPORTING BRIEF

4 Maovrice J. Drx,

Attorney for Petitioner,

29 West 64th Street,

Borough of Manhattan,

New York 23, N. Y.

INDEX

PAGE

PETITION :

Jurisdiction 2

Summary Statement of the Case 2

Questions Involved 2 4

Reasons for the Allowance of the Writ 5

Conclusion 6

Brier:

Jurisdiction 7

Opinions Below 7

Statutes Involved 8

The Facts 8

Point I—The decisions below, holding it necessary

for the Court, in a single action, to acquire juris-

diction over a majority of all of the directors of a

corporation, in order to exercise its jurisdiction

over the directors of whom the Court acquired

jurisdiction, nullified Section 50, Judicial Code (28

U.S. C. A. 111), and judicially repealed the amend-

ment to Section 51, Judicial Code (28 U. S. C. A.

112 as amended), which provides that where direc-

tors reside in different states, a stockholder is not

limited to a single action, but may bring as many

actions as required, so that the venue of them may

be proper, in order to obtain complete relief.

Not only do the decisions below deprive the peti-

tioner of a forum, because the directors are citizen

residents of several states so that there is no

tribunal with jurisdiction over a majority of all

of the directors in a single suit, but, if allowed to

stand, the decisions would be a precedent for

derelict directors to scatter their citizenship and

residence and thus commit breaches of trust with

immunity

14

— a

ii

PAGE

Pornt I]—Since Grant is neither an indispensable

nor a necessary party, naming Grant as a defend-

ant did not deprive the Federal Court of diversity

jurisdiction over the parties who are properly be-

fore the Court 22

e

Point [1I—The second claim states a claim against

the corporation respondent, for dividends legally

payable in common stock, in an amount equal to

the arrears on the outstanding preferred stock... 24

Pornt [V—Petitioner should have leave to serve a

supplemental complaint 31

CoNncLUSION

iii

CASES CITED

PAGE

Ammond v. Penn. R. R. (C. C. A. 6), 125 Fed. (2d) 747,

749 17

Anderson v. Abbott, 321 U. S. 349, 366, 367.0000 18

Arbuckle v. Woolson Spice Co., 11 O. C. D. 726.0000. «19

Ball v. Peper Colton Press, 140 Mo. App. 26, 121 S. W.

798 ~ 2

Bourdieu v. Pacific Western Oil, 299 U. S. 65, 70... 16

Breslav v. New York & Queens (New York), 249 App.

Div. 181, aff’d 273 N. Y. 593, 7 N. E. (2) 708.00. 331

Brown v. Luce, 231 Mo. App. 269, 96 S. W. (2) 1098,

1100 27

Camp v. Gress, 250 U. S. 308, 313 15

Cannon v. Wiscassett Mills, 195 N. C. 119, 141 S. E. 345 20

Consolidated Textile v. Dickey (C. C. A. 5), 269 Fed.

942

Cratty v. Peoria Law Library, 219 Tl. 516, 76 N. E.

707, 708 20

Elko v. Commissioner (C. C. A. 9), 50 Fed. (2) 595,

596

Feist v. Young (7 Cir.), 138 Fed. (2) 972, 974.000.

Fish v. White (Iowa), 175 N. W. 748. 17

Ford v. Atkins, 39 Fed. Supp. 472 23

Galdi v. Jones, 2 Cir., 141 Fed. (2) 984.0000 6, 23, 24

Geer v. Mathieson, 190 U. S. 428, 432 22, 24

General Inv. v. American Hide, 98 N. J. Eq. 326, 129

Atl. 244, 249 21

Grasselli v. Aetna (C. C. A. 2), 252 Fed. 456... ~~

Homewood v. Standard Power & Light, 55 Fed. Supp.

100

iv

PAGE

Indianapolis v. Chase, 314 U. S. 63, 67, 69 23, 33

Johnson v. Bradley Knitting Mills (Wisc., 1938), 280

N. W. 688 29

Johnson v. Lamprecht, 133 Ohio State 567, 572, 573. 28

Kansas City, St. L. v. Alton R. R., 7 Cir., 124 Fed. (2)

780 24

Keough v. St. Paul Milk (Minn., 1939), 285 N. W. 809... 20

Kern v. Coffin (C. C. A. 5), 203 Fed. 238, 241.0000 18

Kinney, In re, 279 N. Y. 423, 18 N. E. (2) 645.0000) 31

Krouse v. Brevard (C. C. A. 4), 249 Fed. 538.0018

Lydia Pinkham v. Gove, 300 Mass. 1, 20 N. E. (2)

482, 489, 490 17, 20

Maeder v. Buffalo Bill’s Wild West, 132 Fed. 280, 284 17

Materese v. Moore-McCormack (2 Cir.), 158 Fed. (2)

631, 633 24

Meredith v. Winter Haven, 320 U. S. 228, 234.0000 32

Mitchell v. Wheel Co., 40 Ohio N. P. (N. S.) 609, 17

O. D. (N. P.) 483, 31 O. D. 420 28

O’Neall v. O’Neall (Ind., 1940), 25 N. E. (2) 656, 659... 21

Patterson v. Durham Hosiery Mills (1939), 214 N. C.

806, 200 S. E. 906 20

Salem Trust v. Manufacturers Trust, 264 U. S. 182... 22

Schneider v. Schneider (App. D. C.), 141 Fed. (2) 542, :

1

o44

Segerstrom v. Holland Piano, 160 Minn. 95, 199 N. W.

897

Shields v. Barrow, 17 Howard (U. 8.) 130, 139. .

Sigwald v. City Bank (S. C.), 64 S. E. 398, 400...

_ ie

Vv

PAGE

Sterling v. Watson, 241 Pa. 105, 88 Atl. 297... —S- 26

Storrow v. Texas (C. C. A. 5), 87 Fed. 612,617... 211

Sutton v. Stacey Mfg. Co., 17 Ohio N. P. (N. S.) 497

Taylor v. Axton Fisher Tobacco (Ky.), 173 S. W. (2)

377 28

Toledo ete. Ry. v. Penn. (C. C. Ohio), 54 Fed. 746, 751... 15

Walden v. Skinner, 101 U. 8. 577 22

Wheatley v. Root, 33 Ohio L. R. 464, 472 29

STATUTES, ETC.

Ohio General Corporation Act:

Section 8623-38 9, 19, 27

Section 8623-42 31

Section 8623-58 14

Section 8623-123(b) 17

Federal Rules Civil Procedure:

Rule 15(d) 5, 32

Rule 42(a) 33

Rule 54(c) 24

Judicial Code:

Section 50 (28 U.S. C. A. 111) 5, 14, 15, 16

Section 51 (28 U.S. C. A. 112) 5, 14, 15, 16

Moore’s Federal Practice:

Volume 2, page 2141, Note 27 16

Volume 2, page 2146 17

Fletcher Cye. Corp. Perm. Ed.:

Volume 11, Section 5350, page 874 27

Volume 11, Section 5623 17

Volume 12, Section 5446, page 182 20

Volume 19, Section 9025, page 207 32

Fletcher Corp. Forms, 3rd Ed.:

Section 1860, page 364 32

1936 U. S. Statutes at Large, Chap. 200. 8

IN THE

Supreme Court of the United States

OCTOBER TERM 1947

No. cittienlt anita = Af

Lucite ScHUCKMAN,

Petitioner,

vs.

-

Lawrence J. Rupenstern, Harvey T. Gracety, Maynarp

E. Montrose, J. Matcotm Srretrrz and Marion Power

SHoveL CoMPANY,

Respondents.

PETITION FOR WRIT OF CERTIORARI

To tHE HonoraBLE CHIEF JUSTICE AND THE ASSOCIATE

Justices OF THE SupreME Court OF THE UNITED

STATES:

Petitioner respectfully prays that a writ of certiorari be ,

issued to the United States Circuit Court of Appeals for

the Sixth Circuit, to review the judgment and order of that

Court, modifying and affirming the judgment and order of

dismissal, on defendant’s motion before answer, made by

the United States.District Court forthe N jorthefn District

of Ohio, Western Division. _/

Jurisdiction

Jurisdiction of this Court is invoked under Section

240 (a) of the Judicial Code, as amended.

December 12, 1947, the United States Circuit Court of

Appeals for the Sixth Circuit, modified and affirmed the

judgment of the United States District Court for the

Northern District of Ohio, entered May 7, 1947.

Federal jurisdiction rests on diversity of citizenship and

the amount in controversy.

Summary Statement of the Case

The complaint states two claims. The supplemental

complaint states a third claim, setting forth transactions,

occurrences and events which have happened since the com-

plaint was filed.

The petitioner and plaintiff below is a substantial pre-

ferred stockholder of the corporation respondent of which

the individuals respondent are directors.

The first claim is against the respondents Rubenstein, ~

Gracely, Montrose, and Strelitz, as directors, to compel

them to vote for the declaration and payment of cash divi-

dends on the corporation respondent’s preferred stock.

When this action was begun on January 3, 1947, dividends

had not been declared or paid in cash for 64 quarters from

October 1, 1930. During that period, the corporation had

surplus profits and earnings available to pay in cash, the

$113.75 arrears on each such share of preferred stock, but

the directors, fraudulently, wrongfully and in bad faith,

diverted the surplus earnings and profits to enhance the

value of the common stock owned or controlled by the cor-

poration’s directors. The directors are citizen residents

of several states, so that there is no Court with venue jur-

isdiction over a majority of all of the directors in a single

3

suit. Judgment is here sought by plaintiff-petitioner

against those directors properly before the District Court,

and no others. As to the remaining directors, some of

whom have been named as defendants, similar suits will

be brought in other Federal Courts as to whom venue will

be proper. The cumulative effect of the number of suits

and judgments would result in the declaration and pay-

ment of cash dividends by a majority of all of the directors.

The second claim is against the corporation, for divi-

dends payable in common stock, in an amount equal to the

dividend arrears on the 17,77814 shares of preferred stock

outstanding. The corporation is authorized, by statute, to

declare dividends payable in shares. The corporation

issued its common stock and took up 13,2191%4 shares of

preferred stock with the accumulated dividend arrears. It

then retired those preferred shares so acquired with the

dividend arrears. The corporation withheld and refused

to pay in common stock, in an amount equal to the arrears,

the dividends accrued upon the 17,778%4 remaining shares

of preferred stock, including that of petitioner.

_ The supplemental complaint challenges a capital restate-

ment which takes away the security behind the outstand-

ing preferred stock and would pay the dividend arrears

from such security.

Before answer to the complaint, respondents moved on

affidavits (13-16*) :

1. To dismiss the action because there is no diver-

sity of citizenship between plaintiff and defendants.

2. To dismiss the action because the complaint faiis

to state a claim against defendants upon which relief

can be granted.

3. To dismiss the action because the Court lacks

jurisdiction over the persons of the defendants in an

action of this type.

* All number references are to pages in the record.

+

While defendants’ motions were sub judicia, plaintiff.

petitioner moved for leave to serve a supplemental com-

plaint.

The District Court granted defendants’ motion on

grounds “2” and “3” (supra) and denied plaintiff’s motion

(23).

The Circuit Court affirmed (29), stating the ruling of the

District Court “should be sustained also on the first ground

stated in the motion” (31).

Questions Involved

1. In a stockholder’s action against a director for his

misconduct, seeking a judgment limited to the director-de-

fendant properly before the Court, did the Court err in

-holding, that a majority of all of the directors must be

joined as defendants in & single suit, in order for the Court

to entertain jurisdiction and to proceed to trial and to

adjudication of the suit between the parties properly be-

fore the Court?

2. In a stockholder’s action against a director for his

misconduct, seeking a judgment limited to the director-

defendant properly before the Court, did the Court err in

holding, that federal diversity jurisdiction of parties prop-

erly before the Court is defeated because a director named

as a defendant, against whom no relief is sought in that

action, who has not appeared, and who has not been served

with either the summons or complaint, is said to be a

citizen resident of the same state as plaintiff?

3. Does a complaint, with two claims, state a claim

against a corporation, for common stock, in an amount

equal to the dividend arrears on preferred stock, in favor

of preferred shareholders, wh- * as alleged: that the

corporation was authorized Lb; © > declare dividends

payable in shares; that to take up =< 194 shares of such

=e

5

preferred stock, with dividend arrears thereon from 1930

to 1946, the corporation issued common stock; that the cor-

poration then retired such 13,2194 shares of preferred

stock with such dividend arrears; that such preferred —

stock dividends so declared payable in common stock was

not paid to the remaining holders of the same class of

preferred stock including the plaintiff?

4. Did the Courts below err in refusing to permit peti-

tioner her right under Rule 15(4), F. R. C. P., to serve a

supplemental pleading setting forth transactions and oc-

eurrences which happened since the filing of petitioner’s

complaint?

Reasons for the Allowance of the Writ

1. The Court decided a question of law of substantial

importance in the administration of justice and the Judi-

cial Code (28 U. S. C. A. 111, and 112 as amended), to wit:

Is a stockholder to be denied a forum to proceed

against his corporation and derelict directors, for the

reason that he is unable te join a majority of all the

directors of the corporation as defendants in a single

suit, because the directors are citizen residents of sev-

eral states so that there is no tribunal with jurisdic-

tion over a majority of them in a single action?

2. The decision below is contrary to well established

law, in the holding below that, federal diversity jurisdic-

tion of parties properly before the Court is defeated be-

cause one against whom no relief is instantly sought, who

has not been served and has not appeared and has been

named as a defendant turns out to be a citizen resident

of the same state as plaintiff.

3. The decision below that federal diversity jurisdiction

is determined by the citizenship and residence of proper

or nominal parties, as distinguished from indispensable

6

and necessary parties, is cont~ary to well established law,

The decision of the Circuit Court of Appeals for the

Sixth Circuit (the Circuit Court below) is in conflict with

the decision of the Circuit Court of Appeals for the Second

Circuit in Galdi v. Jones, 141 Fed. (2) 984. The Second

Cireuit decided that federal diversity jurisdiction in a

stockholder’s action against directors, was not defeated

because plaintiff, a citizen resident of New York, named

as a defendant, a director citizen resident of New York,

against whom the complaint disclaimed a personal judg-

ment, as in this case.

4. The answers to the questions presented have far-

reaching importance on the jurisdiction of the Federal

Courts, the federal rules of civil procedure, on the con-

duct of corporate directors and other fiduciaries and in

corporation law.

Conclusion

WHEREFORE, your petitioner respectfully prays that a

writ of certiorari be issued under the seal of this Court

directed to the United States Circuit Court of Appeals for

the Sixth Cireuit to review the order and judgment of

that Court in the above cause; and that said order and

judgment be reversed; that petitioner be granted the relief

sought by petitioner in this cause and such further relief

as may seem proper.

Respectfully submitted,

Maurice J. Dr,

Attorney for Petitioner,

29 West 64th Street,

Borough of Manhattan,

New York 23, N. Y.

—.

IN THE

Supreme Court of the United States

OCTOBER TERM 1947

No.

Lucitte ScouckMan,

Petitioner,

Vs.

Lawrence J. Rupenstern, Harvey T. Gracety, Maynarp

KE. Montrose, J. Matcotm Srreiirz and Marion Power

SHoveL Company,

Respondents.

BRIEF IN SUPPORT OF PETITION

Jurisdiction

Jurisdiction of this Court is invoked under Section

240 (a) of the Judicial Code, as amended.

December 12, 1947, the United States Circuit Court of

Appeals for the Sixth Circuit, modified and affirmed the

judgment of the United States District Court for the

Northern District of Ohio, entered May 7, 1947.

Federal jurisdiction rests on diversity of citizenship and

the amount in controversy.

Opinions Below

The Cireuit Court’s opinion is reported at 164 Fed. (2)

952, and is found in the record at pages 30-39 inclusive.

The District Court’s opinion is unreported and is found

in the record at pages 22 and 23.

io 2)

Statutes Involved

Judicial Code, Section 50 28 U. S. C. A. 111):

“Where there are seveml defendants in any suit at

law or in Equity, and oneor more of them are neither

inhabitants of nor found within the district in which

suit is brought, and do not voluntarily appear, the

Court may entertain jurisdiction, and proceed to the

trial and adjudication of the suit between the parties

who are properly before t * * *.”

Section 51, Judicial Code (8 U. S. C. A. 112):

“Except as otherwise provided in the five succeed-

ing sections, no person shill be arrested in one district

for trial in another, in anz civil action before a district

court; and, except as prvided in the six succeeding

sections, no civil suit shdl be brought in any district

court against any perso: by an original process or

proceeding in any other listrict than that whereof he

is an inhabitant; but where the jurisdiction is founded

only on the fact that theaction is between citizens of

different States, suit shal be brought only in the dis-

trict of the residence of tither the plaintiff or the de-

fendant; except that suitby a stockholder on behalf of

the corporation may be brought in any district in

which suit against the de‘endant or defendants in said

stockholders’ action, otier than said corporation,

might have been brougit by such corporation and

process in such cases my be served upon such cor-

poration in any district vherein such corporation re-

sides or may be found.” 1936 U.S. Statutes at Large,

Chap. 200.

The ‘acts

This action for dividends is not the usual action for cash

dividends sought by commor stockholders, who challenge

the discretion of directors seected by them. Petitioner is

a preferred stockholder. In 946, when the preferred stock

dividend arrears had accumuated for sixteen years, these

9

dividend arrears were paid in common stock to some pre-

ferred stockholders, but not to others. Petitioner and other

preferred stockholders were not paid.

The respondent corporation has outstanding 7% cumu-

lative preferred stock and common stock.

The respondent corporation’s net earnings per share of

preferred stock and net income for each of the years end-

ing December 31st is as follows (6):

Approximate Earnings per share

Year net income preferred stock

1945 $284,398 $10.76

1944 490,471 18.55

1943 466,952 17.64

1942 610,378 28.09

1941 539,963 20.42

1940 508,603 19.42

1939 102,966 3.89

Respendent’s motions admit the allegations in the com-

plaint :

“19. During said periods there have been and still

are surplus profits to pay said unpaid accumulated

dividends * * * but the company’s directors unreason-

ably and wrongfully refuse to pay dividends on the

preferred stock” (6).

This suit followed the refusal to pay the dividend arrears

(10).

Petitioner challenges the directors’ conduct as oppressive

to the preferred stockholders, and in bad faith for the

benefit of the common stock.

Upon this claim petitioner is entitled to a judgment for

eash dividends, unpaid, after demand (10).

As an Ohio corporation the defendant corporation is

authorized to “declare dividends payable in * * * shares”

(Ohio Corp. Act, See. 8623-38)."

1 See footnote 8.

10

4

-

To take up the 13,21914 shares of preferred shares,

with the dividend arrears from 1930 to June, 1946, retired

in June, 1946, the corporation issued common stock in

exchange (7). This required the payment of the preferred

stock dividend arrears payable in common stock. Such

dividend payment was limited to those preferred stock-

holders who compromised the dividend arrears. The hold-

ers of the remaining 17,788%4 shares of preferred, like

petitioner, who would not compromise, were not paid.

Petitioner’s second claim is against the respondent cor-

poration to recover the dividend arrears payable in com-

mon stock in an amount equal to the arrears.

As a consequence of taking up the 13,2191%4 shares of

preferred, the common stock then outstanding increased in

value about $10.90 for each such share of common stock

(Standard & Poor Corp. Ree., 1946, p. 30).

Also for the benefit of the common stock the corpora-

tion’s $1,145,000 bond issue was retired by prepayment

at 101 of par on April 1, 1945 (7).

October 2, 1946, the corporation respondent stated, inter

alia (7):

“To the Preferred and Common Shareholders of

Marion Power Shovel Company: * * * The manage-

ment is now prepared, with the cooperation of all

shareholders, to carry out its further plans for the

retirement of the 7% Preferred stock and the dividend

arrearages thereon. The Company is asking the Pre-

ferred and Common shareholders to vote upon a pro-

posed amendment to the Articles of Incorporation

authorizing 15,000 shares of 414% Prior Preferred

stock ($100 par value). Upon authorization by the

shareholders of the new Prior Preferred stock, a for-

mal offer will be made to exchange on a voluntary

basis each share of 7% Preferred into one share of

414% Prior Preferred, plus not less than 6 nor more

than 8 shares of Common stock as may be determined

by the directors at the time of the offering.”

October 2, 1946, respondents solicited from the preferred

shareholders their proxy to vote in favor of said charter

11

amendment at a special meeting of the shareholders to be

held on November 7, 1946 (8).

The October 2, 1946 solicitation for proxies did not dis-

close to the preferred shareholders that if any of them

objected to such amendment the Ohio General Corporation

Act gave to such objector the right to dissent and appraisal

of their preferred stock with accumulated unpaid dividends

thereon and to payment of the fair cash value as provided

by the Ohio General Corporation Act (9). On the con-

trary, the solicitation falsely led the preferred share-

holders to believe that the so-called “exchange on a volun-

tary basis” would not alter the position of those preferred

shareholders who declined the “exchange on a voluntary

basis” (7). Actually, the scheme is compulsory. One who

does not assent is deprived of payment under the statute.

The October 2, 1946 copy of the proposed charter amend-

ment accompanying respondents’ proxy solicitation omitted

from such proposed amendment the paragraph regarding

the rights of the holders of the preferred stock and the

common stock on liquidation or dissolution (9). On that

respondents received preferred stock proxies (9). There-

after, on October 26, 1946, respondents sent to the share-

holders a corrected copy of the proposed amendment to

the articles of incorporation to create a new preferred

stock (9).

Petitioner and other preferred stockholders, acting

through counsel, attended the special meeting on Novem-

ber 7, 1946, indicating opposition (9). Respondents ad-

journed that meeting to December 12, 1946, without any

discussion, except to record the vote on respondents’ motion

to so adjourn, including the objections of petitioner’s coun-

sel to such adjournment (10).

November 27, 1946, respondents stated, inter alia (10):

“To the Shareholders of Marion Power Shovel Com-

pany.

The response from the Common stockholders in

favor of the proposed amendment was in excess of the

two-thirds required vote. However, the response from

12

the preferred stockholders to date has not been suffi-

cent to give the required vote in favor of the proposed

amendment.

Furthermore, dissenting stockholders, individually

and through counsel, have indicated that they will

resort to legal proceedings to obtain from the com.

pany the fair cash value of their shares in the event

the proposed amendment is approved. Your directors

are not disposed to subject the company to litigation

or the possible depletion of its cash reserves. There-

fore, the meeting called for December 12, 1946 will not

be held.’

After this action was commenced and on January 6,

1947, respondents caused $1.75 to be paid on January 27,

1947 on each share of said preferred stock (20).

While respondents’ motions to dismiss were sub judicia

before the Court below, and under date of March 1, 1947,

petitioner and the other stockholders received notice of the

statutory annual meeting to be held on April 7, 1947 (19),

It stated that, among others, the purpose of that meeting

was:

“(4) Acting upon a proposal to reduce the stated

capital of the Corporation from $5,011,186.05 to

$3,860,050.00 by amending the Articles of Incorpora-

tion so as to change the Corporation’s 253,815 out-

standing Common Shares without par value into Com-

mon Shares of the par value of $10.00 each, crediting

to the surplus account of the Corporation, $1,151,136.05,

which is the excess of assets resulting from said re-

duction of stated capital and changing 146,185 unis-

sued Common Shares of the Corporation without par

value into 146,185 Common Shares of the par value of

$10.00 each” (19- 20). “

But this was not permissible under the Ohio statute.

The effect of the proposed reduction of the company’s

stated capital from $5,001,186.05 to $3,860,050 and the

change of the company’s outstanding common shares with-

out par value into common shares with the par value of

” cgpamammameeanasagc a5

13

$10 each, and the crediting to the company’s surplus ac-

count of $1,151,136.05, which is the excess of assets result-

ing from such reduction of capital and change in the com-

mon stock, would be (20)

(a) To take away that $1,151,136.05, capital of the

company, which otherwise, in the event of liquidation

or dissolution of the company, would safeguard the

preferred stock (20).

(b) To take away that $1,151,136.05, capital of the

company, which otherwise would be subject only to

diminution by losses in business operations (20).

(c) To deprive the preferred stockholders of the

company of the benefits from the earning power of

that $1,151,136.05 (20).

(d) To deprive the’ preferred stockholders of the

right to rely upon that $1,151,136.05 as capital of the

company safeguarding the preferred stockholders (20).

(e) To make that $1,151,136.05 available for cash

payment of the preferred arrears and then pay divi-

dends on the common stock, at loss, injury and expense

of the preferred stockholders (20-22).

(f) To impair the contract of the preferred stock-

holders with the company and to take property of the

preferred stockholders without due process of law

(21).

(g) Under the guise of a reduction of capital and

change in the common shares would divest the pre-

ferred stockholders of their present vested and per-

manent interest in the corporation, including the right

to common stock for the unpaid dividend arrears on

the preferred stock (21).

ese GOIN 2 li Oh aS IOS, iT ite Si

14

POINT I

The decisions below, holding it necessary for the

Court, in a single action, to acquire jurisdiction over a

majority of all of the directors of a corporation, in

order to exercise its jurisdiction over the directors of

whom the Court acquired jurisdiction, nullified Section

50, Judicial Code (28 U. S. C. A. 111), and judicially

repealed the amendment to Section 51, Judicial Code

(28 U. S. C. A. 112 as amended), which provides that

where directors reside in different states, a stockholder

is not limited to a single action, but may bring as many

actions as required, so that the venue of them may be

proper, in order to obtain complete relief.

Not only do the decisions below deprive the petitioner

of a forum, because the directors are citizen residents

of several states so that there is no tribunal with juris-

diction over a majority of all of the directors in a single

suit, but, if allowed to stand, the decisions would be a

precedent for derelict directors to scatter their citizen-

ship and residence and thus commit breaches of trust

with immunity.

There are four directors before the Court, to wit:

Gracely, Strelitz, Rubenstein and Montrose. Under the

Ohio Corporation Act? three of these four directors may

effectively declare dividends.? If Pell and Hewitt (2, 15,

1 The Ohio General Corporation Act provides, Section 8623-58:

“Quorum. Unless the articles or regulations shall otherwise

provide, a majority of the board of directors shall be necessary

to constitute a quorum for the transaction of business. The

act of a majority of directors present at a meeting at which a

quorum is present shall be the act of the board of directors

unless a great number is required by this act (G. C. Sec. 8623-1

to 8623-138) or the articles or regulations.”

2 Five directors constitute a quorum. Three directors can declare

dividends.

Be ee eget ee

15

16), directors of this Ohio corporation, waive the venue

privilege of suit at their residence, then there would be

six directors before the Court. This would render effec-

tive a decree of the Court below by a majority of all the

directors.

Gracely, Montrose and Strelitz are citizen residents of

Marion, Ohio. Rubenstein is a citizen resident of Massa-

chusetts. He waived his personal privilege of venue.

There is no tribunal with personal jurisdiction over a

majority of all directors of this Ohio corporation.

Section 50 of the Judicial Code (28 U. 8, C. A. 111)8

makes provision for enforcing a cause of action which

exists against several persons, although one of them is

neither an inhabitant of nor found in the district in which

suit is brought and does not voluntarily appear. It does

so, by permitting the Court to entertain jurisdiction, with-

out prejudice to the party not regularly served nor volun-

tarily appearing (Camp v. Gress, 250 U.S. 308 at 313).

The 1936 amendment to the Judicial Code (28 U. 8. C. A.

112),* treating with stockholders’ derivative suits against

5 Page 8, supra, for text.

In Shields v. Barrow, 17 Howard (U. S.) 130, 139, Mr. Justice

Curtis said:

“if the case may be completely decided, as between the litigant

parties, the circuinstance that an interest exists in some other

person, whom the process of the court cannot reach * * * as

| if such other party be a resident of another state * * * ought

| not to prevent a decree on the merits.”

|

“Equity will never suffer a wrong without a remedy.” “Every just

order or rule known to Equity Courts was born of some emergency,

to meet some new conditions, and was, therefore, in its time without

a precedent” (Toledo, etc., Ry. v. Penn. Co. (C. C. Ohio), 54

Fed. 746, 751). The rule is well established that where a duty

| exists, equity will provide a remedy for its violation (Schneider v.

|

’

Schneider (App. D. C.), 141 Fed. (2) 542, 544; Feist v. Young, 7

Cir., 128 Fed. (2) 972, 974; Grasselli v. Aetna, 2 Cir., 252 Fed.

456).

4 Page 8, supra, for text.

16

directors, provides “that suit * * * may be brought in any

district in which suit against the defendant or defendants

in said stockholders’ action, other than said corporation,

might have been brought by such corporation * * *.” Ip

commenting on that legislation Prof. Moore says: “If the

defendant directors reside in States 2 and 3, the plaintiff.

shareholder may bring two actions: one in State 2, and

another in State 3, so that the venue as to them will be

proper” (2 Moore, Federal Practice, p. 2141, Note 27).

That is exactly what the Courts below refused.

“The rule established by the authorities * * * illus-

trates the diligence with which Courts of Equity will

seek a way to the merits of a controversy in the ab-

sence of interested parties that cannot be brought

in * ‘ *” (Bourdieu v. Pacific Western Oil, 299 U. 8.

65, 70).

The 1936 amendment was designed to give to the Fed-

eral Courts jurisdiction for effective corrective action

against individuals for their conduct as directors of cor-

porations. The very purpose of this legislation is defeated

by the decisions below.

The Courts below are silent with respect to this legis-

lation.

The Cireuit Court held Section 50 (28 U. S. C. A. 111)

inapplicable, stating: “That section applies to proper or

necessary parties” (35). If one director is an indispens-

able party to an action against a director-defendant prop-

erly before the Court, then what did Congress intend by

the amendment to Section 51 (28 U. S. C. A. 112 as

amended) concerning which the Circuit Court is silent?

The legislation clearly indicates the Circuit Court’s error.

A fundamental error of the Circuit Court is its decision

that directors’ dividend responsibility is “joint” and not

“joint and several” (36). The Circuit Court does not cite

any supporting authority. We are dealing with an Ohio

corporation.

— ay

y~ 17

In Ohio the directors’ dividend responsibility is joint

bi several.® Therefore in Ohio a separable controversy

ists as to each director with respect to his dividend con-

duct (Ammond v. Penn. R. R. (C. C. A. 6), 125 Fed. (2)

747, 749). Where, as here, “the liability of a director is

several as well as joint, the authorities generally hold that

it is not necessary to join all the directors (Sigwald v. City

Bank (S. C.), 64 S. E. 398, 400; to the same effect see Fish

v. White (Iowa), 175 N. W. 748).

A suit against a director to compel him to vote for

declaration of a dividend is an action for breach of trust

as a director (11 Fletcher, Cyc. Corp., Perm. Ed., See.

5623). A suit to compel directors to declare dividends is

derivative of the corporation (Lydia Pinkham v. Gove

(1939, Mass.), 20 N. E. (2) 482, 489; Maeder v. Buffalo

Bill's Wild West, 132 Fed. 280, 284).

Where a suit for breach of trust is brought against one

director, the remaining directors are neither indispensable

nor proper parties, for the controversy against each is

separate (2 Moore, Federal Practice, p. 2146, citing cases).

® Ohio General Corporation Act, Section 8623—123(b) :

“UNLAWFUL Divipenps; PENALTY.

* * 7 * ~*~ ~~

In case of any wilful or negligent violations of the provisions

of this section, the directors, under whose administration the

same shall have happened (except those who shall dissent as

hereinafter provided), shall be jointly and severally liable to

the corporation for the full amount of any such unauthorized

dividend or distribution with interest at the rate of six per

centum per annum until the same shall be paid.

°° = FF & & @

Any director against whom a claim shall be asserted by or on

behalf of a corporation under or pursuant to this section, or

who shall be held liable under or pursuant to this section, shall

be entitled to contribution from other directors who are liable,

according to the number of such directors, and any and all

directors against whom a claim shall be asserted under or pur-

suant to this section or who shall be held liable, shall have a

right of contribution against the shareholders who knowingly

accepted or received any dividend or distribution not author-

ized to be made, and such shareholders shall contribute in pro-

portion to the amounts received by them respectively.”

A As Oh an eS OE)

18

See also:

Kern v. Coffin (C. C. A. 5), 203 Fed. 238, 241.

Consolidated Textile v. Dickey (C. C. A. 5), 269 Fed.

942, reversed the District Court (266 Fed. 587), which had

held that all of the voting trustees were indispensable

parties to relief for “an injunction to prevent the voting

of the stock * * * by a majority of the voting trustees,

in whom such right to vote is given * * * to be exercised

by a majority” (269 Fed. at 945). The successful plain-

tiff-appellant argued that the non-resident defendant vot-

ing trustee “Jefferson is not an indispensable party” (269

Fed. at 944). The Cireuit Court said (p. 945):

“Tt is evident that the injunction prayed for against

the appelles other than Jefferson would not deprive

him of any right which he can exercise under said

voting trust agreement.”

It did not rest its decision on the number of directors

against whom it could grant relief, though, in fact, a

majority of the trustees (not directors) were parties to

the suit. It said (p. 946):

“Tf the suit cannot be maintained in Georgia, it can-

not be in any state or federal court. The result would

be that appellant would have no tribunal * * *.

The decree dismissing the bill is reversed.”

See also Krouse v. Brevard, 4 Cir., 249 Fed. 538.

In Anderson v. Abbott, 321 U. S. 349, the Court said:

“If the judicial power is helpless * * * then indeed

it has become a handy implement of high finance” (p.

366).

“Once the purpose of the scheme is clear * * * we

would indeed forsake a great tradition to say that we

are helpless to fashion the instruments for appropriate

relief” (p. 367).

19

It is idle to argue that petitioner has gone out of.

her way by the normal procedure of suing in Ohio for

dividends of an Ohio corporation doing business at Marion,

Ohio. Were such a suit begun in any other State Court

(1) that Court would not have jurisdiction of a non-resi-

dent Ohio corporation which must be joined as a defendant

and (2) that Court would not interfere with the internal

affairs of an Ohio corporation (forum non convenions).

The 1936 amendment to the Judicial Code conferring

jurisdiction over a non-resident corporation applies only

in the Federal Court. The Federal Court at New York,

however, would not have diversity jurisdiction in an action

against the New York directors brought by the plaintiff

who is a citizen resident of New York.

The District Court of the United States for the Northern

District of Ohio, Western Division—the Court below—is

the Court to grant the relief sought by plaintiff-petitioner.

The District Court’s statement “that were it to hear

the case on the merits, and were it to conclude that a divi-

dend ought to be paid” (23), is a clear acknowledgment

that the complaint states a claim for dividends under the

Ohio law.

Respondents’ motions admit (6):

“19. * * * there have been and still are surplus

profits, sufficient to pay said unpaid accumulated divi-

dends, and, an excess of the aggregate of the com-

pany’s assets less the statutory deductions required

over the aggregate of the company’s liabilities plus

stated capital to pay dividends on the Preferred stock;

but the company’s directors unreasonably and wrong-

fully refuse to pay dividends on the preferred stock.”

Were petitioner a common stockholder she would be en-

titled to a judicial direction for the declaration of divi-

dends in cash.

Arbuckle v. Woolson Spice Co., 11 O. C. D. 726.

Ohio General Corporation Act, Sec. 8623-38.

ts as

—

20

Cannon v. Wiscassett Mills (1928), 195 N. C. 119, 141

S. E. 345.

Keough v. St. Paul Milk (Minn., 1939), 285 N. W,

809.

The stockholder’s right to dividends is fixed and the

“diseretion of the directors is correspondingly limited, and

the reasons that have made the courts reluctant to order

the declaration of dividends lose their force” (Lydia R.

Pinkham v. Gove (1939), 300 Mass. 1, 20 N. E. (2) 482 at

490, citing cases).

Petitioner, as a preferred stockholder, is in a much

stronger position than a common shareholder, to insist that

the earnings be applied to the preferred stock dividends.

“Tt has been held that, as to dividends, common and

preferred stockholders occupy a different status with

respect to securing the aid of a court of equity in the

enforcement of a declaration of dividends, and that

a court of equity may aid a holder of preferred stock

where it would not aid a holder of common” (12

Fletcher, Cyc. Corporations, Perm. Ed., p. 182, See.

5446).°

“The distinction between common stockholders and

preferred stockholders may be said to be that the

common stockholder is an owner of the enterprise in

the proportion that his stock bears to the entire stock

* * *. A preferred stockholder is a mode by which

a corporation obtains funds for an enterprise without

borrowing money or contracting a debt, the stock-

holder being preferred as to principal and interest

and having no voice in the management” (Elko v. Com-

missioner (C. C. A. 9), 50 Fed. (2) 595, 596).

® “Generally, the question of declaring a dividend is entrusted to

the sound discretion of directors ; and, as to common stock, such dis-

cretion will not be interfered with by a court of equity in the absence

of bad faith or arbitrary or unjustifiable conduct. But different rules

apply with respect to the rights of the holders of preferred stock to

invoke the aid of a court to order the declaration and payment of

dividends on their stock” (Cratty v. Peoria Law Library Assn., 219

Ill. 516; 76 N. E. 707, 708). See also Patterson v. Durham Hosiery

Mills (1939), 214 N. C. 806; 200 S. E. 906.

_—

“Therefore, so far as the face value of the preferred

stock is concerned, it is in the nature of a debt against

the corporation, and the interest thereon becomes a

debt as soon as it can be shown that there were profits

wherewith to pay it, and becomes a lien prior to the

holders of the common stock upon such earnings, if

there were such, for the amount of the dividend and

ean be followed wherever invested by the company”

(Storrow v. Texas (C. C. A. 5), 87 Fed. 612 at 617).

While it is true that a holder of cumulative pre-

ferred stock is not a creditor of the corporation, so

as to entitle him to bring suit at law against the Cor-

poration for dividends in arrears, but not declared

(American Steel Foundry v. Lazear, 124 C. C. A. 231,

204 Fed. 204), yet, considering the relations of the

stockholders inter sese * * * there is every reason to

hold as soon as the agreed dividend which the preferred

stockholder is to receive is matured by time, a right

to its ultimate payment as against those who have

agreed to its payment becomes a vested right. It is

a present property interest” (General Inv. v. Ameri-

can Hide, 98 N. J. Eq. 326, 129 Atl. 244, 249).

21

This is not a case where preferred stockholders, like

common stockholders, may replace the company’s directors.

Nominally the preferred stockholders may select 40% of

the directors—which leaves the control with the common.

Actually, all the directors represent the common stock.

When, as here, “the right to dividend is clear and there

are funds from which it can properly be made, a Court of

Equity will interfere to compel a company to declare it.

Directors are not allowed to use their power illegally,

wantonly or oppressively” (O’Neall v. O’Neall, 25 N. E. (2)

656 at 659).

Had dividends from these earnings been distributed to

the preferred stockholders, as required by the preferred

stock contract, then the company’s directors would have

been unable to carry out their program to benefit the

common stock.

No clearer case of bad faith could exist. No stronger

ease of oppression could be shown.

22

POINT II

Since Grant is neither an indispensable nor a neces.

sary party, naming Grant as a defendant did not de.

prive the Federal Court of diversity jurisdiction over

the parties who are properly before the Court.

Salem Trust v. Manufacturers Trust, 264 U. 8S. 182.

Geer v. Mathieson, 190 U. S. 428, 436.

Walden v. Skinner, 101 U. 8S. 577.

The Circuit Court said (Ree. p. 31):

“Although the District Court based its ruling on

the second and third grounds stated in the motion to

dismiss, it appears that the ruling should be sustained

also on the first ground stated in the motion, namely,

lack of diversity of citizenship.”

The motion to dismiss was made by the respondents

Gracely, Montrose, Strelitz and the corporation (13, 22).

They are the only ones who were served (22). They are

all citizen residents of Ohio (2) and the petitioner is a

citizen resident of New York.

As said by this Court in Walden v. Skinner, 101 U. S.

577, 25 L. Ed. 963, 967, in this case:

“Jurisdiction between the complainant and the re-

spondent is unquestionable.”

The Circuit Court continued (Ree. p. 32):

“The complaint alleged that the defendant Grant

was a resident of the State of Ohio, which furnished

diversity of citizenship between him and the plaintiff.

This allegation was put in issue by the motion to dis-

miss and the affidavit filed by the defendants-appellees

that Grant was a resident of New York. Upon the

issue so raised the burden of proof rested upon the

appellant which was not met.”

\

23

Grant did not join the motion (33). The Circuit Court

acknowledged Grant was not before the Court (33). If

“Grant was at least a proper party to this action, regard-

less of whether or not he was an indispensable party” (33),

a basic error in this conclusion of the Circuit Court is its

decision that though Grant “is not an indispensable party—

his joinder as a defendant by the plaintiff destroys the

necessary diversity of citizenship” (33).

The law is well settled that in ascertaining whether a

controversy is wholly between citizens of different states,

the Court “will disregard the citizenship of all parties

who are not indispensable” (citing cases). (Lindley, D. J.,

who constantly sits in C. C. A. 7—Ford v. Atkins, 39

Fed. Supp. 472.) This Court did not hold otherwise in

Indianapolis v. Chase, 314 U. S. 63.

The Cireuit Court disregarded the complaint which

alleges with respect to Grant:

“47, Plaintiff does not seek personal judgment

against the company’s directors over whom the Court

cannot exercise jurisdiction * * *.

Wherefore, plaintiff demands judgment.

1. That the directors defendants—excepting those

directors who are citizen residents of New York, de-

attained 4) ©

The purpose of such allegations was to protect the juris-

diction of the Court to proceed to trial and adjudication

of the suit between the parties who are properly before

the Court, if it should turn out that someone who is a

defendant in name only is a citizen resident of New York.

Galdi v. Jones, 2 Cir. 141 Fed. (2d) 984, upheld federal

diversity jurisdiction in the Federal Court of Connecticut

against a Connecticut corporation and Connecticut direc-

tors, where the co-defendant director Smythe and the plain-

tiffs were New York citizens and residents. That com-

plaint alleged that those plaintiffs did “not seek personal

judgment against Smythe * * * by reason of the matters

24

herein set forth” (Ree. fol. 80). There as here “They joined

him as a defendant, then failed to serve him” (Defendants.

Appellees’ Brief to 2nd Cir., p. 9).

None of the cases cited by the Cireuit Court are to the

contrary. Its decision presents a conflict with the Second

Cireuit in Galdi v. Jones.

POINT Ill

The second claim states a claim against the corpora.

tion respondent, for dividends legally payable in com.

mon stock, in an amount equal to the arrears on the

outstanding preferred stock.

Considering the directors as parties, this Court, in Geer

v. Mathieson, 190 U. S. 428, said, at page 432:

“A suit may consistently with rules of pleading, em-

brace several distinct controversies.” 7

The Cireuit Court says that this claim is “obviously an

afterthought” (37). It is set forth in the complaint. Peti-

tioner argued the sufficiency of this claim both to the Cir-

cuit and to the District Court. Respondents stood mute.

7It matters not that the complaint’s prayer for relief does not

ask such a judgment at law against the corporation (Galdi v. Jones,

2 Cir., 141 Fed. (2) 984; Materesse v. Moore-McCormack, 2 Cir.,

158 Fed. (2) 631, 633).

In Kansas City, St. L. & C. R. Co. v. Alton R. Co., 7 Cir. (1941),

124 Fed. (2) 780, the unanimous Court said, at 783: “We do not

think that the prayer on this part of the complaint is for equitable

relief. Even if it were, the prayer does not control. The prayer

may be looked to, to help determine the relief to which the appellant

is entitled, but it is not controlling.”

“Rule 54 (c) Demand for Judgment.

eo ot oe ee ee

Except as to a party against whom a judgment is entered by de-

fault, every final judgment shall grant the relief to which the party

in whose favor it is rendered is entitled, even if the party has not

demanded such relief in his pleadings.”

—

25

They contended that they did not challenge the sufficiency

of this claim (compare their motion to dismiss for failure

to state a claim, Ree. p. 13). It is idle therefore to say

that this claim is an afterthought.

Respondents’ motion to dismiss admits the truth of the

following allegations in the complaint (Ree. p. 6):

“19. During said periods, there have been and still

are surplus profits, sufficient to pay said unpaid ac-

cumulated dividends, and, an excess of the aggregate

of the company’s assets less the statutory deductions

required over the aggregate of the company’s liabilities

plus stated capital to pay dividends on the Preferred

Stock; but the company’s directors unreasonably and

wrongfully refuse to pay dividends on the preferred

stock.

20. The company’s directors, including director de-

fendants, devised a scheme and artifice to put the out-

standing common stock on a dividend basis for the

penefit of such common stockholders who elected 60%

of the director defendants.

21. In pursuance of such scheme and artifice, the

company’s directors, including the director defendants,

caused (1) the company’s outstanding 6% Bond Issue

to be retired, before maturity, at a premium about

April 1, 1946, (2) the company’s charter to be amended

about April 3, 1946, by increasing the company’s com-

mon stock from 100,000 shares to 400,000 shares of

common stock, (3) one half of the outstanding 7%

Preferred Stock to be exchanged into common stock

by June 14, 1946, (4) in October, 1946, an amendment

to the charter to be proposed to create a prior preferred

stock and thus subordinate the outstanding Preferred

Stock owned by such as plaintiff who had refused to

convert their preferred into common.

24. Elmer G. Diefenbach, as Chairman of the Com-

pany’s directors, on October 2, 1946, addressed a com-

munication

‘To the Preferred and Common Shareholders of

Marion Power Shovel Company—

The first step in the plans for the simplification

of the capital structure of your Company was suc-

eee

A CLES ‘

26

cessfully concluded on June 14, 1946, at which time,

one half of the 7% Preferred Stock was exchanged

and retired. The present management of Marion

Power Shovel Company has worked with all possible

diligence to put the companies’ affairs in such state

that you, the owners of the business, could receive a

return on your investment at the earliest possible

time consistent with a conservative financialy policy,’

25. The foregoing setup was part of a plan to benefit

the outstanding common stock and to put the common

stock on a dividend basis, which could not lawfully

be done, so long as dividends remain unpaid on the

Preferred Stock.

28. The Company’s directors, including the directors

defendants, own, control, or are beneficially interested

direct or indirectly in the common stock of the cor-

poration, which benefits from elimination, without pay-

ment, of the accrued dividends on the preferred stock.”

Accrued dividends must be paid on retirement of pre-

ferred stock. The retirement of the 13,2191, shares of

preferred stock, carried with it the payment of the divi-

dend arrears and implied a valid declaration of the arrears

payable in common stock.

Sterling v. Watson, 241 Pa. 105, 88 Atl. 297.

The retirement of these 13,21914 shares imports taking

up the holders’ claims for dividend arrears as well. The

corporation took these shares with all their rights. In

doing so the corporation satisfied their claim for dividend

arrears but in a compromised amount.

No matter how large or how small, whether in full or

in compromise, no payment in any form could have been

made on account of arrears without a declaration of divi-

dends. In authorizing tle compromise payment to the

holders of the 13,21914 shares of preferred the corporation

declared a dividend for the accrued and unpaid dividends

on the preferred stock.

eo rer

27

“No particular form*or phraseology is essential to de-

elare a dividend” (11 Fletcher, Cyc. Corporation, Perm.

Ed., p. 874, Sec. 5350). “It is settled that a dividend may

be declared without formal declaration of the same, and

that where declared, the word ‘dividend’ need not be used

in connection with the action in regard thereto” (Brown

y. Luce (1936), 231 Mo. App. 269, 96 S. W. (2d) 1098, 1100).

When the corporation took up the claim for dividend

arrears on the 13,2194 shares which it retired, it became

obligated to take up the dividend arrears on the 17,7881%4

shares left outstanding.

A corporation cannot discriminate between shareholders

(Sutton v. Stacey Mfg. Co. (1915), 17 Ohio N. P. (N. 8.)

497).

The argument that dividends payable in common stock

to holders of common stock are to be treated as capital and

not as earned income has no vitality to dividends payable

in common stock to the holders of preferred stock. A

common shareholder has an aliquot or pro rata interest

in the net assets of a corporation. If the corporation loses

money he loses in proportion to his holdings, even though

the preferred shareholder does not share in the loss. The

value of a common share, at any time, is found by dividing

the number of common shares outstanding into the value

of the net assets, increasing in value as the net assets

increase. The value of a preferred share is fixed and

does not increase as the net assets increase.

There is no prohibition against preferred stock divi-

dends payable in common stock. On the contrary, the

Ohio Corporation Act * expressly provides that dividends

8 Section 8623-38:

“Divipenps. (a) A corporation may declare dividends pay-

able in cash, shares, or other property out of the excess of the

aggregate of its assets less the deductions hereinafter required

over the aggregate of its liabilities plus stated capital.

* * * * *

(c) No corporation shall declare or pay a dividend in cash

or other property when there is reasonable ground for believ-

2 AT ee Es a

a

28

may be paid in common stock, and that, unless otherwise

stated, paid dividends are considered to be a distribution

of earned income.

The declaration of the preferred stock dividend arrears

payable in common stock cannot be recalled.

Taylor v. Axton Fisher Tobacco Co. (Ky.), 173

S. W. (2) 377.

Mitchell v. Wheel Co., 40 Ohio N. P. (N. 8.) 609,

17 O. D. (N. P.) 483, 31 0. D. 420, affirmed by

Court of Appeals.

The corporation cannot defend or refuse to pay in full

the dividend arrears on the remaining 17,78814 shares of

preferred on the alleged ground that such dividend arrears

have not been earned.

Segerstrom v. Holland Piano, 160 Minn. 95, 199

N. W. 897.

Ball v. Peper Colton Press, 140 Mo. App. 26, 121

S. W. 798.

“These unpaid dividends (before declaration) are treated

as if they were in the nature of a debt” (Johnson v.

Lamprecht, 133 Ohio St. 567, 572, 573). Defendants ad-

mit these dividend arrears have been earned (6).

“The preferential rights of the plaintiffs to the

accrued unpaid dividends were vested and absolute

as between the parties and enforceable in a court

of law until the corporation, a party to the contract,

undertook to abolish such rights of the preferred

shareholders to the gain and profit of the common

shareholders. It was never the intention of the leg-

islature that corporate management might secure capi-

ing that it is unable or, by the payment of the dividends, may

be rendered unable to satisfy its obligations and liabilities.

(d) Whenever a dividend is paid, in whole or in part, out

of other than earned excess of assets appearing on the books

of the corporation at the time of the declaration of such divi-

dend, the shareholders receiving such dividend shall be notified

_ as to its source.”

29

tal upon the representation that the investment was

to be safeguarded * * * and then after the investment

has been made * * * the corporate management might

repudiate any part of the contract * * * ” (Wheatley v.

Root, 33 Ohio Law Rep. 464, 470.

Respondents’ program aimed at retirement of the out-

standing preferred and a compromise of the dividend

arrears is, in fact, compulsory and, in law, illegal.

“Attempts * * * to effect a compulsory exchange of stock

** * or to cancel unpaid accumulated dividends have been

enjoined” (Wheatley v. Root, 33 Ohio L. R. 464 at 472).

Respondents’ entire course and conduct is an attempt to

effect a compulsory exchange of stock and to cancel un-

paid dividends. Realists would call it compulsory and

not optional or voluntary.

While petitioner is entitled to cash dividends (Johnson v.

Bradley Knitting Mills (Wisconsin, 1938), 280 N. W. 688),

she and all other preferred shareholders seek a judgment

against the corporation for the dividend arrears, payable

in common shares, in an amount which will fully pay those

arrears.°

It is a far ery from the realistic fact, for the Circuit

Court to say that the dividend arrears were not paid

to those holders of the preferred who compromised the

amount of the arrears and that we are dealing with an

ordinary offer of exchange of preferred stock for com-

mon stock.

The complaint and supplemental complaint allege a

course charted by respondents to bludgeon petitioner and

similarly situated preferred stockholders, all designed to

®When the October, 1946, proposal to preferred shareholders is

evaluated, it is not surprising that it was rejected by the preferred

shareholders (Comp., pars. 38-40) (11). As at October 2, 1946

(11).

Preferred unpaid dividends per share........ $112.00 $112.00

Value 6 shares Common—Market 10%... 63.00

Value 8 shares Common—Market 10%... 84.00

Loss each share preferred 6 sh. basis... $ 49.00

Loss each share preferred 8 sh. basis...... $ 28.00

30

put an end to the preferred stock and to destroy the vested

right in unpaid preferred dividend arrears.

Three assaults were made on petitioner and similarly

situated preferred shareholders, all for the benefit of the

common stockholders.'® First: June 14, 1946, dividends in

common stock were paid to the holders of 13,219% shares

of preferred, who exchanged their preferred stock with the

accumulated arrears for common stock. Nothing was paid

to the holders of the remaining 17,7884 shares of pre-

ferred. This exchange increased the common stock value

about $10.90 per share of common.'' Second: November,

1946, the preferred shareholders were advised that the cor-

porate charter would be amended, a prior preferred would

be created, and of a plan for inadequate payment of the

dividend arrears. This failed (8-10). Third: 1947, the

shareholders were advised of the annual meeting which

would consider a restatement of the corporate capital.

Though this may not be considered at an annual meeting,

the effect of the capital restatement would be that the

preferred stock dividend arrears would be paid in cash

out of the security for the preferred stock (19-20) so that

in the future the common stock could be put on a dividend

basis.

Respondents’ communications to and treatment of the

preferred stockholders reminds us of Lewis Carroll’s

“T sent a message to the fish:

| told them ‘This is what I wish.’

The poor little fishes of the sea,

They sent an answer back to me.

The little fishes’ answer was

‘We cannot do it, Sir, because——’

I sent to them again to say,

‘It will be better to obey.’

The poor little fishes answered with a grin

‘Why, what a temper you are in.’

I told them once, I told them twice,

They would not listen to my advice.”

1© There is a conflict of interest between the preferred and the

common, The directors hold their places through the graces of the

common stockholders.

1! Standard & Poor Corp. Rec. of 1946, p. 30.

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31

POINT IV

Petitioner should have leave to serve a supplemental

complaint.

Petitioner’s supplemental complaint states a claim

against the defendant corporation for relief against the

material charter alteration of preferential rights of plain-

tiff as a preferred stockholder (pp. 12, 13, supra).

After petitioner’s complaint had been filed with the Dis-

trict Court, respondent corporation gave notice of an an-

nual meeting to consider a charter amendment restating

the capital.

Thereupon petitioner applied for leave to serve her

supplemental complaint.

This supplemental complaint challenges the restatement

of capital (18-22).

This capital restatement injures and alters the rights

of the outstanding 17,78814 shares of preferred stock of

petitioner and these similarly situated and is unlawful

(In re Kinney, 279 N. Y. 423, 18 N. E. (2) 645).

Breslav v. N. Y. & Queens Electric, 249 App. Div. 181,

aff'd 273 N. Y. 593, 7 N. E. (2) 708, restrained a charter

amendment affecting a preferred stockholder’s right.

If, as respondents say, objecting shareholders do not

have the right to dissent and appraisal, then their only

remedy is to invalidate the restatement of capital.

Furthermore, the Ohio General Corporation Act is so

worded (a) as to negative the authority of the stock-

hulders at an annual statutory meeting to consider a

charter amendment, and (b) as to require a special meet-

ing of the shareholders to amend the articles of incor-

poration in order to restate the corporation’s capital.

The Ohio General Corporation Act provides:

“See. 8623-42. Annual Meeting.

Unless otherwise provided in the articles or regula-

tions an annual meeting of shareholders, for the elec-

32

tion of directors and the consideration of the reports

to be laid before such meeting, shall be held on the

first Monday of April in each year. When the annual

meeting is not held or directors are not elected there.

at, they may be elected at a special meeting called

and held for that purpose.”

Nothing could more clearly state the business to be

transacted at the annual meeting (19 Fletcher, Corp,

Perm. Ed., Sec. 9025, p. 207; 2 Fletcher, Corp. Forms, 3rd

Ed., Sec. 1860, p. 364).

A capital restatement at the statutory annual meeting

in April, 1947, is unauthorized, illegal and invalid.

A special meeting to convene at the conclusion of the

statutory meeting might have been called to consider the

recapitalization by charter amendment. But that would

have required separate proxies. Judging from the pre.

ferred stockholders’ previous refusal of proxies for a

charter amendment (9, 10), they might again refuse proxies

for a charter amendment.

The purpose of the diversity jurisdicton is to afford this

non-resident plaintiff an opportunity to present this sup-

plemental claim against this Ohio corporation “in the

federal rather than in the state courts”.

Meredith v. Winter Haven, 320 U. S. 228, at 234.

On this supplemental claim petitioner could institute a

separate action against the corporation respondent. But

the Federal Rules of Federal Procedure aim to determine

all controversies in a single litigation.

Since this claim arose after the filing of this suit, and

while respondents’ motions were sub judicia, petitioner

applied below under Rule 15(d), F. R. C. P.,'* for leave to

12“Rule 15. (d) Supplemental Pleadings.

Upon motion of a party the court may, upon reasonable notice

and upon such terms as are just, permit him to serve a supplemental

pleading setting forth transactions or occurrences or events which

have happened since the date of the pleading sought to be supple-

mented. If the court deems it advisable that the adverse party plead

thereto, it shall so order, specifying the time therefor.”

33

file the supplemental complaint and for an order directing

the respondent corporation to answer (Homewood v. Stand-

ard Power & Light Co., 55 Fed. Supp. 100).

Were this claim the basis of a separate suit in the Court

below, consolidation of both actions would follow under

Rule 42(a), F. R. C. P18

“Litigation is the pursuit of practical ends, not a

game of chess.”

Indianapolis v. Chase, 314 U. S. 67, 69.

CONCLUSION

It is respectfully submitted that a writ should be

granted.

Maurice J. Dr,

Attorney for Petitioner,

29 West 64th Street,

New York 23, N. Y.

18“Rule 42. (a) Consolidation.

When actions involving a common question of law or fact are

pending before the court, it may order a joint hearing or trial of

any or all the matters in issue in the actions; it may order all the

actions consolidated ; and it may make such orders concerning pro-

ceedings therein as may tend to avoid unnecessary costs or delay.”

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