Delano v. Kitch, s. 79-1065

• Decision Date: 23 October 1981
• Docket Number: Nos. 79-1065,s. 79-1065
• Citation: 663 F.2d 990
• Parties: Victor DELANO, Victoria Bloom, and First National Bank in Wichita, Executor of the Estate of Marcellus M. Murdock,Plaintiffs-Appellees, Cross-Appellants, v. Paul R. KITCH, Defendant-Appellant, Cross-Appellee, and Harry B. Brown, Defendant-Appellee. to 79-1068.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 990

663 F.2d 990

Victor DELANO, Victoria Bloom, and First National Bank in

Wichita, Executor of the Estate of Marcellus M.

Murdock,Plaintiffs-Appellees, Cross-Appellants, v. Paul R. KITCH, Defendant-Appellant, Cross-Appellee, and Harry B. Brown, Defendant-Appellee.

Nos. 79-1065 to 79-1068.

United States Court of Appeals, Tenth Circuit.

Oct. 23, 1981.

Rehearing Denied Dec. 8, 1981.

John F. Eberhardt and James D. Oliver, Wichita, Kan. (Robert C. Foulston, Wichita, Kan., with them on the brief), of Foulston, Siefkin, Powers & Eberhardt, Wichita, Kan., for defendant-appellant and Cross-Appellee Paul R. Kitch.

John M. Mason, Washington, D.C. (Paul Martin Wolff, Washington, D.C., with him on the brief), of Williams & Connolly, Washington, D.C. (Paul B. Swartz of Martin, Pringle, Fair, Davis & Oliver, Wichita, Kan., of counsel), for plaintiff-appellee, and cross-appellant Victor Delano.

Ronald K. Badger, Wichita, Kan., for plaintiff-appellee, and cross-appellant Victoria Bloom.

Charles W. Harris of Curfman, Harris & Weigand, Wichita, Kan., (Jack Scott McInteer, Wichita, Kan., with him on the brief) for plaintiff-appellee, cross-appellant First National Bank in Wichita.

John M. Kobayashi, Denver, Colo. (Donald C. McKinlay, Denver, Colo., with him on the brief), of Holme, Roberts & Owen, Denver, Colo., for defendant-appellee Harry Britton Brown, Jr.

Before DOYLE, McKAY and LOGAN, Circuit Judges.

LOGAN, Circuit Judge.

These consolidated appeals arise out of a diversity action three shareholders of the Wichita Eagle and Beacon Publishing Company brought for monetary recovery from Paul R. Kitch, a director, officer, and lawyer for the corporation, and Harry Britton Brown, Jr., a director, officer, and shareholder, for breach of fiduciary duty in a transaction involving the sale of all of the corporation's stock to Ridder Publications, Inc. (Ridder). After trial a jury awarded the plaintiffs recovery and punitive damages against Kitch and held Brown jointly liable for some of the award against Kitch. The trial court granted a new trial on the issues of punitive damages and Brown's joint liability. Finding no just reason for delay on the other jury determinations, the trial court entered judgments pursuant to Fed.R.Civ.P. 54(b) permitting appeals by Kitch and cross-appeals by plaintiffs Victor Delano, Victoria Bloom, and the First National Bank in Wichita as executor of Marcellus M. Murdock's estate.

The principal issue in these appeals is whether Kitch owed and breached a fiduciary duty to the suing minority shareholders. Other issues concern the law of the case, alleged trial error, prejudgment interest, and whether Ridder's contract with Brown assuring his continued employment as an officer of the publishing company breached Brown's fiduciary duty to the shareholders.

The essential facts are largely undisputed. The Wichita Eagle and Beacon Publishing Company publishes the only daily newspaper in Wichita, Kansas. Colonel Marshall Murdock founded the newspaper in 1872 and ownership remained in his family until the sale to Ridder. At the time of the sale, defendant Brown was a director and president of the company and was in charge of daily operations. He owned 20,000 of the 60,000 outstanding issued shares, and the following parties owned the remainder of the stock: plaintiff Delano, 10,000 shares; plaintiff First National Bank, 10,000 shares held as executor of Marcellus M. Murdock's estate; plaintiff Victoria Bloom, 2,000 shares; Katherine Henderson, 10,000 shares; and six other descendants of Murdock, 8,000 shares in various amounts. Defendant Kitch was neither a Murdock family member nor a shareholder, but he was a director, the assistant secretary, and the principal lawyer for the corporation.

In conversations that did not include any of the plaintiffs, Brown and Kitch discussed finding a buyer for the stock of the corporation. Brown apparently believed Kitch possessed special bargaining skills and asked Kitch to negotiate a sale. Kitch was willing to find a purchaser, but demanded the right to require the purchaser to pay him a 3% "finder's fee." Brown agreed. Kitch then sought a buyer willing to pay cash for all of the stock and willing to employ Brown for ten years at $100,000 per year. During his search and until he successfully negotiated a sale, Kitch continued to serve as director, assistant secretary, and legal counsel to the corporation.

Kitch obtained an attractive offer from Ridder: all of the corporate stock for $42,000,000, ¹ or any amount above 32,000 shares at a pro rata price. The offer included for Kitch a 3% commission on all shares tendered, ² and for Brown a ten-year employment contract at $65,000 per year. By the time Ridder executed the contract, several shareholders other than the plaintiffs had authorized Kitch to sell their stock; as a result, Brown and Kitch could sell Ridder a majority of the stock. When plaintiffs heard about the offer and discovered that a majority of the shareholders intended to sell, each plaintiff sold his or her stock. ³

Plaintiffs then brought suit against Kitch and Brown for breach of fiduciary duty. The jury awarded each plaintiff the commission Kitch received for the sale of that plaintiff's stock: $202,500 to Delano, $202,500 to First National Bank, and $40,500 to Bloom. The jury determined that neither the bank nor Bloom could recover damages from Kitch or Brown based upon Brown's employment contract. The jury also found that Kitch could not have obtained a higher purchase price for the newspaper.

In ruling on posttrial motions, the court vacated the jury's decisions to award Delano $202,500 against Kitch as punitive damages, and to award Bloom $40,500 against Brown as joint liability for Kitch's finder's fee. ⁴ The trial court ordered a new trial on the claims of punitive damages and joint liability. The court refused to award prejudgment interest and ordered each party to bear his or her own costs.

I

This is the second time this case comes to our Court after a full trial. ⁵ In the first trial a jury found for defendants Kitch and Brown. We reversed and remanded for a new trial because of errors in the instructions on Kansas law as it applies to the fiduciary duties of directors and officers. Delano v. Kitch, 542 F.2d 550 (Delano I ), op. on motion for clarification, 554 F.2d 1004 (10th Cir. 1976). We there reviewed the many Kansas cases holding directors and officers to a very strict duty of loyalty both to the corporation and to its shareholders and concluded that if the Kansas Supreme Court were to decide the issue, it would find that Kitch and Brown owed fiduciary duties to minority shareholders.

After our opinion in Delano I and before the trial on remand, the Kansas Court of Appeals decided Ritchie v. McGrath, 1 Kan.App.2d 481, 571 P.2d 17 (1977). Although affirming that directors, officers, and majority shareholders owe strict fiduciary duties, the Kansas Court of Appeals held that majority shareholders do not breach that duty by selling their stock and concomitant control of the corporation, as long as the majority shareholders do not dominate, interfere with, or mislead other shareholders in exercising their rights to sell (hereinafter the control sales doctrine). Id. 571 P.2d at 23. Control of a corporation is not a corporate asset, and the majority shareholders are not required to share with the minority shareholders any premium received for control. Id. at 25. The court qualified its holding by noting that the sellers would have violated their fiduciary duties if they knew or should have known the purchasers were looters or were likely to mismanage the corporation, or if the sale involved fraud, misuse of confidential information, siphoning off of a business advantage belonging to the corporation or the shareholders in common, or wrongful appropriation of corporate assets. Id. at 22. See also Harman v. Willbern, 520 F.2d 1333, 1334 (10th Cir. 1975); McDaniel v. Painter, 418 F.2d 545, 547-48 (10th Cir. 1969). Ritchie did not disagree with Delano I but instead found it did not address the duty owed by majority stockholders. ⁶

During and after the retrial we ordered in Delano I, the trial court expressed concern that the law of the case we set forth in Delano I unduly restricted the retrial. The court concluded its posttrial order with the following:

"In trying this case a second time, the court attempted to conscientiously comply in every material respect with the circuit court opinion rendered as to the first trial of this case. See Delano v. Kitch, 542 F.2d 550 (10th Cir. 1976). In so doing, this court retains substantial misgivings as to whether a fair trial was accomplished.

"Issues of the utmost significance to the just resolution of this case, including whether the acquiescence of the plaintiff shareholders to the newspaper sale resulted from economic coercion and whether such acquiescence, if uncoerced, constituted ratification and barred recovery on plaintiffs' part, were decided on appeal as a matter of law on the basis of the first trial's record. The evidence at retrial was substantial and conflicting on these matters and, in the estimation of this court, raised issues of a type appropriate for jury disposition.

"Significant Kansas law was recorded in the decision of Ritchie v. McGrath (1 Kan.App.2d 481), 571 P.2d 17 (1977), rendered subsequent to Delano v. Kitch, supra, yet its impact was restricted at retrial by the specific law of this case as enunciated in the circuit court's opinion. Delano v. Kitch, supra.

"The court instructed the jury as it felt required to do in light of the mandate in this case, and if the verdicts rendered on retrial are appealed, the circuit court is invited to review whether the legitimate purview of the jury was to some extent preempted."

The trial court misunderstood the effect Delano I should have upon the issues before the court on remand. Normally, in conducting the...