Pomerantz v. Clark
101 F.Supp. 341, 1951 U.S. Dist. LEXIS 2023 (1951)
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Rule of Law:
Under Massachusetts substantive law, a minority member of a corporation generally cannot bring a derivative suit without first making a demand upon the directors and, if they are disqualified, upon the members of the corporation, unless immediate action is required or there is no impartial internal forum to which the plaintiff can resort. The practical difficulties of communicating with numerous scattered members in a large mutual insurance company do not, by themselves, establish futility of demand on the members.
Facts:
- Pomerantz was a policyholder of the John Hancock Mutual Life Insurance Company, a Massachusetts mutual life insurance corporation.
- Sidney W. Winslow, Jr. was a director of John Hancock, along with other co-directors.
- John Hancock made a $3,500,000 loan to Texmass Petroleum Corporation and a loan of at least $332,938 to Petroleum Reserve Corporation.
- Pomerantz alleged that Texmass was insolvent at the time of its loan, John Hancock received inadequate security, and the directors failed to obtain independent appraisals or follow proper investigatory procedures.
- Pomerantz further alleged that the loans were made in violation of Massachusetts insurance laws (e.g., to an insolvent company, on largely unimproved real property, in excess of two-thirds of fair market value, at lower than prevailing interest rates) and for the purpose of assisting relatives and business associates of the directors.
- Pomerantz did not make a demand on the John Hancock directors to bring suit, alleging futility because the defendant-directors constituted an overwhelming majority of the present board.
- Pomerantz did not make a demand on the John Hancock policyholders to bring suit, asserting futility due to management control, the risk of hostile litigation conduct, and the prohibitive expense of communicating with millions of scattered policyholders.
- Policyholders of John Hancock rarely attend meetings (less than 1% participation) and typically consist of company employees or agents, making independent action difficult for a minority policyholder.
Procedural Posture:
- Pomerantz, a policyholder of John Hancock Mutual Life Insurance Company, filed a derivative lawsuit in a United States District Court against Sidney W. Winslow, Jr., other directors, and John Hancock itself.
- All defendants filed motions to dismiss Pomerantz’s complaint for failure to state a cause of action.
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Issue:
Does a minority policyholder in a mutual life insurance company have a cause of action in a derivative suit without first making a demand on the general body of policyholders, particularly when alleging futility due to the company's size and the practical difficulties of communication?
Opinions:
Majority - WYZANSKI, District Judge
No, a minority policyholder is not authorized to prosecute for the benefit of John Hancock a claim upon which the complainant admits he did not give the policyholders acting in a corporate meeting an opportunity to pass before he sued. The court, sitting in diversity, applied Massachusetts substantive law, which strictly requires a demand upon the internal corporate organs (directors and then members) before a derivative suit can proceed, unless immediate action is required or there is no impartial internal forum. While the court assumed, without deciding, that demand on the directors might have been futile given the allegations against a majority, it rejected the plaintiff's arguments for excusing demand on the general body of policyholders. The court explained that members can bring a derivative suit against directors if the board is controlled, and the mere expense and practical difficulty of communicating with a large, dispersed membership (even in a major mutual insurance company like John Hancock, or the large railroad in the precedent Bartlett's case) has not been recognized by the Massachusetts Supreme Judicial Court (SJC) as a valid ground for excusing demand. The court emphasized that the SJC's jurisprudence prioritizes corporate self-governance, adheres to precedent, and is reluctant to intervene in internal controversies unless parties are clearly prevented from obtaining fair treatment internally. Absent stronger allegations of egregious wrongdoing, corruption at member meetings, or unreasonable refusal of cooperation after attempts to secure support, the SJC would not create a novel exception to its demand requirement for a policyholder merely because of the practical difficulties of mobilizing a large, scattered membership.
Analysis:
This case underscores the strict application of demand requirements in derivative suits under Massachusetts law, particularly distinguishing it from jurisdictions with more liberal demand futility doctrines. It highlights the importance of federal courts in diversity cases to faithfully apply state substantive law, even when practical considerations (like the difficulty of organizing millions of policyholders) might suggest a different equitable outcome. The decision provides insight into the conservative judicial philosophy of the Massachusetts Supreme Judicial Court, emphasizing internal corporate resolution and skepticism towards minority shareholder/member lawsuits unless severe impediments to internal redress are clearly proven. The ruling implies that allegations must go beyond mere difficulty or cost to demonstrate an actual inability to obtain a fair decision from the corporate membership.
