Mansfield Hardwood Lumber Company v. Johnson

• Decision Date: 16 June 1959
• Docket Number: No. 17299.,17299.
• Parties: MANSFIELD HARDWOOD LUMBER COMPANY, Appellant, v. Hattie A. JOHNSON et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

268 F.2d 317 (1959)

MANSFIELD HARDWOOD LUMBER COMPANY, Appellant, v. Hattie A. JOHNSON et al., Appellees.

No. 17299.

United States Court of Appeals Fifth Circuit.

June 16, 1959.

Charles D. Egan, Benjamin C. King, Sidney M. Cook, Frank M. Cook, Shreveport, La., for appellant.

John M. Madison, Vernon W. Woods, Shreveport, La., Ned A. Stewart, Texarkana, Ark., J. W. Patton, Jr., Lewisville, Ark., for appellee.

Before RIVES, TUTTLE and BROWN, Circuit Judges.

PER CURIAM.

Interpreting the opinion as being based on a breach of fiduciary relationship owed by appellant's officers and directors and majority stockholders to the appellees as minority stockholders, appellant insists that such a decision must fail in law because: (1) the existence vel non of such a fiduciary relationship must be determined by the laws of the state of incorporation, viz., Delaware, which imposes no such fiduciary relationship; (2) the Civil Law of Louisiana prohibits the imposition of the remedy of "constructive trust" or "equitable lien" on real or personal property; and (3) Article 1847, LSA-Civil Code,¹ requires that there be an element of "intent" or "design" for an action to be based on fraud; and liability predicated on "constructive fraud" is unknown in Louisiana Civil Law.

Upon further consideration, we agree that the opinion is at least misleading, particularly to Louisiana jurists who practice under that State's unique concepts of equity jurisprudence. We will attempt to clarify and correct the basis for our holding.

We initially expressed doubt that the defendant's officers were guilty of fraud per se because of our doubt that the naked "intent to deceive" element was adequately established. We next held that a "growing minority" of jurisdictions, including Louisiana, recognize a fiduciary relationship or a position of confidence existing between the directors and officers of a corporation and the individual stockholders, especially when the former purchase shares of stock from the latter. And we held that, when this fiduciary duty is violated, it is

"* * * immaterial whether its breach is described as constructive fraud, unjust enrichment, fraudulent breach of trust, breach of fiduciary obligation, gross negligence, or otherwise, and whether the remedy is given by a constructive trust, restitution, or accounting. These are all relative terms describing broad equitable concepts. The standard of a fiduciary\'s duty to his beneficiary, depending upon the instant relation and the facts of the particular case, lies somewhere between simple negligence and willful misconduct or fraud with the intent to deceive. The actual intent to deceive is not required where one party is so placed in such an advantageous position to the other. Actual fraud will afford redress in the absence of the special relationship."

We concluded by holding that Louisiana has long recognized the fiduciary relationship in situations like the present case, and that these Louisiana decisions "fully answer appellant's contentions that Louisiana's limited equity jurisprudence will prevent our imposition of a `constructive trust' or `equitable lien' or `right of restitution' for the breach of the fiduciary duty owed to the plaintiffs by defendant's officers." Then, we listed the ways in which this confidential relationship was violated.

We believe that all of what was said above is good law, both in common-law States and in Louisiana, except for the possible misleading construction which could be placed on the statements which describe the breach of this duty and the remedy in broad equitable concepts as applying literally to Louisiana law. We agree with appellant that the Louisiana Civil Law prohibits the imposition of a constructive trust or equitable lien on property.²

We stated that a "growing minority" of jurisdictions recognize the existence of a fiduciary relationship inuring from the officers or directors or majority stockholders to the individual or minority stockholders, particularly concerning the purchase of stock from a shareholder.³ The next question presented is which law should determine this relationship — that of Delaware or Louisiana?

It is well settled that a federal court in a diversity case must apply the conflict-of-laws rule of the state in which it sits.⁴ While Louisiana conflict-of-laws is silent on which law determines whether such a fiduciary relationship exists in a foreign corporation, its various conflict-of-laws rules are generally the same as in other states.⁵ Therefore, we must look to the general law.

A number of cases have held that the conflict-of-laws rules of the forum require that court to refer to the "law of the State of incorporation to determine the extent and nature of relationship between corporation and stockholder, corporate officer or director and stockholder and between stockholders inter sese,"⁶ while the law of the place of the wrong determines the quantum of the breach of duty.⁷ Apparently, Delaware imposes no fiduciary duty on the part of officers or directors or majority stockholders in buying stock from the minority or individual stockholders.⁸ In strict logic, a strong case is made that, if this Court's opinion is based exclusively on the breach of fiduciary obligations owed by directors and majority stockholders of a foreign corporation to minority stockholders, and if literal compliance is given to those decisions holding that the State of incorporation sets the standards for all personal relationships between persons connected with the corporation, the opinion is faulty.

Those decisions (listed in footnote 6, supra) are, however, in our opinion, either inapplicable or unsound where the only contact point with the incorporating state is the naked fact of incorporation, and where all other contact points, such as, residence of parties and actors, situs of property, lex loci delicti or contractus, place where corporation is conducting its only or principal place of business, et cetera, are found in another jurisdiction. Certainly, in such a situation the charter of the corporation and even non-repugnant statutory laws of the state of incorporation limiting corporate powers should govern the internal affairs of the corporation.⁹ When, however, the situation is such as here, where neither the charter nor the statutory laws of the incorporating state are applicable, and all contact points are in the forum, we believe that the laws of the forum should govern.¹⁰

This was precisely the situation in Blazer v. Black, supra, note 6, 196 F.2d 139, involving a suit by a former stockholder of a dissolved corporation against its former president for damages for the alleged fraudulent conversion of the stockholders' stock before dissolution. The corporation was organized under the laws of Illinois but all other contacts were in Kansas. The court reversed the lower court's judgment for defendant, holding that, under the minority view of Kansas, the director was a fiduciary when negotiating with a stockholder for purchases of shares. The court did not discuss the law of Illinois.

In the case of Mayflower Hotel Stockholders Protective Committee v. Mayflower Hotel Corp., supra, note 6, 193 F.2d 666, the District of Columbia Circuit had held in a prior appeal (84 U.S. App.D.C. 275, 173 F.2d 416) that the directors or majority stockholders occupy a fiduciary relation toward the minority stockholders when selling stock control, relying on Supreme Court decisions which arose under federal statutes or which were diversity cases prior to Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188. On the second appeal, after the defendants presented the question that Delaware law should control such fiduciary relations, the court declined to consider whether the "law of the case" applied to second appeal matters determined on a first appeal (193 F.2d at page 669) and held, as a concurrent ground for imposing these high standards, that the District of Columbia and Delaware law is in substantial accord in imposing a fiduciary relationship on a majority stockholder regarding transactions between corporations with interlocking directorates. 193 F.2d at page 671.

Most of the other cases listed in footnote 6, supra, involve situations where the courts were seeking to impose the fiduciary rule of the state of incorporation in order to escape the inequitable rule of the forum (generally Delaware).

However, in view of our holding hereinafter that the district judge was not clearly erroneous in holding that the actions of appellant through its officers constituted actionable fraud under Article 1847, LSA-Civil Code, what has been said concerning the choice of laws to determine the duty owed by officers, directors, or majority stockholders to the minority stockholders may not be necessary for the disposition of this case. That is true because, as will be seen, the broad scope of fraud in Louisiana covers situations where the law imposes an obligation on the party with superior knowledge to disclose facts within his knowledge to the other and to deal in an atmosphere of trust and confidence. Since appellant's officers had such superior knowledge, Louisiana fraud rules demanded open and disclosed dealings with utmost fairness.

As stated earlier, the equitable remedies of constructive trust or equitable lien are alien to the civil law. Without these remedies and with the rule that "constructive fraud," found in the law of fiduciaries and characterized by the lack of the "intent to defraud,"¹¹ is impossible under Article 1847,¹² Louisiana courts have an awkward time imposing liability for the breach of a fiduciary's duty to disclose or the breach of other fiduciary relations.¹³ In some cases involving a relationship of confidence between the parties, the Louisiana courts have used the terms of common-law equity, ordinarily obnoxious to the civil law, to describe the breach and remedy for breach of fiduciary duty,...