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Miller v. Am. Tel. & Tel. Co. - 507 F.2d 759 (3d Cir. 1974)

Rule:

If plaintiffs' complaint alleged only failure to pursue a corporate claim, application of the sound business judgment rule would support the district court's ruling that a shareholder could not attack the directors' decision. Where, however, the decision not to collect a debt owed the corporation is itself alleged to have been an illegal act, different rules apply. When New York law regarding such acts by directors is considered in conjunction with the underlying purposes of the particular statute involved, the court is convinced that the business judgment rule cannot insulate corporate directors from liability if they did in fact breach 18 U.S.C.S § 610.

Facts:

Plaintiffs, stockholders in American Telephone and Telegraph Company (AT&T), brought a stockholders' derivative action in the Eastern District of Pennsylvania against AT&T and all but one of its directors, alleging that AT&T failed to collect an outstanding debt of some $1.5 million owed to the company by the Democratic National Committee (DNC) for communications services provided by AT&T during the 1968 Democratic national convention. The complaint alleged that the failure to collect was alleged to have involved a breach of the defendant directors' duty to exercise diligence in handling the affairs of the corporation, to have resulted in affording a preference to the DNC in collection procedures in violation of § 202(a) of the Communications Act of 1934, 47 U.S.C. § 202(a) (1970), and to have amounted to AT&T's making a "contribution" to the DNC in violation of a federal prohibition on corporate campaign spending, 18 U.S.C. § 610 (1970). Plaintiffs sought permanent relief in the form of an injunction requiring AT&T to collect the debt, an injunction against providing further services to the DNC until the debt was paid in full, and a surcharge for the benefit of the corporation against the defendant directors in the amount of the debt plus interest from the due date. A request for a preliminary injunction against the provision of services to the 1972 Democratic convention was denied by the district court after an evidentiary hearing. On motion of the defendants, the district court dismissed the complaint for failure to state a claim upon which relief could be granted. The court stated that collection procedures were properly within the discretion of the directors whose determination would not be overturned by the court in the absence of an allegation that the conduct of the directors was "plainly illegal, unreasonable, or in breach of a fiduciary duty.” Plaintiffs appealed.

Issue:

Did plaintiff’s complaint fail to state a claim, thereby justifying the court’s dismissal of the same?

Answer:

No.

Conclusion:

The Court noted that a complaint should not be dismissed unless it appeared that the plaintiffs would not be entitled to relief under any facts which they might prove in support of their claim. In the case at bar, plaintiffs’ complaint stated a claim upon which relief can be granted for breach of fiduciary duty arising from the alleged violation of 18 U.S.C.S. § 610. According to the Court, directors had to be restrained from engaging in activities that were against public policy. The business judgment rule did not insulate the corporate directors from liability for breaching § 610 prohibiting corporate political contributions. Hence, the case was remanded for further proceedings.

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