ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 72-798).
Seitz, Chief Judge, Gibbons and Garth, Circuit Judges.
Plaintiffs, stockholders in American Telephone and Telegraph Company ("AT&T"), brought a stockholders' derivative action in the Eastern District of Pennsylvania against AT&T and all but one of its directors. The suit centered upon the failure of AT&T to collect an outstanding debt of some $1.5 million owed to the company by the Democratic National Committee ("DNC") for communications services provided by AT&T during the 1968 Democratic national convention. Federal diversity jurisdiction was invoked under 28 U.S.C. § 1332.
Plaintiffs' complaint alleged that "neither the officers or directors of AT&T have taken any action to recover the amount owed" from on or about August 20, 1968, when the debt was incurred, until May 31, 1972, the date plaintiffs' amended complaint was filed. The failure to collect was alleged to have involved a breach of the defendant directors' duty to exercise diligence in handling the affairs of the corporation, to have resulted in affording a preference to the DNC in collection procedures in violation of § 202(a) of the Communications Act of 1934, 47 U.S.C. § 202(a) (1970), and to have amounted to AT&T's making a "contribution" to the DNC in violation of a federal prohibition on corporate campaign spending, 18 U.S.C. § 610 (1970).*fn1
Plaintiffs sought permanent relief in the form of an injunction requiring AT&T to collect the debt, an injunction against providing further services to the DNC until the debt was paid in full, and a surcharge for the benefit of the corporation against the defendant directors in the amount of the debt plus interest from the due date. A request for a preliminary injunction against the provision of services to the 1972 Democratic convention was denied by the district court after an evidentiary hearing.
On motion of the defendants, the district court dismissed the complaint for failure to state a claim upon which relief could be granted. 364 F. Supp. 648 (E.D. Pa. 1973). The court stated that collection procedures were properly within the discretion of the directors whose determination would not be overturned by the court in the absence of an allegation that the conduct of the directors was "plainly illegal, unreasonable, or in breach of a fiduciary duty . . . ." Id. at 651. Plaintiffs appeal from dismissal of their complaint.
In viewing the motion to dismiss, we must consider all facts alleged in the complaint and every inference fairly deductible therefrom in the light most favorable to the plaintiffs. A complaint should not be dismissed unless it appears that the plaintiffs would not be entitled to relief under any facts which they might prove in support of their claim. Judging plaintiffs' complaint by these standards, we feel that it does state a claim upon which relief can be granted for breach of fiduciary duty arising from the alleged violation of 18 U.S.C. § 610.
The pertinent law on the question of the defendant directors' fiduciary duties in this diversity action is that of New York, the state of AT&T's incorporation.*fn2 See Perlman v. Feldmann, 219 F.2d 173, 175 (2d Cir.), cert. denied, 349 U.S. 952, 99 L. Ed. 1277, 75 S. Ct. 880 (1955); Kroese v. General Castings Corporation, 179 F.2d 760, 765 (3d Cir.), cert. denied, 339 U.S. 983, 94 L. Ed. 1386, 70 S. Ct. 1026 (1950); Restatement (Second) of Conflicts § 309 (1971). The sound business judgment rule, the basis of the district court's dismissal of plaintiffs' complaint, expresses the unanimous decision of American courts to eschew intervention in corporate decision-making if the judgment of directors and officers is uninfluenced by personal considerations and is exercised in good faith. Pollitz v. Wabash Railroad Co., 207 N.Y. 113, 100 N.E. 721 (1912); Bayer v. Beran, 49 N.Y.S.2d 2, 4-7 (Sup. Ct. 1944); 3 Fletcher, Private Corporations § 1039 (perm. ed. rev. vol. 1965). Underlying the rule is the assumption that reasonable diligence has been used in reaching the decision which the rule is invoked to justify. Casey v. Woodruff, 49 N.Y.S.2d 625, 643 (Sup. Ct. 1944).
Had plaintiffs' complaint alleged only failure to pursue a corporate claim, application of the sound business judgment rule would support the district court's ruling that a shareholder could not attack the directors' decision. See United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 61 L. Ed. 1119, 37 S. Ct. 509 (1917); Clifford v. Metropolitan Life Insurance Co., 264 App. Div. 168, 34 N.Y.S.2d 693 (2d Dept. 1942); 13 Fletcher, Private Corporations § 5822 (perm. ed. rev. vol. 1970). Where, however, the decision not to collect a debt owed the corporation is itself alleged to have been an illegal act, different rules apply. When New York law regarding such acts by directors is considered in conjunction with the underlying purposes of the particular statute involved here, we are convinced that the business judgment rule cannot insulate the defendant directors from liability if they did in fact breach 18 U.S.C. § 610, as plaintiffs have charged.
Roth v. Robertson, 64 Misc. 343, 118 N.Y.S. 351 (Sup. Ct. 1909), illustrates the proposition that even though committed to benefit the corporation, illegal acts may amount to a breach of fiduciary duty in New York. In Roth, the managing director of an amusement park company had allegedly used corporate funds to purchase the silence of persons who threatened to complain about unlawful Sunday operation of the park. Recovery from the defendant director was sustained on the ground that the money was an illegal payment:
For reasons of public policy, we are clearly of the opinion that payments of corporate funds for such purposes as those disclosed in this case must be condemned, and officers of a corporation making them held to a strict accountability, and be compelled to refund the amounts so wasted for the benefit of stockholders. . . . To hold any other rule would be establishing a dangerous precedent, tacitly ...