Niesz v. Gorsuch

• Decision Date: 25 October 1961
• Docket Number: No. 17114.,17114.
• Citation: 295 F.2d 909
• Parties: Vernon E. NIESZ, Edwin B. Pegram, Francis I. Sabo, Hjalmar B. Landoe, Elmer W. Duhame, Angus J. DePinto, John D. Ballantyne and Roslyn B. Croydon, Appellants, v. John S. GORSUCH, on Behalf of Himself and All Other Shareholders of United Security Life, et al., Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

295 F.2d 909 (1961)

Vernon E. NIESZ, Edwin B. Pegram, Francis I. Sabo, Hjalmar B. Landoe, Elmer W. Duhame, Angus J. DePinto, John D. Ballantyne and Roslyn B. Croydon, Appellants, v. John S. GORSUCH, on Behalf of Himself and All Other Shareholders of United Security Life, et al., Appellees.

No. 17114.

United States Court of Appeals Ninth Circuit.

October 25, 1961.

Frank E. Flynn, Gust, Rosenfeld & Divelbess, Phoenix, Ariz., for appellant Elmer W. Duhame.

Herbert Mallamo, Evans, Kitchel & Jenckes and Jos. S. Jenckes, Jr., Phoenix, Ariz., for appellant Angus J. DePinto.

George W. Botsford, T. W. Shumway and Guy C. Wilson, Scottsdale, Ariz., for appellant Sabo, Pegram and Landoe.

W. Lee McLane, Jr., and Nola McLane and Thaddeus Rojek, Phoenix, Ariz., for appellees.

Before BARNES, HAMLEY and JERTBERG, Circuit Judges.

HAMLEY, Circuit Judge.

This is a stockholder's derivative action brought on behalf of United Security Life, "United," an Arizona stock insurance corporation, by John S. Gorsuch, a citizen of the State of Ohio. Instituting the suit in the United States District Court for the District of Arizona, Gorsuch named as defendants, in addition to United, American Security Investment Co., "American," United Finance Corporation, Arizona Corporations, and eleven individuals, some of whom are citizens of the State of Arizona. All but one of the personal defendants were then, or had been, stockholders, directors or officers of United.¹ The district court had diversity jurisdiction. 28 U.S.C.A., § 1332(a) (1).

Plaintiff alleged in his complaint that by reason of negligence and breach of fiduciary duty by the personal defendants, assets of United of the value of $314,794.19 were diverted from that corporation. Defendants answered, denying the essential allegations of the complaint and asserting various defenses. The case was submitted to a jury which returned a verdict for plaintiff in the sum of $20,000.

The court thereafter determined that, because of the equity features of the case, the verdict of the jury would be considered as advisory only. The court further determined that the advisory verdict was not supported by the evidence. Findings of fact and conclusions of law were thereafter entered, upon the basis of which a joint and several judgment was entered in favor of United against nine of the personal defendants, in amounts ranging from $308,000 to $314,794.19.

Eight of the defendants against whom the judgment ran filed notices of appeal. Only five of these defendants, however, have prosecuted their appeals, i. e., Edwin B. Pegram, Francis I. Sabo, Hjalmar B. Landoe, Elmer W. Duhame and Angus J. DePinto.² We have jurisdiction under 28 U.S.C.A. § 1291.

The first questions which we must consider on this appeal have to do with the fact that, subsequent to the commencement of this suit, but prior to trial, United was merged with Provident Security Life Insurance Company, "Provident," also an Arizona stock insurance corporation.

By reason of this merger, appellants contend, the capacity of Gorsuch to maintain the suit as a stockholder of United was terminated and United, in whose favor the judgment was rendered, ceased to exist and lost its capacity to be a party to the action. Appellants further contend that, by reason of the merger Provident, as the real party in interest, became an indispensable party plaintiff, and that if it were joined as a party plaintiff diversity of jurisdiction would be destroyed.³

The pertinent facts relating to the merger questions are not in dispute. The complaint was filed on November 4, 1958, and the trial commenced on March 9, 1960. On February 7, 1959, the boards of directors of United and Provident entered into an agreement for the merger and consolidation of the two companies pursuant to A.R.S. § 10-341 et seq., and 20-731. Under the terms of this agreement Provident was to continue in existence as the surviving corporation and United was to cease to exist.

The shares of stock of United were to be surrendered and Provident was to deliver to each non-dissenting shareholder one share of Provident for every thirty shares of United. Dissenting stockholders were entitled to payment of the fair value of their respective shares in United. It was further provided in the merger agreement that upon completion of the merger all the property and assets of United were to become the property and assets of Provident.

Under Arizona law, a vote of two-thirds of the stock of the merging companies in favor of consolidation is required in order to effectuate a merger agreement. See A.R.S., § 10-344(c). The favorable vote of the required percentage of the stock of record of the two corporations was obtained and the merger was consummated about two or three months after the execution of the agreement described above. It is not established in the record whether appellee Gorsuch was a dissenting stockholder in connection with the vote to merge. It appears, however, that up to the time of the trial he had not surrendered his stock in United and so had not become a stockholder of Provident.

In its findings of fact entered on June 21, 1960, the trial court made no specific findings with respect to the merger. It did find, however, that United was, at the time of the filing of the complaint herein, and has been at all times since, a corporation and citizen of and domiciled in the State of Arizona. In connection with their contentions regarding the merger appellants challenge this finding of fact.

If the merger was lawful, the finding that United was a corporation at the time of the trial is clearly erroneous. By virtue of the express terms of the merger agreement, which was thereafter consummated, United transferred all of its property and assets to Provident and ceased to exist as a corporation.

Appellee contends, however, that the merger is not valid because 38.79% of the outstanding stock of United was voted by a record owner, American, which assertedly did not have good title to such stock. Hence, it is argued, the purported vote of this stock was without legal effect and, without that stock being voted, the required two-thirds favorable vote of outstanding stock was not obtained. Appellee's contention that American did not have good title to the stock which it voted in favor of the merger is premised on the allegation and court's finding that assets of United had been wrongfully taken to pay for it.

As record owner of the stock at the time the merger vote was taken, American had prima facie title thereto and hence the right to vote it.⁴ Provident has for a period of more than two years acted as the "consolidated" corporation, and nothing appearing in the record to the contrary, we must assume that the merger was approved by the Arizona Director of Insurance, as required by A. R.S. § 20-731B.⁵

If appellee wanted to contest the legality of the merger he should have done so in a direct action for that purpose. In our opinion the merger is not subject to collateral attack in the instant action. We therefore conclude, for the purposes of this suit, that the merger has been validly consummated, and that by the time of the trial United had ceased to be a corporation.

But appellee further argues that assuming the merger to be valid and that United ceased to exist as a corporation, Gorsuch nevertheless had capacity to continue with this suit as a stockholder of United, and United nevertheless had continued capacity to be a party to the action and to obtain and enforce the judgment which was entered in its favor.

In support of this position appellee first calls our attention to A.R.S. §§ 10-364 and 365. The purport of these statutes is that a corporation whose charter has expired or which has been dissolved by the voluntary act of the stockholders, may continue to act for the purpose of winding up its affairs. In the case of dissolved corporations this may include the power to sue or to be sued in a civil action. These statutes also preclude abatement of pending actions by reason of any such dissolution.

Sections 10-364 and 365 are a part of Article 12 of the general corporation law of Arizona as enacted by the legislature of that state. That article is entitled, "Voluntary Dissolution And Winding Up." Among other things, it is provided under Article 12 that the legal existence of a corporation may continue for certain purposes, despite...