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Subin v. Goldsmith

June 3, 1955


Author: Frank

Before FRANK and MEDINA, Circuit Judges, and BRENNAN, District Judge.

FRANK, Circuit Judge.

Plaintiff, a stockholder of defendant Julius Kayser & Co., filed a complaint on August 12, 1954, seeking an injunction against that company and the individual defendants who are its directors, from holding a stockholders' meeting to be held on August 20, 1952, to approve a contract for the purchase by Kayser of most of the assets of Diamond Hosiery Corp. Plaintiff moved for a preliminary injunction; the judge denied the motion. The stockholders' meeting was held and there the contract was approved by holders of a majority of the shares. Plaintiff then filed an amended complaint. A copy of that amended complaint is set forth in the Appendix to this opinion.

The amended complaint contained five counts. The first four allege violations of a federal statute. Count V alleges a non-statutory wrong. On defendants' motions, the judge dismissed Counts I, II, III and IV for failure to state causes of action, and entered summary judgment dismissing Count V. Plaintiff has appealed.

All three members of this panel of the court agree on affirmance as to the dismissal of Count II. Judge Brennan and I agree that there must be a reversal as to Count V; Judge Medina dissents in this respect, for reasons stated in his separate opinion. For reasons also stated in Judge Medina's opinion, a majority of this panel holds that the judgment of dismissal of Counts I, III and IV must be affirmed. For reasons I shall state below, I agree as to Count I. But I dissent as to Counts III and IV for reasons stated in a separate opinion, infra. It is convenient to begin with Count V.

1. Count V

Count V is a derivative claim on behalf of defendant Kayser & Co. Through incorporation by reference of other parts of the complaint, it sufficiently alleges (1) diversity of citizenship and the necessary jurisdictional amount, (2) that plaintiff was a shareholder at the time of the transaction of which he complains, (3) that the action is not collusive, and (4) that it would have been futile to make a demand upon the Board of Directors to bring the suit*fn1 These allegations satisfy the jurisdictional requirements and Fed.Rules Civ.Proc. rule 23(b), 28 U.S.C.A.

This count further alleges that the Kayser company, on July 22, 1954, entered into a contract with Diamond Hosiery Corporation for the purchase by Kayser of the assets of Diamond; that this contract was made "at the instigation and direction of" defendants Goldsmith, Feinberg and Hinerfeld, who are directors of Kayser; that these three defendants dominate and control the Kayser Board of Directors and its management, through their control of three companies, Diamond, Hillcrest and Hamilton, which together are the controlling stockholders of Kayser (so that Goldsmith, Feinberg and Hinerfeld thus control both the buyer and seller under the Kayser-Diamond contract); that the purchase by Kayser of the Diamond assets will constitute an improper and wasteful expenditure of Kayser's funds which will be detrimental to it and will be solely for the benefit of Goldsmith, Hinerfeld and Feinberg; that the Diamond assets are not needed by Kayser and are not worth the price paid for them; and that the contract imposes on Kayser a burdensome lease, the lessor under which is a company in which Goldsmith, Feinberg and Hinerfeld have a large interest.

Those allegations state a valid derivative action. See, e.g., Pepper v. Litton, 308 U.S. 295, 306, 60 S. Ct. 238, 84 L. Ed. 281; Sage v. Culver, 147 N.Y. 241, 247, 41 N.E. 513; Perlman v. Feldman, 2 Cir., 219 F.2d 173. We see no reason why greater particularity of allegations should be required in a stockholders' derivative action than in many another sort of action such as, e.g., one for accounting, or for treble damages because of an anti-trust law violation, as to which see, e.g., Package Closure Corp. v. Sealright Co., 2 Cir., 141 F.2d 972, 978.

Defendants did not move for dismissal of this Count for failure to state a cause of action. They did move for summary judgment. The judge granted their motion. We think he erred.

In support of their motion, defendants introduced four affidavits*fn2 Two of them were by defendants' lawyers; so far as they bear at all on Count V, they were not based on "personal knowledge," and therefore do not suffice under F.R.C.P. 56(e)*fn3 A third affidavit, by an accountant, contained nothing which related in any way to this Count.

The fourth affidavit was that of defendant Feinberg, only a portion of which related to this Count. That portion consists of his opinion and his statements about the views of the other directors. If at a trial he were to testify, his opinion as a director would be admissible. But, without evidence of the views of the other directors, his opinion alone would not support a directed verdict, or judgment, for the defendants; nor would his testimony concerning their views, since such testimony would be hearsay and consequently not "competent" evidence*fn4 Therefore his affidavit was insufficient under F.R.C.P. 56(e).

Even if, however, we disregarded that objection, Feinberg's affidavit could not support the summary judgment. The pertinent facts stated in that affidavit are as follows: The Kayser directors believed and decided that the acquisition of the Diamond business would benefit Kayser. Among the benefits were these: There would result a 50% increase in the gross business of Kayser interests; the addition of the Diamond business will treble Kayser's volume of hosiery business; Kayser will obtain the services of Goldsmith who has been outstandingly successful in the hosiery business; Kayser will acquire an excellent merchandising and selling organization; the addition of the Diamond business will round out the line of Kayser's products; Feinberg estimates conservatively that the absorption of the Diamond business will make possible savings which will add a minimum of $700,000 to Kayser's annual earnings before taxes, and this figure should go higher when overlappings of the two organizations are eliminated as the directors are confident they will; Kayser will get the benefit of some $500,000 of unfilled orders. We shall assume, arguendo, that Feinberg's affidavit, if taken as true, completely contraverted the allegations of Count V. But we have held that, in such a derivative stockholders' suit - especially as to facts peculiarly within the knowledge of the defendants - plaintiff is entitled to a trial at which he may cross-examine the defendants and at which the trial judge can observe their demeanor in order, thereby, to evaluate their credibility.

See Fogelson v. American Woolen Company, 2 Cir., 170 F.2d 660.It was a derivative suit seeking to enjoin the company and its directors from carrying out a proposed pension plan. The defendant company moved for a summary judgment. In support of the motion, it filed the affidavits of all the directors, in which each swore that he had participated in the decision of the Board of Directors and had done so because he thought it for the best interest of the company; these directors, who made such affidavits, included a former Governor of Massachusetts, a former Governor of the Federal Reserve Board, a former Assistant Secretary of the Treasury *fn5 The trial judge granted the motion on the ground that these affidavits showed an exercise of judgment by the Board of Directors with which a court should not interfere. See, D.C., 79 F. Supp. 291. We reversed, saying, per Judge Swan*fn5a , 170 F.2d at 622: "Courts are properly reluctant to interfere with the business judgment of corporate directors; they do so only if there has been so clear an abuse of discretion as to amount to legal waste. See McQuillen v. National Cash Register Co., 4 Cir., 112 F.2d 877, 884, certiorari denied 311 U.S. 695, 61 S. Ct. 140, 85 L. Ed. 450. In setting up a retirement pension plan, the decision of the directors to fund past service benefits by a single lump-sum payment rather than by instalment payments over a term of years, will normally be conclusive. So also will their decision as to the desirability of applying a percentage formula uniformly to all employees' salaries without imposing a limitation in dollars upon the maximum pension payable to high salaried officers. In the case at bar the adoption of these features results in giving the president an annual pension for life of more than $54,000 a year while the employee receiving the next largest pension will receive only $7,285. The complaint alleges that the very purpose of the proposed lump-sum payment to a pension trustee is to secure to the president his large pension free from the hazard of future business vicissitudes to which the corporation will be subject. This allegation is denied by the answer, and the denial is supported by affidavits of the directors that each director who voted for the plan exercised his best business judgment. But this denial would be refuted if the plaintiffs were able to prove that the real purpose was as alleged. Therefore a triable issue of fact exists as to whether the directors did exercise their honest business judgment or were motivated by the alleged purpose of favoring the president. It may be unlikely that the plaintiffs can prove their allegation, for such proof must be drawn largely from the directors themselves by cross-examination; but we do not think that their affidavits must be accepted as conclusive and thus preclude any trial of that issue. See Arnstein v. Porter, 2 Cir., 154 F.2d 464, 469-471; Winkelman v. General Motors Corp., D.C.S.D.N.Y., 39 F. Supp 826, 835."

In Bozant v. Bank of New York, 2 Cir., 156 F.2d 787, 790, we said, per Judge Learned Hand*fn6 : "In conclusion we cannot avoid observing that the case is another mistaken effort to save time by an attempt to dispose of a complicated state of facts on motion for summary judgment. This is especially true when the plaintiff must rely for his case on what he can draw out of the defendant. Arnstein v. Porter, 2 Cir., 154 F.2d 464. It appears to be somewhat difficult to persuade the district courts of this; but we are satisfied that it is true." In Colby v. Klune, 2 Cir., 178 F.2d 872, 873-875, reversing a summary judgment for defendants, we said*fn7 : "For the affidavits do not supply all the needed proof. The statements in defendants' affidavits certainly do not suffice, because their acceptance as proof depends on credibility; and - absent an unequivocal waiver of a trial on oral testimony - credibility ought not, when witnesses are available, be determined by mere paper affirmations or denials that inherently lack the important element of witnesses' demeanor. As we observed in Arnstein v. Porter, 2 Cir., 154 F.2d 464, 471: 'It will not do, in such a case, to say that, since the plaintiff, in the matter presented by his affidavits, has offered nothing which discredits the honesty of the defendant, the latter's deposition must be accepted as true.' For the credibility of the persons who here made the affidavits is to be tested when they testify at a trial. Particularly where, as here, the facts are peculiarly in the knowledge of defendants or their witnesses, should the plaintiff have the opportunity to impeach them at a trial; and their demeanor may be the most effective impeachment. Indeed, it has been said that a witness' demeanor is a kind of 'real evidence'; obviously such 'real evidence' cannot be included in affidavits. In Sartor v. Arkansas Natural Gas Corp., Kansas Group, 321 U.S. 620, 628, 64 S. Ct. 724, 729, 88 L. Ed. 967, the Court said that a summary judgment may not be used to 'withdraw these witnesses from cross-examination, the best method yet devised for testing trustworthiness of testimony'; the Court, in that connection, quoted with approval from Aetna Life Insurance Co. v. Ward, 140 U.S. 76, 88, 11 S. Ct. 720, 724, 35 L. Ed. 371: 'There are many things sometimes in the conduct of a witness upon the stand, and sometimes in the mode in which his answers are drawn from him through the questioning of counsel, by which a jury are to be guided in determining the weight and credibility of his testimony.'

"Nor is the situation different because the trial will be before a trial judge without a jury. For how can the judge know, previous to trial, from reading paper testimony, what he will think of the testimony if and when, at a trial, he sees and hears the witnesses? It is because of the crucial element of demeanor-observation that a trial judge's findings are usually binding unless 'clearly erroneous'; his findings have not that effect when he has not observed the witnesses.

"'All manner of expedients,' says Dean Pound, 'have been resorted to * * * to arrive at a written settlement of the facts not dependent on the credit to be accorded witnesses or the impression they may make on the particular trial court. * * * But experience has shown that we cannot be sure that in getting a clear-cut statement of facts in this way, to which the law may be applied, we are not cutting out too much, so in the end to be trying an artificial case instead of the real controversy.'

"It may happen (although we do not know) that, because of their unavailability at the trial, plaintiff will be obliged to obtain the testimony of some or all of the defendants' witnesses by deposition. If so, the demeanor-aspect of their testimony will be lost; however, he will at least have the chance to cross-examine them, an opportunity he has not yet had."

See Toebelman v. Missouri-Kansas Pipe Line Co., 3 Cir., 130 F.2d 1016, 1022, a stockholders' derivative action: "It is obvious that this evidence must come largely from the defendants. This case illustrates the danger of founding a judgment in favor of one party upon his own version of facts within his sole knowledge as set forth in affidavits prepared ex parte. Cross-examination of the party and a reasonable examination of his records by the other party frequently bring forth further facts which place a very different light upon the picture."

In Loudermilk v. Fidelity & Casualty Co. of New York, 5 Cir., 199 F.2d 561, 565, it was said: "This is not the kind of case that can be settled on summary judgment. It is peculiarly the kind of case where the triers of fact whose business it is not only to hear what men say but to search for and find the roots from which the sayings spring, should be afforded full opportunity to determine the truth and integrity of the case. Cf. Gray Tool Co. v. Humble Oil & Refining Co., 5 Cir., 186 F.2d 365, at page 367; Colby v. Klune, 2 Cir., 178 F.2d 872, 873." See also Sarnoff v. Ciaglia, 3 Cir., 165 F.2d 167, 168; Dulansky v. Iowa-Illinois Gas & Electric Co., 8 Cir., 191 F.2d 881, 883-884; Avrick v. Rockmount Envelope Co., 10 Cir., 155 F.2d 568, 571, 573; Lane Bryant, Inc., v. Maternity Lane, Ltd., 9 Cir., 173 F.2d 559, 564-565.

An opponent's failure to file counter-affidavits does not in this kind of case compel acceptance as true of facts alleged in the movant's affidavits. In Albert Dickinson Co. v. Mellos Peanut Co., 7 Cir., 179 F.2d 265, 268, the court said: "It is undoubtedly a somewhat hazardous course of procedure on a motion for summary judgment for the adverse party not to file an answering or opposing affidavit, where the moving party ha filed an affidavit in support of his motion.However, we do not think an inflexible rule should be established that in every case the adverse party be penalized right out of court for not filing an opposing affidavit * * *." See also Griffith v. William Penn Broadcasting Co., D.C.E.D. Pa., 4 F.R.D. 475, 477 ("Defendant's failure to file a counter-affidavit to support its opposition to the motions is of no significance."); Bowdle v. Automobile Ins. Co. of Hartford, D.C. Del., 99 F. Supp. 161.

There are cases where facts stated in a movant's affidavits or exhibits (e.g., that a certain document was executed on a stated date) should be taken as true, unless controverted in the opponent's affidavits, as, e.g., where the contrary facts are peculiarly within the opponent's knowledge, or where they can be developed by his own investigation rather than by cross-examination: In Dixon v. American Tel. & Tel. Co., 2 Cir., 159 F.2d 863, plaintiff sued for review of an earlier adverse judgment; defendants pleaded laches in failure to sue more promptly and moved for summary judgment. Plaintiff by affidavit alleged facts, e.g., illness, which might have satisfactorily explained part of his delay, but which did not cover the entire period during which he had delayed. All facts pertaining to laches - e.g., alleged incompetency of plaintiff's attorneys in the earlier suit, sickness, etc. - were exclusively within plaintiff's knowledge. No additional facts could have been developed and exposed by plaintiff through cross-examination of defendants. His failure, then, to allege facts sufficient to controvert the allegation of laches was properly considered, in effect, an admission of laches. In Gifford v. Travelers Protective Association, 9 Cir., 153 F.2d 209, the plaintiff sued on a fraternal insurance policy. The defendant moved for summary judgment on the ground that the suit was brought beyond the time allowed by the articles of the association as incorporated in the policy. The movant introduced the articles of the association and a letter in which it had denied liability, and rested. The court granted summary judgment. If there were any facts by which plaintiff might have avoided the result plainly indicated by the articles of the association, they were within plaintiff's knowledge, and not to be developed through cross-examination of the defendant. The trial court had given plaintiff extra time in which to plead any facts by which he could have avoided the contractual limitation, and his failure to do so was properly considered, in effect, as an admission of the truth of the movant's position.

Similarly, in Lawson v. American Motorists Ins. Corp., 5 Cir., 217 F.2d 724, in a suit on an insurance policy, defendant pleaded that the plaintiff had not filed proof of loss within 100 days after discovery of loss as required by the contract. Plaintiff filed no counter-affidavits and the court found that the plaintiff's deposition made clear that he had never filed proof of loss. In the absence, then, of any facts (which, if they existed, were within the plaintiff's knowledge) satisfactorily explaining the failure to file, the court granted the summary judgment.

But where - as, e.g., in Fogelson v. American Woolen Company, and Bozant v. Bank of New York, supra - the facts asserted by movant are peculiarly within the knowledge of the movant, then the opponent must be given the opportunity to disprove that fact by cross-examination and by the demeanor of the movant while testifying. In such a case - a case like the one before us - the failure of the opponent to file a counter-affidavit has no significance. For, in his counter-affidavit, he could do no more than to say, "I hope, at a trial, by cross-examination and 'demeanor evidence' of movant's affiants when they testify orally, to persuade the trial court to disbelieve them." Such a paper would be no real affidavit and would not comply with Rule 56(e) since it would not be based on "personal knowledge" and would not "set forth such facts as would be admissible in evidence". As it would be merely the equivalent of his opposition to the entry of a summary judgment, it would be superfluous. So in Garrett Biblical Institute v. American University, 82 U.S.App.D.C. 263, 163 F.2d 265, 267, the court, reversing a summary judgment for plaintiff-appellee, said: "And although appellant has made no offer to show the existence of evidence in support of its denial and defense, and there may be some doubt as to the existence of a defense, still much, if not all, of appellant's defense depends on a cross-examination of appellee's witnesses and an examination of appellee's documentary evidence, and we feel that since the defense is asserted in apparent good faith appellant is entitled to a trial which provides this opportunity to them. On the record as it stands, we cannot say that 'it is quite clear what the truth is.'"

Winkelman v. General Motors Corp., D.C., 39 F. Supp. 826, cited by us with approval in Fogelson v. American Woolen Company, supra, goes to show the danger involved in granting a summary judgment for defendants in a derivative stockholders' suit on affidavits of defendants as to matters peculiarly within their knowledge. In Winkelman, after the judge denied summary judgment, the case went to trial and resulted in a judgment of some $7,900,000 (including interest) against these defendants (a judgment which was settled by the payment of $4,500,000)*fn8

Of course, it is irrelevant that plaintiff owns but a few shares*fn9 (except upon a demand for security under the New York statute, a demand not yet made by defendants). Also irrelevant is the alleged fact, to which the district judge referred, that plaintiff is a competitor of Kayser. Nothing in the record so shows, but we shall assume, arguendo, that (as defendants assert) plaintiff's counsel so admitted in the court below. We assume, again arguendo, that this fact would have significance, if plaintiff's sole motive in suing were to aid his interest as competitor. Since, however, there was no such showing, we must take it that he was motivated at least in part by his stockholder interest. On that basis, his competitor-interest motive must be ignored. See Beardsley v. Kilmer, 236 N.Y. 80, 140 N.E. 203, 27 A.L.R. 1411; Aikens v. Wisconsin, 195 U.S. 194, 25 S. Ct. 3, 49 L. Ed. 154; Holbrook v. Morrison, 214 Mass. 209, 100 N.E. 1111, 44 L.R.A.,N.S., 228; (as to the difference between "disinterested malevolence" and mixed motives).

Defendants contend that to compel them to go to trial will involve them in considerable expense which would be avoided by the summary judgment. In the Fogelson case, supra, we rejected such a contention. There is no more reason why defendants in a stockholders' derivative action should be relieved of expense, through the avoidance of a trial, than in any other kind of suit where preparation for and conduct of a trial will involve considerable cost. The argument about defense expenses is particularly inapposite here since, under Section 61-b of the New York General Corporation Law, McK.Consol.Laws, c. 23, defendants can demand and obtain from the plaintiff security for attorneys' fees and other expenses.

Court V alleges the approval of the contract by a vote at the stockholders' meeting of the holders of a considerable majority of the Kayser stock (which includes some 31% controlled by the controlling defendant-directors). Defendants urge that this approval serves as a complete defense. We do not agree, since under the allegations of Count V, the defendant-directors who dominated and controlled Kayser's Board had conflicting self-interests*fn10

It is suggested that, as apparently the transfer of the Diamond assets to Kayser was completed after denial of the preliminary injunction, a final injunction will serve no purpose, and therefore plaintiff, if he wins, can obtain no relief. To this suggestion there are two answers: (a) Should the ultimate decision go in plaintiff's favor, and should damages not constitute adequate relief, the court will require, by way of restitution, the undoing of the transfer of the assets from Diamond to Kayser if it has already occurred. It will be no bar to such restitution that the district court denied the preliminary injunction*fn11 To be sure, such undoing of the transfer will require Diamond to act, and Diamond is not a party. But defendant Goldsmith controls Diamond, and the court can order him to cause Diamond to do the needful. (b) The complaint asks "for such other and further relief as may be just and proper." Accordingly, the court can award damages if they will afford adequate relief. See F.R.C.P. 54(c).

Defendants, in their brief and oral argument, made much of the reputations and characters of the individual defendants. Of course, we cannot consider any such factor: If, on a trial, it turns out that they did what they are charged with, their previous good behavior will not matter; on the other hand, at this stage of the case, we do not at all suggest that they did anything improper, for only after a trial can that be determined.

2. Count II

Count II rests entirely on Section 29(b) of the Securities and Exchange Act, 15 U.S.C.A. § 78cc(b), which relates solely to a contract made in violation of "any provision" of the Act or of "any rule or regulation thereunder". Here the contract itself was not thus violative. So that, even if the allegations stated a violation of the Rule, the dismissal of this Count was correct.

3. Counts I, III and IV

Counts I, III and IV rest on an alleged violation of a federal statute and regulation in connection with a proxy statement sent to stockholders of the Kayser Company. These Counts are substantially identical except that Counts III and IV are derivative while Count I is not.

As noted above, a majority of the court - for reasons stated in the separate opinion of Judge Medina - holds that the district judge, on defendants' motion, correctly dismissed each of these three Counts for failure to state a cause of action.

I concur as to Count I because I think that, quite aside from New York decisions*fn12 which do not govern here, such a claim must be asserted derivatively on behalf of the Kayser Company. I dissent as to the dismissal of Counts III and IV.

4. Judge Frank's Dissenting Opinion, with respect to the dismissal of Counts III and IV.

I think the district judge erred in dismissing Counts III and IV. As they are substantially identical, I shall discuss Count III only.That count alleges violations of Section 14(a) of the Securities and Exchange Act as amended - 15 U.S.C.A. § 78n(a) - and of SEC Rule X-14A-9.

Section 14(a) reads: "It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of any national securities exchange or otherwise to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered on any national securities exchange in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

The SEC Rule reads: "No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting, or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material facts, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading."

Count III alleges that the contract provided it would not be performed unless approved at a stockholders' meeting of Kayser; that, in advance of this meeting, the defendants solicited proxies and sent to each of the Kayser stockholders a proxy statement; and that this proxy statement violated Section 14(a) and the SEC Rule, in that (1) it contained statements which were false and misleading and (2) it "omitted to state material facts necessary in order to make the statements therein not false or misleading." It also alleges that the defendants knew of the respect in which the proxy statement was false and misleading, and knew of the omissions of material facts, and that the proxy statement was read by many stockholders of Kayser who were thereby misled and induced to grant their proxies in favor of affirmance of the transaction at the stockholders' meeting and to vote in favor thereof at that meeting. It further alleges that the proxy statement was false or misleading in

(a) that it affirmatively but incorrectly stated that it fully described the direct and indirect self-interests of defendants Goldsmith, Feinberg and Hinerfeld, in the Kayser-Diamond contract, and

(b) that it omitted to state material facts, concerning their interests, which facts were "necessary in order to make the statements therein not false or misleading."

As to (a), the proxy statement did disclose this much of the self-interest of the three defendants: On or about May 13, 1954, three companies - Diamond, Hillcrest and Hamilton - each acquired about 10.4% of the Kayser stock; defendant Goldsmith controls Diamond, and defendant Feinberg and defendant Hinerfeld control Hillcrest and Hamilton; Goldsmith, Feinberg and Hinerfeld are directors of Kayser. From this perhaps it may be fairly inferred that, as the complaint alleges, these three defendants control the Board of Directors of Kayser. So far, so good.

But Count III specifically alleges that the proxy statement did not disclose the following facts: In order to purchase these Kayser shares, those three companies had made loans, and, through the consummation of the Kayser-Diamond contract, Diamond would obtain funds which would be used to pay those loans.

My colleagues, however, surprisingly say that, although Count III does refer to those loans, yet "nowhere in the amended complaint is it alleged that such loans were made." I find it difficult to comprehend how my colleagues reach that conclusion. For Count III - in addition to the allegations above described, concerning the control by Goldsmith, Feinberg and Hinerfeld of both the seller, Diamond, and the buyer, Kayser - contains the following allegations:

"Diamond Hosiery Corporation (hereinafter called 'Diamond'), Hamilton Textile Mills, Inc. (hereinafter called 'Hamilton Textile') and Hillcrest Factors, Inc. (hereinafter called 'Hillcrest') are, upon information and belief, corporations duly organized and existing under and by virtue of the laws of the State of New York; on or about May 13, 1954, each of said of corporations purchased 10.4% of the outstanding common stock of the defendant Kayser, to wit, 62,442 shares were purchased by Diamond, 62,443 by Hillcrest and 62,442 by Hamilton Textile. Defendants Goldsmith, Feinberg and Hinerfeld are variously officers and directors of defendant Kayser and variously officers, directors and controlling stockholders of Diamond, Hillcrest and Hamilton Textile. * * **fn13 Said proxy statement omitted to state * * * the amount of money borrowed by Diamond, Hillcrest and Hamilton Textile to purchase the stock by Kayser, as aforesaid; the date or dates on which said corporations were required to repay such loans; and the portion of the purchase price to be paid by defendant Kayser to Diamond which will be used by Diamond, Hillcrest or Hamilton Textile respectively to repay such loans made by them for the purpose of acquiring the stock of defendant Kayser. * * **fn14 Upon information and belief * * * the acquisition of said properties and assets will benefit defendants Diamond, Hillcrest and Hamilton Textile and Defendants Goldsmith, Feinberg and Hinerfeld * * * by enabling Diamond, Hillcrest and Hamilton Textile to acquire funds with which to pay for the stock of Kayser purchased by them, as aforesaid. * * *"*fn15

This is not a mere "conclusory" allegation. It particularizes the violation of the Rule.

This court, like other courts, has often held that allegations far less clear are adequate on a motion to dismiss*fn16 Unless - despite the Federal Rules of Civil Procedure - we revert to the days when courts construed pleadings with what today courts consider unreasonable strictness, I fail to see why these allegations do not fairly advise defendants that plaintiff is asserting that these loans "were made." If I understand my colleagues, they would reverse the dismissal of Count III, if only, in addition to the allegations I have just quoted, plaintiff had inserted the words, "These loans were made."

I cannot concur in a ruling that the dismissal was correct for failure to insert those four words.That ruling ignores the host of decisions, in this Circuit and elsewhere, to the following effect: On a motion to dismiss a complaint, its allegations must be considered most favorably to plaintiff; as thus construed, they must be taken as true; a complaint should never be dismissed on motion unless it "appears to a certainty" that the plaintiff would be entitled to no relief under any set of facts which could be proved in support of the claim."

See, e.g., United States v. Employing Plasterers' Association, 347 U.S. 186, 74 S. Ct. 452, 98 L. Ed. 618; Virgin Islands Corp. v. W.A. Taylor, & Co., 2 Cir., 202 F.2d 61, 65; Package Closure Corp. v. Sealright Co., 2 Cir., 141 F.2d 972, 978; Dioguardi v. Durning, 2 Cir., 139 F.2d 774; Callaway v. Hamilton National Bank of Washington, 90 U.S.App.D.C. 228, 195 F.2d 556, 559; Tiedeman v. Local 705, etc., 7 Cir., 180 F.2d 684, 686; Kingwood Oil Co. v. Bell, 7 Cir., 204 F.2d 8, 12-13; Mitchell v. Pilgrim Holiness Church, 7 Cir., 210 F.2d 879, 881; Continental Collieries v. Shober, 3 Cir., 130 F.2d 631, 635; King Edward Employees Federal Credit Union v. Travelers Indemnity Co., 5 Cir., 206 F.2d 726, 728; Knox v. First Security Bank of Utah, 10 Cir., 196 F.2d 112, 117; Porter v. Karavas, 10 Cir., 157 F.2d 984; 2 Moore, Federal Practice (2d ed.) pp. 2245-2246.

In Forstmann Woolen Company v. Murray Sices Corporation, D.C., 10 F.R.D. 367, 369, 370, Judge Medina said: "The Federal Rules of Procedure prescribe a simple method whereby claims and defenses may be stated. Rule 8, F.R.C.P. The rules, as construed, do not contemplate correction of inartistic pleadings by motion to strike, in the absence of some prejudice to the opposing party. See Moore's Federal Practice 2317-18 (2d Ed., 1948). If the allegations attacked are such that under some contingency they may raise relevant issues, they will not be stricken. Moore, op.cit. supra, at 2318; see American Machine & Metals Co. v. De Bothezat Impeller Co., D.C.S.D.N.Y.1948, 8 F.R.D. 306. * * * Of course, it is only necessary that the allegations constitute a statement of a claim upon which relief may be granted, see Dioguardi v. Durning, 2 Cir., 1944, 139 F.2d 774; Camrel Co. v. Skouras Theatres Corp., D.C.N.J.1944, 57 F. Supp. 811, 812; and ...

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