The opinion of the court was delivered by: FULLAM
This case is presently before the Court on the defendants' motions to dismiss addressed to five counts of the plaintiff's six-count complaint. The defendants named in the respective counts of the complaint are listed in Appendix A hereto. Plaintiff is the owner of 100 of approximately 1,000,000 outstanding shares of Sunasco $1.65 preferred stock.
Before discussing the defendants' motions to dismiss, it is necessary to describe briefly the corporate transactions that give rise to the plaintiff's claim. Sunasco, a defendant corporation,
came into being as a result of the combination of Sunset International Petroleum Corporation and Atlas Credit Corporation in April of 1966. Sunset was operated as a wholly-owned subsidiary of Sunasco after the combination. However, in 1968, Sunasco with shareholder approval entered into an agreement with Commonwealth United Corporation [hereinafter CUC] to exchange Sunset for, among other things, 1,950,000 shares of CUC common.
In the proxy statement dated December 15, 1967, soliciting approval of the CUC transaction, Sunasco stated that it intended to offer 800,000 shares of CUC common stock to $1.65 preferred shareholders of Sunasco on a favorable exchange ratio so as to allow Sunasco $1.65 preferred shareholders to secure CUC common at 10 to 20% of its market price. On June 7, 1968, Sunasco entered into an agreement with Kleiner, Bell & Co. to sell 1,400,000 shares of CUC common to that firm at $8 per share. On August 28, 1968, as a result of the Kleiner, Bell transaction, Sunasco was able to offer only 382,500 shares of CUC common to $1.65 preferred shareholders on a five to two exchange basis. The response to the exchange offer was such that Sunasco could accept only 53% of the Sunasco stock tendered pursuant to the exchange offer.
As of August of 1968, Sunasco had not paid any $1.65 preferred dividends for the five preceding quarters. This resulted in an outstanding accumulation of preferred dividends of approximately $2 per share. Moreover, in August of 1968 there were $1.65 preferred warrants outstanding in the amount of 148,679 shares. In December of 1968, Sunasco declared one of the past due preferred dividends of $.41 per share. On the record date for this dividend, 2,351 shares of Sunasco preferred had been acquired as the result of the exercise of Sunasco warrants. Although these warrants were exercised after the due date for the $.41 dividend declared in December 1968, the dividend was paid to the shareholders who had acquired their stock by the exercise of warrants prior to the record date.
The last transaction in question was the transfer of 197,235 shares of Sunasco common, plus the payment of $1,000,000 to Sunset in consideration for satisfaction of outstanding Sunasco obligations to Sunset. Proxy statements describing the above transaction were distributed to Sunset shareholders, and the shareholders approved the transaction. The plaintiff contends the debt was overevaluated by $600,000.
In Count I the named plaintiff in his own right and on behalf of all Sunasco $1.65 preferred shareholders similarly situated seeks redress for Sunasco's alleged breach of its undertaking in the proxy statement of December 15, 1967 to offer 800,000 shares of CUC common in exchange for Sunasco $1.65 preferred. Sunasco has moved to dismiss for lack of subject matter jurisdiction in that $10,000 is not in controversy.
Plaintiff's complaint and briefs contra Sunasco's Rule 12(b)(1) motion make it clear that the plaintiff does not contend that the requisite $10,000 would be in controversy if Count I of the complaint had been filed by the plaintiff individually and no other counts were alleged in the complaint. Consequently, unless the plaintiff can aggregate the claims of the other members of the class with his own, aggregate the claims in the other counts of the complaint to Count I, or establish pendent jurisdiction over this Count, Sunasco's motion must be granted.
In Snyder v. Harris, 394 U.S. 332, 89 S. Ct. 1053, 22 L. Ed. 2d 319 (1969), the Supreme Court held that federal diversity jurisdiction does not lie if the rights of the class members asserted are individual in nature, and the named plaintiff's claim does not exceed $10,000. Essentially, the Court in Snyder carried forward the jurisdictional doctrine applicable under the pre-1966 version of Rule 23. The long-established judicial doctrine is that for jurisdictional purposes the claims of class members can be aggregated only if the right asserted in the class action is a common undivided right of the class.
Snyder involved a shareholders' class action against a corporation's directors alleging that the directors had received a premium over the fair market value of their shares because the size of the block of stock traded effectively transferred control of the corporation to the purchaser of the stock. Under Missouri law, shareholders are entitled to a pro rata share of the premium received in such a transaction. By affirming the lower court's dismissal, the Court held that such a shareholders' class action seeks to redress only individual rights.
Initially, it should be pointed out that the complaint is defective in its attempt to invoke equitable jurisdiction because no allegation is made that the available legal remedies are inadequate. More importantly, the proper focus is not the relief requested, but rather the right asserted. Lonnquist v. J.C. Penney Co., 421 F.2d 597 (10th Cir. 1970). Is the right asserted in Count I a right that can be asserted by individual members of the class, or is it a class right which does not give rise to causes of action by the individual class members? Berman v. Narragansett Racing Association, 414 F.2d 311 (1st Cir. 1969), a post- Snyder case, relied upon by the plaintiff, exemplifies the proper analysis. There the court held that the right asserted by the class plaintiffs was joint and undivided because the contract alleged was between the class of all racehorse owners who won during a specified period of time and the defendant track owners, and that the members of the class as such had no individual rights to sue on the alleged contract. See also Broenen v. Beaunit Corp., 305 F. Supp. 688 (E.D. Wisc. 1969). In the present case, the proxy statement was sent to all shareholders of record, and to the extent that Sunasco's failure to perform the undertaking therein is actionable, each shareholder has an individual cause of action. Pinel v. Pinel, 240 U.S. 594, 36 S. Ct. 416, 60 L. Ed. 817 (1916); Pentland v. Dravo Corp., 152 F.2d 851 (3rd Cir. 1945); Booth v. Lemont Mfg. Co., 304 F. Supp. 235 (N.D. Ill. 1969); Lesch v. Chicago & Eastern Illinois Ry. Co., 279 F. Supp. 908 (N.D. Ill. 1968).
Also, analysis of the equitable relief requested by the plaintiff reveals that the relief sought is merely a means of redressing the individual claims of the class members. For instance, if the Kleiner, Bell transaction were held to be null and void, Sunasco would be able to perform the alleged undertaking to offer 800,000 shares of CUC common to the preferred shareholders. However, this relates only to the individual shareholders' opportunity to exchange Sunasco $1.65 preferred for CUC common, and the shareholders' opportunity to make a profit on the transaction. Essentially, Count I seeks to reclaim the profit that would have been made by the shareholders had Sunasco performed its original undertaking. Equally, the reinstatement of the $1.65 liquidation preference to its prior level relates only to the individual shareholders' pro rata share upon liquidation. Thus, it is clear that the plaintiff cannot aggregate the respective claims of the members of the alleged class.
Plaintiff next contends that he can aggregate the amounts in controversy of the first count with the second count. The second count is a derivative shareholders' suit against the directors of Sunasco, Kleiner, Bell & Co. and Sunasco as a nominal defendant. The claim asserted is that the Kleiner, Bell transaction was the product of a conspiracy between the Sunasco directors and Kleiner, Bell to waste Sunasco's assets, to the benefit of Kleiner, Bell.
In Snyder v. Harris, supra, the Supreme Court recognized the traditional rule that the jurisdictional amount may be satisfied when a plaintiff seeks redress of two separate claims against one defendant. 394 U.S. at 335, 89 S. Ct. 1053, 22 L. Ed. 2d 319. Obviously, Counts one and two differ in that the defendants in each count are different, and although the named plaintiff is the same, Mr. Weiss sues to redress a corporate right in Count II through the procedural device of Rule 23.1; whereas he sues in his own right to redress a breach of a duty owed to him personally in Count I. Plaintiff's citations relating to the proposition that one act of a particular corporate director or directors may constitute a breach of a duty owed the shareholders individually and a duty owed the corporation are inapposite in the present case. It is true that the shareholders may sue in their own right and also sue derivatively in one cause of action. However, no case has been found which supports a rule that the amount in controversy in a class action by shareholders and in a derivative action can be aggregated. See Wright, Law of Federal Courts, 121 § 36 (2d Ed. 170).
Even if one gives the exception to the no-aggregation rule a liberal reading, there is no justification for allowing the aggregation of an individual shareholder's claim and that of the corporation. Just as the new class action rule did not expand existing jurisdictional rules, Snyder v. Harris, supra, so also Rule 23.1 by allowing an individual to bring a derivative action on behalf of the corporation did not in any way change what is fundamentally a corporate cause of action into a personal cause of action of the shareholder plaintiff.
Finally, plaintiff invokes the doctrine of pendent jurisdiction to support this Court's jurisdiction over Count I. Although it has been argued that the doctrine of pendent jurisdiction is applicable only when a state claim is found to be pendent to a federally created cause of action, Olivieri v. Adams, 280 F. Supp. 428 (E.D. Pa. 1968), the Third Circuit has held on three occasions that a diversity claim may be pendent to another diversity claim properly brought in the federal system. Borror v. Sharon Steel Co., 327 F.2d 165 (3d Cir. 1964); Wilson v. American Chain & Cable Co., Inc., 364 F.2d 558 (3d Cir. 1966); Jacobson v. Atlantic City Hospital, 392 F.2d 149 (3d Cir. 1968).
In Borror the Court held that if federal diversity jurisdiction properly exists over a Pennsylvania survival action, the doctrine of pendent jurisdiction is applicable to the wrongful death action brought by the decedent's personal representative. Chief Judge Biggs, writing for the Court, emphasized the fact that the two actions are complementary, that is, both actions arise from the same tortious conduct of the defendant toward the decedent. Similarly, in Wilson, the Court held that a father's claim for medical expenses occasioned by the tortious injury of his son was pendent to the son's action brought by his father for the injuries inflicted on the son. In both cases, one tortious act gave rise to two causes of action, but because these causes of action redress a single wrong, the Court held that pendent jurisdiction was applicable.
Jacobson involved only a single plaintiff asserting claims against two doctors and a hospital for malpractice. The court there held that the claim against the hospital was pendent to the claim against one of the doctors because the facts giving rise to both claims were so intertwined as to lead the court to consider the action against the doctor and the action against the hospital as one action for the purposes of establishing the jurisdictional amount. Again, the court emphasized the fact that the ...