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ADAIR v. SCHNEIDER

December 10, 1968

Lincoln ADAIR, on behalf of himself and all other stockholders of North Atlantic Life Insurance Company of America, Plaintiff,
v.
Francis X. SCHNEIDER et al., Defendants


Wyatt, District Judge.


The opinion of the court was delivered by: WYATT

WYATT, District Judge.

This is a motion by all defendants named in the complaint except defendants The North Atlantic Life Insurance Company of America, Ticonderoga Holding Co., Inc., Northwestern National Life Insurance Company and individual defendants Dougherty, Pillsbury, Atwood, Jondahl, O'Leary and Christopherson. The motion is expressed in a somewhat tangled fashion but is understood to be for an order dismissing the complaint on its face for lack of jurisdiction over the subject matter (Fed.R.Civ.P. 12(b) (1)) and for failure to state a claim upon which relief can be granted (Fed.R.Civ.P. 12(b) (6)) and, on affidavits, for summary judgment dismissing the action (Fed.R.Civ.P. 56(b)). The motion refers "more specifically" to certain specified "claims" asked to be dismissed; whether this is meant to limit the motion in some way and whether the specified "claims" are all or only part of the claims in the complaint, is not made to appear.

 Plaintiff sues as a stockholder of The North Atlantic Life Insurance Company of America ("North"). The action was commenced on January 24, 1968. According to the complaint (para 4(a)), the action is both a class action and a derivative action for the benefit of North. It is evident, however, that whatever claims may be stated in the complaint can only be maintained derivatively for the benefit of North.

 The complaint openly and defiantly violates Rule 8(a) (2). It is not a "short and plain statement of the claim". It is an extended embroidery of what, if true, would be mere evidence, recited in perplexing and disjointed detail.

 Burdensome study of the complaint, however, separates a small amount of wheat from the vast amount of chaff. The claim in the complaint, in summary, is that certain of the defendants violated fiduciary duties owed to North; that they dominated and controlled North; that for their personal benefit they worked out a plan whereby North would issue and sell additional shares to Northwestern National Life Insurance Company ("Northwestern"); that a special meeting of stockholders of North was held on August 14, 1967; that at said meeting the issuance of the additional shares and their sale to Northwestern were authorized by the stockholders of North; that defendants solicited proxies from stockholders by means of a proxy statement which was false and from which many material facts had been omitted; that the additional shares were issued and sold to Northwestern and amounted to a majority of the shares then outstanding; and that the stock was sold to Northwestern "at a favorable price below its actual value". The relief asked is that the issuance of stock to Northwestern "be declared null and void" and that defendants account to and pay to North all profit made by them and all damages suffered by North.

 On the face of the complaint, a claim is stated under state law for a violation of fiduciary obligations owed to North. No diversity jurisdiction, however, is claimed. In fact, after notice had been served of the present motion, plaintiff on April 23, 1968 commenced in the New York Supreme Court an action similar to that at bar.

 Jurisdiction is rested (complaint, para 1) on four sections of the Securities Exchange Act of 1934 (15 U.S.C. § 78a and following; the "1934 Act"), namely, Section 10(b) (15 U.S.C. § 78j(b)), Section 12(e) (15 U.S.C. § 78 l (e)), Section 14 (15 U.S.C. § 78n), and Section 25 (15 U.S.C. § 78y).

 Three of these sections may be eliminated at the outset as inapplicable.

 Section 12(e)

 Section 12(e) by its terms expired July 1, 1935.

 Section 14

 Section 14 requires that any solicitation of proxies must be in accordance with rules prescribed by the Securities and Exchange Commission (the "Commission"). The Commission has prescribed, among others, Rule 14a-9 (17 C.F.R. § 240-14a-9) which in substance forbids in any proxy statement anything false or misleading as to a material fact and any omission of any material fact.

 Originally, the proxy provisions of Section 14 of the 1934 Act and various other provisions applied only to securities registered on a national securities exchange. The stock of North is not registered on a national securities exchange. By amendments enacted in 1964, however, the proxy and other provisions were extended to securities traded over-the-counter where the issuer was of a certain size and had a certain number of shareholders. At the urging of State Insurance Commissioners and stock insurance companies, Congress exempted securities of insurance companies from the proxy and other provisions of the 1934 Act provided certain conditions of state regulation were present. See 1964 U.S.Cong. & Adm.News, p. 3013 and following. The exemption is found in 15 U.S.C. § 78 l (g) (2) (G). It is established to my ...


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