The point at which they draw the line is that the duty does not come into existence as to mere stockholders "except when those stockholders do not content themselves with the ordinary functions of stockholders, but take upon themselves the powers and prerogatives of directors." As a corollary to this proposition, the defendants contend that in cases where a duty does exist it is only in respect of direct dealings with the corporate property, and can never attach to dealings in its stock.
The fundamental difficulty with the defendants' position is that it fails to recognize that this case involves more than a question of liability -- even that of majority stockholders, which these defendants were not -- in respect of the sale of corporate stock. What is involved here, as has been pointed out, is a sale of control by a minority, but controlling, interest. The duties and liabilities in such case may be more than I have assumed them to be for the purposes of this case, but they are certainly not less. I have stated them as narrowly as possible, and I think that as so stated they are well grounded in the law.
Several minor and more or less technical questions raised by the defendants remain to be considered.
The bill in equity filed in this case might, under the old practice, have been open to the objection that it pleads two distinct causes of action, first, conspiracy to defraud, and, second, negligence. I have held that the owners of control of a corporation occupy a fiduciary relationship to the corporation and its stockholders in respect of the transfer of control and that they owe a duty of due care -- a duty in which these defendants failed, with consequent loss to the corporation. This cause of action is sufficiently pleaded, and the charge of knowingly participating in a fraudulent conspiracy may be dismissed as surplusage.It was not established by the evidence, but the testimony directed to it has a bearing upon the alternative charge. The Federal Rules of Civil Procedure 28 U.S.C.A. following section 723c, are fully applicable, and Rule 8(e) (2) provides that: "A party may set forth two or more statements of a claim * * * alternately or hypothetically, either in one count * * * or in separate counts * * *."
It appears that Paine, Webber & Co. have settled their liability to the corporation and that an instrument was delivered to them which, the defendants contend, operates as a general release and extinguishes the plaintiff's right of action against the remaining defendants. The instrument in question in words: (1) released Paine, Webber & Co.; (2) expressly reserved the plaintiff's rights against all other parties, including specifically Hepburn and the Philadelphia banks; (3) declared it to be the intent of the parties thereto that it should be construed and given effect as and only as a covenant not to sue; (4) expressed the plaintiff's covenant not to sue Paine, Webber & Co.; (5) declared that such covenant was not to affect or prejudice plaintiff's expressly reserved rights against any other parties.
The defendant invokes what has been called "one of those harsh, although strictly logical common-law, rules which has had to make way for the modern tendency to substitute justice for technicality." Walsh v. New York C., etc., R. Co., 204 N.Y. 58, 63, 97 N.E. 408, 410, 37 L.R.A.,N.S., 1137. Although the instrument at its beginning uses technical words of release, if read as a whole in the light of its plainly expressed and dominant intention to reserve the plaintiff's rights against all other parties, I think it must be construed as a covenant not to sue -- particularly as the parties provide, "it being the intent of the parties that this instrument be construed and given effect as and only as a convenant by the party of the first part not to sue the parties of the second part." Even if these words were not present, I am of the opinion that a release coupled with an express reservation of the rights of the releasor against other joint tort feasors would not destroy those rights in any of the three possible jurisdictions (New York, New Jersey or Delaware) the law of which might apply. However, it is the law everywhere that a covenant not to sue does not affect the covenantor's rights against other joint tort feasors, and I think this instrument is plainly to be so construed.
The judgment to be entered here will be for the plaintiff generally. Further proceedings for the purpose of assessing damages and including the amount in the judgment may be taken unless an agreement can be reached upon that point.
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