DePinto v. Provident Security Life Insurance Company

• Decision Date: 20 November 1963
• Docket Number: No. 18245.,18245.
• Citation: 323 F.2d 826
• Parties: Angus J. DePINTO, Hjalmar B. Landoe, Francis I. Sabo and Edwin B. Pegram, Elmer W. Duhame, Appellants, v. PROVIDENT SECURITY LIFE INSURANCE COMPANY and John S. Gorsuch and Albert J. Doig, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

323 F.2d 826 (1963)

Angus J. DePINTO, Hjalmar B. Landoe, Francis I. Sabo and Edwin B. Pegram, Elmer W. Duhame, Appellants, v. PROVIDENT SECURITY LIFE INSURANCE COMPANY and John S. Gorsuch and Albert J. Doig, Appellees.

No. 18245.

United States Court of Appeals Ninth Circuit.

October 1, 1963.

Rehearing Denied November 20, 1963.

O'Connor, Anderson & Westover and John P. Otto, Phoenix, Ariz., for appellant Duhame.

George W. Botsford, T. W. Shumway, Guy C. Wilson and Donald Maxwell, Scottsdale, Ariz., for appellants Sabo and Pegram.

Joseph B. Gary, Bozeman, Mont., for appellant Landoe.

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

W. Lee McLane, Jr., and Nola McLane, Phoenix, Ariz., for appellees.

Before BARNES, HAMLEY and JERTBERG, Circuit Judges.

HAMLEY, Circuit Judge.

This suit, in the nature of a stockholder's derivative action, was commenced by John S. Gorsuch, then a stockholder of United Security Life (United), an Arizona stock insurance corporation. Named as defendants in the amended complaint were United, American Security Investment Co. (American), United Finance Corporation, Angus J. DePinto, Hjalmar B. Landoe, Francis I. Sabo, Edwin B. Pegram, Elmer W. Duhame, and the eight other individuals listed in the margin.¹

The theory of the suit was that, by reason of fraud, negligence and breach of fiduciary duty, unjust enrichment and conversion on the part of the personal defendants, assets of United were diverted from that corporation in connection with its purchase of 30,800 allegedly worthless shares of American.²

DePinto, Landoe, Sabo, Pegram, Duhame and several other defendants answered the amended complaint with general denials. DePinto also asserted affirmative defenses of laches and estoppel based upon the merger of United with Provident Security Life Insurance Co. (Provident), another Arizona insurance stock corporation, subsequent to the commencement of the action. Each of the five personal defendants named above also filed cross-claims against other defendants, and Sabo and Pegram filed a derivative cross-claim against several defendants, for the benefit of American.

After a trial with what the district court finally determined to be an advisory jury, the court entered a judgment in favor of United against all of the personal defendants, except Patrick J. Kelly, in amounts ranging from $308,000 to $314,794.19. Niesz, Pegram, Sabo, Landoe, Duhame, DePinto, Ballantyne and Croydon appealed.

We reversed, holding that a merger which United had consummated with Provident after the action had been commenced deprived Gorsuch of standing as a stockholder of United and deprived United of capacity to be sued, and standing as the real party in interest. In our decision, however, we suggested that the lawsuit could be saved by a reconstituting of parties, and remanded the cause to provide an opportunity for this to be done. Niesz v. Gorsuch, 9 Cir., 295 F.2d 909.³

Following the remand, Albert J. Doig, a citizen of California who was then a former stockholder of United and a present stockholder of Provident, filed an application for leave to intervene as a plaintiff. He also moved for an order joining Provident as a party defendant. Provident moved to intervene and to be substituted as plaintiff in place of Gorsuch. The court permitted Doig to intervene as a party plaintiff and Provident as an additional party plaintiff.

DePinto, Landoe, Sabo, Pegram, and Duhame filed answers to Doig's complaint in intervention and Provident's amended and supplemental complaint in intervention. Each asserted general denials of the essential allegations of these complaints. Duhame and DePinto also advanced certain affirmative defenses, and cross-complained against other defendants, except each other, for contribution. This was on the theory that their liability, if any, was vicarious and secondary to that of the other defendants. Several proposals to amend or supplement the original findings of fact were submitted. Doig moved that Provident be realigned as a party defendant and various other motions were made. A hearing was thereafter had at which evidence was received.

In a memorandum decision and order thereafter entered, the district court realigned Provident as a defendant, holding that it was hostile to the claims asserted on its behalf in this suit. The court dismissed the cross-claims of DePinto and Duhame on the ground that neither of them qualifies as having only secondary liability. The court re-adopted its original findings of fact and reaffirmed its original decision. It specifically held that DePinto, Landoe, Sabo, Pegram and Duhame had been guilty of gross negligence and that all of them except Landoe breached fiduciary duties in connection with the transaction involving the diversion of United's funds.

Supplemental findings of fact and conclusions were entered, together with a judgment in favor of Provident and against the same twelve personal defendants against which the original judgment had run, in amounts again ranging from $308,000 to $314,794.19. The five defendants last named above have appealed. Both Doig and Provident appear here as appellees, being represented in this court by the same counsel who have filed a joint brief on their behalf.⁴

The first question presented is whether the district court erred in permitting Doig to intervene as a party plaintiff in the remanded proceedings.

Doig sought intervention as a party plaintiff so that the remanded proceeding could continue, as it had been up until then, a secondary action by a shareholder of a corporation. Rule 23(b), Federal Rules of Civil Procedure, provides that the complaint of one who seeks to prosecute such an action shall set forth the efforts of the plaintiff to secure from the corporation the action he desires and the reasons for his failure to obtain such action, "or the reasons for not making such effort."

It is not alleged in Doig's complaint that any demand was made upon Provident to intervene as plaintiff.⁵ However, several reasons are stated therein for not making such effort.⁶ But appellants argued that these reasons are legally insufficient to warrant Doig's intervention as a party plaintiff.

The courts are in some disagreement as to what reasons will be deemed sufficient to excuse the failure to make a demand for corporate action.⁷ While Duhame and Doig cite cases which reflect their respective views as to this, we accept, as a fair statement of the rule, this expression in Cathedral Estates, Inc. v. Taft Realty Corp., 2 Cir., 228 F.2d 85, 88:

"* * * It is clear that under Rule 23(b) and its precedessors a demand need not be made on the directors or shareholders where such a demand would be `futile,\' `useless,\' or `unavailing,\' e. g., Delaware & Hudson Company v. Albany & Susquehanna Railroad Company, 1909, 213 U.S. 435, 29 S.Ct. 540, 53 L.Ed. 862; Hyams v. Calumet & Hecla Mining Co., 6 Cir., 1915, 221 F. 529, 538; Whittaker v. Brictson Mfg. Co., 8 Cir., 1930, 43 F.2d 485, 489; Dana v. Morgan, D.C.S.D.N.Y.1914, 219 F. 313, 314-15, affirmed 2 Cir., 1916, 232 F. 85; Cohen v. Industrial Finance Corporation, D.C.S.D.N.Y. 1942, 44 F.Supp. 491, 495; 3 Moore\'s Federal Practice 3525-26. And where the directors and controlling shareholders are antagonistic, adversely interested, or involved in the transaction attacked, a demand on them is presumptively futile and need not be made. * * *"

In determining whether circumstances of this kind exist in a particular case, the normal procedure is to look solely to the allegations of the complaint. But in this case, before acting upon Doig's motion to intervene, the district court received evidence in the form of testimony and exhibits which it considered in determining whether a demand upon Provident to intervene would have been futile.

The court found, on the basis of this evidence and the whole record that counsel for Provident had certain conflicts of interest, there was belated and ineffective concern of Provident in the litigation, a substantial part of Provident's complaint in intervention had been prepared by counsel for an adverse party, and there had been included in this complaint by Provident allegations tending to exculpate an adverse party. In view of these facts the court indicated that it was not satisfied that Provident's application was made in good faith with the bona fide intent and purpose to continue vigorous prosecution of the litigation for the use and benefit of Provident stockholders.

Considering the complaint as amended to conform to the proof received on this question we think it amply sustains the conclusions drawn by the district court and sufficiently demonstrates that a demand upon Provident to prosecute the case effectively would have been futile. We therefore hold that the court did not err in permitting Doig to intervene as a party plaintiff under Rule 23(b).⁸

The next question presented is whether the action is barred by Arizona statutes of limitations. In this connection reliance is placed on A.R.S. § 12-542, providing a two-year limitation, and upon A.R.S. § 12-550, providing a four-year limitation.⁹

The claim accrued on October 18, 1957, when, it is alleged, $314,794.19 in the funds of United were diverted. The original complaint was filed by Gorsuch against United on November 4, 1958, well within two years of the accrual of the claim. But appellant calls attention to the fact that when the merger took place in the spring of 1959, United went out of existence. The Doig and Provident complaints in intervention were not filed until March 8, 1962.¹⁰

It is argued from these facts that Provident's complaint in intervention introduced a new claim not comprehended within Gorsuch's original complaint, and that the limitations applicable as against Provident run back to the time when the claim originally accrued. Under this view, the action is barred under either the two-...