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Vernars v. Young

August 12, 1976.

BEVERLY VERNARS, INDIVIDUALLY AND BEVERLY VERNARS, ON BEHALF OF HERSELF AND ALL OTHER STOCKHOLDERS OF YOUNG GALVANIZING, INC., APPELLANT,
v.
JOHN K. YOUNG, RICHARD MOODY, HERMAN W. GREEN, PEOPLES BANK OF WESTERN PA., YOUNG GALVANIZING, INC.



Appeal from the United States District Court for the Western District of Pennsylvania. D.C. Civil No. 75-120.

Seitz, Chief Judge, Aldisert and Weis, Circuit Judges.

Author: Seitz

Opinion OF THE COURT

Seitz, Chief Judge.

This is an appeal from an order of the district court dismissing plaintiff's complaint for failure to state claims upon which relief can be granted. Plaintiff is a 27% shareholder, an officer and one of three directors of Young Galvanizing, Inc. (corporation). The second board member is the defendant Young, a 50% shareholder and principal officer of the corporation. The third director is not a party to the action. Plaintiff's complaint is in five counts. Since plaintiff does not appeal the dismissal of Count II, we proceed to address plaintiff's assertions of error in the dismissal of the other four diversity jurisdiction counts.

Count I is a stockholder derivative claim alleging that defendant Young fraudulently misappropriated corporate funds for his personal benefit. The complaint alleged that no demand had been made upon the directors to initiate action by the corporation because it would be futile in view of the fact that the defendant-director, John K. Young, is the owner of 50% of the outstanding stock of the corporation and the third director is under his control.

The district court dismissed this count for failure to state a claim. It concluded that plaintiff did not state with particularity her reasons for not first making demand on the directors as required by Rule 23.1 of the Federal Rules of Civil Procedure. That Rule provides in pertinent part:

"The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for failure to obtain the action or for not making the effort."

Plaintiff does not dispute that she was required to state with particularity why she did not make a demand on the Board. She insists that she fulfilled that requirement. We turn to that issue.

Since the Board consists of three directors and since defendant-director Young's adverse position is clear at this stage, the issue is whether plaintiff's allegations as to defendant Young's domination of the non-party third director are stated with the requisite particularity. We pose the issue this way because it is tacitly conceded that if plaintiff pleaded with the requisite particularity that Young dominated the third director, the plaintiff was relieved from making a demand for director action.

The only reference in the complaint to the status of the third director is the allegation that he is "under the control" of the defendant Young. We view the quoted language as being the reason for not making a demand but we fail to see how this fulfills the requirement of the rule that the reason be stated with particularity. See Landy v. Fed. Deposit Ins. Corp., 486 F.2d 139, 149 (3d Cir. 1973); Jannes v. Microwave Communications, Inc., 57 F.R.D. 18 (N.D. Ill. 1972); 3B Moore's Fed. Prac. 23.1.19. Certainly, there is no presumption that a director is controlled. Rather, the issue is an intensely factual one. Consequently, there is no reason why a plaintiff cannot assert the facts from which it is believed an inference of control could be drawn. Indeed, this must be done under Rule 23.1, which is an exception to the notice pleading approach of the federal rules.

We therefore conclude that, at least where the allegations do not make charges against a majority of a Board, a mere allegation of control of a director whose vote would be necessary to constitute an adverse majority is not sufficient under Rule 23.1.

Plaintiff next contends that the district court erroneously dismissed Counts III and V which sought to recover under state law for inducing breach of an implied contract of employment or, alternatively, inducing cancellation of such implied contract. The district court concluded that under Pennsylvania law an officer or director cannot recover compensation from the corporation under the theory of implied contract.

Plaintiff does not appear to disagree with the district court that under controlling Pennsylvania law she could not here recover on an implied contract theory. In any event, we believe the district court was correct in so holding. Rather, plaintiff argues that there may be evidence from which a jury could find the existence of an express contract. Indeed, in her brief she suggests that she should be granted an opportunity to amend. We think such an application should have been addressed to the district court when its decision was announced. We are not inclined to look favorably on this change of position at ...


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