Opinion
No. C.A. 6407.
Submitted: July 21, 1981.
October 27, 1981.
Plaintiff in this case, while being deposed by defendants, refused to answer certain questions designed to elicit information concerning his competency to serve as a derivative and class plaintiff. As a result of such refusal defendants have filed a motion under Rule 37 seeking to compel responses to questions which plaintiff has declined to answer.
The questions which Katz has refused to answer fall into three general categories: (1) whether or not he has any legal or business interests which conflict with those of Plant or its shareholders; (2) whether or not he has sufficient financial resources to prosecute this litigation; and (3) what actions, if any, he took in regard to the disposal of the assets of Plant National (Quebec) Ltd., Plant's Canadian branch.
The defendant Plant Industries, Inc. argues that under the provisions of Chancery Court Rule 23.1, which is modeled on Federal Rule 23.1, a plaintiff may not bring a derivative action unless he is able to establish that he can fairly and adequately represent the interests of the corporation and those of its shareholders, whose rights he purports to represent. Express language to such effect is not found in the Delaware rule, the federal rule reading in part as follow:
"The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association." F.R.C.P. 23.1
Plaintiff, citing Associated Imports, Inc. v. A G Industries, Del. Ch., C.A. No. 5933 (April 28, 1980), argues that the above clause was deliberately omitted from Rule 23.1 of this Court. However, as I read the cited case, it is not authority for such contention, and I am satisfied that the addition to the federal rule merely made explicit what was already implicitly a part of the Federal as well as the Delaware rule.
The other cases cited by plaintiff to support his position are not persuasive as they relate to general past wrongdoings of a plaintiff and are not concerned with a claim of a conflict of interest between the plaintiff in a case in litigation and the shareholders whose interest he purports to represent in such action, Taormina v. Taormina Corp., Del. Ch., 78 A.2d 473 (1951), Abelow v. Symonds, Del. Ch., 156 A.2d 416 (1959), and Keenan v. Eshleman, Del. Ch., 181 A. 655 (1935). Thus there is nothing in the federal rule or Delaware Rule 23.1 which requires that a derivative plaintiff come into Court with a spotless past.
I further conclude, as indicated above, that plaintiff's contention that the Delaware Rule 23.1 was drafted so as to deliberately omit the requirement that a plaintiff in a derivative action must be qualified to represent the interests of similarly situated shareholders in a fair and adequate manner is clearly without support. In short, I am satisfied that the above quoted addition to the federal rule merely spells out what was implicit before the amendment, namely that a plaintiff shareholder in a derivative action must be qualified to serve in a fiduciary capacity as a representative of a class of persons similarly situated, whose interests are in plaintiff's hands and the redress of whose injuries is dependent upon his diligence, wisdom and integrity, Cohen v. Beneficial Loan Corp., 347 U.S. 541 (1959). See also Davis v. Comed, Inc., 619 F.2d 588, C.A. 6 (1980) in which the court enumerated the factors to be given consideration in reaching a determination as to whether or not a plaintiff fairly and adequately represents the interests of his fellow stockholders, the Court stating as follows:
"Typically, the elements are intertwined or interrelated, and it is frequently a combination of factors which leads a court to conclude that the plaintiff does not fulfill the requirements of 23.1 (although often a strong showing of one way in which the plaintiff's interests are actually inimical to those he is supposed to represent fairly and adequately, will suffice in reaching such a conclusion). Among the elements which the courts have evaluated in considering whether the derivative plaintiff meets Rule 23.1's representation requirements are: economic antagonisms between representative and class; the remedy sought by plaintiff in the derivative action; indications that the named plaintiff was not the driving force behind the litigation; plaintiff's unfamiliarity with the litigation; other litigation pending between the plaintiff and defendants; the relative magnitude of plaintiff's personal interests as compared to his interest in the derivative action itself; plaintiff's vindictiveness toward the defendants' and, finally, the degree of support plaintiff was receiving from the shareholders he purported to represent.
"A major `type of antagonism requiring denial of certification is clear economic antagonism between representative and class.' Schnorbach v. Fuqua, 70 F.D.R. 424, 433 (S.D. Ga. 1975). See also Roussel v. Tidelands Capital Corp., 438 F. Supp. 684, 688 (N.D. Ala. 1977). (`Typically, these extrinsic courts have confronted situations of economic antagonism, frequently involving competition between two entities in which the derivative plaintiff is involved."
Accordingly I shall direct the plaintiff to answer questions concerned with Container Industries, a potential competitor of Plant's which was founded by plaintiff after leaving Plant. See Robinson v. Computer Servicenters, Inc., 75 F.R.D. 637 (N.D. Ala. 1976), and duPont v. Wyly, 61 F.R.D. 615 (D.DEL. 1973). He will also be directed to state (1) whether Container is marketing any products similar to those of Plant, (2) whether or not he has personally guaranteed debts of Container, and (3) to describe the circumstances surrounding the departure from Plant of two key employees.
Plaintiff will also be directed to explain his interests in other business ventures in Canada, particularly his interest in Fred Gardner Co., and the reasons for his sale of Plant stock as well as his reasons for retaining the shares he still holds. He will also be directed to state under oath whether or not he has retained proxy solicitors and the status of other litigation involving Plant. He will as well be required to give his reasons for making the allegations which appear in his verified complaint as well as to answer questions concerning his claimed ability to pay the costs of the pending litigation. He will also be required to testify as to his efforts to dispose of Plant's Canadian property and the names of the Canadian brokerage firms he consulted during his tenure at Plant at a time when he considered making Plant's Canadian operation a public enterprise. On the other hand, plaintiff will not be required to disclose the name of the company which approached him with the understanding that its identity would not be disclosed.