Lum v. Hee Kwong, Hee Young, Hee Yee, Hee Hau, NG Sheong Hee, Hee Hop & L. Koon Chan, Ltd.

• Decision Date: 07 October 1952
• Docket Number: NO. 2802.,2802.
• Parties: YIN TAI LUM v. HEE KWONG, HEE YOUNG, HEE YEE, HEE HAU, NG SHEONG HEE, HEE HOP AND L. KOON CHAN, LIMITED, AND MARTIN PENCE, INTERVENOR.
• Court: Hawaii Supreme Court

39 Haw. 532

YIN TAI LUM

v.HEE KWONG, HEE YOUNG, HEE YEE, HEE HAU, NG SHEONG HEE, HEE HOP AND L. KOON CHAN, LIMITED, AND MARTIN PENCE, INTERVENOR.

NO. 2802.

Supreme Court of the Territory of Hawai‘i.

Argued May 23, 1952.

Decided October 7, 1952.

APPEAL FROM CIRCUIT JUDGE FIRST CIRCUIT, HON. G. R. CORBETT, JUDGE.

Syllabus by the Court

Where a minority stockholder of a corporation seeks to set aside the lease of its property to another corporation negotiated and made by boards of directors having members in common, the burden is upon those who would maintain the transaction to show its entire fairness and adequacy of consideration.

J. G. Anthony ( Robertson, Castle & Anthony on the briefs) for appellant.

R. G. Dodge ( Heen & Kai and A. H. Spitzer on the brief) for appellees.

J. R. Cades ( Smith, Wild, Beebe & Cades on the brief) for intervenor-appellee.

TOWSE, C. J., LE BARON AND STAINBACK, JJ.

OPINION OF THE COURT BY STAINBACK, J.

This is an appeal from the decree of a circuit judge sitting in equity dismissing a stockholder's suit brought by appellant against the appellee corporation, L. Koon Chan, Limited, and individual appellees to enjoin the dissipation of the assets of the corporation through the device of a lease of its real estate for an inadequate rental.

Appellant is a stockholder in the L. Koon Chan, Limited, owning 386 out of a total of 1600 shares outstanding; L. Koon Chan, Limited, is a corporation organized and existing under the laws of the Territory of Hawaii and owning certain premises situated at the corner of King and Nuuanu streets in Honolulu which, with its improvements thereon, constitutes the capital assets of the company; the individual appellees hold control of the stock of the company and control the board of directors of the corporation; they are all members of one family. In addition to holding the control of the L. Koon Chan, Limited, respondent, the individuals also control a second Hawaiian corporation, the American Drug Company, Limited, through stock ownership and membership on its board of directors. The Hee family owns exactly 51% of the stock of the L. Koon Chan, Limited, and 71%-plus of the American Drug Company, Limited.

It is alleged that the respondents are securing benefit and advantage to themselves by a lease of a portion of the premises to the American Drug Company, Limited, at an inadequate rental of $515 a month; that such sum is substantially less than could be readily obtained therefor, and it was therefore unfair to those stockholders of L. Koon Chan, Limited, who were not stockholders of American Drug Company, Limited; that such lease was fraudulently contrived by the respondents to secure benefit and advantage to themselves as stockholders in the American Drug Company, Limited, at the expense and to the injury of the petitioner through diminution of dividends and the depreciation of his shares in the L. Koon Chan, Limited.

The verified answer of the appellees states that the $515 is adequate and all that could be obtained unless all the premises (in addition to the premises occupied by the American Drug Company, those occupied by the Hawaii Sales Company) be leased as a whole.

In examining this case it will be necessary to review previous history to a certain extent. Prior to 1945 the American Drug Company was a tenant of L. Koon Chan, Limited, at a rental of $515 per month. In 1945 appellees took up a proposal to lease the American Drug Company area and the Hawaii Sales Company area to the American Drug Company for $1000 per month. Appellant protested that such rental was inadequate and he himself offered a higher rental, to wit $1200 per month. However, appellees went ahead and executed the lease to the American Drug Company over appellant's protests.

In July, 1945, appellant filed Equity Number 4531 to obtain a cancellation of this lease and for other relief; in the month of November, 1945, the directors of the L. Koon Chan, Limited, appellees herein, voted to terminate the lease which was the subject matter of Equity Number 4531 and on November 30, 1945, such lease was canceled and thereupon Equity Number 4531 was dismissed as involving a moot question. Upon cancellation of the lease involved in Equity Number 4531, the rental of the American Drug Company reverted to the previous $515 per month.

Thereafter, on April 5, 1946, the present equity suit was instituted. A verified answer was filed on June 27, 1946, as hereinbefore set forth. However, subsequent to the filing of the present case and the answer, and pending a hearing thereof, an outsider on September 30, 1946, made an offer to lease the American Drug Company premises for five years at $1200 per month but such offer was refused by the directors who instead made a lease to the American Drug Company for a period of five years at a rental of $800 per month plus 4% of the gross sales over $20,000 per month.

On November 4, 1946, Martin Pence, a stockholder of American Drug Company, filed an intervention alleging that such percentage of rental was excessive and unfair to the American Drug Company. Appellees answered the intervention suit of Pence stating that the existing percentage rental was adopted only as an interim measure pending the outcome of the litigation.

In November, 1946, and after the filing of this present suit, the American Drug Company offered to lease the present premises at a flat rental of $1000 per month for a period of ten years. In December, 1946, the directors discussed the offer of the American Drug Company but acceptance was deferred when appellant stated that the $1200 outsider offer was still open. On May 15, 1947, the directors voted to accept the offer of the American Drug Company of November 18, 1946, to rent the premises at $1000 per month with such lease to be for a period of five years only rather than for ten years.

On May 19, 1947, trial of the case began, the petitioner on the same day amending the prayer of the petition to read as follows: “That upon a hearing hereof being had, the said respondents be perpetually enjoined by order of this court from continuing such tenancy of American Drug Company, Limited, upon a monthly rental of less than $1500 net or if on a percentage lease basis at a monthly rental of not less than $600 plus 5% of the gross sales over $12,000 per month, or not less than such minimum rental as the court may find to be fair to the stockholders of L. Koon Chan, Limited.” No additional pleadings were filed by the respondent-appellees after this change of rental agreement whereby the rent was increased from $515 per month to $1000 subsequent to the institution of this suit as heretofore set out.

On April 5, 1947, the deposition of A. L. Moses, real-estate expert and witness for appellant, was taken.

Testimony was taken from two additional expert witnesses on behalf of the petitioner to the effect that a monthly rental of $1500 was a fair rate; Moses, who had previously testified by deposition, based his return upon a flat rate plus a percentage of the gross receipts of the business.

On May 27, 1947, at the conclusion of the appellant's case the appellees and the intervenor moved to dismiss. The chancellor took the matter under advisement and more than two and a half years later, to wit December 31, 1949, filed his decision granting the motion.

In his decision the chancellor reviewed the history of the litigation and then made his finding of law, holding that the appellant was bound to show, prima facie, that the rental was unfair, citing Ching v. Service Cold Stor., 35 Haw. 306, and contrasted this with the general rule that the burden of proof of fairness is on the directors occupying conflicting positions, stating: “The Court is well aware of the statements in the texts, and the line of cases supporting the same, to the effect that those who would support transactions between corporations having directors in common must show their fairness (13 Am. Juris. #1001; Fletcher Cyclopedia Corporations, Permanent Edition, Vol. 3, Sec. 974.) There is authority to the contrary, however, and, in this jurisdiction, the rule has been clearly announced that a stockholders' suit of this type must be dismissed if the petitioner has failed to establish a prima facie case, requiring the intervention of a court of equity.” The court thereafter quoted from the case of Ching v. Service Cold Stor., supra, as follows: “‘The petitioners alleged, and were bound to prove, prima facie, that eleven cents per quart, admittedly charged the corporation for milk by the respondent, T. F. Farm, was an extortionate and unreasonable price for said milk. Without such proof petitioners failed to sustain their bill.’ (Ching vs. Service Cold Storage Company, 35 Haw. 306 at 310).”

The chancellor analyzed the various stock holdings in the lessor and lessee corporations of the several parties and concluded that only three of the directors were more interested in the lessee than the lessor corporation, and since only three of these eight directors had a greater interest in the lessee corporation concluded: “the Court would require clear and convincing proof that they had fraudulently contrived an arrangement to achieve such gains.” The chancellor further stated that since the rental had been increased to $1000 per month since the institution of the suit but before the trial, $1000 per month was the rental which appellant was bound to show, prima facie, to be unfair.

After reviewing the evidence the chancellor stated that the appellant's case rested almost entirely on convincing the court that a percentage lease was the only fair type and further stated that from his own knowledge there were numerous cases of interlocking directorships in this jurisdiction, that there were numerous instances of dealings between such corporations, and that “The question whether every such transaction is, at the instance of a minority stockholder, and in the absence of clear and convincing...