BENJAMIN C. DAWKINS, Jr., Chief Judge.
A program of corporate purchase of minority stock, as treasury shares, has reaped a whirlwind of bitterness, resulting in this three-pronged action.
Brought here under the Diversity Statute
In their verified complaint, supported by various documents, plaintiffs pitch their claims on charges of deliberate fraud, or, alternatively, upon constructive fraud and unjust enrichment. They allege that, in 1953, defendant, Mansfield Hardwood Lumber Company (sometimes called "Mansfield"), through its President, A. S. Johnson, and its Vice-President, Brown McCullough, fraudulently conceived a scheme through which it induced them to sell their stock in the company to it, on the pretense that no dividends would be paid for the next fifteen to twenty years, that all profits would be reinvested in a reforestation program on its extensive land holdings, and that the corporate assets would not be liquidated and distributed to its shareholders in the foreseeable future.
At that time Mansfield's outstanding capital stock consisted of 4,836 shares, of which plaintiffs owned 1,516 shares, or approximately 33 per cent. It is alleged that the corporate management, together with others dominated by them, owned 2,751 shares, or approximately 56 per cent of the total, giving that group full control of its affairs.
Plaintiffs aver that all of them, except Mrs. Hattie Johnson and Mrs. Jeanette Johnson Jennette, sold their stock to the company for $350 per share, and the latter two, owning 547 and 668 shares, respectively, sold theirs for $400 per share. All plaintiffs contend that in doing so they accepted as true, and relied upon, the representations made to them by Mansfield's officers that no dividends would be paid for many years, and that no liquidation and distribution of the company's assets would be made. Since its stock was closely held, mostly by members of the same two families, was not traded on the open market and, accordingly, had no established market value, they also relied, they say, on the officers' statements as to the intrinsic value of the stock, for which they first were offered $300 per share.
Plaintiffs further say that, in arriving at their estimates of stock value, they placed strong reliance upon defendant's annual Balance Sheets, prepared and distributed to stockholders by the management. Copies of two of these statements are attached to the complaint. Under the heading of "Assets", as of June 30, 1952, one of the larger items was "Timber and Timber Lands", then valued at $969,234.03. The Balance Sheet of June 30, 1953, gave these assets a value of $987,674.84. Actually, but allegedly unknown to them at the time, the true value was almost $9,000,000.
Plaintiffs next aver that, notwithstanding such representations by Mansfield's officers, both as to stock values and the lack of prospects for liquidation, they began negotiations for sale of the corporate assets within a few months after the stock had been bought. On September 26, 1955, defendant's then officers, directors, and remaining stockholders voted to liquidate completely, selling all, or substantially all, of the assets. To that end, on May 25, 1956, it sold all of its timbered lands, comprising about 93,000 acres, to Robert Gair Company, Inc., for $8,823,000, $5,000,000 being paid in cash, and the balance represented by a mortgage note for $3,823,000, bearing 3 per cent per annum interest, payable in five years. All minerals underlying these lands were reserved to defendant, to be distributed pro rata to its remaining stockholders. A lumber mill owned by defendant, at Winnfield, Louisiana, was sold for $285,000, on September 29, 1955, and another mill at Zwolle, Louisiana, was sold on May 25, 1956, for $75,000. Another asset, the Reader Railroad in Arkansas, was sold for an unascertained amount. No one apparently knows the exact total worth of the minerals reserved for distribution.
Plaintiffs calculate that defendant's assets will realize, or be worth, approximately $10,000,000, from which each share of the remaining stock will receive about $3,000, as contrasted to the $350 and $400 per share they received. If they had not sold their shares, in reliance on defendant's representations, they now would be entitled to receive more than $2,000 per share. Thus, they say, defendant obtained stock worth approximately $3,300,000 for $609,200, or about 18 per cent of the true value.
As stated, plaintiffs claim that all this resulted, to their serious detriment, from a fraudulent scheme on the part of defendant's officers, Johnson and McCullough. In the alternative, in the event it is determined that no deliberate fraud was practiced, plaintiffs contend that in their sale and defendant's acquisition of the stock they and defendant neither understood the true value of the rights being sold and acquired, and because of this mutual error of fact the sales were invalid.
In the further alternative, plaintiffs contend that in acquiring their stock defendant used cash and credit which equitably belonged to them and that, accordingly, no consideration was paid for the stock, or such consideration as was paid was not serious, and the sales were invalid.
In the still further alternative, plaintiffs urge that the price paid by defendant was so utterly out of proportion to the true value of the stock as to render the consideration vile, and to permit those who stood in a fiduciary relationship to plaintiffs to enrich themselves unjustly at plaintiffs' expense, and, therefore, that the sales were invalid.
Plaintiffs pray for a decree rescinding the sales of their stock to defendant, recognizing them as its equitable owners, requiring defendant to account to them for their share of the liquidation proceeds, and to deliver to them their proper part of the mineral rights reserved for distribution. They further allege that defendant is about to distribute a large amount of cash on hand, and to be received, to the remaining shareholders, and proposes to transfer to them title to undivided interests in the minerals, which would make it possible for third persons to acquire indefeasible interests therein, all to plaintiffs' irreparable injury. Accordingly, they have asked for, and were granted, a temporary restraining order, renewed each ten days since the suit was filed on June 22, 1956, to hold matters in status quo until determination of the suit on its merits. They further pray for a preliminary injunction for the same purpose.
Defendant has filed a motion to dismiss, encompassing several points of defense,
It further contends that it did not "immediately" begin to look for a sale of its timbered lands, after it had purchased plaintiffs' stock, but admits that in about the month of April, 1954, it began to negotiate with International Paper Company for that purpose. It further admits that on September 29, 1955, it agreed to sell those lands to the Gair Company, reserving all mineral rights, for $8,823,000.
While admitting that it was a closely held corporation, it denies that there was no market price for its stock; and it denies that plaintiffs had no accurate knowledge of the value of the company's assets, but, on the other hand, affirmatively alleges that they had representatives on the Board, as well as having participated in stockholders' meetings, and that they were entirely familiar with the company's assets.
It admits that the company followed the custom of circulating annual financial statements among its stockholders, but affirmatively alleges that these were accurate and correct according to the company's books. It denies that the statements made in the Balance Sheets of June 30, 1952 and 1953, were in any sense incorrect or that plaintiffs were required to evaluate their shares solely upon such statements. It affirmatively avers that the company's books, from which the statements were taken, were the usual and customary books in such a business, and that, in evaluating their shares, plaintiffs considered the nature and value of the assets rather than the book values alone.
Defendant further urges that the corporate liquidation now has been largely completed and that plaintiffs are without right to enjoin its further liquidation. If defendant is enjoined, it avers that a tax consequence, amounting to a $1,500,000 loss, will occur, due to defendant's inability to complete the plan of liquidation previously submitted to, and approved by, the United States Department of Internal Revenue, within one year from September 26, 1955. It further urges that should the injunction issue damages of approximately $150,000 per year will accrue because of nondistribution to the remaining stockholders of amounts realized from the liquidation.
Defendant next alleges that, if plaintiffs are entitled to any relief, which is
The motion to dismiss, which must be considered first, makes these points:
1. The complaint fails to state a claim upon which relief can be granted.
2. This is an action for rescission of a sale in which there is no allegation of tender by plaintiffs to defendant of the consideration received by plaintiffs from defendant pursuant to the sale.
3. If plaintiffs are entitled to any relief, which is denied, they have an adequate remedy at law.
4. The complaint affirmatively shows that defendant's position has so changed since the sale that it would be impossible for it to comply with an order granting the relief sought.
5. The complaint affirmatively shows that, if plaintiffs are otherwise entitled to relief, which is denied, they are barred by their own laches.
6. The complaint affirmatively shows that the alleged fraudulent scheme, and the alleged misrepresentations made pursuant thereto, were entered into by and were made on behalf of McCullough and Johnson, as stockholders, and other unnamed stockholders, and not on behalf of the corporation.
7. That there is a non-joinder of indispensable parties defendant, namely, the remaining twenty-four shareholders, whose interests will be directly affected by any decree rendered herein.
8. That there is a misjoinder of parties plaintiff, whose claims do not arise out of the same transaction, occurrence, or series of transactions or occurrences. These points will be considered seriatim.
1. Defendant's general motion to dismiss for failure to state a claim upon which relief can be granted naturally admits all well-pleaded facts in the complaint. If plaintiffs' allegations are true, they clearly would be entitled to the relief they seek. No citation of authority is required to demonstrate that this part of defendant's motion must be, and is, denied.
2. In support of its position that plaintiffs must have made, and must allege, a tender to defendant of the amounts paid by it for plaintiffs' stock, as a prerequisite to this action, defendant relies on a decision by a former member of this Court, now retired, Hollinquest v. Kansas City Southern Railway Co., 1950, 88 F.Supp. 905, 907, wherein one of present plaintiffs' counsel was the attorney for the defendant.
There, a personal injury damage suit, it was alleged that an agent of the defendant paid the injured person $100, and obtained a release, shortly after the accident, while she was in such physical and mental condition that she could not appreciate what she was doing, and when she had no opportunity to know or understand the extent of her injuries. Defendant pleaded lack of tender, and the Court ruled as follows:
We note that in the latest decision cited, Certified Roofing Co. v. Jeffrion, La. App., 1945, 22 So.2d 143, 146, that Court excused that plaintiff from making tender because it would have been refused by the defendant, stating:
For their part, plaintiffs here rely on a decision by the Louisiana Supreme Court, American Guaranty Company v. Sunset Realty & Planting Company, 208 La. 772, 23 So.2d 409, rendered on rehearing, loc. cit. 23 So.2d 430, on May 2, 1945, in an action to rescind certain deeds on grounds of fraud, where the Court ruled:
The decision just quoted from appears to be the last word on this subject by the highest Louisiana Court, notwithstanding earlier jurisprudence apparently to the contrary. As applied here, therefore, these plaintiffs are not required to tender back to defendant the amounts they received for their stock, especially since they pray for an accounting which, if granted, would entitle them to recover more than five times the price they were paid, less the amounts they received. Moreover, in keeping with the judicial philosophy enunciated in Certified Roofing, supra, we feel that plaintiffs should not be required to make a tender to defendant, because we know it would be refused—a vain and useless thing.
Accordingly, this part of defendant's motion must be, and is, denied.
3. Do plaintiffs have an adequate remedy at law? We think not.
If plaintiffs were to be relegated to an action in damages, they would find themselves, should they prevail, with a judgment against an empty shell—a corporation which had transferred all of its assets to its remaining shareholders, in keeping with its plan of liquidation and distribution, on or before September 26, 1956. Then, but only then,
We are forced to conclude, therefore, that plaintiffs do not have an adequate legal remedy available to them in these circumstances.
4. Defendant's strange argument, that its position has so changed since it bought plaintiffs' stock that it could not comply with an order granting the relief sought, falls of its own weight. It refers, of course, to its having already distributed, before this suit was filed, to its present shareholders the cash it had received in selling its lands, its mills and its railroad. No authorities are cited, none could be, in support of this point.
Factually, the record indicates that defendant probably could respond in full. Irrespective of that, however, it is a sufficient answer, we think, to state that plaintiffs clearly are entitled to seek recovery, to the limit of defendant's ability to respond, from such cash and other assets as it may have on hand when, and if, plaintiffs prevail on the merits of their case.
For these reasons, this part of defendant's motion must be, and is, denied.
5. With respect to defendant's plea of laches, it is pertinent to view the practical aspects of the position in which plaintiffs allegedly found themselves. If they discovered, in July of 1955, that defendant had determined to liquidate
While they then may have been deeply disappointed to learn that—contrary to what they had been told in 1953—defendant indeed would be liquidated, yet they did not realize then that they had been bilked into taking less than one-fifth of the actual value of their stock.
Their complete disillusionment came on, or shortly after, May 25, 1956—less than one month before this suit was filed on June 22, 1956—when they learned that the liquidation actually was returning nearly $10,000,000. Surely, if such circumstances truly were theirs, they are not guilty of laches, or any unreasonable delay in crossing swords with defendant.
At this time, we cannot tell with certainty, on the present record, whether plaintiffs actually were so totally ignorant of developments or actual values, as they allege. Because of this, we have concluded that this part of the motion must be, and is, denied; but its counterpart in defendant's answer (together with all other defenses) is to be preserved for determination with the merits of the case after we have heard the evidence on both sides of the controversy.
6. In so far as defendant's motion attempts to exculpate the company from the alleged conduct of Johnson and McCullough, on the ground that they acted only for themselves and not for the corporation, we must look once again to the complaint, the allegations of which must be accepted as true for the purposes of this motion.
There it is expressly averred that these officers, in confecting and accomplishing their alleged scheme to defraud, were acting in their official capacities as President and Vice-President, respectively. Their knowledge and their action thereby became that of the corporation:
Moreover, the corporation ratified their action when it bought plaintiffs' stock for less than 18 per cent of its true value. It received the benefits. It cannot be heard to say now, if plaintiffs' charges are true, that Johnson and McCullough did not act for it.
For these reasons, this part of the motion must be, and is, denied.
7. The present stockholders are not indispensable parties defendant. In law, if they had been joined, a plea of prematurity by them would be good.
Defendant is a Delaware corporation. As such, it, its stockholders, and persons claiming against it are subject to the corporation laws of that State. Christian v. Texas Gas & Power Corp., D.C.N.D. Tex.1952, 14 F.R.D. 80, 81. A footnote in that opinion quotes the Corporation Law of Delaware, Section 51, 8 Del.C. § 325, as follows:
As will be noted from the quotation, in that case the corporation had been dissolved, and its assets turned over to its shareholders, about six months before the suit was brought. Here defendant has not been dissolved. It is still a going concern, although now in the last stages of liquidation. Its shareholders are liable to plaintiffs, if at all, only secondarily. They not only are not indispensable parties; they would be improper parties if they had been joined.
This part of the motion, therefore, must be, and is, denied.
8. As stated, the last point of defendant's motion is that there is a misjoinder of parties plaintiff.
We think the complete answer to that argument is found in Rule 20(a), Fed. Rules Civ.Proc. 28 U.S.C.A.:
Analysis of plaintiffs' claims shows clearly that they seek recovery from the same defendant, whose officers allegedly acted in the same manner as to all plaintiffs, at roughly the same time, and with substantially the same results. All plaintiffs seek the same relief on the same grounds, i. e., 1) actual fraud, or 2) constructive fraud and unjust enrichment. All claims present common questions of fact and law. Their right to relief, if they establish it, arises out of the same series of transactions.
A multiplicity of suits, all aimed at the same goal and utilizing the same protective measures, would result if they could not join together in one assault upon their adversary.
We not only think plaintiffs properly have joined in their action here; it would have been improper for them to have proceeded separately.
For these reasons, and those given above, this part of defendant's motion, and the entire motion, are denied.
This brings us at last to consideration of the whole case, as presented by the pleadings and supporting papers, with particular regard to whether a preliminary injunction properly should issue. That matter has been submitted on those documents, no testimony having been taken.
In passing, we must note for the record that, because of the many problems confronting us, as shown by the very length of this opinion, with time being of such importance, we have been forced to proceed to our preliminary determinations herein under much pressure. Frankly, we have not read all of the many authorities cited in the voluminous briefs, but we have studied carefully what we consider to be the controlling cases and texts, in an effort to grasp thoroughly the essentials involved. That we do not mention some of the authorities cited in the briefs does not mean we have not considered them. We simply do not have the time to discuss and distinguish them from those we do cite as apposite, according to our best judgment.
In our approach to this complicated matter, we have tried to maintain in proper balance, above the welter of facts, figures and prior decisions heaped upon us, the equities involved on both sides of the case. Inevitably, notwithstanding this plethora of legal and factual complexities, we find ourselves returning ultimately to the single, simple, inescapable fact: Plaintiffs received from defendant less than one-fifth of the actual value of their stock.
Serious charges of deliberate fraud are made. Those charges are vehemently denied. Their resolution must await decision until all of the evidence is heard. Plaintiffs bear the heavy burden of proving actual fraud, not just by a preponderance of the evidence, but beyond a reasonable doubt.
The first offers to buy, for $300 per share, admittedly were made by defendant's officers, and it was they who ultimately concluded the transactions by presenting them to their Board for approval, readily granted. These officers stood in a fiduciary, or quasi-fiduciary, capacity in their relation to plaintiffs. It was their duty to advise plaintiffs fully, frankly and faithfully as to the true value of their stock.
We refer to plaintiffs' alternative grounds for relief. Can it conscientiously be said that the consideration they got was serious, as required by Louisiana law, or that the transactions did not constitute an unjust enrichment to defendant? We shall answer those questions after first referring to the applicable Louisiana authorities, and others which are pertinent.
Article 2464 of the LSA-Civil Code of Louisiana reads:
In Murray v. Barnhart, 1906, 117 La. 1023, 42 So. 489, 491, the Court said:
Later, in 1928, the same Court, in Blanchard v. Haber, 166 La. 1014, 118 So. 117, 119, said:
To the same effect are Hirsch v. Rosenberg, La.App., 14 So.2d 331; Shreveport Laundries v. Teagle, La.App., 139 So. 563; Spanier v. DeVoe, 52 La.Ann. 581, 27 So. 174, and D'Orgenoy v. Droz, 13 La. 382. See also Cali v. National Linen Service Corp., 5 Cir., 38 F.2d 35.
Pomeroy's Equity Jurisprudence, Vol. 3, Section 927, pp. 634-638, states:
Applying these authorities to the admitted facts of this case, it is our opinion that the price paid by defendant for plaintiffs' stock was so trifling, so inordinately out of proportion to its true value, that no fair-minded person could say it was "serious". Its inadequacy "shocks the conscience".
Article 1965 of the LSA-Civil Code of Louisiana, provides:
Restatement of the Law, on the subject of "Restitution", page 12, states:
Herrmann v. Gleason, 6 Cir., 126 F.2d 936, 940, held:
On the basis of those authorities, it is also our opinion that defendant was unjustly enriched through its purchase of plaintiffs' stock, and ought to make restitution.
It may be that plaintiffs, and especially Mrs. Johnson, Mrs. Jennette, and Max Brown, by their knowledge of the facts and their subsequent actions, have knowingly ratified defendant's conduct so as to be estopped from prevailing in their claims. Nevertheless, we think they are entitled to their day in court to prove, if they can, their right to recover. Such serious matters ought not to be decided merely on the face of the papers.
The problem which has caused us our greatest concern, in determining whether a preliminary injunction should issue, is the large potential tax consequence with respect to defendant's liquidation. Naturally, that is a result which all parties, and the Court, wish to avoid.
We are informed by all counsel, however, that a conference was held at Washington, D. C., on August 2, 1956, between plaintiffs' and defendant's counsel, on the one hand, and an official of the United States Department of Internal Revenue, on the other, wherein the latter informally stated that the tax loss probably could be avoided if defendant's remaining assets are transferred to a Court-designated trustee, as stake-holder, with power to invest in short-term Government securities. We think application for a formal ruling to that effect by all means should be made at once, and when received, the transfer should be made.
We thus conclude that plaintiffs are entitled to a trial. To protect their rights pending final determination, they likewise are entitled to have all assets remaining in defendant's hands, or subject to equitable control and distribution by this Court (including payments received and to be received, upon the balance
For these reasons, therefore, the preliminary injunction will be granted. Its terms, and the amount of bond to be furnished by plaintiffs, will be fixed after due hearing, to be arranged shortly. The case will be set for trial on its merits at the earliest possible date.
"* * * It is not enough that there is a remedy at law. But the remedy, to preclude injunction, must be certain and reasonably prompt, and as practicable and efficient to the ends of justice and its administration, both in respect of the final relief and the mode of obtaining it, as an injunction would be. The chief cause of the inadequacy of the remedies at law lies in the fact that the injury is irreparable or will occasion a multiplicity of suits."
Sec. 48, pp. 244-245:
"An injury will be regarded as irreparable so as to warrant injunctive relief where it tends toward the destruction of the complainant's estate, or where it is of such a character as to work the destruction of the property as it has been held and enjoyed, so that no judgment at law can restore it to him in that character. Very often an injury is irreparable where * * *
"* * * the damages occasioned are estimable only by conjecture, and not by an accurate standard." (Such as the value of the extensive mineral interests here involved.)
Sec. 49, pp. 245-246:
"Equity assumes jurisdiction to award relief by injunction where the injury complained of is otherwise irreparable and the remedy at law inadequate. This want of a sufficient legal remedy and the resulting irremedial character of the injury proceed largely from the fact that he will be subjected to a great number of suits at law. Prevention of such multiplicity, always a sufficient ground of equity jurisdiction, furnishes a well-recognized basis for the assumption and exercise of the power to restrain acts injurious to property and civil rights, and to prevent a person from being subjected to the costs and vexation of innumerable suits at law. It is of itself, and without reference to other considerations, sufficient to uphold the remedy."
43 C.J.S., Injunctions, § 24, p. 449:
"Where the consummation of a wrongful act will injure complainant, and in order to obtain redress at law he would be required to bring many actions against many persons, he is entitled to an injunction to prevent the performance of the act, where the rights of all depend on the same questions both of law and fact.
"Also where the consummation of a wrongful or illegal act will probably result in many disputed claims and many actions at law against complainant, his remedy at law is inadequate and he is entitled to the protection of equity by injunction."
"For the purposes of this discussion, the material facts set out in the complaint may be stated in few words. The defendant, Arthur O. Simpson, was a director and general manager of the Farmers' Fertilizer Company in which the plaintiffs were shareholders. The defendant, while occupying this trust relation to the plaintiffs, conceived and entered upon a scheme of acquiring the entire corporate assets at much less than their actual value, by representing to each of the plaintiffs that the corporation was not prosperous, but financially embarrassed, and thus having assigned to him the shares of each of the plaintiffs at much less than their real value. The defendant successfully carried out his scheme by means of the false representations to the plaintiffs as to the condition of the corporation and the value of its property; and thus, in breach of his trust, induced the plaintiffs and other shareholders to sell him their stock. After thus acquiring all, or nearly all, the shares of stock, he sold `the stock, franchises, real estate, buildings and machinery' at much more than he had paid the shareholders, to his great profit and to the great loss of the plaintiffs.
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"In a case like this where, according to the complaint, an officer of a corporation conceives and consummates a scheme to defraud the stockholders by deceiving them as to the value of the corporate property, and purchases the stock of each as a step in his scheme of fraudulent acquisition, it seems to us not only illogical, but most inconvenient and unjust, to require each stockholder to allege and prove the fraudulent scheme and the breach of trust in a separate action. In many corporations there are hundreds, and in some thousands, of stockholders, many of them having small holdings and residing at a distance from the corporate enterprise. To establish a rule which would deny to stockholders in such cases the right to unite in attacking such a breach of trust as is here alleged and demanding an accounting by the trustee would be a practical denial of justice." (Emphasis supplied.)
"We are satisfied that when directors or other officers step aside from the duty of managing the corporate business under the charter for the benefit of stockholders, and enter upon schemes among themselves or with others to dispose of the corporate business and to reap a personal profit at the expense of the stockholders by buying up their shares without full disclosure and at an inadequate price, there is a breach of duty. If the corporation ought to cease business, the stockholders may so decide and take steps to share the assets. If a favorable opportunity arises to sell out, the stockholders and not the managing officers are entitled to have the benefit of it."
See also Markey v. Hibernia Homestead Association, La.App., 186 So. 757, 763:
"It is generally held that, while a fiduciary relationship in a strict sense does not exist as between the stockholder of a corporation and an officer or director thereof, there is at least a quasi fiduciary connection between the parties, particularly where it is the duty of the director, by reason of special circumstances, to disclose matters within his knowledge. In 13 American Jurisprudence, Section 1011, it is stated:
"`A director or officer of a corporation actively engaged in the management of its affairs is, of course, in duty bound not actually to misrepresent the financial or other status of the corporate affairs. And if he does so, it has been held in various cases that the stockholder may rescind the sale or recover damages. A sound and equitable rule has been taken that while a director or officer may not be a strict fiduciary for an individual stockholder from whom he purchases stock, yet if called upon for information concerning the affairs of the company or if he volunteers such information or becomes active in inducing the sale, he must speak fully and frankly and conceal nothing to the disadvantage of the selling stockholder. Relief will be granted also to the stockholder where the purchasing director conspires to reduce the market price of the stock.'
"See, also, Fletcher's Cyclopedia of the Law of Corporations, vol. 3, sections 838 and 848. * * *
"It is to be observed here that the defendant directors were not purchasing plaintiff's stock with their own funds. On the contrary, they were using the assets of the corporation for that purpose. It seems too plain for extended argument that, under such circumstances, they became trustees for all of the stockholders and that, if they concealed in bad faith any facts from any one of the persons affected by the plan they devised, they should be made to respond for their deceit.
"In Wood v. MacLean Drug Co., 266 Ill.App. 5, it was held that a purchase of a block of its common stock by a family-owned chain drug corporation is subject to rescission, in a suit by a stockholder from whom purchased, after a sale of the company's stores to another company for an amount much larger per share of common stock than that paid to the individual stockholder, where it was not disclosed to such stockholder at the time of the purchase from her that two of the directors of her company, who were president and vice-president respectively, were negotiating with other companies for the sale of the company's stores, and such fact did not appear of record. There, the court, in distinguishing between the relation of a director who is purchasing the corporate stock for his own account from an individual stockholder, and the fiduciary capacity in which he acts where he is endeavoring to purchase stock for the corporation itself, stated:
"`In the instant case, when the board of directors of the MacLean Drug Company, acting as such board, bought Mrs. Wood's stock, not for the individual directors personally but for the MacLean Drug Company, a corporation, they were acting in their official capacities as directors, and under the law as stated in the Hooker case, (See [Hooker v. Midland Steel Co.] 215 Ill. 444, 74 N.E. 445, 106 Am.St.Rep. 170) we think they were acting as trustees for Mrs. Wood and were in duty bound to advise her of all of the facts; not having done so, she is entitled to recover the balance of the value of her 500 shares.'
"The defendants also maintain that the conclusions drawn by plaintiff, with respect to the fraud which was allegedly perpetrated by them, are unwarranted because the correspondence which forms the basis of plaintiff's claim does not show that they misrepresented the facts. But fraud and deceit need not necessarily be founded upon misrepresentation. On the contrary, a failure to state facts, where there is a duty to fully disclose them, is equally wrongful." (Emphasis supplied.)
See also Seagrave Corp. v. Mount, 6 Cir., 212 F.2d 389, loc. cit. 396, 397:
"We are of the opinion, however, that the case is controlled by the fundamental principle of equity governing the personal transactions of fiduciaries in matters involving the interests of those to whom the fiduciary duty runs. As expressed by then Chief Justice Cardozo of the Court of Appeals of New York in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546, 62 A.L.R. 1: `Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honestly alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions.'
"A director is a fiduciary. So is a dominant or controlling stockholder or group of stockholders. Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 84 L.Ed. 281; Southern Pacific Co. v. Bogert, 250 U.S. 483, 491-492, 39 S.Ct. 533, 63 L.Ed. 1099; Wagner Electric Corp. v. Hydraulic Brake Co., 269 Mich. 560, 566, 257 N.W. 884. When the dual relationship of individual and fiduciary creates a conflict of interest the fiduciary relationship must prevail. The Supreme Court said in United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, at pages 263-264, 37 S.Ct. 509, at page 510, 61 L.Ed. 1119, that questions of internal management are ordinarily left to the discretion of the directors, and `Courts interfere seldom to control such discretion intra vires the corporation, except where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relation which prevents an unprejudiced exercise of judgment; * * *.' (Emphasis added.) This was repeated with approval by this Court in United Milk Products Corp. v. Lovell, supra, 6 Cir., 75 F.2d 923, 927. In Ashman v. Miller, supra, 6 Cir., 101 F.2d 85, 91, we again said: `It is too plain for citation of authority that a director of a corporation cannot barter or sell his official discretion or enter into any contract whatever that will in any way restrict or limit the free exercise of his judgment and discretion in his official capacity, nor can he place himself under any direct and powerful inducement to disregard his duty to the corporation and its stockholders in the management of corporate affairs.' See also: Thomas v. Matthews, 94 Ohio St. 32, 43, 60, 113 N.E. 669, L.R.A.1917A, 1068.
* * * * *
"Although good faith on the part of the Directors and the disclosure of the material facts eliminate the question of actual fraud, equity will still act to enforce the fiduciary obligation under circumstances amounting to constructive fraud. Constructive fraud refers to acts which may have been done in good faith, with no purpose to harm the corporation, but which are done by one who has placed himself in a position of conflict between a fiduciary obligation and his own private interests. In such a situation, by reason of the strict rule applicable to fiduciaries, equity will take appropriate action to prevent the harm resulting from such actions, regardless of the good intentions of the fiduciary. Levitan v. Stout, D.C.W.D.Ky., 97 F.Supp. 105, 117; Epstein v. United States, 6 Cir., 174 F.2d 754, 765-766; Hyams v. Calumet & Hecla Mining Co., 6 Cir., 221 F. 529, 542-543." (Emphasis supplied.)