Monoxide to maintain this action on behalf of Catalyst Research.
Defendants' contentions on these three points must be overruled.
(1) The complaint is sufficiently specific. Although Rule 9(b) of the Federal Rules of Civil Procedure
requires that the circumstances constituting fraud must be stated with particularity, this rule does not abrogate Rule 8(a) which requires short and plain statements in the pleadings.
It is only necessary that the complaint set forth ultimate facts, which are the facts upon which the plaintiff asks relief, and which are sufficient to constitute his cause of action.
General allegations of fraud are insufficient, and enough facts must be set out to apprise the defendant what fraudulent acts are charged. Evidence and proof, however, cannot be made part of the pleadings, for that would destroy the fundamental distinction between the ultimate facts, which alone need be pleaded, and the evidence and proof upon which these facts are based.
Since the function of a "notice" system of pleading is to afford fair notice of the nature and basis of the claim asserted and a general indication of the type of litigation involved,
defendants cannot be heard to say they do not have fair notice. Plaintiff has stated sufficient ultimate facts to notify defendants of the nature of the action, and the fraudulent acts charged.
(2) Generally a court will not accept jurisdiction of a suit involving internal management of a foreign corporation. But this action for an accounting cannot be considered as such a suit, in view of the decision in Overfield v. Pennroad Corporation, 3 Cir., 1940, 113 F.2d 6. That case held that a stockholders' derivative suit on behalf of a foreign corporation for an accounting did not involve internal management.
Defendant contends that if Overfield v. Pennroad Corporation, supra, had involved the internal management of a foreign corporation, the district court's jurisdiction would have been denied. That position is incorrect. The Supreme Court of the United States has said.
"* * * No definite rule of general application can be formulated by which it may be determined under what circumstances a court will assume jurisdiction of stockholders' suits relating to the conduct of internal affairs of foreign corporations. But it safely may be said that jurisdiction will be declined whenever considerations of convenience, efficiency, and justice point to the courts of the state of the domicile as appropriate tribunals for the determination of the particular case. * * *" (Emphasis added).
Thus Federal courts have discretion to accept jurisdiction of such a case, even though it involves the internal management of a foreign corporation. It is no abuse of discretion for this district court to accept jurisdiction in the instant case. Under the rule of convenience (see Overfield v. Pennroad, supra), there is no more appropriate tribunal than the District Court of the Western District of Pennsylvania. The principal defendant is domiciled here, as are all the individual defendants, and the foreign defendant corporations do business here. All have been properly served and entered their appearances. It would be hazardous to assume that such complete jurisdiction could be obtained elsewhere.
Further, the general rule as to internal affairs of foreign corporations does not maintain where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relation which prevents an unprejudiced exercise of judgment.
The instant case alleges examples of both exceptions.
Under these authorities, this court has jurisdiction.
(3) Defendants' third contention in support of the motion to dismiss involves stockholders' "double derivative" rights. It is a well-settled principle of law that a stockholder may enforce a cause of action belonging to the corporation, if the directors and stockholders refuse to do it.
Can this right be extended to enforce a cause of action in favor of a subsidiary of the corporation in which complainant is a stockholder? The better view grants the stockholder "double derivative" rights,
although there is authority to the contrary.
Defendants assert that to permit "double derivative" suits would create an intolerable legal situation, by permitting a stockholder of a corporation to sue for any corporation whose stock was held by the initial corporation in a substantial amount. This does not follow equity practice. A review of the cases permitting "double derivative" rights shows in each case some equitable reason for permitting such practice, for otherwise the complainant would have no remedy. This principle was expressed by the Second Circuit Court of Appeals,
"The justification for allowing a double derivative suit like the present to be maintained is that both the original corporation that is said to have suffered wrong and its shareholder corporation which had the right to bring a derivative suit were in the control of those charged with inflicting the corporate injury."
While contending that the plaintiff has no right to enforce the action for Catalyst Research, defendants admit that the rule may be different for holding companies. But the above quotation indicates that it is the element of control which determines the "double derivative" right, not whether the parent company is also an operating company.
To effect substantial justice, equity will pierce the corporate veil, especially when the affairs of the parent and its subsidiaries are so interwoven as to dictate the penetration. This case justifies such action to render equitable relief; plaintiff has no other remedy if it is denied.
From another viewpoint, the joinder of Catalyst Research must be upheld. It is certain that the plaintiff in the present action may properly sue Catalyst Research, its officers and directors. In this aspect, plaintiff is enforcing a single derivative right, i.e., the cause of action that Carbon Monoxide, as a stockholder, has against Catalyst Research, for permitting its assets to be raided. If Carbon Monoxide refuses to prosecute this cause of action, there is no doubt that a stockholder of Carbon Monoxide may do so, by a stockholders' suit. Only when the suit seeks to include adjudication of Catalyst Research's cause of action against Mine Safety, does it involve double derivative rights.
But Mine Safety is already a proper party to the action, since one phase involves the enforcement of Carbon Monoxide's cause of action against Mine Safety. This is a single derivative suit. Since this court has proper jurisdiction over all the parties, it may use its equity powers to grant full relief in one suit, including the adjudication of Catalyst Research's cause of action against Mine Safety.
Defendants' motion to dismiss the complaint is denied. Orders accordingly may be submitted by plaintiff's counsel on notice to defense counsel.