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Valle v. North Jersey Automobile Club

Decided: August 24, 1973.

ELMO G. VALLE AND ODETTE SCHIELKE, PLAINTIFFS,
v.
NORTH JERSEY AUTOMOBILE CLUB, A MUTUAL ASSOCIATION INCORPORATED IN ACCORDANCE WITH TITLE 15 OF THE LAWS OF THE STATE OF NEW JERSEY, AND FLOYD HUGHES, ALEXANDER PATTERSON, PETER CALCIA AND WALTER D. VAN RIPER, AS OFFICERS AND DIRECTORS OF NORTH JERSEY AUTOMOBILE CLUB, AND FLOYD HUGHES, ALEXANDER PATTERSON AND PETER CALCIA, INDIVIDUALLY, AUTO CLUB AGENCY OF HUDSON COUNTY, A CORPORATION OF THE STATE OF NEW JERSEY, DONALD HUGHES, ALEXANDER PATTERSON, JR., WILLIAM HOLLRITT AND CARLETON H. RITTER, DEFENDANTS. WILLIAM RICCARDO, PLAINTIFF-INTERVENER, V. JAMES T. WHITE, DEFENDANT ON COMPLAINT OF INTERVENER



Kole, J.s.c.

Kole

[125 NJSuper Page 305] Plaintiffs challenge the organizational procedures of North Jersey Automobile Club ("NJAC" or "club"), essentially on the ground that as members they have been foreclosed from a voice in the election of directors as a result of certain by-law provisions. Additionally, plaintiffs attack the acquisition in December 1951, over 20 years ago, of the Fletcher Insurance Agency, now Automobile Club Agency of Hudson County ("Hudson"), by four of NJAC's directors and the operation thereof for the benefit of the directors until November 1971. At that time, while this action was pending, Hudson was turned over by the directors without compensation to NJAC. With respect to the latter

claim, plaintiffs seek an acounting of the profits derived from Hudson and the removal of the directors who have so profited.

Defendant NJAC is a nonprofit membership corporation organized under Title 15 of the New Jersey Statutes and operating under a franchise from the American Automobile Association. Its essential object is to provide automobile road service and travel information to its membership which presently totals over 100,000. For such benefits the member pays an annual fee and agrees to be bound by the charter and by-laws of NJAC.

Plaintiffs are all members of NJAC. Elmo Valle had been a member since 1952, for over 18 years when this suit was started. He served as a director from 1965 to 1970. He has also been retained as an accountant by both NJAC and HUDSON. Odette Schielke has been a member of NJAC from 1969. William Riccardo, a member since 1965, was granted leave to intervene as a plaintiff after the action had been commenced by the two above-mentioned plaintiffs, seeking substantially the same relief.

I

THE FORM OF THE ACTION

This action was designated as a class action under R. 4:32-1 by order dated January 31, 1972, with Riccardo representing the class of members of NJAC. After the close of all the evidence, defendants challenged this designation insofar as the action involves an alleged breach of duty by certain directors of defendant NJAC. Defendants contend that this portion of the action must properly be viewed as a shareholder's derivative suit.

Prior orders in a case are, of course, normally considered "the law of the case" and are not lightly modified or set aside. In the present situation, however, R. 4:32-2(a) specifically provides that an order determining the maintainability

of a class action may be altered or amended before the decision on the merits.

In considering the merits of defendants' contention it must be recognized that there is a real substantive difference between a derivative cause of action by shareholders to enforce derivative or secondary rights under R. 4:32-5 and a claim asserted in a class action to enforce primary rights under R. 4:32-1 to 4:32-4, inclusive.*fn1 In the former the alleged wrong was committed against the corporate entity. Any recovery by the representative plaintiff inures to the corporation's benefit, not the plaintiff's. In the class action the representative plaintiff has been directly harmed and sues to redress his grievance and those of all shareholders similarly situated. An example of this latter category is the action which arises when a class of preferred stock has been wrongfully redeemed. The holders of such stock are directly affected. They may sue individually or through a representative in a class action. Conversely, the most common example of a derivative cause of action is wrongdoing by directors or officers that is alleged to have depleted the corporate treasury in some way. The cause of action belongs to the corporation, not the shareholders. As the wrongdoing officers usually are in control of the corporation, enabling them to suppress any corporate effort to remedy such wrong, equity has permitted shareholder derivative suits to prevent a failure of justice. See 13 Fletcher Cyc. Corporations (perm. ed. 1970), § 5908 et seq., at 279 et seq. ; 3B Moore's Federal Practice, § 23.1.16(1); Weiner v. Winters, 50 F.R.D. 306 (D.C.S.D.N.Y. 1970); Publishers Appendix 3, " Advisory

Committee's Note to Federal Rule on Class Action," N.J. Court Rules (1972 ed., Gann, at 981-982).*fn2

That part of the present action which alleges a breach of trust by defendant directors in acquiring and operating Hudson and seeks their removal therefor seems clearly to involve a cause of action which reposes in the corporation NJAC, not its members. No individual member or class of members has been directly injured. Rather, defendants are said to have wrongfully usurped a "corporate opportunity." In such a case there can be no doubt that the cause of action is primarily that of the corporation.

Accordingly, I conclude that the breach of trust allegations made by plaintiffs constitute a derivative claim and should not have been allowed to proceed as a class action. For purposes of this decision, then, the claim must be considered as having been brought in the form of a shareholder's derivative suit under R. 4:32-5.

R. 4:32-5, "Derivative Action by Shareholders," provides as follows:

In an action brought to enforce a secondary right on the part of one or more shareholders in an association, incorporated or unincorporated, because the association refuses to enforce rights which may properly be asserted by it, the complaint shall be verified and allege that the plaintiff was a shareholder at the time of the transaction of which he complains, or that his share thereafter devolved on him by operation of law. * * *

There can be no question but that the term "shareholder," as employed in R. 4:32-5, includes a "member" of

a nonprofit corporation who seeks to proceed on a derivative cause of action. Leeds v. Harrison, 7 N.J. Super. 558, at 570 (Ch. Div. 1950), rev'd on other gds., 9 N.J. 202 (1952). See also, Escoett v. Aldecress Country Club, 16 N.J. 438 (1954), wherein another provision of the derivative suit rule (then R.R. 4:36-2) was in issue. Implicit in the determination of ...


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