Schilling v. Belcher
| Decision Date | 27 October 1978 |
| Docket Number | 76-1517,Nos. 75-3974,s. 75-3974 |
| Citation | 582 F.2d 995 |
| Parties | Dudley Warren SCHILLING, Plaintiff-Appellee Cross Appellant, v. J. A. BELCHER, Sr., et al., Defendants-Appellants Cross Appellees. Dudley Warren SCHILLING, Plaintiff-Appellee, v. J. A. BELCHER, Sr., et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
John M. Brumbaugh, Miami, Fla., for plaintiff-appellee cross appellant in No. 75-3974.
Samuel J. Powers, Jr., James E. Tribble, Miami, Fla., for defendants-appellants.
Frates, Floyd, Pearson, Stewart, Proenza & Richman, Alan G. Greer, Miami, Fla., for plaintiff-appellee cross appellant in No. 75-3974 and plaintiff-appellee in No. 76-1517.
Appeals from the United States District Court for the Southern District of Florida.
Before TUTTLE, CLARK and RONEY, Circuit Judges.
In this case involving Florida law, we hold that a shareholder who sells his stock pending appeal of a favorable judgment in a stockholder's derivative suit against the corporation, loses standing to further prosecute or defend the case, except to the extent the judgment runs personally in his favor, in this case, for attorney's fees.
This stockholder's derivative suit, brought in federal court on the basis of diversity of citizenship, grew out of a family struggle for control of the Belcher Oil Company, a Florida corporation, which generated between $150 and $200 million in annual revenues. Plaintiff Dudley Warren Schilling, a substantial shareholder in the company at the time, sued the company and various directors and officers, seeking (1) a declaration nullifying the 1973 and 1974 directors elections, (2) an award of damages from the individual defendants in favor of the Belcher Oil Company for wrongfully causing the company to purchase 6,378 shares of its own stock at inflated prices, (3) a declaration invalidating the company's employment contract with defendant K. O. Johnson, then president of the company, and (4) an injunction prohibiting defendants from entering into a proposed stock option plan with Johnson.
The district court held in favor of plaintiff on the election fraud and stock purchase issues, but refused to invalidate defendant Johnson's employment contract and stock option plan. In addition to declaratory relief, a judgment of $491,569 was awarded against the individual defendants in favor of the corporation for the illegal stock purchase. Plaintiff was awarded attorney's fees and costs of $140,122, to be deducted from the corporation's judgment.
Defendants appeal these awards and the declaratory relief entered in favor of plaintiff. Plaintiff by cross-appeal attacks that portion of the court's judgment validating defendant Johnson's employment contract and stock option plan.
After trial but before oral argument on this appeal, Coastal States Gas Corporation purchased 100% Of Belcher Oil Company stock, including plaintiff Schilling's shares. Having sold his stock, pendente lite, plaintiff Schilling lost his derivative standing to litigate claims on behalf of the corporation. He did not, however, lose standing to defend on appeal the attorney's fee award rendered directly in his favor, and any decision necessary to support the fee award.
For reasons discussed below, (1) plaintiff's $140,122 attorney's fees award is affirmed, (2) the remainder of the court's judgment is vacated, and (3) plaintiff's cross-appeal is dismissed.
The issues presented by this appeal, complicated by posttrial events, require a detailed statement of the facts.
During the period pertinent to this litigation, the Belcher Oil Company was, prior to its recent purchase by Coastal States Gas Corporation, a closely held Florida corporation engaged in selling, transporting, and storing heavy fuel oils. Seventy-four percent of Belcher Oil Company stock was owned by members of three families, the Belchers, the Schillings, and the Lefflers, most of whom are descendents of the company's founders. The remaining stock was owned by approximately 100 shareholders, many of whom are employees or are closely affiliated with one of the principal families.
In April 1971, E. N. "Newt" Belcher, III (Belcher III) succeeded his father, E. N. Belcher, Jr., as president of the company. E. N. Belcher, Jr. served as chairman of the board until his death around Thanksgiving 1971. At that time defendant J. A. "Red" Belcher, Sr. (Belcher Sr.), the brother of E. N. Belcher, Jr., was elected board chairman. In the months that followed, a serious fissure developed between Belcher Sr. and his nephew Belcher III over several matters of company management, and in late 1972 Belcher Sr. resolved to oppose the reelection of Belcher III's management team at the October 1973 annual stockholders meeting. Belcher Sr. enlisted the support of defendants Stewart Allen and J. A. Belcher, Jr. (Belcher Jr., the son of Belcher Sr.), who were board members at all times material to this litigation, and defendant Harlan Snodgrass, a longtime company employee.
The groundwork for the 1973 takeover was apparently laid by Belcher Sr. sometime prior to the 1972 annual stockholders meeting. It was the company's longstanding practice to solicit proxies from stockholders in anticipation of each year's annual meeting. These proxies were always voted in favor of management. The form of the proxies sent out in 1972 varied from past proxies in two significant respects. First, Belcher Sr. insisted that his name be added to that of Belcher III as one of the proxy holders. Second, the 1972 proxies bore the legend: "This proxy is solicited by management for annual meeting on (date)." The attorney who drafted the 1972 proxy later testified at trial that the legend was added to show that the proxy was solicited by and would be voted in favor of existing management. In fact, the proxies were voted for management in the 1972 election.
For the 1973 election, however, in furtherance of their plan to oust Belcher III, defendants secretly began to solicit proxies from certain selected stockholders. Those stockholders not solicited were not informed of defendants' intention to oppose the reelection of management.
Defendants' proxy form bore the names of Belcher Sr. and Belcher Jr. Management's proxy for the 1973 annual meeting was virtually identical to the 1972 management proxy, bearing the names of Belcher Sr. and Belcher III. Although aware that the management proxy carried his name, Belcher Sr. did not inform management of his opposition to its reelection or otherwise afford management an opportunity to remove his name from the management proxy and to resolicit the stockholders for management support in light of the impending fight for control. In fact, in early October Belcher Sr. executed three management proxies covering approximately 30,600 shares of Belcher Oil Company stock held in the Gerhart Trust, of which he and Belcher III were joint trustees, and silently delivered them to management. Not until the actual stockholders meeting and election on October 23, 1973 did defendants disclose their takeover plan to management, the other board members, and the nonsolicited stockholders.
Shortly before the meeting, defendants Belcher Sr., Allen, and Snodgrass tallied up their proxies and concluded that they lacked the voting strength necessary to win the upcoming election. Accordingly, they decided that management proxies listing both Belcher Sr. and Belcher III would not be counted in favor of either faction, a decision which ultimately determined the outcome of the election.
On October 23 defendant Belcher Sr., in his capacity as chairman of the board, called the 1973 annual meeting to order. Although management's report on the year's activities was customarily the first order of business at Belcher Oil Company annual meetings, Belcher Sr. opened the 1973 meeting by calling for the election of directors and appointing defendant Snodgrass to count the votes.
Snodgrass attributed to Belcher Sr.'s faction all proxies returned on defendants' form and all management proxies on which Belcher III's name had been lined out by the signing shareholder. Management proxies on which Belcher Sr.'s name had been lined out were counted in favor of Belcher III's faction. Pursuant to the prearranged decision of defendants Belcher Sr., Allen, and Snodgrass, management proxies on which neither Belcher Sr. nor Belcher III had been lined out were not counted at all. Over 16,000 votes, in addition to the 30,643 votes represented by the Gerhart Trust shares, were nullified on this basis.
After tallying the votes, Snodgrass announced that Belcher Sr. had proxies representing 58.1% Of the voting shares. This announcement was repeatedly challenged during the meeting by various shareholders demanding a recount and the right to examine the proxies. Belcher Sr., by invoking his newly acquired 58.1% Voting strength, defeated all such motions for a recount. Within three days after the meeting, a number of shareholders again made oral and written demands for proxy inspection and a recount. These demands were likewise refused.
Shortly after the October election, Belcher Sr. reorganized the company's management. Belcher Sr. remained chairman of the board, Snodgrass became president, Belcher Jr. was demoted to a vice-president, and Allen assumed the post of general counsel. In March 1974 defendant K. O. Johnson entered the picture, succeeding the aging Snodgrass as president of the company. A former employee of the Exxon Corporation, Johnson was widely experienced in the oil industry. Included in Johnson's long-term employment contract was a stock option plan under which Johnson was empowered to purchase, over a period of five years, a total of 7,500 shares of Belcher Oil Company stock at $30 per share, substantially less than the fair market value at the time.
By the summer of 1974 it became clear to defendants that the Belcher III faction would...
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