Overfield v. Pennroad Corporation, No. 8288

• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
• Writing for the Court: BIGGS, JONES, and GOODRICH, Circuit
• Citation: 146 F.2d 889
• Parties: OVERFIELD et al. v. PENNROAD CORPORATION et al. (three cases). WEIGLE et al. v. SAME (three cases).
• Decision Date: 28 December 1944
• Docket Number: No. 8288,8303,8289,8304,8371,8372.

146 F.2d 889 (1944)

OVERFIELD et al.
v.
PENNROAD CORPORATION et al. (three cases). WEIGLE et al.
v.
SAME (three cases).

Nos. 8288, 8289, 8303, 8304, 8371, 8372.

Circuit Court of Appeals, Third Circuit.

Argued October 7, 8, 1943.

Decided December 28, 1944.

146 F.2d 890

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146 F.2d 891

Roscoe Pound, of Cambridge, Mass., for appellants Kaufmann and others

Daniel O. Hastings, of Wilmington, Del. (R. E. Lee Marshall, of Baltimore, Md., Hugh F. O'Donnell, of New York City, George Cochran Doub, of Baltimore, Md., Philip H. Strubing, Paul Maloney, and Evans, Bayard & Frick, all of Philadelphia, Pa., Caleb R. Layton, 3d., John Van Brunt, Jr., and Hastings, Stockly and Layton, all of Wilmington, Del., and Marshall, Carey & Doub, of Baltimore, Md., on the brief), for plaintiffs.

Robert T. McCracken, of Philadelphia, Pa. (John Dickinson, of Philadelphia, Pa., Clarence A. Southerland, of Wilmington, Del., and Philip Price, John B. Prizer, Montgomery, McCracken, Walker & Rhoads, and Barnes, Dechert, Price & Smith, all of Philadelphia, Pa., on the brief), for Pennsylvania R. Co.

Morris Wolf, of Philadelphia, Pa., for Pennroad Corporation.

R. Sturgis Ingersoll, of Philadelphia, Pa., Elder W. Marshall, of Pittsburgh, Pa., and Thomas Stokes, W. Heyward Myers, Jr., Lewis M. Stevens, and Thomas Stokes, all of Philadelphia, Pa., for surviving directors and representatives of deceased directors of Pennroad Corporation.

Charles H. Tuttle, of New York City, and William S. Pettit, of Far Rockaway, N. Y., for Stockholders' Committee of Pennroad Corporation, amicus curiæ.

Hugh Roberts, of Philadelphia, Pa., for intervenor-appellee Roberts.

Francis E. Walter, of Easton, Pa., for intervenor-appellee Costello.

Before BIGGS, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

These actions were brought for an accounting and other relief against the Pennsylvania Railroad and certain individual defendants. The plaintiffs are shareholders of the Pennroad Corporation and have been joined in these actions by other shareholders as intervenors. The defendants are the Pennsylvania Railroad and certain individuals (or their personal representatives) who were directors or officers of the Pennsylvania Railroad Company and/or the Pennroad Corporation. The District Judge gave judgment in favor of the individual defendants for the reason that the suit was barred by lapse of time. He gave judgment in favor of the plaintiffs against the Pennsylvania Railroad, but not to the extent claimed by the plaintiffs. Both sides have appealed.

We consider first the problems arising out of the general question whether the liability of individual and corporate defendants is barred by lapse of time. The transactions of which the plaintiffs complained are eight in number and began in June, 1929, with the Detroit, Toledo & Ironton purchase. It has been found as a fact, and not disputed by either party, that "Neither of these suits was brought within six years after the commission of any act complained of."

The individual defendants in their respective pleadings pleaded limitations generally as well as laches and nonconcealment. The corporate defendant pleaded laches on the part of the plaintiffs in a sufficient fashion to permit the defense under any application of this doctrine.

The first problem is the orientation of this case into the law applicable in federal court. Federal jurisdiction is invoked solely on account of diversity of citizenship; there is no independent federal question involved in the plaintiffs' claims. If all the operative facts had occurred in

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Pennsylvania and the actions were of a type formerly cognizable on the law side of the federal court there is no doubt that the Pennsylvania statute of limitations would control as to their timeliness. The same is true where, upon local facts, an action formerly cognizable in equity, is brought in federal court and the local statute is applicable to local suits in equity. Where the suit is brought in equity and is not in aid or support of a legal right, the jurisdiction on the equity side is said to be "exclusive" and the limitation period applicable is determined by the doctrine of laches as applied in federal courts, assuming that there is no local statute applicable to suits in equity. Where, however, the jurisdiction of equity is "concurrent" with that at law or the suit is brought in aid of a legal right, the state statute of limitations applicable to legal remedies and rights will be applied in the equity suit. With these propositions which have been recently enunciated by the Supreme Court in Russell v. Todd, 1940, 309 U.S. 280, 60 S.Ct. 527, 84 L.Ed. 754, before us, their application to the present litigation will be discussed.¹

The problem of the individual defendants will first be considered. It is not necessary in this aspect of the case to separate these individuals with regard to their length of service with the Pennsylvania Railroad, the dates of their respective deaths, or any other matter which might distinguish individual cases. The sole question is based on the facts as above stated. They are immune from suit by reason of lapse of time.

The Pennsylvania Act of March 28, 1867, P.L. 48,² provides that "* * * no suit, at law or in equity, shall be brought or maintained against any stockholder or director in any corporation * * * to charge him * * * with any neglect of duty as such stockholder or director, except within six years after * * * the commission of such act of negligence by such stockholder or director." The trial judge applied this statute in favor of the individual defendants. The plaintiffs say this is error because, while the statute sounds in terms of "neglect of duty" the present action is based on fraud and this particular statute is, therefore, inapplicable.

Fraud in the sense of conscious misstatement or other deliberate misrepresentation is clearly negatived by the findings made by the trial judge. He found the lack of moral culpability on the part of the directors. "The findings of fact and conclusions of law in this case," he said, "in no way cast any improper reflection on the personal honor and integrity of the defendants." 42 F.Supp. 586, 629 The plaintiffs do not dispute this statement, which while not made as a formal finding of fact was submitted as such finding pursuant to a direction by this Court at the conclusion of the argument to list findings of fact, either from the opinion or formally made.

This rather sweeping statement is buttressed by others more specific which, while not agreed to by plaintiffs, are not seriously attacked in argument. Thus, the judge found: "Here again it may be conceded that the directors acted conscientiously and without deliberate fraud or any intent to benefit themselves." "It is believed that they acted honestly and conscientiously and that there was no element of fraudulent intent or bad faith on the part of any of the persons involved, and that their default resulted from a misconception of their fiduciary position and primary duties." "* * * the directors, who are men of unimpeachable character and integrity, acting in the interest of serving their companies, have misconceived their duties * * *." "Their breach of duty and abuse of fiduciary obligations did not involve intentional moral delinquency." At the trial of the case only one of the individuals named as defendants was available as a witness. One was too ill to testify; the rest were dead. With the one exception noted, their own story of the conduct of events which led to this litigation was, therefore, not heard. Yet in their absence the findings of the trial judge upon the subject of personal culpability went the whole way to absolve them. The

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plaintiffs have not shown us and we cannot find that the findings of the trial court were clearly erroneous

Moral fraud is thus clearly eliminated. We think it does not clear the view of the case to speak of what happened as "constructive" fraud. If the descriptive adjective means anything it means that something less than fraud is going to be called fraud so as to attribute to it the same consequence as that applicable to fraudulent conduct. If directors violate their duty to the corporation on whose board they sit we do not need to resort to fictitious allegations of fraud to hold them liable. They are responsible for the neglect of fiduciary duty. That we think is the substance of plaintiffs' charges against these individual defendants and that was the way it was regarded by the trial judge as shown in the excerpts from his findings of fact, above quoted. That neglect of duty is squarely covered by the terms of the Act of 1867 and the directors in this case fairly come within it.

This conclusion is fortified by the Pennsylvania decisions under this statute and the general statute of limitations. The Pennsylvania court has, in a case where the plaintiffs charged direct misappropriation of corporate funds by the managers of a railroad company, seemingly applied the six year limitation period of the Act of 1867 to an action brought against the directors after the expiration of that time by a shareholder. Link v. McLeod, 1900, 194 Pa. 566, 45 A. 340. The authority of the case is not quite complete since it does not appear in the opinion of the lower court, adopted by the Supreme Court, which statute was relied upon.³

This decision was cited in a recent Pennsylvania case upon the subject, decided since this cause was submitted. Ebbert v. Plymouth Oil Co., 1943, 348 Pa. 129, 34 A. 2d 493.⁴ This, too, was an action by a shareholder suing in equity to compel a restoration to a corporation (also a Delaware corporation) of a sum of money plaintiff alleged to have been improperly expended by the corporation directors for a purpose for which corporate funds should not have been spent. The impropriety of the expenditure charged was so serious as to...