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COHEN v. BENEFICIAL INDUS. LOAN CORP.

December 18, 1946

COHEN (COHEN, Intervener)
v.
BENEFICIAL INDUSTRIAL LOAN CORPORATION et al.



The opinion of the court was delivered by: MEANEY

This action, a stockholder's derivative suit, was instituted by Sol Cohen in 1943, as the holder of 100 shares of Common Stock which had been acquired by purchase in 1937, and seeks the appointment of a receiver and an accounting for funds and assets which it is alleged the individual defendants fraudulently diverted and appropriated to their own use.

David F. Cohen, as holder of 150 shares of the corporation's common stock, intervened as a party plaintiff. On February 14, 1946, by order of the court, Hannah Cohen, executrix of the estate of Sol Cohen, deceased, was substituted as plaintiff.

 The matter is presently before the court on motions by the individual defendants for an order dismissing the fourth, fifth, sixth, seventh, and ninth causes of action alleged in the amended complaint, and for a more definite statement or a bill of particulars, and in opposition to a counter-motion made by the plaintiff for leave to take depositions and for issuance of subpoenas duces tecum.

 The motions to dismiss are made under the provisions of rule 12(b)(6) of the Federal Rules of Civil Procedure, 28 U.S.C.A.following sectio 723c, upon the ground that none of the said causes of action state a claim upon which relief can be granted.

 The defendants seek a dismissal of the fourth alleged cause of action on the above grounds and more specifically, on the ground that it fails to charge any identified persons with the commission of the alleged wrongful acts.

 The fourth cause of action charges specifically that one, Clarence Hodson II, was, up to the time of his death, paid by the defendant corporations a salary of approximately $ 25,000 per annum, although he rendered no service whatsoever to the company. As a result thereof, plaintiff charges that Clarence Hodson II was placed in a privileged position, unlawfully receiving at the order and direction of the individual defendants who were officers and directors of the defendant corporation, large sums of money.

 The objection to the fourth cause of action is not found by the court to be of such nature as to compel a dismissal thereof. The pleadings set forth sufficiently specific identification, as far as the individual defendants are concerned, to establish adequate basis for an appropriate cause of action. The fourth cause will accordingly be allowed to stand, and defendants' motion directed to it is denied.

 The fifth cause of action, against which the defendants likewise seek a dismissal, charges that at or after the time of incorporation of the defendant, Industrial, in May, 1929, it acquired the combined assets of the former Beneficial Industrial Loan Corporation, American Loan Company and Industrial Bankers of America, and at the same time assumed all the liabilities of the three aforementioned companies.

 Prior to the acquisition of such assets, it is alleged that the former Beneficial Loan Corporation, one of the acquired companies, was organized and had acquired assets of three other loan companies by the issuance of 1,250,000 shares of its capital stock. It is further charged that at the time of the issuance of those shares, the former Beneficial Industrial Loan Corporation wrote up the value of the assets transferred from the three companies from which they were acquired, by more than eight million dollars and that the defendant, Industrial, acquired this stock at the same value ascribed to it on the books of the former Beneficial Industrial Loan Corporation, even though an examination of the books of that company would have revealed the excessive value at which the assets were written up and held. It is then charged that the defendant, Industrial, upon acquiring the assets of the former Beneficial Loan Company, American Loan Company, and Industrial Bankers of America in May 1929, issued its stock to the stockholders of these three companies, in exchange for the stock held by them respectively in said three companies, the stockholders of the former Beneficial Industrial Loan Corporation receiving stock from defendant, Industrial, on the basis of the infaulted values previously ascribed to the stock of the former Beneficial Industrial Loan Corporation. Thereafter, it is charged, in September of 1930 the book value of the assets which had been acquired by the defendant corporation from the former Beneficial Industrial Loan Corporation was written down from its inflated value to the same extent as it allegedly was previously written up. As a result of the above it is charged that there was fraudulently and unlawfully issued, 449,209 shares of common stock of defendant corporation which remain outstanding and for which no consideration has been paid or received by it. Upon the shares so issued, it is further charged there has been unlawfully paid by the corporation, from 1929 to 1945, inclusive, more than eleven million dollars by way of unlawful and illegal dividends.

 Examination of the allegations contained in the fifth alleged cause of action support the defendants' contention that the plaintiff has failed to show any damage to the corporate entity.

 The stock issues referred to consisted entirely of shares of stock without par value. Under Delaware law, necessarily controlling insofar as the validity of the stock issue in question is concerned, (the defendant being incorporated under the laws of the State of Delaware) there is no requirement as to the amount of consideration which must be received in respect to an original issue of no par stock, although the quality of consideration must meet the same requirements as stock having a par value. Bodell v. General Gas & Electric Corporation, 15 Del.Ch. 119, 132 A. 442, affirmed 15 Del.Ch. 420, 140 A. 264; West v. Sirian Lamp Co., Del.Ch., 37 A.2d 835.

 Hence, where it is apparent that the original stock issue is of no par stock, the amount of consideration is of no particular moment in an action of this nature. Thus, as the court stated in the Bodell case, supra, 132 A.at page 447:

 'If the corporation has just been formed, I do not see that it can make any difference how much or how little in the way of consideration is received for its original no par stock, so long as the consideration is lawful in its quality. If the assets received are one thousand dollars in money, it is of no consequence whether five shares or ten shares, or ten thousand shares are given for it. Each shares has its one-fifth or one-tenth or one one-thousandth aliquot part of the thousand dollars as the case may be, and no one is ...


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