The opinion of the court was delivered by: MCGLYNN
Plaintiff, Genevieve Kuzmickey,
alleging that she is the owner of 16% of Dunmore Corporation (Dunmore) stock initially instituted this action on behalf of herself and all other similarly situated stockholders of Dunmore against Dunmore and two of its officers, Sullivan and Kloss,
invoking the jurisdiction of this Court pursuant to the provisions of § 22(a) of the Securities Act of 1933, as amended, 15 U.S.C. § 77v(a) and 28 U.S.C. § 1332. The individual defendants filed a motion to dismiss the complaint which was granted on April 28, 1976 without prejudice to the filing of an amended complaint.
Plaintiff amended her complaint, this time invoking jurisdiction under § 27 of the Securities and Exchange Act of 1934 (Act of 1934), 15 U.S.C. § 78aa with regard to the first count and 28 U.S.C. § 1332 with regard to the second count, for claimed violations of § 10(b) of the Act of 1934, 15 U.S.C. § 78j
and Securities Exchange Commission Rule 10b-5 (17 C.F.R. § 240.10b-5)
promulgated thereunder and, for breaches by the individual defendant of their fiduciary duties.
The individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief may be granted and have submitted affidavits in connection therewith.
Because we find that plaintiff lacks standing to bring this suit both derivatively and individually, based in part upon consideration of matters outside the pleadings, the motion is treated as one for summary judgment and is granted.
The first count of the amended complaint containing the claimed violations of the Act of 1934 pertains to the purchase by Dunmore of stock in an affiliate corporation, Dec-Trend Co., involving an expenditure of approximately $18,000.00. Plaintiff contends that the individual defendants "fraudulently purchased stock" on behalf of Dunmore without the consent or authorization of the shareholders and in contravention of the by-laws of Dunmore.
Furthermore, the investment, according to plaintiff, was made "at the insistence and advice of the individual defendants" even though Dunmore was not financially in a position to speculate, especially in a concern such as Dec-Trend whose financial condition did not reflect a positive growth potential.
Plaintiff seeks a declaration that this purchase of stock in Dec-Trend was procured by fraud of the individual defendants and a judgment in favor of Dunmore in the amount of $18,000.00.
Plaintiff contends that a loss of approximately $115,500.00 in net worth of Dunmore over a twelve month period is "directly related to the gross neglect and inattention, palpable breach of trust, and wilful mismanagement and malfeasance in the control of the corporate affairs by the individual defendants."
Additional allegations of fiduciary violations include: defendants' refusal to exhibit to the plaintiff the requisite authorizations for officers' salaries, travel expenses and entertainment expenses. Plaintiff also avers that the defendants improperly expended $19,975.00 for professional fees and refuse to disclose the nature of the expenditure.
The prayer of the second count is for an order directing that a detailed accounting of the financial status of Dunmore be made, that an injunction issue preliminarily restraining the officers and directors from disposing of the assets of Dunmore, that a receiver be appointed, that the officers and agents transfer all property to a receiver, that the officers and directors account to the receiver for any salary received without proper authorization and, finally, that Dunmore pay plaintiff's legal expenses.
It is the defendants' contention that the first count does not state a cause of action under the Act of 1934 and Rule 10b-5. In addition, they challenge the propriety of treating this action as a derivative suit inasmuch as plaintiff does not fairly and adequately represent the interests of any other shareholders of Dunmore and in this regard they have submitted the affidavits of the remaining Dunmore shareholders.
Initially, we note the limitation placed upon private action plaintiffs seeking damages pursuant to § 10(b) of the Act of 1934 and Rule 10b-5 by Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L. Ed. 1356 (1952). This limitation, recently affirmed in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975), requires the plaintiffs in such a suit to be either buyers or sellers of the securities involved in the alleged fraud. Kusner v. First Pennsylvania Corp., 531 F.2d 1234, 1237 (3d Cir. 1976); Thomas v. Roblin Industries, Inc., 520 F.2d 1393, 1396 (3d Cir. 1975).
Obviously, since plaintiff neither bought nor sold Dec-Trend stock she lacks standing in her individual capacity under the Birnbaum rule. See Guttman v. ...