South End Imp. Group, Inc. By and Through Bank of New York v. Mulliken

• Decision Date: 15 July 1992
• Docket Number: No. 90-3431,90-3431
• Citation: 602 So.2d 1327
• Parties: 17 Fla. L. Weekly D1714 SOUTH END IMPROVEMENT GROUP, INC., a Florida Corporation, By and Through The BANK OF NEW YORK, as Trustee under the Will of C.J. Devine, Appellant/Cross Appellee, v. John H. MULLIKEN, Jr. John Good, William H. Moore, Peter Wick, Henry Field and Philip Nuttle, Appellees/Cross Appellants.
• Court: Florida District Court of Appeals

Page 1327

602 So.2d 1327

17 Fla. L. Weekly D1714

SOUTH END IMPROVEMENT GROUP, INC., a Florida Corporation, By

and Through The BANK OF NEW YORK, as Trustee under

the Will of C.J. Devine, Appellant/Cross Appellee, v. John H. MULLIKEN, Jr. John Good, William H. Moore, Peter

Wick, Henry Field and Philip Nuttle,

Appellees/Cross Appellants.

No. 90-3431.

District Court of Appeal of Florida,

Fourth District.

July 15, 1992.

Rehearing and/or Certification Denied Aug. 31, 1992.

L. Martin Reeder, Jr., and Elisa L. Fuller of Steel Hector & Davis, West Palm Beach, for appellant/cross appellee.

Patrick J. Casey and Daniel A. Hershman of Boose Casey Ciklin Lubitz Martens

McBane & O'Connell, West Palm Beach, for appellees/cross appellants.

PER CURIAM.

This is an appeal and cross appeal arising out of a minority stockholder's derivative action. The Bank of New York, as Trustee under the Will of C.J. Devine, appeals from a final judgment determining that it lacked standing to bring a derivative suit on behalf of South End Improvement Group, Inc. against appellees, the directors of South End. The directors cross appeal the trial court's findings against them on the merits of the bank's action. We reverse on the standing issue but reject the claims on cross appeal.

FACTS

The bank, as trustee under the will of C.J. Devine, owns 204 (22%) of the outstanding shares and is the single largest shareholder of South End. Mr. Devine died in 1963. His will created a charitable residuary trust funded by the residue of the estate, which included the 204 shares of South End stock. The bank was named co-executor of the estate and the trustee of the residuary trust. In 1967, record ownership of the shares was transferred from Mr. Devine to the Bank of New York and John Lane as co-executors of Mr. Devine's estate. The estate was closed in 1971, but for reasons unknown, record ownership was not then transferred to the bank as trustee. Notwithstanding this, South End continued to communicate with the bank as shareholder, and permitted the bank to vote the shares at shareholders' meetings. Subsequently, record ownership was transferred to the bank as trustee, on April 13, 1989, after this action was initiated, but one year before the trial.

South End was incorporated in 1943 to supply water to certain residents of Jupiter Island. The company's most valuable asset is approximately 77 acres of unimproved property ("the land") located along the intracoastal waterway on the mainland across from Jupiter Island. The trial court found that the land was worth approximately $6 million, and that South End's other assets were worth only about $100,000 as of March 1988. In March of 1988, the directors unanimously approved a resolution to donate the land to the Fish & Wildlife Service of the United States Department of the Interior ("Fish & Wildlife"), subject to the approval of South End's shareholders. Under the directors' proposal, South End would receive no compensation from Fish & Wildlife, but would reserve an easement over the land to operate and maintain its wells and pipelines. The directors called a special meeting of the shareholders of South End to "authorize" the donation of the land. The bank attended the special meeting of shareholders for the limited purpose of objecting, pursuant to section 607.391, Florida Statutes (1987), to the validity of the notice and the meeting. The holders of 36% of the company's outstanding shares, a majority of the shares present and voting at the meeting, voted to approve the transfer.

Subsequently, the bank filed the subject derivative action on behalf of South End, seeking to enjoin the directors from wasting the company's assets. The directors adopted a resolution providing that South End would not convey the land to Fish and Wildlife pending the resolution of the bank's complaint.

After a bench trial, the trial court entered a final judgment which included findings in favor of the bank on all points except the issue of standing to bring the action. In a lengthy final judgment, it was found that the proposed transfer of the land to Fish and Wildlife was a disposition of "substantially all" of the property and assets of South End; that the notice of the special shareholders' meeting did not comply with section 607.241(2); that the directors' resolution to donate the land was not approved by an affirmative vote of the holders of the majority of the corporation's shares, as required by section 607.241(3); and that the record date set for the meeting did not comply with sections 607.087(2). The court further found that the donation did not serve a "reasonable corporate purpose" and that "the real purpose behind the proposed donation was to preserve the

                view of the Jupiter Island residents across the Intracoastal Waterway."   The court nonetheless entered judgment in favor of the directors because it concluded that the bank did not have standing pursuant to sections 607.147, to bring the derivative action
                

STANDING

Section 607.147, Florida Statutes (1987), sets forth a basic standing requirement for shareholder's actions as follows:

607.147 Shareholders' derivative actions security for expenses. In any action commenced or maintained by a shareholder of any domestic or foreign corporation to procure a judgment in its favor:

(1) It must be made to appear that the plaintiff was a shareholder or a holder of voting trust certificates at the time of the transaction of which he complains or that his shares or voting trust certificates thereafter devolved upon him by operation of law from a person who was a shareholder or holder of voting trust certificates at such time.

(emphasis supplied). Section 607.004(13) states:

(13) "Shareholder" or "Stockholder" means one who is a holder of record of shares in a corporation.

The trial court found that the bank, in its capacity as trustee, was not a contemporaneous holder of record of shares on the date the action was commenced or on the date that the property transfer had been authorized by the directors, and thus did not have standing. The bank contends that this definition of standing is too narrow and contrary to the equitable nature and history of derivative actions. We agree.

The rationale behind the contemporaneous stock ownership rule is to insure that a plaintiff has a legitimate stake in the corporation in order to adequately represent the corporation's interests in a derivative action. Schupack v. Covelli, 498 F.Supp. 704, 705 (W.D.Penn.1980); Phillips v. Bradford, 62 F.R.D. 681, 685 (S.D.N.Y.1974). In recognition of the equitable nature of derivative actions, courts interpreting derivative action statutes similar to section 607.147 have liberally construed such provisions to grant standing in a variety of factual settings without requiring "record" ownership. ¹ The consistent rationale of these decisions is that the policies supporting the contemporaneous ownership rule are not advanced by denying standing to a proven owner of an equitable interest in shares. As the court in Gallup v. Caldwell, 120 F.2d 90 (3d Cir.1941) stated:

[The court is unable to perceive] why a clear title to shares of stock, with the immediate right to have the stock transferred on the books of the company, does not give the owner a right to the ear of this court to protect his interest in the corporation and its management.

120 F.2d at 94 (quoting O'Connor v. International Silver Co., 68 N.J.Eq. 67, 59 A. 321, 324 (1904), aff'd, 68 N.J.Eq. 680, 62 A. 408 (1905)).

Similarly, it is difficult for us to see any valid basis for denying the bank standing, since, at all times material, the bank was the legal owner of the shares, and has The bank is a legal entity, just as a person is a legal entity. It is undisputed that the bank, as a legal entity, has had an ownership interest in the shares since Mr. Devine's death. The beneficial owner of the shares may have changed, in this case from the estate to the beneficiaries of the trust, but the bank's claim to a legal interest in the shares has not changed. The bank points out that any standing it has derives from its legal ownership of the shares, not from its fiduciary relationship to a third party estate or a trust, and that its status has really not changed since the death of Mr. Devine, which set in motion the bank's role with reference to the stock. We agree that the bank was entitled to standing under the statute. ²

been for almost 30 years. In 1963, upon Mr. Devine's death, beneficial ownership of the shares automatically passed to the trust as a beneficiary under the will, and legal title passed to the bank as co-executor for purposes of administering the estate, and subsequently to the bank as trustee. Accordingly, prior to, and at the time of the events of March 1988, the bank held legal title to the shares and also represented, as fiduciary, the equitable title held by the trust and its beneficiaries. It would be difficult to conceive of a more substantial showing of "standing" for both legal and equitable purposes. The sole basis upon which the trial court's ruling rests, is the technical absence of a stock certificate issued in the bank's name as trustee prior to the transaction in question. Under the circumstances of this case we believe it would be putting form over substance to bar standing, given the bank's continuous ownership interest in the stock since Mr. Devine's death. As noted, after Devine's death the shares reflected the bank's legal interest as co-executor. Importantly, South End has at all times treated the bank as a "holder of record," providing it notice of, and allowing it to vote the shares at shareholder meetings.

The bank also contends that it has standing under that portion of section 607.147(1) which confers standing when shares are acquired from a record shareholder by "operation of law." "Operation of law" means that the shares come to the transferee without any act or cooperation on his part....