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April 21, 1964


Appeal, No. 143, Jan. T., 1964, from judgment of Court of Common Pleas of Lehigh County, Sept. T., 1962, No. 9, in case of Leland E. Smith v. Brown-Borhek Company, Robert L. Fox, A. B. Johnston et al. Judgment affirmed; reargument refused May 29, 1964.


Harry A. Dower, with him Dower, Kanehann, Huston, McDonald & Cahn, for appellant.

H. P. McFadden, with him McFadden, Riskin & Williams, for individual appellees.

William B. Joachim, Jr., and Butterfield, Joachim & Brodt, for corporate appellee.

Before Bell, C.j., Musmanno, Cohen, Eagen, O'brien and Roberts, JJ.

Author: Bell

[ 414 Pa. Page 327]


Plaintiff owns 516 out of a total of 8,000 shares of stock (outstanding) in the Brown-borhek Company. He brought this stockholder's derivative suit on October 23, 1962, to recover for the corporation $605,507, the amount of the loss allegedly resulting from negligent mismanagement by the individual defendants, who are, or were at the relevant times, officers and directors. The defendants filed an answer denying plaintiff's material allegations and set up new matter alleging ratification of the acts in issue. Plaintiff filed a reply to the new matter in which he admitted that the stockholders ratified defendants' challenged actions, but denied the legal effect of this ratification and the legality of many of the votes which were cast for ratification. The Court of Common Pleas granted defendants'

[ 414 Pa. Page 328]

    motion for judgment on the pleadings and this appeal followed.

The transactions complained of are a series of sales on credit by Brown-Borhek Company to a large customer, Raydel Homes Corp., throughout 1960 and 1961, and an eventual compromise of the latter's indebtedness in 1962. In 1960 Brown-Borhek's sales to Raydel totaled $550,562, or 37% of all sales. On December 31, 1960, Brown-Borhek carried an account receivable from Raydel of $262,010, which amounted to 60% of Brown-Borhek's receivables and 29% of all its assets. In 1961, Brown-Borhek's sales to Raydel amounted to approximately $1,050,290, 50% of all sales. On December 31, 1961, Raydel's account receivable with Brown-Borhek was $653,994;*fn1 this represented 80% of its receivables and 63% of all its assets.*fn2

Raydel's indebtedness of $605,507 owing to Brown-Borhek as of November 30, 1961, was compromised on February 7, 1962, by an agreement under which Brown-Borhek received $363,300 worth of Raydel 5% non-cumulative preferred stock with a par value of $10 a share and a promissory note for $242,207 with interest at 6%, payable December 31, 1962. In defendants' new matter, they aver that this transaction was part of a composition by Raydel with its major creditors and that in addition Raydel made a cash payment to Brown-Borhek of $50,000. This cash payment was admitted by plaintiff in his reply. Brown-Borhek's President stated at the annual stockholders' meeting that Raydel is presently in bankruptcy, and that nothing of value has been realized as yet from the preferred stock or from the promissory note.

[ 414 Pa. Page 329]

This ratification was made by and pursuant to the following resolution:

"WHEREAS, in accordance with the notice of this meeting the chairman has reviewed the handling of the Raydel account and the questions concerning it raised in a suit by Leland E. Smith, Now THEREFORE

"BE IT RESOLVED that the actions of the officers and directors in connection with the Raydel account be and hereby are ratified and confirmed and made the actions of this Corporation."

This resolution was carried by a vote of 6,693 to 405. Plaintiff's shares were not voted, but counsel for plaintiff was present at this stockholders' meeting.

The lower Court gave judgment for the defendants on the basis of this ratification. Plaintiff contends (1) that the aforesaid transactions could not be ratified under the law and (2) that even if ratification were permitted by law, (a) the transactions could not be ratified by less than all of the Brown-Borhek stockholders and (b) that the vote itself was legally defective because defendants voted their own shares and the proxies of other stockholders in favor of the resolution. We find no merit in any of these contentions.

The rule regarding judgment on the pleadings is well settled.

In Poole v. Great American Insurance Co., 407 Pa. 652, 182 A.2d 509, the Court, quoting from Ross v. Metropolitan Life Insurance Co., 403 Pa. 135, 169 A.2d 74, said (pages 654-655): "'A motion for judgment on the pleadings, like preliminary objections, is the equivalent of the old statutory demurrer and admits all facts which are well pleaded [but not the pleader's conclusions or averments of law]. Necho Coal Co. v. Denise Coal Co., 387 Pa. 567, 128 A.2d 771; Gardner v. Allegheny County, 382 ...

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