Brown v. Hart, Schaffner & Marx

96 F.R.D. 64, 35 Fed. R. Serv. 2d 1332, 12 Fed. R. Serv. 812, 1982 U.S. Dist. LEXIS 16872
CourtDistrict Court, N.D. Illinois
DecidedNovember 24, 1982
DocketNo. 82 C 4333
StatusPublished
Cited by12 cases

This text of 96 F.R.D. 64 (Brown v. Hart, Schaffner & Marx) is published on Counsel Stack Legal Research, covering District Court, N.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Brown v. Hart, Schaffner & Marx, 96 F.R.D. 64, 35 Fed. R. Serv. 2d 1332, 12 Fed. R. Serv. 812, 1982 U.S. Dist. LEXIS 16872 (N.D. Ill. 1982).

Opinion

MEMORANDUM OPINION

KOCORAS, District Judge:

Plaintiff, Ann Brown, brings this derivative action against the Hart, Schaffner & Marx corporation (“HSM”) and all of its directors, alleging violations of federal securities laws, as well as common law fraud and breach of fiduciary duty. Plaintiff owns 10 shares of HSM stock which she purchased on May 6, 1982, for $270.

Plaintiff filed this action on July 13,1982, a little more than two months after making her $270 investment in HSM.1 The action arises out of a business transaction which occurred in late June of 1982. At that time, HSM entered into an agreement with another corporation to purchase at a premium some HSM stock which the other corporation owned. Plaintiff’s claims are predicated on the view that the $11 per share [66]*66premium which HSM agreed to pay for its own shares constitutes “a waste and spoliation” of corporate assets to the detriment of both the company and its stockholders.

In her complaint, plaintiff makes extremely serious allegations against HSM’s directors, charging them with fraudulent and deceitful conduct. According to plaintiff’s allegations, the agreement by HSM to purchase its own stock from the other corporation “serve[d] no legitimate business purpose of HSM.” Furthermore, plaintiff charges, the premium paid for the shares was “grossly excessive,” and the “sole purpose and motivation” of the directors in causing HSM to agree to purchase its own shares was to enable themselves to retain their positions and “continue their domination and control” of the company.

As required by Fed.R.Civ.P. 23.1, plaintiff verified her complaint, stating:

Deponent is the plaintiff in the within action; deponent has read the foregoing complaint and knows the contents thereof; the same is true to deponent’s own knowledge, except as to the matters therein stated to be alleged on information and belief, and as to those matters deponent believes them to be true.

Complaint Verification. In addition, as required by Fed.R.Civ.P. 11, the complaint was signed by plaintiff’s attorneys, certifying that to the best of their knowledge, information, and belief there was good ground to support it.

Pursuant to the filing of this action, the defendants deposed plaintiff on October 5, 1982. Plaintiff’s deposition testimony revealed that although she had verified her complaint, she had done so without having even the vaguest notion of whether or not a factual basis existed for any of the grave charges she had made against the HSM directors. The only documents plaintiff had ever seen in connection with the case were her own handful of HSM stock certificates. The only information she had obtained prior to contacting her lawyers was her husband’s opinion that the price paid by HSM for its shares was “excessive” and “unfair.” Plaintiff testified that she had done no research whatsoever to determine the factual or legal validity of her claims. Instead, according to her testimony, plaintiff left it to her lawyers to investigate the matter and determine whether there was good cause under the facts and the law to file a lawsuit. Plaintiff stated that she became satisfied that such an investigation had been conducted and that good cause existed for the action when her attorneys shortly thereafter filed a complaint in her name.

Having learned that plaintiff had no idea of what facts provided the basis for her claims, and being confronted with a complaint consisting largely of conclusory allegations, the defendant directors sought to depose plaintiff’s attorneys in order to discover whether they had investigated the circumstances prior to filing suit on plaintiff’s behalf, and, if so, to learn the nature and extent of that investigation.

The matter now before the court is a motion by which plaintiff seeks to preclude such discovery. Plaintiff requests this court to enter a protective order prohibiting the defendant directors from conducting any discovery of her lawyers. Plaintiff further requests this court to quash a subpoena duces tecum served on her lawyers requiring them to produce certain documents related to their investigation. Plaintiff advances several theories in support of this motion. First, plaintiff asserts a blanket claim of attorney-client privilege as to all “communications between plaintiff and [her lawyers].” Plaintiff’s Memorandum in Support at 4. Second, plaintiff invokes the work product rule as a bar to discovery of all documents sought from her lawyers. Finally, plaintiff contends that “[defendants’ inquiry is irrelevant and immaterial to the issue at bar.” Id. at 7.

Rule 23.1 requiring verification of complaints in derivative actions “was originally adopted and has served since in part as a means to discourage ‘strike suits’ by people who might be interested in getting quick dollars by making charges without regard to their truth so as to coerce corporate managers to settle worthless claims in order [67]*67to get rid of them.” Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 371, 86 S.Ct. 845, 850, 15 L.Ed.2d 807 (1966). And, while it is undeniable that derivative suits have played a rather important role in protecting corporate shareholders from the machinations of corporation insiders, id., it is equally true that “nuisance” and “strike” suits cannot be tolerated under the guise of a derivative action ostensibly brought for the benefit of a corporation. Strike suits are a particularly repugnant species of blackmail. Such lawsuits are the base work of rapacious jackals whose declared concern for the corporate well-being camouflages their unwholesome appetite for corporate dollars. As one commentator noted in discussing the Surowitz case:

Both individual and corporate defendants are put to great financial expense in the defense of stockholders’ derivative suits. In addition, the corporation incurs indirect expenses, such as bad publicity and diversion of executives’ time and energies from profitable corporate activities. This may lead to settlement even when there is no basis for the complaint; and the settlement-inducing nature of these suits, in turn, encourages plaintiffs and their fee-seeking attorneys to bring such unfounded strike suits. An interpretation of Rule [23.1] eliminating such abuses would thus serve a legitimate and useful purpose.

Note, Verification as a Safeguard Against Abuse of Stockholders’ Derivative Suits, 18 Stan.L.Rev. 1221, 1222 (1966) (footnotes omitted).

Thus, while it is not required that the verifying plaintiff have detailed personal knowledge of the transactions or events that give rise to the suit, see Surowitz, supra, it is essential that “some person, party, attorney, advisor, or otherwise has responsibly investigated the allegations at the behest of the named plaintiff, who then stands behind the merits of the complaint.” Rogosin v. Steadman, 65 F.R.D. 365, 367 (S.D.N.Y.1974). Accord Porte v. Home Federal Savings & Loan Association of Chicago, 409 F.Supp. 752, 754 (N.D.Ill.1976) (“Before a court can proceed with a derivative suit, it must be assured that the plaintiff or some other person has investigated the charges and found them to have substance.”).

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96 F.R.D. 64, 35 Fed. R. Serv. 2d 1332, 12 Fed. R. Serv. 812, 1982 U.S. Dist. LEXIS 16872, Counsel Stack Legal Research, https://law.counselstack.com/opinion/brown-v-hart-schaffner-marx-ilnd-1982.