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Hirshfield v. Briskin

August 24, 1971


Fairchild and Stevens, Circuit Judges, and Grant, District Judge.*fn1

Author: Fairchild

FAIRCHILD, Circuit Judge.

This is a shareholder's derivative suit.*fn2 The amended complaint contains eight counts. The district court granted defendants' motion to dismiss Counts I, II, and III for failure to state a claim. The order contained the expressions requisite for finality of a judgment on less than all the claims under Rule 54(b), F.R.Civ.P. Plaintiff appealed from the judgment accordingly entered.

Plaintiff June Hirshfield was the widow of Moray Briskin. She owns 10,000 shares of common stock of defendant Briskin Manufacturing Company (Briskin), acquired from Moray's estate. The individual defendants are Moray's brother, Lester, his sister Alice, their mother, Anna, Lester's wife, Sophye, and Alice's husband, Elmer Kaplan. The four directors of Briskin were Lester, Elmer, Sophye, and Anna. Except for plaintiff's shares and 10,000 shares held by the guardian of her son, all the 115,000 outstanding shares are owned by Lester and Elmer and their families.

Each of the three counts predicates liability upon certain loans or extensions of credit by Briskin to Century Vitreous Enamel Co. (Century), and the loss to Briskin resulting from Century's default. Count I is based on a theory of constructive fraud. Count II adds an averment of wrongful purpose. Count III adds an averment of negligence.

Counts I and II were dismissed for failure to set forth facts showing mismanagement of corporate funds with sufficient particularity, especially in view of averments in the alternative, hereafter referred to. Count III was dismissed on the theory that a claim of this type may not, in Illinois, be predicated upon negligence.

According to plaintiff's averments in Count I, the following facts appear:

Lester and Elmer were the principal executive officers of Briskin. For many years Briskin owned 50% of the outstanding stock of Century. In January, 1965 Lester and Elmer acquired the remaining 50% for themselves. In 1965 and 1966 Briskin loaned funds or extended credit to Century, in part directly and in part through Coralware, another corporation controlled by Lester and Elmer. The aggregate amount is believed to be in excess of $230,000. At the time of the loans Century could not reasonably have been expected to be able to repay the loans and extensions of credit and Lester and Elmer so knew or in the exercise of ordinary diligence ought to have so known. In late 1966 or early 1967, Century ceased doing business, hopelessly insolvent, and as a result Coralware became insolvent. At that time Century was indebted to Coralware for more than $164,000, Coralware to Briskin, $300,000, and Century to Briskin, $60,000. As a result Briskin sustained a loss believed to be in excess of $350,000. Plaintiff does not know whether directors' resolutions were passed authorizing the loans, and avers in the alternative that Lester and Elmer caused such loans or extensions without authorization and thus misappropriated the funds of Briskin, or that, if resolutions were adopted, all directors voting for them are liable.

We conclude that the facts as to the conflict of interest and the resulting loss are alleged positively and with sufficient particularity. At least two of the defendants, while in a fiduciary capacity with respect to Briskin, caused Briskin to engage in transactions in which their personal interests were at least in part in conflict with their fiduciary duties to Briskin. Although a bail-out of Century would have benefited Briskin as well as Lester and Elmer, they risked only the funds of Briskin. Under Illinois law, the existence of the conflict of interest is sufficient to impose liability for damages unless defendants succeed in "overcoming the presumption against the validity of the transaction by showing its fairness."*fn3

Appellees rely on this court's decision in Duane v. Altenburg (7th Cir., 1962), 297 F.2d 515, 519, where we held that the complaint did not make the strong showing required in this area by Illinois law nor fulfill the particularity required by Rule 9(b), F.R.C.P. in averments of fraud. In Duane, however, virtually every allegation was made on information and belief, without averring supporting facts, and regardless of whether or not the matter was peculiarly within the adverse party's knowledge. In the instant case the facts of the conflict of interest, and the loss resulting from the loans are clearly stated. All averments are positive, as if made on knowledge, except for certain dates and amounts which are alleged to be within the knowledge of Lester and Elmer and as to which approximations are given.

Appellees challenge the presence of averments in the alternative. They contend that when Rule 9(b) requires statement with particularity, Rule 8(e) (2) F.R.C.P., permitting two or more statements alternatively or hypothetically is wholly excluded from application. We think, however, that there must be reasonable accommodation between the two rules.*fn4 One is not always required to elect a single theory of the factual situation where fraud is claimed, and, at least where each of two alternative statements independently satisfies the particularity requirement of Rule 9(b), the pleading does not violate that rule solely because alternatives have been stated.*fn5

Count II incorporates all the averments of Count I and adds only a claim of intent, i. e., that defendants' acts were committed "(a) for the purpose of diverting assets of Briskin to the personal benefit of Lester and Elmer and of Century, or (b) for the purpose of oppressing and harassing the Plaintiff and the other aggrieved stockholders of Briskin, or (c) for both of said purposes; and such acts were committed in pursuance of a scheme or design to operate Briskin for the personal benefit of Lester and Elmer and to the detriment of Plaintiff and such other aggrieved shareholders."

Count III incorporates all the averments of Count I and adds only an allegation that in making the loans or extensions of credit defendants "failed to exercise reasonable care, skill and diligence in the performance of their duties as officers, or directors, or both, of Briskin, as was their duty, but on the contrary, acted negligently, recklessly and with gross disregard for the interests of Briskin."

Since Counts II and III incorporate all averments of Count I, each necessarily states as good a claim as Count I, and in reversing as to II and III we mean no more than that. The averments of wrongful purpose in Count II and of negligence in Count III are, in this complaint, so interdependent with the averments of conflict of interest in Count I that it is fruitless on this appeal to decide whether the averment of purpose in Count II would be formally sufficient to claim fraudulent intent if that were a necessary element of the claim*fn6 or whether the law of Illinois would recognize negligence in ...

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