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Newkirk v. W.J. Rainey, Inc.

Court of Chancery of Delaware, New Castle County

October 26, 1950

NEWKIRK et al.
v.
W. J. RAINEY, Inc., et al.

Page 122

[31 Del.Ch. 434] James R. Morford and Edward W. Cooch, Jr. (of Morford, Bennethum, Marvel & Cooch), Wilmington, for plaintiffs.

C. S. Layton (of Richards, Layton & Finger) and Earl F. Reed (of Thorp, Bostwick, Reed & Armstrong), Pittsburgh, Pa., for moving defendants.

SEITZ, Vice Chancellor.

Certain of the defendants have moved to dismiss as to all plaintiffs except plaintiffs Newkirk and Mazzotti or to strike such plaintiffs on the ground that they were not stockholders at the times of the transactions of which they complain and their stock did not devolve upon them by operation of law. This objection is predicated on Sec. 51A of the General Corporation Law of Delaware, Rev.Code 1935, § 2083A, as added by 45 Del.Laws, c. 157, § 4, which provides: 'In any derivative suit hereafter instituted by a stockholder of a corporation organized under the laws of this State, it shall be averred in the Bill of Complaint that the Complainant was a stockholder of the corporation at the time of the transaction of which he complains or that his stock thereafter devolved upon him by operation of law.'

Thus, it must be ascertained whether the plaintiffs covered by defendants' motion were owners (either legal or equitable) of the stock at the times of the transactions of which they complain. Plaintiffs tacitly concede that their stock did not devolve upon them by operation of law.

To dispose of the issue posed, I must determine during what period of time the transactions of which plaintiffs complain took place.

In this action plaintiffs seek to have a trust impressed upon stock of Texas Gas Transmission Corporation held by the corporate defendants Hecla Coal & Coke Company and W. J. Rainey, Inc., and/or the individual defendants. Plaintiffs allege that one J. H. Hillman, Jr., and the other [31 Del.Ch. 435] individuals as well as the corporate defendants, acting under Hillman's domination and control, in breach of their fiduciary duties to Pennsylvania Industries, Inc., diverted to their own use and profit corporate opportunities to which Industries rightfully was entitled.

I shall summarize the pertinent allegations. In 1944 Hillman knew of the bright prospects for natural gas industries. He then conceived the plan of creating a vast natural gas transmission system. Pursuant to Hillman's preconceived plan he diverted from Industries in June, 1944, the opportunity to purchase shares of Kentucky Natural Gas Corporation. In November, 1945, pursuant to his plan, Hillman diverted from Industries a second corporate opportunity to purchase Kentucky stock. Also pursuant to his preconceived plan, Hillman

Page 123

On December 7, 1945, Hillman caused Texas to be organized for the purpose of consolidating the operation of Kentucky and Memphis in furtherance of his preconceived plan to develop an integrated natural gas transmission system. This preconceived plan was not consummated until April 9, 1948, when the merger of Kentucky, Memphis and Texas was achieved.

Plaintiffs contend that although the wrong of which they complain had its inception before they acquired their stock, they are not precluded from maintaining a derivative action because it was continuing at and after the times plaintiffs purchased their stock. They argue that when a wrong is a continuing one and has not been consummated, a derivative action may be maintained by stockholders who purchased their shares after the 'inception' of the wrong. They say the alleged plan of wrong-doing was begun in 1944 and was not consummated until April 9, 1948, when the merger of the corporations involved in the scheme took place.

[31 Del.Ch. 436] Defendants point out that none of these plaintiffs acquired their stock until at least October, 1947. They further point out that the last stock purchase of which these plaintiffs complain took place in 1945. Thus defendants say the transactions were not continuing when the plaintiffs purchased their stock.

The issue is whether the actual diversion of the three corporate opportunities to purchase stock in 1944 and 1945 are the transactions of which plaintiffs complain, or whether, because of the alleged continuing scheme, the 1948 merger constituted the culmination of the transactions of which plaintiffs complain.

There is substantial authority for the general proposition that if, in a derivative action, the wrong complained of is a continuing one and has not been consummated, a transferee of stock may sue although the wrong commenced before the transfer. See 13 Fletcher Cyc. Corps. (Perm.Ed.), Sec. 5982. This rule is sometimes called an 'exception' to the statutory rule, our Sec. 51A, that in order to maintain a derivative action the stockholder must allege that he was a stockholder at the time of the transaction of which he complains. In states where such a statute exists and the rule is recognized, there is no inconsistency in application because those courts do ...


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