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SELAS OF AMERICA N.V. v. SELAS CORP. OF AMERICA

September 27, 1973

SELAS OF AMERICA (NEDERLAND) N.V. General Kinetics, B.V.
v.
SELAS CORPORATION OF AMERICA et al.


Huyett, District Judge.


The opinion of the court was delivered by: HUYETT

HUYETT, District Judge.

 Selas of America (Nederland) N.V. (SAN) was, prior to September 16, 1971, a wholly owned subsidiary of the defendant corporation, Selas Corporation of America (SCA). By a "Memorandum of Understanding" dated September 16, 1971, entered into between SCA and a group of "Key Employees" of SAN, SCA agreed to sell 60% of the SAN shares issued and outstanding to a new Dutch corporation to be organized by the "Key Employees". General Kinetics (GK) was later organized for this purpose. The memorandum also provided that SCA would for a three year period be entitled to nominate three of the five members of SAN's Board of Directors, and thereafter two members; SAN would authorize and issue ten (10) noncallable preferred shares bearing cumulative dividends at the rate of $60,000.00 per share for two years and $40,000.00 per share thereafter; SCA would be entitled to repurchase the SAN shares sold to GK if the $600,000.00 preferred dividend was not paid at the end of each of the first two years; SCA was to receive all of the retained earnings of SAN as of October 1, 1971 "comprising approximately two million dollars (subject to final audit)."

 Soon after execution of the Memorandum of Understanding and after transfer of the SAN shares to GK, a dispute arose between the parties concerning the proper amount of SAN's retained earnings as of October 1, 1971. An audit commissioned by SCA placed SAN's retained earnings at $2,280,096.00; an audit commissioned by SAN placed retained earnings at $1,869,363.00. In July of 1972 SCA brought suit in the Netherlands attempting to establish the primacy of the audit it had commissioned which entitled SCA to a greater amount of retained earnings than that reflected in the SAN audit.

 In April of 1973 SCA brought a second suit in the Netherlands seeking to reacquire full control of SAN under the provisions of the Memorandum of Understanding whereby SAN was to pay a $600,000.00 preferred dividend to SCA for the period from October 1971 to September 1972. SCA claims that SAN's earnings for the period of October 1971 to September 1972 is sufficient to pay the $600,000.00 dividend owed SCA only because of the under-reporting of retained earnings accomplished by use of the SAN audit for the period prior to October 1, 1971. Of the $700,000.00 of total earnings by SAN for the twelve-month period commencing October 1, 1971, $410,733.00 are a result, SCA contends, of SAN's under-reporting of retained earnings for the period prior to October 1, 1971. Thus, SCA reasons that if the audit it commissioned is found by the Netherlands court to be the correct report, SAN cannot possibly meet its obligations to pay the $600,000.00 dividend for the 1971-1972 period. This result would allow SCA the right to reacquire SAN pursuant to the Memorandum of Understanding.

 Based on this history of prior litigation between SCA, SAN and its various officials, the defendants in the action currently before us have moved to dismiss or stay Counts I through VII and IX of the complaint. Defendants contend that plaintiffs' complaint is in essence a request for declaratory relief which should not be entertained by this court since the issues in the case sub judice will be decided by the Netherlands litigation. Count VIII is sought to be dismissed but on the substantive grounds that this court lacks subject matter jurisdiction under the Securities Exchange Act of 1934 (Act) and that Count VIII fails to state a claim upon which relief may be granted under § 10(b) of the Act, 15 U.S.C. § 78j(b)(1970). We will consider the motion to dismiss or stay Counts I through VII and IX separately from our consideration of the motion to dismiss Count VIII.

 Motion to Dismiss or Stay Counts I through VII and IX

 Counts I through VII and IX of the complaint are premised on diversity of citizenship jurisdiction, 28 U.S.C. § 1332(a)(2) (1970); plaintiffs are citizens of the Netherlands and the defendants are citizens of Pennsylvania. The requisite jurisdictional amount is also alleged.

 Count I alleges a breach of fiduciary duty by SCA and the three SCA appointed Board of Directors of SAN. It is alleged that the individual defendants, Siemssen, Seemann, and Claycomb, have used confidential information obtained as a result of their service as SAN Directors for the purpose of attempting to influence SAN's customers to breach, repudiate or cancel existing contracts with SAN. The prayer for relief under Count I is for one million dollars damages, one million dollars exemplary damages, an injunction restraining defendants from interfering with relations between SAN and any of its customers or from making false representations concerning SAN to those customers, removal of the SCA appointed Directors from the SAN Board and an order voiding that paragraph of the Memorandum of Understanding allowing SCA to nominate three (later two) of SAN's Directors.

 Count II alleges interference with contractual relationships. The factual allegations underpinning Count II are substantially similar to the allegations in Count I. The prayer for relief under Count II asks for damages and injunctive relief.

 Count III alleges trade defamation resulting from false information supplied by SCA to the effect that SAN was technologically incapable of fulfilling its contractual obligations to its customers. In addition, it is alleged that SCA published a false report that SAN was about to become bankrupt and that SAN had not earned the $600,000.00 preferred dividend authorized by SAN's Board of Directors. The prayer for relief requests damages and an order compelling SCA to retract the alleged false statements.

 Count IV alleges unfair trade practice and unfair competition. The facts alleged are substantially similar to those alleged in regard to the previous count.

 Counts V, VI and VII allege breaches of contract. Count V involves a contract negotiated by SAN and SCA with Linde-McKee for the design and manufacture of a gas-cracking furnace in Argentina (the Bahia-Blanco Project). SAN prepared the process design and was to be reimbursed by SCA. Although a successful bid was submitted by SCA, SAN has not been paid for its contribution to the project. In addition to a prayer for damages, plaintiffs request that paragraph 14 of the Memorandum of Understanding reserving a right of repurchase of SAN by SCA be voided. Count VI alleges breach of the Memorandum of Understanding. SAN claims that SCA refused to provide a "countersignature" on a performance guarantee for a contract to design and construct an industrial facility in Leuna, East Germany. It is alleged that SCA was obliged by the Memorandum of Understanding to provide counter-signatures for performance guarantees. Count VII alleges breach of an agreement between SCA and SAN whereby SAN was to be the sub-licensee under a license from Imperial Chemical Industries. The prayer for relief in Count VII asks for damages, an order reducing the preferred dividends payable by SAN to $150,000.00 per year and an order voiding SCA's right under paragraph 14(f) of Memorandum of Understanding to repurchase the 60% interest in SAN.

 Count IX alleges a conspiracy by the defendants to ruin and destroy SAN's business and the value of GK's interest in SAN. The prayer for relief under this count seeks an order voiding the provision for payment of preferred dividends, an order voiding the provision for repurchase of the SAN shares held by GK and an order excusing ...


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