Court Opinion

ID: 9641850
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:41:35.256001+00
Date Added: 2024-06-11T18:10:40.289870
License: Public Domain

MATHEWS, Circuit Judge
(dissenting).
As stockholders of the Anglo California National Bank of San Francisco1
2(here-after called Anglo), appellees brought this suit against appellants — Herbert Fleish-hacker, Victor Klinker, Harry T. Thompson, Palo Alto Stock Farms, Incorporated (hereafter called Stock Farms), and Anglo —to recover of Fleishhacker, Klinker, Thompson and Stock Farms, for Anglo, profits alleged to have been made by Fleish-hacker, with the aid and assistance of Klinker, Thompson, and Stock Farms, from the use of money belonging to Anglo. The bill of complaint alleged that the profits so made exceeded $148,125, and prayed for an accounting. Appellants defended on the ground, among others, that appellees had no right to bring or maintain the suit. From a decree8 in appellees’ favor for $736,485.57, this appeal is prosecuted.
Appelles are citizens of France. Fleish-hacker, Klinker and Thompson are citizens of California. Stock Farms is a California corporation. Anglo is a national banking association located in California. At all times here pertinent, Fleishhacker was Anglo’s president. He was also a member of its board of directors. Klinker and Thompson were employees of Anglo, but were not directors. On October 29, 1934, appellees’ agent, Etienne Lang, wrote and delivered to the chairman of the board the following letter, addressed to the directors:
“I am agent for the following stockholders of the Anglo California National Bank of San Francisco [naming appellees] and am writing this letter on their behalf. The said stockholders have been apprised of certain matters pertaining to Herbert Fleish-hacker, president of said bank, and the loans of funds by the said bank to J. N. Barde and L. B. Barde during the period from 1919 to 1923.
“These stockholders have been informed that the said Bardes, desiring to borrow $500,000 to use in buying steel from the United States Government for purposes of resale, agreed to pay Herbert Fleishhacker personally one-half of the profits from the enterprise if he would make that amount of money available to them. That pursuant to said agreement said Herbert Fleish-hacker caused the Anglo California National Bank of San Francisco (then known as the Anglo and London Paris National Bank of San Francisco) to loan $325,000 to the said Bardes ($250,000 on December 16th, 1919, and $75,000 on December 21, 1919) and arranged for said Bardes to borrow $175,000 from the Central National Bank of Oakland. These loans were repaid in a few months. Said Bardes caused a corporation to be organized named the Barde Steel Products Co. through which to conduct such enterprise, and caused one-half of the stock of said corporation to be issued to nominees of the said' Fleishhacker 3 for his .benefit. Further, the Anglo California National Bank of San Francisco loaned the said Barde Steel Products Co. during the period between 1920-1923 additional sums of money for use in such enterprise aggregating in excess of $100,000.
“These stockholders are further informed that the said Fleishhacker received large profits pursuant to his said agreement with the said Bardes and in this regard that he received $50,000 on September 20th, 1920, and $25,000 on March 16th, 1921, from the Barde Steel Products Co. as a- purported, salary from said company, although he was not an officer or employee of said concern. Further, that there was paid on the stock of the said Fleishhacker, held by nominees for him, the sum of $73,125 in *550dividends, and that in March, 1923, the said Herbert Fleishhacker sold his interest in the Barde Steel Products Co. to the Barde Bros, for a large sum of money.
“Under these circumstances, the stockholders believe the profits received by the said Herbert Fleishhacker rightfully belong to the Anglo California National Bank of San Francisco, and on their behalf I now make demand on you forthwith to institute on behalf of the bank the necessary suit to recover all profits received by Herbert Fleishhacker in the transactions just referred to.”
The letter was presented to the board of directors at a meeting held on November 13, 1934. The board refused to comply with appellees’ demand. Thereafter, on December 5, 1934, appellees commenced this suit, seeking thereby to recover for Anglo the profits mentioned in the letter. Appellants moved to dismiss the bill on the ground, among others, that it did not state facts sufficient to constitute a cause of action. The motion was denied, appellants answered, the case was tried, and on March 29, 1938, the District Court entered its decree in ap-pellees’ favor. Appellants seek reversal.
This was, as indicated, a suit in equity which appellees, as stockholders of Anglo, brought in their own names on a cause of action which — if it existed at all — existed in Anglo itself, and in which Anglo itself was the appropriate plaintiff! Hence, to determine whether or not appellees were entitled to maintain this suit, we should apply the doctrine of Hawes v. Oakland, 104 U.S. 450, 460, 26 L.Ed. 827: 4
“ * * * [To] enable a stockholder in a corporation5 to sustain in a court of equity in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff, there must exist as the foundation of the suit—
“Some action or threatened action of the managing Board of Directors or Trustees of the corporation, which is beyond the authority conferred on them by their charter 6 or other source of organization;
“Or such a fraudulent transaction, completed or contemplated by the acting managers, in connection with some other party, or among themselves, or with other shareholders as will result in serious injury to the corporation,7 or to the interests of the other shareholders;
“Or where the Board of Directors, or a majority of them, are acting for their own interest, in a manner destructive'of the corporation itself, or of the rights of the other shareholders;
“Or where the majority of shareholders themselves are oppressively and .illegally pursuing a course in the name of the cor-, poration, which is in violation of the rights of the other shareholders, and which can only be restrained by the aid of a court of equity.
“Possibly other cases may arise in which, to prevent irremediable injury, or a total failure of justice, the court would be justified in exercising its powers,8 but the foregoing may be regarded as an outline of the principles which govern this class of cases.”
*551Applying these principles, I find here a total lack of any factual showing entitling appellees to maintain this suit. There was neither allegation nor proof that Anglo’s board of directors had tíon.e or threatened to do any act which was beyond the authority conferred on them by their charter or other source of organization;9 or that any fraudulent transaction had been completed or contemplated by the board of directors; or that the board, or a majority of them,10 were acting for their own interest, in a manner destructive of Anglo, or of the rights of other stockholders; or that a majority of Anglo’s stockholders 11 were oppressively and illegally pursuing a course, in the name of Anglo, which was in violation of the rights of other stockholders; or that irremediable injury would be suffered, or that a total failure of justice would occur, if the court did not exercise its preventive powers.
The sole “foundation’’12 of this suit was the failure of Anglo’s board of directors to bring suit, in Anglo’s name, against Fleishhacker, Klinker, Thompson and Stock Farms. The bill did not directly - charge that such failure was, in any respect, wrongful or improper. The only allegation of the bill • which could possibly be regarded ' as constituting such a charge was “that the causes for such failure * * * are that the board of directors is composed of relatives, close friends and business associates of the defendant Fleishhacker and are under the domination13 of the defendant Fleishhacker.” This allegation was denied and not proved. Only one relative of Fleishhacker was shown to be a member of the board.14 That the other members were close friends and business associates of Fleishhacker was immaterial, if true. There is no evidence that any member of the board was dominated by Fleishhacker.
Domination of the board by Fleishhacker was not — as the trial court supposed — to be inferred from the fact that the chairman of the board, in acknowledging receipt of the above mentioned letter, promised to “communicate” later with appellees’ agent, but failed to do so; or from the fact that the board did not request appellees! agent to appear and offer proof of the charges made in the letter, but “merely passed a resolution that no action be taken;” or from the fact that, having been joined as a defendant in this suit, Anglo “made common cause” with its co-defendants.15 The board may, in good faith, have believed that the charges made in the letter were false and unfounded; that Anglo had, in fact, no right of action against Fleishhacker, Klinker, Thompson or Stock Farms; and that it could not, in equity or good conscience, bring suit against them, or leave appellees’ suit undefended. Lacking proof to the contrary, we should — and I do — presume that the board acted in good faith. Corbus v. Alaska Treadwell Gold Mining Co., 187 U.S. 455, 463, 23 S.Ct. 157, 47 L.Ed. 256.
Even if the board had believed that Anglo had a right of action, it might also, in good faith, have believed that it was not to Anglo’s best interest to bring suit thereon and, so believing, might properly have waived such right of action. Hawes v. Oakland, supra, 104 U.S. at page 462, 26 L.Ed. 827; Corbus v. Alaska Treadwell Gold Mining Co., supra; United Copper Securities Co. v. Amalgamated Copper Co., 244 *552U.S. 261, 263, 264, 37 S.Ct. 509, 61 L.Ed. 1119.
Having failed to show that the board’s failure to sue constituted a fraud or breach of trust, or that it was in any respect wrongful or improper, appellees had, and have, no standing to maintain this suit.
The decree should he reversed and the case should he remanded with directions to dismiss the bill of complaint.

 Formerly the Anglo and London Paris National Bank of San Francisco.

 Blum v. Fleishhacker, D.C.. 21, F. Supp. 527.

 The bill alleged that Fleishhaeker’s nominees were Klinker, Thompson and Stock Farms.

 Reaffirmed in Huntington v. Palmer, 104 U.S. 482, 26 L.Ed. 833; Detroit v. Dean, 106 U.S. 537, 539-542, 1 S.Ct. 560, 27 L.Ed. 300; Quincy v. Steel, 120 U.S. 241, 244-249, 7 S.Ct. 520, 30 L.Ed. 624; Corbus v. Alaska Treadwell Gold Mining Co., 187 U.S. 455, 459-65, 23 S.Ct. 157, 47 L.Ed. 256; Stewart v. Washington & Alaska Steamship Co., 187 U.S. 466, 23 S.Ct. 161, 47 L.Ed. 261; Wathen v. Jackson Oil & Refining Co., 235 U.S. 635, 639-641, 35 S.Ct. 225, 59 L.Ed. 395; United Copper Securities Co.

 Anglo is a corporation. 12 U.S.C.A. § 24.

 As in Dodge v. Woolsey, 18 How. 331, 340-346, 15 L.Ed. 401.

 As in Doctor v. Harrington, 196 U.S. 579, 587-589, 25 S.Ct. 355, 49 L.Ed. 606.

 Such a ease arises where a board of directors is pursuing a course of action amounting, in law, to a breach of trust, and such course, if persisted in, will cause the corporation and its stockholders irremediable injury. Dodge v. Woolsey, supra; Greenwood v. Union Freight R. Co., 105 U.S. 13, 16, 26 L.Ed. 961; Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429, 553, 554, 15 S.Ct. 673, 39 L.Ed. 759; Smyth v. Ames, 169 U.S. 466, 515-518, 18 S.Ct. 418, 42 L.Ed. 819; Cotting v. Kansas City Stock Yards Co., 183 U.S. 79, 112, 113, 22 S.Ct. 30, 46 L.Ed. 92; Doctor v. Harrington, supra; Delaware & Hudson Co. v. Albany & Susquehanna R. Co., 213 U.S. 435, 445-453, 29 S.Ct. 540, 53 L.Ed. 862; Brushaber v. Union Pacific R. Co., 240 U.S. 1, 9, 10, 36 S.Ct. 236, 60 L.Ed. 493, L.R.A.1917D, 414, Ann.Cas.1917B, 713; Smith v. Kansas City Title Co., 255 U. *551S. 180, 200-202, 41 S.Ct. 243, 65 L.Ed. 577; Hill v. Wallace, 259 U.S. 44, 60-62, 42 S.Ct. 453, 66 L.Ed. 822; Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 318-323, 56 S.Ct. 466, 80 L.Ed. 688; Carter v. Carter Coal Co., 298 U.S. 238, 286, 287, 56 S.Ct. 855, 80 L.Ed. 1160.

 12 U.S.C.A. § 24-40, 71-78.

 Anglo was, by law, required to have at least five directors. 12 U.S.C.A. §§ 71, 71a. In 1919 — the earliest year in which any of the acts complained of were said to have occurred — it had 19 directors. There is no evidence that the number was diminished. We may assume, therefore, that Anglo had, at all pertinent times, 19 directors. Of these, only Fleishhacker was sued.

 The record does not show how many shares of stock Anglo had outstanding, or what their par value was. There is no evidence that Klinker, Thompson or Stock Farms owned any of Anglo’s stock. There is no direct evidence that Fleish-hacker owned any, but, being a director, he presumably owned shares having a par value, in the aggregate, of not less than $1,000. 12 U.S.C.A. § 71a. We have no reason to suppose that he owned a majority of Anglo’s stock.

 Hawes v. Oakland, supra.

 Compare Delaware & Hudson Co. v. Albany & Susquehanna R. Co., supra.

 See footnote 10.

 Blum v. Fleishhacker, supra, 21 F.Supp. at page 534.