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LIPPMANN v. HYDRO-SPACE TECH.

November 25, 1964

David LIPPMANN, Plaintiff,
v.
HYDRO-SPACE TECHNOLOGY, INC., et al., Defendants



The opinion of the court was delivered by: WORTENDYKE

In this action, seeking both money damages and equitable relief, the plaintiff, a resident of the State of Texas, invokes the jurisdiction of this Court by reason of his diverse citizenship from that of the twelve defendants, and the alleged involvement of the jurisdictional minimum required under 28 U.S.C. § 1332(a)(1). The defendants are Hydro-Space Technology, Inc. (hereinafter Hydro-Space), its former president, Imperial '400' National, Inc. (hereinafter Imperial), Imperial's affiliate Four Hundred Construction Company (hereinafter Four Hundred), six former directors of Hydro-Space, the Lithium Corporation of America, Inc. (hereinafter Lithium) and its president, who also had been chairman of the board of Hydro-Space. The voluminous but unverified complaint is in three counts; the allegations of the preceding count or counts having been incorporated by reference in each succeeding count. All of the counts seek damages from the defendants, collectively, in the sum of one million dollars. In the first count, in addition to monetary damages, the plaintiff seeks various forms of equitable relief. *fn1"

The first count of the complaint, in summary, makes the following allegations. Plaintiff is and was the holder of 4,000 shares of the common stock of Hydro-Space. Plaintiff bought his shares in July of 1961, at a time when defendant Lithium owned more than 50% Of the Hydro-Space stock, and instituted a suit against Hydro-Space and Lithium (infra) in the Chancery Division of the Superior Court of New Jersey in 1962. After the dismissal of that action in December, 1962, Lithium sold its controlling interest in Hydro-Space to Four Hundred at the price (allegedly inflated) of $ 1.15 a share, payable in installments over two years. Imperial, which controlled Four Hundred, then installed its own directors of Hydro-Space (six of the individual defendants) who disposed of some of its assets, and thereafter, in 1963, directed the corporation to sell, with stockholder approval, all of its remaining assets to Imperial (which controlled Four Hundred, the majority shareholder), in exchange for shares of Imperial, which were then distributed to stockholders of Hydro-Space in exchange for their stock. (Hydro-Space was then dissolved in May, 1963.) Plaintiff claims that he, as a minority stockholder, was damaged by the foregoing conduct, which he alleged constituted a 'fraud, conspiracy and cheat' in the following respects: (1) the sale of the 4,000 shares to plaintiff by Lithium was effected by means of misrepresentations, non-disclosure of facts and fraud (all unspecified) in a prospectus dated July 19, 1961; (2) Hydro-Space was managed for the sole benefit of Lithium, its majority stockholder, in that Lithium's losses were assumed by Hydro-Space and its officers and directors had conflicting interests and favored Lithium in managing Hydro-Space, all in violation of the fiduciary duty to minority stockholders; and (3) in the prior litigation in the New Jersey courts, two of the individual defendants (the presidents of Lithium and of Hydro-Space) presented affidavits to the court, that Hydro-Space was in satisfactory condition, which were false and perjurious in that, during the pendency of the New Jersey action, all of the defendants (including the affiants) were engaged in a conspiracy to siphon off the valuable assets of Hydro-Space for their own benefit by curtailing the operation of Hydro-Space and thereafter misrepresenting to its shareholders that it would be in Hydro-Space's best interests to sell its assets to Imperial, and the New Jersey courts relied on those affidavits and dismissed plaintiffs' action, at which time defendants proceeded with and completed their alleged conspiracy by having Hydro-Space sell its assets to Imperial in exchange for Imperial stock 'having only a speculative, contingent and uncertain value' which was then distributed to stockholders of Hydro-Space.

 Incorporating by reference the allegations of the first count, the second count charges that the defendants, by means of the conduct complained of, offered and sold securities in violation of 15 § U.S.C. 77a et seq., and used the mails and other instrumentalities of interstate communication in consummating a conspiracy to sell such securities in violation of 15 U.S.C. § 77q.

 The third count incorporates the allegations of the two preceding counts by reference, and charges that the acts and omissions of the defendants constituted wilful, intentional, malicious and deliberate fraud, for which punitive damages are sought.

 This case is a supplemental effort of plaintiff to that made in his unsuccessful prosecution of an action in which he and other minority stockholders of Hydro-Space sought generally similar relief in the Chancery and Appellate Divisions of the Superior Court of New Jersey, against Hydro-Space, Lithium, their respective presidents, and others not defendants here. See Lippmann v. Hydro-Space Technology, Inc., App.Div.1962, 77 N.J.Super. 497, 187 A.2d 31. The trial court in that case was affirmed in dismissing the complaint upon defendants' motion for the reason that '* * * the complaint, upon any theory, failed to state a claim upon which relief could be granted under the general equity powers of the court.' *fn2" (p. 510, 187 A.2d p. 38).

 The defendants in the action before me have moved for dismissal of the complaint. The defendants Lithium and its president move to dismiss under F.R.Civ.P. 12 upon the asserted ground that the complaint fails to state a claim upon which relief can be granted in that (a) the complaint seeks to enforce a secondary right, on the part of a corporate stockholder, but fails to comply with the requirements of F.R.Civ.P.23, (b) the charges of fraud and other wrongdoing made in the complaint are vague and conclusory and stated with insufficient particularity, (c) the complaint fails to allege that the plaintiff owns 10% Of the stock of Hydro-Space as required by N.J.S.A. 14:14-3 and fails to allege the statutory insolvency of the corporation required to justify relief under N.J.S.A. 14:14-2, (d) no facts are set forth warranting the appointment of a receiver, (e) the complaint fails to allege facts stating a primary cause of action to which the appointment of a receiver might be appropriately ancillary, (f) the complaint fails to state a statutory cause of action under the provisions of any Federal or State law.

 The remaining defendants (with the single exception of the president of Hydro-Space who, although served with summons, has merely entered an appearance in the current action) have adopted the grounds urged by Lithium and its president upon their motion to dismiss, and additionally contend that the complaint should be dismissed for improper venue, and for laches, and, in the alternative, that the defendant Hydro-Space is entitled to security for costs and expenses as provided by N.J.S.A. 14:3-15.

 The foregoing motions were duly briefed on behalf of plaintiff and all moving parties and argued orally before this Court on October 26, 1964. At the conclusion of the oral argument, the Court reserved decision. This opinion embodies the Court's decision upon the motions.

 We first consider the contentions of all moving defendants, under F.R.Civ.P. 12(b), that the complaint fails to state a claim upon which relief can be granted; bearing in mind that a complaint should not be dismissed for that reason unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief, Hughes v. Local No. 11 of International Ass'n of Bridge, etc. Workers, 3 Cir. 1961, 287 F.2d 810, 814, cert. den. 1961, 368 U.S. 829, 82 S. Ct. 51, 7 L. Ed. 2d 32.

 As described above, plaintiff's complaint in substance alleges the following: (1) the sale to plaintiff of stock by means of a fraudulent prospectus in July, 1961; (2) mismanagement of Hydro-Space for the benefit of Lithium in breach of fiduciary duties to minority stockholders; (3) deceit in the presentation of false and perjurious affidavits to the New Jersey courts to obtain and sustain a dismissal of that litigation as part of a conspiracy by all defendants to siphon off Hydro-Space's assets for their benefit, which was successfully accomplished by the sale of assets to Imperial in exchange for its stock which was distributed to

 Hydro-Space's shareholders (the first count); (4) the same conduct alleged in (1) through (3) above constituted violations of 15 § U.S.C. 77a et seq. (the second count); *fn3" and (5) all of the foregoing conduct was done wilfully and maliciously, justifying claim for punitive as well as compensatory damages (the third count).

 With respect to the above-enumerated parts (1) and (2) of the complaint, they are the same allegations which were made in the New Jersey litigation which was dismissed for failure to state a claim on which relief could be granted (see footnote 2, supra). Parts (1) and (2) allege that plaintiff bought his stock as a result of a fraudulent prospectus in July, 1961, and that Hydro-Space was managed for the benefit of Lithium in breach of fiduciary duties owed to minority stockholders, at the time when Lithium was the majority stockholder of Hydro-Space.

 In the New Jersey action, in support of its motion to dismiss the complaint, Hydro-Space submitted, in March 1962, an affidavit by its president, N. David Fulton (also a defendant here). Fulton's affidavit stated, inter alia, that in May of 1961 Lithium acquired all of the issued and outstanding stock of Hydro-Space in exchange for certain assets. Subsequently, pursuant to a prospectus dated July 19, 1961, a public offering was made of 300,000 shares of Hydro-Space common, of which 145,000 shares were offered by Lithium as a selling stockholder, and 155,000 shares were offered by Hydro-Space as an original issue. The prospectus that Lithium would own 57.4% Of the outstanding stock of Hydro-Space. On the date of Fulton's affidavit there were issued and outstanding 705,000 shares of the common stock of Hydro-Space, of which Lithium was the holder of 405,000 shares, constituting the 57.4% Above stated. The stock ownership of the plaintiffs in the New Jersey action aggregated 4,900 shares, representing less than 7/10ths of 1% Of the issued and outstanding stock of Hydro-Space. The affidavit ...


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