Robert A. Wachsler, Inc. v. Florafax Intern., Inc., 83-1214

• Decision Date: 26 November 1985
• Docket Number: No. 83-1214,83-1214
• Parties: ROBERT A. WACHSLER, INC., a Connecticut corporation, Plaintiff-Appellee, v. FLORAFAX INTERNATIONAL, INC., a Delaware corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 547

778 F.2d 547

ROBERT A. WACHSLER, INC., a Connecticut corporation, Plaintiff-Appellee, v. FLORAFAX INTERNATIONAL, INC., a Delaware corporation,

Defendant-Appellant.

No. 83-1214.

United States Court of Appeals, Tenth Circuit.

Nov. 26, 1985.

Ira L. Edwards, Jr., Houston & Klein, Inc., Tulsa, Okl. (Drew R. Heard and John T. Helm of Shank, Irwin & Conant, Dallas, Tex., on brief), for defendant-appellant.

Joel L. Wohlgemuth (Janet Spaulding also of Prichard, Norman & Wohlgemuth, with him on brief), Tulsa, Okl., for plaintiff-appellee.

Before BARRETT and LOGAN, Circuit Judges, and SAFFELS, District Judge. ^*

LOGAN, Circuit Judge.

In this diversity action defendant Florafax International, Inc. appeals a $240,000 judgment rendered against it in a jury trial for breach of contract brought by plaintiff Robert A. Wachsler, Inc. (RAW). Florafax is a publicly held Delaware corporation with its principal place of business in Oklahoma. RAW is a closely held Connecticut corporation with its principal place of business in Connecticut.

The issues on appeal are (1) whether Oklahoma or Delaware corporate law governs this suit; (2) concluding, as we do, that Delaware law controls, whether Del.Code Ann. tit. 8, Sec. 144 is the exclusive means of ratifying interested director contracts; and (3) if not, whether the jury verdict that Florafax did ratify the contract with RAW may be upheld under the standards that would then properly apply.

Robert A. Wachsler is a marketing consultant who served on the board of directors of Florafax. He is president of RAW and, together with his wife, owns all of RAW's stock. RAW's principal business is marketing Wachsler's personal consulting services. For a short time before Wachsler and Michael Lupo, president and chief executive officer of Florafax, signed the contract in question, RAW had been receiving $3,500 per month from Florafax for serving as a marketing consultant. At this time, other Florafax directors also were receiving fees from the corporation under agreements that did not have formal advance approval of the board of directors.

In June 1980, Wachsler brought a draft of a proposed agreement between Florafax and RAW to a Florafax marketing meeting. The contract provided that RAW would supply consulting services to Florafax for five years for a $60,000 annual fee. Wachsler discussed the contract with Lupo and Richard Hughes, Florafax's chairman. Lupo signed the contract on behalf of Florafax some time before June 26, although it was never presented to or approved by the board of directors. On that date apparently all the board of directors members together owned or controlled no more than 36.8% of Florafax's outstanding voting stock. ¹

On June 26 Hughes announced to the Florafax board of directors by way of a conference telephone call that he had sold his Florafax stock to Joseph Hale, who on that day became the new chairman of the board and chief executive officer of Florafax. Lupo remained as Florafax's president and chief operating officer. Hale soon learned of the consulting agreement with RAW, and at a meeting with Lupo and Wachsler on July 22, he informed Wachsler that Florafax would not honor the contract. Lupo then sent RAW a letter dated August 22, 1980, in which he referred to the minutes of an April 9 board of directors meeting that purported to preclude contracts made without prior board approval. ²

Wachsler resigned from the Florafax board on November 4. The remaining directors, with the exception of Lupo, resigned shortly thereafter. On November 24, 1980, a new board composed of Hale, Lupo, and two new directors formally disavowed the contract with RAW. Florafax never paid any fees to RAW under the contract.

Soon after Wachsler's resignation from the board, RAW brought suit for breach of contract. The complaint alleged that Florafax had ratified the contract when its president Lupo asked RAW in June 1980 to provide a major marketing analysis of the method by which Florafax could increase the sale of silk flowers to gift shops and then utilized this analysis in marketing Florafax products. Florafax denied ratification and claimed to have returned all copies of the marketing analysis without ever using it. Nevertheless there was some evidence at trial from which the jury could have found that Florafax in fact used some of RAW's marketing ideas.

I

The parties initially contested the issue of whether Oklahoma or Delaware law is applicable to this suit. At trial, however, neither party objected when the district court applied Oklahoma law, apparently because the relevant statutes of the states are substantively identical. ³ We are convinced that Delaware law should be applied to determine the questions at issue here, and we rely primarily on the relevant statute and cases from that state. Nonetheless, we have examined the Oklahoma authorities cited, and, although that state's law is not as fully developed, we are convinced that the Oklahoma and Delaware supreme courts would arrive at the same conclusion. ⁴

Sitting as a federal court in a diversity case, we must apply the substantive law that an Oklahoma state court would apply, including that state's choice of law rules. Klaxon Co. v. Slentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). Although there is no recent Oklahoma Supreme Court decision directly on point, we are convinced that an Oklahoma court would apply the choice of law rules of the Restatement (Second) of Conflicts of Law (1971) in a case such as this. See Collins Radio Co. v. Bell, 623 P.2d 1039, 1046-47 (Okla.App.1980) (court "guided" by Restatement (Second) rules on choice of law in contract questions arising under but not fully answered by Article 2 of the Uniform Commercial Code); White v. White, 618 P.2d 921, 923-24 (Okla.1980) (Restatement (Second) used as guide in tort choice of law cases); Brickner v. Gooden, 525 P.2d 632, 637 (Okla.1974) (same).

Section 301 of the Restatement (Second) generally applies when a choice of law involves corporate acts of a sort that can likewise be done by an individual, such as making contracts, committing torts, and receiving and transferring assets. See Restatement (Second) of Conflicts of Law Sec. 301, comment b. Section 302(2), however, governs matters peculiar to corporate status and internal affairs, such as the rules regarding a corporation's relationship to its shareholders, the election or appointment of directors and officers, and the like. See id. Sec. 302, comment a; see also Kozyris, Corporate Wars and Choice of Law, 1985 Duke L.J. 1, 24-26. That section provides that the law of the state of incorporation shall be applied to determine issues involving the rights and liabilities of a corporation, unless it is shown that some other state has a more significant relationship to the occurrence and the parties. Restatement (Second) of Conflicts of Law Sec. 302(2).

Oklahoma cannot claim to have a more significant relationship than Delaware to the question of the validity of an interested director contract. Applying Delaware law in this case ensures certainty, predictability, and uniformity of result in internal corporate matters. It more nearly satisfies the needs of interstate systems, protects the justified expectations of the parties involved, and provides a rule of law more easily determined. See id. Sec. 302, comment e. Corporations incorporate in a specific state precisely because they desire to avail themselves of that state's corporate laws. Id. Any rule not looking to the law of the state of incorporation could lead to potential chaos. See Kozyris, 1985 Duke L.J. at 49. If the validity of a corporation's assent to an interested director contract depended on the law of the state where each contract was negotiated, the same corporation might have to follow radically different ratification/approval procedures for each one, depending on how stringent the various requirements were in each state that the contract might affect. A provision in the law of the state of incorporation, such as Del.Code Ann. tit. 8, Sec. 144, would then be meaningless, unless the corporation only conducted business in states with equivalent or less stringent provisions for validating interested director contracts or conducted business only in the incorporating state.

Because the issue in this case concerns a peculiar question of contract affirmation that arises only when a corporation is one party to the contract, Delaware law should govern this issue. Therefore, as a federal court we pretend to sit as an Oklahoma state court applying Delaware law.

II

Applying Delaware law, the first substantive issue is whether Del.Code Ann. tit. 8, Sec. 144, which pertains to interested director contracts, is the exclusive means by which these contracts may be validated. Section 144(a) provides:

"Sec. 144. Interested directors; quorum.

(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, ... if:

(1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

(2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

(3) The contract or transaction is fair as...