Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

TABAS v. MULLANE

January 10, 1985

HARRIETTE TABAS, Plaintiff,
v.
ROBERT E. MULLANE, et al., Defendants; ELI BALLAN and HARRY LEWIS, Plaintiffs, v. ROBERT E. MULLANE, et al., Defendants; ISABEL HEFFLER, Plaintiff, v. WILLIAM T. O'DONNELL, SR., et al., Defendants



The opinion of the court was delivered by: BROTMAN

 Plaintiffs bring this derivative action under the court's diversity jurisdiction, 28 U.S.C. § 1332. Defendants move to dismiss plaintiffs' petition for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendants also move, in the alternative, to stay this proceeding pending the disposition of a similar action in the Delaware Chancery Court. The court heard oral argument on these motions on November 16, 1984. Having considered the submissions and arguments of the parties, and for the reasons provided below, this court will deny defendants' motion for a stay and grant and deny, in part, defendants' motion to dismiss.

 Procedural History

 This is a consolidated derivative complaint. Plaintiffs Harriette Tabas, on January 11, 1984, Eli Ballan and Harry Lewis, on January 31, 1984, and Isabel Heffler, on February 29, 1984, filed derivative actions against nominal defendant Bally Manufacturing Corporation ("Bally") and defendants William T. O'Donnell, Sr., Robert E. Mullane, Walter Wechsler, James M. Rochford, James R. Cowan, George N. Aronoff, and Patrick L. O'Malley, Officers and/or Directors of Bally. On August 10, 1984, plaintiffs filed a consolidated derivative action complaint against Bally, O'Donnell, and the named director defendants.

 In summary, plaintiffs allege that defendants breached their fiduciary duty to Bally and its shareholders and wasted the corporation's assets by embarking on a scheme to enrich O'Donnell. The three principal elements of this scheme are alleged to include:

 (1) On January 6, 1984, the director defendants caused Bally to purchase O'Donnell's Bally stock at $25 per share, for $17.3 million, a premium of approximately 20 percent above the market price and also to purchase his Bally's Park Place stock at $15 per share, which had a market price of 13 1/2 and 14 1/8. Bally's directors approved this plan despite the fact that O'Donnell had previously agreed to divest his stock.

 (2) In 1979, Bally extended O'Donnell's employment for five years and raised his salary, effective January 1, 1980, despite the fact that O'Donnell was under investigation by the Division of Gaming Enforcement of the New Jersey Casino Control Commission ("Commission"). In December 1979, O'Donnell resigned all positions with Bally. In 1981, Bally paid O'Donnell $2,112,000 in settlement of all purported claims he might have made pursuant to his employment contract. Plaintiffs argue that Bally should not have paid O'Donnell, because he breached the agreement by failing to perform the contracted services.

 (3) In July 1983, Bally paid $1.9 million to a partnership in which O'Donnell had a two-sevenths interest, for the purchase of the premises at which its former headquarters were located, as well as an additional $292,000 as a lease termination charge. Plaintiffs allege that Bally received no consideration for this additional lease termination payment because it had already purchased the building and the payment exceeded the annual rent.

 Plaintiffs also filed derivative suits in the Delaware Chancery Court in January and February 1984 and consolidated their Delaware complaint on August 7, 1984. Shareholders have also filed similar actions against defendants in the United States District Court for the Northern District of Illinois.

 Defendants move to dismiss these complaints pursuant to Fed. R. Civ. P. 23.1 for plaintiffs' failure to make demand prior to bringing this derivative action. Plaintiffs argue that defendants are neither disinterested nor independent and their actions are so egregious as to strip them of protection under the business judgment rule and render demand futile. Defendants further move to stay this proceeding pending resolution of defendants' motion to dismiss in the Delaware court.

 I. Motion to Stay This Proceeding

 Defendants argue that the court should stay this action because the consolidated complaint duplicates one previously filed in Delaware, involves the same attorneys, seeks identical relief and requires the determination of Delaware law. For a discussion as to the legal standards for granting a stay in deference to ongoing state proceedings, we turn to the Supreme Court's analysis in Will v. Calvert Fire Insurance Co., 437 U.S. 655, 57 L. Ed. 2d 504, 98 S. Ct. 2552 (1978).

 It is well established that "the pendency of an action in state court is no bar to proceedings concerning the same matter in the Federal Court having jurisdiction." Will, supra at 662, quoting McClellan v. Carland, 217 U.S. 268, 282, 54 L. Ed. 762, 30 S. Ct. 501 (1910). There is no question that the court has jurisdiction over this matter pursuant to its diversity power. See 28 U.S.C. § 1332. It is equally well settled that a district court is "under no compulsion to exercise that jurisdiction" where a controversy may be settled more expeditiously in state court. Id. at 662-63, quoting Brillhart v. Excess Insurance Co., 316 U.S. 491, 494, 86 L. Ed. 1620, 62 S. Ct. 1173 (1942).

 The decision as to whether to defer to the state court is "largely committed to the 'carefully considered judgment' of the district court." Id. at 663. The Supreme Court noted that:

 
ordinarily it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in state court and presenting the same issues, not governed by federal law, between the same parties. Gratuitous interference with the orderly and comprehensive disposition of a state court litigation should be avoided.

 Id. at 663-64, quoting Brillhart, supra at 495. It is true, as plaintiff argues, that the Supreme Court emphasized in Colorado River Water Conservation District v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976), "the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them." Id. at 817. The court noted that the language

 
underscores our conviction that a district court should exercise its discretion with this factor in mind, but in no way undermines the conclusion of Brillhart that the decision whether to defer to the concurrent jurisdiction of a state court is, in the last analysis, a matter committed to the district court's discretion.
 
the power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. How this can best be done calls for the exercise of judgment, which must weigh competing interests and maintain an even balance.

 Landis v. North American Company, 299 U.S. 248, 81 L. Ed. 153, 57 S. Ct. 163 (1936).

 Factors which the court should consider and balance in determining whether to stay an action include:

 
(1) ease of access to sources of proof
 
(2) availability of compulsory process for attendance of hostile witnesses
 
(3) the possibility of viewing premises, if appropriate
 
(4) the enforceability of any judgment rendered
 
(5) the efficiency of the litigation
 
(6) the progress of the litigation already commenced in state court, and
 
(7) the applicability of state and/or federal law.

 Gilbane Building Company v. Nemours Foundation, 568 F. Supp. 1085 (D. Del. 1983); ABCKO Music, Inc. v. Beverly Glen Music, Inc., 554 F. Supp. 410 (S.D.N.Y. 1983); National Bank of Detroit v. United States, 1 Cl. Ct. 712 (Cl. Ct. 1983). However, the moving party has the burden to demonstrate sufficient grounds to warrant a stay. Gilbane, supra; Kraftsman Container Corp. v. Finkelstein, 461 F. Supp. 245 (S.D.N.Y. 1978).

 The possibility of multiple suits is greater in the derivative action context than it is in most other types of litigation. See Amdur v. Lizars, 372 F.2d 103 (4th Cir. 1967); Klein v. Walston & Co., 432 F.2d 936, 937 (2nd Cir. 1970). To avoid overburdening defendant corporations, district courts have granted stays only in deference to a previously commenced state court action which can adjudicate the rights of all parties concerned. See Amdur, supra. In Amdur, the Fourth Circuit found a stay warranted where plaintiffs commenced a state action fully ten months prior to the federal suit. The court further found that plaintiffs had aggressively litigated the state action to a point where it was "appreciably more advanced" than the federal action. The parties had conducted numerous hearings, solicited and secured documentation and filed an answer on the merits. The court stressed that by granting a stay under these circumstances, it prevented any undue:

 
inconvenience, loss of time, and expense inflicted upon the corporate defendant, and the danger that its treasury may be depleted by litigation supposedly prosecuted for its benefit.

 Amdur, supra at 107; Ferguson v. Tabah, 288 F.2d 665 (2nd Cir. 1961); Mottolese v. Kaufman, 176 F.2d 301 (2nd Cir. 1949). Despite these policy concerns, the Fourth Circuit still suggested that "should plaintiffs prefer to proceed in federal forum, the District Court may lift its stay order. . . ." Amdur, supra at 108.

 The circumstances in this case do not warrant a stay based on the grounds articulated above. First, no previously filed, significantly litigated, or more advanced state action exists. Plaintiffs filed both their federal and state actions during roughly the same period of time -- January and February 1984. They consolidated their state and federal actions during the same week in August 1984. The defendants' motion to dismiss -- decided by this court today -- has yet to be heard in the state court.

 Defendants have failed to provide this court with any evidence that the state court will be able to adjudicate the rights of all the parties to this action. They merely attach a copy of plaintiffs' state court brief to their own. This brief, however, addresses only the motion to dismiss for failure to make demand and not the ultimate relief sought by the parties. Plaintiffs raise unrebutted allegations that the Delaware court may not be able to adjudicate the rights of defendant O'Donnell, due to lack of in personam jurisdiction.

 An order for expedited discovery has been entered in the state court proceeding. However, only the depositions of defendants Mullane, Aronoff and O'Donnell have been taken. Both parties have entered a stipulation that they can use these depositions in both the federal and state actions. One court has found the presence of such an agreement sufficient to deny a stay in a shareholder derivative action. Kaufman v. Jeffords, 268 F. Supp. 784 (S.D.N.Y. 1967). Defendants make no showing that further prosecution of the federal action will deny them access to sources of proof, hostile witnesses, or any judgments rendered in the future. The court finds, therefore, that defendants offer no evidence that a stay of the federal action will promote the efficient handling of this litigation.

 Finally, the court rejects defendants' arguments that it should defer to the Delaware court for consideration of novel issues of state law. The issues arising in this complaint have been subject to repeated, extensive and thorough analysis by the Delaware courts, most recently in the cases of Aronson v. Lewis, 473 A.2d 805 (Del. Supr. 1984) and Pogostin v. Rice, 480 A.2d 619 (Del. Supr. 1984). The United States Supreme Court has held that:

 
the difficulties of ascertaining what the state courts may hereafter determine the state law to be do not in themselves afford a sufficient ground for a federal court to decline to exercise its jurisdiction to ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.