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NEUWIRTH v. MERIN

April 21, 1967

Samuel NEUWIRTH, Plaintiff,
v.
Herbert L. MERIN, William J. Kreizel, Elihu H. Modlin and Emenee Corporation, Defendants



The opinion of the court was delivered by: HERLANDS

HERLANDS, District Judge:

 This stockholders' derivative action is brought by a New Jersey resident on behalf of a New York corporation against its directors. Of the defendant-corporation's outstanding 545,926 shares, plaintiff beneficially owns 100 shares having a total market value of about $375.

 Presently before the Court are two motions. Defendants move for an order requiring plaintiff to give security for expenses and costs pursuant to New York Business Corporation Law, McKinney's Consol.Laws, c. 4, § 627. Plaintiff crossmoves for an order directing the corporate defendant to produce its shareholders' list for his inspection and copying. Defendants' motion is granted and plaintiff's cross-motion is denied for the reasons set forth in this opinion.

 The cross-motion is made "under [F.R.Civ.P.] Rule 34 to require the corporate defendant to produce a stockholders' list for inspection, copying or photographing." (Plaintiff's moving affidavit, p. 1; plaintiff's memorandum of law, pp. 2-3.) Confronted by the requirements of New York Business Corporation Law, § 627, plaintiff would like to try to persuade other stockholders to join him in the present lawsuit inasmuch as plaintiff would not be required to give security if he and other stockholders joining him hold stock having a fair value in excess of $50,000 or constituting five per cent of any class of the outstanding shares of the corporation. It is plaintiff's position that he is entitled to utilize Rule 34 as the means of obtaining the stockholders' list in order to enable him to solicit other shareholders to join him as parties plaintiff, and thereby possibly obtain the additional amount of stock that would obviate the necessity of giving security. Plaintiff asserts that he has no practical way of communicating with his fellow stockholders unless he is provided with a stockholders' list.

 When defendants move to have plaintiff post security under New York Business Corporation Law, § 627 in stockholders' derivative actions in the New York State courts, the plaintiff can generally obtain, upon his cross-motion, an order for the production of the stockholders' list. Auerbach v. Shafstor, Inc., 34 Misc.2d 658, 229 N.Y.S.2d 927 (Sup.Ct.1962), aff'd, 19 A.D.2d 531, 240 N.Y.S.2d 146 (2d Dept.1963), appeal dismissed, 13 N.Y.2d 891, 243 N.Y.S.2d 673, 193 N.E.2d 501 (1963). This Court is now urged by plaintiff to adopt the New York State procedure. This cannot be done.

 In a stockholders' derivative action brought in this Court on the basis of diversity jurisdiction, the Court does not possess the power to issue an order in the nature of a mandatory injunction, directing the corporation to produce its stockholders' list for the inspection and copying of the plaintiff. Rosen v. Alleghany Corporation, 133 F. Supp. 858 (S.D.N.Y.1955); Breswick & Co. v. Briggs, 136 F. Supp. 301 (S.D.N.Y.1955); Selman v. Colborn, 143 F. Supp. 112 (S.D.N.Y.1956); Newark Morning Ledger Co. v. Republican Company, 188 F. Supp. 813 (D.Mass.1960); Stern v. South Chester Tube Company, 252 F. Supp. 329 (E.D.Pa.1966).

 In Rosen, supra, a diversity case, the plaintiffs-stockholders moved for an order directing the defendant-corporation to permit one of the plaintiffs to inspect and make extracts from the corporation's stockholders' list. The ostensible purpose of the requested inspection was to assist the plaintiffs-stockholders' committee and the individual plaintiffs in the distribution to the other stockholders of the committee's proxy material and to assist in bringing about the intervention of other stockholders in a certain action against the corporation. The Court found that plaintiffs were "acting in good faith" (133 F. Supp. at 864).

 Treating the motion as one "for a mandatory injunction * * * not in aid of jurisdiction already acquired but * * * [as] an independent subject of relief," Judge Dimock concluded "[with] great regret" that "the United States District Courts lack power to issue a direction in the nature of mandamus and that a direction that a corporation permit a stockholder to examine the stock list is such a direction." (At 864-865.)

 In Breswick, supra, the Court expressed its reluctance in having to deny a plaintiff-stockholder's motion for an order permitting him to examine the corporate stockholders' list in a stockholders' derivative action. Defendants moved to require security for costs under the New York General Corporation Law, McKinney's Consol.Laws, c. 23, § 61-b (now Business Corporation Law, § 627). Some of the claims in the multi-count complaint presented exclusively federal questions under the Investment Company Act of 1940, § 1 et seq., 15 U.S.C.A. § 80a-1 et seq., while one claim (count seven) was based upon violations of common law duties.

 As to the count based on violations of common law duties, the Court held that it lacked the power to issue a direction in the nature of mandamus and that a direction that a corporation permit a stockholder to examine its stock list constituted such an impermissible direction. Judge McGohey, following Rosen, supra, said that he would not arrogate that power "under the guise of imposing a condition on the allowance of security" (136 F. Supp. at 303-304).

 Selman, supra, followed the rule expressed in Breswick and Rosen. Judge Levet said (143 F. Supp. at 113):

 
"However, it has been determined by this Court that in a stockholders' derivative action, this Court has no power to issue a direction in the nature of a mandamus or condition that the defendant-corporation permit plaintiff to inspect the books or lists as a condition or prerequisite to require plaintiff to furnish security for costs. Rosen v. Alleghany Corporation, D.C.S.D.N.Y.1955, 133 F. Supp. 858."

 In Newark Morning Ledger Co., supra, and Stern, supra, diversity actions were instituted by plaintiffs-stockholders solely to compel the corporate defendant to permit them to examine its stockholders' list. In both cases, the complaint was dismissed on the ground that federal courts have no general original power to issue a writ of mandamus or an order in the nature of mandamus in cases where that is the only relief sought.

 The leading commentator on corporation law, Hornstein, Corporation Law and Practice § 722, pp. 225-26 ...


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