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April 8, 1975


The opinion of the court was delivered by: HIGGINBOTHAM

This action is a derivative and class suit for damages and equitable relief instituted by a convertible debenture holder in The First Pennsylvania Mortgage Trust (hereinafter "Trust"). The suit was instituted against Trust, its eight trustees, and certain related corporations for alleged violations of the securities laws and the Investment Advisers Act of 1940, 15 U.S.C. ยง 80b-1 et seq. The defendants have filed, upon a number of substantive and procedural grounds, motions to dismiss the complaint which I find must be granted because plaintiff lacks standing to sue derivatively under Fed. R. Civ. P. 23.1 and because he lacks standing to sue upon the claims alleged in his own right as a security holder of Trust.


 As recited in the complaint, Trust was organized under the sponsorship of defendant, First Pennsylvania Corporation (hereinafter "First Pennsylvania"), as a Massachusetts business trust *fn1" established to invest in a diversified portfolio of real estate mortgages and similar investments. Defendant, Associated Mortgage Companies, Inc. (hereinafter "Associated"), is a wholly owned subsidiary of First Pennsylvania and pursuant to its mortgage servicing agreement with Trust, originates, sells and services both permanent first mortgage loans and construction and development loans invested in by Trust. Defendant, Associated Advisers, Inc. (hereinafter "Advisers"), also a wholly owned subsidiary of First Pennsylvania, is under contract to Trust as an investment adviser and was organized for that specific purpose in 1970. Advisers and Associated receive fees and commissions for the services they provide Trust under their respective agreements. Defendant, The First Pennsylvania Banking and Trust Co. (hereinafter "Bank"), is also a wholly owned subsidiary of First Pennsylvania and invests in mortgage loans and construction and development loans of the type invested in by Trust. The eight individual defendants are trustees of Trust, three of whom have formal affiliations with First Pennsylvania. *fn2"

 Against this background plaintiff claims that the defendants have defrauded and continue to defraud Trust through grossly excessive fees and commissions paid under its contracts with Associated and Advisers (Count I); through Trust purchases of low quality investments from Bank in August and September, 1970 (Count II); and by diverting the better investment opportunities from Trust's investment portfolio and permitting First Pennsylvania and Bank to acquire or retain those investments for their own benefit (Count III).

 Plaintiff sues derivatively as to Counts I, II and III of the complaint alleging causes of action under The Investment Advisers Act of 1940 and requesting the Court to exercise its pendent jurisdiction as to state claims for breach of contract and for breach of fiduciary duty. Count IV of the complaint is a class action brought on behalf of Trust's debenture holders attacking the Prospectus of Trust under the Securities Act of 1933 and the Securities and Exchange Act of 1934, and incorporating by reference the allegations made in Counts I, II, and III. Plaintiff prays that the Court (1) enjoin Trust's performance under or renewal of its contracts with Associated and Advisers; (2) rescind both contracts and grant restitution to Trust for payments made under the contract during the pendency of this litigation; (3) award damages to Trust and to the class; and (4) award to plaintiff costs, expenses, attorneys' and accountants' fees.


 Derivative Counts.

 As to the derivative claims defendants contend that assuming arguendo the complaint states a claim upon which relief can be granted, plaintiff does not have standing to sue. Derivative suits may be initiated by shareholders, they argue, but not by a mere creditor, and plaintiff's interest in Trust is that of a creditor, and not a shareholder. Plaintiff counters that defendants' legal analysis ignores the multifaceted interests which he purchased in August of 1971, for he owns not merely debentures, but convertible debentures with attached warrants, the combination of which entitle him to sue as a shareholder even though he does not in fact own any Trust shares.

 In Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 735 (3d Cir. 1970) the Court of Appeals recognized that only a proprietary interest in a business entity invests a party with the requisite legal standing to prosecute a secondary or derivative action. Judge Aldisert was emphatic in his recognition of this well established principle.

"The timber of sound reason forms the conceptual underpinning of the rule requiring stock ownership in a corporation as the prerequisite for bringing a derivative action in its behalf. Only by virtue of the shareholder's interest, which has been described as 'a proprietary interest in the corporate enterprise which is subject to injury through breaches of trust or duty on the part of the directors,' Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 321, 56 S. Ct. 466, 471, 80 L. Ed. 688 (1936), does equity permit him 'to step into the corporation shoes and seek in its right the restitution he could not demand on his own.' Standing is justified only by this proprietary interest created by the stockholder relationship and the possible indirect benefits the nominal plaintiff may acquire qua stockholder of the corporation which is the real party in interest. Without this relationship, there can be no standing, 'no right in himself to prosecute this suit,' Hawes v. Oakland (Hawes v. Contra Costa Water Co.), 104 U.S. 450, 462, 26 L. Ed. 827; Venner v. Great Northern Railway, 209 U.S. 24, 34, 28 S. Ct. 328, 52 L. Ed. 666 (1908)." (Footnotes omitted.)

 Rule 23.1 *fn3" of the Federal Rules of Civil Procedure also acknowledges the necessity of shareholder standing in derivative actions, and expressly commands that in pleading such an action the plaintiff allege to have been a shareholder at the time of the transaction of which he complains. *fn4" Entel v. Guilden, 223 F. Supp. 129, 131 (S.D.N.Y. 1963).

 In contrast, the interest of a mere creditor, although it may constitute a substantial financial stake in the success of the business enterprise, is clearly non-proprietary. Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 318, 56 S. Ct. 466, 470, 80 L. Ed. 688 (1936); Brooks v. Weiser, 57 F.R.D. 491, 494, 495 (S.D. N.Y. 1972); Dorfman v. Chemical Bank, 56 F.R.D. 363 (S.D. N.Y. 1972). This distinction was scrupulously observed in Brooks v. Weiser, supra.

". . . The fact that among the plethora of derivative suits brought over the generations none even discuss the issue reflects the obviousness of the proposition that the right to sue derivatively is an attribute of ownership, justified on the theory that the plaintiff in such a suit seeks to recover what belongs to the corporation, because as a co-owner, it also belongs to him. A creditor's interest, on the other hand, is limited to ensuring the corporation's continuing ability to pay him what it owes, an ability which is not in question here."

 A debenture is a credit instrument, one which does not devolve upon its holder an equity interest in a business enterprise. But plaintiff urges the court to consider the convertibility feature of his debentures and the attached warrants to purchase shares of beneficial interest as an interest in Trust sufficiently akin *fn5" to shares that the law should accord him the status of a shareholder in interpreting the scope of Rule 23.1. Entertaining plaintiff's argument requires that I look beyond his complete lack of share ownership and engage in a comparative analysis of his present interest and the interest which he would hold were he the legal or beneficial owner of Trust shares. This analytical approach was used in Ashwander v. Tennessee Valley Authority, supra, when the Court was confronted with the argument that ownership of a certain class of stock did not carry with it the privileges of a proprietary interest. However, despite the appropriateness of this method of legal analysis when rights accompanying the ownership of different classes of stock are at issue, the concept of proprietary interest is distorted beyond analytical usefulness when the holder of a mere option to purchase shares who has not yet exercised his option or legally committed himself to the exercise of his option is held a shareholder under Rule 23.1 by virtue of the dollar amount of his financial investment in business enterprise on behalf of which he seeks to bring suit. *fn6" In this instance plaintiff does not hold Trust shares and the interest which he does hold is nonproprietary.

 The plaintiff's interest in Trust does not afford him rights or privileges traditionally associated with an ownership interest. He presently owns eighteen $1000 six and three-quarter percent convertible subordinated debentures due September 1, 1991, with attached series B warrants issued by Trust in August 1, 1971. These securities do not entitle plaintiff to vote, he is not entitled to participate in Trust profits or distributions, *fn7" nor is he subject to Trust losses. *fn8" Plaintiff holds a debt obligation of the Trust upon which he is entitled to receive interest at a rate of six and three-quarter percent per year. These obligations mature September 1, 1991, at ...

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