BISBEE et al. v. MIDLAND LINSEED PRODUCTS CO. et al.*

Circuit Court of Appeals, Eighth Circuit. April 13, 1927.

No. 7463.

1. Corporations 619-Liquidators of corporation were in fiduciary relation with corporation and stockholders, and could not deal' with its property for their own advantage.

Directors, officers, majority stockholders, and those in control of liquidation of corporation occupied toward corporation and stockholders, in respect to corporation's business and property, a fiduciary relation or sub modo trusteeship, and could not deal with corporation's property for their own personal benefit or advantage.

2. Corporations

619-Liquidators of corporation owe no trust duty to stockholders respecting dealings in stock, unless situation makes it inequitable to buy stock.

No trust duty rests on directors, officers, majority stockholders, or liquidators of corporation, in behalf of any other stockholders or set of stockholders, with respect to dealings between them, in buying or selling stock in corporation, unless some situation exists making it inequitable for them to buy stock in question.

3. Corporations 393-Directors, and not court, determine propriety and desirability of corporation purchasing its own stock.

Directors of corporation, and not the court, should generally determine the question of the propriety and desirability of corporation purchasing its own stock.

4. Corporations 316(3)-Whether officer may buy corporate stock on his own' behalf depends on whether it is his duty to buy stock for corporation.

Where officer of corporation may in his own behalf purchase stock of corporation, depends on whether it is his duty to purchase such stock on behalf of corporation.

5. Corporations 619-Stockholders' resolution held not to require liquidating agents to purchase corporation's stock on behalf of corporation.

Stockholders' resolution, making directors liquidating agents of corporation and directing them to conduct liquidation in the usual manner, by converting corporation's assets into cash and paying its debts and obligations held not to require directors, on behalf of corporation, to buy corporation's stock offered by stockholders.

ing treated as liquidating dividend for income tax purposes, within revenue laws then in effect, meaning sale to outside party. 7. Corporations 619-Facts held not to show that it was duty of liquidators of corporation not to deal in corporate stock in their own behalf.

Facts held not to show that it was duty of liquidators of corporation not to deal in corporation's stock in their own behalf, so as to make them liable to account to corporation for profits received in such transactions, and equity would not require that corporation itself should, while in process of liquidation, attempt to buy outstanding stock, in hope of realizing profit at expense of selling stockholders. 8. Corporations

619-Directors, securing purchaser for corporation's plants, held not required to account for profits and stock received for services to purchasing corporation, and for underwriting and financing its securities.

Directors, who openly, fairly, and for best interests of corporation being liquidated, took part in securing sale of corporation's plants for price satisfactory to corporation and stockholders, were not required to account to corporation or minority stockholders for profits earned in connection with underwriting and financing securities for purchasing corporation, or for stock in purchasing corporation received for services rendered to it.

9. Corporations 307-Directors and officers in fiduciary relation to corporation cannot assume positions in conflict with interests of corporation.

Directors and other officers of corporation, occupying a fiduciary relation toward corporation, are not permitted to assume positions which will bring their private interests into conflict with their corporation.

10. Corporations 619-President, employed by directors as liquidating officer at salary he had received as president, held not required to account to corporation therefor.

President of corporation, employed in good faith by directors as liquidating officer for 30 months at same salary, $5,000 per month, that he had received as president, held not required to account to corporation for such salary, where, after sale of corporation's plants, there remained the business and affairs of corporation to be closed up, and disposition of assets, consisting of raw materials, finished products, and accounts to the amount of $5,000,000. 11. Corporations 393-Equity court will not regulate internal affairs of corporation, or Interfere with salaries fixed by directors, not clearly excessive, in absence of fraud.

A court of equity will not undertake to regulate the internal affairs of a corporation, or assume to act as the manager of corporate affairs, or interfere with the fixing of salaries of its officers or agents by board of directors, in absence of fraud, and if salaries are not clearly excessive.

United States for the District of Minnesota; Appeal from the District Court of the John B. Sanborn, Judge.

H. V. Mercer, of Minneapolis, Minn. (E. J. Lien, of Minneapolis, Minn., on the brief), for appellants.

George Hoke and John Junell, both of Minneapolis, Minn. (Cobb, Wheelwright, Hoke & Benson and Lancaster, Simpson, Junell & Dorsey, all of Minneapolis, Minn., on the brief), for appellees.

Before KENYON, Circuit Judge, and Before KENYON, Circuit Judge, and SYMES and MOLYNEAUX, District Judges.

MOLYNEAUX, District Judge. This is a minority stockholders' suit for the purpose of enforcing an alleged right of action in Midland Linseed Products Company against the corporations and individuals named as appellees, praying that they be declared trustees of alleged wrongful profits, for an accounting, and for a receiver. The bill was dismissed by the trial court, after the appellants had rested, and the suit is here on appeal for review.

The Midland Linseed Products Company (hereinafter called the Midland), one of the appellees in this action, was a corporation with its principal place of business in Minne apolis, Minn., with an authorized capital stock of $10,000,000, having $3,175,000 of preferred stock, and $3,175,000 (the par value of shares, $100) of common stock, issued and outstanding. The appellee E. C. Warner was president and manager, as well as di

rector and member of the executive commit

tee. Clive T. Jaffray was vice president and

director, and member of the executive committee. Robert W. Webb (representing the Minneapolis Trust Company, as trustee under the will of Walter D. Douglas) was a director and member of the executive committee, Arthur F. Berglund was treasurer, William H. Morris was secretary, and Harry C. Piper and Sumner T. McKnight were di

rectors.

The appellant Arthur L. Bisbee owned 2,035 shares of the common stock; Frank J. Bisbee owned 1,400 shares, and Edgar C. Bisbee 2,349 shares; E. C. Warner Company owned 6,211 shares of common stock; Piper & Co., 4,696 shares; S. T. McKnight Company, 3,8202 shares; C. T. Jaffray, 842 shares; and Minneapolis Trust Company, under the will of Walter D. Douglas, held 6,666 shares. Such was the ownership of the common stock at the time of the purchase of

In the fall of 1921, the directors of the Midland became persuaded that a sale and disposition of the plants of the company and liquidation of the corporation was advisable, and they agreed, appellants concurring, that a price of $3,000,000 for the plants would be acceptable. Edgar C. Bisbee asked H. C. Piper to find a purchaser on that basis. H. C. Piper, a director of the Midland, and also a stockholder and director of Lane, Piper & Jaffray, Inc., investment bankers, did attempt to procure a purchaser at that time, but was unsuccessful. Later he reopened negotiations and finally induced the Archer-Daniels Company, a corporation engaged in business of the same general character as the Midland, to take part in organizing a new company, Archer-Daniels-Midland Company, which

would purchase and take over the plants of both the Archer-Daniels and the Midland Companies. After the organization of the new company, the plants of the Midland were sold to it for $3,175,000, the reasonableness of which price is not assailed. The sale of the plants was satisfactory to all concerned and is not questioned here. The new company also took over the Archer-Daniels assets.

The proceeds of the sale were paid to the preferred stockholders of the Midland, resulting in the retirement in full of all of the preferred stock outstanding. There remained approximately $5,000,000 in assets of the Midland Company after the preferred stock had been retired. The firm of Lane, Piper & Jaffray, Inc., participated in a number of syndicates which took part in financing the organization of the new corporation

and marketing its securities. In connection with such financing of the new corporation's securities, Lane, Piper & Jaffray, Inc., made an underwriting and merchandising profit. Neither Lane, Piper & Jaffray, Inc., H. C. Piper, Piper Brothers, nor anybody associated with them or any one else, received any compensation, commission, or fees in connection with the sale of the plants or property of the Midland to the new corporation, or otherwise, from the Midland, its officers or directors, or from any other source.

C. T. Jaffray was paid 100 shares of the stock of the new Archer-Daniels-Midland Company by the bankers' syndicate for services rendered and to be rendered as a director in connection with the new organization. This stock in the new organization was selling at that time at prices ranging from $23.50 to $39 per share. At about the time of

the sale of the Midland plants the directors of the Midland entered into an agreement with E. C. Warner, its then president and manager, whereby he was to continue with the company as its liquidating officer for a period of 30 months at the same salary he had been receiving, namely, $5,000 per month. Shortly after the sale of the Midland plants, the largest stockholders discovered that, if they took dividends in the form of liquidation, they would be obliged to make federal tax returns on such dividends as income, subject to both normal and surtax rates, and that the taxes so imposed would be very substantial. On the other hand, if they were to make a sale of their stock in the Midland to a third party, instead of retiring it by liquidation, such disposition would be treated as a sale of the capital assets and would result in a much lower tax. E. C. Warner, R. W. Webb, and C. T. Jaffray therefore proceeded to organize a corporation, the Richmond Securities Company, with a capitalization of $500,000. E. C. Warner, R. W. Webb, C. T. Jaffray, and Arthur Berglund were the only stockholders in the Richmond Company. The new company informed every stockholder in the Midland that it would purchase the common stock of the Midland at a price of $153 per share, and all stockholders, including the appellants, had an equal opportunity to sell their stock on this basis.

The appellants, Arthur L. Bisbee, Frank J. Bisbee, and Edgar C. Bisbee, did not sell their stock, nor did they ever offer or attempt to buy the stock of those who did sell, to the Richmond Company. From time to time liquidating dividends were paid in varying installments upon all common stock of the Midland, finally totaling $207 per share, and such dividends were paid to the appellants upon their stock, as well as to the Richmond Securities Company upon the stock which it had acquired.

It will be observed that the appellees sold to the Richmond Company the bulk of the stock bought by the Richmond Company at $153 per share. If they had held their stock as did the Bisbees, they would have received $207 per share. The result of their venture was that they received for their stock the same as Bisbee did, $207 per share; i. e., $153 per share on the sale to the Richmond Company, and $54 per share profit through the Richmond Company. The Richmond Company invested about $3,000,000 in purchasing the stock. It had $500,000 capital, and borrowed the rest of the money from E. C. Warner, E. C. Warner Company, Grain Securities Company, and the First National Bank of Minneapolis. E. C. Warner indorsed the Richmond Company paper to the First National Bank. The Midland did not furnish any of the money to finance the Richmond Company, and none of its money or assets was used by the Richmond in buying the stock.

The appellants have assigned 44 specifications of error, all of which may be considered under the forty-second specification, which is that the court below "erred in granting the dismissal." The questions raised by this appeal are:

From E. C. Warner....

From Douglas estate.

From Piper Bros..

From S. T. McKnight..
From C. T. Jaffray and his imme-

diate associates in the banking business (Mrs. Chamberlain and Mr. Price)

From Mr. Tucker, another associate of Jaffray... From Mr. Kelly of Boston.

9,000 shares 5,200 shares 1,800 shares 1,200 shares

2,500 shares

250 shares 250 shares

20,200 shares

None of the stockholders who sold to the Richmond Company have ever complained.

(b) Was there a duty upon H. C. Piper to account to these appellants or to the Midland because of any profits earned by Lane, Piper & Jaffray, Inc., in connection with the underwriting and financing of the ArcherDaniels-Midland Company securities? Likewise, was there any duty upon the appellee, Clive T. Jaffray, to account for the 100 shares of stock in the Archer-Daniels-Midland Company paid to him by the Bankers' Syndicate for services rendered and to be rendered to the new company?

the powder company were Alfred Du Pont and William Du Pont. Both were directors, vice presidents, and members of the executive committee. Now, it is clear that, if Coleman had made his offer of February 13th to Alfred Du Pont singly, or to Alfred and William jointly, their official relations to the powder company would not have prevented them singly or jointly buying Coleman's stock, although such purchase would have given him or them the potential power incident to such increased stock ownership. We use this simply to emphasize the position that the fact of the syndicate buyers of this Coleman stock being officers of the powder company did not, per se, qualify or take away the right officers of any company have to buy, in large or small quantity, its stock. It is manifest, therefore, that disability on their part to buy the stock must be found, if it exists, in the fact that they made some wrongful use of their position or influence as officers, or such wrongful use of the money, property, or credit of the company, as made it inequitable for them to acquire and hold stock which the company should hold or wished to buy for itself; or, to put it in another form, the facts of their being officers of the company and their bad faith as officers in buying the stock were such as to warrant the court in decreeing them trustees ex maleficio of the stock, and therefore liable to turn the stock over to the company, if it so desired. Do the proofs measure up to that standard?

[3] The directors, and not the court, should, generally speaking, determine the question of the propriety and desirability of the corporation purchasing its own stock. The court said in Du Pont v. Du Pont, supra: "To us, however, it has seemed that, assuming for present purposes, but not deciding, that the company had legal power to buy, the proofs show the question of exercising its power to buy was, after all, one of those business questions of corporate policy which the stockholders, through their majority, and not a court, through its equitable power, should decide." [4] There might arise a situation in the affairs of a corporation which would impose a specific duty upon those in control of the corporation to deal in the stock on behalf of the corporation. The rule is stated as follows in Fletcher, Cyc. Corp. § 2282: "The test seems to be whether there was a specific duty on the part of the officers sought to be held liable to act or contract in regard to the particular matter as the representatives of the corporation, all of which is largely a question of fact. If there is no such duty, then the directors, or

other corporate officer, may acquire outside interests, although the corporation may be more or less interested." Instances may be imagined where this duty would arise. It would undoubtedly be a breach of duty for an officer to buy stock for himself, when he had been employed by the corporation to buy it for the corporation.

[5] It is argued by the appellants that a special injunction and duty was laid upon the liquidating agents to buy such stock as was offered to the Midland Company by the stockholders, by the resolution adopted by the stockholders making the board of directors liquidating agents. No stock was ever offered for sale to the Midland, and the resolution referred to will not bear the construction placed upon it by the appellants. A reading of the resolution clearly discloses that such was not the intention of the resolution; the liquidating directors were directed by the resolution to conduct the liquidation in the usual and conventional manner, by converting the assets into cash and paying the debts and obligations of the corporation.

[6] Neither is the contention of the appellants, that the letters, Exhibits B and C, implied a plan whereby stockholders could remain in the company and get liquidating dividends or could sell their stock at a fixed price to the Midland Company. A reading of the communication shows that the opportunity necessarily meant a sale to an outside party or corporation, for the reason that it contemplated "making a sale of the capital asset."

In order to make a sale of a capital asset, under the revenue laws in force at the time, it was necessary to sell to an outside party, or otherwise the Internal Revenue Department would have treated the transaction as a retirement of the shares and the proceeds as a liquidating dividend. See Internal Revenue Cumulative Bulletin III, Vol. I, p. 47, I. T. 2034.

[7] There was no situation in the present case which laid a specific duty upon those in control of the corporation not to deal in the stock, and there was no situation in the affairs of the company which laid upon those in control a specific duty to deal in the stock of the corporation in its behalf. There was nothing in the situation that required those who had the power to decide to risk the assets of the company in speculating in its assets. It was not clear what the outcome of such speculation would be. The stock was not an obligation of the company, in any other sense than the right of the stockholders to participate in the distribution of the assets after the debts and obligations of the corporation had been