Backus v. Finkelstein

• Decision Date: 19 November 1927
• Citation: 23 F.2d 357
• Parties: BACKUS et al. v. FINKELSTEIN et al.
• Court: U.S. District Court — District of Minnesota

23 F.2d 357 (1927)

BACKUS et al. v. FINKELSTEIN et al.

District Court, D. Minnesota, Fourth Division.

November 19, 1927.

Harrison E. Fryberger, of Minneapolis, Minn., and Leslie H. Morse, of Mankato, Minn., for plaintiffs.

Doherty, Rumble, Bunn & Butler, of St. Paul, Minn., for defendants.

CANT, District Judge.

Since about January 1, 1915, except as hereinafter set forth, the defendants Finkelstein and Ruben, through ownership or control of a majority of the stock, have been in complete control of the management of the Miles Theater Company, a South Dakota corporation, which during all of said time has been operating a moving picture theater at Minneapolis, Minn. This theater was first known as the Miles Theater, and later as the New Garrick. On April 28, 1918, the defendant Hamm, through contract with the other individual defendants above named, acquired an interest in said Miles Theater Company, and in other organizations and property controlled by said individual defendants. Except as otherwise appears from the context, the word "defendants," when used herein, shall be deemed to refer to the three individual defendants above named. In 1920, this suit was begun by certain stockholders in said Miles Theater Company, hereinafter referred to as the corporation, and by certain others who claimed that they had been stockholders therein and that they had been induced to sell their stock through the fraud and misrepresentation of defendants.

Since the institution of the suit, various other persons claiming to be in the same class last above referred to, have been allowed to intervene therein. All those who are plaintiffs or interveners claim that defendants have grossly violated their duties as managing agents of the corporation, and that, while defendants have profited greatly thereby, the corporation and the minority stockholders have suffered grievous losses in consequence thereof. For alleged wrongs against the corporation, and losses suffered thereby, plaintiffs and interveners pray a recovery on its behalf. On account of the alleged fraud and misrepresentations whereby certain of the plaintiffs and interveners were induced to sell their stock, such parties pray that such sales be rescinded, and that they be restored to their respective positions as stockholders in said corporation.

1. The cause of action on behalf of the corporation was submitted to Hon. Wilbur F. Booth, while he was a judge of this court. 23 F.(2d) 531. Judge Booth determined conditionally that there should be a recovery on behalf of the corporation. Certain questions were definitely and finally passed upon by him and certain others were left for determination later on. By interlocutory decree the defendants were required to account with respect to various of the charges made against them on behalf of the corporation, and the matter was submitted to Special Master H. D. Irwin for the purpose of taking such accounting and reporting to the court his findings with reference thereto. Pursuant to such reference, evidence was taken at length on such accounting and the special master thereupon filed his report in such matter. Both plaintiffs and defendants filed exceptions to the report of the special master. Such exceptions, in part, have already been disposed of.

It is now ordered that the exceptions so filed, and each of them, be and they hereby are overruled, and that such report and findings be and they hereby are adopted and confirmed. This report, in large measure, affirms the claims of wrongdoing made on behalf of the corporation. The charges relating to the mortgage of $52,000 made by the corporation in 1914, and those relating to the mortgage of $250,000 made by certain other corporations, controlled by defendants Finkelstein and Ruben, in 1916, as well also as certain other matters of importance in the case, are not covered thereby. In view of the strict presumptions against defendants, which, as a matter of law, necessarily arose from the evidence, the report of the master was much more favorable to them than it might have been if the master had more fully indulged such presumptions. However, upon consideration of all thereof, the court has concluded to approve the report as made.

It is possible that defendants had no accurate knowledge or clear conception of their duties, or of what the law required of them as managing officers and owners of the majority of the stock in the corporation in question. It is at least charitable to take this view, and it may be according to the fact. It is not difficult to understand how in a somewhat vague and blind way they may have reasoned that such success as attended the corporation was largely due to their individual efforts, and therefore that they should reap the reward to the exclusion of all other persons. This may explain their course, but it fails entirely to justify or excuse. By their own conduct defendants, in large measure, have overwhelmed themselves, and they are not in a position to complain of the consequences which necessarily must follow. Neblett v. MacFarland, 92 U. S. 101, 105, 23 L. Ed. 471.

2. The rules applicable in such cases exact from those in control a high degree of diligence and good faith. The stockholders of a corporation, as such, cannot participate in shaping its policies or directing its activities from day to day. They are obliged to look to and rely upon the managing officers, who in theory of law, and as a matter of fact, represent and act for all the stockholders. Officers of a corporation, who through the ownership of a majority of the stock control its activities, occupy a fiduciary relation to the minority stockholders, and at their peril must act in the strictest good faith in guarding the interests of the latter.

"Such a majority of the holders of stock owe to the minority the duty to exercise good faith, care, and diligence to make the property of the corporation in their charge produce the largest possible amount, to protect the interests of the holders of the minority of the stock, and to secure and deliver to them their just proportion of the income and of the proceeds of the property. Any sale of the corporate property to themselves, any disposition by them of the corporation or of its property, to deprive the minority holders of their just share of it, or to get gain for themselves at the expense of the holders of the minority of the stock, becomes a breach of duty and of trust which invokes plenary relief from a court of chancery." Jones v. Missouri-Edison Electric Co. (C. C. A.) 144 F. 765, 771. See, also, Wheeler v. Abilene National Bank Building Co. (C. C. A.) 159 F. 391, 394, 16 L. R. A. (N. S.) 892, 14 Ann. Cas. 917.

"Directors and officers of corporations occupy a position of trust and must act in the utmost good faith. They will not be allowed to deal with the corporate funds and property for their private gain. They have no right to deal with themselves and for the corporation at the same time, and they must account for the profits made by the use of the company's assets, and for moneys made by a breach of trust." McCourt v. Singers-Bigger (C. C. A.) 145 F. 103, 107 (7 Ann. Cas. 287), quoting from Ward v. Davidson, 89 Mo. 445, 458, 1 S. W. 846.

"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." Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 588, 589 (23 L. Ed. 328); Miner v. Ice Co., 93 Mich. 97, 109, 53 N. W. 218, 17 L. R. A. 412.

"The officers of a corporation are charged in the performance of their duties with certain obligations of trust and confidence to all the stockholders thereof without discrimination, to be performed with fidelity, and any intentional deviation or departure therefrom, to the substantial injury of any of the stockholders, constitutes willful mismanagement as a matter of law, for which a court of equity has jurisdiction to call them to account." Green v. National Advertising & Amusement Co. et al., 137 Minn. 65, 162 N. W. 1056, L. R. A. 1917E, 784 (Syllabus — by the court).

"The law requires of the majority the utmost good faith in the control and management of the corporation as to the minority. It is of the essence of this trust that it shall be so managed as to produce for each stockholder the best possible return for his investment." Dill v. Johnston, 72 Okl. 149, 152, 179 P. 608, 610, quoting from Miner v. Ice Co., 93 Mich. 97, 53 N. W. 218, 17 L. R. A. 412. See, also, Jones v. Morrison, 31 Minn. 140, 148, 16 N. W. 854; Shearer v. Barnes, 118 Minn. 179, 136 N. W. 861.

3. The foregoing fundamental rules speak in unmistakable terms and are applicable throughout this case. It is clear that they go quite beyond any standards recognized by the defendants here. At first the defendants Finkelstein and Ruben, and later on those two and the defendant Hamm, all stood in the relation of fiduciaries to the plaintiffs and interveners here. How distressingly far some or all of them wandered from the path of duty in such relation may be seen from an inspection of the master's report and from the further considerations herein.

4. Among the questions left for determination at this time is whether the conduct of defendants in relation to the corporation has been such that salaries should or should not be allowed them in connection with the services which they claim to have rendered. In this connection a long and imposing list of derelictions of duty are pressed upon the consideration of the court:

(a) The scrappy and sketchy and quite inadequate records which were kept of business transactions, whereby no stockholder, without great...