Court Opinion

ID: 9636588
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:34:33.890782+00
Date Added: 2024-06-11T18:09:47.174437
License: Public Domain

DENMAN, Chief Judge
(dissenting).
It will be a shock to the legal profession that this court holds, in a proceeding in equity, that stockholders suing a corporation known by them to be entirely controlled by president Keane, also known by them to be a criminal, as yet undisclosed to the public, who has continually robbed the corporation of its Clayton stock1 *and who, as an inducement for their action, threatens them to steal all its remaining Clayton stock,2 and who was necessarily in fear of exposure by them either by a stockholders’’ suit for restitution for the thefts or by seeking a criminal prosecution, may secure his stipulation for a judgment against his-corporation by which they obtain all the 170,000 Clayton shares the criminal has-not yet stolen, a part of which consists of 73,175 shares of Clayton stock which they knew were held in trust-by the corporation for other stockholders,3 without disclosing to the court to which the stipulation is presented and which entered judgment thereon that part of the benefit they received was illegally taken from other stockholders, or the criminal character of the stipulator and what he might fear from those benefited by his action if he could not effect a settlement with them.
It will also startle the profession that such may be held without mention of, much less consideration of, any of the pertinent cases offered on behalf of appellants, and disposing of their contention on the authority of a text writer, who nowhere states the law to be as stated in the opinion.
The petition's allegations of appellees' connivance with Keane to give them the Clayton shares held in trust for the other stockholders are clear cut. They are:
“ * * * The defendant Company, the-Independence Lead Mines Company, now asserts that the said judgment is fraudulent and is a fraud upon this Court and this defendant Company, and makes this motion-to set aside the same so this defendant can assert its lawful rights and defend and protect the rights of the holders of the common, assessable stock of this defendant Company; that no disclosure was made to-this Court that the award of 170,000 shares. of Clayton to the plaintiffs would deprive-common assessable stockholders of a dividend previously declared, in the amount of *98973,175 shares of Clayton which was a trust for said common stockholders held by the defendant Company and its so-called President, F. C. Keane.” [Tr. 70.]
“Upon information and belief, the said defendant alleges the following: That the doings and transactions of the said F. C. Keane in regard to dissipating the cash and funds of the Independence Lead Mines Company and selling the stock of the Clayton Silver Mines Company belonging to the Independence and squandering and dissipating the funds realized therefrom for his own benefit, and the extent of the possession by the Independence Lead Mines Company of the sum of only 170,000 shares of Clayton, including over 73,000 shares held in trust for common assessable stockholders, were well known in all particulars to the said plaintiffs long prior to the settlement made in this controversy and the judgment entered therein. * * *” [Tr. 73.]
The law of the state of Independence’s incorporation, Arizona, controls with respect to the rights of stockholders against corporate officers who connive with one group of stockholders to give them dividends out of the property to be distributed to other stockholders. National Lock Co. v. Hogland, 7 Cir., 101 F.2d 576, 582. Cf. Harr v. Pioneer Mechanical Corporation, 2 Cir., 65 F.2d 332, 334.
In the case of Johnson v. Moore, 31 Ariz. 137, 145, 250 P. 995, there was such connivance by which the corporate officers declared a dividend of the proceeds of the sale of certain company assets and then paid over all the proceeds to certain stockholders to the exclusion of other stockholders The latter brought suit against both the corporation and the stockholders receiving all the dividend moneys. The Arizona supreme court held, 31 Ariz. at page 145, 250 P. at page 998,
“ * * * If the officers of defendant corporation had merely retained in their custody as such officers plaintiff’s share of the proceeds of the sale, his remedy would indeed be ex contractu, but the allegation of the complaint is that the corporation and the individual defendants, with the ‘knowledge, consent, aid, and connivance one with the other,’ divided among the defendants, not only their pro rata of the $42,000 but also that which should have been paid plaintiff. If the trustee of a sum of money pays it to a person not entitled to receive it, with full knowledge on the part of the latter as to the facts, and his active participation in the illegal payment, it is undoubtedly a breach of trust, for which both the trustee and the recipient of the money are liable as in conversion. White v. Sherman, 168 Ill. 589, 48 N.E. 128, 61 Am.St.Rep. 132; Duckett v. National Mechanics’ Bank, 86 Md. 400, 38 A. 983, 39 L.R.A. 84, 63 Am.St.Rep. 513; American Trust & Banking Co. v. Boone, 102 Ga. 202, 29 S.E. 182, 40 L.R.A. 250, 66 Am.St.Rep. 167; 38 C.J. 2055. * * * ”
Here the claiming owners of 1,000,000 shares take the 73,125 shares belonging to holders of 292,700 by collusion with Keane in control of the corporation. So far as concerns equity, the obligation to return shares thus collusively acquired is no different from where a majority persuades a corporate management to give them all of a dividend to the exclusion of the minority. It is the wrongful control of the corporate officers by which the latter violate a trust for all the stockholders which gives equity its jurisdiction. Hence the following cases of deprivation of a minority of its share of a distribution of corporate assets are applicable. Heimbauch v. Hitchcock, 115 Kan. 182, 222 P. 114; Morse v. Metropolitan S.S. Co., 87 N.J.Eq. 217, 100 A. 219.
The majority opinion does not mention, much less distinguish, these cases, offered on behalf of appellants. It cites no authority to the contrary from Arizona or elsewhere. I therefore dissent from its holding “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.”
*990Nowhere does Fletcher state that after a dividend is declared one group of stockholders may wrongfully cause the directors to distribute to them the dividends belonging to other stockholders and yet create no trust relationship to those so wronged.
Here is clear Arizona authority that there is community of interest creating a trust relationship between the stockholders where appellees had “knowledge that the settlement of their demands would absorb Clayton shares otherwise claimable by common stockholders.”
Independence is still the trustee for the stockholders who have not received their dividend of Clayton shares and owes the duty to recover such specific property (a) to such stockholders and (b) to the corporation and its creditors4 to avoid a suit for the value of the shares if the stockholders, denied the distribution of this specific property, sue for its value.
In the discharge of these duties, the present honest officials find a judgment, procured by such connivance, in the road to the recovery of the Clayton shares for the stockholders entitled to them. It is clear that equity requires the removal of the obstruction of that judgment, as here sought.
It seems clear that it was the duty of the appellees to disclose to the court the character of the criminal controlling the corporation and of his proposed settlement depriving the other stockholders of the stock held in trust for them, so offered for their connivance, and have the court appoint for that litigation a trustee for the corporation, who would be free of any such pressure, to defend against the claim of the appellees for his trust res, the clayton stock.
It is, of course, unfortunate that litigants find themselves required to procure such a substitution, just as it would be unfortunate for them if the person in sole control of the corporation were imbecile or insane.
I dissent from the opinion’s statement that to procure such a trustee would require an adjustment of the internal affairs of the corporation.5 Even if it required such an adjustment, such a burden would not make the stipulation any the less one procured by the obvious coercive compulsion in the mind of the criminal Keane and one by which the appellees in connivance with him obtain the stock held in trust for other stockholders.
I dissent further from the opinion’s statement, seeking to show Keane could have no fear of exposure by appellees, that the holders of the outstanding Class A common stock could not sue “effectively” to prevent Keane from further stealing the corporate assets6 which gave value to the Class A common as well as all the other outstanding stock, or to remove Keane as president.
The only ground upon which the maintaining of such a suit could not be “effective” is that their outstanding stock should be cancelled, an issue they had to face in any suit against the corporation and which, if the fact, would defeat their defense to the instant action. Appellees had no such impression of their lack of power to sue effectively when they threatened such a suit to enjoin the Clayton Company to prevent further stealing of Independence’s Clayton shares.7
It is now long established in Arizona, the. state of Independence’s incorporation, supra, in Idaho, and in the federal courts that stockholders’ suits are maintainable in just such a situation of wrongful dealing with the corporate assets, Ryan v. Old Veteran Mining Co., 37 Idaho 625, at page 636, 218 P. 381, at page 384, a stockholders’ suit in which the court said, “Directors of corporations act in a fiduciary capacity. They hold the corporate property in trust, and any attempt on their part to divert the use of such property to their personal profit or interest is a violation of the trust imposed by virtue of the office. Riley v. *991Callahan Mining Co., supra. [28 Idaho 525, 155 P. 665].” Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 599, 41 S.Ct. 209, 65 L.Ed. 425; Cutting v. Woodward, 9 Cir., 255 F. 633, 634. This court, by holding or dictum, thus should not overrule or cast doubt upon its own decisions.
I further dissent from the contention of the opinion that the fact that Keane was compelled to disclose his misappropriations nine months after the appellees had wrongfully acquired the 73,175 Clayton shares belonging to other stockholders by virtue of his threat to appellees to steal for himself all the remaining 170,000 shares, warrants the inference that any other stockholder than appellees knew of his thefts when the latter agreed to his stipulation.
There is nothing in the petition inconsistent with its allegation that appellees sought to obtain a better settlement of their 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.” That nine months after they made such a settlement he was unable further to conceal his wrongdoing is no evidence that Keane’s apprehension of appellees’ knowledge of his crimes was not a factor in the negotiation nine months earlier which wrongfully gave to appellees the 73,175 shares belonging to other stockholders.
I further dissent from the opinion’s statement that Keane “was currently acquiring substantial amounts [plural] of Clayton stock on behalf of Independence.” The only statement in this regard is that of the auditor’s report (tr. 99) that Keane misappropriated 229,000 shares and that “F. C. Keane reacquired 11,000 shares vwhich were issued as dividends to common stock of the Independent Lead Mines.”
This shows a net misappropriation of the 218,000 shares admittedly stolen. Dryden’s pearl of a restoration of but 5% of his stealing thus appears to be ersatz. Instead of the purchase being “on behalf of Independence” as stated in the opinion, it is obviously on behalf of Keane to restore it to Independence from which, as a part of the dividend already declared, it was distributed before the stipulation was signed and the judgment on it rendered.
That the amount known by appellees to have been stolen when they entered into the stipulation giving them the 73,175 shares which belonged to the other stockholders is 218,000 shares appears from the following table.
1) Total Clayton stock held by Independence (Tr. 7).... 1,001,000
2) Amount of Clayton to be distributed .............. 686,175
(1 Clayton share for each 4 shares of 2,744,700 outstanding common.), (Tr. 67, 68)
3) Undistributed Clayton shares remaining ............ 314,825 (1 minus 2) (Tr. 68)
4) Total amount of Clayton sold by Keane and proceeds kept by him (Tr. 99) 229,000
5) Net amount misappropriated after restoring by Keane of 11,000 shares (Tr. 98, 99) .................... 218,000
6) Amount of Clayton left in Independence not declared in dividends (2) 96,825 (3 minus 5)
7) Amount of Clayton shares still left in trust of 686,175 dividend (3 above) (Tr. 68, 70) ................. 73,175
8) Total Clayton remaining in Independence (6 plus 7) .. 170,000
9) Amount of Clayton stipulated to be given Kingsbury and Marquardt in settlement (Tr. 69)........... 170,000
10) Amount of Qayton left in Independence after settlement (8 minus 9) ....... 0
I dissent also from the opinion’s seeking to deprecate the petition by stressing that its allegations concerning the appellees’ knowledge of Keane’s criminality and their connivance with him to obtain the shares of other stockholders is on information and belief. It is apparent, if the honest success sor directors of Independence were not present when the appellees’ knowledge was *992obtained, the wrongful connivance never could have equitable relief, unless they could allege it on information and belief.
The.district court erred in holding the petition failed to state a cause of action and its judgment of dismissal should be reversed.

 Maj. op., 175 F.2d 988. -This, like other facts alleged in the dismissed motion to set aside the judgment, is to be taken as true solely .for determining whether a cause of action has been alleged.

 Maj. op., 175 F.2d 986.

 Maj. op., 175 F.2d 986.

 In this connection the transcript shows at pages 97 and 98 a deficit in earned surplus of $198,597.63 for the year 1943; of $222,948.04 for 1944, and a further net loss of $67,315 for the year 1945.

 Maj. op., 175 F.23 986.

 Maj. op., 175 F.2d 986.

 Maj. op., 175 F.2d 987, footnote.