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GOLAR v. DANIELS & BELL

February 19, 1982

Simeon GOLAR, on behalf of himself as a shareholder of Freedom National Bank of New York, and in the right of Freedom National Bank of New York, and on behalf of all other shareholders of said corporation similarly situated, Plaintiff,
v.
DANIELS & BELL, INC., Dan Bell Group, Inc., Travers J. Bell, Jr., Travers J. Bell, Sr., Frank Savage, James Dowdy, John H. Howell, Edward Lewis, Wyatt Tee Walker, Sharnia "Tab" Buford as President of Freedom National Bank of New York, Freedom National Bank of New York, Bedford-Stuyvesant Restoration Corporation, Harlem Commonwealth Council, Inc., and the Comptroller of the Currency, Defendants



The opinion of the court was delivered by: DUFFY

This is a stockholder derivative action alleging violations of the National Banking Act, 12 U.S.C. §§ 24, 51b(a) and 71, and of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Plaintiff Simeon Golar is a director of the defendant Freedom National Bank of New York ("Freedom") and owner of 971 shares of common stock of the bank. Freedom is a national bank and the only Black-owned and operated commercial bank in New York. It has its principal office in Harlem, New York City. On behalf of himself, other shareholders and derivatively on behalf of Freedom, the plaintiff accuses certain members of the board of directors of Freedom of engaging in a course of conduct which prevents Freedom from exercising its right to redeem its convertible stock. The plaintiff seeks inter alia an injunction against certain directors of the bank from purchasing the bank's outstanding convertible stock and damages resulting from any consequent dilution in the common stock's value.

According to the complaint, the defendants have attempted to purchase the convertible stock for their own account in an effort to obtain control of a majority of Freedom's common stock. The complaint alleges that all the outstanding convertible stock of Freedom is presently owned by defendants Bedford-Stuyvesant Restoration Corporation ("Restoration") and Harlem Commonwealth Council, Inc. ("Harlem Council"), two New York not-for-profit corporations. The defendant directors purportedly arranged to purchase from Restoration and the Harlem Council the outstanding preferred shares of Freedom without disclosing this fact to the entire board.

 Under the terms of the convertible stock, Freedom has the right of redemption at a price of either $ 25 per share or 44/9 shares of Freedom common stock per share. According to plaintiff, the Board of Directors voted for redemption, but the defendants attempted to thwart the will of the board and instead purchase the outstanding convertible stock for their own use.

 The complaint sets forth four claims. The first alleges that Freedom and its President Sharnia Buford failed to implement a December 4, 1981 resolution by Freedom's Board of Directors to redeem the Bank's convertible stock. This resolution allegedly was passed by a vote of six to five. In addition to seeking an injunction compelling Freedom to redeem its convertible stock, count one of the complaint requests an injunction against seven members of the board of directors from acquiring any Freedom convertible stock for their own account.

 The second claim alleges that two groups of members of the board of directors, the Bell Group (consisting of Travers J. Bell, Sr. and Travers Bell, Jr.) and the Savage Group (consisting of defendants John H. Howell, Edward Lewis, Frank Savage, James Dowdy and Wyatt Tee Walker) are attempting to purchase 10,000 shares of convertible stock with the intent to convert these shares into common stock shares. This will result in an increase in the number of outstanding shares of common stock currently held by 1,770 Freedom shareholders and effectively vest control of Freedom in either the Savage or the Bell group. In addition, this action will purportedly disrupt not only the continuity of management but also the policies of the bank. Thus, according to the plaintiff, the defendant directors are breaching "their fiduciary duty and obligation to faithfully and diligently administer the affairs of Freedom as directors of the bank." Amended Complaint, P 34.

 The third claim alleges that the Savage group has committed fraud in violation of Section 10(b) of the Exchange Act of 1934 by attempting to purchase the 10,000 shares of convertible stock discussed in Count II and thereby prevent Freedom from redeeming the same stock. Three vaguely described instances of fraud are alleged. First, the defendants Savage, Dowdy, Howell, Lewis and Walker while acting in their capacities as directors of the Bank failed to disclose to the bank or its disinterested directors that the defendants had offered on May 11, 1981 to purchase from Restoration and the Harlem Council the bank's convertible stock for a purchase price of $ 1.1 million. Second, the defendants also failed to disclose that they had actually entered into an agreement with Restoration to purchase the convertible stock. Third, at a December 4, 1981 meeting of the board of directors the Savage Group withheld this information and "thereupon manipulated the vote of the board of directors with respect to the December 4 Redemption Resolution and ... prevailed upon the management of the bank to refuse to implement such redemption resolution." Amended Complaint, P 39.

 The fourth claim asserts that if either the Savage Group or the Bell Group acquire the convertible stock of Freedom presently held by Restoration the common stock of Freedom will consequently decrease in value by $ 500,000. This diminution will purportedly result from the defendants' breach of their fiduciary duties. In addition to injunctive relief against all defendants, including Restoration and the Harlem Council, plaintiff seeks damages against the Savage Group in the amount of $ 500,000.

 This action was originally commenced in state court where plaintiff obtained an ex parte temporary restraining order against Restoration and the Harlem Council from selling or converting their convertible stock. On January 7, the Bell group removed this action to this court. Plaintiff now moves for a preliminary injunction against all defendants from buying or selling Freedom convertible stock and compelling Freedom to redeem the outstanding convertible stock in accordance with a board of directors resolution. On February 3, 1982, I granted plaintiff a temporary restraining order against all defendants except Restoration and the Harlem Council. For the reasons stated below, plaintiff's motion for a preliminary injunction is denied and the case is remanded to the state court.

 DISCUSSION

 As a preliminary matter, it should be stated that remand in this case is necessary because of the failure of all fourteen defendants to join in the petition for removal. Evidently, only four defendants (Daniels & Bell, Inc., Dan Bell Group, Inc., Travers J. Bell, Sr. and Travers J. Bell, Jr.) petitioned this court for removal. It is settled law that removal requires the consent of all the defendants. Chicago R. I. & P. Ry. v. Martin, 178 U.S. 245, 20 S. Ct. 854, 44 L. Ed. 1055 (1900); Reiken v. Nationwide Leisure Corp., 458 F. Supp. 179 (S.D.N.Y.1978).

 More substantive reasons exist, however, for returning this case to the state court. Plaintiff's amended complaint has two purported bases for subject matter jurisdiction under 28 U.S.C. § 1331. Plaintiff alleges violation of the National Bank Act, specifically 12 U.S.C. §§ 24, 51b(a) and 71, and violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). The complaint fails, however, to state a claim for relief under any of these sections of our federal banking and security laws.

 1. Banking Laws

 The first section invoked by plaintiff under the banking laws is Section 24 of Title 12 of the United States Code. This section enumerates nine corporate powers of a national banking association. Plaintiff argues that the seventh power is of significance here; that is the bank's power "(t)o exercise by its Board of Directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking ...." 12 U.S.C. § 24 (Supp.1981). Plaintiff also invokes Section 71 of Title 12 which provides in part: "The affairs of each association shall be managed by not less than five directors ...." Finally, plaintiff refers to Section 51b(a) which provides that the preferred stock of a national bank shall be subject to such terms and conditions as may be provided in the bank's articles of association with the approval of the Comptroller of the Currency. According to the complaint, these sections have been violated by the defendant directors' actions to prevent Freedom from exercising its redemption option. Redemption was purportedly mandated by a lawful vote of the board.

 The initial question raised by this motion to dismiss is whether the plaintiff has the right to sue directly under any of the invoked sections of the National Bank Act. With respect to Section 71, plaintiff cites only one case, Wahyou v. Central Valley National Bank, 361 F.2d 755 (9th Cir. 1966), which purportedly stands for the proposition that a violation of Section 71 raises a federal question for which a private plaintiff may seek equitable relief. Wahyou involved an injunction against the implementation of an election of directors. The appeal was dismissed as moot and the court did not at all develop a rationale for permitting the bank and two of its directors to sue. That case is not supportive of plaintiff's position. Wahyou concerned the election of board members by stockholders. Such ...


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