288 U.S. 123 (53 S.Ct. 295, 77 L.Ed. 652)

ROGERS v. GUARANTY TRUST CO. OF NEW YORK et al.

No. 227.

Argued: Dec. 15, 16, 1932.

Decided: Jan. 23, 1933.

opinion, BUTLER [HTML]

Messrs. Richard Reid Rogers and Evan Shelby, both of New York City, for petitioner.

Mr. John W. Davis, of New York City, for respondents.

TOP

Mr. Justice BUTLER delivered the opinion of the Court.

Petitioner, plaintiff below, owns 200 shares of the common stock of the American

Tobacco Company which he acquired prior to the passage of chapter 175, p. 354, New

Jersey Laws, 1920 (Comp. St. Supp. §§ 47—183 to 47—187), that is here involved. He

also owns 400 shares of common stock B. He brought two suits in the Supreme Court of

New York: One against the tobacco company and some of its directors, the other

against the trust company, Junius Parker and others. On application of defendants both

were removed to the federal court for the southern district of that state. The first was

discontinued as to some defendants and the cases were consolidated. The defendants

before the court are the two companies, Parker, and five of the seventeen directors of

the tobacco company including its president, one of its vice presidents, and its

secretary.

The tobacco company was organized under the laws of New Jersey, and in that state

maintains its 'principal and registered office' as designated in its charter, holds the

stockholders' meetings, and does a substantial amount of business. It is authorized by

the laws of New York to do business there and has in New York City its principal place of

business where its directors usually meet, its executives have their offices and most of

its records are kept. It carries on business in that and many other states and also in a

number of foreign countries.

The grievances alleged by plaintiff concern the issue, allotment, and sale of stock of the

tobacco company. June 25, 1930, the board of directors adopted a resolution

recommending the reduction by one-half of the par value and the doubling of the

number of shares of its common stock and common stock B. It had outstanding 526,997

shares of preferred stock, and, as a result of action in accordance with that

recommendation, 1,609,696 shares of common and 3,077,320 shares of common B.

And by another resolution the board advised approval by the stockholders of a plan for

the issue and sale of common stock B to employees pursuant to chapter 175, New

Jersey Laws, 1920.  1   The plan submitted accords to such employees and others actively

engaged in the conduct of the business as may be selected an opportunity to purchase

stock 'by way of additional compensation for services to be rendered,' and allots for

subscription shares of unissued stock. The board may offer stock to such persons in the

service at prices not less than par and upon other terms and conditions determined by

the president pursuant to authority granted him for that purpose by the board. No

employee or person actively engaged in the conduct of the business of the corporation

or its subsidiaries shall be deemed ineligible to its benefits by reason of being also a

director of the corporation or of any of its subsidiaries or of holding any office therein.

July 28, 1930, the stockholders adopted the plan. And January 28, 1931, the board

authorized a sale of 56,712 shares of common stock B at par value of $25 per share. It

directed that there be furnished to the president, to be considered in determining to

whom the stock should be allotted for purchase, a list showing the services rendered,

and, having regard to the value of the same, the rating on a percentage basis given to

each together with the total amount of his compensation for 1930. It recommended that

the basis of distribution should be the number of shares having par value equal to one-

third of that year's compensation to each allottee rated at 100 per cent. and

correspondingly less to those having lower ratings. And there was accorded to each of

535 employees, including directors and others active in the business, the right to

subscribe for the new stock on that basis. All the shares allotted were sold at $25 for

cash to the trust company. The trust company allowed each allottee to subscribe at the

same price. At that time it was worth $112. The agreement stated that this was by way

of additional compensation for service to be rendered between January 31 and

December 31, 1931; that until the end of the year no allottee could take up his stock;

that he was entitled to have dividends applied on the purchase price; and that, if he

should terminate his employment before the end of the year, the trustees were to

decide whether he should have his allotment.

The complaint attacked the transaction upon the following grounds: The directors being

disqualified by reason of their interest as allottees, the plan was not passed by a valid

vote or adopted as required by chapter 175. The subsequent vote of the stockholders,

required by the statute to be predicated upon action by the board, was likewise invalid.

The plan was ultra vires in that the allotment 'by way of additional compensation for

services to be rendered' violated chapter 195, p. 566, New Jersey Laws, 1917 (Comp. St.

Supp. N.J. § 47—176 et seq.). Under the Company's charter and the statutes of New

Jersey—section 124, General Corporation Law as added by section 16 of chapter 318, p.

544, Laws 1926 (Comp. St. Supp. N.J. § 47—119i)—every stockholder had the right

according to the number of his shares to have pro rata distribution of the stock in

question. And the complaint prayed decree that the defendants be enjoined from

carrying out the plan; that the stock be declared void and canceled; and that the

defendants, other than the tobacco company, be held for costs and damages sustained

by that company.

Four defenses were set up: Plaintiff failed to comply with Equity Rule 27 (28 USCA §

723). The stockholders including plaintiff ratified the allotments to the directors. The

suit is an attempt to regulate the internal affairs of a corporation foreign to New York,

and the United States District Court sitting therein should decline to take jurisdiction.

The allotments were fair and reasonable and were made in accordance with the

company's by-laws and the statutes of New Jersey. Plaintiff moved for an order striking

out the defenses as insufficient and for a decree in accordance with the prayer of the

complaint or, in the alternative, for an injunction pendente lite preventing the carrying

out of the plan.

The District Court (60 F.(2d) 106, 108) filed an opinion in which it said:

'In the present case, the validity of the shares sought to be canceled depends primarily

upon the interpretation and effect of the act of 1920. The directors cited this statute as

their authority for the plan when they formulated it, and have all along insisted that the

plan is in conformity with the statute. The plaintiff takes the position that the statute is

not applicable and has been used by the directors merely as a cover for a raid upon the

corporate treasury for their own profit. In addition, plaintiff submits that two other

statutes, that of 1917 and that of 1926, must be taken as limiting the operation of the

1920 act. It is obvious that the case presents not merely questions of fact, but questions

of some complexity under the New Jersey laws. There seem to be no decisions of the

New Jersey courts to serve as a guide in the proper construction and possible

interrelation of these statutes. The legality of the corporate proceedings which resulted

in the issuance of this stock is peculiarly a matter for determination in the first instance

by the New Jersey courts. It may be noted that the American Tobacco Company is not a

local enterprise. While its chief office is said to be here and it unquestionably carries on

business here, its activities are known to be world-wide. It has a New Jersey charter; it

refers to the New Jersey office as its principal office; it holds its stockholders' meetings

there. It is not a resident corporation in any sense of the word.' And it entered judgment

denying the motion and that 'in the exercise of this Court's discretion, each of the bills

of complaint herein be and the same are hereby dismissed, without prejudice to the

enforcement of the rights of plaintiff, if any, in the courts of New Jersey.'

The Circuit Court of Appeals, 60 F.(2d) 114, dealing with plaintiff's contentions before it,

held that the plan was authorized; that the stock was lawfully issued under New Jersey

statutes; and that, for the reasons given in the opinion, the bill was properly dismissed.

A dissenting opinion suggests that the plan was not sufficiently in detail to comply with

the New Jersey statute. The court affirmed the judgment appealed form, and, upon its

mandate, the District Court entered a decree that the bills of complaint be dismissed

with costs.

Among the points and contentions raised and pressed by plaintiff in his petition for

certiorari and argument here are the following: The plan is not definite and formulated

as required by chapter 175. That chapter as construed below is repugnant to the

contract clause of the Federal Constitution (Const. art. 1, § 10). The decision that the

plaintiff failed to comply with Equity Rule 27 is contrary to chapter 175. Chapter 195,

New Jersey Laws 1917, does not permit the issue of stock to employees for services to

be rendered. The decree of the District Court declining to exercise jurisdiction is

contrary to decisions of this court and in conflict with the decision of the Circuit Court of

Appeals for the Seventh Circuit in Williamson v. Missouri-Kansas Pipe Line Co., 56 F.(2d)

503.

The authorization, allotment, and sale of the shares in question involved the

proportionate ownership of stockholders and their rights inter sese. Unquestionably the

steps taken and proposed to formulate and carry out the plan constitute the conduct

and management of the internal affairs of the tobacco company. The controversy is

solely between the plaintiff and other stockholders not participating in the distribution

on one side and the purchasers of the new stock, the corporation, its directors, and

officers on the other. When, by acquisition of his stock, plaintiff became a member of

the corporation he, like every other shareholder, impliedly agreed that, in respect of its

internal affairs, the company was to be governed by the laws of the state in which it

was organized. His rights, whatever the tribunal chosen for their vindication, are to be

determined upon the ascertainment and proper application of New Jersey law.

It has long been settled doctrine that a court—state or federal—sitting in one state will,

as a general rule, decline to interfere with, or control by injunction or otherwise, the

management of the injunction or otherwise, corporation organized under the laws of

another state but will leave controversies as to such matters to the courts of the state

of the domicile. Wallace v. Motor Products Corporation (C.C.A.) 25 F.(2d) 655, 658;

Chicago Title & Trust Co. v. Newman (C.C.A.) 187 F. 573, 576; Eberhard v. Northwestern

Mutual Life Ins. Co. (D.C.) 210 F. 520, 522; Powell v. United Association, 240 N.Y. 616,

148 N.E. 728; Sauerbrunn v. Hartford Life Ins. Co., 220 N.Y. 363, 371, 115 N.E. 1001;

Jackson v. Hooper, 76 N.J.Eq. 592, 604, 75 A. 568, 27 L.R.A.(N.S.) 658; Guilford v.

Western Union Telegraph Co., 59 Minn. 332, 340, 61 N.W. 324, 50 Am.St.Rep. 407;

Kimball v. St. Louis, etc., Railway, 157 Mass. 7, 31 N.E. 697, 37 Am.St.Rep. 250; Hogue

v. American Steel Foundries, 247 Pa. 12, 15, 92 A. 1073; Babcock v. Farwell, 245 Ill. 14,

33, et seq., 91 N.E. 683, 137 Am.St.Rep. 284, 19 Ann.Cas. 74; Clark v. Life Association,

14 App.D.C. 154, 179, 180, 43 L.R.A. 390; North State Copper & Gold Mining Co. v. Field,

64 Md. 151, 20 A. 1039. Cf. Burnrite Coal Co. v. Riggs, 274 U.S. 208, 212, 213, 47 S.Ct.

578, 71 L.Ed. 1002. While the District Court had jurisdiction to adjudge the rights of the

parties, it does not follow that it was bound to exert that power. Canada Malting Co. v.

Paterson Co., 285 U.S. 413, 422, 52 S.Ct. 413, 76 L.Ed. 837, and authorities cited. It was

free in the exercise of a sound discretion to decline to pass upon the merits of the

controversy and to relegate plaintiff to an appropriate forum. Langnes v. Green, 282

U.S. 531, 535, 541, 51 S.Ct. 243, 75 L.Ed. 520; Heine v. New York Life Ins. Co. (C.C.A.)

50 F.(2d) 382. Obviously no definite rule of general application can be formulated by

which it may be determined under what circumstances a court will assume jurisdiction

of stockholders' suits relating to the conduct of internal affairs of foreign corporations.

But it safely may be said that jurisdiction will be declined whenever considerations of

convenience, efficiency, and justice point to the courts of the state of the domicile as

appropriate tribunals for the determination of the particular case. Cohn v. Mishkoff-

Costlow Co., 256 N.Y. 102, 105, 175 N.E. 529; Travis v. Knox Terpezone Co., 15 N.Y.

259, 263, 109 N.E. 250, L.R.A. 1916A, 542, Ann. Cas. 1917A, 387; Kimball v. St. Louis,

etc., Railway, supra.

The complaint shows that as of its date seven directors of the tobacco company were

not residents of New York. Only six allottees are before the court. The others, over 525,

are not mentioned in the complaint. It appears from the answer that many of them are

outside New York, and it may be inferred that a large number of them reside in the

other States and countries in which the company does business. At the time, February

23, 1932, of the dismissal of the bill the services of the employees, for which the

allotments constitute part compensation, had been fully performed and they were

entitled to have and presumably they, or at least some of them, had secured the

delivery of the shares so allotted to them. As the tobacco company, in addition to its

registered office, has property, operates directly or through subsidiary branch factories

in New Jersey and carries on business there and in other states and countries, it may

not be deemed to have been organized in that state as a mere matter of convenience

for the purpose of carrying on all its business in another state or be deemed in New York

to be a local concern. This case is wholly unlike Williamson v. Missouri-Kansas Pipe Line

Co., supra, relied on by plaintiff.

The determination of plaintiff's contentions requires not only the ascertainment of the

true meaning and intent of chapter 175 of New Jersey Laws, 1920, but also its

constitutional validity. Its provisions have never been construed by the New Jersey

courts and they or their like are not familiar in the statute law governing corporations

organized in other states. And other New Jersey statutes among which are chapter 195,

Laws of 1917, and chapter 318, section 16, Laws of 1926, are claimed by plaintiff to

have an important bearing upon this case. But the courts of that state have had no

occasion to consider the interrelation, if any, between them and chapter 175 pursuant

to which the stock in question purports to have been issued to employees. A mere

inspection of the New Jersey statutes directly involved suggests grave doubts as to their

proper application to the facts in this case and the difference of opinion expressed

below confirms that impression.

So far as concerns the cancellation of the allotted shares and other relief sought by

plaintiff the situs of the stock is in New Jersey and all questions relating to the validity of

the plan, authorization, issue, allotment, and sale of the same may be conveniently and

effectively determined in New Jersey courts, the authoritative and final interpreters of

the statutes of that state. A proceeding in rem is authorized, process thereiin may be

served by publication and a decree, final and binding upon all, canceling or sustaining

the stock, may readily be enforced. New Jersey Practice Act of 1903, § 84 (3 Comp. St.

N.J. 1910, p. 4076, § 84); Jellenik v. Huron Copper Co., 177 U.S. 1, 13, 20 S.Ct. 559, 44

L.Ed. 647; Andrews v. Guayaquil & Quito Ry. Co., 69 N.J.Eq. 211, 60 A. 568; Holmes v.

Camp, 219 N.Y. 359, 114 N.E. 841. The facts and circumstances disclosed by the record

clearly bring this case within the general rule and abundantly justify the exercise of

discretion on the part of the District Court in dismissing the bills of complaint without

prejudice. As the Circuit Court of Appeals considered and decided the merits of the

case, its judgment is reversed, the judgment of the District Court entered upon its

mandate is vacated, and the case will be remanded to the District Court with directions

to reinstate the earlier judgment dismissing the bills of complaint without prejudice.

It is so ordered.

1961.]

WESTERN AIR LINES, INC. (a Corporation), Respondent, v. JOHN G. SOBIESKI, as

Commissioner of Corporations, Appellant.

COUNSEL

Stanley Mosk, Attorney General, Lee B. Stanton, Deputy Attorney General, and Richard

W. Jennings for Appellant.

Darling, Shattuck & Edmonds, Hugh W. Darling, O'Melveny & Myers and Pierce Works

for Respondent.

OPINION

McMURRAY, J. pro tem. fn. *

This is an appeal by the Commissioner of Corporations of the State of California from a

judgment of the superior court in an action brought by Western Air Lines, Inc., for a writ

of mandate to review a final order rendered by the commissioner. By its judgment, the

superior court, in substance, determined that the commissioner had exceeded his

jurisdiction in purporting to act on a change in voting rights of its shareholders attempted

by Western Air Lines, Inc., by means of amending its articles of incorporation.

Western, as the respondent herein will be called, is a Delaware corporation with its

principal place of business in California. Western's original predecessor was

incorporated in California in 1925; thereafter, in 1928, a Delaware incorporation was

effected. This Delaware corporation, under a permit [191 Cal. App. 2d 401] applied for

and granted by the California Corporations Commissioner, exchanged its shares for all

of the outstanding shares of the California corporation in 1929, and the California

corporation then became a wholly owned subsidiary of the Delaware corporation. This

wholly owned subsidiary was dissolved in 1934. The certificates of incorporation of both

of these corporations contain provisions for cumulative voting.

On April 19, 1956, a group of Western's minority shareholders voted their shares

cumulatively and elected two of Western's 13 directors. The board of directors thereafter

met and, by amendment of the by-laws, increased the number of directors from 13 to

15. On July 12 and 13, 1956, the board resolved to eliminate cumulative voting for

directors and began proceedings in compliance with the relevant Delaware laws to

amend the certificate of incorporation with a view to the elimination of cumulative voting

rights.

A proxy statement and proxy form for voting against cumulative voting were sent to

each shareholder on July 31, 1956. The commissioner, by letter on August 28, 1956,

advised counsel for Western that in his opinion the proposed amendment of the articles

of incorporation would constitute a "sale" of securities within the provisions of section

25009, subdivision (a), of the Corporations Code, fn. 1 and, further, that pursuant to

section 25500 fn. 2 of the same code Western should not engage in the solicitation of

proxies or hold a shareholders meeting for the purpose of amending the articles until

Western had applied for and received a permit authorizing such action from the

commissioner.

Western applied for such a permit, reserving, however, the right to question the

jurisdiction of the commissioner to require such a permit. The commissioner granted a

negotiating permit, but expressly reserved the issue of "fairness" under Corporations

Code, section 25510, fn. 3 and conditioned the issuance [191 Cal. App. 2d 402] of the

permit upon nonfiling of the proposed amendment with the Secretary of State of

Delaware until a further permit had been obtained from the commissioner. The

negotiating permit granted further authorized the use of any proxies received by

management before its issuance, provided that such proxies were not thereafter

revoked. Western so advised its shareholders and clarified certain matters contained in

the original solicitation which had been objected to by the Securities and Exchange

Commission as misleading. It did not forward any new proxy forms and subsequently

voted those proxies which had been received before the objection of the commissioner

and the Securities and Exchange Commission, except those proxies expressly revoked.

On October 10, 1956, at a shareholders' meeting, 442,780 shares voted in favor of

eliminating cumulative voting and 199,810 voted against such change. Outstanding

shares then numbered 743,963 shares, requiring a vote of 371,982 to abolish

cumulative voting. Included in the voting were 194,278 proxies obtained prior to sending

the explanatory letter and the obtaining of the negotiating permit. On October 15, 1956,

Western applied for a supplemental permit to effect the elimination of the provision for

cumulative voting from its articles. After notice to all shareholders, a hearing on the

fairness of the proposed amendment was held by the commissioner. Upon conclusion

of the hearing, the commissioner made detailed findings of unfair, unjust and inequitable

actions and conduct by Western and its management. Among the findings made by the

commissioner were specific findings that indicated that Western's business in California

was of a substantial nature and that California residents were the holders of over 30 per

cent of the outstanding shares in Western.

Western's certificate of incorporation, as permitted by the laws of Delaware, contained

an article providing for cumulative voting and an article reserving the right to "amend,

alter, change or repeal any provision" in the certificate. The stock certificates issued by

Western also contained a written provision to the effect that by acceptance thereof the

holder "assents to and agrees to be bound" by all the provisions of the certificate of

incorporation. The final step to effect amendment of the articles of incorporation under

Delaware law is the filing of such amendment with the Delaware Secretary of State.

What the commissioner described as his "terminal findings" were, in essence, that

Western's management was determined [191 Cal. App. 2d 403] not to relinquish

control, nor to tolerate any interference from minority shareholders, or directors

representing them, and that the resolution enacted to eliminate the minority's right to

cumulative voting would be "... unfair, unjust and inequitable to the great number of

security holders residing in California." On the basis of the findings, the commissioner

concluded that he had jurisdiction under Corporations Code, sections 25009, 25500,

25510, supra, and 22507, fn. 4 and that the change in the right and privilege of the

shares from cumulative to straight voting would constitute a "sale" and an "exchange"

within the meaning of section 25009, subdivision (a), and section 25510 of the

Corporate Securities Law. The commissioner further found that the solicitation materials

of respondent were prepared and mailed from California; that both shareholders of

record and beneficial owners of shares of Western, resident in California, were solicited

in California in order to accomplish such change in voting rights; that the shareholders'

meeting on October 10, 1956, and the vote of the shareholders on the amendment

occurred in California, and that the filing of the certificate of amendment in Delaware

would result in a change in the contract rights between the corporation and its California

shareholder residents, over both of whom the commissioner had jurisdiction, and as to

which a prior definitive permit under California law was and is necessary.

The commissioner further found that for the purpose of considering the application for a

permit and to achieve overall fair play and substantial justice, the fiction of Delaware

residence should yield to the totality of California contacts so as to require, in addition to

compliance with the Delaware law, the approval of the California Corporations

Commissioner as a condition to eliminating the right of cumulative voting by the

shareholders. Upon the commissioner's denial of the definitive permit, Western applied

for a rehearing, [191 Cal. App. 2d 404] which was denied. Western then filed a

mandamus action, which resulted in a remand upon stipulation on April 12, 1957.

Hearings were again held as a consequence of the remand in June 1957. On February

5, 1958, the commissioner issued his findings and again denied Western's application. It

is the findings and denial of February 5, 1958, that are here in issue.

After being denied a rehearing, Western filed its complaint for administrative review and

for writ of mandate on February 28, 1958. The superior court made findings of fact and

conclusions of law and gave judgment issuing the peremptory writ of mandate. In a

memorandum opinion that court properly stated that mandamus was the proper action

under the circumstances. (Corp. Code, §§ 25317, 25318; Code Civ. Proc., §§ 1085

through 1094.5.) In its opinion, the court relied upon Moran v. Board of Medical

Examiners, 32 Cal. 2d 301, 308-309 [196 P.2d 20] and Tringham v. State Board of

Education, 50 Cal. 2d 507, 508 [326 P.2d 850]. The court did not reject commissioner's

argument that Code of Civil Procedure, section 1094.5, fn. 5 provides that judicial

review of proceedings before the commissioner is limited to the determination of

whether there is substantial evidence in the light of the entire record to support his

findings and order, but rather determined that the court had the specific power under

Code of Civil Procedure, section 1094.5, subdivision (b), to extend its review inquiry to

the question of whether the commissioner proceeded in excess of his jurisdiction. The

court then indicated that it felt that there was but one issue for determination, which was

whether the commissioner proceeded [191 Cal. App. 2d 405]" 'without, or in excess of

jurisdiction' " as a matter of law, and then the court concluded that under the facts

before it, the commissioner acted beyond his jurisdiction. The court indicated, in dealing

with the Corporations Code and the Corporate Securities Law of the State of California,

that such laws could only have application to transactions occurring within the State of

California, that the amendment of the articles of incorporation was not a "sale" or

"exchange" of stock and that the amendment of the articles of incorporation was an

internal affair of Western and its shareholders. The court further stated that any

changes in the "rights, preferences, privileges, or restrictions" of the outstanding stock

would be "... accomplished outside the State of California" by the filing and recording of

the certificate of amendment in the appropriate offices in Delaware. The trial court made

some 50 findings of fact and 10 conclusions of law with main emphasis upon Western's

extra-California activities.

On this appeal, the commissioner vigorously contends that his findings of fact must be

accepted as the controlling facts of the case, and respondent, as staunchly, contends

that the court's findings of fact must be accepted as controlling. The rule set forth in

Code of Civil Procedure, section 1094.5, subdivision (b), is supported by the language

in Allen v. Railroad Commission, 179 Cal. 68, 74-75 [175 P. 466, 8 A.L.R. 249], where

in considering a similar problem with relation to jurisdictional findings by a commission,

it is said: " 'It is plain, and indeed it has in effect been decided, that the declaration in

that section that "findings and conclusions of the commission on questions shall be final

and not be subject to review, has to do with the commission's determination upon

questions of fact within its jurisdiction. When the question, ever one of mixed law and

fact, goes, as here, to the jurisdiction itself, when the whole controversy revolves around

the inquiry as to whether or not the corporation is a public utility, to say that the

determination of the commission upon this matter is final and conclusive and is not

subject to review, is the equivalent of denying to a petitioner a hearing upon a right

carefully preserved to him by the language of section 67 itself. ...' "

" 'Thus we are brought to a consideration of the evidence upon which the commission

acted in holding this plaintiff to be in toto a public service corporation.' "

[1] People v. Lang Transportation Co., 217 Cal. 166, 171 [17 P.2d 721], sets forth the

proper rule as follows: [191 Cal. App. 2d 406] "... the determination of the board on the

question whether the facts existing were sufficient to bring the case within the scope of

its powers is subject to review in so far as they do, as here, present a question of law

bearing upon the subject. In other words, the finding of the board is not conclusive as to

the facts necessary to the existence of the board's jurisdiction." (Emphasis added.) (See

also Witkin, Summary of California Law, vol. 3, Constitutional Law, § 204, p. 2017.)

[2] Insofar as the findings of the commissioner and the court pertain to the question of

commissioner's jurisdiction to hold a hearing in circumstances such as those here

disclosed, it would appear that the plain language of section 25009 [subd. (a)] of the

Corporations Code providing that " '[s]ale' or 'sell' includes every disposition, or attempt

to dispose, of a security or interest in a security for value. 'Sale' or 'sell' includes all of

the following ... an exchange; any change in the rights, preferences, privileges, or

restrictions on outstanding securities" persuades us that the court below erred in finding

that the commission had no jurisdiction to act in this matter. Many cases hold that where

the Corporate Securities Act is violated by solicitation of sales of stock in California, the

Corporate Securities Act applies even though issuance of the stock and the transfer of

title are to take place in a foreign state. (People v. Sears, 138 Cal. App. 2d 773, 791

[292 P.2d 663].) Furthermore, even criminal sanctions may properly be imposed under

the above-stated rule where the main effectuation of a sale or transfer of stock takes

place in California although the ultimate act may take place extraterritorially. (People v.

Alison, 189 Cal. App. 2d 201, 205 [10 Cal. Rptr. 859].)

People v. Rankin, 169 Cal. App. 2d 150 [337 P.2d 182], specifically holds that even

though the last act necessary to the issuance of a security such as the signing of

documents occurs outside of California, the Corporations Commissioner is not thereby

deprived of jurisdiction over the subject matter.

Respondent cites Robbins v. Pacific Eastern Corp., 8 Cal. 2d 241 [65 P.2d 42]; B. C.

Turf & Country Club v. Dougherty, 94 Cal. App. 2d 320 [210 P.2d 760] and Jones v. Re-

Mine Oil Co.,47 Cal. App. 2d 832 [119 P.2d 219], to the effect that the commissioner

has no extraterritorial jurisdiction, and that such jurisdiction as he has is limited to acts

done or proposed to be done in California. The Robbins case, supra, on page 284,

contains the following language: "It, therefore, follows that even if it be assumed that the

negotiations in [191 Cal. App. 2d 407] California were illegal, nevertheless the validity

of the sale in New York was not affected. This conclusion makes it unnecessary to pass

upon the contention of respondents, that the Corporate Securities Act, properly

interpreted, has no application at all to negotiations had in California that contemplate

the issuance and sale of stock in a foreign jurisdiction." (Emphasis added.)

B. C. Turf & Country Club v. Daugherty, supra, dealt with a state of facts which the court

felt did not amount to the solicitation or the type of preliminary negotiation requiring a

permit under California law. On page 332 of that opinion, it is expressly stated: "... the

discussions had in California by Fraser during his short visit in September, did not

amount to solicitation or the type of preliminary negotiation requiring a permit under

California law." The opinion further contains the following language relative to the

Corporate Securities Act (p. 329): "From a standpoint of interpretation, there can be no

reasonable doubt but that these provisions of the statute require a foreign corporation to

secure a permit to solicit a sale of its stock in this state, or to engage in preliminary

negotiations looking towards such sale, even though the issuance of the securities and

the transfer of their title will, in good faith, be completed in a foreign state. The sections

quoted clearly prohibit a foreign corporation from soliciting in this state a sale of stock of

its own issue without first securing a permit, even though in good faith the issuance of

the stock and transfer of title are to take place in the foreign state. We also have no

doubt that, although such a regulation may impose some restraint on interstate

commerce and place some restriction on free speech, it is a valid exercise of the state's

police power, and is not unconstitutional. It is true that in the Robbins case, supra, these

problems were expressly left open and not decided, and that no other California case

seems to have expressly determined these questions, but the suggested construction is

so clear that reasonable minds cannot differ thereon, and the question of

constitutionality has been so long settled that citation of authority would be superfluous."

As we interpret Jones v. Re-Mine Oil Co., supra, 47 Cal. App. 2d 832, that case, insofar

as it relates to the Corporate Securities Act, appears to rely upon the Robbins case,

supra, and states at page 840: "All the parties here did go in person to Nevada; they

there organized a corporation; they there paid for and had issued shares of stock in that

corporation, [191 Cal. App. 2d 408]and they there made an agreement regarding the

conditions on which they would hold the shares. No suggestion is made that any of

these acts were invalid under Nevada law. California law can have no application to

them and they must be regarded as valid here." The instant case shows no such

substantial extraterritorial dealing.

The case of Transportation Building Co. v. Daugherty, 74 Cal. App. 2d 604 [169 P.2d

470], relied upon by Western, was one wherein a corporation requested approval of the

amendment of its articles of incorporation to change its stock structure. The appellate

court upheld a trial court's determination that the commissioner had acted improperly in

denying such permit since such reorganization was an internal affair of the corporation.

It appears that at the hearing held by the corporations commissioner, stockholders were

invited to attend but none did; and the court based its opinion upon the ground that the

commissioner did not find that the plan was unfair, unjust, or inequitable, nor that a

fraud would be worked upon those who would acquire the new stock. On page 615 it is

said: "There was no dispute whatever as to the facts, and there was no failure to

disclose any facts in connection with the proposal. It is a fair, just, and equitable plan

unless it is the reverse. It is an honest plan if it is not dishonest. There is no middle

ground. The deputy commissioner evidently thought there was, and that without any

finding or evidence to support a finding that the plan was unfair, unjust or inequitable, it

was his duty to refuse the permit because of his opinion that the shareholders should be

able to work out a better deal for themselves." The quoted language clearly

distinguishes the instant case where proper findings were made under the relevant

Corporate Securities Act sections.

Western earnestly insists that under the authority of Southern Sierras Power Co. v.

Railroad Com., 205 Cal. 479 [271 P. 747], the commissioner had no jurisdiction to act

upon the amendment of the articles here proposed, again contending that such

amendment is essentially an internal affair of the corporation. The Southern Sierras

case was considered in Gillis v. Pan American Western Petroleum Co., 3 Cal. 2d

249 [44 P.2d 311], where it is put in its proper framework. In the last cited case, on page

252, it is said with reference to the Southern Sierras case: "The court held that the

commission was without jurisdiction, for the reason that it was never intended by the

Public Utilities Act of this state 'to subject [191 Cal. App. 2d 409] foreign corporations to

regulation concerning the exercise of the inherent corporate powers conferred upon

them by the legislative power of the incorporating state.' It was largely grounded upon

the Fryeburg case, which was very similar in character. The Fryeburg Water Company

was a Maine corporation doing business in both Maine and New Hampshire. It sought to

compel the public service commission to approve that portion of a stock dividend which

was represented by its capital investment in New Hampshire. The court refused the writ

upon the statement that while the language of the act conferring authority upon the

commission was quite broad it would not be 'presumed that the legislature intended to

give the commission power to regulate the internal affairs of such corporations.' We

have no criticism of these authorities. Indeed, in Commonwealth Acceptance Corp v.

Jordan, 198 Cal. 618 [246 P. 796], this court called attention to the well-known fact that

the laws of the several states authorize different capital stock structures for

corporations, and under the doctrine of comity they are allowed, in the absence of

express constitutional or statutory inhibitions, to enter other states for the purpose of

doing business, regardless of whether a corporation with like structure is permitted to be

formed in the latter states. However, these authorities are far from holding that the

issuance and sale of the stock in a state other than that in which the corporation is

formed is not a proper subject for legislative action. A number of authorities by their

conclusions confirm the right of the state to protect its citizens, by legislative

interposition, against the issuance or sale of stock in the state. Among these we cite,

Hohn v. Peters, 216 Cal. 406 [14 P.2d 519]; Hayden Plan Co. v. Friedlander, 97 Cal.

App. 12-16 [275 P. 248, 253]; In re Flesher, 81 Cal. App. 128 [252 P. 1057]. In the case

of London, Paris & American Bank v. Aronstein, 117 F. 601-609, it is said: 'It is true that

the courts in California cannot control the internal affairs of any foreign corporation.

Such matters are to be conducted in pursuance of and in compliance with the provisions

of the charter of the foreign corporation, and the laws of the country where it was

created; but in the management and method of its business affairs in California with the

citizens and residents thereof, in the sale or disposition or transfer of the shares of

stock, it must conform to the laws of California in relation to such matters, and is bound

thereby. In the recent case of Williams v. Gaylord, supra, 186 U.S. 157 [22 S. Ct. 798,

46 L. Ed. 1102], the Supreme Court of the United States said: [191 Cal. App. 2d

410] "When a corporation sells or encumbers its property, incurs debts, or gives

securities, it does business; and a statute regulating such transactions does not

regulate the internal affairs of the corporation." ' (Italics ours.) In Hall v. Geiger-Jones

Co., 242 U.S. 539-550 [37 S. Ct. 217, 61 L. Ed. 480, Ann. Cas. 1917C 643, L.R.A.

1917F 514], we find a similar statement of the purpose of legislation similar to that we

are considering which is helpful in arriving at a sound conclusion. It is as follows: 'It will

be observed, therefore, that the law is a regulation of business, constrains conduct only

to that end, the purpose being to protect the public against the imposition of

unsubstantial schemes and the securities based upon them. Whatever prohibition there

is, is a means to the same purpose, made necessary, it may be supposed, by the

persistence of evil and its insidious forms and the experience of the inadequacy of

penalties or other repressive measures.' To like effect is Merrick v. N.W. Halsey &

Co., 242 U.S. 568 [37 S. Ct. 227, 61 L. Ed. 498]. The case of Biddle v. Smith, 148 Tenn.

489-494 [256 S.W. 453], is authority for the proposition that in order 'to protect residents

of the state against the imposition of worthless investments offered by domestic and

foreign investment companies under whatsoever guise presented,' the legislature is

empowered to restrict valid issues to those which are in accordance with a permit

therefor and to declare void other issues. To the same effect is Edward v. Ioor, 205

Mich. 617 [172 N.W. 620, 15 A.L.R. 256]. Conceding, therefore, the premise of

respondents' argument that ordinarily speaking the issuance of capital stock or the stock

structure of a corporation is an internal affair, yet the issuance and sale of stock within a

state other than that of its organization may be regulated in order to protect the

residents and citizens of the former state."

Western also urges that the case of Order of United Commercial Travelers of America

v. Wolfe,331 U.S. 586 [67 S. Ct. 1355, 91 L. Ed. 1687, 173 A.L.R. 1107], sustains the

proposition that the commissioner had no jurisdiction to act as he did here. A reading of

that case persuades us that its holdings are necessarily restricted by the facts therein to

fraternal insurance associations. There were a number of such cases before the United

States Supreme Court before the decision in Wolfe, and the court seems to have

treated these cases as unique and to have established rules of law applicable only

thereto. [191 Cal. App. 2d 411]

The case of Watson v. Employers Liability Assurance Corp., 348 U.S. 66 [75 S. Ct. 166,

99 L. Ed. 74] was one wherein it was contended that no action might lie against an

insurer, where that insurance company was a foreign corporation qualified to do

business in Louisiana, until after the insured's liability to pay damages had been finally

determined either by judgment or agreement. The Supreme Court dealt with a Louisiana

statute which provided for direct actions for injuries occurring in Louisiana (regardless of

whether the insurance policy was written or delivered in that state), and which

conditioned the right of a foreign liability insurer to do business in Louisiana upon the

consent to allow suits under such statute. The court rejected the argument that such

statute was violative of the equal protection, contract, due process and full faith and

credit clauses of the federal Constitution and realistically recognized that a state has a

legitimate interest in safeguarding the rights of persons injured there even though

certain of the activities affected occurred beyond its boundaries.

It would appear that the provisions of the Corporate Securities Act here before us are a

proper exercise of legislative discretion in requiring that corporate dealings with

residents of this state be authorized by the Commissioner of Corporations, particularly

where such corporation does a substantial amount of business within the state, and the

act is not violative of the constitutional clauses of equal protection, contract, due

process and full faith and credit if such legislative enactments operate equally upon

such foreign corporations and domestic corporations in this state.

Furthermore, it appears here that since 1929 Western has recognized and submitted to

the continuing jurisdiction of the California Corporations Commissioner. At that early

date Western applied for and was granted a permit by the commissioner to allow the

exchange of its shares for those of its California predecessor. At that time, the permittee

represented to the commissioner that the shareholders of the California corporation

would not be hurt in any way by the exchange. If the exchange had not taken place, the

shareholders could not now be deprived of their right to cumulative voting, for a

California corporation, by legislative act (Corp. Code, § 2235) must provide its

shareholders with the right to vote cumulatively for directors. Thus it is apparent that the

condition agreed to by Western as a basis for the original exchange of stock now tacitly

prevents the company from [191 Cal. App. 2d 412] depriving its shareholders of a right

which they would now have had if the 1929 exchange had not taken place.

Western complains that the commissioner, since the institution of this action, has

created a new class of foreign corporation called a pseudo- foreign corporation, and

urges that such definition of such corporation is mere fiat; that the commissioner has

usurped the function of the Legislature which has seen fit to divide corporations into

only two classes--domestic and foreign; and that the commissioner has seen fit by his

arbitrary definition to create a third. Western's position in this respect is not well taken.

The commissioner did not create any new class of corporation. He merely named a

class of corporation which has, in effect, existed for many years, one with its technical

domicile outside of this state but one which exercises most of its corporate vitality within

this state. Unless it can be said that the Corporations Commissioner's characterization

of such corporation as "pseudo-foreign" is arbitrary, it would appear to be a matter well

within his administrative discretion. The concept of a pseudo- foreign corporation as

defined by the commissioner and the well established concept of "commercial domicile"

of a corporation appear to us to be founded upon reality.

There appears to be little difference in difficulty of concept between that of commercial

domicile and that of pseudo-foreign existence. Each would appear to be descriptive of a

particular type entity and neither would appear to have been created by a fiat or

definition but rather by the nature, operation and establishment of certain corporations

and the transaction of corporate business. For an interesting discussion of the concept

of commercial domicile, see the case of Southern Pacific Co. v. McColgan, 68 Cal. App.

2d 48 [156 P.2d 81].

The fact that since the commencement of this action the commissioner has seen fit to

enunciate certain administrative rules which will be applied when dealing with a pseudo-

foreign corporation does not indicate any abuse of his discretion. Such corporations

have existed for many years, and naming them does not change their nature.

Contrariwise, it would appear to be a just and fair administrative step to preinform those

interested in such corporations as to the standards which will be applied by the

commissioner in considering various applications and granting various permits.

Western properly contends that there is nothing basically evil in provisions giving

shareholders the right of straight voting instead of giving them the right of cumulative

voting. [191 Cal. App. 2d 413] This does not mean, however, that the commissioner's

announced policy, that insofar as a pseudo- foreign corporation's coming into this state

is concerned, the lack of provision for cumulative voting in its charter will be considered

by him as a negative factor, is any abuse of his discretion. The argument that the

commissioner has created another class of corporation is not persuasive, nor is the

argument that legislative history relative to foreign corporations indicates that the

Legislature, by eliminating earlier provisions requiring cumulative voting to be provided

by all corporations and associations doing business in this state, declared an affirmative

public policy allowing foreign corporations to provide whatever form of voting they

wished persuasive.

It is certainly equally likely that the Legislature, by eliminating and failing later to reenact

the sections requiring foreign corporations to provide for cumulative voting, intended to

allow the appraisal of the fairness of the corporate structures of foreign corporations to

be examined and appraised by the commissioner within reasonable limits of discretion,

as it is that such legislative action was a declaration of public policy. It seems patent

that if the Legislature may provide that all domestic corporations shall have cumulative

voting, the commissioner may well, in his discretion, look askance upon any corporate

scheme of voting which does not contain such rights. This is not to say that under

certain circumstances the commissioner, in the exercise of sound discretion, could not

approve the issuance of securities in a corporation which did not provide for such

cumulative voting.

When we consider the complexity of present-day corporate structure and operation, and

the far-flung area of corporate activities where transportation or nation-wide distribution

of products may be involved, we are persuaded that the commissioner has this

discretion. To hold otherwise, and to follow the argument of Western to its conclusion,

would be to say that the commissioner might have the power in the first instance to

require certain rights to be guaranteed to shareholders before he would permit the sale

or issuance of a foreign corporation's stock in this state, but that immediately thereafter,

by the device of amending the charter of such corporation in another state, the entire

structure of that corporation, even to substantial changes in the rights of shareholders in

California, might be legally effected. Such a holding would enable a foreign corporation

to destroy the [191 Cal. App. 2d 414] rights which the State of California has deemed

worthy of protection by the enactment of the Corporate Securities Act.

This position is not without support in other jurisdictions. The mere fact that the last act

here necessary to effectuate the change in the voting rights of the numerous California

residents who are shareholders of Western will take place in Delaware does not of itself

necessitate a finding that the commissioner for that reason was without jurisdiction in

this matter. Also, a fair and impartial reading of the pertinent Corporations Code

sections convinces us that the amendment here sought is a "change in the rights,

preferences, privileges, or restrictions on outstanding securities" (Corp. Code, § 25009,

subd. (a), supra) of such nature as to be within the contemplation of the Legislature

upon enactment of those sections.

Numerous arguments relative to comity between states are advanced by Western, but

none of these appear to be sufficiently cogent to invalidate the above interpretations of

the Corporate Securities Act sections here involved. It would seem too evident to

require protracted dissertation that the right of cumulative voting is a substantial right,

and one which the Legislature may well have had in mind when it enacted the code

sections here under consideration.

While not binding upon the courts of this state, the reasoning and result reached in

State ex rel. Weede v. Iowa Southern Utilities Co. of Delaware, 231 Iowa 784 [2 N.W.2d

372], (State ex rel. Weede v. Bechtel, 239 Iowa 1298 [31 N.W.2d 853], cert. den. 337

U.S. 918 [69 S. Ct. 1159, 63 L. Ed. 1727] [same case on merits]) are persuasive of the

above result. That case, at 2 N.W.2d 395, succinctly states: "Simply because that State

[Delaware] chartered the appellee [corporation] does not require Iowa to admit it to

transact business within its border unconditionally" in a case where the directors of the

corporation proposed an amendment to the certificate which would change the value of

outstanding stock.

Because of the foregoing the judgment of the superior court must be reversed.

[3] This, however, raises another disagreement between the parties, the commissioner

contending that this court has before it the entire record of the proceedings before the

Corporations Commissioner and must therefore review the entire record, citing Code of

Civil Procedure, section 1094.5, supra. Western, however, argues that since the trial

court never appraised the commissioner's findings from either the standpoint [191 Cal.

App. 2d 415] of substantial evidence or, as it contends should have been done, an

independent review of the evidence, the matter must be remanded to the superior court

for trial. Western's position in this regard appears to be correct. The superior court's

determination was confined to establishing whether or not the commissioner had

jurisdiction. In so examining the record, the full review contemplated by section 1094.5

of the Code of Civil Procedure was not made. The court below determined there was no

jurisdiction, and thus made no determination of the merits of the case, that is, whether

there was substantial evidence to support the commissioner's findings. (See Martin v.

Alcoholic Beverage etc. Appeals Board, 52 Cal. 2d 259, 264-265 [341 P.2d 291].)

There is no express grant of the right of an appellate court to conduct a review in such a

case without remand, and it would appear to be of doubtful wisdom to attempt such

review in a court which is constituted as an appellate court when trial courts are

established for that very purpose.

Reversed and remanded.

U.S. Court of Appeals for the Fifth Circuit - 268 F.2d 317 (5th Cir. 1959)

June 16, 1959

Charles D. Egan, Benjamin C. King, Sidney M. Cook, Frank M. Cook, Shreveport, La.,

for appellant.

John M. Madison, Vernon W. Woods, Shreveport, La., Ned A. Stewart, Texarkana, Ark.,

J. W. Patton, Jr., Lewisville, Ark., for appellee.

Before RIVES, TUTTLE and BROWN, Circuit Judges.

PER CURIAM.

Interpreting the opinion as being based on a breach of fiduciary relationship owed by

appellant's officers and directors and majority stockholders to the appellees as minority

stockholders, appellant insists that such a decision must fail in law because: (1) the

existence vel non of such a fiduciary relationship must be determined by the laws of the

state of incorporation, viz., Delaware, which imposes no such fiduciary relationship; (2)

the Civil Law of Louisiana prohibits the imposition of the remedy of "constructive trust"

or "equitable lien" on real or personal property; and (3) Article 1847, LSA-Civil Code,1 

requires that there be an element of "intent" or "design" for an action to be based on

fraud; and liability predicated on "constructive fraud" is unknown in Louisiana Civil Law.

Upon further consideration, we agree that the opinion is at least misleading, particularly

to Louisiana jurists who practice under that State's unique concepts of equity

jurisprudence. We will attempt to clarify and correct the basis for our holding.

We initially expressed doubt that the defendant's officers were guilty of fraud per se

because of our doubt that the naked "intent to deceive" element was adequately

established. We next held that a "growing minority" of jurisdictions, including Louisiana,

recognize a fiduciary relationship or a position of confidence existing between the

directors and officers of a corporation and the individual stockholders, especially when

the former purchase shares of stock from the latter. And we held that, when this

fiduciary duty is violated, it is

"* * * immaterial whether its breach is described as constructive fraud, unjust

enrichment, fraudulent breach of trust, breach of fiduciary obligation, gross negligence,

or otherwise, and whether the remedy is given by a constructive trust, restitution, or

accounting. These are all relative terms describing broad equitable concepts. The

standard of a fiduciary's duty to his beneficiary, depending upon the instant relation and

the facts of the particular case, lies somewhere between simple negligence and willful

misconduct or fraud with the intent to deceive. The actual intent to deceive is not

required where one party is so placed in such an advantageous position to the other.

Actual fraud will afford redress in the absence of the special relationship."

We concluded by holding that Louisiana has long recognized the fiduciary relationship

in situations like the present case, and that these Louisiana decisions "fully answer

appellant's contentions that Louisiana's limited equity jurisprudence will prevent our

imposition of a `constructive trust' or `equitable lien' or `right of restitution' for the breach

of the fiduciary duty owed to the plaintiffs by defendant's officers." Then, we listed the

ways in which this confidential relationship was violated.

We believe that all of what was said above is good law, both in common-law States and

in Louisiana, except for the possible misleading construction which could be placed on

the statements which describe the breach of this duty and the remedy in broad

equitable concepts as applying literally to Louisiana law. We agree with appellant that

the Louisiana Civil Law prohibits the imposition of a constructive trust or equitable lien

on property.2 

We stated that a "growing minority" of jurisdictions recognize the existence of a fiduciary

relationship inuring from the officers or directors or majority stockholders to the

individual or minority stockholders, particularly concerning the purchase of stock from a

shareholder.3  The next question presented is which law should determine this

relationship — that of Delaware or Louisiana?

It is well settled that a federal court in a diversity case must apply the conflict-of-laws

rule of the state in which it sits.4  While Louisiana conflict-of-laws is silent on which law

determines whether such a fiduciary relationship exists in a foreign corporation, its

various conflict-of-laws rules are generally the same as in other states.5  Therefore, we

must look to the general law.

A number of cases have held that the conflict-of-laws rules of the forum require that

court to refer to the "law of the State of incorporation to determine the extent and nature

of relationship between corporation and stockholder, corporate officer or director and

stockholder and between stockholders inter sese,"6  while the law of the place of the

wrong determines the quantum of the breach of duty.7  Apparently, Delaware imposes

no fiduciary duty on the part of officers or directors or majority stockholders in buying

stock from the minority or individual stockholders.8  In strict logic, a strong case is made

that, if this Court's opinion is based exclusively on the breach of fiduciary obligations

owed by directors and majority stockholders of a foreign corporation to minority

stockholders, and if literal compliance is given to those decisions holding that the State

of incorporation sets the standards for all personal relationships between persons

connected with the corporation, the opinion is faulty.

Those decisions (listed in footnote 6, supra) are, however, in our opinion, either

inapplicable or unsound where the only contact point with the incorporating state is the

naked fact of incorporation, and where all other contact points, such as, residence of

parties and actors, situs of property, lex loci delicti or contractus, place where

corporation is conducting its only or principal place of business, et cetera, are found in

another jurisdiction. Certainly, in such a situation the charter of the corporation and even

non-repugnant statutory laws of the state of incorporation limiting corporate powers

should govern the internal affairs of the corporation.9  When, however, the situation is

such as here, where neither the charter nor the statutory laws of the incorporating state

are applicable, and all contact points are in the forum, we believe that the laws of the

forum should govern.10 

This was precisely the situation in Blazer v. Black, supra, note 6, 196 F.2d 139,

involving a suit by a former stockholder of a dissolved corporation against its former

president for damages for the alleged fraudulent conversion of the stockholders' stock

before dissolution. The corporation was organized under the laws of Illinois but all other

contacts were in Kansas. The court reversed the lower court's judgment for defendant,

holding that, under the minority view of Kansas, the director was a fiduciary when

negotiating with a stockholder for purchases of shares. The court did not discuss the

law of Illinois.

In the case of Mayflower Hotel Stockholders Protective Committee v. Mayflower Hotel

Corp., supra, note 6, 193 F.2d 666, the District of Columbia Circuit had held in a prior

appeal (84 U.S. App.D.C. 275, 173 F.2d 416) that the directors or majority stockholders

occupy a fiduciary relation toward the minority stockholders when selling stock control,

relying on Supreme Court decisions which arose under federal statutes or which were

diversity cases prior to Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S. Ct. 817, 82 L.

Ed. 1188. On the second appeal, after the defendants presented the question that

Delaware law should control such fiduciary relations, the court declined to consider

whether the "law of the case" applied to second appeal matters determined on a first

appeal (193 F.2d at page 669) and held, as a concurrent ground for imposing these

high standards, that the District of Columbia and Delaware law is in substantial accord

in imposing a fiduciary relationship on a majority stockholder regarding transactions

between corporations with interlocking directorates. 193 F.2d at page 671.

Most of the other cases listed in footnote 6, supra, involve situations where the courts

were seeking to impose the fiduciary rule of the state of incorporation in order to escape

the inequitable rule of the forum (generally Delaware).

However, in view of our holding hereinafter that the district judge was not clearly

erroneous in holding that the actions of appellant through its officers constituted

actionable fraud under Article 1847, LSA-Civil Code, what has been said concerning the

choice of laws to determine the duty owed by officers, directors, or majority stockholders

to the minority stockholders may not be necessary for the disposition of this case. That

is true because, as will be seen, the broad scope of fraud in Louisiana covers situations

where the law imposes an obligation on the party with superior knowledge to disclose

facts within his knowledge to the other and to deal in an atmosphere of trust and

confidence. Since appellant's officers had such superior knowledge, Louisiana fraud

rules demanded open and disclosed dealings with utmost fairness.

As stated earlier, the equitable remedies of constructive trust or equitable lien are alien

to the civil law. Without these remedies and with the rule that "constructive fraud," found

in the law of fiduciaries and characterized by the lack of the "intent to defraud,"11  is

impossible under Article 1847,12  Louisiana courts have an awkward time imposing

liability for the breach of a fiduciary's duty to disclose or the breach of other fiduciary

relations.13  In some cases involving a relationship of confidence between the parties,

the Louisiana courts have used the terms of common-law equity, ordinarily obnoxious to

the civil law, to describe the breach and remedy for breach of fiduciary duty, such as,

"breach of trust" and "constructive trust."14  Normally, however, the Louisiana courts, in

finding liability for a breach of a fiduciary duty, have based such liability on "fraud" as

encompassed in Article 1847 of the LSA-Civil Code. This is true in cases involving both

corporate fiduciaries15  and other fiduciaries16  Therefore, the breach of the relationship is

called fraud and the remedy is, of course, a rescission of the contract or damages.17  By

bringing such relationship under the broad heading of fraud, the Louisiana courts have,

in effect, reached the same results as would be reached under the common-law —

results which seem to common-law lawyers hard to obtain under a literal interpretation

of the Civil Code.18 

It is also apparent that these same results are achieved when the Louisiana courts hold:

"In determining whether or not fraud has been proved, the situation of the parties and

the circumstances surrounding the transaction may be taken into consideration,"

Winzey v. Louisiana Industrial Life Ins. Co., La.Ct.App., 1940, 195 So. 67, 69;

and when they hold:

"Considerable stress is laid by counsel for plaintiff on the question of the proof that is

generally required to show that fraud exists. Whilst it is true that in Article 1848 of the

[LSA-] Civil Code it is provided that fraud, like every other allegation, must be proved by

him who alleges it, however, that same article further provides that `it may be proved by

simple presumptions, or by legal presumptions as well as by other evidence. The maxim

that fraud is not to be presumed, means no more than that it is not to be imputed

without legal evidence.' Courts have always acknowledged how difficult it is for one to

prove fraud by positive and direct testimony, realizing full well that those who indulge in

it generally prepare themselves in such a manner as to cover up and leave no traces of

their practice behind them. In an early case, Simon-Gregory Dry Goods Co. v. Newman,

50 La.Ann. 338, 23 So. 329, the Court stated that: `While fraud is never to be

presumed, courts of justice "recognize the cunning concealment in which it shrouds its

devious practices and the difficulty of tracing it by direct proof."' We can well conceive of

such a situation in this case where such practices may well have been indulged in and it

becomes next to impossible to put our finger on any particular piece of direct testimony

to show actual fraud on the part of Griffing. As a matter of fact his fraud wasn't active

but rather of a passive nature in that he failed to disclose the information which he was

in justice and in equity bound to disclose to the other party to the contract who was not

on an equal footing with him. He suppressed the truth, and therefore the case comes

within the rules laid down in our Civil Code," Griffing v. Atkins, supra, 1 So. 2d 445, 450;

and when they hold:

"* * * `Fraud,' as the word is used in our Code and in courts of equity, as relates to

contracts, `comprises all acts, omissions and concealments involving a breach of legal

or equitable duty and resulting in damage to another'," Thieme v. Collier, 1930, 13

La.App. 661, 128 So. 730, 731;

and when they hold:

"* * * While a purchaser is under no obligation to inform a prospective vendor as to the

value, the title or the condition of the property involved, he, individually, or as agent for

his principal, having made representations and statements as to the value, the title or

the condition of the property, knowing them to be false or reckless or without knowledge

of their truth or falsity, is under the solemn obligation to make correct representations

and tell the whole truth, without concealment or suppression of any material facts,

especially if there exists an inequality of knowledge, as where the seller does not reside

near the land and the purchaser does and is familiar with it," American Guaranty Co. v.

Sunset Realty & Planting Co., 1945, 208 La. 772, 23 So. 2d 409, 449;

and when they hold:

"`Two things are necessary to constitute fraud: the intention to defraud, and actual loss

or damage, or such strong probability of it as will induce a court to interfere.' (Slocomb

v. Real Estate Bank of Ark., 2 Rob. 92)," Buxton v. McKendrick, 1953, 223 La. 62, 64

So. 2d 844, 846;

and when they hold:

"The rule of equity, briefly stated, is that a purchase by a trustee or agent per

interpositam personam carries fraud on its face. Michoud's Case, [Michoud v. Girod] 45

U.S. (4 How.) [503] 552, 11 L. Ed. 1076." Cuggy v. Zeller, 1913, 132 La. 222, 61 So.

209, 212.

We have not overlooked the matters pretermitted on pages 753 and 754 of 263 F.2d,

but we think that those matters have been sufficiently covered in the opinions of the

district court and of this Court and that the contentions there pretermitted are without

merit.

In our original opinion we wrote too much in the language of the traditional equity

jurisprudence familiar to lawyers in common-law states. The evidence viewed in the

light of the civil law, including the principles just discussed, removes the doubt which we

held "that the `intent' element necessary as the basis for actual fraud was adequately

established." In view of the confidential relationship existing between the parties, and

considering the circumstances surrounding the transactions, we now hold that the

district court was not clearly erroneous in holding that the necessary "intent" had been

established to constitute actionable fraud in Louisiana. The petition for rehearing is

therefore,

Denied.