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Duncan v. National Tea Co.

JUNE 19, 1957.

ADELAIDE

v.

DUNCAN,

v.

NATIONAL TEA COMPANY, ET AL., APPELLEES. KENMORE COMPANY, AND BARBARA A. NOVAK, PETITIONERS-APPELLANTS,

v.

NATIONAL TEA COMPANY, JOHN F. CUNEO ET AL., AMERICAN PROCESSING AND SALES COMPANY, INC., CUNEO PRESS, INC., BOOK PRODUCTION INDUSTRIES, INC., AND GARIBALDI & CUNEO, APPELLEES.



Appeal from the Circuit Court of Cook county; the Hon. CHARLES S. DOUGHERTY, Judge, presiding. Order reversed with directions.

PRESIDING JUSTICE ROBSON DELIVERED THE OPINION OF THE COURT.

Rehearing denied October 4, 1957.

This is an appeal from an order denying a petition to intervene in a stockholder's derivative suit. The question presented is whether or not the petitioners are entitled to intervene as a matter of right under Section 26.1 of the Civil Practice Act. (Ill. Rev. Stat., 1955, chap. 110.)

The record reveals that on February 18, 1952, Adelaide V. Duncan, a stockholder in the National Tea Company, as trustee of the testamentary trust of her late husband, filed a complaint on behalf of herself and all others similarly situated, asserting the rights of National Tea Company, a corporation, in a derivative action seeking relief for the alleged misconduct of certain directors of that corporation. The various defendants all filed motions to strike the complaint and dismiss the action. Leave was granted plaintiff to file an amended complaint. By her amended complaint of December 19, 1952, plaintiff did not purport to represent others "similarly situated" but continued to assert rights derived from the corporation in her capacity as trustee and stockholder.

The complaint sets forth the manner in which the plaintiff acquired stock in National Tea Co. under her husband's trust and in substance alleges a continuing conspiracy on the part of certain directors, since 1944, to cheat and defraud National for personal gain. The injuries alleged include an arrangement to make secret profits, illegal loans to the officers and directors, illegal stock transactions, excessive salaries, and the unjust enrichment of certain defendant corporations through so-called exclusive purchase agreements with National. The complaint alleges specifically the entry into certain transactions in the years 1945, 1947, and 1948, with the further allegation that the acts and doings of the individual defendants constitute continuing violations of the fiduciary duties and obligations of each of them to National and its stockholders.

The defendants filed motions to strike the amended complaint and dismiss the action on grounds that the plaintiff did not have the legal capacity to sue, and that the complaint was substantially insufficient at law and failed to allege a cause of action. The court considered these motions and entered an order denying them. The defendants then filed their answers and the cause was referred to a master in chancery.

The petitioners, the Kenmore Company, a corporation, and Barbara A. Novak became holders of record of common stock in National Tea Co. in February, 1955. On January 4, 1956, the petitioners filed a petition for leave to intervene as a matter of right under Section 26.1 (1) (b) of the Civil Practice Act, alleging that the representation of the petitioners' rights by the plaintiff was or might be inadequate because of plaintiff's advanced age and inability to prosecute the cause to a decree. The petitioners adopted in full the plaintiff's amended complaint, alleging no new matter or wrongdoing. The defendant, National Tea Co., did not resist the petition, but the other defendants raised numerous objections denying in substance that petitioners had any interest in the subject matter of the suit or that a decree therein could affect the petitioners. Prior to a hearing on this petition the plaintiff moved to join petitioners as coplaintiffs and relieve herself from the responsibility of prosecuting the suit. By order of court on March 19, 1956, both the petition to intervene and plaintiff's motion to join petitioners as coplaintiffs were denied.

On April 11, 1956, defendants McNamara and Russell filed a petition for an order directing plaintiff to appear and give her deposition. Plaintiff answered on April 19 requesting that she be excused from giving testimony because of her advanced age, and because she had sold all her stock in National Tea Co. At the same time petitioners filed a second petition for leave to intervene, or in the alternative, a motion to vacate the order of March 19. The grounds for intervention alleged in the second petition were inadequate representation of petitioners' rights because the plaintiff was no longer a stockholder in National Tea Co., and that there existed a possibility of a decree in the action that would be binding against the petitioners. All defendants except National Tea Co. opposed this second petition for a variety of reasons not essentially different from their objections to the first petition, all of these reasons being again set forth on appeal. On May 3, 1956, the court entered an order denying both the second petition for leave to intervene and the alternative motion to vacate the order of March 19, 1956. A further order of the same date directed plaintiff to appear for the purpose of taking a discovery deposition, and in the event of plaintiff's failure to comply, directed that the suit be dismissed. This order also contained a provision striking and denying the second petition to intervene.

This appeal is taken from the order of May 3, 1956, denying the second petition to intervene and the alternative motion to vacate the order of March 19, 1956. Defendants argue that a final order denying an application for leave to intervene as a matter of right cannot be reviewed on an appeal from a subsequent order denying a second petition for leave to intervene. Notice of appeal was filed on May 17, 1956, within the sixty-day period required for an appeal from a final order. Inasmuch as the order of May 3 not only denied the second petition but also denied a motion to vacate the order denying the first, this is an appeal properly taken from either or both orders denying petitioners the right to intervene. Classen v. Ripley, 407 Ill. 350, 352; id. 343 Ill. App. 298, 303.

This appeal presents only the question of the right of the petitioners to intervene in a stockholder's derivative suit on the ground of inadequate representation of petitioners' interest by the plaintiff. Defendants have attempted to interject matters pertaining to the merits of the complaint on this appeal. The trial court denied defendants' motion to strike the complaint. These matters are therefore irrelevant to the single issue that we must decide.

Section 26.1(1) (b) of the Civil Practice Act provides that upon timely application anyone shall be permitted as of right to intervene in an action when the representation of the applicant's interest is or may be inadequate and the applicant will or may be bound by a judgment, decree, or order in the action. In Dowsett v. City of East Moline, 8 Ill.2d 560 (1956), the Supreme Court of this State upheld a grant of intervention as a matter of right for inadequate representation. The facts of that case were not similar to those in the case at bar, but we believe the language of the court favors a liberal interpretation and application of the statute, and is, in that sense, binding upon this court (p. 567):

"Section 26.1 of the Civil Practice Act above referred to is new and was effective as of the 1st day of January, 1956, and provides a modern intervention practice for Illinois analogous to that prevailing in other States and Federal rules of civil practice. Under prior law the right to intervene was severely limited by the decisions of this court in Bernero v. Bernero, 363 Ill. 328, and Hairgrove v. City of Jacksonville, 366 Ill. 163. This section now provides an intervention remedy of liberalized scope but grants the trial court the power to prevent intervention from unduly hampering or delaying the original plaintiffs in their conduct of the litigation. However, in interpreting and applying said section in a particular case the entire Civil Practice Act and its provisions must be considered."

To decide whether or not the present petitioners have a right to intervene, we must first determine what interest they have in the action. Counsel contend that because petitioners were not stockholders at the time of the transactions set forth in the complaint, they have no right to intervene in this action. As authority for this contention they have cited the following cases: Kaufman v. Wolfson, 136 F. Supp. 939 (S.D.N.Y. 1955); Hirshhorn v. Mine Safety Appliances Co., 101 F. Supp. 549 (W.D. Pa. 1951); Winkelman v. General Motors Corp., 44 F. Supp. 960 (S.D.N.Y. 1942); Piccard v. Sperry Corporation, 36 F. Supp. 1006 (S.D.N.Y. 1941); Breswick & Co. v. Harrison-Rye Realty Corp., 114 N.Y.S.2d 25 (1952). These cases all hold that one seeking to intervene in a derivative action must come within a statutory provision requiring the plaintiff in such an action to aver that he was a stockholder at the time of the transaction of which he complains. In the Federal courts, the plaintiff, or one seeking to intervene in a derivative action, must qualify under Rule 23(b) of the Federal Rules of Civil Procedure, which requires that plaintiff be a shareholder at the time the transaction of which he complains took place. In New York the plaintiff or intervenor must meet the requirements of section 61 of the New York General Corporation Law. The statutes of California, Delaware, Nevada, New Jersey, Pennsylvania, and Wisconsin also require the plaintiff in a derivative suit to aver that he was a stockholder at the time of the wrongdoing alleged in the complaint. There is no comparable rule or statute in Illinois.

Our Supreme Court has recognized a qualified right on the part of certain stockholders to maintain a derivative action for acts of mismanagement which occurred prior to their acquisition of stock. In Lampropulos v. Kedzie Ogden ...


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