Opinion ID: 1692654
Heading Depth: 1
Heading Rank: 1

Heading: the fiduciary obligation

Text: Relators concede that our law imposes a fiduciary obligation upon a Liquidator who sells the assets of a corporation in liquidation, to himself or a corporation in which he has an interest, especially a controlling interest. According to Relators, the obligations of a liquidator are the same as those of a corporate officer or director except that a liquidator is not free to continue indefinite transaction of corporate affairs, but rather must expeditiously liquidate the corporation, as held in Brown v. Wholesalers, Inc., in Liquidation, La.App., 52 So.2d 321, and Todd Shipyards Corp. v. Lomm, La.App., 190 So.2d 125. Recognizing that sales of corporate assets to corporate officers or directors are held to close scrutiny, Relators suggest that, nevertheless, such transactions are judicially sanctioned provided the elements of good faith and fair value are observed. In so contending, Relators rely upon LSA-R.S. 12:84, subd. A(1), (2) and (3), which provide that no contract a corporation and one or more of its officers or directors, or between a corporation and another corporation in which its officers or directors are interested, shall be either void or voidable solely because of this reason. In further support of their position, Relators cite and rely upon General Motors Acceptance Corporation v. Hahn, La.App., 190 So. 869, and House of Campbell v. Campbell, La. App., 172 So.2d 727. On the foregoing premise, Relators maintain Roussel was in good faith, and the record establishes a fair price was paid for the land. Relators insist that the American stock Noe received for his share of the purchase price was worth the value assigned thereto in the transaction, as established by a factual analysis of American's holdings appearing of record, and also as evidenced by Roussel's offers to purchase Noe's American stock for $12.00 per share prior to the present action and for $10.00 per share on the day of trial. Contrarily, Noe argues that our law attaches a presumption of fraud to a fiduciary's acquisition of his principal's property, and imposes upon the fiduciary the burden of showing that the transaction was one at arm's length. Further, Noe contends the record shows a calculated plan to defraud, which scheme was executed to Noe's detriment despite Noe's attempts to avoid the large financial loss which resulted. Relators argue that the Court of Appeal erred in: (1) Reversing the factual findings of the trial court notwithstanding evidence of record constituting a reasonable basis therefor, contrary to the manifest error rule; (2) granting in effect a suspensive appeal to Noe who only devolutively appealed the judgment dismissing the present action for rescission; (3) declaring absolutely void the liquidator's sale from Roussel to American; (4) failing to consider the fairness of the price paid by American, and (5) rejecting Relators' plea of mootness by ignoring the sale of subject property to third persons not parties herein in violation of LSA-C.C.P. art. 3751; LSA-R.S. 9:2721, 2722; and LSA-C.C. art. 2266, which establish our law of public registry insofar as said principle is applicable herein. American further contends the Court of Appeal erred in casting it in solido with Roussel. Liquidation of a corporation is an extraordinary corporate proceeding beyond the scope of ordinary business affairs usually delegated to corporate management and boards of directors. Authorization and regulation of corporate dissolution is provided by Louisiana Business Corporation Act, LSA-R.S. 12:141 through 149, among which Section 141(A) provides that a corporation may be liquidated either by voluntary or involuntary proceedings. In the case of involuntary liquidation, dissolution may be with or without judicial supervision. In the event of involuntary liquidation, judicial supervision is mandatory. The validity and effectiveness of any corporate liquidation, voluntary or involuntary, supervised or unsupervised, depends upon its being legal, regular and equitable. Law of Corporations, Henn, West Publishing Co. 1970, §§ 340 and 348. LSA-R.S. 12:142(A) authorizes corporate dissolution by two-thirds of the voting power present at an annual or special stockholders meeting held after notice of the proposed liquidation. Although Relators maintain a shareholders meeting was held in this case, Citrus' liquidation was initiated by a unanimous resolution of consent authorized by LSA-R.S. 12:76, which dispenses with the necessity of a shareholders' meeting upon consent of all stock owners. The resolution, adopted July 1, 1970, was signed by Gordon and American as alleged sole shareholders. American was represented by Roussel who had full knowledge of the judicial recognition of Noe's 35% plus stock ownership of Citrus stock which was then carried in Gordon's name. On this same date, Roussel was Citrus' President and a member of Citrus' Board of Directors, having served in said capacities at least since June, 1968. Noe had no notice of this proceeding. Upon application of shareholders holding not less than 25% of a corporation's voting power, a nonjudicial liquidation may be converted into a liquidation under judicial supervision, and the liquidator required to furnish bond. LSA-R.S. 12:142, subd. E. The duties and obligations of corporate officers and directors are provided for by LSA-R.S. 12:91, which pertinently reads as follows: Officers and directors shall be deemed to stand in a fiduciary relationship to the corporation and its shareholders and shall discharge the duties of their respective positions in good faith, and with that diligence, care, judgment and skill which ordinary prudent men would exercise under similar circumstances in like positions.... In the event of corporate liquidation, all of the rights, powers and duties of corporate officers and directors, are vested in the liquidator, whether appointed by the shareholders or the court. LSA-R.S. 12:141, subd. C. LSA-R.S. 12:145, subd. C confers very broad power and authority on liquidators of business corporations. The manner of performance of a liquidator's duties is mandated by LSA-R.S. 12:145, subd. G, which recites: In the performance of his duties, each liquidator shall be bound to exercise that care and prudence in the listing, custody, possession, control and disposition of the property and moneys of the corporation coming into his hands, and in the proper accounting therefor, and distribution thereof, as by law is imposed upon fiduciaries. Our Business Corporation Act, LSA-R. S. 12:1 et seq., is silent as to the validity of contracts between a corporation in liquidation and one of its corporate stockholders, conducted through a liquidator vested with a financial interest in the corporate shareholder. We note, however, the analogous provisions of LSA-R.S. 12:84, which prescribes criteria for determining validity of transactions between corporations and other entities in which corporate officers and directors have a financial interest, and which states: A. No contract or transaction    between a corporation and any other    foreign corporation    in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason,    if: (3) The contract or transaction was fair as to the corporation as of the time it was authorized, approved or ratified by the board of directors, committee, or shareholders. The foregoing statutory provisions clearly impose a fiduciary duty upon a corporate liquidator. Relators contend the trial court properly assessed the extent of Roussel's fiduciary duty to be that the transfer of Citrus' assets be for a fair consideration. Conversely, Noe contends our jurisprudence requires not only fair dealing on the part of a fiduciary but that where, as here, the fiduciary acquires the principal's property, fraud, is presumed and the fiduciary bears the heavy burden of establishing that the transaction was negotiated and entered into at arm's length. Relators suggest that the Court of Appeal erred in finding a breach of fiduciary duty without specifically finding that the price paid was inadequate. Noe urges that the Court of Appeal properly applied the arms length transaction test, and correctly held Roussel to be at fault. In General Motors Acceptance Corporation v. Hahn, La.App., 190 So. 869, it was held that a corporate officer may validly acquire corporate assets provided the transaction is in good faith and the consideration paid is adequate. In House of Campbell v. Campbell, La. App., 172 So.2d 727, a liquidator sought rescission of a sale of corporate assets to a former corporate officer. The action was brought pursuant to former LSA-R.S. 12:36, the source of present LSA-R.S. 12:91. It is noteworthy that former LSA-R.S. 12:36 established fiduciary duties upon officers and directors to their respective corporations only. With the adoption of the Louisiana Business Corporation Act in 1968, the fiduciary duties of officers and directors were, by LSA-R.S. 12:91, above, expressly extended to shareholders. While Campbell, above, addresses itself to the fiduciary duty owed to corporations, the following language appearing therein is applicable in this instance: The prevailing rule in the United States is that a purchase of corporate property from the corporation by a corporate officer or director is not absolutely void but merely voidable. If the contract is not fair to the corporation it has a just and legal right to set the sale aside. While the Courts have not meticulously defined what is `fair,' they have closely scrutinized each transaction to determine its fairness to the corporation. Because of the fiduciary relationship between the corporation and director, the burden of proof is on the director to prove his good faith in entering into the transaction and also the inherent fairness from the viewpoint of the corporation.       The rule in Louisiana, therefore, is that a corporation has a right of action to set aside a transfer of property from the corporation to one of its directors. The contract or transaction is not void but merely voidable at the option of the corporation. In such an action the director has the burden of proof of fairness to the corporation and that he was acting in good faith; in effect he must prove that the transaction was one negotiated and entered into at arm's length. Applying the foregoing test, Campbell concluded the defendant officer did not sustain the burden of proving that the transaction possessed all the characteristics of an arm's length bargain. Accordingly, the sale was rescinded. It is of no moment that Campbell, above, involved a sale between a corporation and its officer-director, and the instant matter concerns a transaction between a corporate liquidator and a foreign corporation in which the liquidator had a financial interest. LSA-R.S. 12:84, above, is expressly applicable to transactions between a corporation and a foreign corporation in which a fiduciary has a financial interest. American is a foreign corporation. In the early case of Michoud v. Girod, 45 U.S. 504 (4 Howard) 11 L.Ed. 1076, which involved the fiduciary obligations of executors who acquired property entrusted to them, the United States Supreme Court held such a transaction carries fraud on its face. This rule has become firmly embedded in the common law. It imposes upon a fiduciary the obligation of refuting the presumption which obtains in such cases, and also the obligation of establishing that the transaction was an arm's length matter. See also, Jackson v. Ludeling, 88 U.S. 616, 21 Wall. 616, 22 L.Ed. 492 (1874); Mason v. Pewabic Mining Co., 133 U.S. 50, 10 S.Ct. 224, 33 L.Ed. 524 (1890). In our jurisprudence, we note Cuggy v. Zeller, 132 La. 222, 61 So. 209 (1913), which involved an instance of an agent acquiring his principal's property. In commenting upon the obligation of the principal, the court, citing Michoud v. Girod, above, stated such a transaction carries fraud on its face. We also note Assunto v. Coleman, 158 La. 537, 104 So. 318 (1925), to virtually the same effect. In this instance, we do not have to rely upon a presumption of fraud as held in Cuggy v. Zeller, above, and Assunto v. Coleman, above. The record before us discloses that Roussel has breached his fiduciary duty in that his actions will not stand the test of rigorous scrutiny as required in Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939), which establishes the following criteria: A director is a fiduciary.... Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director not only to prove good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein. (Citations omitted.) The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain (footnote with citation omitted). If it does, equity will set it aside. We hold, therefore, that an agent who acquires his principal's property, or one who otherwise acts in a fiduciary capacity, bears the burden of establishing that the transaction was an arm's length affair. This means that the agent or fiduciary must handle the matter as though it were his own affair. It also means the agent or fiduciary may not take even the slightest advantage, but must zealously, diligently and honestly guard and champion the rights of his principal against all other persons whomsoever, and is bound not to act in antagonism, opposition or conflict with the interest of the principal to even the slightest extent. The reason for the rule is obvious. In our preliminary factual presentation, we have listed the numerous occasions on which Roussel manipulated Noe's stock interest in furtherance of Roussel's interest and advantage, to the disadvantage and detriment of Noe. The record also shows that in 1967, one William F. Kelley became interested in Citrus' holdings and caused an appraisal thereof to be made by E. A. Tharpe of International Appraisal Company, New Orleans, Louisiana. On October 30, 1967, Tharpe appraised the property at $14.7 million. Although Roussel did not procure or order this appraisal, he was fully aware of its existence and the amount thereof. On September 1, 1969, Tharpe again appraised the property, this time at Roussel's request. On this occasion, Tharpe valued the lands at $25 million. Both of Tharpe's appraisals were introduced by Noe as proffered evidence upon the trial court sustaining Relators' objection to their admissibility. We agree with Noe's contention that the documents were admissible insofar as they bear upon Roussel's knowledge of the value of the property, which circumstance is relevant in determining the alleged breach of Roussel's fiduciary duty. From the record, it may be reasonably inferred that Roussel used this appraisal in valuing the Citrus stock then listed among American's assets as having a value of $13 million. Between May 18, 1969 (the date of the Gulf leases), and December 31, 1969, Roussel published an elaborate full color brochure entitled Citrus, 16,200 Acres for Industry, Living and Recreation. The booklet proclaimed 16,200 acres of prime industrial land available for leasing. The pamphlet cited the Gulf leases and extolled the virtues and advantages of the land for industrial, recreational and living purposes. The booklet noted the availability of deep water river frontage to accommodate ocean going vessels and accessibility to the nearby intracoastal canal waterway alternate route which can accommodate barge traffic. Additionally, the pamphlet pointed out the availability of oil, gas, plentiful water supply and other raw materials required by petro-chemical industries. The availability of plentiful lands for housing accommodations and recreational activities for industrial employees was also noted. Mention was made in the pamphlet of a $3.6 billion industrial investment along the lower Mississippi River since the year 1946. Roussel purchased 3,000 of these brochures and distributed 1,400 in business, industrial and financial circles. The brochures cost approximately $20,000.00, which Roussel paid personally. Notwithstanding the foregoing, Roussel's liquidation advertisement of the property for sale described the land as industrial and grazing land. The description of the land, and the nature of the advertisement, was not conducive to arousing the interest of prospective purchasers. To say the least, the ad was misleading. Roussel declined to have the property appraised before the liquidation sale. When queried on this score, he explained that he was one of the largest and most knowledgeable landowners in the New Orleans area, and he knew of no one who was better informed than he as to land values. He stated he used his own judgment in determining the land value and deciding that American's offer was fair. We reject Roussel's testimony, and that of the Board Members of American who testified that Roussel took no part in formulating the bid which American submitted. We note that these parties were either relatives, associates or employees of Roussel. The record justifies the inference that Roussel alone makes the major decisions with respect to the businesses he controls. It also shows that, as Liquidator of Citrus, Roussel handled the liquidation as though he were sole owner. He alone made all decisions. The inference is also clear that he ignored all advice which did not correspond with his own judgment. Roussel's business philosophy, as revealed by the record, compels the finding that, as 99% owner of American, it is inconceivable that Roussel did not dictate the terms of American's offer. The record precludes the reasonableness of a contrary conclusion. We likewise conclude Roussel's breach of his fiduciary duty has been demonstrated by his constant manipulation of Noe's stock to suit Roussel's individual purposes and aims. Additionally, we find that Roussel breached his duty by knowingly selling the property for an inadequate consideration.