Irving Trust Co. v. Deutsch

• Decision Date: 30 October 1934
• Docket Number: No. 307.,307.
• Citation: 73 F.2d 121
• Parties: IRVING TRUST CO. v. DEUTSCH et al.
• Court: U.S. Court of Appeals — Second Circuit

73 F.2d 121 (1934)

IRVING TRUST CO. v. DEUTSCH et al.

No. 307.

Circuit Court of Appeals, Second Circuit.

September 17, 1934.

Rehearing Denied October 30, 1934.

Ernst, Gale, Bernays & Falk, of New York City (Murray C. Bernays, George G. Ernst, Emily C. Holt, and Abraham Friedman, all of New York City, of counsel), for appellant.

Strauss & Abrahams, of New York City (Jerome A. Strauss, of New York City, of counsel), for appellee Deutsch.

Rushmore, Bisbee & Stern, of New York City (Eldon Bisbee, H. G. Pickering, Stuart, H. Steinbrink, and Randolph H. Guthrie, all of New York City, of counsel), for appellee Biddle.

White & Case, of New York City (Lowell Wadmond, of New York City, of counsel), for appellee Hammond.

Wagner, Quillinan & Rifkind, of New York City (Simon H. Rifkind and Sidney R. Nussenfeld, both of New York City, of counsel), for appellee Stein.

Hays, St. John, Abramson & Schulman, of New York City (John Schulman, of New York City, of counsel), for appellee Mendes.

Edwin L. Garvin, of New York City, for appellees Bell and V. C. Bell & Co., Inc.

Martin Conboy, of New York City, for appellees Reynolds and W. R. Reynolds & Co.

Lorenz & Lorenz, of New York City (Keith Lorenz, of New York City, of counsel), for appellee, on rehearing.

Before MANTON, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

A very complete statement of the facts may be found in the opinion of the District Court which by the terms of the decree appealed from stands as the findings of facts and the conclusions of law. For an understanding of the main issues raised by the appeal, the following summary will serve as an adequate introduction:

The plaintiff is the trustee in bankruptcy of a Delaware corporation, Sonora Products Corporation of America, whose corporate name was formerly Acoustic Products Company. For convenience the bankrupt will be referred to as Acoustic. It was chartered in 1927 to deal in phonographs, radios, and similar apparatus. In March, 1928, it was essential for Acoustic to acquire rights to manufacture under basic patents in the radio art, and it was believed that such rights might be acquired through the De Forest Radio Company, which was then in receivership in the Chancery Court of New Jersey. The defendant Bell was employed by Acoustic to negotiate with the defendants Reynolds and W. R. Reynolds & Co., who were in control of the De Forest situation by reason of a contract under which they expected to purchase 600,000 shares of stock at 50 cents per share, lift the receivership, and reorganize the De Forest Company. Although Bell's negotiations did not produce an arrangement of the sort originally contemplated by Acoustic, he did succeed, with the assistance of the defendant Biddle, in obtaining from Reynolds & Co. an offer of a one-third participation in the purchase of the 600,000 shares of De Forest stock; that is, 200,000 shares for $100,000 cash. The offer was directed to Messrs. Biddle and Bell, and provided:

"Your signatures on a signed copy hereof will constitute an agreement between us which will be subject to the approval of your board of Directors not later than April 9th 1928."

It also provided that, if the stock was taken, Acoustic's nominees should hold four of the nine places on the De Forest Company's directorate and that Acoustic should have the right to enter into a contract, subject to the approval of the De Forest board of directors, "to handle the managing, operating and selling of the De Forest products." This offer was presented to a meeting of the board of directors of Acoustic on April 3, 1928, and a resolution was passed instructing its president, the defendant Deutsch, to endeavor to obtain sufficient funds to enable Acoustic to carry out its obligations in the event of its final acceptance of the offer. On April 9th, at an adjourned meeting of the board, Mr. Deutsch reported his inability to procure the necessary funds for Acoustic, and announced that "several individuals were desirous of accepting said proposition on their own behalf" and were willing to make arrangements so as to extend to Acoustic the benefits contemplated by the acquisition of the stock. Thereupon a resolution was adopted approving Mr. Biddle's acceptance on behalf of Acoustic and directing the proper officers to notify its acceptance to Reynolds & Co. On April 10th, Mr. Deutsch telegraphed Mr. Biddle of this action, with the explanation that it was understood by the directors that, if Acoustic could not finance the purchase when time for payment came, the directors would individually acquire the stock. Partial payment for the 200,000 shares was made on April 24th by the personal checks of Biddle, Deutsch, and Hammond, for which Reynolds & Co. gave a receipt to Acoustic. The balance was paid on May 25, 1928, at which time it was explained to Reynolds that the stock was being purchased by individuals since Acoustic was without available funds. He acquiesced and caused the stock certificates to be issued to Messrs. Bell, Biddle, Deutsch, Hammond, Stein, and White. For convenience these gentlemen are referred to as the Biddle syndicate. The defendant White was dismissed out of the case on an interlocutory motion for lack of proper venue. Mr. Bell turned over some of his shares to the defendants Martin and V. C. Bell & Co., formerly known as Mendes & Co. An active market for De Forest shares was created on the Curb Exchange, and the defendants made large profits in selling their shares. The bill of complaint seeks to hold the defendants jointly and severally to account for such profits. Jurisdiction of the District Court is founded on diverse citizenship.

The theory of the suit is that a fiduciary may make no profit for himself out of a violation of duty to his cestui, even though he risk his own funds in the venture, and that any one who assists in the fiduciary's dereliction is likewise liable to account for the profit so made. See Jackson v. Smith, 254 U. S. 586, 41 S. Ct. 200, 65 L. Ed. 418; Wing v. Dillingham, 239 F. 54 (C. C. A. 5); Trice v. Comstock, 121 F. 620, 61 L. R. A. 176 (C. C. A. 8); Wendt v. Fischer, 243 N. Y. 439, 154 N. E. 303; Blake v. Buffalo Creek R. Co., 56 N. Y. 485; Dutton v. Willner, 52 N. Y. 312; Farwell v. Pyle-National, etc., Co., 289 Ill. 157, 124 N. E. 449, 10 A. L. R. 363; Higgins v. Lansingh, 154 Ill. 301, 40 N. E. 362; Trenton Banking Co. v. McKelway, 8 N. J. Eq. 84. Concretely, the argument is that members of the Biddle syndicate, three of whom, Messrs. Biddle, Deutsch, and Hammond, were directors and one, Mr. Bell, its agent in procuring the contract, appropriated to themselves Acoustic's rights under its contract with Reynolds & Co. for 200,000 shares of De Forest stock, when as fiduciaries they were obligated to preserve those rights for Acoustic and were forbidden to take a position where personal interest would conflict with the interest of their principal. The other defendants are claimed to have assisted in their dereliction. In answer to this argument, the defendants do not deny the principle, but dispute its applicability to the facts.

First, it is argued that no contract was created between Acoustic and Reynolds & Co. because the latter's offer did not run to Acoustic but to Bell and Biddle as individuals. This contention deserves mention merely in order to show that it has not been overlooked. It is contradicted not only by the provision requiring the approval of the Acoustic's board of directors, but also by the resolution of April 9th, the subsequent conduct and correspondence of the parties, and the direct testimony of Mr. Biddle whose negotiations helped to produce the offer.

It is next contended that the contract was ultra vires Acoustic, and hence its directors and officers violated no fiduciary duty in taking stock which the corporation could not legally acquire. See Case v. Kelly, 133 U. S. 21, 10 S. Ct. 216, 33 L. Ed. 513; Lancaster Loose Leaf Tobacco Co. v. Robinson, 199 Ky. 313, 250 S. W. 997. Without pausing to determine the soundness of the asserted conclusion, we pass to a consideration of the premise. Access to the De Forest patents was concededly essential to Acoustic. It was thought that access to them could be obtained by buying a minority stock interest because four of the De Forest Company's nine directors were to be named by Acoustic and it was to have the opportunity to make a contract to manage the De Forest Company. It is true that the terms of such contract were yet to be drafted and submitted to the De Forest board of directors, but, with four directors committed to it, the prospect of getting the contract seemed bright. The management contract, carrying access to the patents, was a legitimate corporate purpose. So was stock ownership in the De Forest Company as a going concern. By Acoustic's investment, together with that of Reynolds & Co., the receivership was to be lifted and De Forest restored to the position of a going concern. No stock market operation was contemplated by Acoustic when it accepted the offer; that was a later development arranged between Reynolds and the Biddle syndicate on May 25th. In the light of these facts, we think the purchase was within the corporation's charter powers. Cf. Edwards v. International Pavement Co., 227 Mass. 206, 116 N. E. 266.

The main defense asserted is that Acoustic by reason of its financial straits had neither the funds nor the credit to make the purchase and that the directors honestly believed that by buying the stock for themselves they could give Acoustic the advantage of access to the De Forest patents, while at the same time taking a stock speculation for their own benefit. In support of the proposition that the prohibition against corporate officers acting on their own behalf is removed if the corporation is itself financially unable to enter into the transaction, the appellees cite Hannerty v. Standard Theater Co., 109 Mo. 297, 19 S. W. 82; Grand Amusement...