WEINFELD, District Judge.
This is essentially a stockholders' derivative action with jurisdiction based upon diverse citizenship. The Helen Shop, Inc., for whose benefit the action is brought, is a Tennessee corporation. The two individual plaintiffs are citizens of Massachusetts, and the third plaintiff, Lowell Wiper Supply Co., is a Massachusetts corporation. All the defendants are citizens of the State of New York. Sidney Berman, the dominant and controlling stockholder of The Helen Shop, Inc., who died in 1959, was also a citizen of New York, as are his executors who are named as defendants.
The defendants move pursuant to Rule 12(b) (6) of the Federal Rules of Civil Procedure to dismiss the First, Second and Sixth causes of action on the ground that the plaintiffs were not stockholders at the time of the transactions complained of, and upon the further ground that the claims are barred by the applicable statute of limitations. Dismissal is also sought of the Third cause of action upon the ground that the issues presented thereunder were considered by the courts of Tennessee and decided adversely to the plaintiffs. The parties have submitted affidavits as permitted under Rule 12(b) (6) and the motion is treated as one for summary judgment.
THE FIRST AND SECOND CAUSES OF ACTION
The principal claims center about certain primary leases of property in Memphis, Tennessee, where The Helen Shop, Inc. has conducted its business since 1945. The essence of the charge is that Berman, who was the promoter and the chief executive officer of the corporation until his death, in conspiracy with other defendant stockholders, directors and officers, improperly availed himself of a corporate opportunity. In substance, the complaint alleges that the primary leases were taken by Berman, as lessee, who then sublet the premises to The Helen
In the first cause of action the claim is that under the law of Tennessee the subleases between Berman, as a fiduciary, and the corporation are void and recovery is sought of all the rentals paid to him. In the second cause of action the claim is that under the law of Tennessee the subleases are voidable and recovery is sought of the excess of the fair rental value of the premises. The complaint further alleges that John J. Blesch, another officer and director, in each year received ten per cent of the alleged excessive rentals in furtherance of the conspiratorial purpose and to induce him to violate his fiduciary duty to attack the subleases. The complaint omits dates and other relevant information, but the extensive affidavits submitted by the parties in support of and in opposition to the motion reveal the following:
In April 1944 Berman leased premises in Memphis, Tennessee, and purchased a specialty shop which the landlord had conducted on the premises. This lease was for ten years, to August 1954, with two ten-year renewal options. He operated the business as sole proprietor until February 1, 1945, when he sold and transferred it and its assets to The Helen Shop, Inc., which he had caused to be incorporated shortly before. He also sublet the premises to the corporation for a term of ten years. In consideration of the transaction, he received corporate stock. In 1946, Berman individually obtained a lease of the adjacent property and in turn sublet it to The Helen Shop, Inc. for a term ending August 1954, so that both subleases expired on the same date. The primary leases to Berman were at fixed dollar rentals, whereas the subleases from him to the corporation were on a percentage of net sales.
None of the plaintiffs was a stockholder of the corporation when it entered into the subleases. Plaintiff Feinberg became a shareholder in 1947 and plaintiff Ashapa in 1952. Lowell Wiper Supply Co., the corporate plaintiff, was not registered as the owner of stock until 1957, although it was a pledgee of the stock as collateral for a loan which it made in October, 1953.
Rule 23(b) of the Federal Rules of Civil Procedure provides that in a derivative suit the plaintiff must allege he was "a shareholder at the time of the transaction of which he complains * * *."
Whether the corporate plaintiff has the necessary status to maintain this action under Rule 23(b) must be determined by the law of Tennessee, the state of incorporation of The Helen Shop, Inc.
Thus the issue on defendants' motion is narrowed to their contention that these causes of action are barred by the applicable statute of limitations.
Whether these causes of action, involving as they do the internal affairs of a Tennessee corporation and arising there, are time-barred must be determined in accord with the body of law which would be applied by New York, the forum state in this diversity suit.
Our initial inquiry concerns the date on which the causes of action accrued, for that is when the statutory period begins to run.
We next consider the applicable limitation period. Prior to September 1, 1963, when the new Civil Practice Law and Rules (CPLR) took effect in New York,
This result is not changed by the new CPLR for section 218 thereof declares that nothing contained in the article governing limitations shall authorize commencement of an action barred when the article becomes effective, except in circumstances not here present.
We next pass to the plaintiffs' contention that the defendants are estopped to avail themselves of the limitation bar by reason of their conduct which allegedly precluded timely commencement of suit.
In advocating this position the plaintiffs disclaim any challenge to the existing New York doctrine, already referred to, that the period of limitation in a stockholders' derivative suit commences to run from the date of the perpetration of the wrong and not from the date of its discovery, notwithstanding continued domination by the allegedly recreant fiduciaries — a doctrine characterized as "out of line" with that prevailing in many states and one which seems "harsh and inequitable."
The plaintiffs also disavow contending that the statutory period for claims grounded on common law fraud, which begins to run only from discovery, is applicable to this derivative suit.
What they do press is a plea of equitable estoppel, an application of the well settled principle that "no man may take advantage of his own wrong."
Plaintiffs argue in effect that the defendants, as controlling directors and officers of The Helen Shop, Inc., to prevent detection of their alleged misconduct, concealed material facts, furnished misleading financial statements, denied plaintiffs their legal right of access to corporate books and records, compelled them to institute proceedings in the courts of Tennessee to vindicate that right, and engaged in deliberate delaying tactics and unwarranted appeals so that four years passed before the Tennessee courts finally upheld their right as shareholders to examine the corporate records. The inspection for the first time fully revealed the facts upon which this suit is based, but by then the statute of limitations had already run against the causes of action related to the 1954 sublease renewals.
Defendants counter with the argument that, even before the court-compelled inspection, plaintiffs in litigation instituted in 1959 had made charges substantially parallel to those in the instant suit, indicating they then had knowledge of material facts relating to the 1954 renewals sufficient to have permitted them to have instituted timely suit.
In reply plaintiffs say they then only suspected wrongdoing and it was not until their right to inspection was upheld that their suspicions were confirmed.
Whatever the fact, the sharply disputed contentions present a triable issue whether the alleged non-disclosure, concealment, affirmative misrepresentations, and delaying tactics compel a court of equity, under established New York doctrine of estoppel, to deny the defendants the defense of the statute of limitations. If this issue, which necessarily includes consideration of the extent of plaintiffs' knowledge and the date of its acquisition, is resolved upon a trial against plaintiffs, then under the present ruling the first two causes of action must be dismissed as time-barred.
THE SIXTH CAUSE OF ACTION
The sixth cause of action, which is also attacked on the same grounds as are the first and second, alleges that upon the organization of the corporation in 1945, the then incumbent directors, including Blesch, caused it improperly to issue 3,430 shares of common stock to Berman and 300 shares of common stock to Blesch for which no consideration was ever received by the corporation. As already shown, one of the individual plaintiffs became a stockholder in 1947 and the other in 1952, and the corporate
The attempt to overcome this defect by allegations that dividends were paid on the stock so issued to Berman and Blesch at various dates subsequent to the time plaintiffs became stockholders, and that the value of plaintiffs' shares will suffer diminution upon distribution of assets is futile. It again seeks to apply the rejected doctrine of continuing wrong on the theory that each payment of a dividend gives rise to an individual claim. In this instance, as in that of the excess lease rentals, the wrong, if any, occurred upon the original issuance of the stock in 1945, two years before any of the plaintiffs became a stockholder. The motion to dismiss the sixth cause of action is granted. This disposition makes it unnecessary to consider the statute of limitations question.
THE THIRD CAUSE OF ACTION
The defendants also move to dismiss the third cause of action on the ground that the issues raised therein have been determined adversely to the plaintiffs' contentions by the courts of Tennessee. Here the plaintiffs seek restitution to the corporation by the defendants, including the corporation's attorneys, of all expenses incurred by it in contesting the Tennessee litigation brought by Lowell Wiper Supply Company. The gist of the claim is that the opposition to this stockholder effort to gain access to the corporate books and records was pursuant to a conspiracy of the defendants purely obstructive and not in the furtherance of the corporate interests. The adjudication by the Tennessee courts on which the motion to dismiss this cause of action is predicated is the denial of recovery of the Tennessee statutory penalty for refusal or neglect to exhibit the stock book. However, the proceeding brought by Lowell Wiper Supply Company sought examination not only of the stock book but of all corporate books and records as well as all leases entered into by The Helen Shop, Inc. While the statutory penalty for refusal to permit inspection of the stock book was disallowed, the general inspection prayed for was granted.
SECURITY FOR COSTS
The defendants move alternatively for security for costs pursuant to section 627 of the New York Business Corporation Law. Each of the individual stockholders, at the time of the 1954 renewal of the subleases, held 50 shares and the corporate plaintiff as pledgee held 350 shares of the preferred stock — or a total of 450 shares of stock of this class. There were 7,000 shares of preferred stock outstanding; the plaintiffs, collectively, thus owned more than 5% of the outstanding preferred stock. Under the New York statute they are not required to give security and that branch of the motion is accordingly denied.
In conclusion, the defendants' motion for summary judgment on the first, second and third causes of action is denied; it is granted as to the sixth cause of action. Examination of the defendant as to the matters in issue under existing claims may proceed upon a date to be fixed in the order to be entered herein.
Settle order upon notice.
It does not appear, however, that New York courts observe these somewhat arbitrary distinctions, for in Erbe v. Lincoln Rochester Trust Co., supra, "estoppel" language was applied to toll the statute of limitations where a fiduciary had concealed the fact of his wrongdoings. Cf. Glover v. National Bank of Commerce, 156 App.Div. 247, 141 N.Y.S. 409 (1st Dep't 1913) (dictum on fraudulent concealment); Rank Organization Ltd. v. Pathe Labs., Inc., 33 Misc.2d 748, 227 N.Y.S.2d 562 (Sup.Ct.1962) (equitable estoppel).