The opinion of the court was delivered by: Bauer, District Judge.
This cause comes on the plaintiff Fred P. Tasner's motion for
leave to file an amended and supplemental complaint.
This diversity action seeking injunctive relief and damages was
instituted on January 23, 1974 in the Circuit Court of Cook
County, Illinois. It was thereafter removed to this Court
pursuant to 28 U.S.C. § 1441(a) within the time prescribed by
law. This Court allegedly has jurisdiction over this diversity
action pursuant to 28 U.S.C. § 1332. The matter in controversy
allegedly exceeds the sum of $10,000 exclusive of interest and
The plaintiffs, Fred P. Tasner and Harry Fox, are citizens of
the State of Illinois. The defendant, I. John Billera is a
citizen of the State of Connecticut. The defendant U.S.
Industries, Inc. ("USI") is a corporation incorporated under the
laws of the State of Delaware, with its principal place of
business in the State of New York.
The named plaintiffs in their original complaint allege two
causes of action. The first cause of action is on behalf of the
plaintiffs individually and the other is a derivative and
representative claim on behalf of all USI stockholders "similarly
4. Defendant Billera fraudulently solicited proxies through the
use of said Proxy Statements knowing that they were false and
misleading with the intent to mislead holders of voting
securities of USI, as to his fitness for election as a director
and officer of USI, and voted proxies so solicited for his
election as a director of USI.
5. Upon information and belief, the holders of voting
securities of defendant USI would, if the USI Proxy Statements
for the annual meetings of shareholders for 1970 through 1974 had
disclosed the true facts of defendant Billera's wrongful
acquisition of his interest in said tract of Puerto Rico Land,
have withheld proxies, which were given in reliance on the
adequacy of said Proxy Statements to vote for the management
slates of nominees for election of directors of USI elected at
6. Through said fraudulent omissions from and misstatements in
said Proxy Statements which he published in order to obtain
election as a director of USI, and in order to be elected an
officer of USI, Billera has illegally and wrongfully obtained
compensation and other benefits having an aggregate value in
excess of $1,250,000.
7. By reason of the material omissions and misstatements in
said Proxy Statements, plaintiff Tasner and all other holders of
voting securities of USI have been and will, unless this Court
grants the injunctive and other relief herein prayed for, be
further irreparably injured, harmed and damaged through the
continuation in office of directors of USI elected illegally by
means of said Proxy Statements.
The defendant, in opposition to the instant motion, contends
1. Defendant would be severely prejudiced and justice
would not be properly served by allowing the
plaintiff to file the amended pleading.
2. The proposed new counts are not involved in or
related to the present complaint.
3. Defendants are entitled to clarification of the
status of plaintiff Fox.
4. The proposed amendments should not be allowed
either as supplemental or amended pleadings.
On June 13, 1974 this Court ordered the plaintiffs to reply to
the defendants' memorandum in opposition to the motion to amend
specifying that plaintiffs
". . . should precisely state why the instant
amendment is required in the interests of justice and
why the plaintiffs would be severely prejudiced by
being required to file a new action rather than
amendments to this action."
It is the opinion of this Court after carefully examining the
relevant pleadings and memoranda submitted by the parties in
support of their respective positions that the plaintiffs should
not, in the interests of justice, be given leave to file the
amended and supplemental complaint.
It is clear that Rule 15(a) of the Federal Rules of Civil
Procedure requires that leave to amend be granted freely "when
justice so requires". However, the allowance of amendments after
a responsive pleading has been served is within the sound
discretion of the trial court. Foman v. Davis, 371 U.S. 178, 83
S.Ct. 227, 9 L.Ed.2d 222 (1962); Komie v. Buehler Corporation,
440 F.2d 449 (9th Cir. 1971); PSG Co. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 417 F.2d 659 (9th Cir. 1969); Strauss v.
Douglas Aircraft Co., 404 F.2d 1152 (2nd Cir. 1968); Vine v.
Beneficial Finance Co., 374 F.2d 627 (2nd Cir. 1967), cert.
denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967). It is
well settled that such leave should be denied where the amendment
would cause substantial prejudice to a party to the action.
Strauss v. Douglas Aircraft Co., supra; Middle Atlantic Utilities
Co. v. SMW Devel Corp., 392 F.2d 380 (2nd Cir. 1968); United
States v. 47 Bottles, More or Less, 320 F.2d 564 (3rd Cir. 1963),
cert. denied in Schere v. United States, 375 U.S. 953, 84 S.Ct.
444, 11 L.Ed.2d 313 (1964).
It is clear to this Court that the proposed amended and
supplemental complaint poses serious problems of prejudice to the
defendants. This Court acknowledges that the plaintiffs have
advanced an explanation for the proposed amended and supplemental
complaint; however, the plaintiff's explanation does not cure the
serious problem of prejudice to the parties of the instant
action. Thus, there are two major reasons for denying the
plaintiff leave to file the amended and supplemental complaint.
First, the instant amendments significantly alter the cause of
action and seriously complicate and prejudice the issues to be
litigated. The new counts, which plaintiff Tasner seeks to add
are in essence two: (1) a derivative claim against Billera for
$20,000,000 for alleged appropriation of a corporate opportunity,
and (2) a claim for the setting aside of the 1974 election of
directors and the calling of a new election, based on alleged
proxy rule violations consisting of the failure to disclose the
alleged appropriation of the corporate opportunity.*fn1 These
new claims, based upon a 1956 purchase of land in Puerto Rico and
its value when sold in 1972, apparently have nothing whatever to
with the present action and have no relationship whatever with
the Northern District of Illinois.*fn2
Certainly all amended and supplemental complaint should not be
used as a subterfuge for bringing a totally unrelated and foreign
cause of action into a forum which may appear to be more
appealing to the plaintiffs.
The new derivative claims allege that defendant Billera "and
other officers and directors of USI or attorneys for USI"
committed the uselessness of a demand on USI's Board of Directors
and states that "[i]n addition, a majority of the directors of
USI may be subject to liability to USI and USI stockholders for
permitting or participating in the wrongful conduct by defendant
Billera and others, and the concealment thereof, as hereinafter
alleged". It is significant that the plaintiff Tasner has not
sought to make any of the participants in the venture, or any of
the other directors, parties to this action, despite the
extraordinarily large sums which the plaintiff is seeking
individually from defendant Billera. The omission of these
parties is not in the best interest of defendant USI, its
shareholders or the just and proper disposition of these new
claims. This also is prejudicial to defendant Billera in that it
focuses solely on him as the target defendant. Further, if the
additional proper parties were added to the instant action there
may be serious jurisdictional problems raised since the action is
allegedly based upon the Puerto Rican claim and has no relation
to the instant original complaint and indeed has allegedly no
significant contact with the Northern District of Illinois. It is
clear that the plaintiff's amended and supplemental complaint not
only obfusciates the issues of the original complaint and
seriously complicates the instant litigation but also seriously
prejudices the parties to the action,*fn3 and the new issues to
Second, the defendant USI and its shareholders are seriously
prejudiced by the plaintiff Tasner's failure to properly comply
with Rule 23.1 of the Federal Ruels of Civil Procedure.
Rule 23.1 of the Federal Rules of Civil Procedure requires that
a disgruntled shareholder must show either that he exhausted all
intracorporate means of redress or, alternatively, why such
efforts would be futile. Rule 23.1 embodies the common law
requirement that before a shareholder derivative action may
proceed, demand must be made on the directors and, if necessary,
the other shareholders so that the corporation itself may have
the opportunity to institute
the action.*fn4 Under Rule 23.1 such a demand is excused only if
the complaint, which must be verified, alleges with particularity
the reasons for not making the effort.
It is well settled that the question of whether a shareholder
should be required to make a demand as a prerequisite to
maintaining a derivative action is addressed to the sound
discretion of the court, and ordinarily, the court determines
this question on the basis of the allegations of the complaint.
Fields v. Fidelity General Insurance Company, 454 F.2d 682 (7th
Cir. 1971); DePinto v. Provident Security Life Insurance Co.,
323 F.2d 826 (9th Cir. 1963), cert. denied 376 U.S. 950, 84 S.Ct.
965, 11 L.Ed.2d 969 (1964). Courts have generally been lenient
in declaring that the plaintiff was not required to make a demand
where it was clear from the relevant pleadings that such a demand
would be a useless act or an idle ceremony or completely futile.
See, e.g., Pioche Mines Consolidated, Inc. v. Dolman,
333 F.2d 257 (9th Cir. 1964), cert. denied 380 U.S. 956, 85 S.Ct. 1081, 13
L.Ed.2d 972 (1965); Cohen v. Industrial Finance Corporation,
44 F. Supp. 491 (S.D.N.Y. 1942); Winkelman v. General Motors Corp.,
44 F. Supp. 960 (S.D.N.Y. 1942). However, courts have stubbornly
refused to depart from the ritual of demand in some cases,
despite the allegations of the plaintiff which state the utter
absurdity of making the demand. For example, courts have held
both that merely because a putative majority of the directors are
alleged to be implicated in the fraud on the corporation, the
necessity for a demand upon the entire board continues and that
general averments of complicity on the part of the directors in
the wrong against which relief is sought will not bring the
plaintiff within the exception to the rule. See Watson v. United
States Sugar Refinery, 68 F. 769 (7th Cir. 1895); Ziegler v. Lake
St. El. Ry., 76 F. 662 (7th Cir. 1896). See also In re Kauffman
Mutual Fund Action, 479 F.2d 257 (1st Cir. 1973), cert. denied
414 U.S. 857, 94 S.Ct. 161, 38 L.Ed.2d 107 (1973); Robison v.
Caster, 356 F.2d 924 (7th Cir. 1966).
The plaintiff Tasner in paragraphs 20 and 23 of the amended and
supplemental complaint alleges that a demand would be futile
because the present Board of Directors is dominated and
controlled by Billera whose conduct is the subject matter of the
In appraising the sufficiency of the allegation on this point
of potential prejudice to defendant USI and its shareholders the
Court must take into account the fact that, for all that appears
in the record, it would have been a very simple matter for the
plaintiff to make a demand upon the directors. This could have
been done, for example, by simply mailing a copy of the complaint
to the Board of Directors with a letter advising them that,
unless the corporation enforced its right within a reasonable
time, the plaintiff would undertake to do so on its behalf.
There is also the practical issue of whether the ends of
justice and orderly procedure will be served better by enabling
a minority stockholder, through the use of vague allegations such
as in the instant amended and supplemental complaint, to impose
on the defendants
and the Court the necessity of a long and complicated trial which
must result in dismissal if the Court finds that the defendant
Board of Directors was not in fact dominated and controlled by
some allegedly errant defendant directors; or, on the other hand,
whether those ends will be served better by adherence to a rule
which would require the plaintiff Tasner, before filing suit, to
ascertain (by means of the simple procedure outlined above)
whether the corporation can be induced to bring the action.
It appears that the proper approach with the least possible
prejudice to USI and its shareholders is that if there is any
chance that the corporation will agree to the request, it, rather
than an individual shareholder, ought to be given the opportunity
to sue. This approach is preferrable for the following reasons:
First, the corporate officers and directors will undoubtedly be
in possession of more information than is necessary to frame the
complaint properly and to pursue the action more efficiently.
Second, the corporation generally will have greater financial
ability to prosecute the suit with those legal resources
appropriate to the magnitude of the claim. Third, the directors
and officers of the corporation will have a fiduciary duty (with
attendant legal liabilities) to the corporation and all of its
shareholders to act in their interests in the maintenance of the
action, whereas an individual shareholder has no such obligation.
If the plaintiff's proposed suit appears meritorious, this same
fiduciary duty will obligate the directors to pay heed to the
If the demand is to be excused merely because some but not a
majority of the directors allegedly participated, the same could
be said with respect to those who failed to oppose or indeed,
who, as new directors, had merely neglected to take action
against their predecessors. If by plaintiff's merely alleging
error, the directors are to be presumed incapable of exercising
sound business judgment, Rule 23.1 would become virtually
meaningless — a stockholder would be entitled to try the case on
the merits to show that he had a right to bring it. Such an
approach would be contrary to the spirit and letter of Rule 23.1.
Rule 23.1 also requires that plaintiff fairly and adequately
represent the interests of all shareholders similarly situated.
Given the instant action's history of intense and somewhat
strongly contested issues it is the opinion of this Court that
this difficult case may not be the appropriate action to properly
represent USI and its shareholders' newly found claims.
A large part of the complaint consists of conclusory
allegations. Plaintiff, a shareholder, is not in a position to
have much personal knowledge of the facts involved, nor does he
have direct and immediate access to the books and records of the
corporation. In these circumstances the preferrable course is for
the directors to be given the first chance to bring the action so
that it can be supervised by persons with a greater knowledge of
the facts and easier access to information.
In the case of a stockholder's derivative suit, the cause of
action does not belong to the stockholder; it belongs to the
corporation. The wrong which the suit seeks to redress is one
which the corporation has sustained. It is clear, given the
present posture of the pleadings, that the new derivative claims
alleged in the plaintiff's amended and supplemental complaint
pose a serious problem of unjust prejudice to the interests of
USI and its shareholders.
Accordingly, it is hereby ordered that the instant motion for
leave to file the amended and supplemental complaint is denied.