Opinion ID: 1349675
Heading Depth: 1
Heading Rank: 4

Heading: claims against anaconda and asarco

Text: The trial court found that the evidence was undisputed that (1) in 1975, three independent directors were on the UPCM board when the restructuring plans and resort agreements were considered and approved, (2) the three independent directors had full knowledge concerning the terms of the restructuring and its effects upon UPCM and then voted in favor of the restructuring, and (3) the independent directors were not implicated in any wrongdoing, did not have any conflicts of interest, and were fully informed of all material facts involving the restructuring plan and the subsequent execution of the 1975 agreements. Additionally, the trial court found: In 1975, the shareholders of UPCM had actual knowledge of the restructuring plan and the leases and agreements relating thereto, or they were put on notice of facts which would lead a person of ordinary prudence to discover the alleged wrongdoing, sufficient to commence the running of the statute of limitations. Based on those findings of fact, the trial court held that UPCM's action against Anaconda and ASARCO was barred by Utah Code Ann. § 78-12-27, which provides: Actions against directors or stockholders of a corporation to recover a penalty or forfeiture imposed, or to enforce a liability created, by law must be brought within three years after the discovery, by the aggrieved party, of the fact upon which the penalty or forfeiture attached, or the liability accrued, and in case of actions against stockholders of a bank pursuant to levy of assessment to collect their statutory liability, such actions must be brought within three years after the levy of the assessment. UPCM assails those findings of fact and contends that it proffered evidence that none of the members of the board of directors were independent of Anaconda and ASARCO until August 1985, when new management took control, and that the statute of limitations did not begin to run until that date. A corporation discovers wrongdoing by its officers, directors, or controlling shareholders through outside shareholders or independent directors. Discovery of breach of fiduciary duty thus has two components: The shareholders or directors must have knowledge of the wrongdoing or facts that put them on inquiry and must be sufficiently independent to be able to assert a claim on behalf of the corporation. As long as the wrongdoers remain in control of the corporation and conceal their wrongdoing from shareholders or independent directors, the statute of limitations on the corporation's claims against them is tolled. See, e.g., Mosesian v. Peat, Marwick, Mitchell & Co., 727 F.2d 873, 876-79 (9th Cir.), cert. denied, 469 U.S. 932, 105 S.Ct. 329, 83 L.Ed.2d 265 (1984); IIT & Int'l Inv. Trust v. Cornfeld, 619 F.2d 909, 928-32 (2d Cir.1980). Some federal courts have held that in order to toll the statute of limitations, a plaintiff must allege and show full, complete, and exclusive control of the corporation by the wrongdoers so that the possibility that an informed stockholder or director could have induced the corporation to sue is negated. See, e.g., Mosesian, 727 F.2d at 879; International Rys. of Cent. Am. v. United Fruit Co., 373 F.2d 408, 414 (2d Cir.1967). In United Fruit, the plaintiff corporation brought an antitrust and breach of contract action against the defendant, which controlled the election of the corporation's nine directors. The defendant moved for summary judgment based partly on the statute of limitations. The corporation contended that the statute was tolled until the defendant relinquished its control of the corporation. The Second Circuit Court of Appeals determined that the statute was not tolled, the action was barred, and summary judgment was properly granted. The court held that the corporation had failed to carry its burden of negating the possibility of suit against the corporation while the defendant was in control because three independent directors were on the board: One principle emerging with some clarity is that a plaintiff who seeks to toll the statute on the basis of domination of a corporation has the burden of showing a full, complete and exclusive control in the directors or officers charged. Such control was found for example in Adams v. Clarke, 22 F.2d 957 (9 Cir.1927), where all the directors were accused of wrongdoing and held a majority of the capital stock.... This principle must mean at least that once the facts giving rise to possible liability are known, the plaintiff must effectively negate the possibility that an informed stockholder or director could have induced the corporation to sue. And here we think [plaintiff] fails. .... Since [plaintiff] has not met its burden of demonstrating that, after the election of the three independent directors in 1959, [defendant] had such full, complete and exclusive control as to rule out the possibility of a corporate suit against it, on the demand of a stockholder or director, for antitrust violations the facts giving rise to which had become well-known, any tolling of the statute ended at least by that time. 373 F.2d at 414-16 (citation omitted). The Ninth Circuit Court of Appeals has held that an action is time-barred if the plaintiff discovered or should have discovered the alleged wrongdoing within the limitation period and that the question of when it was or should have been discovered is a question of fact. Mosesian, 727 F.2d at 877. The Mosesian court further added that the question may be decided as a matter of law only when `uncontroverted evidence irrefutably demonstrates plaintiff discovered or should have discovered the fraudulent conduct.' Id. (quoting Kramas v. Security Gas & Oil Inc., 672 F.2d 766, 770 (9th Cir.), cert. denied, 459 U.S. 1035, 103 S.Ct. 444, 74 L.Ed.2d 600 (1982)). In Kramas, the plaintiff actually knew of the alleged fraud. He consulted with the Securities and Exchange Commission and even suggested to other investors the possibility of an action for fraud. The Washington Court of Appeals decided a case in which a minority stockholder brought a derivative action on behalf of a corporate automobile dealership, seeking the profit from the majority stockholder, who bought a company-owned car for $6500 and later sold it for $40,000. The court held that the action was barred by the statute of limitations because one officer and director of the corporation had knowledge of facts sufficient to put one on inquiry, which could have led to the discovery of the alleged fraud. Interlake Porsche & Audi, Inc. v. Bucholz, 45 Wash.App. 502, 728 P.2d 597 (1986). The Washington court further held that if one director knew facts which by the exercise of due diligence could have led to the discovery of the alleged wrongdoing, that director's knowledge is imputed to the corporation. Id. 728 P.2d at 607. Finally, the court concluded that even in an action for fraud where a fiduciary relation exists, the burden is upon the plaintiff to show that the facts constituting the fraud were not discovered until within 3 years prior to the commencement of the action. Id. 728 P.2d at 608. Anaconda and ASARCO assert that during the entire relevant period of time, including 1974 and 1975, when the alleged wrongdoing occurred, there were always three independent directors on UPCM's board who could have instituted legal action on behalf of the corporation: Sid Cornwall April 1969 to Retired partner, December 1980 VanCott, Bagley, Cornwall & McCarthy Miles P. Romney July 1970 to Former president, Utah December 1980 Mining Association (deceased) Harold J. Steele April 1969 President, First to June 1978 Security Bank Wheeler M. Sears January 1981 President, Cimarron to August 1985 Corporation Hugh J. Leach December 1981 Vice president, to present Western Operations of Cleveland Cliffs Iron Co. UPCM counters that these directors may have been technically independent in the sense that they were not employed by Anaconda or ASARCO but charges that they had close business ties with them and that they therefore could not and did not act independently of them. UPCM relies upon Federal Deposit Insurance Corp. v. Howse, 736 F.Supp. 1437, 1442 (S.D.Tex.1990), for the proposition that the statute of limitations is tolled as long as controlling shareholders or directors adversely dominate a majority of the board, whether or not a minority of the board is independent. Farmers & Merchants National Bank v. Bryan, 902 F.2d 1520 (10th Cir.1990), is cited by UPCM as an example of where a court found a question of fact to exist as to the ability and willingness of the outside directors because of their domination to bring suit on behalf of the corporation. UPCM points out that Cornwall had for many years been a partner in a law firm which represented both Anaconda and UPCM, that Romney was a mining consultant who served as president of UPCM when the restructuring was approved, and that Steele was president of a bank which had long-standing relationships with Anaconda and ASARCO. We need not and do not decide whether UPCM raised a question of material fact as to the domination of these directors and their ability and willingness to bring suit on behalf of the corporation so as to preclude summary judgment. That is unnecessary because we conclude that as a matter of law (1) the shareholders, as a class, were given sufficient information in the proxy statement that was mailed to them to put them on notice of further inquiry into the fairness of the restructuring agreements and (2) the statute of limitations began to run on the date of the special stockholders' meeting on October 7, 1975. In White v. Federal Deposit Insurance Corp., 122 F.2d 770 (4th Cir.1941), cert. denied, 316 U.S. 672, 62 S.Ct. 1043, 86 L.Ed. 1747 (1942), the FDIC brought suit against certain bank directors to recover bank assets transferred to them and to recover a judgment for bank monies alleged to have been received by them, in large part, as collections made on the transferred asset. The issue arose as to whether the defendants were entitled to the benefit of a statute of limitations with respect to the assets transferred to them and the collections made thereon. In holding that the defense was available to the defendants, the court stated: It is argued that the statute did not run in favor of the directors because, it is said, they control the corporation through a majority of stock ownership and control of the directorate and there was consequently no one to sue them. It is clear, however, that suit in behalf of the corporation could have been brought by any of the independent stockholders. We do not hold that knowledge of a single stockholder or of a bank examiner would be imputed to the bank, nor that the right of such stockholder or the banking authorities to seek a remedy would, of itself, set the statute of limitations running. What we do hold is that knowledge of all the stockholders is knowledge of the bank and that where these and the banking authorities have such knowledge and have power under the law to institute suit and take other action to remedy the situation, the statute of limitations is set in motion. In other words, there is no reason why the running of the statute with respect to a diversion of assets should be suspended when all parties affected thereby have knowledge thereof and full power under the law to pursue a remedy. Id. at 775-76 (citations omitted). In Armstrong v. McAlpin, 699 F.2d 79 (2d Cir.1983), a derivative action was brought by a receiver and a shareholder on behalf of a mutual fund, alleging securities fraud. The statute of limitations was interposed as a defense which was upheld by the trial court on the ground that the shareholders could have discovered the alleged fraudulent conduct before the statute of limitations ran. This ruling was upheld on appeal where it was stated: Assuming for the argument only that appellants' complaint adequately alleges exclusive domination and control [of the board of directors], the district court nonetheless did not err in holding that shareholders as a class should have known the skulduggery was taking place.... .... ... [W]here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, the duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him. Higgins v. Crouse, 147 N.Y. 411, 416, 42 N.E. 6 (1895). Armstrong, 699 F.2d at 88 (citations omitted except White, 122 F.2d at 775-76). Turning to the instant case, the trial court found that the six-page proxy statement mailed to the stockholders prior to the special meeting held October 7, 1975, stated in detail what UPCM was giving and what it was receiving. We agree. The salient points of the proxy statement are summarized in the following three paragraphs. As the result of GPCC's failure to meet its existing contractual obligations, the principal creditors and stockholders of GPCC entered into a tentative agreement to adjust the assets and liabilities of GPCC. UPCM agreed to the restructuring subject to approval by a majority of its stockholders. Anaconda and ASARCO approved of the restructuring. The ultimate purposes of the intended transaction were to relieve GPCC of real estate inventory, real estate held for development, and essentially all of its real estate mortgage debt and to infuse into GPCC adequate equity capital to place it on a solid financial footing whereby its operations would become successfully and profitably conducted. The opinion of management was that if GPCC was not restructured, it would not be able to meet its obligations to UPCM or its other creditors and would cease to operate. One of UPCM's remedies for GPCC's default was to take back all of the property sold to GPCC that had not yet been conveyed (2014 acres), to retain all payments which GPCC had made, and then to take whatever action was appropriate for the operation of the ski properties and development and sale of real property. Another option was to treat the purchase agreement as a mortgage and proceed to foreclose it. However, management believed that such actions might result in protracted and complex legal proceedings and would be detrimental to UPCM's interests. Therefore, the board of directors concluded that the proposed restructuring would be in UPCM's best interests. UPCM owned 63.2 percent of the preferred stock and 39.4 percent of the common stock of GPCC, which it had acquired for $972,000. UPCM would sell the preferred stock to GPCC for $1000 and the common stock to AMOT for $1000. Accrued interest due and owing from GPCC to UPCM in the amount of $248,652 [3] would be cancelled. No payment of principal owing on the contract for the purchase of land would be required until 1978. The ski leases would be amended to provide for two additional extensions of twenty years each with a small percentage increase in the ski-lift revenue. The current fair market value of the property being purchased by GPCC under the 1971 agreements was not known by UPCM. The principal assets in which the other parties were involved in the restructuring were discussed. At the special stockholders' meeting held on October 7, 1975, a letter the board received from Jerome Gartner, a New York City attorney, was discussed. Gartner wrote the letter on behalf of Timothy Donath, a long-time UPCM shareholder. He demanded that the scheduled stockholders' meeting be adjourned until you issue a revised proxy statement setting forth the fairness of the consideration to be received by the [UPCM] stockholders; and consider, review and modify your proposed final sale of the valuable ski resort.... And further, that you take immediate steps to withdraw your signature and approval from the proposed reorganization of GPCC (Greater Park City Corporation, which presently controls the ski area) and related corporations, until careful review of the proposed abandonment of the invaluable rights of the ski area now possessed by [UPCM]. At the stockholders' meeting, the directors discounted the claims made by Gartner, and Miles P. Romney (then president of UPCM) responded by telegram to Gartner that the directors had considered his objections and concluded that it was in the best interests of UPCM to agree to the proposed restructuring. Five other stockholders also wrote the board, questioning the adequacy of the consideration that UPCM would receive in the restructured agreements. For example, one stockholder called the proposal a boondoggle and said that it was interesting to note that an asset with sufficient book value to act as a tax deduction, now has absolutely no value.... Two new corporations born on the assets of a bankrupt. The ramifications are so deep, so insidious and unbelievable that, it could constitute a text for uncontrolled corporate maneuver. Another stockholder felt so ignorant of the terms, legal claptrap arguments, evasions, and loopholes involved in the proxy statement that he signed under protest to preserve his rights to seek legal redress against UPCM if there is any larceny, legal or illegal rascality or subterfuge involved. It is true, as argued by UPCM, that more information could have been included in the proxy statement which would have further illuminated any unfairness in the proposal. However, disclosure of every detail is not required. All that is required is that the proxy statement contain sufficient information to apprise the stockholders of the corporation's action so as to put them on notice to make further inquiry if they harbor doubts or questions about the proposal. White, 122 F.2d at 774-75; Armstrong, 699 F.2d at 88-89. The statement here discloses the very facts out of which UPCM's contention of unfairness arises. It details that GPCC was in default and that UPCM could terminate the contracts to sell GPCC land and water and cancel the ski leases. A quarter of a million dollars of interest was being forgiven. For two thousand dollars, UPCM was giving up its preferred and common stock in GPCC for which it had paid nearly a million dollars. The ski leases were being extended for only a slight increase in the ski-rental revenue. Generous concessions on the part of UPCM were evident throughout the proxy statement. The fact that the board did not know the current value of the properties involved in the agreement raised a question as to the wisdom of the restructuring as opposed to repossessing the properties. We acknowledge that only the eighteen shareholders who personally attended the stockholders' meeting had actual notice of the six letters protesting or questioning the proposed restructuring that were sent to the board. We mention the letters only to demonstrate that these six shareholders had no difficulty in discerning from the proxy statement that UPCM was not receiving adequate consideration. There is no reason to suspect that other shareholders who studied the proxy statement could not have been similarly alerted to the questionableness of the proposal. The fairness of the proposal to UPCM was clearly raised as the details of the proxy statement were read and considered. UPCM relies upon deHaas v. Empire Petroleum Co., 286 F.Supp. 809 (D.Colo.1968), aff'd, 435 F.2d 1223 (10th Cir.1970), as controlling. In deHaas, shareholders brought a derivative suit in connection with a merger of a parent and its subsidiary corporation. The defendants argued that the statute of limitations had expired because the named plaintiffs had doubts about the advisability of the merger, ... were acquainted with key officers of [the parent corporation], and yet failed to make inquiries or protests against the action. Id. at 813. The plaintiffs, however, argued that their consent was obtained through misleading proxy solicitations and subsequent encouraging letters from management. Id. at 812. They also argued that while they doubted that the merger was good business practice, they relied upon [the controlling shareholders'] integrity and the information provided them by management and that they had no reason to suspect fraud until much later. Id. at 813. The deHaas court denied the defendants' motion for summary judgment, finding that there was a fact question as to the amount of knowledge available to the plaintiffs and the reasonableness of their conduct. Id. We do not question the rationale of deHaas; however, it is not controlling here. No suggestion of fraud or secret profiting by the board, Anaconda, or ASARCO is alleged in the present case. Moreover, the proxy statement in the instant case was, as has been pointed out, sufficient to raise questions of fairness of the proposal presented, whereas in deHaas the court found that the proxy material was clearly inadequate to have aroused a reasonable suspicion. deHaas, 435 F.2d at 1226; see Riddell v. Riddell Washington Corp., 866 F.2d 1480, 1491 (D.C.Cir.1989) (statute tolled where there was fraudulent concealment). Therefore, we hold that the statute of limitations began to run on October 7, 1975, barring UPCM's claims against Anaconda and ASARCO long before this action was filed.