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Escoett v. Aldecress Country Club

Decided: November 8, 1954.

JAY ESCOETT, PLAINTIFF-APPELLANT,
v.
ALDECRESS COUNTRY CLUB, ET AL., DEFENDANTS-RESPONDENTS



For reversal -- Chief Justice Vanderbilt, and Justices Heher, Oliphant, Burling, Jacobs and Brennan. For affirmance -- Justice Wachenfeld. The opinion of the court was delivered by Jacobs, J.

Jacobs

[16 NJ Page 440] On December 29, 1953 the plaintiff, a member of the Aldecress Country Club, filed a complaint in the [16 NJ Page 441] Chancery Division on behalf of himself and all other members who desired to join the proceeding. It alleged substantially the following: (1) the defendant Donald J. Flamm conveyed land to the defendant Donmor Realty Corporation and the defendant Aldecress Country Club is now in possession as tenant; (2) Flamm has been the sole stockholder of Donmor and has controlled its board of directors; (3) Flamm acquired possession of the books and records of the then defunct Aldecress and without election and in violation of its by-laws, installed the other named individual defendants as its officers and trustees; (4) Flamm has assumed the position of sole controlling trustee of Aldecress which has "a gross annual income in excess of the sum of $400,000.00 through membership, dues, operation of its restaurant, swimming pool, golf range, sport shop and the sale of liquor at its bars"; (5) Flamm, his servants and agents, "have diverted the assets and property of the Aldecress Country Club and defrauded its membership" by, (a) causing the aforementioned conveyance pursuant to a plan and scheme to divert the assets of Aldecress, (b) "perpetrating in office the officers and trustees" of Aldecress, (c) "imposing themselves upon said corporation for their personal gain and deriving large salaries and income therefrom without the lawful authority of the membership," (d) "deriving other personal benefits and things of value such as eating at its restaurants, receiving refreshments without charge and membership privileges," (e) causing Aldecress "to make substantial permanent capital improvements to the real estate owned by the Donmor Realty Corporation," (f) "illegally avoiding the payment of income taxes to the Bureau of Internal Revenue of the United States of America on income diverted to Donmor Realty Corporation, rightfully belonging to Aldecress Country Club, a non-profit corporation," (g) "failing to render an annual statement of receipts and disbursements or any other form of accounting to the membership of its vast income and profit, notwithstanding a demand," (h) "treating and mishandling the business affairs of the Aldecress Country Club as if the

same were his own"; (6) the action is brought "to enforce the rights of the defendant, Aldecress Country Club, because the said defendant has failed to enforce the same"; (7) on December 2, 1953 the plaintiff mailed a letter to Aldecress charging it with the allegations set forth in the complaint and demanding an accounting of the income and profit belonging to him and the other members and on December 2, 1953 he sent a telegram "for an accounting of the commercial enterprises and diversion of assets"; (8) on November 15, 1953 he mailed a letter to all other members of Aldecress known to him, "calling to their attention the diversion of assets and profit derived by the defendants and their failure to hold elections and account."

The complaint demanded judgment that the defendants answer "and render an accounting of all sums of money or things of value belonging to the Aldecress Country Club"; that judgment be entered for the amount found due to Aldecress; that a receiver be appointed; that Aldecress be dissolved and reorganized under the General Corporation Act; that Aldecress and Donmor account to all the members of Aldecress "for their lawful share of the profits, income or assets"; and that such other relief as may be equitable and just be granted. The complaint bore a short verification by the plaintiff which stated that the "statements contained therein are true to the best of my knowledge, information and belief."

On February 10, 1954 the Chancery Division directed that a list of the members of Aldecress be furnished to the plaintiff's attorney who was directed to mail to each of the members a notice of the pendency of the plaintiff's action, together with a copy of his complaint. The order contained a provision that the list of members was "to be used for no other purpose." Thereafter the defendants moved for an order dismissing the plaintiff's complaint because it failed to meet the requirements of R.R. 4:36-2 and failed to state a claim upon which relief could be granted. On March 9, 1954 the trial judge addressed a letter to counsel for the parties which concluded as follows:

"Assuming for the purpose of this motion the truth of the allegation of the complaint that the trustees of Aldecress Country Club were not properly chosen and were the puppets of the defendant Donald J. Flamm, the plaintiff would be relieved from the necessity of appealing to the trustess for action. But that would not relieve the plaintiff from the duty of seeking aid from the membership body. This, so far as the complaint discloses, he failed to do. Additionally, the verification is on information and belief.

The complaint is defective and will be stricken."

Under date of March 12, 1954 the plaintiff addressed a notice that he would move for an order permitting the filing of an amended complaint in the revised form annexed thereto. Paragraph (8) of the amended complaint set forth that on November 15, 1953 the plaintiff had mailed a letter to all other members of Aldecress known to him, calling to their attention the diversion of assets and profit derived by the defendants and their failure to hold elections and account; and having so informed members whose names he at the time knew, he made no other efforts to secure from the members such action as he desired since he deemed it unnecessary and futile to make such demand for the following reasons: (a) he had requested a membership list from the secretary of Aldecress but such list had been refused to him, (b) he had requested a copy of the by-laws of Aldecress from its officers and trustees and it had been refused to him, (c) not knowing the contents of the by-laws he believed that a meeting of the members called to elect new trustees might well have been futile, (d) and he believed that a majority of the members were hand-picked by Flamm or the other defendants who were subservient to him and their memberships were cancellable at the behest of Flamm. He asserted that these "facts are borne out by the fact that certain members whom the plaintiff knows, are afraid to cooperate with him because of the possibility that they may lose their membership and dues which they have paid in advance for the current year." The affidavit annexed to the amended complaint asserted that the plaintiff did "hereby verify on my own personal knowledge all allegations set forth therein except such allegations as are specifically

alleged to be on information and belief. Such allegations so alleged to be on information and belief I believe them to be true."

On March 19, 1954 the Chancery Division entered an order which, after setting forth that the court had determined that the complaint was defective in that it failed to allege that the plaintiff had sought aid from the membership body as required by R.R. 4:36-2 and was not properly verified as required by the same rule, granted the defendants' motions and directed that the complaint be dismissed. On the same day a further order was entered which denied the plaintiff's motion for leave to file an amended complaint. Thereafter the plaintiff filed notice of appeal to the Appellate Division from the orders dismissing the complaint and denying leave to file the amended complaint. We certified his appeal on our own motion under R.R. 1:10-1.

The primary question presented by the parties bears on the effect to be given to the provision in R.R. 4:36-2 that a shareholder's complaint seeking to enforce a secondary right must be set forth with particularity "the efforts of the plaintiff to secure from the managing directors or trustees and, if necessary, from the shareholders such action as he desires, and the reasons for his failure to obtain such action or the reasons for not making such effort." Since the quoted language is identical with and was taken from Federal Civil Rule 23(b), we shall review briefly the history and interpretation of the federal rule for such aid as might be furnished in reaching a just and proper construction of our own rule. See Fritts v. Kuhl, 51 N.J.L. 191, 199 (Sup. Ct. 1889); Urian v. Urian, 31 N.J. Super. 608, 619 (App. Div. 1954); Mayflower ...


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