Court Opinion

ID: 9442973
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:05:45.065079+00
Date Added: 2024-06-11T17:29:18.642750
License: Public Domain

HOLMES, Circuit Judge
(dissenting).
The majority opinion does not hold that the by-law is valid, but proceeds upon the thesis that a void by-law may become a valid contract. . The opinion concedes that the charter of the company contains no provision authorizing restrictions on the transfer of shares; it predicates its decision upon the substance of a void by-law referred to on the face, and summarized on the back, of each stock certificate, which the court holds to be a valid contract.
The affirmative of several genuine issues presented by the pleadings is that the price offered appellant for her stock is only a fraction of its true value; that the by-law and alleged contract were wilfully devised by the directors to evade the laws of Missouri ; that the by-law was intended to permit the directors to further their own selfish ends at the expense of the other stockholders, and that they repeatedly used it for such purpose; that the by-law was an intentional scheme of the officers and directors to perpetuate themselves in office, which they have done regardless of merit ; and that, under the by-law, the directors have abused their trust by enforcing it rigidly as to some employees, with confiscatory results, while waiving its provisions or making special arrangements as to others, who -were favored by department heads.
Not only did the charter of the Graham Paper Company give it no authority to *543adopt such a by-law, but the general corporation law of Missouri requires that restrictions on the transfer of stock must be reasonable. The by-law is not only alleged to be unfair, unreasonable,- and against public policy, but to have been affected with bias, -prejudice, and partiality, in its administration. I think it violates the fundamental principle that no one should be permitted to declare the law for himself (nemo jus sibi dicere potest). Also, it renders every employee and shareholder subject to the whim, caprice, or favoritism, of the directors: and facts are pleaded which justify the inference that, in operation, the by-law is unfair to some, prejudicial to others, and contrary to the best interest of the corporation.
By keeping all of the outstanding stock in the hands of friendly employees, subject to dismissal, the members of the Board are enabled to discriminate in their own favor in the matter of paying bonuses. For example, in the years 1944, 1942, 1943, 1944, and 1945, they voted to all of the officers, consisting of five of their number, bonuses of 30% of their salaries. These salaries, even without bonuses, were higher than those of other employees. For the same period, they fixed bonuses for other classifications as follows: Sales managers, 25%; branch managers, 20%; department managers, 20%; salesmen, 15%; clerical employees, 10%. Then follows a complicated scale of bonuses, for warehouse and delivery employees, at 5%, to be computed by taking 6% of actual compensation earned during five months ending November 30th. Exactly what this means, I do not know, but it is followed by this sentence, which is easy to understand: “Variations in the basis of this resolution in special cases may be made at the discretion of the president.” Next comes the resolution for 30% additional compensation to the officers of the company for services rendered during the last half of 1945, amounting to $2880 for the president; $2700 for the executive vice-president; $2520 for the vice-president; $2520 for the secretary and treasurer.
The resolution closes with the following clarifying sentence: “The above amounts are voted separately, each officer, however, not voting upon the motion fixing the additional compensation paid to himself.” Similar resolutions were passed for each of the above mentioned years, with a slight variation for 1941. Thus loyalty in an employee to the personnel of the management becomes more important than efficient operation. This is not only true as to bonuses but as to the distribution of stock that may be confiscated in part under the by-law at a fraction of its real value. Thus we find the President of the company writing to one who had made a constructive suggestion with reference to some- additional stock purchases, saying: “In this connection, I would be less than fair if I did not tell you that in considering the merits of any individual the stock is connected with, the attributes of loyalty and organization team work are given great weight.” It is apparent that, under the alleged agreement, there is a windfall in stock values to be taken from the appellant and given to someone. The recipients of this unjust enrichment are to be determined by the directors of the corporation. Preferential treatment of loyal employees is permissible, or all of it may be awarded separately to the directors themselves. This may happen not only when a faithful employee dies, but when one is discharged simply because of his disagreement with policies of the management. Upon such discharge, the by-law restriction, if valid, would permit the directors to see that such dissenter’s stock is placed in more pliable hands, or in the hands of the directors individually. Thus all criticism, whether constructive or not, may be effectively silenced. A number of examples are given in the record to illustrate the discriminatory manner in which the by-law has operated against some, while favored insiders were given special dispensations. Thirteen such instances are alleged by the appellant; in reply, the appellee undertakes to explain and justify each one; a judge, jury, or other fact-finding tribunal, might draw different inferences from the undisputed facts relevant to this issue, but the summary judgment procedure has denied appellant a trial there* of on the merits.
*544Since the majority opinion proceeds upon the hypothesis that a void by-law may become a valid contract, we are justified in saying, as to some of the stock, that this is an action in a federal court, sitting in Louisiana, for the specific performance of a contract, made in Louisiana, for the sale of stock to be delivered in Louisiana. This is true since some of the stock certificates were delivered in Louisiana, and their stubs were signed by Palmer in New Orleans, all of which the appellant offered to prove on the trial of the case on the merits. Under the Louisiana law, the alleged agreement would be void for lack of mutuality and as containing 'potestative conditions. Civil Code, Articles 2024 and 2034; Avery v. International Trade Exhibition, 163 La. 454, 112 So. 44; Blanchard v. Haber, 166 La. 1014, 118 So. 117; Cloverland Dairy Products Co., Inc., v. Grace, 180 La. 694, 157 So. 393. If a man signs a written contract, for a valuable consideration, he is bound by it, in the absence of fraud or other illegality; but, if he signs a purported receipt, he is^ not always bound by a contractual provision printed thereon, and is never so bound unless there is a valid consideration for the contract. This is well illustrated by a recent decision of this court. Royal Route Coal Co. v. Burch, 5 Cir., 182 F.2d 658.
It is not necessary 'to impugn the motives of the directors; they may be personally innocent; it is the scheme that makes them ruthless; that offends public policy; and permits them to profit by the death of their fellow, though they have no insurable interest in his life. The scheme must be tested for reasonableness, not only by what the directors did, but by what they may do, or might have done. In purchasing stock from shareholders pursuant to the bylaw, and acquiring it in their individual capacity, as they frequently did or might have done, and apparently did in this case, the directors would be in the position of violating their fiduciary relationship through the device of the by-law agreement. See Ballantine on Private Corporations, p. 397.
He who seeks equity must do equity, and it is not equity to require specific performance of an agreement to sell for a fraction of the value of the property involved. The right of alienation is an incident of property that should not be surreptitiously restrained by corporate management. The incentive of employees would be impaired if they understood that they were not absolute owners of the shares in their names. The good relations of directors would be marred if each should be deemed the quasi-heir presumptive of the others. Corporate stock may be worth many times its book value,' due to good will, patent rights, other hidden assets, earning power, and many other things; but all that needs to be decided here is that the device is unfair and unreasonable. In this view the case is simple, and the decision in accord with justice under the laws of either Louisiana or Missouri: but, if we undertake to make a valid contract out of a void by-law, we become entangled in the conflict of. laws of two states; the public policy of each, the duties of directors as fiduciaries, their rights as individuals to purchase shares that they claim to hold in trust; and their capacity to sue or be sued under Rule 17(a) and (b) of the Federal Rules of Civil Procedure.
Here we have an instance of the summary judgment procedure being as arduous as a trial on the merits. The pertinent provisions of the by-law or so-called agreement cover less than a printed page; but the record contains four hundred and seven printed pages, not to mention the briefs. Notwithstanding the complaint, exhibits, answer, request for admission of facts, reply the'reto, depositions, affidavits, stipulation following pretrial conference, and motion for summary judgment, with exhibits, we remain in doubt as to which of the appellees are the real parties plaintiff. Sec. 2 of the by-law (or the alleged agreement) provides, inter alia, that, if any stockholder shall die, all of the common stock owned by him at the time of his death shall immediately become vested in the directors of the company, who shall hold the same in trust for such disposition within sixty days after notice or knowledge of the death of such stockholder as the Board of Directors may determine; and so much of said stock *545as may not be purchased within sixty days by the directors, or persons permitted by their resolution to buy the same, shall immediately become the property of the personal representative of the deceased stockholder. Effective compliance by any of the appellees with either the by-law or so-called agreement is problematical.
This suit is not in the name of the directors of the corporation, as trustees, in whom the by-law says the stock shall immediately become vested upon the death of the stockholder; neither is it in the name of the directors individually, because two of the directors who are named as plaintiffs were not designated by the Board as individuals who have agreed to purchase the 2750 shares of stock. The court is entitled to know in what capacity the plaintiffs are suing. Rule 17(a) provides that every action shall be brought in the name of the real party in interest, but that a trustee of an express trust (which the directors claim to be) may sue in his own name. The capacity of the plaintiffs to sue may be determined by the laws of different states, which is dependent upon whether they are suing as individuals or in a representative capacity. If the directors are suing as individuals, their capacity to sue is determined by the law of their domicile, which is Missouri; but if they are suing as trustees, their capacity is determined by the law of Louisiana, which is the State of the forum. See Rule 17(b) of the Federal Rules of Civil Procedure. Since this case is reduced to a suit for the specific performance of a contract between the seller and the purchasers, it is well to inquire who are the real parties plaintiff, and whether they complied with the obligations upon them under the alleged contract.
In notifying Mrs. Palmer, the executrix, that the above mentioned stock had been purchased from her husband, and the price that the directors were willing to pay for it, the Treasurer of the corporation wrote: “In order to clear this matter, we will require a certified copy of letters testamentary, copy of court order of sale, and there is an added requirement imposed upon states of non-resident decedent stockholders of Missouri corporations of obtaining a waiver from the State of Missouri. For this purpose the form for Transfer and Inheritance Tax, Consent to Transfer or Deliver Assets, can be obtained from the Office of Director of Revenue, Jefferson City, Missouri.”
According to appellees’ contention, this letter was directed to one of the beneficiaries of an express trust by the Treasurer of a corporation, whose directors were the trustees and whose duty was to be faithful to the interest of said beneficiary, as well as to the interest of the prospective purchasers. In this letter, appellant was told that the stock of the late Mr. Palmer had been purchased, but not by whom, and that the Board of Directors had authorized the writer “to settle” for said 2750 shares for a total of $90,062.50. At another time, she was advised that the amount had been recomputed and raised to $91,-025.00; on the same day she was served with a process verbal of tender. The president not being ready to recommend anyone to purchase the stock, other than the directors themselv.es, the Board designated themselves as the persons entitled to purchase the same, and (as alleged) seven of their number, individually, did purchase the 2750 shares standing on the ‘books in the name of Edwin M. Palmer, Sr., deceased. Thus the directors, as trustees, sold to themselves individually the stock which they claim became vested in them, in trust, upon the death of the deceased, the price being about one thousand dollars above what was first offered Mrs. Palmer, which shows that the price-fixing formula is an elastic one.
According to the contention of the appellees, immediately upon the death of Palmer his stock vested in the directors in trust; but they disregarded the fact that the appellant was one of the beneficiaries of the trust, with a contingent reversionary interest in the res. The other beneficiaries were the prospective purchasers, who were to be designated by the directors, not by the president; and the trustees’ duty was to act impartially between all beneficiaries; and, if no purchasers were duly designated within said sixty days, thé stock was immediately to become the property of the *546estate of the deceased stockholder, which it was the duty of the directors, as trustees, so to declare. Instead of doing this, the directors declared themselves entitled as individuals to purchase said stock, and are suing in their own name fpr specific performance of the alleged contract. When trust officers and directors overstep the line between duty and self-interest, they cannot come into court with clean hands, and are not entitled to specific performance in any view of the case. Even if the by-law were valid, and the directors acquired the stock in trust, with the power and duty to designate the purchasers within sixty days, they were estopped to designate themselves, and their effort to do so, at a price decreed by themselves, was a nullity. No one else having been designated within the required period, the stock immediately 'became the property of the personal representative of the deceased stockholder.
Nothing is better settled than the duty of a trustee not to deal with trust property for his own advantage, and not to sell trust property to himself nor to buy from himself. Vol. 4, Pomeroy’s Equity Jurisprudence (5th Edition), Sections 1075 and 1078, pp. 217 and 226. A by-law that sanctions the violation of this principle is against public policy. I think the judgment appealed from should be reversed.