The opinion of the court was delivered by: TYLER
This is a motion, pursuant to F.R. Civ. P. 12(c), to dismiss counts 2, 3, 5, 6, 8, 9 and part of counts 4 and 10 of plaintiff's complaint. The plaintiff in this action, Charles Monheit, owns 1,700 shares of defendant Fifth Avenue Coach Lines, Inc. ("Coach Lines"),
and is suing, in addition, certain other corporate and individual defendants who exercise or used to exercise control over Coach Lines.
The defendants are Coach Lines, Utilities & Industries Corporation ("U & I"), Utilities & Industries Management Corp. ("Management"), The Carter Group Inc., ("Carter Group"), and twelve present and five former directors of Coach Lines. The complaint states that U & I, through its wholly-owned subsidiary, Management, was the beneficial owner of 44.36% of Coach Lines' stock from January 1, 1973 to May 30, 1973. During this same period, plaintiff alleges that Carter Group owned 30% of the common stock of U & I, which amount it has since increased to 50%. According to plaintiff, therefore, U & I, Management, and Carter Group were all controlling persons of Coach Lines.
Coach Lines is the nominal defendant on behalf of which count 10 of the complaint is brought derivatively. On August 12, 1968, a trustee and receiver for Coach Lines were appointed by the United States District Court for the Southern District of New York. On October 2, 1968, the trustee caused Coach Lines to register under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. The trusteeship was terminated on June 16, 1972 and the management of Coach Lines reverted to its Board of Directors, the members of which had been elected on June 15, 1970 at a meeting of the shareholders held under the supervision of the court.
In general, the activities about which plaintiff complains include defendants' acquisition of control over Coach Lines; the issuance of a false proxy statement soliciting proxies for the May 30, 1973 meeting of the Coach Lines' shareholders; the election of too few disinterested directors; and the unwise purchases of certificates of deposit and common stock of other companies.
Defendants' instant motion to dismiss is based primarily on the argument that plaintiff belongs in state rather than federal court. According to defendants, plaintiff is improperly seeking to invoke the antifraud provisions of the federal securities laws to bring what are essentially state claims into federal court. For the reasons hereinafter stated, defendants' motion to dismiss is denied, except as to certain portions of count 3.
In count 1, plaintiff alleges material violations of § 13(d) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78m(d), and the rules promulgated thereunder, 17 C.F.R. § 240.13d-1. At the heart of this claim is the charge that the defendants conspired to acquire capital shares of Coach Lines in a deceptive and illegal fashion. In addition, plaintiff states that the defendants failed to file proper reports with the Securities Exchange Commission ("SEC") and failed to disclose certain arrangements made in connection with the acquisition of stock. The defendants have not denied that this count is properly before this court.
In count 2 of his complaint, plaintiff claims that the defendants violated § 14(f) of the Exchange Act, 15 U.S.C. § 78n(f)
by failing to file certain information respecting election of directors in November, 1972 with the SEC. Defendants argue that the provisions of § 14(f) are only applicable when a majority of a board is elected without a shareholders' vote, and that in the instant case only three directors, Carter, Graham, and Kaplan, out of a total of thirteen, were elected in November, 1972. Plaintiff contends, however, that four of the directors not up for election in November had agreed to become the designees of Carter, Graham, Carter Group and U & I and that in practical effect, therefore, the prerequisite of the election or designation of a majority of the board was met.
In support of their position, defendants cite the case of Gruss v. Uris Buildings Corp., CCH FED. SEC. L. REP. para. 94,154 at 94,630 (S.D.N.Y.) which stated that the agreement of five directors to resign, even if they were controlled by the defendants in the case, was not sufficient since they were not in fact "elected or designated" by the defendants. Plaintiff, on the other hand, argues that a formal redesignation or reelection should not be necessary where four of the present directors had in fact agreed to become the controlled directors of Carter et al.
If the allegations of plaintiff are taken as true, as they must be for the purposes of this motion, it would seem that plaintiff has stated a sufficient cause of action under § 14(f). Since an actual change in control would have taken place, the reporting requirements presumably were or may have been triggered.
The conduct of the defendants is attacked in count 3 of the complaint on the grounds that it is violative of §§ 8(b) and 13(a) of the Investment Company Act, 15 U.S.C. §§ 80a-8(b) and 80a-13(a).
Defendants, however, correctly point out that Coach Lines did not change its subclassification from a "diversified" to a "nondiversified" investment company, in violation of § 13(a) (1). In order for a company to be a non-diversified company, it must invest less ...