The opinion of the court was delivered by: CONGER
This is an application of approval of a compromise of a stockholders' derivative action. Notice of the proposed compromise pursuant to Rule 23(c), Federal Rules of Civil Procedure, 28 U.S.C.A., was given to each preferred and common stockholder of record of the company at the close of business on February 16, 1948, and hearing on the proposal was had before me on April 21, 1948.
The action was commenced on June 5, 1946, and, before answer, the defendants Fred F. French Investing Company, Inc. and Fred F. French Operators, Inc. moved before me to dismiss the complaint on the grounds that each of the three alleged claims therein was insufficient, and furthermore was barred by the statute of limitations. Before decision was filed on the motions, the parties applied for approval of the compromise. At the time of such application, I had drafted the opinion which I proposed to file, and I deem it wise to quote it in full in support of my determination to approve the settlement made as fair and equitable to all concerned. The opinion as drafted follows:
'The defendants, Fred F. French Investing Company, Inc. and Fred F. French Operators, Inc. move to dismiss each of the causes of action of the instant complaint upon the grounds (1) that they fail to state a claim upon which relief can be granted, and (2) that the transactions complained of therein are barred by the applicable New York Statutes of Limitations. They further move to dismiss the whole complaint upon the ground that Rule 23(b) of the Federal Rules of Civil Procedure has not been complied with in that the specific allegations required to be set forth in stockholders' derivative suits are alleged merely upon information and belief and the complaint is not properly verified. Finally, defendants move, in the alternative, to strike paragraphs 47 to 54 of the complaint, in the event the third cause of action is not dismissed.
'The plaintiffs move to amend the complaint to include in their second cause of action an alternative prayer for damages for breach of contract.
'The plaintiffs, all residents of States other than New York, sue as stockholders on behalf of and for the benefit of defendant 39 Broadway, Inc. upon three causes of action.
'It appears from the complaint that on or about November 7, 1929, the defendant 39 Broadway, Inc. (hereinafter called 'Broadway') was incorporated by the Fred F. French Investing Company, Inc. (hereinafter called 'Investing') pursuant to a plan and scheme devised by Investing under which Broadway was to sell to the public its stock, consisting of 75,000 shares of 6% cumulative preferred of the par value of $ 100. each and 150,000 shares of common without par value. Each purchaser received in consideration of $ 100. a unit made up of one share of preferred stock and one share of common stock, and Investing received, in accordance with a written sealed underwriting agreement executed between Broadway and Investing, one share of common stock plus the sum of $ 15. for each unit sold.
'It is further alleged that by this method Investing received well over 50% of the total voting stock of Broadway, and was enabled to dominate and control Broadway, free of any voice by the investors.
'The sum of $ 5,285,266.88 was realized from the public marketing of Broadway's stock, $ 5,170,700. being received for stock fully paid and $ 114,566.88 representing payments on subscriptions not fully paid. 51,707 shares of preferred and 51,707 shares of common, all paid up, were issued to investors while 5,001 shares of preferred and 5,001 shares of common remained unissued awaiting completion of payment on installment subscriptions. Investing acquired, according to the agreement, sufficient common stock to match the common stock issued to the public.
'Upon the incorporation of Broadway, Investing caused the former to acquire from Fred F. French Operators, Inc. (hereinafter called 'operators'), a corporation wholly controlled by Investing, a contract for the purchase of the premises at 39 Broadway in New York City at a profit to Operators of $ 290,000.
'Further, it is alleged that all during Broadway's existence, Investing occupied with respect to the fund of $ 5,285,266.88, the affairs and activities of Broadway, conflicting positions calculated to impair its judgment as a fiduciary by acquiring voting control, permitting Operators to profit on the sale of the building, receiving commissions for underwriting the stock issue, appointing the Fred F. French Management Co., Inc. as managing agent of the building, charging fees for bookkeeping work, acquiring substantial participations in the Broadway mortgage, failing to purchase stock representing defaulted subscriptions and accepting its commission on such stock, and failing to cause the dissolution of Broadway when its financial condition became critical.
'All of these things were accomplished, it is alleged, by Investing's domination and control of Broadway through paid employees of Investing who were the incorporators of, and throughout the history of Broadway and still are, the officers and directors of Broadway.
'Upon these facts, the plaintiffs pray (First cause of action) that Investing be ordered to account for and pay $ 5,177,712.77, the amount by which the fund entrusted to it through the sale of stock has been depleted.
'The second cause of action, after repeating many of the allegations of the first, demands that Investing specifically perform the underwriting agreement under the terms of which Investing underwrote and undertook to sell for Broadway, or itself purchase, for the price of $ 100. per unit of one preferred and one common share, so much of the preferred and common stock as might be needed for the purchase by Broadway of the premises at 39 Broadway, the expenses of incorporation, adequate cash working capital, commissions and other expenses. 5,001 of the units so underwritten were only partly paid for by subscribers, Broadway receiving $ 114,566.88 as payment on account instead of the full $ 500,100. Which it would have received had there been no defaults. Investing, nevertheless, received its commissions on these units, and the total of $ 114,566.88 was at least $ 304,870.68 short of the amount required for the purposes set forth in the underwriting agreement.
'The plaintiffs demand that Investing purchase the 5,001 defaulted units and pay therefor the sum of $ 500,100.
'It is with respect to the second cause of action that the plaintiffs ask leave to amend their complaint. This will be dealt with hereafter.
'The third cause of action, repeating and realleging many of the previous allegations of the complaint, demands that Investing and Operators be required to return to Broadway the sum of $ 290,000. the amount of profit made from the sale of 39 Broadway by reason of the concealment and misrepresentation of the interests of Investing and Operators in the property.
'It is alleged that the directors of Broadway acted upon orders of, and under the domination and control of, Investing in accepting the assignment of ...