MAYFLOWER HOTEL STOCK. PC v. Mayflower Hotel Corp.

• Decision Date: 26 January 1949
• Docket Number: No. 9714.,9714.
• Citation: 173 F.2d 416,84 US App. DC 275
• Parties: MAYFLOWER HOTEL STOCKHOLDERS PROTECTIVE COMMITTEE et al. v. MAYFLOWER HOTEL CORPORATION et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

84 US App. DC 275, 173 F.2d 416 (1949)

MAYFLOWER HOTEL STOCKHOLDERS PROTECTIVE COMMITTEE et al. v. MAYFLOWER HOTEL CORPORATION et al.

No. 9714.

United States Court of Appeals District of Columbia Circuit.

Argued October 5, 1948.

Decided January 26, 1949.

Mr. D. Worth Clark, of Washington, D. C., with whom Messrs. John Lewis Smith, Leslie C. Garnett, Samuel F. Beach, George Eric Rosden, Jerome J. Dick and John Lewis Smith, Jr., all of Washington, D. C., were on the brief for appellants.

Mr. Edmund L. Jones, of Washington, D.C., with whom Messrs. Nelson T. Hartson and Howard Boyd, both of Washington, D. C., were on the brief for appellees, Mayflower Hotel Corporation, et al. Mr. Roger J. Whiteford, of Washington, D. C., with whom Mr. Philip S. Peyser, of Washington, D. C., was on the brief, for appellees, Hilton Hotels Corporation, et al.

Before EDGERTON, CLARK, and WILBUR K. MILLER, Circuit Judges.

CLARK, Circuit Judge.

This is an appeal from a final judgment of the District Court of the United States for the District of Columbia granting motions to dismiss an amended complaint filed by appellants for injunction, receivership, accounting and to set aside a contract for fraud against the appellees herein.

The appellants brought suit in equity as stockholders of Mayflower Hotel Corporation and on behalf of Mayflower Hotel Stockholders Protective Committee (representing holders of more than 6500 shares of stock of Mayflower Hotel Corporation) and on behalf of many others similarly situated. The appellees are Mayflower Hotel Corporation, Hilton Hotels Corporation, the officers and directors of these two corporations, and Donner Estates, Incorporated. The suit involves sundry charges of fraud involving a conspiracy on the part of the Donner Estates, the former owner of the majority of stock of the Mayflower Hotel Corporation and the Hilton Hotels Corporation, purchaser from Donner of the same majority stock, to unfairly depress the price of the minority stockholders' holdings by fraudulently and untruthfully publishing that the stock had been acquired for a much lesser price than had actually been the case.

The bill charged defendant Folger, formerly president of the Mayflower Corporation, not only with participation in several fraudulent acts as a director, but also with direct fraud in the transaction with regard to the refinancing of certain notes which is alleged to have been actually done by arrangements with the bank but which was fraudulently made to appear as a sale to Folger and his brokerage firm, out of which Folger derived a private profit in the sum of $17,000. to the detriment of Mayflower and its stockholders, and the bill alleges that, although the sale was actually to the bank, the records of Mayflower were fraudulently caused to reflect the sale to Folger's firm. The bill further alleges that as soon as Hilton secured the control of the corporation it succeeded, through a controlled Board of Directors in negotiating a management contract between Hilton and Mayflower to the profit of Hilton and greatly to the detriment of Mayflower, and more particularly its minority stockholders who are appellants here.

The trial court sustained a motion to dismiss on the ground that no cause of action was stated. Of course, on motion to dismiss all facts properly pleaded are taken as admitted. We are of the opinion that the trial court erred and that the bill stated not one but several different causes of action, any one of which should have been sufficient to require appellees to answer and to be put upon their proof.

Since the case involves questions of the responsibility of interlocking directorates, the responsibility and liability of the directors in dealing with the corporations of which they are directors, and the duties devolving upon majority stockholders to deal fairly with the corporation and with minority stockholders, it is believed that it would be profitable to set out a few general principles believed to be universally accepted before undertaking analysis of the specific allegations of the complaint.

It is, of course, a fundamental principle that directors of a corporation occupy a fiduciary relationship to the corporation and its stockholders and must act in utmost good faith in managing corporate affairs.¹

The rule with regard to contracts or dealings between corporations having one or more directors in common has been applied with particular stringency.

In the report of Geddes et al v. Anaconda Copper Mining Co. et al., decided by the Supreme Court of the United States in 1921 and reported in 254 U.S. 590, 41 S.Ct. 209, 65 L.Ed. 425, it is stated that where the minority shareholders of a corporation seek to set aside a sale of its property to another corporation negotiated and made by boards of directors having a member in common, the burden is upon those who would maintain the transaction to show the entire fairness and the adequacy of the consideration.

In that case Mr. Justice Clarke delivered the opinion of the Court and, 254 U.S. at page 599, 41 S.Ct. at page 212, 65 L.Ed. 425, he said: "The relation of directors to corporations is of such a fiduciary nature that transactions between boards having common members are regarded as jealously by the law as are personal dealings between a director and his corporation, and where the fairness of such transactions is challenged the burden is upon those who would maintain them to show their entire fairness and where a sale is involved the full adequacy of the consideration. Especially is this true where a common director is dominating in influence or in character. This court has been consistently emphatic in the application of this rule, which, it has declared, is founded in soundest morality, and we now add in the soundest business policy. Twin-Lick Oil Co. v. Marbury, 91 U.S. 587, 588²; Thomas v. Brownville, Ft. Kearney & Pacific R. R. Co., 109 U.S. 522;³ Wardell v. Railroad Co., 103 U.S. 651, 658⁴; Corsicana National Bank v. Johnson, 251 U.S. 68, 90⁵."

In the case of Corsicana National Bank v. Johnson, decided by the Supreme Court of the United States in 1919, reported in 251 U.S. 68, Mr. Justice Pitney delivered the opinion of the Court and on page 90⁶ he said:

"The fact that the same persons were directors and managers of both corporations subjects their dealings inter sese to close scrutiny. That two corporations have a majority or even the whole membership of their boards of directors in common does not necessarily render transactions between them void; but transactions resulting from the agency of officers or directors acting at the same time for both must be deemed presumptively fraudulent unless expressly authorized or ratified by the stockholders; and certainly where the circumstances show, as by the undisputed evidence they tended to show in this case, that the transaction would be of great advantage to one corporation at the expense of the other, especially where in addition to this the personal interests of the directors or any of them would be enhanced at the expense of the stockholders, the transaction is voidable by the stockholders within a reasonable time after discovery of the fraud. Twin-Lick Oil Co. v. Marbury, 91 U.S. 587, 589;⁷ Wardell v. Railroad Company, 103 U.S. 651, 657, et seq.;⁸ Thomas v. Brownville, etc., R. R. Co., 109 U.S. 522, 524;⁹ Richardson v. Green, 133 U.S. 30, 43;¹⁰ McGourkey v. Toledo & Ohio Ry. Co., 146 U.S. 536, 552, 565.¹¹" (Emphasis added.)

In the earlier case of Twin-Lick Oil Company v. Marbury, 91 U.S. 587, 23 L.Ed. 328, Mr. Justice Miller in delivering the opinion of the Supreme Court said at pages 588, 589:

"That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings with the subject matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and in others." (Emphasis ours.)

In the case of McGourkey v. Toledo, etc. Ry. Company, 146 U.S. 536, at page 565,¹² Mr. Justice Brown said:

"No principle of law is better settled than that any arrangement by which directors of a corporation become interested adversely to such corporation in contracts with it, or organize or take stock in companies or associations for the purpose of entering into contracts with the corporation, or become parties to any undertaking to secure to themselves a share in the profits of any transactions to which the corporation is also a party, will be looked upon with suspicion."

Mr. Justice Brown then proceeded to specifically quote with great approval the leading case, Wardell v. Railroad Company, 103 U.S. 651, 26 L.Ed. 509.

This case is of particular interest in deciding the questions now under consideration because it is a case wherein a committee of a Board of Directors of a railroad company entered into a contract with a coal company, the stock of which was largely owned by the Directors of the railroad company for the purchase of coal by the railroad company. The contract was held to be a fraud upon the railroad company.

In delivering the opinion of the Court in that case Mr. Justice Field said, 103 U.S. at page 658¹³:

"It is among the rudiments of the law that the same person cannot act for himself and at the same time, with respect to the same matter, as the agent of another whose interests are conflicting. Thus a person cannot be a purchaser of property and at the same time the agent of the vendor. The two positions impose different obligations, and their union would at once raise a conflict between interest and duty; and, `constituted as humanity is, in the majority of cases duty would be overborne in the struggle.' Marsh v. Whitmore, 21 Wall. 178, 183.¹⁴ The law, therefore, will always condemn the transactions of a...