Hilton v. Mumaw
| Decision Date | 04 August 1975 |
| Docket Number | Nos. 73-1077,73-1131,s. 73-1077 |
| Citation | 522 F.2d 588 |
| Parties | Henry HILTON, Plaintiff-Appellant, v. Richard Henry MUMAW and Bethel Mumaw, his wife and the marital community composed thereof, Defendants-Appellees. Anthony HILTON, Plaintiff-Appellant, v. Richard Henry MUMAW and Bethel Mumaw, his wife and the marital community composed thereof, Defendants-Appellees. Anthony HILTON, Plaintiff-Appellee, v. Richard Henry MUMAW and Bethel Mumaw, his wife and the marital community composed thereof, Defendants-Appellants. Anthony HILTON, Plaintiff-Appellee, v. Richard Henry MUMAW and Bethel Mumaw, his wife and the marital community composed thereof, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John T. Piper (argued), Seattle, Wash., for plaintiff-appellant.
Stanley J. Krause (argued), Aberdeen, Wash., for defendants-appellees.
Before DUNIWAY, INGRAHAM * and WALLACE, Circuit Judges.
Anthony Hilton and Henry Hilton (Hiltons) brought this action against Henry and Bethel Mumaw (Mumaws), 1 alleging claims of common law and equitable fraud and violations of Rev.Code Wash. § 21.20.010 and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The alleged fraud was perpetrated in connection with contracts for the purchase of stock of Cohassett Beach Telephone Co. (Cohassett). Jurisdiction in the district court was founded upon diversity of citizenship.
After the Hiltons presented their case-in-chief, the Mumaws moved for directed verdict. The district court granted the motion, specifying two reasons: first, the Hiltons had presented insufficient evidence on each of their theories of recovery; and second, their claims were barred by the statute of limitations. Hiltons appealed from the directed verdict and Mumaws then cross-appealed from the earlier denial of their motion for summary judgment. We affirm in part and reverse in part the directed verdict. We affirm in part the denial of summary judgment and we dismiss in part the cross-appeal.
The facts, taken in a light most favorable to Hiltons, show that they are grandsons and joint one-third heirs of W. C. Mumaw, who died in 1969. Mumaws are husband and wife. Henry Mumaw is the son of W. C. Mumaw and an uncle of the Hiltons. He is also an heir of W. C. Mumaw and the executor of his estate. Hiltons allege that Mumaws defrauded W. C. Mumaw in contracting in 1957, 1958 and 1959 to buy all his stock in Cohassett. They seek damages in the amount of their share of the losses suffered by W. C. Mumaw and an accounting, imposition of a constructive trust and an order requiring conveyance to them of their share of the proceeds from the sale of such stock by Mumaws. Thus, Hiltons bring this action solely as joint one-third heirs of whatever claims W. C. Mumaw might have possessed against Mumaws.
W. C. Mumaw co-founded Cohassett in 1911. He bought out his associate in 1941 and managed the company by himself until 1949. Mumaws' active involvement in the business began in 1946, when they both worked part-time for Cohassett. In 1949, Henry Mumaw became a full-time employee and by 1952, he had become manager of the company, replacing W. C. Mumaw. Also in that year, Bethel Mumaw took over bookkeeping relevant to loans from the Rural Electrification Administration (REA), which were to prove crucial to Cohassett's growth. By 1955, she had taken over all company bookkeeping from W. C. Mumaw.
Cohassett undertook a major expansion program approximately the same time that Mumaws entered management. As late as 1946, the company served only 150 subscribers. In 1952, it began to expand and improve its services, relying upon REA loans payable over 35 years at 2% Interest. Between 1952 and 1957, Cohassett's operating revenues more than doubled, and by 1964, they had increased fivefold. Mumaws were almost entirely responsible for obtaining REA financing and overseeing Cohassett's growth. During this same period, for reasons that we need not detail, small telephone companies like Cohassett became very attractive investments for telephone holding companies. During the trial, expert testimony placed the value of Cohassett in 1957, when the first of the disputed contracts were signed, at $300,000.
When the 1957 contract was signed, Henry Mumaw was a director and president of Cohassett; W. C. Mumaw was a director and secretary; and his wife, Myrtle Mumaw, was the remaining director and vice-president. Together with his wife, W. C. Mumaw owned 190 of the 200 outstanding shares of Cohassett. Henry Mumaw owned 10 shares.
The contracts giving rise to this action were signed by Mumaws and W. C. Mumaw in 1957, 1958 and 1959. The 1957 contract is the most important. It provides for the sale to Mumaws of all Cohassett stock held by W. C. Mumaw and his wife. The purchase price was.$19,000, payable over 32 years at $50 per month without interest. Discounted at 6%, the value of the promise to pay was slightly less than $8,500 in 1957. Title passed as the payments were made and Mumaws received voting control upon W. C. Mumaw's death. Mumaws could accelerate payments with W. C. Mumaw's written consent.
The 1958 contract contained W. C. Mumaw's written consent to accelerate payments.
The 1959 contract was the second half of a two-part transaction. In the first half, W. C. Mumaw surrendered $8,000 of notes payable by Cohassett in 1962 and accruing interest at 6%. In exchange, Cohassett issued to him 80 shares of stock. With the 1959 contract, W. C. Mumaw sold his 80 shares of stock to Mumaws for an $8,000 note payable by Mumaws and accruing interest at 6%, but only after the 1957 contract had been paid off, or as much as 29 years later. Assuming that payments were not begun until that time, the value of the obligation discounted at 6% Was $940 at the time the contract was made.
Mumaws paid installments under the 1957 contract at $50 per month until 1963. They sharply increased their payments in the years 1963 to 1966, and in 1967, bought the remaining 60% Interest of W. C. Mumaw for $16,150. They then sold all their Cohassett stock to Continental Telephone Corp., receiving $1,236,000 and realizing a profit in excess of $1,200,000. Hiltons learned of the price Mumaws had obtained from Continental Telephone Corp. in December, 1970. They brought this action four months later.
W. C. Mumaw died in 1969, after entering a rest home in 1963 when he could no longer care for himself. Probate of his estate was completed in February, 1970.
Mumaws argue that state probate proceedings bar this action on three grounds: first, federal courts lack jurisdiction to "restore" corpus to the estate of a decedent; second, the 1970 decree closing W. C. Mumaw's estate and the 1958 decree closing the estate of his wife bar this action by res judicata; and third, the one-year limitation applicable to certain actions by heirs against administrators bars this action. We reject each of these arguments.
Mumaws' jurisdiction argument is governed by Markham v. Allen, 326 U.S. 490, 66 S.Ct. 296 at 298, 90 L.Ed. 256 (1946):
(F)ederal courts of equity have jurisdiction to entertain suits "in favor of creditors, legatees and heirs" and other claimants against a decedent's estate "to establish their claims" so long as the federal court does not interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court.
Id. at 494 (citations omitted). The evil to be avoided is federal interference with state probate proceedings. See H. Hart & H. Wechsler, The Federal Courts and the Federal System 1186-87 (2d ed. 1973). The present action poses no such threat. 2
The probate of W. C. Mumaw's estate was completed and Hilton's joint one-third share fixed before this action was filed. Hiltons concede that they are entitled to relief only to the extent of their rights under the probate decree closing W. C. Mumaw's estate. The only question to be decided is whether recovery may be had upon claims that, in the first instance, are those of the estate. Federal adjudication of this question interferes with state probate proceedings no more than federal adjudication of claims against the estate, an exercise of federal jurisdiction that is clearly proper.
We are aware of no likely conflict between state and federal proceedings and Mumaws have brought none to our attention. Should Hiltons succeed in this action, and reopening of an estate become necessary, See In re Estate of Christianson, 16 Wash.2d 48, 53, 132 P.2d 368, 371 (1942) (dictum), the district court should restrict its relief to avoid interference with pending or imminent probate proceedings.
Divorced from any basis in policy, Mumaws' argument reduces to the assertion that federal courts lack power in all circumstances to determine claims to "restore" an estate, either asserted directly by an executor or indirectly by an heir. They cite two decisions to support this broad rule: Princess Lida v. Thompson, 305 U.S. 456, 59 S.Ct. 275, 83 L.Ed. 285 (1939), and Smith v. Smith, 272 F.Supp. 397 (W.D.Va.1967). The first is not in point. Princess Lida holds only that federal courts lack jurisdiction to supervise the administration of an Inter vivos trust. It restricts federal jurisdiction over "restoration" of trust assets only to the extent that restoration of assets serves as a remedy against trustees engaged in mismanagement. 305 U.S. at 462-68, 59 S.Ct. 275, 83 L.Ed. 285. This holding is an obvious corollary to the principle that federal courts lack jurisdiction to supervise trust administration. The second decision is also distinguishable. In Smith v. Smith, an heir brought an action for an accounting against the executor of an estate in federal court after filing an action for similar relief in state court. 272 F.Supp. at 398-99. The risk of inconsistent adjudications and inconsistent remedies was...
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