Ulloa v. Guam Economic Development Authority

• Decision Date: 16 August 1978
• Docket Number: Nos. 77-2509,77-3538,s. 77-2509
• Parties: David J. ULLOA, Richard F. Ulloa and Johnny Guevara Sablan, Plaintiffs-Appellants, v. GUAM ECONOMIC DEVELOPMENT AUTHORITY, a Public Corporation, and Lee M. Holmes, Defendants-Appellees. Robert E. HALSEY, Joan M. Halsey and Richard G. Cruz, Plaintiffs-Appellants, v. GUAM ECONOMIC DEVELOPMENT AUTHORITY, a Public Corporation, and Lee M. Holmes, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 952

580 F.2d 952

David J. ULLOA, Richard F. Ulloa and Johnny Guevara Sablan, Plaintiffs-Appellants, v. GUAM ECONOMIC DEVELOPMENT AUTHORITY, a Public Corporation, and Lee M. Holmes, Defendants-Appellees.

Robert E. HALSEY, Joan M. Halsey and Richard G. Cruz, Plaintiffs-Appellants, v. GUAM ECONOMIC DEVELOPMENT AUTHORITY, a Public Corporation, and Lee M. Holmes, Defendants-Appellees.

Nos. 77-2509, 77-3538.

United States Court of Appeals, Ninth Circuit.

Aug. 16, 1978.

Robert D. Wyatt (argued), John A. Bohn (argued), Agana, Guam, for plaintiffs-appellants.

George T. Okamura of Damon, Shigekane, Key & Char, Honolulu, Hawaii, for David J. Ulloa et al.

J. Bradley Klemm (argued), of Klemm, Dear & Lawrence, Agana, Guam, and Vernon F. L. Char (argued), Damon, Shigekane, Key & Char, Honolulu, Hawaii, for Robert E. Halsey et al.

Appeal from the United States District Court for the Territory of Guam.

Before CHAMBERS and WALLACE, Circuit Judges, and WONG, ^* District Judge.

WONG, District Judge:

Appellants in consolidated Case Nos. 77-2509 and 77-3538 are six of the 16 former shareholders of Marianas Communications Systems, Inc. ("MCS"), a Guam corporation founded in 1968 for the purpose of establishing a cable television system for Guam and the Northern Marianas. ¹ By 1969, the corporation was in need of extra funds, and the officers and shareholders of MCS sought to obtain the additional financing from the Guam Economic Development Authority ("GEDA"), an incorporated government agency created for the purpose of stimulating economic growth in the Territory of Guam. GEDA ultimately agreed to guarantee a loan in the amount of $200,000 obtained by MCS from the Guam offices of the First National City Bank ("FNCB").

Throughout the years 1971 and 1972, MCS continued to experience severe financial difficulties. After the failure of at least two attempts by MCS to obtain needed capital from outside corporations, MCS once again turned to GEDA. By a Stock Purchase Agreement dated May 21, 1971, each of the MCS shareholders agreed to sell, for a nominal consideration, all of the issued MCS stock to GEDA, who was in turn to assume all of the outstanding obligations of MCS and attempt to transform MCS into a viable enterprise. Section 6 of the Stock Purchase Agreement prohibited GEDA from transferring, alienating or in any way disposing of any MCS shares unless such shares were first offered for sale to the original 16 MCS shareholders. The shareholders' right of first refusal was set at a purchase price equal to the total amount of money expended and incurred by GEDA in the operation of the company.

By a supplemental Agreement also entered into on May 21, 1971, each of the MCS shareholders and GEDA agreed that notwithstanding Section 6 of the Stock Purchase Agreement, GEDA would be further prohibited from offering for sale any of the MCS shares within 180 days of the May 21st Agreement. Both the Stock Purchase Agreement and supplemental Agreement (hereinafter referred to as "May 21st agreements") were signed by each of the 16 MCS shareholders and James Halliday, the GEDA Administrator. ²

Less than two months after the May 21st agreements were entered into, GEDA was approached by Lee Holmes, who, with the support of David Ulloa, met with the GEDA Board on July 14, 1971 to discuss the possible sale of MCS. In its most basic terms, Holmes proposed to purchase 21,000 shares (70 percent) of MCS stock for a total purchase price of $42,000; to have GEDA offer, in varying amounts, 4,500 shares (15 percent) of MCS stock to the former MCS shareholders; to have GEDA retain the remaining 4,500 shares (15 percent) until the GEDA loan was paid off, at which time the shares were to be offered by GEDA to Holmes, D. Ulloa, Sablan, and three other former MCS shareholders at $4.00 per share; and to have both GEDA and FNCB increase their respective loans by $50,000 each.

Holmes' proposal was favorably greeted by the GEDA Board, and on July 20, 1971, a meeting between Holmes, three of the seven GEDA Board members, and five of the former MCS shareholders was held to further discuss the proposal. This meeting resulted in the drawing up of an Agreement, dated July 20, 1971, providing for the cancellation of both the former MCS shareholders' right of first refusal contained in Section 6 of the May 21st Stock Purchase Agreement and the 180-day prohibition of the sale of MCS stock contained in paragraph 2 of the May 21st supplemental Agreement. The July 20th Agreement was conditioned upon the execution of a contract by Holmes, GEDA, and MCS for the sale of MCS stock to Holmes, and was signed by Guy Wharton (on behalf of GEDA), Holmes, and all of the 16 former MCS shareholders except Richard Cruz and Robert and Joan Halsey.

Further meetings of the GEDA Board were held on August 2 and 3, 1971, and by an Agreement for Sale of MCS Stock dated August 4, 1971, GEDA agreed to sell 70 percent of the MCS stock to Holmes on the terms described above, with the exception of the deletion of any reference to a $50,000 matching loan from FNCB. This August 4th Agreement was signed by Jesus Guerrero (on behalf of GEDA), Halliday (on behalf of MCS), Holmes, and witnessed and signed by D. Ulloa and one J. S. Perez.

Pursuant to the terms of the August 4th Agreement, the shares of MCS stock prescribed therein were sold by GEDA to Holmes and the former MCS shareholders. On February 28, 1972, the 16 former MCS shareholders filed suit, claiming, Inter alia, that due to the bad faith of defendants Holmes and GEDA, the latter had failed to first offer to them, as required under the May 21st agreements, the 21,000 shares of MCS stock sold to Holmes. The former MCS shareholders therefore requested that the court impose a constructive trust in favor of them over the 21,000 shares.

The trial court ruled in favor of Holmes and GEDA, and six of the former shareholders appealed, raising a number of issues for this Court's consideration.

Appellants first claim that the July 20th Agreement, under which the former MCS shareholders purportedly waived their rights of first refusal, is not a binding agreement due to the lack of a quorum of the GEDA Board. It is clear that the July 20th Agreement was not properly transacted due to the absence of a Board quorum. Guam Government Code, § 53558(c). While no Guam case law exists on this point, it is also clear, however, that the general rule with respect to ratification is that

"ratification of a contract or other act will be implied if the corporation, represented by the board of directors, who have knowledge of the facts, accepts and retains the benefits of the contract or act, or recognizes it as binding, or acquiesces in it. They may ratify by acquiescence, and need not act at a meeting regularly called, but may ratify without any formal action. . . ." 2 Fletcher Cyc. Corp. § 762.

See also Petroleum Anchor Equipment, Inc. v. Tyra, 419 S.W.2d 829, 834 (Tex.Sup.Ct.1967) ("Ratification of an unauthorized act may be express or it may be implied from a course of conduct . . .."); See-Tee Mining Corp. v. National Sales, Inc., 76 N.M. 677, 417 P.2d 810, 812 (1966) ("Ratification of the action of a corporate officer for which there may have been no antecedent authority may be express or implied (citations omitted), and may be implied by the corporation's acquiescence in or recognition of its officer's unauthorized act, or by the corporation's acts tending to show an acceptance or adoption of the contract (citations omitted)."); Monteleone v. Southern California, 264 Cal.App.2d 798, 70 Cal.Rptr. 703 (Second Dist.1968); Johnson v. Community Development Corp., 222 N.W.2d 847 (N.D.Sup.Ct.1974); 19 C.J.S. Corporations § 1141 (1940).

That the GEDA Board possessed the original authority to enter into a contract in the nature of the July 20th Agreement cannot be disputed. Guam Government Code, § 53553.

An examination of the conduct of the GEDA Board subsequent to the signing of the July 20th Agreement unequivocally demonstrates Board action sufficient to establish ratification. As the July 20th Agreement states in paragraph 4 thereof, the Agreement was conditioned upon the execution of a contract for sale of MCS stock to Holmes among GEDA, MCS, and Holmes. Holmes in fact subsequently submitted a proposed contract of sale for GEDA's consideration, paragraph 5 of which explicitly referred to the fact that by the July 20th Agreement, GEDA and the former MCS shareholders agreed to abrogate the latter's rights of first refusal contained in the May 21st agreements. This paragraph was specifically discussed at the August 2nd and 3rd GEDA Board meetings. The following notation was entered in the minutes of the August 3rd meeting:

"Section (paragraph) 5 (of Holmes' proposed contract) The Administrator (of GEDA) pointed out that the last part of this section regarding the abrogation of the former shareholders had been changed to read . . . 'GEDA will jointly with Holmes and MCS defend any claim thereon by any persons or other entity. . . .' The Board agreed to this."

Therefore, not only did the GEDA Board recognize the existence of the July 20th Agreement, but it was even willing to go so far as to agree to defend Holmes and MCS on any claim arising from the Agreement. Finally, of course, by that Agreement for Sale of MCS Stock dated August 4, 1971, and agreed upon at the August 2nd and 3rd Board meetings, GEDA agreed to sell 21,000 shares to Holmes, despite the fact that on the previous day, the Board had specifically ratified the May 21st agreements containing the former MCS shareholders' rights of first refusal. Paragraph 5 of the August 4th Agreement both recognized the July 20th abrogation of the former shareholders' rights of first refusal and asserted the obligation to defend noted above. Appellants do not contend that quorum was lacking at the August 2nd and 3rd meetings, and, as indicated previously, the August 4th agreement was witnessed...