DePinto v. Provident Security Life Insurance Company

• Decision Date: 29 March 1967
• Docket Number: No. 20553.,20553.
• Parties: Angus J. DePINTO, Appellant, and James P. Donohue, as Trustee in Bankruptcy for the Estate of Angus J. DePinto, Intervenor-Appellant, v. PROVIDENT SECURITY LIFE INSURANCE COMPANY, and Albert J. Doig, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

374 F.2d 37 (1967)

Angus J. DePINTO, Appellant, and James P. Donohue, as Trustee in Bankruptcy for the Estate of Angus J. DePinto, Intervenor-Appellant, v. PROVIDENT SECURITY LIFE INSURANCE COMPANY, and Albert J. Doig, Appellees.

No. 20553.

United States Court of Appeals Ninth Circuit.

February 24, 1967.

Rehearing Denied March 29, 1967.

Herbert Mallamo, Evans, Kitchel & Jenckes, Joseph S. Jenckes, Jr., Phoenix, Ariz., for appellant, DePinto.

Anthony O. Jones and Joseph K. Brinig, Phoenix, Ariz., for intervenor, Donohue.

McLane & McLane, Wm. Lee McLane, Nola McLane, Thaddeus Rojek, Washington, D. C., Harold Kohn, Dilworth, Paxson, Kalish, Kohn & Dilks, Harold E. Kohn, Philadelphia, Pa., Elsing & Crable, Phoenix, Ariz., for appellees.

Before BARNES, HAMLEY and JERTBERG, Circuit Judges.

HAMLEY, Circuit Judge:

This stockholder's derivative action, based on diversity of citizenship, was originally brought on behalf of United Security Life (United), an Arizona stock insurance corporation, by John S. Gorsuch, a citizen of Ohio. The defendants were Angus J. DePinto, Edwin B. Pegram, Francis I. Sabo, Hjalmar B. Landoe, Elmer W. Duhame, together with eight other personal defendants and three companies in addition to United. With regard to DePinto and certain other defendants, damages in the sum of $447,633.70 were sought, including an item for $314,794.19, based on a transaction which occurred on October 18, 1957, to be described below.

After commencement of the action, but prior to trial, United merged with Provident Security Life Insurance Company (Provident). However, neither Provident nor a stockholder of that company was made a party to the action. The case was tried to a jury which returned a general verdict for plaintiffs in the sum of $20,000 against Pegram, Sabo, Landoe and Vernon E. Niesz. The jury also returned special verdicts in which it exonerated DePinto and Duhame of liability. As to them the jury found, among other things, that they had not breached any then existing fiduciary duty to United nor, as directors of United, acted in a negligent manner, proximately causing loss to United with respect to the transfer of the assets in question.

The trial court considered the verdicts to be advisory only. The court determined that the verdicts were not supported by the evidence, issued its own findings of fact and conclusions of law, and entered a joint and several judgment in favor of United against twelve of the personal defendants, in amounts ranging from $308,000 to $314,794.19. The award against DePinto was for $314,794.19. In the alternative, and on the assumption that the defendants were entitled to a jury trial, the trial court granted plaintiffs' motions for directed verdicts in the same amounts as it had allowed on the basis of its own findings of fact.

DePinto, Pegram, Sabo, Landoe and Duhame, effectuated appeals to this court. We reversed and remanded for further proceedings on the ground that, by reason of the merger of United into Provident, Gorsuch, as a stockholder in United, lost his capacity to maintain this derivative action, and United lost its capacity to be sued and its capacity as the real party in interest, to obtain a judgment. Niesz v. Gorsuch, 9 Cir., 295 F.2d 909 (1961).

Upon remand, Provident was joined as a plaintiff and was realigned by the trial court as a defendant. The trial court allowed Albert J. Doig, a former stockholder of United and a then-existing stockholder of Provident, to intervene as a party plaintiff. Provident and Doig filed complaints in intervention in which, on behalf of Provident, they sought damages against DePinto, Pegram, Sabo, Landoe and Duhame and several others, in the amount of $314,794.19. The allegations in support of these claims were generally similar to those of the amended complaint and pretrial order in the original Gorsuch suit. The five named defendants filed answers joining issue on the allegations of the complaint and raising certain affirmative defenses, which plaintiffs contested. No further testimony was taken on the merits of the controversy.

The trial court re-adopted its original findings of fact and reaffirmed its original decision. The court specifically held that DePinto, Landoe, Sabo, Pegram and Duhame had been guilty of gross negligence and that all of them, except Landoe, had breached fiduciary duties in connection with the diversion of United's funds. Supplemental findings and conclusions of law were entered, together with a judgment in favor of Provident and against the same twelve personal defendants, in the same amounts as in the case of the original judgment. Alternatively, as in the case of the original judgment, this second judgment also rested on directed verdicts which were entered in favor of plaintiff.

DePinto, Landoe, Sabo, Pegram and Duhame appealed. We again reversed and remanded for a new trial, holding that the defendants were entitled to a jury trial, and that, considering the alternative basis for the judgment, the Seventh Amendment forbids an award of damages in excess of a jury verdict, not consented to by the defendants. DePinto v. Provident Security Life Insurance Company, 9 Cir., 323 F.2d 826 (1963).

Following the second remand, there were three important developments before the case proceeded to another jury trial. One of these was the entry of a comprehensive pretrial order which superseded the pleadings. Among other things, this order contains a lengthy statement of admitted facts, a detailed list of the contentions of the respective parties,¹ and a restatement of plaintiffs' claims against the various parties. With regard to DePinto and several other named defendants, a total claim of $553,353.63 was asserted, itemized as follows:

(1) $177,863.84 for damages sustained by United between June 30, 1956 and October 18, 1957;

(2) $314,794.19 for damages sustained by United on October 18, 1957, by reason of a transfer of assets as described below; and

(3) $60,695.60 for damages sustained by United between October 19, 1957 and June, 1959.

A second pretrial development was the agreement by executors of the estate of Duhame, deceased, to pay Provident the sum of $100,000 in consideration for a covenant not to sue. The trial court ordered that this sum be allocated to the $177,863.84 claim referred to above, and withdrew this claim from the case. The estate of Duhame was thereby dropped as a defendant. The third pretrial development was the action of the trial court, at the request of plaintiff Doig, and over the objection of DePinto, in severing the cause as to the remaining defendants, and ordering that the case proceed to trial against DePinto as the sole defendant.

It would appear, from an examination of the record, that the $60,695.60 claim against DePinto was also dropped before the case reached the jury. This is also indicated by the fact that, in its instructions to the jury, the trial court made reference only to the $314,794.19 claim. The jury returned a verdict in favor of Provident and against DePinto in that sum and on June 28, 1965, judgment was entered on the verdict. DePinto then took the present appeal.²

Subsequent to the institution of this appeal, DePinto was adjudicated bankrupt and James P. Donohue was appointed as Trustee in Bankruptcy. An order was subsequently entered in this court permitting the Trustee to intervene in this appeal. DePinto and the Trustee have identical interests on this appeal, and have filed joint briefs. In referring, below, to DePinto's contentions and arguments, we have also included the Trustee's identical contentions and arguments.

The damages awarded by the trial court were intended to reimburse Provident for the loss sustained by its predecessor, United, in connection with a transfer of assets from United to American Security Investment Company (American), in exchange for 30,800 shares of American's assertedly worthless shares. DePinto was a director of United until immediately prior to the transfer in question.

He contends on this appeal that the undisputed evidence discloses that any loss which may have been sustained by United as the result of its exchange of assets for stock in American was not proximately caused or contributed to by any act or omission of DePinto as a director of United. Accordingly, he argues that the trial court erred in denying his motion for a directed verdict, made at the close of all the evidence, and his motion for judgment notwithstanding the verdict.

We now state the salient facts as the jury could have found them on the basis of the evidence received at the trial.

In 1947, DePinto, a practicing physician with substantial investment interests, met James E. Kelly, one of the defendants in the original Gorsuch action. The two became friends and business associates. DePinto worked with and assisted Kelly in promoting Life Underwriters, Inc. (Underwriters), which was formed on June 16, 1952. Kelly was the president and DePinto a director of that company.

On November 21, 1952, Kelly organized United and held office as a director and officer of United from its inception until July, 1956. Although DePinto was not involved in organizing United, he soon learned that Underwriters had become the exclusive operating management and sales agent for United.

Before DePinto became officially connected with United, he attended a March 29, 1955 meeting of its directors, where he heard complaints about Kelly's management of United. On October 14, 1955, DePinto, responding to a request by Kelly, became a director of United.

He was not, however, an active director. At no time during his term as a director of United did he make a telephone call to United's office to obtain information concerning that company's financial condition. DePinto was not aware that United sustained losses in 1955, 1956, and up to October 18, 1957. He did not know who were the officers of United from July 18, 1956 to October 18, 1957.

Although Kelly...