The opinion of the court was delivered by: DUFFY
KEVIN THOMAS DUFFY, District Judge.
On March 12, 1971, plaintiff Mollie Nussbacher, a stockholder of the Leasco Data Processing Equipment Corporation ("Leasco") commenced this action against Chase Manhattan Bank and other institutional defendants, as well as the directors of Leasco, seeking damages for alleged violations of Regulations G, T and U, 12 C.F.R. §§ 207, 220, 221, promulgated by the Board of Governors of the Federal Reserve System pursuant to Section 7 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78g, ("The Exchange Act"). These alleged violations arise out of the acquisition by Leasco of the Reliance Insurance Co. ("Reliance"). Plaintiff contends that in order to accomplish the acquisition, Leasco executed an agreement with Reliance Class A shareholders to purchase for cash their Reliance stock. To finance this agreement Leasco arranged for Reliance shareholders to receive Leasco stock in exchange for their own and for certain of the institutional defendants to simultaneously purchase that Leasco stock from the former Reliance shareholders, holding it "as security for Leasco's guarantee to repay the money advanced by the lenders." Nussbacher v. Continental Illinois Bank and Trust Co. of Chicago, 518 F.2d 873 (7th Cir. 1975), cert. denied, 424 U.S. 928, 47 L. Ed. 2d 338, 96 S. Ct. 1142 (1976), (Nussbacher II).
The above transaction, which plaintiff characterizes as disguised loans entered into "in an attempt to avoid the applicable credit rules and regulations," (Complaint at para. 14) has given rise to this litigation, both in this district and in Illinois. Nussbacher II, supra. Defendant Chase Manhattan Bank ("Chase") now moves for summary judgment on the grounds that plaintiff lacks standing to maintain this action as a derivative suit, and to dismiss the complaint on the ground that no private cause of action for damages exists under Section 7 of the Exchange Act or Regulation U.
A review of the background of this action, leading up to the instant motion, is helpful to an understanding of the case and the positions of the parties. The complaint originally named twenty-nine defendants, including all members of the Leasco board of directors and Leasco itself. Only twelve of the named defendants were ever served with process; service was never made on any of the directors. In 1972, the complaint was dismissed as to the Continental Illinois National Bank and Trust Co. and the First National Bank of Chicago for improper venue. Suit was thereafter brought against Continental only, in Illinois district court, Nussbacher v. Continental Illinois Bank and Trust Co. of Chicago, 61 F.R.D. 399 (N.D.Ill. 1973) (Nussbacher I) and ultimately settled. All the defendants who had been served with process, and who were properly before the New York District Court, have also settled, with the exception of Chase and one other defendant.
Prior to the Illinois settlement, defendant Continental had moved to dismiss the complaint for failure to comply with Rule 23.1 of the Federal Rules of Civil Procedure which requires that demand be made upon the board of directors of a corporation before a derivative action may be brought on its behalf. Plaintiff had not made such a demand and this omission, Continental contended, was fatal to her complaint. District Judge Richard B. Austin dismissed the complaint, Nussbacher I, supra, however, his ruling was reversed by the Seventh Circuit, which held that since the evidence established the futility of any demand, (the board's opposition to the suit was patent), the requirements of Rule 23.1 could be excused. In focusing on this narrow issue, the Court noted that still to be resolved was the "merits question presented by the matter of business judgment," a question which might "be susceptible to resolution by summary judgment or (might) require a trial." Nussbacher II at 878. On remand the district court directed that a separate trial be held on the question of plaintiff's standing to maintain the action. Nussbacher v. Continental Illinois National Bank and Trust Co. of Chicago, 73 Civ. 512 (April 22, 1976). Before a trial could be held, however, the settlement with Continental was arranged.
In the midst of all this activity in the midwest, the New York action did not lie dormant. On March 10, 1972, plaintiff moved for partial summary judgment on the issue of liability and for dismissal of the cross-claims asserted against Leasco by several of the defendants. Certain of the defendants, including defendant Chase, moved for summary judgment or, alternatively, for dismissal for failure to comply with Rule 23.1. Judge Pollack denied all the motions, holding that a trial was necessary to determine whether the questioned transaction was "an extension of [credit,] . .. involved security for the extension of credit . . . [or] was neither." Nussbacher v. Chase Manhattan Bank (N.A.) Trustee, et al., 71 Civ. 1153 (Sept. 22, 1972). He went on to note:
It may well be that when the full record is before the Court, no violation of fundamental federal law will appear to be involved and that at best a question of the reasonable business judgment of the corporate officials of Leasco is sought to be second-guessed by the plaintiff. If this be true the case must fail for want of demand prior to suit and plaintiff's obligation to allege and show that refusal to sue by the directors derived from bad faith and wrongdoing and constitutes a breach of fiduciary duty on their part. The question of plaintiff's standing to sue derivatively may properly be raised by the defendants herein and is not a question which only Leasco may raise. Whether to sue is like other business questions, ordinarily a matter of internal management. The facts, when resolved here will determine whether the ordinary rule should apply.
Id. citations omitted. Judge Pollack then directed that discovery be completed within ninety days from the date of his order. I assumed control over the case upon taking the bench in November 1972. Following the decision of the district court in Nussbacher I, Chase renewed its motion to dismiss under Rule 23.1. I denied that motion after the Seventh Circuit's reversal in Nussbacher II "without prejudice to its being renewed at a later date."
With that as background, I turn first to Chase's motion for summary judgment. The question of demand under Rule 23.1 is not now before me, since for purposes of this motion Chase assumes that the failure to make such demand is excused by the obvious futility of so doing. Rather, Chase asks me to determine the limited question whether under the business judgment rule, the board's refusal to sue deprives plaintiff of standing to maintain this action.
The business judgment rule, which has been adopted by many circuits and appears to be acquiring growing acceptance in this Circuit, provides that absent allegations of fraud, collusion, bad faith or breach of fiduciary duty on the part of the board of directors, their refusal to sue should not be questioned by the court and, accordingly, a derivative suit by stockholders is not maintainable. See United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 263-64, 61 L. Ed. 1119, 37 S. Ct. 509 (1917); Hawes v. City of Oakland, 104 U.S. 450, 26 L. Ed. 827 (1881); Cosentino v. Carver-Greenfield, 433 F.2d 1274, 1277 (8th Cir. 1970); Ash v. International Business Machines, Inc., 353 F.2d 491, 492-93 (3d Cir. 1965), cert. denied, 384 U.S. 927, 16 L. Ed. 2d 531, 86 S. Ct. 1446 (1966); Swanson v. Traer, 249 F.2d 854, 858-59 (7th Cir. 1957); Gall v. Exxon Corp., 418 F. Supp. 508 (S.D.N.Y. 1976); Lasker v. Burks, 404 F. Supp. 1172, 1174 (S.D.N.Y. 1975); Bernstein v. Mediobanca di Credito Finanziario-Societa per Azioni, 69 F.R.D. 592 (S.D.N.Y. 1974); Klotz v. Consolidated Edison Co. of New York, 386 F. Supp. 577 (S.D.N.Y. 1974); Kemper v. American Broadcasting Co., Inc., 365 F. Supp. 1272 (S.D.Ohio 1973); Miller v. American Telephone & Telegraph Co., 364 F. Supp. 648 (E.D.Pa. 1973); Issner v. Aldrich, 254 F. Supp. 696 (D.Del. 1966). This rule is apparently in addition to the demand requirement of Rule 23.1. See generally Lasker v. Burks, supra; see also Note, The Demand Requirement and Standing Requirements in Stockholder Derivative Actions, 44 U.Chicago L.R. 168 (1976).
Defendant argues, relying principally on Bernstein, Lasker and Gall, that plaintiff's failure to adduce any evidence of bad faith after the completion of extensive discovery establishes the business judgment defense and warrants summary judgment in its favor. Plaintiff opposes the motion on two grounds: She first argues that since the board of directors chose to maintain a neutral position with regard to this action, as evidenced by its letter to stockholders dated May 10, 1971, plaintiff has the right to proceed. Her own pleadings in the prior proceeding, however, belie this statement. In her complaint filed in Illinois against Continental, she stated:
(iii) Leasco's Board of Directors met on April 18, 1972 and discussed the New York action brought by plaintiff. At that meeting, the Board decided that it would be "contrary to business ethics" and the corporation's interest for Leasco to have initiated such action.
Such a statement is hardly consistent with plaintiff's present assertion that "the board has carefully and meticulously maintained a position of neutrality." (Plaintiff's memorandum at 5). Moreover, in an affidavit dated April 24, 1973, Saul Steinberg, chairman of the board of directors of Leasco (Defendant's Exhibit F) attested to the board's conclusion that the derivative action was inconsistent with the best interests of the corporation and, in fact, damaging to its business interests. He refers to a resolution of the board that the Nussbacher litigation was contrary to business ethics and would have been damaging to the corporation's "credit and standing in the financial community" had the corporation initiated ...