Opinion
Civil Action No. 8624 (1986).
Submitted: October 6, 1986.
Decided: October 7, 1986.
A. Gilchrist Sparks, III, Esquire, MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, DE.
R. Franklin Balotti, Esquire, RICHARDS, LAYTON FINGER, Wilmington, DE.
Rodman Ward, Jr., Esquire, SKADDEN, ARPS, SLATE, MEAGHER FLOM, Wilmington, DE.
ON COUNTERCLAIM DEFENDANTS' MOTION TO DISMISS COUNTERCLAIM: GRANTED;
ON ORIGINAL PLAINTIFFS' MOTION TO DISMISS COUNTERCLAIM: DENIED IN PART.
Gentlemen:
This is a summary proceeding brought pursuant to 8 Del. C. § 225 in which plaintiffs seek to have determined whether Albert L. Bossier is a director and the Chairman of the Board of Avondale Industries, Inc., a Delaware corporation. The original defendants have now asserted affirmative defenses and counterclaims against the original plaintiffs and other counterclaim defendants. The counterclaim defendants have moved to dismiss the counterclaim as to them and the original plaintiffs have moved to strike the affirmative defenses and the counterclaim. The motion to dismiss must be granted. The motion to strike must be denied — at least in part.
I
The original plaintiffs in this action, Albert L. Bossier and Avondale Industries, Inc., filed a complaint pursuant to 8 Del. C. § 225 seeking to have Mr. Bossier declared to be the Chairman of the Board of Avondale Industries, Inc., a Delaware corporation.
Mr. Bossier, on behalf of himself and purportedly on behalf of Avondale, asserted two claims: the first is that Mr. Bossier was duly elected as Chairman of the Board, President and Chief Executive Officer of Avondale on September 16, 1986; and the other is that Mr. Bossier's purported removal as a director of Avondale later the same day by the sole stockholder for cause was defective and of no effect.
Although the complaint appears to merely seek to have determined the validity of the election of Mr. Bossier as Chairman of the Board and to challenge the validity of his removal as a director, there is a much broader controversy involving the parties which is already subject to a Federal suit in Massachusetts.
In September of 1985, Ogden Corporation ("Ogden") spun off eight of its subsidiaries into Avondale Industries, Inc. ("Avondale") for the benefit of an Employees Stock Option Plan ("ESOP") for the benefit of Ogden's employees. The sole common stockholder of Avondale is the ESOP Trust. Federal law apparently requires that after the spin off to the ESOP Trust, Avondale's control must be separate from Ogden. The counterclaim plaintiffs now allege that Ogden intended, and still intends, to circumvent this Federal requirement by installing Mr. Bossier as Chairman of the Board of Avondale.
It is further alleged by the counterclaim plaintiffs that Ogden had grossly overcharged the ESOP Trust for Avondale and issued to itself more shares of Avondale preferred stock than was fair.
These allegations, however, are already apparently before a federal court because the ESOP Trust and Avondale commenced suit in the U.S. District Court of Massachusetts against Ogden in April of 1986 to recover the overcharge and the excessive issue of stock. Part of this lawsuit has been settled and part continues.
At the time of the spin off defendant (and counterclaim plaintiff) William F. Connell, ex-Vice President of Ogden became Chairman of Avondale pursuant to a three-year contract and was elected an Avondale director.
Counterclaim plaintiffs allege that the Chief Executive Officer of Ogden attempted to install Mr. Bossier as President of Avondale in retribution for the Federal suit and in order to force Avondale to terminate the Federal suit.
Although not set forth in the pleadings, the counterclaim plaintiffs now further allege that no vote on Mr. Bossier's self-nomination was actually taken. They also claim that, in any case, shortly after the Board meeting at which Mr. Bossier was allegedly elected Chairman of the Board, the ESOP trustees, as the governing body of the sole stockholder, voted unanimously by the use of written consents to remove Mr. Bossier as a director for cause.
The original defendants and Avondale (which is purportedly both one of the original plaintiffs and a counterclaim plaintiff) filed an answer and asserted a counterclaim which attempts to join five new counterclaim defendants in addition to asserting a claim against the original plaintiffs. The new counterclaim defendants are: Ogden Corporation ("Ogden"), Ogden America Corporation, Donald A. Krenz, James M. Russo and Constantine G. Caras. It is not disputed that the individual counterclaim defendants are presently directors of Avondale and officers of Ogden. Neither the complaint nor the counterclaims allege that there is any dispute over the validity of the right of Messrs. Krenz, Russo, or Caras to hold office as directors of Avondale. The counterclaim merely alleges that Messrs. Krenz, Russo and Caras breached their fiduciary duties of loyalty to Avondale and its sole common stockholder, the ESOP Trust, and that Ogden aided and abetted the other counterclaim defendants in their breach of fiduciary duty. The alleged breach of fiduciary duty allegation apparently arises out of the allegation that plaintiff (and counterclaim defendant) Bossier, in combination with the Ogden designated directors of Avondale are attempting to control Avondale in violation of Federal law.
II
The purpose of 8 Del. C. § 225 is to grant a quick method of review of the corporate election process in order to prevent a corporation from being immobilized by controversies as to who are its proper officers or directors. In order to preserve an expedited remedy this Court has consistently held that a proceeding brought pursuant to 8 Del. C. § 225 is a summary proceeding and this Court has consistently limited trials pursuant to it to narrow issues. In re Chelsea Exchange Corporation, Del. Ch., 159 A. 432 (1932); Fleer v. Frank H. Fleer Corporation, Del. Ch., 125 A. 411 (1924); Bachmann v. Ontell, Del. Ch., C.A. 7805-NC, Ch. Brown (Nov. 5, 1984). An 8 Del. C. § 225 proceeding, therefore, cannot be used to hear purely collateral issues, or to try issues of directors misconduct or other breaches of duty. See In re Tonopah United Water Co., Del. Ch., 139 A. 762 (1927); FOLK, The Delaware General Corporation Law § 270 (1972).
The Court, however, cannot so limit an 8 Del. C. § 225 proceeding that manifest injustice would result. As long ago as 1928 this Court, in construing the predecessor statute, permitted an inquiry as to whether there had been wrongful conduct and trickery at the stockholders meeting.
The Court, therefore, must carefully balance the need to preserve a Section § 225 proceeding as an expedited method to ascertain who are the managers of a corporation with the duty to permit the parties to reasonably present their case.
III
It is clear that the counterclaim does not state a claim against the counterclaim defendants which can be considered in an 8 Del. C. § 225 proceeding. The only relief sought against the counterclaim defendants is predicated on allegations of breach of fiduciary duties. Allegations of breach of fiduciary duty are collateral to the issues in an 8 Del. C. § 225 proceeding and cannot be considered in such a proceeding. In re Tonopah United Water Co., supra.
Although the counterclaim plaintiffs contend that their counterclaim is a compulsory counterclaim because it arises out of the same transaction or occurrance as set forth in the complaint and, as such, cannot be dismissed (although they conceded that it could be severed for trial), I note that the counterclaim apparently states claims which are the subject of another pending action in the Federal court and therefore is not a compulsory counterclaim. Chancery Rule 13(a). Cf., Kaye v. Pantone, Del. Ch., 395 A.2d 369 (1978).
I also note that the counterclaim defendants have agreed to make themselves available for discovery in this action. There, therefore, is no present reason to require them to continue to bear the cost of a defense in this action. If the progress of this suit requires the counterclaim defendants' presence, they can be joined at a later time.
The motion of counterclaim defendants Ogden Corporation, Ogden American Corporation, Donald A. Krenz, James M. Russo and Constantine G. Caras to dismiss the counterclaim as to them is therefore granted.
IT IS SO ORDERED.
IV
The motion of the original plaintiffs to strike the affirmative defenses and the counterclaim presents a more difficult issue.
It is clear that the allegations of the counterclaim are collateral and therefore improper as to the issue of whether Mr. Bossier was actually elected Chairman of the Board of Avondale, but plaintiffs seek more than a determination of whether a valid election occurred. They also seek to have set aside the purported removal of Mr. Bossier as a director for cause. Many of the allegations of the counterclaim go to this issue. While I am convinced that much of the counterclaim does not comply with Chancery Rule 8(a) (especially paragraph 20) and that many of the allegations can be raised by the defendants at trial even if not plead in a counterclaim, I am reluctant to dismiss the counterclaim in its entirety in view of the fact that trial is scheduled to commence in a few days. Nor does the few hours I have available to decide this issue permit me to sift through the numerous allegations of the counterclaim to separate the proper from the improper.
I will therefore not strike the counterclaim and affirmative defenses but will limit the evidence at trial to those matters which are directly related to the events which occurred on or about September 16, 1986.
Counsel for counterclaim plaintiffs has already advised the Court that his presentation will be concise and will not unduly delay the summary proceeding.
The motion to strike is therefore denied. IT IS SO ORDERED.