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STELLA v. KAISER

August 2, 1948

STELLA
v.
KAISER et al.



The opinion of the court was delivered by: LEIBELL

The plaintiff, Michael Stella, suing on behalf of himself and all other stockholders of Kaiser-Frazer Corporation, commenced this action by the filing of a complaint in this Court on May 10, 1948. He names ten individuals and the Kaiser-Frazer Corporation as defendants. The individuals are all directors of the corporation and also hold important offices. This is a derivative stockholders suit brought on behalf of the corporation which is named as a nominal defendant, but is a necessary party to the action. The individual defendants are charged with having violated certain provisions of the Securities Act of 1933, 15 U.S.C.A. § 77a et seq., and of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a et seq. in the purchase on behalf of the corporation of 186,200 shares of the corporation's stock on the New York Curb Exchange and other exchanges at 13 1/2 on February 3, 1948. It is also charged that in making the purchases the individual defendants violated their duty as fiduciaries 'to manage the corporation's affairs with due care and with due regard to the laws of the land' and that the actions of the said defendants 'constituted a deliberate, or in the alternative, a negligent waste of the funds' of the corporation.

Certain of the individual defendants (G. G. Sherwood, E. E. Trefethen, Jr., Henry J. Kaiser and Walston S. Brown) have moved -- 'for an order pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure (28 U.S.C.A.) dismissing the action upon the ground that the Court lacks jurisdiction of the subject matter in that the action does not involve a controversy arising under the Constitution and laws of the United States and is not wholly between citizens of different States.

'(They) further move under Rule 12(b)(6) to dismiss the cause or causes of action alleged in paragraphs '2', '23', '24', '25', '26' and '27' of the complaint for failure to state a claim under which relief can be granted; in the alternative, they move under Rule 12(f) to strike said paragraphs of the complaint as immaterial.'

 The enumerated paragraphs of the complaint related to the charge that the defendants violated the Acts of 1933 and 1934.

 The defendants, G. G. Sherwood, E. E. Trefethen, Jr., and Henry J. Kaiser further moved -- 'for an order pursuant to Rule 12(b) (2), (3) and (5) of the Federal Rules of Civil Procedure setting aside, vacating and declaring null and void the purported service upon them, and dismissing the action upon the following grounds:-

 '1. Under Rule 4(f), the Court lacks jurisdiction of the person of said defendants in that the purported service of process was effected in California and the complaint does not state a cause of action under a statute of the United States providing for service beyond the territorial limits of the State of New York;

 '2. The action is in the wrong District because (a) the jurisdiction of this Court is invoked solely on the ground that the action arises under the Constitution and laws of the United States, and (b) said defendants are inhabitants of the State of California;

 '3. Service of process was insufficient in that said defendants have not peen served with the summons in the action in any manner and more particularly in the manner prescribed by Rule 4(d) (1)'.

 Subsequently the attorneys stipulated --

 '1. The motion by the defendants, Sherwood, Trefethen and Henry J. Kaiser for vacature of the service of process upon them the ground that service of process was insufficient under Rules 12(b) (5) and 4(d) (1) is withdrawn.'

 In effect the said four individual defendants move to dismiss the complaint under Rule 12(b) (1) upon the ground that the court lacks jurisdiction of the subject matter of the action; and move to dismiss certain paragraphs of the complaint (charging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934) as failing to state a claim under which relief can be granted, or in the alternative they move to strike said paragraphs as immaterial. Other individual defendants, as served, are deemed to have joined in these motions. The individual defendants, who are residents of California and were served with a copy of the complaint at Oakland, also move to vacate the service of process for lack of jurisdiction over their persons and for improper venue.

 If this court has jurisdiction of the subject matter of the complaint which charges violation of the Securities Act of 1933 and the Securities Exchange Act of 1934 then the process of the court could properly be served on Sherwood, Trefethen and Kaiser in California. Sec. 27 of the Securities Exchange Act of 1934, Title 15 U.S.C.A. § 78aa, and Sec. 22(a) of the Securities Act of 1933, Title 15 U.S.C.A. § 77v (a). *fn1" The venue question would also be eliminated, because the transactions in the Kaiser-Frazer stock on February 3, 1948 took place on the New York Curb Exchange (within the Southern District) and on other exchanges

 The Kaiser-Frazer Corporation, through separate counsel, has moved-'for an order, pursuant to Rule 12(b) (1) and (6) of the Federal Rules of Civil Procedure, setting aside, vacating and declaring null and void the purported service upon the defendant, Kaiser-Frazer Corporation, and dismissing the action upon the following grounds:-

 '1. that the complaint fails to state a claim upon which relief can be granted; and

 '2. that the court lacks jurisdiction over the subject matter in that the action does not involve a controversy under the Constitution and laws of the United States, although purporting so to do, and said defendant is not amenable to process in this district'.

 The corporation was organized under the laws of Nevada. Its principal place of business is at Willow Run, Michigan. A copy of the summons in this action was served on an Assistant Secretary of the corporation at Willow Run. A vice president was also served with a copy of the summons and complaint in this Sourthern District of New York. The president of the corporation makes an affidavit that it is not engaged in business in New York, is not authorized to do business in New York and has not designated any one in New York to receive service of process. No facts are set forth in the affidavits of the parties showing the particulars as to the corporation's business activities within this district. However, if the court concludes that the court has jurisdiction of the subject matter of the complaint and that it charges violation of the Securities Act of 1933 or the Securities Exchange Act of 1934 to the damage of the corporation, then process in the action was properly served in Willow Run and the court would have jurisdiction of the person of the corporation. In the consideration of the issues presented by these motions, an analysis of the complaint is the first step.

 The complaint alleges: the residences of the parties (Par. 1); that-'This Court has jurisdiction by virtue of Section 27 of the Securities Exchange Act of 1934 (Title 15, Sec. 78aa, U.S.C.A.), Section 22(a) of the Securities Act of 1933 (Title 15, Sec. 77v (a), U.S.C.A.), and Section 24 of the Judicial Code, as amended, (Title 28, Sec. 41(8), U.S.C.A. (now Sec. 1337))' (Par. 2); that plaintiff was a stockholder of Kaiser-Frazer at the time the transactions complained of occurred, and that he still is a stockholder and brings this action on behalf of the corporation and the action is not a collusive one to confer jurisdiction on this court (Par. 3); that all the defendants were and are directors and hold certain specified offices in the corporation (Par. 4); that the Kaiser-Frazer Corporation was organized on August 5, 1945, that Kaiser and Frazer were its active promoters and supplied its initial capital through their various business enterprises, and that the directors and officers were selected by Kaiser and Frazer and most of them were former business associates (Par. 5); that since the organization of the corporation the defendants Kaiser and Frazer have either directly or indirectly owned or held control of at least a substantial minority of its stock, about 30% (Par. 6); that Kaiser and Frazer dominate and control the corporation, its officers and directors, and were the primary actors 'in causing to be done the transactions hereinafter complained of', which the other individual defendants participated in and approved of (Pars. 7 and 8; that on November 30, 1947 Kaiser-Frazer owed the Bank of America National Trust and Savings Association a balance of $ 11,280,000 on certain notes which were guaranteed jointly and severally by Joseph W. Frazer and by Henry J. Kaiser Company, The Kaiser Company, and Kaiser Engineers, Inc., corporations substantially owned and controlled by Kaiser; that the notes were payable in monthly installments of $ 360,000 beginning December 1, 1947, with the remaining balance payable on August 1, 1949, and that they were paid off in full by Kaiser-Frazer Corporation prior to December 31, 1947 (Par. 9); that Kaiser and Frazer caused the notes to be paid to relieve their interests from liability under the guarantee and that in doing so they depleted the corporation's working capital to such an extent that it required new financing, and that in January 1948 the management decided to issue and sell to the public new shares of stock to build up working capital and to purchase certain items of plant and property (Pars. 10 and 11).

 The complaint further alleges that in January 1948 the management entered into negotiations with certain underwriters, Otis & Company, First California Company and Allen & Company in which Cyrus Eaton took the lead for the underwriters; that an underwriting contract was signed by which they agreed to purchase from Kaiser-Frazer 1,500,000 shares of new stock and a registration statement was filed with the Securities and Exchange Commission, which was not complete and was not permitted to become effective until February 3rd after 3 P.M., the closing time of the New York Curb Exchange (Pars. 12, 12 and 14); that during the year 1947 and up to February 2, 1948 the price of the corporation's stock on the Curb Exchange had fluctuated from a high of $ 18.25 to a low of $ 5.00 a share and that the prices of the stock on the other exchanges (San Francisco, Los Angeles, Detroit and Boston) were at all times substantially identical with the Curb prices, that the corporation was confronting difficulties because of the nationwide shortage of steel and other materials, in addition to its difficulties as a newcomer in the automobile business, and was forced to pay higher prices and made some uneconomic transactions, which put the corporation in a poor competitive position and which would have to be disclosed in any prospectus on the new stock issue (Pars. 15 and 16); that the management recognized that the public would not purchase the new shares at a price in excess of the market for the existing shares and the market was watched by both the underwriters and management, that it was agreed that when the market was satisfactory the new shares would be issued at or about the market price, that on February 2, 1948 the stock closed on the New York Curb at 13 1/2 (6800 shares had been sold that day at prices ranging from 13 3/8 to 13 3/4), that management and the underwriters agreed that when the market opened February 3d the Kaiser-Frazer Corporation would enter firm bids at 13 1/2 and purchase all the stock offered at that price, that it was planned that the registration statement for the new stock would become effective after the close of the Curb market on February 3d, that before the registration statement and prospectus could become ...


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