Court Opinion

ID: 9636587
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:34:33.883261+00
Date Added: 2024-06-11T18:09:47.170426
License: Public Domain

HEALY, Circuit Judge.
This is an appeal from an order dismissing a petition of appellant, hereafter called Independence, to vacate a judgment. The background of the litigation may he summarized as follows:
Originally the authorized capital stock of Independence consisted of three million shares of common assessable stock and one million shares of preferred. None of the preferred was outstanding. In 1932 the articles were amended by eliminating the authorized preferred stock and creating in lieu thereof one million shares of nonasses-sable Class A common. Upon the amendment the Class A common was issued to Mines Finance, a corporation wholly owned by two men, Kingsbury and Marquardt, who were respectively ■ president and secretary of Independence. Kingsbury died at an unspecified date. In 1941 Mines Finance assigned two-thirds of the Class A common to Kingsbury’s widow and one-third to Marquardt, and Independence issued to those individuals certificates evidencing the shares.- In 1942 Marquardt died and his shares were distributed to his widow who-thereupon obtained a formal transfer of the stock to herself. Thus on the hooks of Independence the two widows, who are appellees here, appeared as holders of all the Class A common.
Independence owned and had in its treasury 1,001,000 shares of the stock of Clayton Silver Mines Company. The common stockholders were insistent upon the distribution-, of the Clayton stock, or the bulk of it, as a dividend. Accordingly the directors of Independence, in August of 1944, adopted a resolution providing that 750,000 of the Clayton shares be distributed to the common stockholders on the basis of one share of Clayton to- four shares of Independence. The resolution provided that the Class A common was not to participate in the distribution “for the reason that there is a question as to the validity” of that stock.
Independence commenced actively to distribute the Clayton stock and by June 1946-all but 73,175 shares of the dividend declared had been distributed.1 Appellees in-June of 1945 filed suit against Independence-in the court below alleging their ownership-of the Class A common, their right to participate in the dividend equally with other stockholders, and the refusal of Independence to recognize their right. They asked, that Independence be ordered to distribute to them 250,000 shares of the Clayton stock together with a sum alleged to have been paid to Independence as a dividend thereon. Independence moved to dismiss and its motion was denied in November of 1945. Later, no answer having been filed by Inde*985pendence and extensions of time, given it to answer having expired, appellees moved for a default. Thereupon Independence answered.
The answer denied that the Class A common had been lawfully issued for value received or for any other consideration. It alleged that at the time of the transfer of the stock to Mrs. Kingsbury and to Mar-quardt the latter was the alter ego of Independence and that the transfer was made without knowledge of its other officers; and further, that at the time of the transfer of the Marquardt stock to his widow the officers of Independence were not aware of the true facts. Finally, the answer denied that the Class A common was issued or outstanding and alleged that if so it was void and of no effect.
Subsequent to the joinder of issue in the suit the parties entered into a stipulation for the entry of judgment to the effect that the claim of the appellees to 250,000 shares of the Clayton stock be rejected and that they have from Independence 170,000 shares thereof, and no more; that appellees surrender to Independence 400,000 shares of their Class A common; that it be adjudged that they are the bona fide owners of the balance, namely 600,000 shares, with rights identical to those of the common stock; and finally that Independence pay to the appellees the sum of $10,050. Judgment to this effect was entered by the court on June 29, 1946.2
The petition for the vacation of this judgment was filed in 1947 after the election by Independence of a new board of directors. Two of its main paragraphs were extensively amended after a motion to dismiss it had been interposed. Appellees’ motion was then renewed, and Independence having declined to plead further the court dismissed the amended petition as insufficient. This appeal followed.
The defenses of want of consideration, invalidity and fraud in the original issuance to Mines Finance of the Class A common, as set up in the answer, are repeated in the petition with much evidentiary detail and in greatly amplified form. The substance of the defenses, however, is concededly identical in the two pleadings. Since fraud in this respect was in issue in the litigation concluded by the judgment it can not be made the basis of an attack on the judgment. Donovan v. Miller, 12 Idaho 600, 88 P. 82, 9 L.R.A.,N.S., 524, 10 Ann.Cas. 444; United States v. Throckmorton, 98 U.S. 61, 68, 25 L.Ed. 93; Toledo Scale Co. v. Computing Scale Co., 261 U.S. 399, 43 S.Ct. 458, 67 L.Ed. 719; 49 Corpus Juris Secundum, Judgments, § 372, pages 738-740. Independence concedes that such is the general rule, but argues in its brief that the principle is not applicable here for the reason that appellees at all times had knowledge of the invalidity of their holdings. Such knowledge, however, is not pleaded, and we need not inquire what might be its effect if it had been pleaded. There is no averment in the petition that appellees knew that fraud had been practiced by their predecessors in the acquisition of the stock; and no facts are set out which would in good conscience preclude them from resorting to the courts for an adjudication of their disputed claim.
The balance and bulk of the petition is devoted to an attempt to show fraud in the procurement of the judgment. On this phase Independence argues that collusion between its president on the one side and appellees on the other prevented it from making its defense. What the court has to determine is whether the contention finds adequate support in the facts alleged in the petition.3
 The petition avers that since the death of Marquardt in 1942 Independence had been under the control and domination of one Keane, its acting president; that Keane was currently disqualified to act as an officer because no longer a stockholder; and that the two other directors serving with and appointed by Keane were not stockholders, hence were also disqualified from acting. No stockholders meeting, it is *986said, had been held for eight years. It is averred that appellees, well knowing these facts, dealt with Keane in the settlement of their suit. From the recitals of the petition as a whole, however, it is plain that Keane and the other directors were at least de facto officers. Cf. Fletcher, Cyc. Corp., Vol. 2, Ch. 11, §§ 372-390. Keane was and for years had been in open and unchallenged possession of the office, discharging its duties under color of authority and with the acquiescence of the generality of stockholders. The latter appear to have recognized his authority to act for the corporation; and there is no allegation that they themselves were unaware of the true nature or infirmities of his tenure. The very dividend from which this litigation stemmed had been declared and was in process of distribution by Keane and his associates acting as officers and directors. The common stockholders had sought the dividend at their hands, recognized their authority to declare it, and claimed and accepted its fruits. We think Independence, speaking here ostensibly for the common stockholders, is in no position to challenge Keane’s official status.
Again, it is alleged that Keane was currently engaged in the sale of large blocks of the Clayton stock held by Independence and was corruptly dissipating the proceeds or applying them to his own use. Appellees are alleged on information and belief to have had knowledge of Keane's plundering of the corporation and that they took no steps to oust him for the reason that they could obtain a better settlement of their own claims “by dealing with the so-called president who desired to conceal the true condition of the affairs of the said Company and his own misdeeds in connection with its operations.” It is alleged that ap-pellees “claimed to be” such large stockholders of Independence that “they were in virtual control thereof,” yet took no action to curb Keane’s mismanagement. On this phase it is to be noted that there is no allegation that appellees owned or claimed to own any stock in Independence other than the Class A common, their title to which was being currently denied and contested by Independence. The court is not informed of the means by which, in the circumstances, they could act effectively. Indeed, if the petition be taken at its face value they had in law no standing as stockholders or right to interfere in the corporate affairs. In any event we think they were not obliged to halt their suit until, the internal affairs of the corporation were-, corrected.
The petition, in substance, alleges further that prior to the settlement of the suit Keane had sold 218,000 of the Clayton-shares ’belonging to Independence and had! appropriated the proceeds to his own account; that 613,000 Clayton shares had been distributed as dividends to the common stockholders of Independence4; and that there was thus left in the treasury a balance of 170,000 Clayton shares. It is alleged that as the result of a conference between Keane and one Sekulic the latter approached appellees with the proposition that Keane would, in settlement of their demands, turn over to them all the Clayton-shares remaining in the treasury, to wit 170,000 shares, plus the sum of $10,050 in-cash, they, however, to relinquish to Independence 400,000 shares of their Class A common, retaining the balance as their own; and that Sekulic informed appellees that if they would not accept the proposal: they would receive no dividend in consequence of any judgment secured against Independence for the reason that Keane would sell and dispose of the remaining Clayton stock and apply the funds to his own use. It is averred that appellees accepted the proposal with knowledge that they would thereby secure all the remaining Clayton stock, including 73,175 shares “being held in trust” by Independence for 'the benefit of the common stockholders who. had not yet received their dividend.
*987The foregoing paragraph is a summary of a series of allegations running through eight pages of the printed record. Independence argues that against this background the settlement reflects, not a reasoned compromise of a doubtful lawsuit, but merely the panicky surrender of all available assets by an officer under pressure or threat of exposure.
In urging this view counsel for Independence ask us to heed Dryden’s couplet: “Errors, like straws, upon the surface flow; he who would search for pearls must dive below.” We have done so and come up, among other things, with a small pearl or two possibly worth mentioning. Made a ■part of the petition is an audit of the affairs ■of Independence prepared by a certified public accountant, covering the year 1945 and the three prior years, and forming part ■of a report submitted by Keane as president ■of Independence to the Securities and Exchange Commission in March 1947. The audit fully discloses Keane’s sales of Clayton shares referred to in the petition, and also shows that he was currently acquiring substantial amounts of Clayton stock on behalf of Independence. It would appear from the submission of this audit and report that within nine months after the entry of the judgment Keane himself made a public disclosure of the internal affairs of Independence and of his own irregularities as its president. One is accordingly obliged to take a dim view of the argument, here so heavily stressed, that Keane’s anxiety to avoid exposure of those matters was the moving factor inducing the settlement.
On other considerations, too, this central thesis of the petitioner hardly survives analysis. It is obvious that Keane’s misdeeds were irrelevant to the issues joined in the suit and would not be disclosed in the ■ordinary course of a trial of those issues. If Independence was really in position to establish fraud in the acquisition by Kings ■ bury and Marquardt of its Class A common it would have been greatly to Keane’s advantage to proceed to trial rather than to multiply the difficulties of his situation by effecting the settlement he did. There is, it must be remembered, no allegation that appellees made any threats of exposing Keane, or that they put him under any duress other than the pressure of their suit.5 Viewed dispassionately, the settlement bears the earmarks of a compromise between adversaries neither of whom felt entirely confident of his ability to prove his case.
With respect to appellees’ knowledge that the settlement of their demands would absorb Clayton shares otherwise claimable by common stockholders it is notable that no facts appear which would place appellees in a trustee relationship toward such stockholders. It is the rule that a stockholder may sue the corporation to recover a dividend declared, since he holds his right to the dividend in his individual capacity. Fletcher, Cyc. Corp., Perm. Ed., Vol. 13, § 5922. After the dividend is declared all community of interest in relation to the same as among stockholders themselves and as between them and the corporation is at an end. And the action to recover may be maintained not only by the stockholders recognized by the corporation as entitled to share in the dividend, but by those wrongfully denied the right to share therein. Fletcher, Cyc. Corp., Perm. Ed., Vol. 11, § 5365. •
 The nature of the burden resting on a party who seeks to set aside a judgment for fraud in its procurement is well understood, and counsel are not in serious disagreement as to' the applicable principle. The fraud must be extrinsic or extraneous to the issues in the action in which the judgment was rendered. It must have been *988practiced or connived at by the successful party, and it must be such as prevented the losing party from fully and fairly presenting his case or defense. Zounich v. Anderson, 35 Idaho 792, 208 P. 402; United States v. Throckmorton, supra; Toledo Scale Co. v. Computing Scale Co., supra; Donovan v. Miller, supra. Cf. Restatement of the Law of Judgments, § 122 (p. 593), Comment “e” (p. 596). Common “e” of the Restatement is illuminating and we quote it: “Collusion or duress. There is collusion where a party to an action or someone acting on his account induces a fiduciary to neglect or to act contrary to; the interests of the beneficiary. This may be accomplished by a money payment or promise of future benefits to the fiduciary, or by causing him to act out of friendship or by persuasion. Mere knowledge that the fiduciary is neglecting the interests of the beneficiary does not. constitute collusion; there must be some cooperation or activity in causing him to act wrongfully.”
It must be remembered that a petition to vacate a judgment is addressed to the sound legal discretion of the trial court, and its determination will not be disturbed except for abuse of discretion. Western Union Telegraph Co. v. Dismang, 10 Cir., 106 F.2d 362, 364; Bush v. Bush, 61 App.D.C. 357, 63 F.2d 134; In re Rochester Sanitarium & Baths Co., 2 Cir., 222 F. 22, 26. Particularly is this true in this instance, where the experienced judge passing on the petition had presided in the litigation in which"the judgment was entered, and it is claimed that fraud was practiced upon the court. Certainly we are not able to say that the court’s ruling adverse to the petition was wrong.
Affirmed.

The resolution required that the stockholders send in their certificates in order that the receipt of the distribution might be evidenced by a stamp thereon. Some Independence shares appear for a long while to have been traded in ex-dividend on the exchange,

 It appears that throughout the suit Independence was represented by several attorneys.

 The Idaho rule, like the rule generally, is that in a proceeding of this nature the facts constituting the fraud must be definitely and positively alleged, Zounieh v. Anderson, 35 Idaho 792, 208 P. 402.

 It appears in the petition that 2,744,-700 shares only of the ordinary common stock of Independence had been issued. Thus, on the basis of one share of Clayton to four of Independence, it required 686,-175 shares of Clayton to fill the dividend requirements as restricted to the ordinary common stock. Clayton shares to the number of 73,175 had not been called for by common stockholders. The balance of 613,000 shares had been distributed.

 There is an allegation that in July 1945 — almost a year prior to the settlement — appellees became alarmed at the large sales of Clayton and notified the Clayton Company to stop all further transfers of Clayton shares belonging to Independence, saying that if this were not done they would bi’ing injunction proceedings to prevent further transfers. There is no allegation that this admonition came to Keane’s notice or, if so, that it had any effect on his activities, or even that the Clayton Company heeded the notice. We are unable to seo the relevancy of the incident as indicating fraud, connivance, or duress on appellees’ part.