Appeal from the United States District Court for the Northern District of Illinois, Eastern Division No. 73 C 512 RICHARD B. AUSTIN, Judge.
Fairchild, Chief Judge, Pell, Circuit Judge, and Wyzanski, Senior District Judge.*fn*
This is an appeal from a final judgment order dismissing the amended derivative complaint of Mollie Nussbacher, a stockholder of Leasco Corporation. Defendants named were the Continental Illinois National Bank and Trust Company of Chicago, appellant herein, Leasco Corporation and the nine members of Leasco's board of directors. Pursuant to directions of the plaintiff no attempt was made to serve the individual defendants with process. Finding that Nussbacher had not made an appropriate demand upon the board of directors of Leasco under Rule 23.1, Fed.R.Civ.P.,*fn1 the district court held that Nussbacher was precluded from bringing the derivative suit. Nussbacher v. Continental Illinois Bank and Trust Company, 61 F.R.D. 399 (N.D. Ill. 1973). This appeal followed.
This litigation arose from the acquisition by Leasco of another corporation, Reliance Insurance Company, which allegedly did not desire to be acquired. The allegations of the complaint*fn2 were that to accomplish its goal it was necessary for Leasco to acquire certain controlling stock of Reliance; that to do so it was necessary to resort to cash purchases rather than the exchange offer originally offered; that Leasco's investment bankers devised a plan whereby Reliance's shareholders would exchange their stock for that of Leasco and simultaneously certain lenders, including Continental, would furnish the money which would be given to the Reliance shareholders in exchange for their stock which would be held by the lenders as security for Leasco's guarantee to repay the money advanced by the lenders.*fn3
The gist of the complaint is that the Leasco securities were in actuality collateral for loans; that as loans they failed to meet applicable provisions of margin regulations;*fn4 that Leasco paid interest of 15% to the lenders, a rate in excess of that which would have been payable if the loans had been properly collateralized; that the market value of the Leasco securities declined sharply and when redeemed they had a market value substantially below that at the time of the original loan.*fn5
In 1972, Nussbacher had commenced an action basically identical to the one here under review in a federal district court in New York against the defendant Continental, the arrangers of the Reliance transaction, and other so-called lenders. Continental secured its dismissal from this action because of lack of venue. It was also alleged that the board of directors consisted of 7 members in July 1968 and that the 6 individual defendants are still directors and constitute a majority of the board. It was further charged that the directors aided and abetted the arrangers and lenders in the allegedly illegal credit plan and in soliciting lenders.
Now coming to that which is crucial to the present appeal, the complaint alleged that plaintiff had not made demand upon Leasco's directors to commence the action for the following reasons, she believing that demand would be a futile and useless act:
"A. (i) After commencing an identical action in the United States District Court for the Southern District of New York, representatives of plaintiffs initiated a discussion with representatives of Leasco to determine whether Leasco would assist plaintiff directly or indirectly in the prosecution of that action. Plaintiff was informed that Leasco's representatives refused to assist plaintiff in any way.
"(ii) On May 10, 1971, Leasco informed the Arrangers and Lenders that it had been advised by counsel that 'it must adopt a neutral stance with regard to the lawsuit.'
"(iii) Leasco's Board of Directors met on April 18, 1972 and discussed the New York action brought by plaintiff. At that meeting, the Board decided that it would be 'contrary to business ethics' and the corporation's interest for Leasco to have initiated such action.
"(iv) In view of the expressed attitude of Leasco's Directors in an identical action commenced by plaintiff in which the defendant Continental was a defendant for a portion of the time, plaintiff does not believe that Leasco's Directors would adopt a different attitude were demand to have been made by her upon them prior to the commencement of this action.
"B. The Leasco Directors, constituting a majority of its present Board, participated in and aided and abetted the Arrangers and Lenders in the illegal credit plan. They are personally liable for damages sustained by Leasco. Being personally involved in the wrongdoing, they cannot reasonably be expected to enforce Leasco's rights.
"C. Because of their personal involvement, the Leasco Directors are seeking to vindicate their actions and are prevented from an unprejudicial ...