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MENDEL LURIE v. JACOB M. KAPLAN (12/10/68)

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, FIRST DEPARTMENT 1968.NY.43808 <http://www.versuslaw.com>; 295 N.Y.S.2d 493; 31 A.D.2d 93 December 10, 1968 MENDEL LURIE, SUING ON BEHALF OF GENERAL REFRACTORIES COMPANY, RESPONDENTv.JACOB M. KAPLAN, APPELLANT, ET AL., DEFENDANT Appeal from an order of the Supreme Court at Special Term, entered December 26, 1967 in New York County (Gustave G. Rosenberg, J.), which denied a motion by defendant-appellant to dismiss the complaint under CPLR 3211. Spencer Pinkham of counsel (Colton & Pinkham, attorneys), for appellant. Charles M. Berkson for respondent. Rabin, J. Stevens, J. P., Eager and Capozzoli, JJ., concur with Rabin, J.; McGivern, J., dissents in opinion. Author: Rabin


Appeal from an order of the Supreme Court at Special Term, entered December 26, 1967 in New York County (Gustave G. Rosenberg, J.), which denied a motion by defendant-appellant to dismiss the complaint under CPLR 3211.

Rabin, J. Stevens, J. P., Eager and Capozzoli, JJ., concur with Rabin, J.; McGivern, J., dissents in opinion.

Author: Rabin

 In this action, the plaintiff suing derivatively on behalf of the General Refractories Company, a Pennsylvania corporation (hereinafter referred to as General), charges the defendant with having sold corporate votes in violation of section 504 of the Pennsylvania Business Corporation Law. (Now Pa. Stat., tit. 15, ยง 1504 [1967].)

He seeks to recover, on behalf of the corporation, the sum of $532,875 which he alleges "is a corporate asset and is equitably the property of" the corporation by reason of it being a "premium * * * exacted in violation of law through the sale of a corporate vote". The premium referred to represents the difference between the market price of General's stock and the higher price received for it as the result of a sale by the defendant of 101,500 shares of that stock.

This action is not the same as was involved in Diamond v. Oreamuno (29 A.D.2d 285), or in Securities & Exch. Comm. v. Texas Gulf Sulphur Co. (401 F. 2d 833). The complaint does not allege that the defendant was either a director or officer of the corporation, nor does it allege that he was an insider or had inside information, or that he was a fiduciary of any kind, or that he either had or sold control of the corporation. The cause of action asserted is grounded simply upon an alleged violation of the Pennsylvania statute prohibiting the sale of a corporate vote. It is that which the plaintiff must prove in order to make out a case. He may not, in this case, recover for a breach of any claimed fiduciary relationship if, indeed, there was one, or for the defendant having profited through the advantage of inside information, if indeed he did. Whether he could establish a case on any of these grounds is a different question entirely and is not before us.

The defendant, in this consolidated appeal, appeals from two orders. The first denied his motion to dismiss the complaint for failure to state a cause of action, and the second denied his motion for summary judgment.

In denying the first motion the court did not really pass upon the sufficiency of the complaint. After stating the accepted principle that "every beneficial inference is given to the complaint," the court said that the complaint "discloses that from the very nature of the transaction, the facts relating thereto are within the exclusive knowledge of the movants * * * under circumstances that plaintiff would have no actual knowledge thereof. The plaintiff has established that facts essential to justify opposition to this motion may exist but cannot be stated until disclosure is had in this action." We observe that a complaint that is insufficient cannot be held to state a cause of action because, though not alleged, "facts * * * may exist" to enable the plaintiff to write a good complaint. Be that as it may, the court denied the motion to dismiss "without prejudice to the right to renew the motion after the plaintiff has completed pre-trial disclosure herein."

Subsequently, disclosure proceedings were had. The defendant was examined before trial and produced such documents and records as requested by the plaintiff. It was after such disclosure proceedings, opening the door for the plaintiff to obtain all the information that he claimed he did not have at the time the motion to dismiss was made, that the defendant made its motion for summary judgment, which the court denied.

We first consider the claim that the complaint fails to set forth a cause of action. As indicated, the plaintiff must allege sufficient facts which point to a violation of the Pennsylvania statute prohibiting the sale of a corporate vote.

It is alleged in the complaint that General issued a proxy statement dated March 22, 1966. That proxy statement was aimed at soliciting proxies for a meeting to be held on April 22, 1966 to obtain approval of a proposal to acquire the assets and liabilities of the Mining and Mineral Products Division of the Great Lakes Carbon Corporation (hereinafter referred to as Great Lakes). The proxy statement revealed that Great Lakes had entered into an agreement with an individual shareholder of General (referring to defendant Kaplan) to purchase at a price of $28 per share, 101,500 shares of General's capital stock for payment and delivery on September 30, 1966. The agreement further provided for the delivery of irrevocable proxies to the buyer, giving it the right to vote such shares at any and all meetings prior to September 30, 1966. The complaint further states that the opening price of General's stock on the New York Stock Exchange on March 22, 1966 was $22.75 per share, or $5.25 below the contract price and that, therefore, the defendant Kaplan received a premium of $532,875 above the market price.

After pleading section 504 of the Pennsylvania Business Corporation Law, which forbids the sale of a corporate vote, the plaintiff, in the only place in the complaint where he attempts to plead wrongdoing on the part of the defendant, alleges as follows: "15. The said premium of $532,875, exacted in violation of law through the sale of a corporate vote, is a corporate asset and is equitably the property of General."

It is to be noted that the plaintiff does not directly charge the sale of a corporate vote. He alleges it rather obliquely -- merely by way of a conclusory assumption. However, for the purpose of construing the complaint, we shall consider it a direct charge that a vote had been sold.

From the facts alleged in the complaint, can such a conclusion be drawn? There are but three operative facts alleged: 1. That the block of shares was sold at a price above the market price. 2. That the agreement of sale provided for payment and delivery of the stock, to be made in September, 1966 (about six months after the date of the issuance of the proxy statement). 3. That the seller was required to deliver an irrevocable proxy to the buyer enabling it to vote the shares at all meetings prior to the date when the stock was to be delivered.

From none of these statements, taken separately, may we draw a conclusion that a vote was sold. 1. An owner of stock may sell it, even above the market price. 2. There can be no criticism if the arrangement of sale provides that payment and delivery be deferred. 3. The delivery of an irrevocable proxy to the buyer, enabling it to vote prior to the delivery of the stock, does not constitute the sale of a vote within the meaning of section 504 of the Pennsylvania Business Corporation Law. That section permits the delivery of an irrevocable proxy where it is coupled with an interest. It provides as follows: "A proxy, unless coupled with an interest, shall be revocable at will". It is quite apparent then that where a proxy is coupled with an interest, it may be an irrevocable one. Consequently, the very section that prohibits the sale of a vote, allowing delivery of ...


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