Palmer v. Chamberlin, 13524.

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Citation191 F.2d 532
Docket NumberNo. 13524.,13524.
PartiesPALMER v. CHAMBERLIN et al.
Decision Date12 September 1951

COPYRIGHT MATERIAL OMITTED

J. Raburn Monroe, Alden W. Muller, New Orleans, La., for appellant.

R. Walston Chubb, St. Louis, Mo., Justin V. Wolff, New Orleans, La., for appellee.

Before HOLMES, BORAH, and RIVES, Circuit Judges.

RIVES, Circuit Judge.

This suit is for specific performance to require an executrix to surrender and transfer certificates of the common stock of the Graham Paper Company in accordance with a by-law of that company.

The by-law provides in substance that if any stockholder shall desire to sell any part of his common stock that for a period of sixty days after written notice of the stockholder's intention to sell the persons then composing the board of directors of the company shall have the right to buy, at a price determined according to a formula prescribed in said by-law, all or any part of said stock.

The formula for fixing the price at which the option is to be exercised is thus stated: "* * * at a price per share which shall be determined by dividing the aggregate net value of the assets of the company, as shown by its last preceding inventory, less the aggregate par value of outstanding preferred stock, together with or plus six per cent from the date of such inventory upon said net inventory value less the aggregate par value of said preferred stock, by the number of shares of the common capital stock of this company, and subtracting from such quotient the amount of dividends, if any, which may have been paid upon each share of stock since the date of such inventory; * * *"

The by-law further provides that the directors of the company shall hold the stock so purchased in trust for disposition, at the same price per share, among the persons and in the proportions directed by a resolution of the board of directors to be subsequently adopted.

The by-law further provides that if any stockholder shall die or cease to be connected with the company as a director, officer or employee, all of his common stock shall immediately become vested in the persons who at the time may be the directors of the company, and they shall hold the same in trust for disposition within sixty days, or if the holdings of the stockholder so deceased or retiring shall exceed 30% of the then outstanding common stock of the company, the directors shall have twelve months instead of sixty days within which to dispose of his stock. The stock is to be disposed of at a price to be determined according to the formula heretofore stated. So much of said stock as may not be purchased within said sixty days or twelve months, as the case may be, by the directors or persons permitted by their resolution to buy the same, shall immediately become the property of the personal representative of the deceased stockholder or revert to the retiring stockholder.

All of the stockholders joined in adopting and signing the original by-law in 1904. Its policy was then stated as follows: "It is for the common benefit of all the stockholders of this company that its stock should be owned only by those in its service as directors, officers or employees".

The by-law was amended several times until it reached its present form in 1912. Previous to 1912 the directors themselves were the only persons permitted to buy the stock. One effect of the 1912 amendment was to permit the directors to dispose of the stock to any person or persons.

Two main issues are presented on this appeal: first, whether the by-law and any contract based thereon are illegal or unenforceable; and second, whether the District Court erred in deciding the case upon the plaintiff's motion for summary judgment.

The charter of the company contains no provision authorizing restrictions on the transfer of shares. It is not, however, necessary that we determine the validity of the by-law strictly as a by-law adopted by persons holding only a majority of the common stock, for we may treat it as a contract entered into by all of the common stockholders.

Beginning in 1921 and continuing throughout his life, from time to time, and each time pursuant to the terms of said bylaw, the decedent acquired by transfer fourteen certificates representing 2750 shares of the common stock of the company. In 1946 the stock of the company was split 10 for 1. All of the stockholders, including the decedent, turned in their certificates and received new certificates and at that time signed stubs for the new certificates which bore the printed language as follows: "Received Certificate No. * * * for * * * shares of Common Stock which, for a valuable consideration, the undersigned agrees with all other holders of common shares shall be held by him, his personal representatives and assigns, subject in every respect to the provisions of the by-law of the Company as amended at the meeting of the stockholders held on October 22, 1912."

Each certificate, both old and new, carried on its face the words: "Issued subject to the agreement among the stockholders contained in the by-laws and summarized on the reverse hereof." On the back of each certificate the substance of the by-law was summarized. In part that summary read as follows: "* * * In the event of the death of the holder of any of said common shares, or in the event of the severance of his connection with Company as officer, director or employee thereof, all his said shares shall thereupon be subject to the right of purchase, within the time and at a price to be ascertained in the manner prescribed by the By-laws, to the members of the existing Board of Directors of the Company or by such other persons as the said Board of Directors may determine."

It is of course well settled that "A void by-law may become a valid contract". Blue Mountain Forest Association v. Borrowe, 71 N.H. 69, 51 A. 670,1 673.

As is conceded, the validity of the by-law as such would be governed by the law of Missouri, the state of incorporation. Restatement Conflict of Laws, Sec. 182; 20 C.J.S., Corporations, § 1802. Appellant contends, however, that its validity when considered as a contract should be tested by the law of Louisiana where appellant claims that the decedent purchased his stock. See Restatement of the Conflict of Laws, Secs. 311, 312, 313 et seq. None of the counsel have cited any Louisiana decisions directly in point on the validity of the contract.2 Appellant claims that under the law of that state it would be void for lack of mutuality and as containing what is referred to in Louisiana law as potestative conditions, and cites the following authorities: Louisiana Civil Code Articles 2024 and 2034; Blanchard v. Haber, 166 La. 1014, 118 So. 117; Cloverland Dairy Products Co., Inc., v. Grace, 180 La. 694, 157 So. 393; Avery v. International Trade Exhibition, 163 La. 454, 112 So. 44. We do not pass upon that contention, for we think that the validity of the by-law even as a contract is governed by the law of the State of Missouri.

In diversity of citizenship cases, the federal courts, when deciding questions of conflict of laws, must follow the rules prevailing in the states in which they sit. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477; Cockburn v. O'Meara, 5 Cir., 141 F.2d 779.

Louisiana recognizes the rule that a contract made in that state may be made with reference to the law of some other state. 2 Beale Conflict of Laws 1139, Sec. 332.26 and cases there cited; Whiston v. Stodder, 8 Mart., O.S., La., 95, 13 Am.Dec. 281; McKane v. New Amsterdam Casualty Co., La.App., 199 So. 175, 182. In the last mentioned case the Court said: "* * If, after investigation, it appears that the parties have indicated, either expressly or tacitly, that their rights and obligations should be governed by the laws of the place of performance then the court should not hesitate to apply that law to the case."

That rule was well expressed by Judge Sibley speaking for this Court in a case coming from Texas: "* * * Parties in contracting may adopt as part of their contract the laws of a state other than their own if not contrary to the law or public policy of the state where the contract is made and to be performed. Mutual Life Ins. Co. v. Hill, 193 U.S. 551, 24 S.Ct. 538, 48 L.Ed. 788. * * *" Connecticut General Life Ins. Co. v. Boseman, 5 Cir., 84 F.2d 701, 705; See also Clark v. Gibbs, 5 Cir., 69 F.2d 364, 365; Duskin v. Pa. Central Airlines Corporation, 6 Cir., 167 F.2d 727; Annotation 112 A.L.R. 124.

The things to be done under the contract centered in Missouri. The contract took the form of a by-law of a Missouri corporation. That by-law was unanimously agreed to or ratified by all of the stockholders, one hundred fifty-one in number. The agreement of each stockholder to be bound by the terms of the by-law was a material consideration for a like agreement on the part of each other stockholder. The one-hundred fifty-one stockholders resided in various states. It was not intended that the validity and effect of the agreement should vary according to the laws of many different states, but rather that each stockholder should be alike bound. All these considerations clearly point to the intention of the stockholders that the validity and effect of the by-law either as such or as a contract should be governed by the law of the State of Missouri.

We need not go further back into the law of Missouri than 1946 when the stockholders renewed their contract. If not already bound, Palmer then became bound by the terms of the by-law, in consideration of a like agreement on the part of the other stockholders. In fact Palmer availed himself of that consideration on June 4, 1948, when he purchased an additional 250 shares of stock.3

In the case of State at Inf. of Huffman v. Sho-Me Power Co-operative, 356 Mo. 832, 204 S.W.2d 276, 280, decided by the Missouri Supreme Court in 1947, the Court said: "It is...

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