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August 16, 1978



Hennessey, C.j., Kaplan, Wilkins, & Liacos, JJ.


Limitations, Statute of. Jurisdiction, Nonresident. Conflict of Laws, Statute of limitations.

The opinion of the court was delivered by: Wilkins

Claims in a complaint brought by corporate shareholders against the company and certain of its past and present officers and directors alleging that six years or more prior to the action large sums of money belonging to the company were used and converted for criminal, illegal, and ultra vires purposes were barred by the two-year statute of limitations on tort actions under G. L. c. 260, § 2A, inserted by St. 1948, c. 274, § 2, where there were no allegations of fraudulent concealment or the existence of inherently unknowable causes of action. [173-174]

A complaint by shareholders alleging misuse of corporate funds was an action in tort, not an action in contract. [174-176]

Under the provisions of G. L. c. 260, § 9, a claim based on breach of contract against defendants who were not residents of the Commonwealth was barred where it was not brought within the period of the statute of limitations imposed by the State in which the plaintiffs resided. [176-177]

Bill in equity filed in the Superior Court on June 3, 1974. The suit was heard by Adams, J., on motions to dismiss. After review was sought in the Appeals Court, the Supreme Judicial Court, on its own initiative, ordered direct appellate review.

The plaintiffs appeal from a judgment dismissing their complaint for failure to state a claim on which relief could be granted. The plaintiffs, residents of Missouri and long-time shareholders of the defendant American Investment Company, a Delaware corporation (company), brought this action on May 31, 1974, against the company and certain of its past and present directors and officers. We affirm the judgment on the ground that the plaintiffs' claims were barred by the statute of limitations.

We summarize the relevant allegations of the amended complaint. On April 27, 1973, counsel for the plaintiffs wrote to the president and chairman of the board of directors of the company about disclosures made in the Massachusetts "small loans" cases concerning the use of the company's funds to bribe officials in Massachusetts and in other States. He asked what legal steps the company had taken to recover these illegally expended funds, and, if the company had taken no action, demanded that the company proceed against six named individuals. *fn3 By letter, dated May 18, 1973, the secretary and general counsel of the company replied that the company had commenced no action against the named individuals. He asked for certain additional information, and stated that without further "facts sufficient to substantiate the serious charges you have made," he could not consider recommending a positive course of action to the company's board of directors. On May 22, 1973, the plaintiffs' counsel answered that the substantiating facts were "contained in the transcripts of the testimony of many witnesses before the Massachusetts Crime Commission, special grand juries, and the Suffolk Superior Court in the course of the, so-called, 'Small Loans Cases.'" He again demanded the institution of suit. On June 26, 1973, the company's secretary and general counsel wrote to counsel for the plaintiffs that at the board's June meeting, the "disinterested 'outside directors,' constituting a majority of the Board," voted that "the Board of Directors, having given careful consideration to the matters raised in certain correspondence . . ., believe the suit [the plaintiffs' counsel] demands would not be in the best interest of the Company and declines to bring said suit." *fn4

The complaint alleges that as of September 1, 1975, the company had approximately 10,400 voting stockholders who reside in every State and many foreign countries; that the company's shares are listed for trading on the New York Stock Exchange; that the present directors, officers, and the defendants own or control approximately 10% of the company's outstanding voting stock; that the plaintiffs do not have sufficient funds to solicit the shareholder votes necessary for a special meeting of stockholders or for a "proxy fight to authorize the conduct of this action"; that in the circumstances "it is almost impossible for any stockholder minority to muster sufficient support for the action sought"; and that any notice to shareholders "would be a pointless and impossibly burdensome task, and should be excused as a condition precedent to the prosecution of this action." *fn5

The complaint alleges that during the years 1963 through 1968, agents of the company testified in the "small loans" cases that "large sums of money belonging to . . . [the company and its subsidiaries] were used and converted for criminal, illegal, and ultra vires purposes," and that the illegal use of corporate funds was "a breech [ sic ] of the fiduciary and other duty owed by the individual defendants and others." The complaint specifically alleged the use of corporate funds, directly or indirectly, to bribe a "Deputy Banking Commissioner of the Commonwealth of Massachusetts," to entertain members of the Commonwealth's Small Loans Regulatory Board, and to bribe members of the Legislature. It further alleged that certain corporate funds had been retained by some of the individual defendants rather than used for the ostensible illegal purposes. The plaintiffs alleged, on information and belief, that individual defendants made similar illegal use of corporate funds in other States as part of a "studied, knowing, sophisticated, wholesale raid on the corporate treasury." The plaintiffs sought the repayment of all funds found to be justly due the corporation.

The defendants filed motions to dismiss on the ground that the amended complaint failed to state a claim on which relief could be granted, relying in part on the claim that the statute of limitations had run before the complaint was filed. These motions were allowed without specification of reasons and, as we have said, judgment was entered accordingly for the defendants.

We start with an analysis of precisely what alleged wrongs to the company lie at the base of the plaintiffs' derivative action. The allegations of the complaint cannot fairly be read as presenting any claim for recovery of any illegal payment or misappropriated corporate funds other than those disclosed in the course of the so called "small loans" cases in Massachusetts. The complaint substantially exceeds the scope of the demand on the directors, which lacks the necessary particularity to support a shareholder derivative action based on other circumstances, such as illegal conduct in other jurisdictions, or an action against any defendant not mentioned in the demand. See 3B Moore's Federal Practice par. 23.1.19, at 23.1-81 (2d ed. 1978); 7A C. A. Wright & A. R. Miller, Federal Practice and Procedure ยง 1831, at 377 (1972); ...

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