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Lynch v. Marklin of America Inc.

United States District Court, N.D. Illinois, E.D
Nov 15, 1989
724 F. Supp. 595 (N.D. Ill. 1989)

Opinion

No. 88 C 3725.

November 15, 1989.

Lois K. Winston, Oppenheimer Wolff Donnelly, Chicago, Ill., for plaintiff.

John Cassidy, Vedder, Price, Kaufman Kammholz, Chicago, Ill., for defendants.


MEMORANDUM OPINION


Plaintiff Philip Lynch brings this suit against defendants Marklin of America, Inc. ("MOA"), Marklin, Inc. ("Marklin"), Gebr. Marklin Cie. GmbH ("GMBH"), and Gerhard Kelter, Jr. alleging violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (§ 10(b)), and the common law. On July 7, 1989, this court dismissed the plaintiff's complaint for failing to state a claim. Lynch v. Marklin, 88 C 3725, slip op., 1989 WL 82002 (N.D.Ill. July 7, 1989) ("the July 7 Order"). The plaintiff now has moved for leave to file an amended complaint but the defendant objects to this motion on the grounds that the amended complaint still does not state a viable claim. For the reasons set forth below, the motion to file the amended complaint will be granted.

DISCUSSION

In the July 7 Order, this court set forth the factual allegations of the original complaint in some detail. Since these allegations remain substantially unchanged in the amended complaint, this court will proceed with the discussion of the specific claims, citing the changes only when relevant.

Counts I-II

The plaintiff agrees that the amended complaint does not substantively affect these three federal securities law claims, so they will be dismissed again.

Count IV

Count IV of the amended complaint is re-titled "Oppression of Minority Shareholder by GmbH and MOA." The allegations in the amended Count IV differ from the original in several important respects. Now Lynch alleges that Marklin is a closely held corporation, whose shares are not publicly traded. Lynch claims that GMBH and MOA (GMBH owning 100% of MOA, and MOA owning 80% of Marklin) acted to depress the value of Marklin in order to force a buy-out of Lynch's shares (representing the remaining 20% ownership of Marklin) for less than their fair value. That, Lynch alleges, was a beach of fiduciary duty for which he is entitled to damages.

Count IV of the original complaint alleged that GMBH and MOA "breached their fiduciary duties to Lynch by failing to manage [Marklin] in such a manner as to maximize profits for the benefit of Lynch's position as a minority shareholder." After first holding that Delaware law controls the question, this court, in the July 7 Order, held that under Delaware law, Lynch had stated a derivative, rather than a direct claim and, since he no longer owned stock in the company, had no standing to assert it. The July 7 Order at 6-7, citing Kramer v. Western Pacific Industries, 546 A.2d 348, 353 (Del. 1988) (stockholder "actions charging `mismanagement which depresses the value of stock [allege] a wrong to the corporation; i.e., the stockholders collectively, to be enforced by a derivative action.'") (citations omitted).

A derivative action is brought on behalf of all stockholders and seeks redress for a "wrong to the corporation," the stockholder bringing the action "has no right, title or interest in the claim itself." Individual stockholders, on the other hand, may bring a direct action against the corporation where the harm complained of is direct, rather than derivative of a harm to the corporation. Fletcher Cyc. Corp. § 5908 (Perm. Ed. 1984).

Delaware does, however, allow individual actions by former shareholders who have suffered certain types of direct harm because of a particular corporate action, since "`[n]o one would assert that a former owner suing for loss of property through deception or fraud has lost standing to right the wrong that arguably caused the owner to relinquish ownership or possession of the property.'" Kramer at 354, citing Cede Co. v. Technicolor, Inc., 542 A.2d 1182, 1188 (Del. 1988). In Delaware, then, direct attacks on corporate restructurings may be maintained even after the transaction has been completed. Cede Co. at 1188; Rand v. Western Airlines Inc., Civil No. 8632, slip op. at 2, 1989 WL 104933 (Del.Ch. 1989). Accordingly, a former shareholder may directly challenge a merger which terminated the shareholder's status, if the merger itself is the subject of a claim of fraud. Lewis v. Anderson, 477 A.2d 1040 (Del. 1984).

In the instant case, Lynch alleges that the buy-out of his share of Marklin was effected in order to deny him the fair value of his holdings. Thus, he has standing to pursue his claim even though he no longer holds shares in Marklin.

Count V

Count V of the amended complaint alleges that GMBH committed common law fraud against the plaintiff in 1983 by intentionally misrepresenting to him, through its Chief Executive Officer, Mr. Motte, that it intended a long-term relationship with the plaintiff, that profits were a long-term rather than a short-term goal, and that the plaintiff need not be concerned with the low short-term profits of the company. These allegations, as amended, satisfy Rule 9(b)'s particularity requirement. Further, although the defendant interposed additional arguments for dismissal of the fraud claim in its motion to dismiss the original complaint, it has not raised those objections now. Accordingly, Count V, insofar as it is predicated on Mr. Motte's alleged misrepresentations, will stand.

Count V alleges other misrepresentations and omissions, but with respect to these does not satisfy this court's admonition in the July 7 Order that the plaintiff plead them with particularity. Accordingly, they cannot form the basis for the plaintiff's fraud claim.

Count VI

The plaintiff concedes that Count VI in the original complaint does not differ materially from Count VI in the amended complaint. The court already has dismissed this count, and will do so again.

Count VII

Count VII alleges that Marklin and GMBH breached the implied covenant of good faith and fair dealing in the Shareholders' Agreement by acting to depress the value of Lynch's stock under the formula set forth in the agreement. The defendants contend that this count fails to state a claim against GMBH because it was not a party to the Shareholders' Agreement. They also insist that the count fails to state a claim against Marklin because it does not allege any wrongdoing.

The court agrees with the defendants that the plaintiff cannot pursue GMBH under this count. Although the plaintiff insists that GMBH was a signatory of the License Agreement, and that the Shareholders' Agreement and License Agreement were "part and parcel of the same thing," he fails to explain how GMBH can have a contractual duty of good faith under a contract to which it was not a party. Accordingly, insofar as this count seeks liability against GMBH, it is insufficient.

Count VII does state a claim, however, against Marklin. The defendants' sole argument with respect to this defendant — that the count fails to allege any actionable wrongdoing — simply ignores the fact that, under Illinois law, "a party vested with contractual discretion must exercise that discretion reasonably and with proper motive, and may not do so arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectation of the parties." Dayan v. McDonald's Corp., 125 Ill. App.3d 972, 991, 81 Ill.Dec. 156, 466 N.E.2d 958 (1984). The plaintiff alleges that Marklin breached this mandate through its efforts to depress the value of the plaintiff's stock. Count VII therefore states a claim.

Count VIII

Count VIII alleges that GMBH and Marklin breached the Shareholders' Agreement by failing to retain an independent accounting firm in calculating the value of the plaintiff's stock. As with Count VII, this count fails with respect to GMBH since GMBH was not a party to the agreement. The defendants to not deny that this count states a claim against Marklin, but they do warn the plaintiff that unless he withdraws this claim, they will move for summary judgment and Rule 11 sanctions on the ground that an arbitration provision in the Shareholders' Agreement required the plaintiff to assert his breach of contract claims during the earlier arbitration proceedings. Since the plaintiff has seen fit to pursue this claim, the court will allow it, and await with anticipation the defendants' future motions.

Count IX

Count IX of the amended complaint, like Count VII of the original complaint, alleges that GMBH breached its License Agreement with Marklin, and that as a third party beneficiary of the agreement the plaintiff is entitled to recovery for the breach. In the July 7 Order, this court dismissed this claim on the grounds that the plaintiff's status as a Marklin minority shareholder did not make him a third party beneficiary of Marklin's contracts, but the plaintiff now insists that he has established his third party status by alleging that the License Agreement between Marklin and GMBH was executed "for the specific benefit and protection of [the plaintiff]." Am. Comp. ¶ 65. GMBH, in turn, argues that the claim still fails because a third party acquires rights under a contract only when the contract clearly identifies him as a beneficiary, and the License Agreement does not do so. The plaintiff's response is twofold. He first argues that the defendants misstate Illinois law. He then contends that, irrespective of Illinois law, his claim survives because Wisconsin law governs this dispute and, under Wisconsin law, the court must look to all of the circumstances surrounding the contract in determining whether one is a third party beneficiary of it.

The plaintiff appears to be correct on the choice of law issue, but it does not matter in any event. Case law from both states suggests that, although third party beneficiary status ordinarily requires that the contract manifest an intent to benefit the third party, such manifestation is not essential when the circumstances surrounding the creation of the contract clearly demonstrate that the contracting parties intended directly to benefit him. See Carson Pirie Scott Co. v. Parrett, 346 Ill. 252, 178 N.E. 498 (1931); People ex rel. Resnik v. Curtis Davis, 78 Ill.2d 381, 36 Ill.Dec. 338, 400 N.E.2d 918 (1980); Bates Rogers v. Greeley Hansen, 109 11.2d 225, 93 Ill.Dec. 369, 486 N.E.2d 902 (1985) (Illinois law); Pappas v. Jack O.A. Nelson Agency, Inc., 81 Wis.2d 363, 260 N.W.2d 721, 725 (1978) (Wisconsin law). The complaint here not only summarily alleges that Marklin and GMBH executed the License Agreement for the plaintiff's benefit, but further sets forth facts indicating that this agreement was signed in conjunction with the Shareholders' Agreement (to which the plaintiff was a party) for the specific purpose of protecting the plaintiff's interests. These allegations suffice to state a third party beneficiary claim.

The court is cognizant of the fact that the License Agreement contains a provision mandating arbitration of disputes arising under it. Whether this provision applies to the plaintiff's third party beneficiary claim; whether, if it does, it required the plaintiff to assert this claim during the prior arbitration; and whether the defendant now may move to compel arbitration of this claim are all issues best left for future resolution.

Count X

Count X, the analog to Count VIII in the original complaint, alleges that, beginning in 1983, all of the defendants participated in a conspiracy to defraud the plaintiff. The defendants make two objections to this claim: that the plaintiff has not alleged an actionable tort; and that, even if he has, he fails to allege any tortious conduct by defendants Kelter and Marklin.

The defendants' first argument fails because, as discussed earlier, the plaintiff successfully has pleaded fraud against GMBH. The defendants' second argument simply misses the point of a conspiracy claim. The plaintiff alleges that Kelter and Marklin joined the conspiracy to defraud him; if they did, then they are subject to liability even if, alone, they did not perform any tortious acts. Accordingly, this count stands.

Summary

This court has determined that six of the counts in the amended complaint state viable claims. Although most, if not all, of these claims have substantial problems, the plaintiff is entitled, at least for now, to pursue them. See Fed.R.Civ.P. 15(a).

CONCLUSION

The plaintiff's motion to file a first amended complaint is granted. Counts I, II, III, and VI of the amended complaint are dismissed with prejudice.


Summaries of

Lynch v. Marklin of America Inc.

United States District Court, N.D. Illinois, E.D
Nov 15, 1989
724 F. Supp. 595 (N.D. Ill. 1989)
Case details for

Lynch v. Marklin of America Inc.

Case Details

Full title:Philip M. LYNCH, Plaintiff, v. MARKLIN OF AMERICA INC., Marklin Inc.…

Court:United States District Court, N.D. Illinois, E.D

Date published: Nov 15, 1989

Citations

724 F. Supp. 595 (N.D. Ill. 1989)

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