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SIMMS v. EXETER ARCHITECTURAL PRODS.

April 11, 1994

LAWRENCE P. SIMMS, Plaintiff
v.
EXETER ARCHITECTURAL PRODUCTS, INC., CHARLES D. FLACK, JR., and HAROLD E. FLACK, II, Defendants



The opinion of the court was delivered by: RICHARD P. CONABOY

 Plaintiff Lawrence P. Simms initiated this diversity based action on May 26, 1993, against Defendants Exeter Architectural Products Inc., Charles D. Flack, Jr. and Harold E. Flack, II. The Plaintiff seeks both equitable and legal relief from Defendants' illegal and oppressive corporate conduct. (Doc.No. 1, p.14). Presently before the Court is a motion by Defendants Charles D. Flack, Jr. and Harold E. Flack, II, to dismiss Counts I, II and III of Plaintiff's complaint. Also before the Court is Defendant Exeter's Motion to Dismiss the Complaint.

 BACKGROUND

 Defendant Exeter Architectural Products, Inc. (hereinafter Exeter) manufactures and distributes a patented window barrier, of which perforated steel is a major component. Plaintiff Simms is a founding shareholder and a director of Exeter and served as Exeter's President from the time of its creation until he was terminated in October, 1992. Defendant Charles D. Flack, Jr. is a founding shareholder of Exeter along with his brother Harold E. Flack, II. The two served as Exeter's Chairman of the Board and Vice President respectively. Both were also founding Shareholders of Exeter. (Doc.No. 3, p.1).

 In 1989, Simms, Charles Flack and Harold Flack, as the founders of Exeter, had each initially purchased and controlled an equal amount of shares of common stock. In December, 1990, the three founders, Simms, C. Flack and H. Flack, each loaned Exeter the sum of $ 80,000. On July 30, 1991, the Board of Directors, also comprised of Simms, C. Flack and H. Flack, approved an amendment to the Articles of Incorporation of Exeter which increased the authorized shares of common stock to 2,000,000 shares. The three shareholders simultaneously converted their $ 80,000 loans to investments in Exeter for which each was issued an additional 399,990 shares. The relevance is that each continued to own equally one-third of the outstanding stock of this closely held corporation. (Doc.No. 4, p.2).

 In September 1991, Simms, Charles Flack and Harold Flack entered into a Shareholders Agreement. (Doc.No. 4, Exh."A"). According to this agreement, if any of the founding shareholders were terminated in 1992, with or without cause, the remaining founding shareholders and/or the Exeter corporation were entitled to purchase the terminated shareholder's shares at a fixed price of $ 1.10 per share. In October 1991, Exeter made available preferred stock with a par value of $ 100 per share. Purchasers of this preferred stock were entitled to receive cash dividends. Once a holder of preferred stock, shareholder had the option to convert his stock into common stock at a conversion rate of 17.15 shares common stock for each share of preferred stock. (Doc.No. 4, p.3)

 In March 1992, the parties agreed to a thirty percent (30%) salary reduction for three months for Simms, Charles Flack and Harold Flack. The Plaintiff Simms has alleged that at the end of this salary reduction period, the Flacks began to implement a plan to eliminate his rights and economic interests as a one-third owner of Exeter. Plaintiff contends that in July 1992, the Flacks indefinitely extended the 30% salary reduction over his protest. The Plaintiff further alleges that in September 1992, without proper notice of any corporate meeting and in violation of the Exeter By-Laws, the Flacks converted Exeter's debt of $ 330,000 to Diamond Manufacturing, which the Flacks owned, from non-interest bearing to interest bearing at a rate of 2 points above the prime rate.

 The Plaintiff avers that the defendants conspired to misrepresent to him the date of a Board of Directors meeting to assure that he was not in attendance and that once absent from that meeting the Flacks falsely represented that Simms demanded control of Exeter due to differences in management philosophies. The minutes of the meeting have allegedly preserved these assertions. It was at this September Board of Directors meeting that Charles Flack and Harold Flack acted to approve the replacement of Simms as President. The Plaintiff contends that upon his termination, despite the provisions in the Shareholders Agreement, Charles and Harold Flack conspired and combined to offer to purchase Simms' shares at only $ .20 per share, well below the $ 1.10 per share figure set forth in the Shareholders Agreement.

 LEGAL STANDARD

 In deciding a motion to dismiss, all material allegations must be accepted as true and construed in a light most favorable to the non-moving party. Truhe v. Rupell, 641 F. Supp. 57 (M.D. Pa. 1985) A complaint may be dismissed only if it appears that the plaintiff cannot approve any set of facts in support of his claim that would entitle him to relief. Id. The Court must view all allegations made in the complaint, as well as all inferences reasonably drawn therefrom, in favor of the plaintiff. Sturm v. Clark, 835 F.2d 1009 (3d Cir. 1987). Because a motion to dismiss results in a determination on the merits at the earliest stage of the proceedings, the Court is obligated to construe the plaintiff's complaint liberally in favor of the plaintiff. Pittsburgh National Bank v. Welton Becket Associates, 601 F. Supp. 887 (W.D. Pa. 1985). A complaint should never be dismissed for failure to state a claim unless the court is convinced beyond doubt that the plaintiff can prove no set of facts to support a claim which would permit a recovery. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Hooten v. Pennsylvania College of Optometry, 601 F. Supp. 1151 (E.D. Pa. 1984).

 DISCUSSION

 I. Motion to Dismiss Counts I, II and III of Plaintiff's Complaint

 Defendants aver that Plaintiff Simms has failed to present a legally cognizable claim against Charles and Harold Flack in Counts I, II and III. We will address counts II and III only as Count I has been rendered moot by our previous decision regarding Plaintiff's request for equitable relief from Exeter Architectural, Inc. in the form of a receiver pendente lite.

 A shareholder may however, bring an action against a corporation and others when the injury is one to the plaintiff as a shareholder in his individual capacity, and not to the corporation. Fishkin v. Hi-Acres, Inc., 462 Pa. 309, 341, 341 A.2d 95 (1975). The Defendants contention is based on the supposition that Simms has suffered no direct injury. Plaintiff's Complaint however, sets forth in detail the concerted efforts of the Flacks to harm him financially, to prevent and inhibit Plaintiff's ability to sell or transfer his stock, to relegate his share holdings to practically worthless stock, to oust Plaintiff from the presidential office, to interfere with the U.S. Postal Service, and to eliminate Plaintiff's access to corporate records. We believe Simms has sufficiently demonstrated how he has been injured in his individual capacity as an employee, shareholder, director and investor in the closely held corporation Exeter Architectural Products, Inc. With regard to his assertions that the Defendants are in engaged in a full blown scheme to squeeze him out, we must afford him the benefit of the doubt. As we have stated, we must liberally construe Plaintiff Simms' allegations and all inferences drawn therefrom. This Middle District has held, in the not so distant past, that it is permissible for a shareholder to assert, in his own right, a cause of action against a corporation and majority shareholder. In Willis v. Dillsburg Grain & Milling Co., 490 F. Supp. 46 (M.D.Pa. 1980), the Court held that such an action for relief from oppressive corporate conduct directed specifically towards Plaintiff was not only permissible but sufficient to survive summary judgment. In that case, the wronged minority shareholder set forth four counts in his complaint. The second count, dealing with the production of corporate books, need not be discussed here for in the present case, we have already addressed that issue in an earlier opinion. However, the remaining counts have direct bearing on the matter before us. In count I of the Willis complaint, the plaintiff alleged that the defendant engaged in "a course of conduct calculated to oppress and harass the plaintiff and to render his shares in stock in the defendant corporation worthless..." 490 F. Supp. at 48.

 In count IV, the plaintiff alleged that "the defendants have taken on a course of conduct to squeeze out the plaintiff from all participation in the defendant corporation, have denied the plaintiff a fair return on his investment and therefore have breached fiduciary duties owed the plaintiff." Id. at 50. As to both of these counts, the court denied defendant's motion for summary judgment, thereby recognizing plaintiff's standing and the adequacy of his claims.

 Count III of the complaint alleged that defendant, as majority shareholder and director of the defendant corporation owed fiduciary duties to the plaintiff, as minority shareholder, which included the duty to act fairly toward the plaintiff and to provide the plaintiff with a fair return on his investment. To substantiate his allegations, the plaintiff proffered seven specific instances in which the defendant allegedly breached these fiduciary duties to the plaintiff. The court however, stated that "these alleged acts would properly be raised in a derivative action by the plaintiff, brought on behalf of the defendant corporation, but not in a private action by the plaintiff." Id. 490 F. Supp. at 49. The court dismissed count III for lack of standing.

 In the present case, Plaintiff Simms has proffered specific acts indicative of abuse of discretion among majority shareholders in a closely held corporation sufficient to give rise to an inference of personal injury. We must accept as true plaintiff's assertions and in doing so must recognize that, if true, there is enough information to support a claim which would permit recovery.

 Although Plaintiff Simms improperly characterizes his own Count II as a breach of fiduciary duty owed to a minority shareholder, almost to his detriment, the substance of his claim adequately depicts Plaintiff's injuries in an individual capacity. It is clear that Plaintiff cannot simply aver that injury to the corporation is injury to him by virtue of his shareholder status. However, it is equally clear that not every shareholder is an officer or employee of the corporation in which they own stock. It is also eminently clear that while some shareholders receive a return on their investment purely from the increased value of their shares, others recoup their original investment and return on their investment in the form of salaries and benefits. *fn1" When Plaintiff Simms claims that he was terminated, restricted from access to records, and prevented from selling shares at their true value, he is alleging violations endured by himself in his individual capacity. That capacity takes him out the realm of the derivative action shareholder who claims that the corporation has suffered injury. The situation here is quite the opposite. The undeniable underlying theme to the whole Simms-Exeter-Flack ...


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