The opinion of the court was delivered by: VAN ANTWERPEN
FRANKLIN S. VAN ANTWERPEN, UNITED STATES DISTRICT JUDGE
I have before me defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment and Plaintiffs' Response thereto ("Response"). For the reasons given below, following oral argument on October 6, 1989, I will grant the Motion and enter judgment in favor of defendants and against plaintiffs.
A motion to dismiss under Rule 12(b) (6) cannot be granted "unless it appears beyond doubt" that the plaintiffs can prove no set of facts in support of their claims which would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957).
Summary judgment under Fed.R.Civ.P. 56 imposes different burdens upon the moving party. Summary judgment may only be granted if there are no genuine issues of material fact and the moving party demonstrates that it is entitled to judgment as a matter of law. Summary judgment will not lie if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). Before summary judgment may be granted it must be clear what the truth is, and any doubt as to the existence of a genuine issue of material fact will be resolved against the movant. Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 82 S. Ct. 486, 7 L. Ed. 2d 458 (1962).
On a summary judgment motion, the burden to demonstrate the absence of material fact issues is on the moving party regardless of which party would have the burden of persuasion at trial. First National Bank of Pennsylvania v. Lincoln National Life Ins., 824 F.2d 277, 280 (3rd Cir. 1987). The moving party must clearly show that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986), on remand, Catrett v. Johns Manville Sales Corp., 263 U.S. App. D.C. 399, 826 F.2d 33 (1987), cert. denied, Celotex Corp. v. Catrett, 484 U.S. 1066, 108 S. Ct. 1028, 98 L. Ed. 2d 992 (1988). The evidence presented to the Court is always construed in favor of the party opposing the motion, and that party is given the benefit of all favorable inferences that can be drawn from it. Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S. Ct. 1598, 26 L. Ed. 2d 142 (1970). Facts asserted by the party opposing the motion, if supported by affidavit, are regarded as true. First National Bank of Cincinnati v. Pepper, 454 F.2d 626 (2nd Cir. 1972), Wright, Miller, & Kane, Federal Practice and Procedure: Civil § 2727.
The factual background of this dispute, as alleged in the Complaint and Response and supported and amplified by the exhibits to them, is set forth in the following paragraphs.
In 1956, plaintiff Vernon Alibert, a physicist, started a business called Columbia Research Laboratories. The business primarily engaged in the design and manufacturing of accelerometers for the aerospace industry. Early on, Vernon Alibert brought his brother, defendant Victor Alibert, into the business as a partner. In 1958 they incorporated the business as Columbia Research Laboratories, Inc. ("Columbia I"), Victor and Vernon Alibert each owning 50% of the stock (Response, p. 3).
In 1959 Vernon and Victor decided to bring into the corporation as shareholders their sisters, Rose and Olive, and their mother, Ernestine. They also decided to give shareholder status to two of Columbia I's valued employees, Thomas Carey and George Harman. Accordingly, on September 1, 1959, all of the parties executed a Stockholders' Agreement which distributed ownership of Columbia I as follows:
Vernon Alibert 40 shares
Victor Alibert 40 shares
Olive Alibert 40 shares
Ernestine Alibert 52 shares
Rose Alibert 20 shares
Thomas Carey 4 shares
George Harman 4 shares
Ernestine Alibert died in 1966 and bequeathed her shares in Columbia I to Vernon, Victor and Olive equally, leaving each of them with 57 1/3 shares. The Stockholders Agreement remained in effect until October 2, 1979, when Vernon, Victor and Olive Alibert executed a new agreement cancelling all prior agreements (Response, p. 4).
Following the execution of the original Stockholder's Agreement two additional corporations were formed to take advantage of certain tax provisions. Alibert Properties, Inc. ("Alibert Properties I") became the owner of the headquarters building and Alibert Industries ("Alibert Industries I") performed manufacturing. Vernon, Victor and Olive each owned one third of the shares of these corporations. (Hereinafter Columbia I, Alibert Properties I and Alibert Industries I will be collectively called the "Old Companies") (Response, p. 4).
Over the next decades the business flourished. Vernon Alibert was the driving force of the Old Companies. Vernon was President and member of the Board of directors of Columbia I and Vice President and a member of the board of Directors of Alibert Properties I and Alibert Industries I (Response, pp. 4 & 5).
In August 1981, defendants Victor and Olive Alibert, without benefit of any shareholders' or Directors' votes, summarily and permanently prevented Vernon Alibert from performing any further duties and enjoying any further rights as an officer of the Old Companies, by barring him from the headquarters, instructing all of the respective corporate employees that they were to take no further orders from him, and threatening him and his family with physical harm if he tried to return (Complaint, para. 23, Response, p. 5).
Plaintiff Vernon Alibert was not formally removed from his position as president of Columbia I and Vice President of Alibert Properties I and Alibert Industries I until votes of the respective Boards of Directors at special meetings held on March 10, 1987, five and a half years later. Notice of these meetings was sent to counsel for plaintiff Vernon Alibert (Complaint, para. 24).
Plaintiff Vernon Alibert was paid his salary as President of Columbia I through calendar year 1986. For Example, in calendar year 1982, as revealed by Exhibit D to plaintiffs Response, plaintiff Vernon Alibert's compensation from Columbia I as a part time officer was $ 215,284. Defendant Victor Alibert, also part time, received compensation of $ 100,000 and defendant Olive Alibert, shown as full time, received compensation of $ 270,000. Shareholder/sister Rose Alibert received $ 51,720 for "part time" services and shareholder/employee Thomas Carey received $ 61,294 for full time services. In that same year, the taxable income for Columbia I was $ 45,951. No dividend was paid (Response, p. 5 & Exhibit D).
After August, 1981, plaintiff Vernon Alibert never received notice from any of the Old Companies of annual Directors' or shareholders' meetings (Complaint, para. 45). (Notice to him regarding special Directors' and shareholders meetings directly involved in this litigation is discussed in connection with those meetings.)
During the period from August, 1981 until March 10, 1987 plaintiff Vernon Alibert remained ready, willing and able to resume his official duties, and in fact tried to do so (Complaint, para. 24).
Following his removal as an officer of the Old Companies on March 10, 1987, plaintiff Vernon Alibert repeatedly requested an accounting and distribution of his accrued pension benefits due from Columbia I, but defendants Victor and Olive Alibert, in their capacity as controlling agents of defendant Columbia I, refused to furnish that information (Complaint, para. 51).
At the time Vernon Alibert was barred from the headquarters of the Old companies, the stock certificates which evidenced his ownership interest in the Old Companies were all in the corporate safe in the headquarters building. Over a period of several years Vernon Alibert attempted unsuccessfully to obtain the certificates. Throughout the period defendants maintained that Vernon Alibert's stock certificates could not be located and refused to issue new ones. Finally, in October 1986, five years and two attorneys later, Vernon Alibert obtained replacement certificates (Response, p. 6).
During the same period, Vernon Alibert also tried to sell his interests in the Old Companies to defendants Victor and Olive Alibert. In August 1984 he offered to sell all of his shares in the Old Companies for $ 4,784,000.00. This offer was rejected by defendants. Later, in 1986, he offered to sell the shares for $ 3,000,000.00. This offer was also rejected and defendants made a counter-offer of $ 2,000,000.00, which was rejected by plaintiff Vernon Alibert (Complaint paras. 26-30).
On August 31, 1986, plaintiff Vernon Alibert sold to plaintiff Ferdinand Drexel Investment Co. Inc. ("Ferdinand Drexel Co.") one share in each of the Old Companies. On August 20, 1987 plaintiff Vernon Alibert once again sold to plaintiff Ferdinand Drexel Co. one share in each of the Old Companies. In both sets of transactions written notice was sent to defendants, who refused to transfer the shares on the corporate books. Certificates for these shares have never been issued in the name of Ferdinand Drexel Co. (Complaint, paras. 31-42, Response pp. 6-7).
Plaintiff Ferdinand Drexel Co. has never received notices of any annual or special shareholders' meetings nor has it received stock certificates from any of the Old Companies (Complaint, para. 46).
On July 20, 1988 plaintiff Vernon Alibert presented to counsel for defendants affidavits dated July 18, 1988 stating that he was the owner of 57 1/3 shares of Columbia Research Laboratories, Inc, 44 shares of Alibert Industries, Inc. (actually there were 150 shares outstanding, of which plaintiff Vernon Alibert's one-third share equalled 50 shares) and 10 shares of Alibert Properties, Inc. Allowing for plaintiff Vernon Alibert's misunderstanding concerning the number of shares in Alibert Industries, Inc, these are the full number of shares of the Old Companies owned by plaintiff Vernon Alibert, without allowance for the transfers to plaintiff Ferdinand Drexel Co. (Response, Exhibit K).
Plaintiff Vernon Alibert remained a Director of each of the Old Companies until their corporate existence was terminated by merger into the respective New Companies (Complaint, paras. 20-22, 44).
On March 11, 1988, defendants Victor and Olive Alibert, as controlling agents of defendant Old Companies, sent to plaintiff Vernon Alibert, by certified United States first class mail, notices of Directors meetings of the Old Companies to be held on March 25, 1988. The purpose of the Directors' meetings was to approve for submission to the shareholders a Plan and Agreement of Merger for each of the Old Companies into the respective New Companies. The envelope containing the notices was marked "refused" by the United States Postal Service on March 12, 1988 and returned to the sender. Consequently defendants were on notice that plaintiff Vernon Alibert never actually received those notices (Complaint, para. 59 and Exhibits F, G, H, Response, Exhibit N).
The Boards of Directors of each of the Old Companies met on March 25, 1988 and approved, for submission to the shareholders on April 12, 1988, a Plan and Agreement of Merger for merging each of the Old Companies into the respective New Companies (Complaint, paras. 58, 62).
On March 25, 1988 defendants Vernon and Olive Alibert, as controlling agents of defendant Old Companies, sent to plaintiff Vernon Alibert, by certified United States first class mail, notices of a special shareholders' meeting called to consider the merger of the Old Companies into the New Companies. The envelope containing the notices was marked "refused" by the United States Postal Service on March 28, 1988 and returned to the sender. Consequently defendants were on notice that plaintiff Vernon Alibert never actually received those notices (Complaint, paras. 60, 61, 63-67 and Exhibits I, J, K, Response, Exhibit N).
On April 12, 1988 defendants Victor and Olive Alibert, as controlling agents of the Old Companies, caused the shareholders meetings to be held as scheduled and voted their shares, which constituted the majority, in favor of the merger of each of the Old Companies into the respective New Companies. Upon merger, the name of each of the New Companies was changed to that of the Old Company which was merged into it. (Hereinafter individual reference to the New Companies will be to "Columbia II", "Alibert Properties II" and "Alibert Industries II") (Complaint, para. 68).
Under the mergers, holders of shares in the New Companies, who in fact were all of the holders of shares in the Old Companies except plaintiffs, exchanged their shares in the Old Companies for equivalent shares in the New Companies. The mergers had the purpose and effect of eliminating plaintiff Vernon Alibert as a shareholder and Director of the Old Companies, which ceased their independent corporate existence. The mergers had the further effect of forcing plaintiff Vernon Alibert to receive the following compensation for his shares in the Old Companies: for his 57 1/3 shares of Columbia I, $ 29,652.00 a share or $ 1,700,048.00; for his 10 shares in Alibert Properties, $ 5000.00 a share or $ 50,000.00; and for his 50 shares of Alibert Industries I (not 44 shares as he claims), $ 5000.00 a share or $ 250,000.00. These amounts would be paid in four equal annual payments, with interest on the unpaid balance at 8% per annum. These payments would, of course, be subject to the interest of plaintiff Ferdinand Drexel Co. (Complaint, paras. 76, 78 and Exhibits F-N).
The mergers purportedly became effective on or about May 4, 1988 under the laws of the Commonwealth of Pennsylvania (Complaint para. 69 and Exhibits L, M, N).
There is no allegation by the plaintiffs that at any time, between the mailing on March 11, 1988 of the notices of the special meetings of the Boards of Directors of the Old Companies scheduled for March 25, 1988 and the effective date of the merger, May 4, 1988, Vernon Alibert filed a written objection to the terms of the merger. Provision for such written objection is found in Section 5(c) of the Plan and Agreement of Merger of each of the Old Companies, sent with the notices of the Directors' meetings and the shareholders' meetings, and in Section 515 B of the Pennsylvania Business Corporation Law, 15 P.S. § 1515 B. As required by Section 902 B of the Pennsylvania Business Corporation Law, 15 P.S. 1902 B, copies of Sections 515 and 908 of that law, 15 P.S. § 1515 and § 1908, were attached to the notices of the shareholders' meetings (Complaint, Exhibits F-K).
On or about June 27, 1989, defendants Victor and Olive Alibert, as controlling agents of the defendant Old Companies, sent plaintiff Vernon Alibert notices through the United states Postal Service that his shares of stock had been exchanged for a specified amount of cash, which was to be paid in installments. On July 6, 1988 the envelope enclosing these notices was marked "refused" by the Postal Service (Complaint para. 81, Exhibit N).
Defendants Victor and Olive Alibert, in their positions as controlling agents of defendant Old Companies, gave plaintiff no information regarding how the values attributed to his share of the Old Companies were computed under the terms of the merger (Complaint, para. 82).
During and after the merger, defendants Victor and Olive Alibert were planning and negotiating to sell the New Companies after the merger. These plans or negotiations were never disclosed to plaintiff Vernon Alibert (Complaint, paras. 73, 74).
The defendants never offered to plaintiffs Vernon Alibert and Ferdinand Drexel Co. any reason for the mergers. In particular they did not reveal that the sole purpose of the mergers was to eliminate plaintiff Vernon Alibert as a shareholder (Complaint, para. 75, Response, p. 17).
At the time of approval of the merger by the majority shareholders of the Old Companies, each of the Old Companies, as well as defendants Victor and Olive Alibert, had actual notice that plaintiff Vernon Alibert objected to the terms of the merger, because he had previously and repeatedly expressed to them, through counsel, his desire to resume active participation in the corporations, and because he had previously rejected the offer of defendants Victor and Olive Alibert to purchase his shares for $ 2,000,000.00, virtually the same amount which he was forced to accept under the terms of the merger (Complaint, para. 80).
Defendants Victor and Olive Alibert, in their positions as controlling agents of defendant Old Companies altered the books and records of the Old Companies to support the false values which were attributed to plaintiff Vernon Alibert's shares under the terms of the mergers.
(Complaint, para. 79)
Plaintiffs have cited a long list of complaints against the defendants. Some of them may state a cause of action under various Pennsylvania laws. However, stripped of pejorative language and collateral issues under Pennsylvania law, plaintiff Vernon Alibert's federal causes of action are based on his contention that by action of family members, who were the majority shareholders, he was fraudulently divested of his ownership interest in the Old Companies. But fraud is a narrowly defined cause of action and, pursuant to Fed.R.Civ.P. 9(b), the circumstances constituting fraud must be stated with particularity. Not every civil or business wrong sounds in fraud.
Plaintiffs' federal causes of action are based on allegations of securities fraud under the Securities Act of 1934, 15 U.S.C. § 78j and the regulations promulgated thereunder, 17 C.F.R. § 240.10b-5; and under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C §§ 1961-1968 with predicate acts of securities fraud and of mail fraud under 18 U.S.C. § 1341.
FERDINAND DREXEL INVESTMENT CO., INC.
The situation of plaintiff Ferdinand Drexel Co. is somewhat different from the situation of plaintiff Vernon Alibert. Ferdinand Drexel Co. never had a notice to rely on because the shares of the old Companies conveyed to Ferdinand Drexel Co. were not transferred on the books of the Old Companies, a fact known to both plaintiff Vernon Alibert and plaintiff Ferdinand Drexel Co. Since the federal causes of action, securities fraud and RICO, are based on the "sale" to the New Companies of plaintiff Vernon Alibert's share in the Old Companies, and since plaintiff Ferdinand Drexel Co. was not the registered owner of those shares, its rights relating to those shares must be vindicated through the registered owner, Vernon Alibert. If plaintiff Vernon Alibert's federal rights fail, so do the federal rights of plaintiff Ferdinand Drexel Co. Plaintiff Ferdinand Drexel Co. may well have direct causes of action under Pennsylvania law, but not under the federal claims alleged here.
I note that in this entire litigation there has been no independent action by or on behalf of Ferdinand Drexel Co. No person claiming to be an officer of Ferdinand Drexel Co. has signed a document or prepared an affidavit. Although the value of the shares conveyed to plaintiff Ferdinand Drexel Co. is, at the defendants ' valuation, $ 79,304, a not inconsiderable amount, the role of plaintiff Ferdinand Drexel Co. has been entirely passive.
Plaintiffs also raise a derivative cause of action on behalf of the Old Companies. This cause is set forth in paragraph 87 of the Complaint, as follows:
"As a direct and proximate result of the execution of the illegal scheme of Defendants Victor and Olive Alibert which is described above, Plaintiffs Columbia I, Alibert Industries [I] and Alibert Properties [I] were caused to lose their corporate existence and to convert their shares into shares of the surviving corporation[s] at less than their true market value."
Plaintiffs did not argue this point and have cited no authority for the proposition that a corporation has an inherent constitutional or common law "right to life", or that a change in corporate ownership arising from a merger, where the surviving corporation has the same assets and liabilities as the predecessor corporation, states a cause of action of the predecessor corporation.
With regard to the second part of the derivative claim pertaining to share value, the New Companies are the direct successors in interest to the Old Companies.
The only shares for which there has been a claim of inadequate consideration were the shares held by the plaintiffs. Plaintiffs claim that the New Companies, the successors in interest to the Old Companies, paid too low a price in a buy-back of the shares of their predecessor Old Companies. The shares which were converted into shares of the New Companies would have had their value increased rather than decreased by the New Companies paying too low a price in such a transaction. Plaintiffs cite no authority for the proposition that a transaction which enhanced the value of the New Companies shares in this type of merger states a cause of action of the Old Companies or the New Companies, their successors in interest. Unless there is a cause of action of the Old Companies or the New Companies, there can be no shareholder's derivative action.
INTRODUCTION TO SECURITIES FRAUD AND RICO
Having determined that there is no direct federal cause of action of plaintiff Ferdinand Drexel Co., and that the plaintiff Old Companies have no derivative federal cause of action, I must determine whether the Complaint states federal causes of action in Securities Fraud or under RICO on behalf of plaintiff Vernon Alibert. For the reasons discussed below, I find that plaintiffs have not stated a federal cause of action in securities fraud or under RICO. Consequently, even though plaintiffs may have valid causes of action under Pennsylvania law, there is no federal cause of action and no jurisdiction in this court.
The requirements for a cause of action in securities fraud have in been described as follows in this circuit:
"In order to state a claim under § 10(b) and Rule 10b-5, a plaintiff must plead ...