323 F.2d 826
Angus J. DePINTO, Hjalmar B. Landoe, Francis I. Sabo and
Edwin B. Pegram, Elmer W. Duhame, Appellants,
v.
PROVIDENT SECURITY LIFE INSURANCE COMPANY and John S.
Gorsuch and Albert J.Doig, Appellees.
No. 18245.
United States Court of Appeals Ninth Circuit.
Oct. 1, 1963, Rehearing Denied Nov. 20, 1963.
O'Connor, Anderson & Westover and John P. Otto, Phoenix, Ariz., for appellant Duhame.
George W. Botsford, T. W. Shumway, Guy C. Wilson and Donald Maxwell, Scottsdale, Ariz., for appellants Sabo and Pegram.
Joseph B. Gary, Bozeman, Mont., for appellant Landoe.
Evans, Kitchel & Jenckes, Herbert Mallamo and Joseph S. Jenckes, Jr., Phoenix, Ariz., for appellant DePinto.
W. Lee McLane, Jr. and Nola McLane, Phoenix, Ariz., for appellees.
Before BARNES, HAMLEY and JERTBERG, Circuit Judges.
HAMLEY, Circuit Judge.
This suit, in the nature of a stockholder's derivative action, was commenced by John S. Gorsuch, then a stockholder of United Security Life (United), an Arizona stock insurance corporation. Named as defendants in the amended complaint were United, American Security Investment Co. (American), United Finance Corporation, Angus J. DePinto, Hjalmar B. Landoe, Francis I. Sabo, Edwin B. Pegram, Elmer W. Duhame, and the eight other individuals listed in the margin.
The theory of the suit was that, by reason of fraud, negligence and breach of fiduciary duty, unjust enrichment and conversion on the part of the personal defendants, assets of United were diverted from that corporation in connection with its purchase of 30,800 allegedly worthless shares of American.
DePinto, Landoe, Sabo, Pegram, Duhame and several other defendants answered the amended complaint with general denials. DePinto also asserted affirmative defenses of laches and estoppel based upon the merger of United with Provident Security Life Insurance Co. (Provident), another Arizona insurance stock corporation, subsequent to the commencement of the action. Each of the five personal defendants named above also filed cross-claims against other defendants, and Sabo and Pegram filed a derivative cross-claim against several defendants, for the benefit of American.
After a trial with what the district court finally determined to be an advisory jury, the court entered a judgment in favor of United against all of the personal defendants, except Patrick J. Kelly, in amounts ranging from $308,000 to $314,794.19. Niesz, Pegram, Sabo, Landoe, Duhame, DePinto, Ballantyne and Croydon appealed.
We reversed, holding that a merger which United had consummated with Provident after the action had been commenced deprived Gorsuch of standing as a stockholder of United and deprived United of capacity to be sued, and standing as the real party in interest. In our decision, however, we suggested that the lawsuit could be saved by a reconstituting of parties, and remanded the cause to provide an opportunity for this to be done. Niesz v. Gorsuch, 9 Cir., 295 F.2d 909.
Following the remand, Albert J. Doig, a citizen of California who was then a former stockholder of United and a present stockholder of Provident, filed an application for leave to intervene as a plaintiff. He also moved for an order joining Provident as a party defendant. Provident moved to intervene and to be substituted as plaintiff in place of Gorsuch. The court permitted Doig to intervene as a party plaintiff and Provident as an additional party plaintiff.
DePinto, Landoe, Sabo, Pegram, and Duhame filed answers to Doig's complaint in intervention and Provident's amended and supplemental complaint in intervention. Each asserted general denials of the essential allegations of these complaints. Duhame and DePinto also advanced certain affirmative defenses, and cross-complained against other defendants, except each other, for contribution. This was on the theory that their liability, if any, was vicarious and secondary to that of the other defendants. Several proposals to amend or supplement the original findings of fact were submitted. Doig moved that Provident be realigned as a party defendant and various other motions were made. A hearing was thereafter had at which evidence was received.
In a memorandum decision and order thereafter entered, the district court realigned Provident as a defendant, holding that it was hostile to the claims asserted on its behalf in this suit. The court dismissed the cross-claims of DePinto and Duhame on the ground that neither of them qualifies as having only secondary liability. The court re-adopted its original findings of fact and reaffirmed its original decision. It specifically held that DePinto, Landoe, Sabo, Pegram and Duhame had been guilty of gross negligence and that all of them except Landoe breached fiduciary duties in connection with the transaction involving the diversion of United's funds.
Supplemental findings of fact and conclusions were entered, together with a judgment in favor of Provident and against the same twelve personal defendants against which the original judgment had run, in amounts again ranging from $308,000 to $314,794.19. The fave defendants last named above have appealed. Both Doig and Provident appear here as appellees, being represented in this court by the same counsel who have filed a joint brief on their behalf.
The first question presented is whether the district court erred in permitting Doig to intervene as a party plaintiff in the remanded proceedings.
Doig sought intervention as a party plaintiff so that the remanded proceeding could continue, as it had been up until then, a secondary action by a shareholder of a corporation. Rule 23(b), Federal Rules of Civil Procedure, provides that the complaint of one who seeks to prosecute such an action shall set forth the efforts of the plaintiff to secure from the corporation the action he desires and the reasons for his failure to obtain such action, 'or the reasons for not making such effort.'
It is not alleged in Doig's complaint that any demand was made upon Provident to intervene as plaintiff. However, several reasons are stated therein for not making such effort. But appellants argued that these reasons are legally insufficient to warrant Doig's intervention as a party plaintiff.
The courts are in some disagreement as to what reasons will be deemed sufficient to excuse the failure to make a demand for corporate action. While Duhame and Doig cite cases which reflect their respective views as to this, we accept, as a fair statement of the rule, this expression in Cathedral Estates, Inc. v. Taft Realty Corp., 2 Cir., 228 F.2d 85, 88:
'* * * It is clear that under Rule 23(b) and its precedessors a demand need not be made on the directors or shareholders where such a demand would be 'futile,' 'useless,' or 'unavailing,' e.g., Delaware & Hudson Company v. Albany & Susquehanna Railroad Company, 1909, 213 U.S. 435, 29 S.Ct. 540, 53 L.Ed. 862; Hyams v. Calumet & Hecla Mining Co., 6 Cir., 1915, 221 F. 529, 538; Whittaker v. Brictson Mfg. Co., 8 Cir., 1930, 43 F.2d 485, 489; Dana v. Morgan, D.C.S.D.N.Y.1914, 219 F. 313, 314-15, affirmed 2 Cir., 1916, 232 F. 85; Cohen v. Industrial Finance Corporation, D.C.S.D.N.Y.1942, 44 F.Supp. 491, 495; 3 Moore's Federal Practice 3525-26. And where the directors and controlling shareholders are antagonistic, adversely interested, or involved in the transaction attacked, a demand on them is presumptively futile and need not be made. * * *'
In determining whether circumstances of this kind exist in a particular case, the normal procedure is to look solely to the allegations of the complaint. But in this case, before acting upon Doig's motion to intervene, the district court received evidence in the form of testimony and exhibits which it considered in determining whether a demand upon Provident to intervene would have been futile.
The court found, on the basis of this evidence and the whole record that counsel for Provident had certain conflicts of interest, there was belated and ineffective concern of Provident in the litigation, a substantial part of Provident's complaint in intervention had been prepared by counsel for an adverse party, and there had been included in this complaint by Provident allegations tending to exculpate an adverse party. In view of these facts the court indicated that it was not satisfied that Provident's application was made in good faith with the bona fide intent and purpose to continue vigorous prosecution of the litigation for the use and benefit of Provident stockholders.
Considering the complaint as amended to conform to the proof received on this question we think it amply sustains the conclusions drawn by the district court and sufficiently demonstrates that a demand upon Provident to prosecute the case effectively would have been futile. We therefore hold that the court did not err in permitting Doig to intervene as a party plaintiff under Rule 23(b).
The next question presented is whether the action is barred by Arizona statutes of limitations. In this connection reliance is placed on A.R.S. 12-542, providing a two-year limitation, and upon A.R.S. 12-550, providing a four-year limitation.
The claim accrued on October 18, 1957, when, it is alleged, $314,794.19 in the funds of United were diverted. The original complaint was filed by Gorsuch against United on November 4, 1958, well within two years of the accrual of the claim. But appellant calls attention to the fact that when the merger took place in the spring of 1959, United went out of existence. The Doig and Provident complaints in intervention were not filed until March 8, 1962.
It is argued from these facts that Provident's complaint in intervention introduced a new claim not comprehended within Gorsuch's original complaint, and that the limitations applicable as against Provident run back to the time when the claim originally accrued. Under this view, the action is barred under either the two- or four-year Arizona statutes of limitations. Alternatively, it is argued that even if the Provident complaint did not introduce a new cause of action, Gorsuch's action on behalf of United abated in the spring of 1959 when the merger was consummated, and Provident's complaint, filed three years later, is barred by the two-year Arizona statute of limitations.
We are not concerned with Provident's complaint in intervention, for the district court realigned Provident as a defendant. While appellants argue that this realignment was 'meaningless and ineffective,' we do not agree. Had Provident intended to make a bona fide attempt to enforce its rights as the successor to United, then the district court could not have realigned that corporation as a defendant. But, as related above, the court found that Provident did not so intend and the record, in our opinion, supports that finding. The district court did not abuse its discretion in realigning Provident as a defendant.
Appellants do not appear to argue that Doig's complaint in intervention is barred by the Arizona statutes of limitations, but if they do so argue, it is to no avail. Having intervened as plaintiff in a class action brought by Gorsuch, and having introduced no new cause of action therein, the filing of the Borsuch complaint inures to his benefit.
As established in Niesz v. Gorsuch, 9 Cir., 295 F.2d 909, Gorsuch lost his capacity to sue and United lost its capacity as defendant and its standing as the real party in interest when the merger was consummated. This did not, however, abate the action in the sense that all prior proceedings had gone for naught. It necessitated only reinstatement of the suit by joinder of indispensable parties within a reasonable time, as we ruled in Niesz (295 F.2d at page 913).
When an action is reinstated, the effect of the statute of limitations is to be determined by the date the complaint was originally filed, unless the result will be to inject a new claim. As indicated above no new claim was injected in the further proceedings on remand.
We therefore hold that this action is not barred by the Arizona statutes of limitations.
The third question presented is whether appellants were deprived of their constitutional right to trial by jury.
Appellees point out that none of the appellants filed a demand for a jury trial prior to the original trial, and argue from this that they waived trial by jury.
It is provided in Rule 38(d), Federal Rules of Civil Procedure, that the failure of a party to serve such a demand constitutes a waiver of trial by jury. But Rule 38(d) further provides that a demand for trial by jury made as herein provided may not be withdrawn without the consent of the parties. It follows that failure to demand a trial by jury does not constitute a waiver if such a demand is withheld in reliance upon a demand filed by another party, and if withdrawal of the latter demand is not consented to.
Gorsuch, as plaintiff in the original complaint, filed a timely demand for a jury trial. At a subsequent pre-trial conference Gorsuch sought to withdraw this demand, his counsel stating that they 'waive jury trial.' Counsel for certain defendants then requested additional time to consider the matter of waiving a jury. The record does not indicate which defendants were represented by this request. In any event there is nothing in the record to indicate that, at that time, appellants DePinto, Landoe, Sabo and Pegram consented to the withdrawal of Gorsuch's demand.
However, counsel for Duhame advised the court at that time that Duhame 'will waive jury.' This constituted a consent by Duhame to the withdrawal of Gorsuch's jury demand. The record does not indicate any action at that time by the trial court with regard to Gorsuch's request to withdraw his demand for a jury. Subsequent events of record indicate, however, that no one regarded the demand as effectively withdrawn at that time, as to any of the appellants. As the result of a further pre-trial conference held on March 1, 1960, a minute entry was made reciting that all defendants except Duhame 'do not waive jury trial at this time.'
Later, but prior to trial, Gorsuch moved under Rule 39(a)(2), Federal Rules of Civil Procedure, to require a non-jury trial. This motion was made on the ground that a right to trial by jury does not exist under the Constitution or statutes of the United States in a stockholder's derivative action. All of the appellants resisted the granting of this motion, thus indicating that none of them consented to the withdrawal of Gorsuch's jury demand. As for Duhame, it indicated a change of position from consent to the withdrawal of Gorsuch's demand to refusal to consent.
Since this change of position took place prior to the time the court, as related below, granted Gorsuch's motion for a non-jury trial, we see no reason why it should not be respected. The trial court was apparently in agreement with this view for the jury was instructed that the case was being tried non-jury 'as to all defendants other than DePinto, Duhame, Niesz, Pegram, Sabo and Landoe.'
We therefore hold that none of the appellants waived trial by jury.
At the time of the argument on the Gorsuch motion the court reserved ruling thereon. At the same time, however, the court announced that a jury would be impaneled, and that the verdict would be deemed advisory if the motion for a non-jury trial were ultimately granted. Accordingly, a jury was duly impaneled and as to all of the appellants and defendant Niesz, the trial proceeded as if it were a normal jury case. The remaining defendants, however, except for Patrick J. Kelly and American, who had failed to appear, had stipulated that as to them the case would be tried non-jury. At the close of the evidence the court denied the several motions made by appellants and Gorsuch for directed verdicts subject, however, to a later determination of the legal questions raised by these motions, as provided in Rule 50(b), Federal Rules of Civil Procedure.
The jury returned a general verdict in favor of Gorsuch and United and against appellants Sabo, Pegram and Landoe, and defendant Niesz, in the sum of $20,000. Four special verdicts were also returned, as set out in the margin.
In its memorandum decision thereafter entered the district court, proceeding on the assumption that appellants or any of them had a right to trial by jury, denied the motions of Sabo, Pegram and Landoe to set aside the verdicts and enter judgments in their favor. Proceeding on the same assumption, the court granted the motion of Gorsuch to set aside the verdicts and enter judgment for United against each appellant, and defendant Niesz, in the sum of $314,794.19.
The Court further held, however, that actually appellants were not entitled to a jury trial in a stockholder's derivative action. Accordingly, the court, as a part of its memorandum decision, granted the earlier motion of Gorsuch to require a non-jury trial. The court determined that the jury verdict would therefore be treated as advisory only. As already indicated, the court did not accept this advisory verdict except on the issues of unjust enrichment and fraud. Findings of fact and conclusions of law were thereupon entered supporting the judgment for damages against the appellants in the amount of $314,794.19.
The first appeal herein was then taken, during the course of which appellants raised the question that they were deprived of their Constitutional right to a trial by jury. Because of our ruling on that appeal that indispensable parties were absent, we concluded that we could not then decide this jury question or the other substantive questions which were raised on that appeal. The jury question is now properly before us on this second appeal and is to be considered in the light of circumstances as they existed at the time of the first appeal.
Although this is a diversity suit, the right to a jury trial is to be determined as a matter of federal law. Simler v. Conner, 372 U.S. 221, 222, 83 S.Ct. 609, 9 L.Ed.2d 691. In making that determination we also have in mind this admonition by the Supreme Court announced in Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 501, 79 S.Ct. 948, 952, 3 L.Ed.2d 988:
'* * * Maintenance of the jury, as a fact-finding body is of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right to a jury trial should be scrutinized with the utmost care.'
It is provided in the Seventh Amendment that 'in Suits at common law,' where the value in controversy shall exceed $20.00, the right of trial by jury shall be preserved. In Rule 38(a), Federal Rules of Civil Procedure, it is provided that the right of trial by jury as declared by the Seventh Amendment to the Constitution 'or as given by a statute of the United States' shall be preserved to the parties inviolate.
There is no applicable statute providing for a jury trial in a stockholder's derivative action. It follows that appellants were entitled to a jury trial only if this is a suit 'at common law' in the Seventh Amendment sense.
Arguing that this is such a suit, appellants concede that, in a derivative action, a stockholder must avail himself of the aid of a court of equity in order to get into court. They argue, in effect, however, that if the right therein sought to be asserted on behalf of the corporation is a legal right and if the remedy sought is monetary damages, it is a right and remedy characteristic of a suit at common law. In this event, appellants urge, the suit ought to be regarded as one at common law insofar as all issues pertaining to this corporate right and remedy are concerned, thereby entitling such a stockholder, or those he sues, to a jury trial as guaranteed by the Seventh Amendment.
Rounding out this argument, appellants contend that the corporate right sought to be asserted by Gorsuch in this particular derivative action is a legal right, and point out that Gorsuch sought only money damages.
Prior to the promulgation of the Federal Rules of Civil Procedure, a court sitting in equity could retain jurisdiction even with regard to legal remedies which became available. American Life Ins. Co. v. Stewart, 300 U.S. 203, 215, 57 S.Ct. 377, 81 L.Ed. 605. Consistent with this principle, courts of equity, exercising a jurisdiction separate from courts of law were, in some cases, allowed to enjoin subsequent legal actions between the same parties involving the same controversy. See Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 507, 79 S.Ct. 948, 3 L.Ed.2d 988.
Thus it may be, although we are not called upon to decide, that prior to the Federal Rules of Civil Procedure, a court exercising equity jurisdiction in determining whether a stockholder had standing to prosecute a derivative action could, in the continued exercise of equity jurisdiction, proceed to determine the substantive questions, thereby precluding a jury trial on any legal issues which might be involved.
But at least since the promulgation of the Federal Rules of Civil Procedure, this principle has not had general application in the federal courts. Under Rules 1, 2 and 18, Federal Rules of Civil Procedure, the same court may try both legal and equitable causes in the same action. Beacon Theatres, Inc. v. Westover, 359 U.S. at page 508, 79 S.Ct. at 955, 3 L.Ed.2d 988. As pointed out in Beacon, legal and equitable issues can be tried at the same time, the jury (if one has been demanded), rendering a verdict on the legal issues, and the court rendering a decision on the equitable issues.
Thus, except under most imperative circumstances, a right to a jury trial on legal issues may not now be denied to a federal litigant on the ground that the case reached court only through equity, or because equitable rights are involved, or because the legal issues are 'incidental' to the equitable issues, or because substantive equitable remedies are sought, or by the device of trying the equitable issues first.
A stockholder's derivative action is an invention of equity to supply the want of an adequate remedy at law to redress breaches of fiduciary duty. Koster v. Lumbermens Mutual Casualty Co., 330 U.S. 518, 522, 67 S.Ct. 828, 91 L.Ed. 1067. The aid of equity is needed in order to establish the shareholder's right to sue in the corporate stead. Fanchon & Marco, Inc. v. Paramount Pictures, Inc., 2 Cir., 202 F.2d 731, 734, 36 A.L.R.2d 1336. But the claim set up is that of the corporation.
In order to determine whether appellants were entitled to a jury trial in this derivative action, it is therefore necessary to ascertain whether any of the claims asserted against them on behalf of the corporation are of a kind which, if asserted by the corporation, would be cognizable in a suit at common law. If so, and if the judgment which has been entered, insofar as can be determined rests on claims of that kind, there has been a denial of trial by jury as guaranteed by the Seventh Amendment and appellants have been aggrieved thereby.
Nine counts are set forth in the amended complaint, but only counts VI, VII and VIII involve any of the appellants. The only relief sought against any of the appellants in these counts is money damages. As modified or enlarged by the pre-trial order, the claims against all of the appellants are predicated on fraud, negligence and breach of fiduciary duty. In addition, the claims against all appellants except Duhame are predicated on conversion and unjust enrichment.
The judgment on appeal is not, as to any of the defendants, based on fraud, unjust enrichment or conversion. Therefore none of the appellants is aggrieved because they did not have a jury trial on those issues. One ground for the judgment, applicable to all of the appellants, is gross negligence. Another ground, applicable to all appellants except Landoe, is breach of fiduciary duty.
An action brought by the corporation to recover damages against former officers or directors on the ground of negligence would be cognizable in a suit at common law. Kelly v. Dolan, 3 Cir., 233 F. 635. Thus all appellants were denied a jury trial on an issue cognizable in a suit at common law. Landoe was necessarily essarily aggrieved by this denial since, as to him, this was the only basis of the judgment.
The court having expressly found that none of the appellants was guilty of fraud, the conclusion seems inescapable that the finding that DePinto, Sabo, Pegram and Duhame breached fiduciary duties owed to United actually rests upon a finding of gross negligence. The conclusions of law dealing with the question of breach of fiduciary duty lend support to this view. Directors, it is there stated, are required to discharge their duties with good faith, exercise diligent care and skill, devote reasonable attention to the corporate affairs, take reasonable precautions against neglect and fraud, supervise corporate affairs, attend to the business of the company, avoid acting as figureheads, know what is transpiring. The court concluded that DePinto, Sabo, Pegram and Duhame were grossly remiss in these respects.
Having in mind the necessity of scrutinizing, with utmost care, any seeming curtailment of the right to a jury trial, we hold that where a claim of breach of fiduciary duty is predicated upon underlying conduct, such as negligence, which is actionable in a direct suit at common law, the issue of whether there has been such a breach is, subject to appropriate instructions, a jury question. We therefore conclude that, in the context of this case, the question concerning breach of fiduciary duty, as well as negligence, should have been submitted to the jury.
It follows that, as to all of the appellants, the judgment rests upon issues which appellants were entitled to have submitted to a jury, and upon findings which appellants were entitled to have made by a jury. The trial court therefore erred in ruling that the jury verdicts were advisory only, and in basing the judgment upon court-made findings of fact.
But, as appellees point out, these were alternative rulings and actions. The trial court, proceeding on the alternative assumption that appellants were entitled to a jury trial, set aside the jury verdicts and entered judgment in accordance with plaintiff's motion for a directed verdict. Thus judgment was granted against each of them in the amount of $314,794.19, notwithstanding the fact that the verdicts exonerated DePinto and Duhame of all liability, and as to Sabo, Pegram and Landoe, awarded appellees only $20,000.
Appellees argue that a trial court may so deal with jury verdicts where the evidence warrants such action and that here the record amply supports the action taken by the court. Thus, contend appellees, appellants have no grievance under the Seventh Amendment or otherwise.
Federal practice does not permit the use of additur in cases where the the use of additur in cases where the amount of damages is disputed. Thus, inadequate as to the three appellants against which verdicts were obtained, had granted a motion by plaintiff for a new trial unless defendants would consent to an increase in an amount fixed by the court, and defendants had agreed thereto, denial of plaintiff's motion on that ground would violate the Seventh Amendment.
What the trial court did in the instant case was not additur in the technical sense. There was no motion by plaintiff for a new trial, the trial court did not grant such a motion unless defendants consented to the awards which were actually entered, the defendants did not consent to such awards, and plaintiff is not the party who is complaining about what the court did. But, insofar as the Seventh Amendment right to a trial is concerned, the reasoning which forbids additur just as clearly forbids an unconditional award of damages in excess of a jury verdict in an amount which, although agreeable to plaintiff, is not consented to by defendant.
In the case of additur, the Constitutional right of the plaintiff to a jury trial is brought to an end, while in our case the Constitutional right of the defendant is likewise terminated. What the court said, in Dimick, concerning such an impairment of a plaintiff's right to a jury trial is equally applicable where it is the defendant's right which is impaired.
We therefore hold that the trial court was without power to enlarge the jury awards against Sabo, Pegram and Landoe, or to make an award against DePinto and Duhame who had escaped any jury award.
The trial court does have power, where the record warrants, to set aside a jury verdict for plaintiff, on the ground that the jury award of damages is inadequate. But when that is done the only recourse is to grant a new trial. Where this procedure is followed, however, the granting of a new trial is not reviewable prior to the second trial, as it is an interlocutory order. See Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 254, 61 S.Ct. 189, 85 L.Ed. 147.
While appellees did not move for a new trial, and the trial court did not purport to grant one, the necessary effect of the order setting aside the verdict was, for the reasons indicated, to grant a new trial. Accordingly, we cannot at this time concern ourselves with the question of whether the trial court should have set aside the verdicts.
It follows that all questions presented on this appeal pertaining to the evidentiary showing as to negligence of breach of fiduciary duties may not be decided at this time.
There are also certain other questions presented on this appeal. But they are not of a kind which requires decision now in order to provide guidance as to the remanded proceedings. Nor will they be presented here again unless plaintiff prevails in the further proceedings and then only if the judgment is of the same kind as that which is before us on this appeal. If these questions do arise again, they can best be dealt with on the record for that appeal.
The judgment is reversed and the cause is remanded for a new trial.