Smith v. Sperling

• Decision Date: 15 October 1956
• Docket Number: No. 14334.,14334.
• Citation: 237 F.2d 317
• Parties: Charles B. SMITH, as Special Administrator of the Estate of Edward S. Birn, Deceased, Appellant, v. Milton SPERLING, Harry M. Warner, Jack L. Warner, United States Pictures, Inc., and Warner Bros. Pictures, Inc., Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

237 F.2d 317 (1956)

Charles B. SMITH, as Special Administrator of the Estate of Edward S. Birn, Deceased, Appellant, v.Milton SPERLING, Harry M. Warner, Jack L. Warner, United States Pictures, Inc., and Warner Bros. Pictures, Inc., Appellees.

No. 14334.

United States Court of Appeals Ninth Circuit.

May 21, 1956.

Certiorari Granted October 15, 1956.

Moss, Lyon & Dunn, Herman H. Levy, Los Angeles, Cal., for appellant.

Freston & Files, Eugene D. Williams, Ralph E. Lewis, Los Angeles, Cal., Oliver B. Schwab, Beverly Hills, Cal., Arthur Livingston, Hollywood, Cal., for appellees.

Before STEPHENS, FEE and CHAMBERS, Circuit Judges.

Certiorari Granted October 15, 1956.See77 S.Ct. 98.

JAMES ALGER FEE, Circuit Judge.

This is a stockholders' derivative suit, which was brought ostensibly for the benefit of Warner Bros. Pictures, Inc., a Delaware corporation, by plaintiff Smith, as Special Administrator of the Estate of Edward S. Birn, deceased, owner of 400 shares of stock therein.The corporation was joined as a defendant with two of its directors and another Delaware corporation, United States Pictures, Inc., along with one Sperling, a director of the latter.The trial court directed that the questions relating to jurisdiction and limitations should be determined before trial on the merits.

Upon such a preliminary hearing, judgment of dismissal of the first cause of action was granted because, when the court realigned Warner Bros., as plaintiff, diversity of citizenship no longer existed, since Delaware corporations were, respectively, among the plaintiffs and among the defendants.¹

The second cause of action was dismissed for lack of equity.This cause was asserted against defendantsHarry M. Warner and Jack L. Warner alone, and is based upon alleged violations of their duties in a fiduciary capacity as directors of Warner Bros.A third cause of suit was dismissed upon stipulation by the parties.

The facts which were found upon the preliminary hearing were as follows:

"As to the First Cause of Action, the Court Finds:

"I.That this action was commenced by Edward S. Birn, a citizen of the State of New York, and since the commencement of said action, said Edward S. Birn has died and Charles B. Smith, as special administrator of the estate of Edward S. Birn, deceased, has been substituted in his place as plaintiff.That said Charles B. Smith is a citizen of the State of California.

"II.That defendantsHarry M. Warner, Jack L. Warner and Milton Sperling, and each of them, are citizens of the State of California, and that the defendantsWarner Bros. Pictures, Inc. and United States Pictures, Inc., are, and each of them is, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and is a citizen of the State of Delaware; and that as the parties are aligned by the plaintiff, it appears that the plaintiff is a citizen of the State of New York and that the defendants are citizens of the states of California and Delaware, as hereinbefore stated.

"III.That this action was commenced by Edward S. Birn as the owner, during the period of the transactions challenged in the complaint, of four hundred shares of the capital stock of the defendantWarner Bros. Pictures, Inc., and that he is suing derivatively on behalf of and for the benefit of said defendantWarner Bros. Pictures, Inc., and the stockholders thereof; that by the prayer of the complaint a trust is sought to be impressed on the capital stock and assets of United States Pictures, Inc., in favor of Warner Bros. Pictures, Inc., the agreement between said Warner Bros. Pictures, Inc. and United States Pictures, Inc. referred to in the complaint is sought to be cancelled and terminated and that the defendantsMilton Sperling, Harry M. Warner, Jack L. Warner and United States Pictures, Inc. be required to account to Warner Bros. Pictures, Inc., for all losses and damages suffered by it and its subsidiaries and all profits and benefits received by said defendants and that said defendants make restitution accordingly.That the claim set forth in the first cause of action of the complaint, and relief sought, are for and on behalf of the defendantWarner Bros. Pictures, Inc., and that the said Warner Bros. Pictures, Inc. is the real party in interest in said cause of action.

"IV.That the Board of Directors of Warner Bros. Pictures, Inc. is composed of eleven men of whom the defendantsHarry M. Warner, Jack L. Warner and their brotherAlbert Warner, are but three; that the contract in controversy was made and entered into in good faith and without fraud, and said contract was intended by the directors to be of financial benefit to Warner Bros. Pictures, Inc. and its stockholders, and said contract was considered by said eleven members of the Board of Directors of Warner Bros. Pictures, Inc. to be a sound business arrangement for the best present and future interests of the corporation; that in approving and authorizing the contract, the officers and Board of Directors acted in good faith and exercised their independent business judgment.That at the time of the execution of the contract, Albert Warner, together with the defendantsHarry M. Warner and Jack L. Warner, owned less than twenty percent of the outstanding shares of stock of Warner Bros. Pictures, Inc., and that neither the corporation nor the directors or officers were shown to be at that time or at any time under the domination or control of the three brothers Warner above named.That neither the stockholders, its officers or directors were, at any time involved in this action, antagonistic to the financial interests of the corporation.

"V.That it is not true either as alleged in the complaint, or otherwise, that all or a majority or any of the Board of Directors and officers of Warner Bros. Pictures, Inc. wrongfully participated in the acts in the complaint complained of, nor was said Board of Directors dominated or controlled by Harry M. Warner, Jack L. Warner, Albert Warner, Milton Sperling, or any one or more of them.It is not true that if demand had been made upon Warner Bros. Pictures, Inc., that those to whom such application would be made to institute such suit would have been disqualified from faithfully doing their duty as directors and officers of said corporation because of any matters or facts set forth in said complaint, or otherwise.That no demand was made on the directors of said Warner Bros. Pictures, Inc. to institute this action and such a demand would have been futile; nor was any demand addressed to the stockholders of said corporation.That the stockholders of said corporation were not at the time of the execution of the contract complained of or at any time or at all under the domination or control of the three brothers Warner; nor was said corporation at any time herein referred to in hands or under control antagonistic to the financial interests of said corporation and its stockholders.

"That because of the foregoing findings of fact, Warner Bros. Pictures, Inc. should be by the Court realigned as a partyplaintiff and that upon such realignment it appears that a plaintiff, Warner Bros. Pictures, Inc., is a citizen of the State of Delaware, and that the defendant, United States Pictures, Inc. is a citizen of the State of Delaware.

"That the sole basis of the jurisdiction of this Court is the claim set forth in the complaint of diversity of citizenship and that in view of the realignment of the parties in accordance with these findings, such diversity does not exist."

The record has been examined and gives no occasion for a reversal upon the facts found by the trial court.Only two questions of law remain.The trial court did not attempt to decide the cause on the merits, and this Court makes no such attempt either.

The key questions are:

First.Where the complaint asserted that the two directors Warner dominated and controlled the corporation Warner Bros. and conspired to misappropriate the assets and business opportunities of the corporation and caused it to enter an utterly improvident contract with United, was the trial court empowered to go behind the allegations and, on the facts found, realign Warner Bros. as a plaintiff?Second.Where United was a party served and appearing in the case and thus before the court, was it proper for the court to dismiss the second cause of action because United was not named in the second cause of action as a party against whom relief was sought therein?

The first question is answered by another.This question is whether Doctor v. Harrington, 196 U.S. 579, 25 S.Ct. 355, 49 L.Ed. 606, is indistinguishable from the case at bar.If so, the trial court must be reversed as to the first cause of action.In that case the complaint set up that Harrington and the individual defendant had the voting power of a majority of stock, directed the management of the affairs of the corporation, dictated its policy and selected its directors.Without holding a hearing to determine the truth of such allegations, the trial court dismissed the bill for lack of jurisdiction.The Supreme Court of the United States reversed on the ground that, accepting the allegations of the complaint, there was no ground to realign the parties since the corporation had been used as a tool without independent volition.To like effect are Venner...