McMenomy v. Ryden, 39924

• Decision Date: 17 February 1967
• Docket Number: No. 39924,39924
• Citation: 276 Minn. 55,148 N.W.2d 804
• Parties: , 30 A.L.R.3d 1078 Edward B. McMENOMY et al., Respondents, v. Arnold J. RYDEN, Jr., et al., Defendants, Arnold J. Ryden, Jr., et al., Appellants.
• Court: Minnesota Supreme Court

Page 804

148 N.W.2d 804

276 Minn. 55, 30 A.L.R.3d 1078

Edward B. McMENOMY et al., Respondents, v. Arnold J. RYDEN, Jr., et al., Defendants, Arnold J. Ryden, Jr., et al., Appellants.

No. 39924.

Supreme Court of Minnesota.

Feb. 17, 1967.

Syllabus by the Court

1. Before res judicata can apply to the trial of an action it must appear that the complaint in the earlier action involves the same cause of action as the complaint in the action against which the doctrine is to be applied, and that the parties are the same or in privity with each other. Unless both conditions exist, res judicata does not apply.

2. The common test for determining whether a former judgment is a bar to a subsequent action is to inquire whether the same evidence will sustain both actions.

3. In this case, where a proceeding was brought by the Securities and Exchange Commission under the Investment Company Act of 1940, the parties are not the same as those in an action brought by individual shareholders in the state court against the same directors or officers of the company. Nor are the shareholders in privity with the Securities and Exchange Commission. The purposes of the two actions are not the same and the tests to be used in determining liability are not the same.

4. The Investment Company Act of 1940 is a comprehensive regulatory act intended to curb those practices in investment companies which might jeopardize the rights of the public and investors in the company. Whether a suit may be brought by S.E.C. to recover for the benefit of shareholders illegal profits and unlawful gains is not certain, but even if such action can be brought the tests are not the same for determining liability as in an action brought by individual shareholders to recover for the benefit of stockholders the illegal gains and unlawful profits of directors and officers of the company.

5. Appellants contend that plaintiffs in the action brought in the state court should have intervened in the S.E.C. action and litigated the issues which are raised in the state action. Even if we assume that plaintiffs could intervene as a matter of right or that the court had discretionary power to permit them to intervene and would have done so, the rule is clear that having failed to seek intervention they are not barred on that account. The right to intervene at the best is permissive; and inasmuch as it was not exercised, failure to intervene would not bar plaintiffs from litigating the issue here. Ordinarily a judgment does not bind the parties in a subsequent controversy unless they were adversaries in the original action.

Dorsey, Owen, Marquart, Windhorst & West, Henry Halladay and Curtis D. Forslund, Minneapolis, for appellants.

McMenomy, Hertogs & Fluegel, Hastings, Fred Burstein, Minneapolis, for respondents.

OPINION

KNUTSON, Chief Justice.

This is an appeal from an order denying a motion for summary judgment wherein the questions involved were certified by the trial court as being important and doubtful.

Midwest Technical Development Corporation (hereinafter referred to as Midwest) was incorporated under Minnesota law in 1958 as a closed-end, nondiversified investment company. The purpose of its existence is to invest funds of its stockholders in securities of other enterprises, and it is organized in such a manner that its main purpose is to seek out investment opportunities in new companies operating in the technological field. It aims at investing in growth capital so that its stockholders will benefit eventually through long-term capital gains.

As an investment company of this type it is subject to the jurisdiction of the Securities and Exchange Commission, hereinafter referred to as S.E.C., under the Investment Company Act of 1940. 54 Stat. 789, 15 U.S.C.A. § 80a--1, et seq.

In 1962 S.E.C. brought an action against certain corporations and the appellants, who were formerly directors of Midwest, charging that defendants were 'guilty of gross abuse of trust and gross misconduct because they had placed themselves in positions of conflicting interests whereby they made decisions 'with other than disinterested motives."

Shortly after the action was commenced by S.E.C., this action was commenced in the District Court of Hennepin County by Edward B. and Ellen B. McMenomy, minority shareholders in Midwest, as a derivative action for the benefit of the shareholders of the company. An examination of the complaints in the two actions shows quite conclusively that the McMenomy complaint was almost an exact copy of the S.E.C. complaint.

The S.E.C. case went to trial in Federal court before the Honorable Gunnar Nordbye, who rendered his decision on July 5, 1963, absolving the directors of Midwest of the charges made by S.E.C. ¹ He did grant some injunctive relief which is not of importance here. Judge Nordbye, among other things, found that--

'* * * an adjudication of gross abuse of trust must be based upon evidence that a director is so untrustworthy that he should not be permitted to act in that capacity for any other company. The Court would not be justified in painting these directors with a broad brush of malfeasance and stigmatize them with a finding of gross misconduct and gross abuse of trust. In the launching of new electronic companies in 1960 and 1961, some of these directors, if not all, may have failed to recognize their inherent responsibilities as directors of an investment company, and therefore unwittingly placed themselves in situations which should have had the approval of the Commission.'

After the S.E.C. action was terminated, several of the defendants moved for summary judgment in their favor in the derivative action brought by plaintiffs on the grounds that the decision in the S.E.C. action barred any further proceedings in the derivative action by virtue of the fact that such determination was res judicata or that the derivative action was barred by the doctrines of estoppel by judgment and estoppel by verdict. The court denied this motion but certified the questions as important and doubtful, which led to this appeal.

1. It is elementary that before res judicata can apply the two complaints must involve the same cause of action and the parties must be the same or in privity with each other. Unless both conditions exist the derivative action cannot be barred by the determination of the S.E.C. action.

2. The common test for determining whether a former judgment is a bar to a subsequent action is to inquire whether the same evidence will sustain both actions. West v. Hennessey, 58 Minn. 133, 59 N.W. 984; Melady-Briggs Cattle Corp. v. Drovers State Bank, 213 Minn. 304, 6 N.W.2d 454.

3. On the privity issue, it is obvious that the parties are not the same. Are they, then, in privity? It is next to impossible to formulate a definition of 'privity' in this context that will apply to all cases. In 30A Am.Jur., Judgments, § 399, we find the following:

'There is no generally prevailing definition of privity which can be automatically applied to all cases involving the doctrine of res judicata. Who are privies requires careful examination into the circumstances of each case as it arises. In general, it may be said that such privity involves a person so identified in interest with another that he represents the same legal right.'

50 C.J.S. Judgments § 788, states:

'With respect to the application of the doctrine of res judicata to those in privity with parties to a suit, there is no generally prevailing definition of 'privity' which can be automatically applied to all cases, and the determination of who are privies requires careful examination into the circumstances of each case as it arises.'

Applying the general definition to the facts of this case, it would seem quite clear to us that the shareholders in the derivative action brought in the state court were not in privity with S.E.C. in the action brought in Federal court. The purposes of the two actions were not the same and it cannot be said that in this action S.E.C. represented the shareholders. That being true, this question must be answered in the negative and might well end this appeal.

4. The trial court based its decision on the lack of privity alone. A determination of who are in privity is such a nebulous thing that we have felt compelled to consider other aspects of the case as well. Whether S.E.C. as such could or would litigate the question of whether directors, officers, and others should be compelled to disgorge illegal profits or gains is something we do not know. The power to do so cannot be found expressly stated in the Investment Company Act of 1940. If it is to be found at all, it must be in the implied powers incident to the enforcement of those regulatory measures expressly provided in the act. There is some difficulty among the Federal courts as to whether a stockholder may maintain a derivative action under the Investment Company Act, and it goes even one step further when we seek to determine whether S.E.C. may maintain such action for the benefit of stockholders. A review of the few cases there are on this subject may throw some light on it.

An examination of the Investment Company Act of 1940 can hardly lead to any other conclusion than that it was intended as a comprehensive regulatory act. Its purpose undoubtedly was to curb those practices which are inherent in such companies and may result in detriment to investors if not controlled.

In Aldred Investment Trust v. Securities and Exchange Comm. (1 Cir.) 151 F.2d 254, 260, the court said:

'* * * By reason of its essential character of liquidity the investment company is peculiarly subject to abuse (See Report of the Securities and Exchange Commission on Investment Trusts and Investment Companies (1939); 50 Y.L.J. 440; 41 Col.L.R. 269). The Investment Company Act of 1940 meets the problems recognized therein by subjecting investment companies to regulation by the S.E.C. § 1(b) of the Act, 15...