Mayflower Hotel Stock. P. Com. v. Mayflower Hotel Corp.

• Citation: 89 US App. DC 171,193 F.2d 666
• Decision Date: 25 June 1951
• Docket Number: No. 10745.,10745.
• Parties: MAYFLOWER HOTEL STOCKHOLDERS PROTECTIVE COMMITTEE et al. v. MAYFLOWER HOTEL CORP. et al.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

89 US App. DC 171, 193 F.2d 666 (1951)

MAYFLOWER HOTEL STOCKHOLDERS PROTECTIVE COMMITTEE et al. v. MAYFLOWER HOTEL CORP. et al.

No. 10745.

United States Court of Appeals District of Columbia Circuit.

Argued March 26, 1951.

Decided June 25, 1951.

Argued On Rehearing October 25, 1951.

Decided November 29, 1951.

COPYRIGHT MATERIAL OMITTED

Messrs. D. Worth Clark and Leslie C. Garnett, with whom Messrs. John Lewis Smith, Samuel F. Beach, John Lewis Smith, Jr., Edgar J. Goodrich and Jerome J. Dick were on the brief, for appellants.

Mr. Claude A. Roth, of the Bar of the Supreme Court of Illinois, pro hac vice, by special leave of Court, and Mr. Roger J. Whiteford, with whom Mr. John J. Wilson was on the brief, for appellees Hilton Hotels Corporation, Joseph P. Binns, Harry L. Ludwig and William J. Friedman. Mr. Jo V. Morgan Jr., also entered an appearance for these appellees.

Mr. Edmund L. Jones, with whom Messrs. Nelson T. Hartson and William B. Harvey were on the brief, for appellees Mayflower Hotel Corporation, John Clifford Folger, John Stewart, Robert V. Fleming and Thornton Rancy.

Before WILBUR K. MILLER, PRETTYMAN and FAHY, Circuit Judges.

FAHY, Circuit Judge.

Certain minority stockholders of the Mayflower Hotel Corporation, a Delaware corporation (referred to in this opinion as Mayflower), filed an action in the District Court against Mayflower, Hilton Hotels Corporation (referred to as Hilton), and certain officers of these and other corporations involved in transactions attacked as illegal. The case was before this court in Mayflower Hotel Stock. P. C. v. Mayflower Hotel Corp., 1949, 84 U.S.App.D.C. 275, 173 F.2d 416, where we reversed a judgment which had dismissed the amended complaint for failure to state a cause of action. On remand, answers were filed, trial was had, findings of fact and conclusions of law were made, and final judgment was entered for defendants. Plaintiffs appeal again. The relief they seek is primarily with respect to (1) the acquisition by Hilton of the majority stock of Mayflower, alleged to have been accomplished in a manner violative of the rights of that corporation and of its stockholders; (2) a management contract between the two hotel corporations by which Hilton was engaged to manage the Mayflower hotel; and (3) commissions and bonuses paid by Mayflower to defendant Folger, Nolan, Incorporated, in connection with (a) the purchase of Mayflower bonds to meet its sinking fund requirements and (b) refinancing of a Mayflower indebtedness of $1,700,000.

From this brief statement it is seen that the action involves to some extent the internal affairs of a foreign corporation. In such circumstances the courts of another jurisdiction will not ordinarily interfere. Rogers v. Guaranty Trust Co., 1933, 288 U.S. 123, 130, 53 S.Ct. 295, 77 L.Ed. 652; Beasley v. Mutual Housing Co., 1930, 59 App.D.C. 245, 39 F.2d 290; Maccarone v. Big Sign Shop, 1930, 59 App.D.C. 345, 41 F.2d 567; Fletcher Cyclopedia Corporations, Vol. 17, § 8425, p. 367. But there is a discretion; Rogers v. Guaranty Trust Co., supra; Williams v. Green Bay & W. R. Co., 1946, 326 U.S. 549, 556-557, 66 S.Ct. 284, 91 L.Ed. 311; Koster v. (American) Lumbermens Mutual Co., 1947, 330 U.S. 518, 528, 67 S.Ct. 828, 91 L.Ed. 1067; Restatement, Conflict of Laws, Topic 5, p. 279; Fletcher Cyclopedia Corporations, Vol. 17, §§ 8427, 8444, pp. 375, 413; and we construe this court's action in deciding the merits of the prior appeal as a proper exercise of discretion to entertain the case in this jurisdiction.

1. The purchase by Hilton of the majority common stock of Mayflower.

It is urged that Hilton acquired a majority of the common stock of Mayflower by a conspiracy among officers of Mayflower and the owners of a majority of its stock to secure for Hilton control of Mayflower to the detriment of its minority stockholders. It is asserted that the stock was sold to Hilton at a price substantially lower than could have been obtained, that the sale was secret, and that there were verbal conditions of which the minority were not informed. In passing upon such questions courts will ordinarily apply the law of the state of incorporation. Rogers v. Guaranty Trust Co., supra, 288 U.S. at page 130, 53 S.Ct. 295 (on this point the dissent of JJ. Stone and Brandeis, and that of J. Cardozo, do not appear to differ; see 288 U.S. at pages 148-149, 53 S.Ct. 295); Williams v. Green Bay & W. R. Co., supra, 326 U.S. at page 553, 66 S.Ct. 284; Zahn v. Transamerica Corp., 3 Cir., 1947, 162 F.2d 36, 40, 172 A.L.R. 495; Geller v. Transamerica Corp., D.C.Del. 1943, 53 F.Supp. 625, 629, footnote 7, affirmed per curiam, 3 Cir., 1945, 151 F.2d 534; Restatement, Conflict of Laws, §§ 197, 199, pp. 283-4; cf. Moran v. Harrison, 1937, 67 App.D.C. 237, 240, 91 F.2d 310, 313; Armstrong v. U. S. Building Ass'n, 1899, 15 App. D. C. 1, 18. In the prior opinion of this court, however, reliance was primarily placed upon Supreme Court decisions which either arose under federal statutes or were diversity jurisdiction cases decided according to federal law prior to Erie R. Co. v. Thompkins, 1938, 304 U. S. 64, 58 S.Ct. 817, 82 L.Ed. 1188. We accordingly construe our prior opinion as an application of the District of Columbia law. Further, we apply the rule that "The first decision has become the settled law of the case." Thompson v. Maxwell Land Grant Co., 1897, 168 U.S. 451, 456, 18 S.Ct. 121, 123, 42 L.Ed. 539. See, also, Clark v. Keith, 1882, 106 U.S. 464, 1 S.Ct. 568, 27 L.Ed. 302; Barney v. Winona & St. Peter R. Co., 1886, 117 U.S. 228, 231, 6 S.Ct. 654, 29 L.Ed. 858; In re Sanford Fork & Tool Co., 1895, 160 U.S. 247, 259, 16 S.Ct. 291, 40 L.Ed. 414. This court has, in the past, felt itself bound by such a rule. Washington Post Co. v. Chaloner, 1917, 47 App. D.C. 66, 71, reversed on other grounds, 1919, 250 U.S. 290, 39 S.Ct. 448, 63 L.Ed. 987. We recognize that "the law of the case" is not to be construed as a limitation upon the power of a court to reconsider on a second appeal matters determined on a first appeal, but is merely an expression of a practice. Messenger v. Anderson, 1912, 225 U.S. 436, 444, 32 S.Ct. 739, 56 L.Ed. 1152; see, also, Insurance Group v. Denver & R. G. W. R. Co., 1947, 329 U.S. 607, 612, 67 S.Ct. 583, 91 L.Ed. 547. This court has nevertheless stated that it will disregard the rule only when "a clear case * * * is * * * presented showing that the earlier adjudication was plainly wrong and that application of the rule would work manifest injustice, * * *." Brown v. Gesellschaft Fur Drahtlose Tel., M. B. H., 1939, 70 App.D.C. 94, 95, 104 F.2d 227, 228. In any event, the law of Delaware would require no different result.

The shares of stock involved in the questioned sale were owned by Donner Corporation and the defendant John C. Folger in respective amounts which will appear. The defendant John Stewart, who participated in the negotiations in behalf of Donner Corporation, was a director of Mayflower as well as president of Donner. Defendant C. Kenneth Baxter, who also acted for Donner, was a director of Mayflower. The defendant Folger was the president and a director of Mayflower. Donner held 194,525 shares and Folger 5,300 shares, their sum constituting a majority of the stock. In these circumstances some of the standards applicable to fiduciary relationships apply to the sale. Twin-Lick Oil Co. v. Marbury, 1875, 91 U.S. 587, 588; 23 L.Ed. 328; Southern Pacific Co. v. Bogert, 1919, 250 U.S. 483, 492, 39 S.Ct. 533, 63 L.Ed. 1099. See, also, Jackson v. Ludeling, 1874, 21 Wall. (88 U.S.) 616, 624, 22 L.Ed. 492; Pepper v. Litton, 1939, 308 U.S. 295, 306, 60 S.Ct. 238, 84 L.Ed. 281.

As recently stated by the Supreme Court in Securities and Exchange Comm. v. Chenery Corp., 1943, 318 U.S. 80, 85-86, 63 S.Ct. 454, 87 L.Ed. 626, to say that one is a fiduciary only begins analysis; but, as we held on the prior appeal, one of the consequences in circumstances like the present is that the majority stockholders, "upon whom the minority is dependent for knowledge, must make full disclosure when selling stock control", citing Sautter v. Fulmer, 1932, 258 N.Y. 107, 179 N.E. 310. Mayflower Hotel Stock. P. C. v. Mayflower Hotel Corp., 84 U.S. App.D.C. at page 282, 173 F.2d at page 423. Fletcher Cyclopedia Corporations, Vol. 13, § 5845, p. 187, was quoted as follows: "A secret and unfair sale of controlling stock may be redressed by suit of the minority." Fletcher, at the point indicated, cites for support:

"Secretly selling controlling shares above par while urging others to sell at par shows fraud. McManus v. Durant, 168 App.Div. 643, 154 N.Y.S. 580.

"Where majority stockholders, in violation of fiduciary duties owing the minority, secure the minority stock on the false representation that a third party has offered a certain price for the company's stock, and then sell their own stock to such purchaser for more than three times as much, the fact that the sale of the majority stock was attended by certain covenants on the majority stockholders' part of doubtful and unascertainable value, does not relieve them of the duty of accounting. Sautter v. Fulmer, 258 N.Y. 107, 179 N.E. 310."

Thus the secrecy which condemns such a sale is the secrecy of its terms and conditions, not the fact that a sale is to be effected. Hence failure to give prior advice to the minority is not itself a violation of a fiduciary responsibility owed by the majority stockholders. Nevertheless the sale must be shown to have been fair, free of secret or undisclosed arrangements as to price or other considerations different from the terms subsequently made known to all stockholders, and entirely in good faith.

The testimony regarding the sale led the trial court to conclude that it "was lawfully made and violated no rights of the minority stockholders of Mayflower." None of the officers or representatives of Hilton was connected with Mayflower or with the selling stockholders...