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GLOBUS, INC. v. JAROFF

January 19, 1968

Globus, Inc., Plaintiff,
v.
Jaroff et al., Defendants.


Mansfield, District Judge.


The opinion of the court was delivered by: MANSFIELD

MANSFIELD, District Judge.

This is a motion to dismiss as moot this stockholders' derivative action brought under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Rule 10B-5, 17 C.F.R. § 240.10b-5, and a cross-motion by plaintiff for the award of counsel fees. The complaint alleges that the individual defendants, the directors of Techmation Corporation (hereinafter "Techmation"), used misleading proxy material to obtain majority stockholder approval required by N.Y. Bus. Corp. Law § 505(d) (McKinney's 1967) of a ten-year restricted stock option agreement with its president, defendant Jaroff, which required sale to him of newly issued shares at a price substantially lower than market.

 On March 16, 1967, Judge Croake denied defendants' motion to dismiss pursuant to Rule 12(b) and 23.1, F.R.C.P., for lack of jurisdiction, failure to state a claim upon which relief may be granted, and lack of fair and adequate representation by plaintiff of stockholders similarly situated. 266 F. Supp. 524 (S.D.N.Y. 1967). Judge Croake upheld plaintiff's right to maintain a derivative action under § 10(b) on behalf of Techmation as the issuer of its own stock, and concluded that the complaint "set forth with sufficient clarity and particularity a claim of deception", 266 F. Supp. at 529, and that "causation is a matter to be developed and proved at trial." 266 F. Supp. at 530.

 On July 7, 1967, Judge Bonsal denied plaintiff's motion for summary judgment, 271 F. Supp. 378 (S.D.N.Y. 1967), on the ground that although plaintiff had established that the individual defendants, in soliciting proxies to obtain approval of the option agreement, failed to furnish material information *fn1" which operated as a fraud or deceit upon Techmation and its stockholders in connection with the purchase or sale of securities and that such omissions constituted a violation of § 10(b) and Rule 10B-5, it did not appear whether the violation was causally related to the ratification of the option agreement. Judge Bonsal held,

 
"plaintiff need not establish causation in a strictly mathematical sense. . . . It may be that where any element of a corporation's decision making body is not furnished with all material information relevant to a proposed transaction, causation will be inferred," 271 F. Supp. at 381,

 and denied the motion "without prejudice to its renewal when all facts bearing on the element of causation have been developed through discovery or otherwise" 271 F. Supp. at 381.

 On August 9, 1967, Jaroff's deposition, taken by plaintiff to establish facts on the issue of causation, disclosed that

 
(1) on July 2, 1966, the date of the stockholders' meeting in question, 249,057 shares of Techmation stock were outstanding, of which 124,529 shares constituted a majority;
 
(2) of the 136,237 shares voted in favor of ratification, 121,655 shares, or less than a majority of the outstanding stock, were voted by Jaroff, his associates, or persons whom Jaroff claimed had been orally informed of the terms of the stock option agreement.

 Plaintiff also contends that 14,207 shares were held by stockholders who had received the misleading notice of meeting but as to whom there was no contention of corrective oral disclosure, so that, even assuming the efficacy of the oral disclosure, the untainted affirmative vote (122,030 shares) was short of a majority. Armed with these additional facts, plaintiff, allegedly hampered by defendants' lack of cooperation in furnishing certain documents as agreed during Jaroff's deposition, was in the process of preparing a renewal of its motion for summary judgment when, on October 9, 1967, before any stock had been issued under the option agreement, Techmation's board of directors and Jaroff cancelled the agreement, thus accomplishing the object of plaintiff's action.

 In reply to defendants' contention that cancellation of the option agreement rendered this action moot, plaintiff contends that the action continues to exist for the purpose of determining counsel fees. Defendants argue that if an action is otherwise moot, jurisdiction will not be retained to decide such incidental matters, and that plaintiff should be relegated to a plenary action to recover counsel fees, where defendants will be entitled to a jury trial.

 The claim that defendant would be entitled to a jury trial in a plenary action to recover counsel fees is at best doubtful, see Dottenheim v. Emerson Elec. Mfg. Co., 7 F.R.D. 343 (E.D.N.Y. 1947). In any event, while the matter of counsel fees is not sufficient to prevent an action otherwise moot from being dismissed, the Court has the power, in dismissing an action as moot, to award counsel fees where appropriate. Plaintiff's demand for counsel fees may be considered by the Court as an ancillary matter and it is not necessary to relegate plaintiff to a separate action to recover fees. Schechtman v. Wolfson, 244 F.2d 537 (2d Cir. 1957).

 Although § 10(b) does not expressly authorize an award of counsel fees,

 
"jurisdiction over the main cause of action necessarily carries with it jurisdiction, in the exercise of the 'historic equity jurisdiction of the federal courts,' Sprague v. Ticonic Nat. Bank, 1939, 307 U.S. 161, 164, 83 L. Ed. 1184, 59 S. Ct. 777, . . . to award fees and expenses in appropriate situations to counsel ...

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