Blaustein v. Pan American Petroleum & Transport Co.

Rosenman, J.

Counsel on both sides have waived findings of fact and conclusions of law. By reason of such waiver, it becomes necessary to discuss in some detail the complicated and multitudi *604 nous facts and the conflicting evidence forming the basis of the legal conclusions reached. That explains the unusual length of this opinion. The complexities of the factual and legal disputes in this case are evident in the statement that the trial consumed seventy trial da3rs; it involved the taking of 10,631 pages of stenographer’s minutes, the introduction of 1,048 exhibits, many of which are voluminous and contain large collections of related documents, and some of which consist of hundreds of pages, the receipt in evidence of 2,686 additional printed pages of examinations before trial, and the submission during the trial and afterwards of about 2,900 pages of printed briefs.

Not all of the numerous questions of fact can be discussed in any detail, but the essential ones are set forth. As to many of these there was vigorous controversy; and the facts hereinafter stated are those which have been found by the court from the conflicting evidence and exhibits.

The Parties.

The case involves many millions of dollars. It is a derivative action brought by plaintiffs as stockholders and directors of Pan American Petroleum & Transport Company (a Delaware corporation hereinafter referred to as “ Pan Am ”). It is based upon the alleged breach of fiduciary obligations by the majority directors of Pan Am and by its majority and dominant stockholder, the Standard Oil Company of Indiana, (an Indiana corporation hereinafter referred to as “ Indiana ”).

The claim is that the directors and Indiana frustrated the intended “ integration ” of Pan Am, and prevented its natural development as a self-sufficient oil business; that Indiana and the directors of Pan Am under the domination of Indiana, exploited Pan Am for the benefit of Indiana; that the defendant Standard Oil Company (N. J.) (a New Jersey corporation hereinafter referred to as “ New Jersey ”), and the Standard Oil Company of New Jersey (incorporated in Delaware), a subsidiary of New Jersey (hereinafter referred to as “ New Jersey [Del.]”), were knowing participants in, and beneficiaries of, the alleged breaches of duty, and that they were conspirators with Indiana and with the Pan Am directors in a general scheme to secure benefits from certain transactions involving Pan Am which belonged in justice and equity to Pan Am itself.

The individual plaintiffs were, at the commencement of this action, president and first and executive vice-president respectively (f Pan Am. The corporate plaintiff is wholly owned by the Blausteins. The action is unlike the general run of minority stockholders’ actions, for the plaintiffs owned, between them, a substan *605 tial interest in the corporation — approximately twenty per cent of the stock of Pan Am. The defendant Indiana owned about seventy-eight per cent thereof. The balance was held by the public. Since the commencement of this action, two stockholders have intervened. Louis Blaustein died during the pendency of the action; and at the commencement of the trial, his representatives were substituted as parties plaintiff in his stead.

The relationship between the plaintiffs and the various corporations involved in this controversy is quite complicated. It may best be shown by means of the following chart (p. 606). The chart shows the intercorporate structure as it came into being after March 28, 1933, under a plan of reorganization which forms the basis of this suit.

In addition to these corporations, and not a part of either the Indiana or Pan Am system, are the defendant New Jersey, its wholly owned subsidiary, New Jersey (Del.), and its seventy-two per cent owned subsidiary, Humble Oil & Refining Co. (a Texas corporation hereafter called “ Humble ”). Indiana owns about seven per cent of the stock of New Jersey. The defendant Teagle is president of New Jersey.

The various other corporations taking part in the transactions involved in this litigation will be referred to as follows:

“ Pan Refining Pan American Refining Corporation; incorporated in Delaware in 1933; a wholly owned subsidiary of Pan Am.

“ PAPL Pan American Pipe Line Company; incorporated in Delaware in 1933; a wholly owned subsidiary of Pan Am.

“ Pan Production Pan American Production Company; incorporated in Delaware in 1935; a wholly owned subsidiary of Pan Am.

“ Amoco The American Oil Company; incorporated in Maryland in 1922; all stock originally owned by Blausteins. Pan Am acquired fifty per cent of the stock in 1923 and the balance in 1933.

“ Mexpet Mexican Petroleum Corporation; incorporated in Maine in 1915; since 1933 a wholly owned subsidiary (except for qualifying shares) of Amoco.

“ Lord Baltimore ”: Lord Baltimore Filling Stations, Inc.; incorporated in Maryland in 1921; since 1933 a wholly owned subsidiary of Amoco. “ Scop Stanolind Crude Oil Purchasing Company, wholly owned subsidiary of Indiana since 1930; now being

*606

*607 dissolved and its functions now being taken over by Stanolind Oil Purchasing Corp., also a wholly owned subsidiary of Indiana.

“SOP”: Stanolind Oil Purchasing Company; incorporated in

Delaware in 1938; wholly owned subsidiary of Indiana.

“ SPL ”: Stanolind Pipe Line Company; incorporated in Maine; a wholly owned subsidiary of Indiana since 1930.

“ SO&G ”: Stanolind Oil & Gas Company; incorporated in Delaware in 1930; stock ownership shown in Chart I, supra.

“ HPL ”: Humble Pipe Line Co.; wholly owned subsidiary of Humble.

“Petro”: Petroleum Heat & Power Company; incorporated in Delaware in 1919; Pan Am owns fifty per cent (represented by voting trust certificates) of the stock of Petro.

Of the individual defendants, Jackson & Bullock were not served. The board of directors of Pan Am consists of nine members. The remaining individual defendants are all the majority directors of Pan Am, and were all nominated to the board by Indiana, the majority stockholder of Pan Am. They have all been directors of Pan Am since February 17, 1933, which is the date after which the actionable wrongs are alleged to have been committed, except Stephens who became a director on May 9, 1933, and Wilson who became a director on November 26, 1934. These gentlemen, in addition to being directors of Pan Am, held or hold offices and directorships in the Pan Am subsidiary companies. Some of them also held offices and directorships in Indiana and in its wholly owned subsidiaries included in the column on the left in the chart above. Since the claim is that the interests of the Indiana group and the interests of the Pan Am group were diverse, and that Indiana as the then seventy per cent (now seventy-eight per cent) stockholder of Pan Am dominated the majority of the Pan Am board to the detriment of Pan Am and for the benefit of Indiana, it is important to note some of the positions which each of the defendants held in some of the corporations in the two groups. They are as follows:

Pan Am Group.

Seubert: (1) Member of executive committee of Pan Am since 1927.

(2) Chairman of the board of Pan Am since March 28, 1933.

*608 (3) Director, chairman of the board and member of executive committee of Pan Refining from date of incorporation, March 28, 1933, to date, with about one month’s interruption.

(4) Director, chairman of the board and member of the executive committee of Pan Production from date of incorporation May 2, 1935, to date.

Indiana Group.

A. Director and president of Indiana.

B. Director, chairman of the board and vice-president of SPL.

C. Director (since 1930) and vice-president (since April 8, 1935) of SCOP.

Pan Am Group.

Barkdull: (1) Director of Pan Am and member of executive committee of Pan Am since 1929.

(2) Director and member of executive committee of Pan Production from date of incorporation, May 2, 1935, to date.

(3) Director and member of executive committee of Pan Refining from date of incorporation, March 28, 1933, to date, with about one month’s interruption.

Indiana Group.

A. Vice-president and treasurer of Indiana since 1928.

B. Director and officer of SCOP since January 1,1933.

C. Director and officer of SPL since January 1, 1933.

Pan Am Group.

Stephens: (1) Director and member of executive committee of Pan Am since May 9,1933.

(2) Director and member of executive committee of Pan Production since May 21, 1935.

Indiana Group.

A. Director of Indiana from May, 1928, to May, 1929, and from May 11, 1931, to date.

B. Director of SCOP since April 8, 1935.

C. Director of SPL since January 1, 1933.

Pan Am Group.

McKeever: (1) Director of Pan Am since May 23, 1932.

(2) Various offices in Pan Am since 1932.

*609 (3) Director and officer of Pan Refining since 1933 and member of executive committee since March 28, 1933.

(4) Director, officer and member of executive committee of PAPL from July 28, 1933, to date.

(5) Director, officer and member of executive committee of Pan Production since date of incorporation, May 2, 1935.

Indiana Group.

A. President of Pan Am Southern.

Pan Am Group.

Wilson: (1) Director and member of executive committee of Pan Am since November 26, 1934; president since April 13, 1937; vice-chairman from December 19, 1934, to April 13,1937.

(2) Director and member of executive committee of Pan Refining since December 19, 1934; vice-chairman from December 19, 1934, to March 29, 1937, and president since March 29, 1937.

(3) Director and member of executive committee of PAPL since December 19, 1934; chairman from December 19,1934, to March 29,1937, and president since March 29, 1937.

(4) Director of Pan Production since April 27, 1935; member of executive committee from May 2, 1935, to date; vice-chairman from May 2,1935, to March 29, 1937, and president since March 29, 1937.

Indiana Group.

A. Director of Indiana from May 11, 1931, to December 31, 1934.

B. Vice-president of Indiana from January 1, 1933, to December 31,1934.

Pan Am Group.

Carroll: (1) Director, officer and member of executive committee of Pan Am from 1932.

(2) Director, officer and member of executive committee of Pan Refining to date since 1933.

(3) Director, member of executive committee, vice-president and treasurer of PAPL since 1933.

(4) Director and vice-president and treasurer of Pan Production since May 2, 1935; member of execu *610 tive committee from May 2, 1935, to May 21, 1935.

The facts will be discussed with reference to three separate periods of time in chronological order; (1) 1910 to 1923; (2) 1923 to 1932; (3) 1933 to the commencement of this action in January, 1937, each period being relevant to various contentions urged by both plaintiffs and defendants.

1910 to 1923.

The plaintiffs Blaustein began the business of selling gasoline and kerosene at retail in the city of Baltimore, Md.¿ in 1910 under the trade name of American Oil Company. In comparatively few years their retail marketing activities extended over large portions of Maryland, Pennsylvania, the District of Columbia and northern Virginia. Their marketing ability was evidenced almost from the moment they began. Their pioneering and constructive methods led them to produce a blended anti-knock gasoline which they sold under brand names of “ Amoco ” and “ American Strate.” They also were among the first to sell such premium gasoline in distinctive color and from visual pumps in regular filling stations.

In 1922 the Blausteins incorporated their business under the name of “ American Oil Company ” and distributed their products through another wholly owned corporation, Lord Baltimore. In that year their business had so increased that the gross receipts had reached a total of about $4,000,000. Plowever, they experienced difficulty in the conduct of their business. Their principal product was gasoline which they would buy at wholesale from other oil companies and sell at retail. They had no source of supply except companies who were at the same time also competitors of Amoco in retail selling.

Nearly all of these competitors were large oil companies which had their own crude oil fields, and their own pipe lines running from the oil fields to their own refineries, where the crude oil was refined to produce gasoline and other products. These products were then shipped from the refineries to storage tanks owned by the same company located at strategic points. From there the products were transported in their own tank cars (by rail) and tankers (by boat) to various points throughout the United States, and then by their trucks to the various marketing places which they also owned, such as filling stations and garages, and thus sold to the public. Such companies are known in the oil business as “ integrated ” companies, since they comprise, through subsidiary corporations or departments, a complete cycle and unit from the ownership of crude oil lands to the eventual sale of the finished product to the buying public.

*611 Crude oil is generally refined to produce four principal products: gasoline, kerosene, heating oil and Bunker C or heavy fuel oil; and all of these products are generally produced and marketed by the integrated companies. These integrated companies furnished great competition to Amoco and Lord Baltimore (Amoco’s retail distributor) because of their ability to produce at a lower cost than that at which the Blaustein companies could purchase the gasoline.

The largest of these integrated companies was New Jersey, which offered direct competition in the retail sales of its products in Lord Baltimore’s territory. From it Amoco was buying nearly all of its products. Consequently the Blausteins sought to become allied with some oil company which had sufficient crude oil reserves, refining and transportation facilities to supply them with their needs, in order that they might compete on a more equal basis with the other integrated companies. It was at that time (1923) that Pan Am came into the situation for the first time.

1923 to 1933.

In 1923, when the Blausteins sought to become affiliated with it, Pan Am was an integrated oil company, although it owned only relatively small marketing facilities for gasoline. It was wholly independent of any of the defendant corporations; and was then one of the leading oil companies of the world. Pan Am had reserves of crude oil both in the United States and Mexico. It also had oil lands in Venezuela. Its refineries were located in Mexico, Louisiana and California; and in 1929 it had completed one of the largest refineries in the world on the island of Aruba in the Dutch West Indies. Pan Am, in addition, owned a large tanker fleet, with convenient ocean terminals on the Atlantic seaboard. Its retail and wholesale marketing business was, for the most part, the sale of fuel oil; its retail sale of gasoline was comparatively a minor part of its business. But even in the gasoline field, it did not compete in the territory covered by the Blausteins. Amoco, on the other hand, sold very little fuel oil at that time, but a great deal of gasoline. Thus it appeared that the union of both corporations would be advantageous to each; since each would supply the deficiencies of the other, and together make a soundly integrated company.

In June, 1923, therefore, the Blausteins, Amoco and Pan Am entered into an affiliation by a contract which, in substance, provided: (a) Pan Am, by its subsidiary Mexpet, agreed to supply Amoco with its entire requirement of gasoline for ten years, ending December 31, 1933, at a price fixed at five and one-quarter cents “ under the prevailing tank wagon market price ” in Baltimore, Norfolk and Philadelphia at the time of delivery; (b) the Blausteins *612 sold to Pan Am fifty per cent of their stock ownership in Amoco and Lord Baltimore corporations, the arrangement taking the following form: The stock of Amoco was changed to Class A and Class B, equally; the Blausteins retained the Class B stock, with the right to elect the president and vice-president and general manager of Amoco (thus keeping control in the Blausteins of the marketing business); Pan Am received all of the Class A stock, with the attendant right to elect the secretary and treasurer of Amoco. The board of directors and the executive committee of Amoco were to be divided equally between Pan Am and the Blausteins; (3) during the lives of the Blausteins, each party to the contract had the option to purchase from the other such stock as that party wished to sell. The Blausteins acquired no stock interest in Pan Am at that time.

By means of the contract the two companies together became wholly integrated. Pan Am had the crude reserves, the refineries, the transportation. Amoco had the marketing facilities.

The beneficial effect of this integration was far-reaching. The two Blaustein corporations (Amoco and Lord Baltimore) began to flourish. Their marketing territory was expanded in Maryland, Pennsylvania, Virginia and the District of Columbia and in addition spread into West Virginia, Delaware, North Carolina, South Carolina, Ohio and the southern portion of New Jersey. The sales of crude oil products of those two corporations increased from 32,887,886 gallons in 1924 to 278,050,719 gallons in 1932. Profits rose annually from $353,097 in 1923 to $4,149,200 in 1932.

During the last few years of this arrangement between Amoco and Pan Am, Pan Am produced the crude oil mainly from its reserves in the Lake Maracaibo region of Venezuela. This oil was transported in Pan Am’s tankers to its refinery in Aruba. After refining, the gasoline and other products were transported in Pan Am’s tankers to its terminals on the eastern seaboard, where Amoco took the gasoline to its various marketing and distributing points for sale. Pan Am took for its own markets along the seaboard, which were rather extensive, the fuel oil and Bunker C oil. As a result Amoco became a vigorous competitor of New Jersey in the sale of gasoline; and Pan Am became a vigorous competitor of New Jersey in the sale of fuel oil.

In 1925 Indiana appeared on the scene. Under Col. R. W. Stewart, Indiana began a policy of expansion and began to buy the stock of Pan Am. In 1927 it acquired control of Pan Am, and by 1929 owned over ninety per cent of the stock of Pan Am. Indiana, therefore, through its subsidiaries Pan Am and Amoco, was competing with New Jersey in the eastern States.

*613 As a result of this purchase by Indiana the corporate structure of Pan Am and Amoco in relation to Indiana and the Blausteins assumed the following form, Chart 2, which continued substantially unchanged until the reorganization of March 28,1933, later discussed and heretofore illustrated by Chart 1. (See p. 606.)

CHART 2

Pan Am intercorporate structure prior to reorganization of 1933

In March, 1929, after a conspicuous controversy and proxy fight Col. R. W. Stewart was removed as the head of Indiana, and the defendant Seubert became and still is its executive head.

*614 The plaintiff has urged that this was brought about by large stockholders of New Jersey who were also large stockholders of Indiana, viz., the Rockefeller interests, in order to stifle the policy of expansion of Indiana and competition between Indiana and New Jersey. The defendants deny this; and contend that the fight against Colonel Stewart and his removal was occasioned solely by reason of certain charges made against him in connection with the Continental Trading Company, which were then under investigation by a Congressional committee.

Indiana, in Juty, 1931, caused Pan Am to sell its United States crude oil resources, reserves and pipe lines to two subsidiary corporations of Indiana, SO&G and SPL, for which Pan Am received twenty-five per cent of the stock of SO&G.

During the next year (1932) Indiana also sold to New Jersey the foreign properties of Pan Am, Pan Am’s Venezuela crude reserves, Pan Am’s refinery at Aruba and Pan Am’s tanker fleet.

This sale of Pan Am’s foreign properties to New Jersey is stressed by the plaintiffs as one of the major items of a program followed by Indiana, showing a sinister purpose on the part of both Indiana and New Jersey to reduce Pan Am to the status of a mere marketing business, bereft of the necessary means of providing itself with its own crude and refined supplies, to stifle the competition of Pan Am as against New Jersey, and to strangle Pan Am in its efforts to be a self-sufficient company.

The defendants, however, maintain that the sale was the result of business necessity and judgment entered into in good faith for the best interests of Pan Am. As early as 1930 there was agitation in the oil industry to petition the Federal government to place an embargo upon the importation from abroad of petroleum and petroleum products. The campaign for such legislation continued the following year. It caused grave concern to the directors of Pan Am and to Indiana, its ninety-six per cent stockholder. The prospect of a prohibitive excise tax upon Pan Am’s importation of its products from its own producing lands and refinery outside of the United States presented an unpleasant picture of the value to Pan Am of its foreign producing and refining facilities. Pan Am’s entry into foreign markets had not been entirety successful; and its main source of supply of refined products for its domestic markets would seriously be curtailed, if not entirety destroyed, by such an embargo.

During that year, 1931, therefore, negotiations were commenced by Pan Am with other major oil companies having large American 1" induction of crude oil, for the purpose of exploring the possibility of obtaining from them its domestic requirements of crude oil *615 refined products until further permanent provision could be made therefor. Among the companies approached by Pan Am was New Jersey.

From the negotiations looking toward á supply contract evolved the proposal for the sale to New Jersey of the Paii Am foreign properties which were no longer going to be able to supply the domestic tnarkets of Pan Am if the embargo were passed by the Congress, and which were not necessary to supply the limited Pan Am foreign markets. These suggestions crystallized in the proposed sale at a meeting held at Sea View, N. J., in April, 1932, between representatives of New Jersey, Indiana and Pan Am. At this meeting, which lasted for several days, it became apparent that if Pan Am divested itself of its main source of refined supplies by the sale of its foreign properties, including its production, refining and transportation facilities, it would be necessary for New Jersey td supply Pan Am with sufficient refined products to enable Pan Am in turn to meet its contractual engagements with Amoco made in 1923 until at least the expiration thereof in December, 1933. Agreement thereon was reached. Toward that end various memoranda were drawn embodying the meeting of the minds of the parties as to the particulars of the sale of the foreign properties and the supplies of fuel oil and gasoline.

The first memorandum provided, in substance, that a corporation (later known as Pan American Foreign Corporation) was to be formed whose shares of capital stock would be identical in number with the amount of Pan Am stock then issued and outstanding. To this new corporation, in exchange for all of its issued capital stock, would be transferred all of the foreign assets of Pan Am (whether held through subsidiaries or directly). Thereupon a capital distribution of such shares of the stock of the new corporatioii would be made to the stockholders of Pan Am, share for share. This would enable Indiana to receive ninety-six per cent of the stock of the new corporation (since it then owned ninety-six per cent of the shares of Pan Am). Indiana would then transfer this Pan Am Foreign Corporation stock to New Jersey for approximately $50,000,000 in cash and about seven per cent of New Jersey stock.

Another memorandum related to New Jersey’s agreement to supply Pan Am with its gasoline requirements from May 1,1932, to December 31, 1933.

A third, memorandum related to New Jersey’s agreement to sell to Pan Am sufficient quantity of fuel oil to cover the latter’s existing commitments for a period of five years and from year to year thereafter, subject to termination by either party upon one year's notice.

Later, formal contracts embodying the substance of those memo *616 randa were executed; and the acts agreed upon were, in fact, consummated. The contracts for the sale of gasoline and fuel oil were executed by New Jersey (Del.) and Mexpet.

Two other memoranda were contemporaneously drawn at the Sea View conference. These memoranda, which plaintiffs characterize as “ secret options,” were disclosed to plaintiffs, they say, for the first time upon their examination of defendant New Jersey before trial in this action.

They were initialled by defendants Teagle and Seubert. The first of these so-called “ secret options ” provided that New Jersey was to have the option to purchase Pan Am’s “ domestic retail marketing facilities in the Northern Division and/or Southern Division at their depreciated book value as of the date of the exercise of the option.” The option ran until December 31, 1933, but was not to be construed to prevent “ a sale or merger or consolidation agreement with ” Amoco. In the event of New Jersey’s not taking up the option it would, at Pan Am’s request, aid in maldng a sale thereof to others. The second of these “ secret options ” provided that New Jersey was to have an option, for a period of five years from May 1,1932, to purchase Pan Am’s “ domestic fuel oil facilities (including refineries) * * * at the depreciated book value thereof at the time such option is exercised.” If at the end of the five-year period, Pan Am still had them, New Jersey agreed to purchase them at their depreciated book value.

The claim of the plaintiffs is that the sale of the foreign properties and the resulting fuel oil and gasoline contracts were not induced by the impending tariff on imported petroleum products legislation but that the main purpose and motive were the disposing by Indiana to New Jersey of the means by which effective competition by Pan Am could be stifled; that the options for the gasoline marketing and domestic fuel oil facilities of Pan Am, once exercised after the sale of the foreign properties, would practically put Pan Am out of business.

On the other hand, the defendants claim that these options were memoranda only and were not considered binding agreements; that they were never reduced to formal contracts as were the other memoranda. It was thought by New Jersey to be but a trading point for Pan Am in the event the fuel oil and gasoline contracts were not renewed by New Jersey, in view of the fact that the Pan Am domestic fuel oil properties would then be quite valueless to Pan Am. In any event, they say that during the later merger negotiations between Pan Am and Amoco, these memoranda options were voluntarily surrendered, leaving those parties free to complete any arrangements they wished without hindrance from New Jersey; *617 and that the first “ secret ” memorandum specifically so provided. In addition, the defendants claim that the Blausteins knew of these options at the time; and that consequently these memoranda had no effect upon the real purposes for the sale of the foreign properties, namely, to overcome the effect of the possible embargo, and to insure Pan Am a source of supply adequate to the fulfilment of its domestic marketing needs.

The Congress, soon after the Sea View conference was implemented, did enact an import duty of one-half cent per gallon of crude and heavy fuel oil and two and one-half cents per gallon of gasoline, reducing to a minimum the importation of these products from foreign countries.

The picture presented after these various transactions was: (1) New Jersey was to satisfy Pan Ain’s gasoline requirements, up to 18,000,000 barrels, for the period from May 1,1932, to December 31, 1933; (2) New Jersey was to supply Pan Am with its Bunker C fuel oil commitments up to 16,500,000 barrels per year for the period of five years from May 1, 1932 (with a partial extension by option until August 1,1940); (3) Pan Am no longer had its foreign producing properties, refinery or tanker fleet; (4) at the end of the fuel oil and gasoline contracts Pan Am would be compelled to make other arrangements for its supplies; (5) Pan Am was no longer an independent, integrated oil company even in collaboration with Amoco and Lord Baltimore; and Amoco (and the Blausteins) were once more dependent upon New Jersey which remained its biggest competitor.

In the early part of May, 1932, the Blausteins claim they learned of the proposed sale of Pan Ana’s foreign properties through press announcements. They knew that it would break up the contractual integration between Pan Am and Amoco which had contributed so much to the success of Amoco. Upon learning that a stockholders’ meeting was to be called for May 23,1932, for the purpose of ratifying such sale, the Blausteins, who had in April, 1932, bought a small quantity of Pan Am stock, retained counsel for the purpose of instituting an action to prevent the consummation of the deal. Thereafter, and on or about May 20, 1932, a conference was had between the Blausteins, defendants Barkdull and Jackson, R. G. Stewart, and the attorneys representing the various parties concerned, in order that the whole situation be discussed and straightened out. Although tentative proposals for settlement were reached and embodied in a letter of that date, nothing definite was accomplished.

Controversial negotiations continued, however. In July, 1932, a meeting was held at White Sulphur Springs between Jacob *618 Blaustein, his lawyer Steinman, Stephens, Barkdull, Seubert, McKeever and Tappen, an attorney for Pan Am. This meeting, which covered about a week of discussion, culminated in the signing of the so-called “ White Sulphur Agreement ” of July 15, 1932, between Indiana, Pan Am and the Blausteins.

It provided for a consolidation of Pan Am and Amoco by which the Blausteins would receive about twenty-six per cent and Indiana about seventy per cent of Pan Am stock. It also provided for the construction by the new company of a refinery with a 40,000-barrel per day capacity of crude oil and for the acquisition of necessary crude oil properties. It specified equal representation on the boards and committees of the new company for the Blausteins and Indiana, etc. Three days later this agreement was approved by the board of directors of Indiana.

However, controversy arose in connection with this White Sulphur agreement, and the agreement was canceled by mutual consent in an exchange of letters dated October 18 and 22, 1932, between Indiana and the Blausteins.

In November of 1932 there was a renewal of negotiations. Finally an agreement was signed on February 17, 1933. This agreement was the beginning of the third period in the history of this controversy.

1933 to January 1, 1937, the Commencement of this Action.

On February 17, 1933, Indiana (by defendant Barkdull, its vice.president), Pan Am (by defendant McKeever, its president), Amoco (by Louis Blaustein, its president), and Lord Baltimore (by Alvin Thalheimer, its president), signed an agreement (hereinafter referred to as the “ definitive agreement ”) relating to the merger of Pan Am and Amoco. Its execution was dated as of January 1, 1933, and was “ subject to approval of the Bpards of Directors of Indiana and Pan A™- by February 21, 1933.”

The salient parts of this contract are substantially as follows:

(1) The named corporations, other than Indiana, were to be reorganized. “ The purpose of this agreement is to effect a reorganization of Pan-Am (including subsidiaries), American [Amoco] and Lord Baltimore, to form a complete cycle and unit in the oil business Which will acquire property and produce therefrom its own sufficient reserves of crude oil and raw products, refine and manufacture same into gasoline and other derivatives and combinations and, within the limits of continental United States, market the various products.” .In other words, Pan Am was to become an integrated company.

*619 (2) Pan Am was to acquire from the Blausteins the balance of the stock of Amoco, so that it would become the sole owner of Amoco and Lord Baltimore.

(3) The Blausteins were to have the right to name respectively three and two members of the board of directors and executive committee of Pan Am, which were to consist respectively of nine and seven members. This right of representation by the Blausteins was also to apply proportionately to all subsidiaries of Pan Am.

By virtue of its stock ownership, Indiana, of course, named the remaining six and five members respectively.

The Blausteins were to become president and first and executive vice-president respectively of Pan Am, to hold those positions so long as the management contract (thereinafter provided for) should continue.

(4) Pan Am agreed “ to provide a refining capacity (including necessary cracking units) for a thru-put of 40,000 barrels of crude oil per calendar day, making a maximum efficient yield of gasoline.” The details in this agreement with respect to refining are discussed hereafter under the subject of the refinery.

(5) Pan Am was to ‘ ‘ actively proceed to secure its own sufficient crude oil production as a reserve for the requirements of Pan-Am and for such purpose shall immediately allocate an initial sum of $3,000,000.00, to be expended under the supervision of the Board of Directors for the acquisition of crude oil producing properties.” All parties agreed “ to use their best efforts, resources and personnel to propose, establish and carry out a program for the establisliment and maintenance of a backlog of crude oil properties sufficient for the operation of Pan-Am.” Budgets for crude oil and raw products were also provided for.

(6) The Blausteins were to direct and mat age all marketing operations of Pan Am for four years at specified salaries, and they were to be the chairman of the board and president and general manager respectively of Amoco, which became the chief marketing subsidiary of the reorganized corporation.

(7) The Blausteins received 1,286,876 shares of Pan Am stock of the total issued, i. e., 4,702,945, as the result of the reorganization of Pan Am and the affiliated corporations.

(8) Under specified conditions, the Blausteins were empowered to demand from Indiana that it purchase their stock at the book value thereof plus $1, but not less than $13.52 per share.

(9) There were certain properties of Pan Am excluded from the reorganization which were transferred to a corporation to be formed (Pan American Southern Corporation), and were not part of this definitive agreement.

*620 The definitive agreement was ratified by the directors of Indiana and Pan Am on February 20, 1933. Pursuant to a call for a stockholders’ meeting for the purpose of ratifying the reorganization, a stockholders’ meeting of Pan Am was held on March 27, 1933. At that meeting both Mr. Seubert, president of Indiana, and Mr. McKeever, president of Pan Am, spoke on behalf of the ratification, pointing out the advantages in merging the corporations. The plan of merger and reorganization was fully presented to the meeting and discussed; but the precise terms of the definitive contract were not submitted to the meeting. The stockholders voted overwhelmingly in favor of the ratification.

The plaintiffs claim that this definitive agreement should have been the guide for future action to be followed by the board of directors with respect to the integration of Pan Am. They do not claim, nor can they, that this contract was to be the sole motivating guide in the actions to be taken by the directors. They urge that it did express the then existing best business judgment of all the signatories and of their boards of directors, as to what constituted the best policy for the advancement of the well-being of Pan Am. Their complaint is that the defendants disregarded that agreement, and that what defendants did after its execution was not in furtherance of the interests of Pan Am, but was for the benefit of Indiana and the other defendants. The defendants, on the other hand, claim that they adhered to the basic principles underlying that agreement; but that economic, legal and other factual conditions arose after its execution which made it impossible to carry out its terms as therein set out; and that they used their best business judgment in acting as they did.

The Role of the Definitive Agreement of February 17,1933.

The fact is that Indiana and the board of directors of Pan Am did not carry out the provisions of the definitive agreement as they agreed. This is, however, not an action ex contractu by the Blausteins as a party to the contract. Instead of bringing an action on the contract, they have elected to bring this derivative suit as minority stockholders and directors of Pan Am, against the majority stockholder (Indiana) and the majority directors of Pan Am, on the ground of fraud, conspiracy, waste, negligence and breach of trust. The New Jersey defendants have been made parties on the theory that they knowingly participated in, and profited by, the fraud and breach of trust.

The suit must, therefore, be considered in the same light as if it had been brought by any other minority stockholder who, unlike the Blausteins, was not a party to the definitive contract and who *621 had no individual rights under it. The definitive contract in such a suit would be admissible in evidence, but not as the basis of a contractual action. The same result follows here.

The plan of reorganization, which was submitted to the stockholders of Pan Am and approved, as well as the definitive agreement itself, called for a fully integrated Pan Am corporation. Integration was particularly significant since Pan Am had just recently (April 30, 1932) been disintegrated by reason of the sale to New Jersey of its crude oil supplies, refinery and transportation facilities, and had been left with only its own marketing facilities and those of Amoco— dependent for supplies, refinery and transportation upon a competitor.

The definitive agreement, therefore, was a general statement, approved by Indiana and most of the defendants, and subscribed by Indiana and by others, as to what were the best interests of, and policies for, Pan Am, as of February 17, 1933, the date of its execution. Such a statement, of course, does not mean that the plan of the agreement had to be followed to the letter, in so far as legal rights and duties in this stockholder’s action are concerned. Nor does it mean that it could not be deviated from in the future, should conditions change.

In view of the fact that it is determined elsewhere in this opinion that Indiana became a fiduciary of Pan Am by reason of its domination and control as a majority stockholder, the definitive agreement is also significant as outlining the affirmative obligation which the fiduciary assumed to the cestui. It was a declaration of independence for Pan Am by Indiana, its trustee — a guaranty that Indiana would not use Pan Am for its own benefit, as a part of its own empire, but would treat it as an independent entity. Of course, as later pointed out, this is only the duty owing by any dominant stockholder to minority stockholders. In this case, however, there was not only this duty imposed by equity and principles of fair dealing; there was a duty emphasized and reinforced by solemn contract.

The agreement is also important as indicating that all of the elements of integration — production, purchasing, transportation, refining and marketing — were functions which legitimately and logically belonged to Pan Am. The carrying out of these functions was, therefore, a business opportunity of Pan Am, which Pan Am should have been allowed to perform on its own account, unless some justification existed for Indiana to take them over as the plaintiffs allege they did.

In four respects it is claimed that the defendants broke the letter or the spirit of the agreement. As to (1) the refinery and (2) the *622 purchase of crude reserves, the express provisions of the contract were disregarded; ás to (3) crude oil purchasing, and (4) pipe lifie transportation, necessary to the full integration of Pan Am, the implied intention and avowed purpose tif the agreement and reorganisation was violated. Each of these separate charges and the defenses urged by the defendants as to each will be discussed seriátim.

Refinery.

The first act of the defendants about which the plaintiffs complaiii, as constituting tint only a breach of the definitive agreemetit but alsó a refusal to reintegrate Pan Am in accordance with the plafi of reorganization, was in connection with the refinery for Pan Am.

The definitive agreement was very clear and explicit in this connection. It stated that Pan Am agreed to provide a refinery “ for a thru-put of 40,000 barrels of crude oil per calendar day, making a maximum efficient yield of gasoline.” The final date of completion was fixed at February 10, Í934, “ provided subh date of completion is reasonably possible.” The definitive agreement also provided that the construction and allotment of contracts for the refinery “ shall be under the direction of Indiana.” In case the refining units were not completed on the dates specified in the estimates, Indiana agreed “ to indemnify Pan-Am for the difference (if any) in the price Pan-Am is required to pay for products purchased and the prices at which the estimates fixed the cost of products.”

The capacity of the refinery was figured on the basis Of the known marketing needs of Pan Am for gasoline at that time, which were 10,000,000 barrels of gasoline per year. A refinery “ making a maximum efficient yield of gasoline ” is a refinery which produces only two products from the crude oil, namely, gasoline and Bunker C fuel oil. A refinery which is run so as to produce the Usual four refined products of crude oil, namely, gasoline, kerosene, No. 2 heating oil and Bunker C of heavy fuel oil, does not make the maximum yield of gasoline from the crude. When a refinery runs ofi four products, it will, therefore, require a larger number of barrels Of crude oil to make the same amount of gasoline than a refinery which runs to prodube only two products. In view of the fact that the refinery to be constructed by Pan Am contemplated four products, it was generally assumed that the capacity of the refinery mentioned in the definitive agreement was to be 48,000 barrels of crude oil per calendar day.

In 1933, instead of constructing a refinery large enough to provide this amount of gasoline, the board of Pan Am decided to construct a refinery of approximately half that size; and to make a contract *623 with Humble for three years, whereby Humble agreed to process the remaining half of the Pan Am neéds from crude to be delivered by Pan Am to Humble’s own refinery at Baytown, Tex.

The refinery unit that was constructed by Pan Am (hereinafter referred to as the No. 1 Unit) was completed by April, 1934; with a capacity of producing approximately 5,000,000 barrels of gasoline per year, only one-half of Pan Am’s gasoline requirements. The plaintiffs’ contention is that two such units should have been constructed as required in the definitive agreement, so as to produce the full 10,000,000 barrels needed by Pan Am for its business.

They claim that the cost of processing the remaining estimated 5,000,000 barrels for the three-year period was approximately $3,000,000 more than the cost to Pan Am would have been if it had constructed a second unit like the first and had operated it for the three years during which the processing contract was in effect. The plaintiffs’ position is that, if the board of Pan Am had constructed a refinery of the capacity provided for by the definitive agreement either in one unit of 48,000 barrels capacity or in two units of 24,000 barrels capacity each, this excess cost of processing would have been saved; and that the acts of the board in making the processing contract, over the objection of the three Blaustein directors, were acts of misfeasance, violation of duty, and waste, for which the directors are liable.

The plaintiffs claim that, pursuant to a general conspiracy between Indiana and New Jersey to help New Jersey and to give it profitable business opportunities at the expense of Pan Am, the six majority members of the board of Pan Am who had been nominated by Indiana and who were dominated by it, voted to award this processing contract to Humble, the subsidiary of New Jersey. They point to the fact that the contract entered into on April 30,1932, between New Jersey (Del.) and Mexpet, the subsidiary of Pan Am, whereby New Jersey (Del.) was selling to Mexpet all of the requirements of Amoco, was about to expire on December 31,1933; that by reason of the fact that New Jersey’s foreign sales were now being largely filled from the foreign properties which it had lately acquired from Pan Am in 1932, it would be quite a problem for New Jersey to find a new domestic customer for'this large quantity of gasoline after December 31, 1933, if Pan Am should construct its own refinery. The contention is, therefore, that this arrangement was made between Indiana and New Jersey, presumably at the suggestion of common large holders of stock in both corporations, for the purpose of taking care of the loss of Pan Am as a customer through Mexpet which threatened New Jersey at the end of that year.

*624 The defendants’ contention, on the other hand, is that they used their best business judgment in coming to the conclusion that it was better for the interests of Pan Am to go slowly in its new construction program and to build only one-half of the contemplated refinery capacity at a time. The various considerations which influenced their decision will be described in greater detail, but in general they were: (1) The economic conditions which prevailed through the United States during March and April of 1933, particularly the national bank holiday declared on March 6, 1933, and the complete and chaotic demoralization of the entire petroleum industry; (2) the feeling that the Federal government would step in to regulate the petroleum industry in some way, as was later borne out by the National Industrial Recovery Act, and the petroleum code thereunder; (3) doubts as to the efficiency and flexibility of so large a unit as even a 24,000-barrel unit which at that time was larger than any refinery unit in the entire world.

Starting with the White Sulphur agreement of July, 1932, all of the negotiations between the Blausteins and the representatives of Indiana and Pan Am had treated the refinery as one of the fundamental items of the proposed merger. The refinery under contemplation during all this period was a refinery of the size finally provided for in the definitive agreement. Even before the definitive agreement was signed, a refinery for Pan Am had also been considered independently by the directors of Pan Am, without relation either to the agreement or to the Blausteins. For, after the sale of the Pan Am foreign properties, which included the refineries from which the Pan Am requirements had been obtained, it had become absolutely necessary for Pan Am to look around for a new refinery.

Starting in August, 1932, long before the merger of Pan Am and Amoco, various estimates were made by the personnel of Pan Am and of Indiana (its ninety-six per cent stockholder) with respect to the construction of new refinery capacity. After the White Sulphur agreement was definitely rescinded, there was increased activity along these lines on the part of the technical refinery experts of Pan Am and of Indiana.

These plans for a contemplated new refinery reached the ears of the officers of New Jersey before the definitive agreement was signed. At this time New Jersey through New Jersey (Del.) had a contract to furnish Pan Am (through Mexpet, its 100 per cent subsidiary) with all its gasoline requirements up to the end of 1933 and its Bunker C fuel oil requirements up to May, 1937. New Jersey approached Pan Am and Indiana with the suggestion that New Jersey (through its subsidiary, Humble) might process some or all *625 of the Pan Am requirements in the Humble refinery at Baytown so that the new refinery for Pan Am might be reduced in proposed size or eliminated altogether. Pan Am, which was purchasing nearly all its gasoline from New Jersey, appeared willing to make a processing contract if such an arrangement would enable them to get their gasoline more cheaply than they were buying it. Under the suggested processing arrangement, Pan Am would deliver its own crude to the Humble refinery at Baytown, Texas; there it would be refined into refined products as specified, which would then be taken away by Pan Am and delivered to its own markets. Humble would be paid only for its services in processing Pan Am’s crude oil into those refined products.

Accordingly, even before the definitive agreement was signed, a meeting was held on January 11 and 12, 1933, between the refining experts of New Jersey (Del.), Humble, Pan Am and Indiana to explore the possibility of such a contract, and to compare the relative cost to Pan Am of processing by Humble on the one hand, and building a refinery by Pan Am on the other hand, to do its own refining. A proposal by the New Jersey representatives was there made to process at thirty-three cents per barrel. A second conference was held in Chicago on February 10, 11 and 13, 1933, to discuss in detail this figure. The Pan Am and Indiana experts, during this period, were contending that the processing figure of Humble was too high; and the New Jersey representatives were endeavoring to show the others that their refining figures were too low.

No agreement was reached, and these discussions came to an end when the definitive agreement was signed.

At the same time the negotiations were being carried on between Indiana, Pan Am and the Blausteins, which finally led to the definitive agreement. The Blausteins complain that they were not being advised of the separate negotiations being carried on contemporaneously between Indiana and New Jersey. The explanation offered is that there was no reason why either New Jersey or Blausteins should be informed of the negotiations being conducted by Indiana with the other. Seubert’s testimony is that there was nothing definite as yet with either side; that they were trying to protect the Indiana interest in Pan Am, and that if negotiations with the one failed, they could look to the other. The explanation is a valid one under the circumstances.

After the definitive agreement was signed on February 17, 1933, the banking situation in the United States, which had become serious, quickly worked to a climax on March 6, 1933, when the national bank holiday was declared by the President. Other symptoms of a chaotic state of business depression were apparent.

*626 On the next day, March 7, and on March 8, 1933, the directors of Pan Am had their first meeting with the Blausteins since the execution of the definitive agreement. Seubert, Barkdull and McKeever testified that during that meeting Seubert discussed the chaotic conditions then prevalent and raised the question as to whether it was advisable to go ahead with the building of a refinery in the light of those conditions, particularly in the oil business.

This is denied by Jacob Blaustein, who testified that the first time they ever heard about any hesitation or doubt with respect to the construction of the refinery was on March 28, 1933, after the stockholders of Pan Am had agreed to the reorganization provided for in connection with the definitive agreement, and after the Blausteins had surrendered their Amoco stock in exchange for a minority of Pan Am stock as provided in the reorganization plan.

There is conflicting evidence on this point. My finding is that the first time that the Blausteins were informed by Seubert or any one that there was serious question in the minds of the directors about the size of the refinery was at the meeting of March 28, 1933.

On March 18, 1933, Seubert, then on a business and inspection trip with other members of the American Petroleum Institute, met ■ Teagle, the president of New Jersey, in Tulsa. Teagle expressed grave concern that Pan Am should be building a new refinery at a time when business in general, and the petroleum business in particular, was in such a demoralized state. Teagle wanted to get a contract for Humble to process some or all of Pan Am’s crudeSeubert told him that there was a contract in existence with the Blausteins with respect to this refinery, and that he could not come to any final understanding with Teagle without the Blausteins’ presence. When Seubert returned from his trip, a meeting was arranged for March 30, 1933, between the Blausteins, Seubert and Teagle-

Although the evidence is conflicting, I find that the Blausteins knew at least by March twenty-first what the subject of the proposed meeting with Teagle was going to be, although they did not know before the meeting of March twenty-eighth that Seubert was actually in favor of any processing arrangement or had any serious doubts in his own mind as to the size of the refinery.

At this paeeting of March twenty-eighth, which followed the formal completion of the reorganization, Seubert discussed the general economic conditions in the country and the unsettled situation in the petroleum industry in particular. He raised the question as to whether the financial condition of the reorganized Pan Ain and the general economic conditions warranted the capital investment required for acquisition of crude properties, refinery construe *627 tion and marketing expansion. He also referred to recent negotiations with representatives of New Jersey with respect to the processing contract which would provide gasoline at a cost below their existing contract, and would at the same time approach the price at which they could themselves refine crude in their own plant. He suggested that they meet with Teagle. The Blausteins agreed.

The meeting with Teagle and Stewart of New Jersey was held March 30, 1933; and was attended by the Blausteins, Seubert and some of the other directors of Pan Am. At this meeting Teagle referred also to the disastrous conditions in the oil industry, stating that he had just come from "Washington where he and other oil men and representatives of Governors of the various oil States had been attempting to work out some solution. He mentioned the over-expansion and over-development in the oil industry including production, manufacturing, marketing, refineries, etc. He pointed out that if the oil industry did not put its own house in order the majority of people in Washington felt that the industry was facing Federal control; that refinery capacity was then operating on a sixty per cent basis. He also stated that if Pan Am built a large refinery in the Gulf, New Jersey would have an excess of 10,000,000 barrels of gasoline produced in connection with their contract to supply the fuel oil for Pan Am until 1937, and that this gasoline would have to be dumped upon the market. There was a general discussion on the subject. Seubert stated that the proposed processing price of thirty-three cents per barrel was too high; but that the general economic and business conditions should be given their due consideration; and that his mind was still open on the subject. The Blausteins pointed out the necessity of Pan Am being integrated instead of buying its gasoline or having it processed by a competitor; and suggested that Pan Am might relieve New Jersey of its fuel oil commitments to the extent that fuel oil would be produced by the new Pan Am refinery in producing Pan Am’s gasoline requirements.

New Jersey offered to process at twenty-five cents per barrel for the full 40,000 barrels per day or twenty-eight cents per barrel for the half capacity or 20,000 barrels per day.

After the New Jersey representatives withdrew from the meeting, Seubert stated that in view of the present economic conditions, the earnings of the company, the amount of funds available, and the'disruption of the markets which would come from the dumping which Teagle had threatened, he was not certain that the company should proceed with the full program of refinery construction. He was inclined to take the middle road, although he had not yet made up his mind. The other nominees of Indiana on the board of Pan *628 Am agreed with him; but nothing definite was done about it. Seubert later testified that although he agreed at the time with Teagle’s views as expressed at that meeting, he regarded Teagle’s threat with respect to dumping surplus gasoline as merely a sales talk by which Teagle and Stewart were trying to sell Pan Am a processing contract.

At the next meeting of the Pan Am board on April 5 and 6, 1933, there was further discussion of the processing contract. It was finally voted that a 24,000-barrel refinery be constructed at Houston, Texas (subsequently changed to Texas City because of title difficulties) and that efforts be made to make a processing contract for the balance of the 24,000. The Indiana nominees on the Pan Am board all voted for this proposal; and the Blausteins’ three nominees all voted against it.

At this meeting the minutes indicate that Seubert stated that the refinery matter had been discussed in detail at a full meeting of the Indiana board in Chicago on April 3, 1933, and that he was ready to advise the Pan Am board of the views of the Indiana board on the matter. This, Seubert claims, is an error; and that he merely took it up with some of his Indiana associates. The minutes of the Indiana meeting of that date bear him out. This is illuminating on the question of domination by Indiana of Pan Am even though it was not discussed at a full formal meeting of the Indiana board as the plaintiffs claim.

Between April tenth and April twentieth an offer was received by Seubert from Stewart for processing by Humble at twenty-two and one-half cents per barrel of crude oil. On April 20, 1933, the next meeting of the directors of Pan Am, the board authorized the making of a contract at this price over the negative votes of the Blaustein directors. The contract was formally approved at the meeting of Pan Refining on July 28, 1933, after numerous and protracted conferences between the experts of the various companies.

Under the processing contract (which expired December 31, 1936, and was renewed by exercising options until July 1, 1937), Pan Am agreed to deliver to Humble for processing at its refinery at Baytown, 20,000 to 28,000 barrels of crude per calendar day from January 1,1934, to December 21, 1936, at twenty-two and one-half cents per barrel, subject to increase in case the price of labor or materials increased. The percentages of gasoline, kerosene, No. 2 fuel oil, and Bunker C fuel oil, respectively to be produced from the crude, were all set forth in the contract. Changes in these percentages or in the described quality of the products might be made on revised prices.

*629 The first unit of 24,000 barrels capacity was finished and went into operation in April, 1934, with full capacity achieved two months later.

On April 15, 1936, Pan Refining voted to proceed with plans for the construction of a new refinery .unit, unit No. 2. It was built and went into operation in February, 1937. It was of larger capacity than No. 1 unit, and made higher octane gasoline since it was adaptable to Gulf Coast crude which produced a higher octane gas than the crude from the East Texas field for which unit No. 1 was designed. Unit No. 2 contained other technical improvements in the art of refinery construction not possible in 1933 when unit No 1 was built. Nor could unit No. 1 be remodeled to equal wit No 2 except at considerable outlay of money varying, according to the defendants’ experts, from $500,000 to $1,000,000.

The demand for refining capacity increased and on November 24, 1936, a third wit was authorized (Blausteins not voting).

In addition to these three combination wits and necessary appurtenances, there have been constructed and placed in operation at the Texas City refinery:

1. A polymerization plant which makes very high octane polymer gasoline out of gas which either would have been burned as fuel or wasted.

2. A No. 1 pipe still, used to manufactwe a high quality furnace oil.

3. A No 2 pipe still, used to handle heavy (Cayuga) crude for Pan Am Refining’s asphalt refineries.

Pan Refining is also now building a catalytic reforming unit, a very large wit further to improve the octane of gasoline by a still different process.

Thus, to date, Pan Refining has erected, in addition to the necessary auxiliary equipment, and now has in operation:

1. No. 1 wit which ran about 33,0G0 barrels per calendar day during 1939.

2. No. 2 unit which ran about 35,000 barrels per calendar day during 1939.

3. No. 3 unit which ran about 12,000 barrels per calendar day during 1939.

4. The polymerization plant which made 1,800 barrels of polymer gasoline per calendar day during 1939.

5. No. 1 and No. 2 pipe stills.

Wilson testified: “We are planning, though it has not been definitely approved, the construction of a lubricating oil plant, in the space between the office building and the vacuum tank farm. The total refinery occupies an area of about 750 acres, and we are *630 currently running about 88,000 barrels of crude per calendar day. After June 1st, when we are making some changes and building a new heater for No. 1 unit, we will raise that to about 93,000 barrels per day.”

Referring again to the original No. 1 unit authorization, it is clear that Indiana and the defendant directors of Pan Am knew in March and April, 1933, that the failure to build the second half of the refinery mentioned in the definitive agreement and the substitution of a processing contract for half of Pan Am’s requirements would cost Pan Am a great deal of money each year that the processing contract continued. The plaintiffs claim that the loss was in excess of $1,000,000 per year. The estimates prepared by Indiana experts and submitted to Seubert before the final action of the board, indicated that the second unit of the refinery could have been built for only $3,506,000 and that on a basis of twenty-two and one-half cents per barrel charge; the additional investment necessary to build the second half of the refinery would have been completely paid out in about three years on the money saved by its own refining instead of having its oil processed elsewhere. The estimates showed a contemplated cost of operation for the second half of the refinery for three years to be $2,000,000. Adding this to the proposed cost of construction gives $5,506,000. As against this, the minimum commitment to Humble (20,000 barrels per day), multiplied by twenty-two and one-half, amounted to $5,000,000 per year.

With respect to these estimates the defendants argue that the experts were figuring operating costs in a proposed unit larger than any existing unit in the world. They sufficiently point out that a safety factor of ten per cent to twenty per cent should have been added, which would have increased the payout period beyond that claimed by the plaintiffs. Furthermore, the kind of yields in the estimate were not beyond doubt of realization in this unprecedented refinery. The defendants also urge that owing to rapid obsolescence in refinery equipment, a payout of three years is not always to be deemed very attractive; and one of their refinery experts so testified.

The damages claimed on this part of the complaint is about $3,000,000 or about $1,000,000 excess cost of processing over refining for each year of the three-year processing contract.

Crude Producing Properties.

The second respect in which the plaintiffs claim that the definitive agreement was broken, and the second specification on which they claim that the directors and Indiana violated their duties relative to the interests of Pan Am, is in connection with the acquisition of crude oil producing real estate.

*631 The definitive agreement was very clear on the question of crude oil reserves.

It provided that Pan Am should “ actively proceed to secure its own sufficient crude oil production as a reserve for the requirements of Pan-Am, and for such purpose shall immediately allocate an initial sum of 13,COO,000 to be expended under the supervision of the Board of Directors for the acquisition of crude oil producing properties.” It further provided that all the parties to the agreement (which include Indiana) were “ to use their best efforts, resources and personnel to propose, establish and carry out a program for the establishment and maintenance of a backlog of crude oil properties sufficient for the operations of Pan-Am.” It further specified that until Pan Am succeeded in accumulating a reserve necessary for its requirements it should have the option to require Indiana to supply, and Indiana agreed to supply, any deficiency at “ ‘ average prevailing field prices ’ to the extent of its ability and without loss to itself.”

It is generally conceded that an oil company which has its own crude oil producing properties from which it may receive a steady stream of supply has a great advantage over competitors who do not have such independence of supply, and who have to go out and buy their crude. It is one of the important elements of integration in the oil industry. All of the large integrated companies have adopted the policy of acquiring a large backlog of crude oil reserves of their own.

It was particularly important for Pan Am immediately upon reorganization to begin to obtain crude oil properties, because it had, during 1931 and 1932, been separated from its foreign and domestic reserves of crude. At the time of the reorganization, Pan Am no longer owned any consequential independent oil producing properties. Therefore, the definitive agreement, in addition to its contractual implications, would seem to be a fair statement of at least a prima facie obligation in this regard imposed upon the directors of Pan Am. In the memorandum of July 15, 1932 (the White Sulphur agreement), similar provision had been made to proceed actively and promptly in the acquisition of crude oil properties. The various written drafts of the definitive agreement contained the same agreements for acquiring crude oil properties for Pan Am. The definitive agreement does not mention the proposed locale of the properties which the parties had in mind; but the inference is clear that all of the parties intended principally the oil fields of East Texas and the Gulf Coast.

Although the definitive agreement and the best interests of Pan Am required immediate and active acquisition of oil-producing *632 properties, the fact is that no subsidiary of Pan Am was organized to acquire such property until May, 1935 (Pan Production), and no actual properties were purchased until September, 1935. The only reason advanced by the defendant directors and Indiana for the failure sooner to approve the acquisition of crude properties or to organize a subsidiary for that purpose, was a legal opinion advanced by Stephens on which they all relied, that the Texas antitrust laws made it illegal for Pan Am to engage in the business of producing crude oil required for its contemplated refinery, or to organize a subsidiary for that purpose.

During all of the preliminary negotiations leading up to the final definitive agreement of February 17, 1933, lasting over seven months, one of the fundamentals insisted upon by the plaintiffs was the acquisition of crude oil properties and the production of crude oil therefrom, generally along the lines of the provisions which were finally included in the definitive agreement.

In all of the written memoranda, drafts and letters throughout this period and up until March 28, 1933, there was no intimation by the defendants, or by any one representing them, that there was any serious question in their minds as to the legality of the proposal under the Texas anti-trust laws. I also find that up "to March 28, 1933, there was no oral statement or warning made by the defendants or their representatives to the plaintiffs with respect to this subject.

The defendants claim that during the conference at White Sulphur the representatives of Indiana did point out the doubt which was in their minds with respect to these Texas statutes, although they admit that no written record of it was made. It is difficult to believe that, in a transaction of such importance, this one very fundamental question would have been allowed to remain doubtful even up to the time of the signing of the agreement; or at least, that no reservation would have been made in writing with respect to such doubts, especially in view of paragraph IX-L excluding oral representations or warranties. It is my finding that when the definitive agreement was executed and up to the time that the plaintiffs surrendered their stock, no question had been expressed by the defendants to the plaintiffs with respect to the acquisition of producing properties based on any fear of the Texas anti-trust laws.

While it is true that the plaintiffs in this derivative action should not be accorded any advantage by reason of this concealment from them, this finding of fact is important in passing upon the genuineness of the claim later raised by the defendants that crude production and the purchase of crude reserves by Pan Am were impossible because of the Texas statutes.

*633 After the definitive agreement was signed and during the period when the directors of Pan Am and Indiana were formally ratifying it, and were drafting, executing and approving the plan of reorganization and all the necessary accompanying documents, and even at the meeting at which the formal approval of the stockholders was being obtained, no mention was made in any of the documents as to any possible illegality. During this period, however, there was some discussion between counsel for Pan Am (Tappen), and counsel for the Blausteins (Steinman), as to whether the proposed production subsidiary of Pan Am should be incorporated in Delaware or in Texas. The considerations there involved, however, were solely with respect to the organization tax and technical corporate procedure; and did not refer to any claim of illegality by reason of any anti-trust laws.

On March seventh, however, the question of the anti-trust laws of Texas was being considered by Seubert and Barkdull and by Indiana counsel (Fellingham, assistant to Stephens) and Pan Am counsel (Tappen). The question of law involved was whether Pan Am could engage in producing crude oil in Texas through a subsidiary corporation, in spite of the fact that Indiana already had an almost wholly owned subsidiary corporation (SO&G) which was likewise engaged in producing crude oil in Texas. Since seventy per cent of the stock of Pan Am was owned by Indiana, would it be illegal for a Pan Am subsidiary, which would in turn be a subsidiary of Indiana, to engage in the production of crude oil in Texas, where another almost wholly owned subsidiary of Indiana was engaged in the same business?

There are certain statements, and communications between some of the parties, which do refer to the fact that the question of the incorporation of a Pan Am production subsidiary had been submitted to Texas counsel; but these do not specifically refer to the anti-trust laws and might well refer to the matter which the Blausteins knew was under consideration, namely, whether, for tax and corporate purposes, the corporation should be organized in Texas or in Delaware.

The fact is, however, whether the Blausteins were informed of it or not, that on March 8, 1933, a formal inquiry was made by Fellingham of Stone, a Texas lawyer, asking for his opinion as to whether or not it would be legal for a Pan Am subsidiary to go into the production business in Texas and obtain a backlog of crude. An answer was received- by Fellingham from Stone giving certain legal conclusions based upon his understanding of the facts which were detailed in an attached memorandum. On March 22, 1933, Indiana counsel (Fellingham) replied; pointed out that some of *634 the facts in Stone’s memorandum were incorrect; and corrected them.

On March 25, 1933, Indiana counsel (Fellingham) received an answer to his letter of the twenty-second (not from Stone but from his partner Agerton) giving the opinion of both Stone and Agerton j that it would be legal under the anti-trust laws for Pan Am to I organize a corporation for the business of producing crude in Texas. Although the meeting of stockholders of Pan Am to approve the reorganization was held on March twenty-seventh and was addressed ■ by Seubert, no mention was made of any legal difficulties involved; nor were the Blausteins or their counsel, Steinman, informed of these various communications with Stone.

The general counsel for Indiana was the defendant Stephens; but this matter was being handled by his assistant, Fellingham, because Stephens had been in the hospital from February twenty-fifth to April third. On April third Fellingham left for his vacation, and turned the matter ovér to Stephens. Stephens as counsel had not only the legal problem of the absence or suppression of competition as between these two subsidiaries (SO&G and Pan Am Production) of one parent company (Indiana), but he also had the legal problem of common management of the various companies through interlocking directors. This latter problem also involved the refining companies of the Pan Am group and the refining companies of the Indiana group as well. Accordingly, on April eighth, he wrote to Stone again, asking for his views as to whether the directors of Indiana who were also directors of Indiana subsidiaries could legally serve as directors of the proposed Pan Am subsidiaries, pointing out that Indiana owned the majority of the stock of Pan Am.

In the answer from Stone to his question a legal opinion was given that there could be such common directors. After weighing all of these letters, Stephens on April 27, 1933, wrote Seubert a letter, of which the following is an extract:

“ After due consideration of the entire file I agree with Judge Stone, and it is therefore my opinion that directors of Stanolind Pipe Line Company, Stanolind Crude Oil Purchasing Company or Stanolind Oil and Gas Company may serve as directors of Pan American Refining Company or the producing company proposed to be organized to operate in Texas under the Pan AmericánAmerican Oil consolidation, without violation of the anti-trust laws of the state of Texas.

“ I am today advising Mr. Lotus Blaüstein of this situation, as per attached letter to him,”

*635 He also wrote Blaustein to the same effect on the same date.

Although the defendants urge that all that Stephens had in mind was the question of interlocking directors, I find this to be a specific statement of Stephens’ opinion on April 27, 1933, that it would be legal for Pan Am to organize a producing subsidiary.

Nothing further was done, however, about the producing subsidiary company for Pan Am for several months, although the Blausteins kept insisting from time to time that it be organized.

In the meantime other disputes arose between the majority directors of Pan Am nominated by Indiana, and the Blaustein minority directors.

One significant fact, on which much reliance is placed by the plaintiff, is that during this period, the Indiana subsidiary SCOP tried to obtain from Pan Am a contract under which Pan Am for three years would have to purchase all its crude oil requirements through SCOP from the other Indiana subsidiary SO&G. Of course the consummation of such an arrangement would have made it useless for Pan Am to buy any crude oil producing properties or to go into production at all, because it would have had to buy all its crude oil requirements from the Indiana subsidiary anyway. This proposal came up at the meeting of July 28, 1933. Blaustein strenuously objected and pointed out that the proposal would do away with the very foundation of Pan Am’s integration viz., its crude oil reserves. The Pan Am board yielded on this matter; and in the purchasing contract finally adopted Pan Am was permitted to purchase crude elsewhere if it could be obtained more cheaply.

It is not important to decide whether the frustration of this attempt to get Pan Am to buy all its crude oil requirements from the Indiana subsidiary for three years was, as the plaintiffs claim, the proximate cause of the subsequent change of legal opinion by Stephens, which had the effect of keeping Pan Am out of procuring its own crude oil reserves for several years, and compelling it as a practical matter to buy its requirements from the Indiana subsidiary. The defendants’ contention that Stephens did not draft the proposed purchasing contract, and that he even joined Blaustein in his objections, would not of itself necessarily overcome the inference sought to be drawn by the plaintiffs with respect to cause and effect in the matter of production.

Whether it was the cause for the change of events or not, the change came.

On August eighth Stephens wrote Seubert a letter stating that in his opinion the Texas anti-trust statutes prohibited Pan Am from going into the production business because of the stock owner *636 ship and control by Indiana of both Pan Am and SO&G; and stating also that his prior letter of approval of April twenty-seventh related solely to the question of interlocking directorates and not to the question of restraint of competition under the anti-trust laws.

On August twenty-second he wrote Seubert a second letter which repeated substantially his letter of August eighth.

I find that these letters of August eighth and twenty-second indicate a complete reversal of Stephens’ legal opinion rendered on April twenty-seventh.

In the meantime, however, he had not obtained further opinion from any Texas lawyers; nor had he had any conference with them. Apparently he had only discussed the matter with his own assistant, Fellingham. In his letter of August eighth Stephens did not state it would be improper for Pan Am to have a pipe line subsidiary, even though Indiana also had a pipe line subsidiary in Texas; he only stated his opinion that there should not be common directors of the two pipe line subsidiaries.

At a meeting of August 24,1933, Barkdull announced that because of these legal difficulties, nothing would be done in respect to organizing a production company in Texas “ until legal difficulties could be cleared up to the satisfaction of Indiana counsel.”

At the meeting of September 19, 1933, Blaustein and his counsel, Steinman, again insisted upon the organization of a production company, and attempted to argue the question of anti-trust laws involved in the matter. At that meeting it was stated by Stephens that in addition to the legal difficulties Pan Am would not have any crude oil production for “ policy reasons,” and that Indiana would not consent to Pan Am going into the crude production business.

At the meeting of October 18, 1933, Seubert read a prepared statement defending the Indiana position with respect to the proposed production activity of Pan Am. He stated that Pan Am had taken the best Texas legal advice on the subject, and that the legal difficulties were due to Blaustein’s connection with the Crown Central Refinery in which he had an interest as well as to the common parenthood of Indiana. There had been no additional Texas legal advice taken since Stephens’ letter of April twenty-seventh; and the advice which had been taken up to that time had resulted in a legal opinion directly contrary to the one which Seubert was urging. It should also be pointed out that in Stephens’ letters of August eighth and twenty-second, no mention had been made of any difficulty arising out of Blausteins’ ownership of an interest in Crown Central Refinery.

The most important fact in this course of corporate events is that Pan Am’s own counsel was not authoritatively consulted in the *637 matter; nor was Pan Am permitted to obtain the advice of any independent counsel. The opinion upon which the Indiana nominees on the board were consistently acting to keep Pan Am out of the production business in Texas came only from the general counsel of Indiana. In fact it was definitely stated by Barkdull that Indiana counsel would have to be satisfied as to legality before production activities could start.

Stephens was an officer, director and general counsel of Indiana, whose subsidiary, SO&G, was going to have to face the competition of the proposed Pan Am subsidiary if it was ever organized. The vice of this attitude of the defendant directors in relying exclusively upon the opinion of one of its directors who was so closely connected with an interest adverse to Pan Am, becomes even more apparent in the light of the fact, later discussed, that Indiana by its subsidiary SO&G was, itself, during this very time, engaged in acquiring crude oil producing properties, from which it expected to, and later did, sell crude oil at a profit to its subsidiary Pan Am.

Because of the other difficulties arising between the Blausteins and the Indiana nominees, Barkdull on June 6, 1934, suggested that a meeting be held for the purpose of discussing the controversies between them. He inclosed a proposed agenda for this meeting. The agenda indicates that Indiana was not only advancing the legal objection as of that date, but that they were considering from a policy standpoint “ the advisability of entering upon production activity if same is legally possible.”

After a long controversy which lasted more than a year, on August 21, 1934, it was decided to submit the question of legality anew to two Texas lawyers, one to be selected by each side. Stephens selected Judge Batts, and Steinman selected Mr. Weems, both well-known counsel in Texas. The submission was by joint letter on October 3, 1934. The opinion of these two gentlemen was submitted on November 6, 1934; and definitely stated that it would be legal for a subsidiary to be organized by Pan Am to go into the production business in Texas in spite of the Texas anti-trust laws.

On November 22,1934, Stephens wrote Judge Batts about clearing up one paragraph of the opinion; and this was done by Judge Batts and Mr. Weems on November 27, 1934.

The subsidiary corporation, Pan Production, was, however, not organized until May, 1935. On July 1, 1935, a Mr. Turner was employed by it to manage its production activities. It was not until September, 1935, that the first piece of producing oil property was purchased. This was ten months after the second Batts-Weems opinion had been received indicating that the legal road was clear.

*638 During all the time that the question of the legality of production in Texas was being considered, no effort was made to acquire for Pan Am any producing property in Louisiana, which was a proper source of supply for the refinery then being built at Texas City, Texas. No claim had ever been made by any one that there would be any illegality in going into production of oil in Louisiana at the time. Many companies were exploring Louisiana fields for oil, very actively. Indiana itself was exploring in Louisiana through its subsidiary SO&G.

While Pan Am was kept from the production business, that is from 1933 to July, 1935, there were many opportunities in Texas for the acquisition of valuable crude oil properties which would be advantageous to Pan Am. First, there was the East Texas field which bad been discovered in 1930, and which by 1931 had come to be recognized as the largest field ever discovered in the United States. By 1933 it had been so developed as to make investment in leases there substantially safe.

Secondly, in the Gulf Coast area in the years 1933, 1934 and 1935 there was a great deal of exploration, discovery and activity. By means of the use of new geophysical instruments of exploration, new fields of great value were being discovered. Many of the large oil companies werp exploring and acquiring leases in that area. By 1935, when Pan Am Production was finally organized, the desirable properties in the Qulf Coast near the Texas City refinery had been largely acquired by other companies; and opportunities in that field were becoming scarce.

Indiana, through its practically wholly owned subsidiary, SO&G, was itself engaged, during this time, in an aggressive campaign of leasing crude properties in both the East Texas and the Gulf Const fields, expending several millions of dollars for such purpose.

These leases, both in the East Texas field and in the Gulf Coast area, are of substantial value, and have been profitable to SO&G. The record indicates that Indiana itself authorized these purchases, as well as many other deals which were not consummated. Sometimes the purchases were the subject of specific authorization, and sometimes were made pursuant to general authorizations.

The defendants testified that in authorizing and making these purchases in East Texas, SO&G did not have in mind the proposed Texas City refinery of Pan Am as a possible purchaser for the crude oil which was to come from the fields. The inference is very clear from the evidence, however, that much of the motivating influence for these purchases was the fact that there was to be built a refinery particularly designed for East Texas crude; and that a prpcessing contract was being entered into calling for that type of crude. In *639 fact the representatives of SO&G, as indicated in Exhibit 195, were looking forward to the Pan Am refinery as holding out some promise of realizing a substantial return on all of the money which SO&G had spent in “ remaining in the picture ” in East Texas.

Indiana was also familiar with the exploration and purchasing activity of its subsidiary, SO&G, in the Gulf Coast area of Texas and Louisiana. The approval of the Indiana board was formally obtained for many of these. Budgets covering proposed purchases were sent by SO&G to Indiana, and authorizations were made by Indiana for such purchases. The inference is clear that here, too, the SO&G executives had clearly in mind the Texas City refinery as a prospective market for this crude.

After Indiana had obtained these properties in the East Texas field, and even while it was' preventing Pan Am from obtaining properties of its own there, it sold to Pan Am at a profit substantially all of the crude coming from these properties, for use by Pan Am in its refineries. In the same way nearly all of the oil produced from certain of the fields in the Gulf Coast area acquired by SO&G was also sold to Pan Am at a substantial profit.

Up to January 1, 1937, the original $3,000,000 which was mentioned in the definitive agreement as the initial amount to be allocated by Pan Am for crude oil properties, had not yet been invested. The daily net production of Pan Production had by that date reached only 1,850 barrels. The evidence would indicate that Turner, who was managing the production activities of the subsidiary corporation, was finding it difficult to obtain satisfactory properties, and was also under the impression that Pan Am directors were not backing him up enthusiastically in a production program.

As of January 1, 1940, even considering the increased activity which came after the institution of the present litigation in January, 1937, the producing properties of Pan Am were still yielding only 5,354 barrels per day, which is less than ten per cent of its refining requirements. It has now invested over $9,000,000 of capital, but of this, $4,000,000 consist of profits put back in the company.

It is clear, therefore, that as a result of the delay in commencing a production program in earnest in 1933, Pan Am now finds itself without an adequate backlog of crude reserves.

The defendants urge that, in any event, Pan Am would not have been able physically or financially in 1933 to carry on the organization and exploration work and purchasing necessary to develop its own backlog of crude reserves. As will be indicated later, this inability, even if true, would not justify its fiduciary, Indiana, in undertaking the business itself, and then selling the crude therefrom to the cestui, Pan Am, at a profit. But apart from such legal *640 conclusion, Pan Am could have done the job or a good part of it, if it had been permitted to do so. In the first place, under the definitive agreement, Indiana was obligated to use its best efforts, resources and personnel to help Pan Am do it. Secondly, it could have hired one of the several exploration companies active at that time to do 'the geophysical work. Besides, the fact is that within six months after Pan Production was finally organized, it was doing its own seismographic work. Its financial condition would have made it possible, especially since many purchases of land could have been made on a part cash and part oil payment basis.

With respect to production matters the plaintiffs seek an accounting from Indiana and from the defendant directors of all the profits which Indiana made by selling crude to Pan Am from those crude properties which it purchased itself during the time it prevented Pan Am from purchasing any crude properties on its own account. The plaintiffs also seek to have a trust in favor of Pan Am impressed upon the properties themselves. The value of these lands and the profits therefrom run into many millions of dollars.

Pipe Line Transportation and Crude Connections.

The third specification in the plaintiffs’ charge that the defendant directors failed to integrate Pan Am and failed to promote its best interests, involves the pipe line facilities for the transportation of its crude oil. A pipe line is a physical auxiliary of major importance to an oil company. Through a gathering system the company collects the crude from the various wells in the oil field; it then runs the oil into a major trunk fine, through which the oil passes to the refinery where it is to be processed. It is the cheapest form of land transportation for oil, and is a necessary and vital part of any major integrated oil company. Of the fifteen companies producing substantial amounts of oil in the East Texas field in 1933, fourteen of them had their own gathering systems and their own pipe line outlets from the field, or, at least, a part interest in such an outlet.

The ownership and control of a pipe line system not only provides much cheaper crude oil transportation than paying the posted traffic rates to some pipe line company; it also insures a steady supply, and renders the company independent of others for continuous movement of its crude oil. Physically, through its gathering systems and spur lines, it has the further advantage of giving the company a direct contact with independent oil well owners in the field.

In March and April, 1933, Pan Am was contemplating the construction of a huge refinery on the Texas Gulf Coast. It was *641 generally understood by all the parties that one of the main sources of supply of crude oil for the refinery was to be the East Texas oil field about 200 miles away in a direct line. When Pan Am began to negotiate the processing contract with Humble, it was likewise contemplated that the crude oil to be processed would be moved principally from the East Texas field down to the Humble refinery at Baytown, which was near Texas City. It seems obvious, therefore, that the natural and cheapest thing for Pan Am to have done was to construct a pipe line running about 200 miles directly from the East Texas field down to Texas City (the site of Pan Am’s proposed refinery) and Baytown.

The construction of such a pipe line was voted down, however, by the majority of the board of directors of Pan Am. Instead, the majority directors, over the opposition of the Blaustein directors, made contractual arrangements to transport its crude over two existing pipe lines, one owned by a subsidiary of Humble, HPL, and the other by SPL, a subsidiary of Indiana. This arrangement has resulted in a substantial loss to Pan Am, and a substantial profit to Indiana through its subsidiary SPL.

There are innumerable pipe lines running in all directions through Texas to take the crude from the various oil fields in the State to refineries or points of shipment both within and without the State. Some of them are several hundreds of miles long. A map in evidence of the pipe lines of Texas shows that a pipe line of 200 .miles is a comparatively small enterprise.

The following map (p. 642) indicates the portions of the pipe lines involved in the present controversy, and the location and distances between the various points. The pipe lines do not stop at Mexia as shown on the map; but only the parts indicated are material to this litigation.

SPL owned a pipe line running down from Whiting, Ind., to Mexia and from Mexia to Sinco. That part of the line from Mexia to Sinco, 166 miles long, was not used by the Indiana refineries themselves, but was at this time under contract to carry approximately 25,000 barrels of crude oil per day for the Sinclair Oil Company to the Sinclair refinery at Sinco. This contract to carry Sinclair oil was to terminate in September of 1933; and Sinclair was building its own new and larger pipe line from Mexia to Sinco to take care of transporting this oil. The evidence indicates that the reasonable assumption was that this contract was not going to be renewed by Sinclair in September. Therefore, for business for this part of its pipe line, SPL would have to look elsewhere.

Humble, through its wholly owned subsidiaiy, HPL, owned a gathering system in the East Texas oil field, and a trunk line from

*642

MAP SHOWING HUMBLE. STANOLIND

AND PAN AM PIPE LINES EAST TEXAS TO TEXAS CITY

HUMBLE i-a, STANOLJNDm PAN AM U AND BAYTOWN

*643 that field which ran to Mexia, 127 miles away, and on beyond Mexia toward the western part of Texas. SPL did not own a gathering system in the East Texas field; and did not own any pipe line running out of the East Texas field.

At Mexia (Bullock) SCOP owned a large tank farm which in March of 1933 had a total capacity of 5,000,000 barrels. SO&G owned some oil properties in the East Texas field which it had bought in 1931. This oil was being purchased by SCOP, gathered by HPL, and transported by HPL to SCOP’s tanks at Mexia. There some of it was stored, and some of it was sold to the Sinclair Oil Company and transported through the SPL line from Mexia to Sinco.

After the signing of the definitive agreement, it became necessary to consider how to transport all the crude oil from the East Texas field necessary for the proposed 48,000-barrel refinery. It first came up at the first informal meeting of March 7-8, 1933, at which time Seubert stated that if the SPL pipe line was used they would have to charge the regular full pipe line tariff. At the meeting of April 5-6, 1933, the board requested Peake to make a study of the pipe line and crude oil supply situation, in so far as it affected Pan Am, and to report on it at a later meeting.

Peake, although present at this meeting, was not a director of Pan Am. He was, however, a director of Indiana. He was also a director of SCOP; later (1934) became its vice-president, and subsequently (1935) the chairman of its board; he was also a director of SPL; later (1934) became its vice-president, and in 1935 chairman of its board. In 1935 he became director and chairman of the board of SO&G. Therefore, Peake was closely connected with the management and with the policy-making of Indiana and of its three major subsidiaries; but had no formal connection with Pan Am.

The result of Peake’s investigation was communicated by him in letters to Seubert dated, respectively, May 24 and May 25, 1933. Before writing them he had negotiated with the representatives of Humble. In these letters Peake made several alternative recommendations as to how to transport the crude from East Texas to the Pan Am refinery at Texas City and to the Humble refinery at Bay-town. None of these recommendations included the construction of an independent pipe line by Pan Am out of East Texas. They all involved the use of the Humble gathering system and pipe line from the East Texas field to Mexia, and the SPL pipe line from Mexia to Sinco, with the construction by Pan Am of two spurs from Sinco to Texas City and to Baytown respectively. Peake admitted that it would be cheaper to build a new pipe line from East Texas to Sinco with spurs to Baytown and Texas City; but urged that *644 Pan Am would not be able to get sufficient connections to the wells in the East Texas field to give them their necessary refinery requirement of 48,000 barrels per day. On the other hand, he represented that, if they would enter into a pipe fine arrangement with Humble which would employ the HPL pipe line to Mexia, Humble would, in consideration thereof, turn over to Pan Am a sufficient number of well connections to insure the 48,000-barrel per day supply.

A “ connection,” as that term is used in the oil industry, means a physical contact by means of a pipe running into a small tank on a leasehold. This tank contains the oil which has been poured into it directly from the several oil wells on the leasehold. A number of such pipe lines constitute a gathering system; and the oil from a gathering system runs into some main pipe line outlet from the field.

The word “ connection ” is also used to include the legal relationship between the purchaser of the oil and the owner or lessee of the well who is the producer of the oil. It involves an agreement between them, terminable at the will of either party, whereby the purchaser buys each day the allowable oil produced from the well by the operator, which is pumped into the gathering system. From time to time these connections are changed so that a well, instead of being connected with one pipe line and one purchaser, gets connected with another pipe line and another purchaser. It is the number of connections which determines the amount of crude oil running into a gathering system or a pipe line. The more connections a pipe line gathering system has, the more crude oil it collects.

The task of the directors of Pan Am in the spring of 1933 was not only to provide transportation for the crude oil, but also to make sure that it was connected by a gathering system to enough wells, so that it could collect the necessary amount of crude and have it flowr to the refinery in a steady stream through a pipe fine outlet from the field.

The amount of crude oil which can be obtained from a well connection is not a constant one over a period of time. Although the natural flow of oil from any one well may be fairly constant, the laws of Texas do not permit the collection of all that a well will produce during a day. This limitation is called “ proration;” and the amount which can legally be removed from each well per day is called the “ allowable ” for that well. Any oil produced from a well in excess of the allowable is illegal, and is known as “ hot oil.”

The Texas Railroad Commission was the State agency charged with the responsibility of fixing the amount of oil which could be ■ *645 removed each day from the East Texas field, and of dividing that amount equitably among the different wells on the field. The purpose of vesting such power in the Railroad Commission was twofold: (1) To conserve the oil resources of the State from waste, and (2) to balance, in some measure, the supply of the crude with the demand for it, in order to avoid a complete collapse in the price structure of oil.

Over-production of oil in the East Texas field had resulted in this form of statutory restriction and conservation. At times the over-production reached such levels that the wells were all shut down for days at a tune. The amount of allowable oil changed quite drastically through the year 1933. Assuming that a company had a steady requirement for a certain amount of crude oil per day, that supply might be readily obtainable from the connections which it had when the allowable was high; but if the allowable was reduced, the same number of connections would give the company a much smaller quantity of crude oil, because only a smaller amount of oil could be lawfully taken from each well connection.

At the meeting of May 31-June 1,1933, Mr. Peake was presented to the meeting by Mr. Seubert, and he announced to the meeting a tentative arrangement made with Humble by which Humble agreed to turn over to SCOP the required additional barrels per day of connections, if the proposed pipe line arrangement were made with HPL. No final decision was reached.

There was authority given, however, immediately to begin to construct a pipe line for Pan Am from Sinco to Texas City, and also from Sinco to Baytown as soon as the processing contract was completed. The construction of these spurs would be necessary in any event, whether an independent line was built from East Texas to Sinco or whether the Humble-SPL lines were used. Peake was also directed to obtain a definite proposition from Humble; and to obtain data as to what it would cost Pan Am to put its own gathering system in the field and build a trunk line itself from East Texas, so as to avoid paying Humble for gathering and transporting.

At this same meeting the question of the contract for purchasing crude oil was discussed. Peake had urged that SCOP be permitted to do all of the purchasing of crude for Pan Am at a marketing charge of five cents per barrel. Blaustein objected, stating that Pan Am should have its own crude oil purchasing department and, besides, that the rate was far too high. It was finally arranged that for the interim period up to the end of 1933, SCOP should act as a purchasing agent for Pan Am at a marketing charge of five cents per barrel.

*646 The next meeting of the board at which there was a discussion of the pipe line situation was on June 28, 1933. Peake reported the result of his investigation. His estimates presented at that meeting, if analyzed, show that the saving to Pan Am which would have resulted from building and operating a gathering system and a direct pipe line from East Texas to the refinery at Texas City, including depreciation and interest on the capital investment, would have been $1,0C0,C00 per year as compared with using the Humble and SPL lines (excluding the cost of storage). However, Peake again stated that would be impossible to obtain connections to get the required crude if the direct line were constructed.

Under the definitive agreement, Pan Am had the right to call upon Indiana to furnish whatever crude it could not get elsewhere, and Indiana agreed to furnish it up to the extent of its ability, at the prevailing prices, without loss to itself. At this time SCOP itself had connections amounting to 40,000 barrels of crude per day and, therefore, needed an additional 10,000 per day. Peake reported that it would be impossible to obtain connections in that amount from any source other than Humble, and that Humble would not turn them over unless the pipe line arrangement was entered into with HPL.

Parenthetically, it seemed to be assumed at this meeting, by failure to consider the fact in any estimates submitted to the meeting, that Pan Am was not going to buy any crude properties for itself, to which it would of course be connected, even though Stephens’ opinion of August eighth had, of course, not yet been delivered.

On this representation by Peake that the connections would be otherwise unavailable, Blaustein agreed to the proposal of the joint Humble-SPL arrangement; but insisted upon presentment of the formal contracts at a later meeting for approval.

The next meeting was on July 28, 1933. The formal pipe line contracts which had been drawn up were presented. This was the meeting at which was also presented the proposed contract mentioned on pages 635 and 657 of this opinion, between SCOP and Pan Refining which provided that for a period of three years the latter should buy from SCOP all the crude oil which Pan Am would need or use in its refinery.

This proposed purchasing contract violated not only the definitive agreement, but was inconsistent with the understanding which had been reached at the previous meeting. Under it, Pan Am for three years would have had to buy all of its crude from SCOP; it could not have gone into the business of crude oil production or purchasing crude oil properties; and it could not have undertaken for that period to purchase crude oil or to transport it on its own account. *647 It was not merely a temporary arrangement, but a binding agreement for three years. It did not make SCOP only a purchasing agent on the basis'of a five-cent marketing charge; it provided that SCOP could actually sell all the crude oil which Pan Am would need, at the posted price as of the date of delivery of the oil, irrespective of what SCOP had paid or would pay for the oil. This would give SCOP a profit on all the oil that had been bought by it at distress prices and stored by it at Bullock (Mexia), and on any oil that it might buy later and put in storage, on which the posted price might thereafter rise.

In view of the fact that the purchasing contract was intimately bound up with the pipe line transportation contracts, the Blaustein directors voted against all of them. However, the contracts providing for pipe line arrangements were approved over their opposition; and the crude oil purchasing contract was postponed to another meeting. It will be discussed further in connection with that part of the opinion which deals with crude oil purchasing.

The contracts which were thus adopted to carry out the pipe line arrangements were substantially as follows:

(1) An agreement between SCOP and HPL that the latter should for five years gather in the East Texas field and transport to Mexia all the East Texas crude which SCOP might purchase, up to a maximum of 48,000 barrels per day.

(2) A joint pipe line traffic agreement between SPL and HPL for a period of five years beginning July 18, 1933. By it, HPL was to receive as its participation for gathering the crude oil in the East Texas field and transporting it to Mexia, a flat rate of ten and one-quarter cents per barrel (later voluntarily reduced by it on September 1, 1935, to nine and one-quarter cents per barrel).

(3) An assignment by SPL to PAPL of the interest of SPL under the aforesaid joint pipe line traffic agreement for three years; by which PAPL assumed all responsibility for the operations under the traffic agreement.

(4) A lease by SPL to PAPL for three years beginning September 24, 1933, of the SPL 166 miles of pipe line from Mexia to Sinco. That portion of this line which runs from Hufsmith to Sinco was leased to PAPL for an additional period of two years. The rental to be paid by PAPL to SPL wras to consist of 12.95 per cent of the total of the following sums: (a) $3,000,000, the agreed value of the entire pipe line leased, for the first three years, and $720,000, the agreed value of the Hufsmith-Sinco line, for the last two years; (b) the cost of such additional trunk line and gathering facilities as SPL agreed to install. The taxes and repairs were to be paid by PAPL.

*648 (5) An agreement between PAPL and SPL whereby PAPL employed SPL to operate the pipe line sj^stem for five years beginning September 24, 1933. The cost of this to PAPL was to be the actual cost of SPL’s services for labor, supervision, insurance, etc., plus an overhead charge of $2,500 per month ($2,000 per month during the last two years).

PAPL constructed at its own expense the spur lines from Sinco to Texas City and from Sinco (Dawes Junction) to Baytown, which lines became and still are the property of PAPL.

The principal justification advanced by the defendants for entering into these contracts which cost Pan Am approximately $1,000,000 per year (excluding storage costs) more to transport its crude than it would have cost upon constructing its own pipe line, is the claim that, without them, it would have been impossible, by January 1, 1934, when the refinery was supposed to have been finished, to have acquired the 48,000 barrels of connections per day.

In their answering brief, the defendants rely upon two other points of justification for not voting for an independent Pan Am pipe line. One was the flexibility of the pipe line arrangement with respect to types and quality of oil, since the line could pick up, as it passed through other oil fields, crude of a different quality from East Texas' crude. The other was the inadvisability of making the large capital investment required by the construction of a new pipe line. The first was raised incidentally at a board meeting of Pan Am but not seriously considered by the directors. The second was never even raised at any board meeting.

The main question of fact to determine, therefore, is whether or not the chief defense urged by the defendants has been proved, namely, the unavailability of crude oil connections for its refinery, if it had not made the pipe line deal with Humble, as a quid pro quo for which Humble turned over several thousand barrels per day of its own connections to SCOP for Pan Am.

The burden of proof here is upon Indiana and upon its nominees on Pan Am’s board, to prove such impossibility of obtaining connections. This burden of proof devolves upon these defendants from the facts that Indiana, as a dominating and controlling majority stockholder, was a fiduciary of Pan Am, that it prevented Pan Am from constructing its own pipe line, and with the co-operation of the directors caused Pan Am to enter into pipe line arrangements with Indiana itself (through its subsidiaries, SPL and SCOP), which were profitable to Indiana. The showing of these facts, as will be discussed later in detail, casts upon the defendants, the trustees, the burden of justifying their conduct toward the cestui.

I find that the burden has not been sustained.

*649 What were the requirements in the way of additional connections which had to be provided for Pan Am? Although, as the defendants point out in their answering brief, the provision in the definitive agreement requiring Indiana to supply Pan Am’s deficiency in crude oil needs to the extent of Indiana’s ability, does not mention connections, all of the parties assumed that Indiana would make available to Pan Am all of the connections which Indiana then had in the East Texas field, both free and controlled. In no other way could Indiana adequately perform its obligation under the definitive agreement. On May thirty-first, SCOP was connected to 489 wells with an allowable on that date of 37,845 barrels; and on June 14, 1933, according to the letter of that date from Peake’s assistant, Soper, Indiana was connected to 530 wells with a daily allowable, as of that date, of 40,094 barrels. The problem of the directors, therefore, during May and June, 1933, was to determine whether or not Pan Am could obtain sufficient additional connections in the East Texas field to supply their refinery with 48,000 barrels per day.

Included in these connections as of each date were approximately 143, with 11,000 daily allowable, which had been turned over by Humble to SCOP on May 16, 1933. The defendants’ contention is that SCOP had agreed to return these 143 connections if a contract was not finally entered into with Humble for the transportation by HPL to Mexia of the East Texas crude intended for the Pan Am refinery. The plaintiffs contend that these 143 connections had been turned over by Humble on May 16, 1933, without any such condition.

My conclusion from the evidence is that there was no such condition attached by Humble to the transfer of these 143 connections to SCOP on May 16, 1933. The oral testimony introduced by the defendants on this point does not overcome the natural inferences to be drawn from the written documents in the case. For example, the letter from Humble to SCOP dated May 19, 1933, referring to the connections turned over, does not mention any such conditions. Mr. Peake in his letters of May 24 and 25, 1933, to Mr. Seubert, speaks of Humble’s willingness to turn over “ additional ” East Texas connections. There is no intimation that there had been any condition requiring a retransfer of the connections already turned over by Humble. At the meeting of May 31 and June 1, 1933, the minutes indicate that “ Humble has made a tentative proposition of releasing to Stanolind [SCOP] an additional 10,000 barrels per day,” of connections. There is here no implication that there had been any condition attached to the prior turn over of the connections by Humble to SCOP. The memoranda made by Peake of conferences with the Humble representatives on this subject, *650 dated June 12 and June 20, 1933, contain no intimations with respect to the return of the original 10,000 barrels of connections. The formal estimate made by Soper on June 14, 1933, to determine the amount of crude which could be obtained without the pipe line agreement with HPL — the estimate which Peake presented to the Pan Am board on June twenty-eighth — indicates that these 10,000 barrels of connections taken over from Humble in May were the property of SCOP and would not have to be tinned back to Humble even if a direct pipe line were built by Pan Am.

According to Soper’s estimate submitted to the board, the amount of additional connections which Humble would have to turn over was 132 in order to get an additional 10,000 barrels. These, added to the existing 40,000 barrels, would produce the refinery’s requirements.

Exhibit A 184 shows that the connections actually turned over by Humble to SCOP during 1933 were many more than Soper anticipated would be needed, and indeed more than Humble had promised in June, 1933, to turn over. The promise was only for 132 wells, with a call on an indefinite number, of additional connections if they should be released by Standard of Louisiana. In fact, 532 connections actually were transferred before January 1, 1934, by Humble to SCOP with a daily allowable as of their dates of transfer of 26,000 barrels per day. By January 1, 1934, these allowables had shrunk to 16,000 per day, and, of course, the allowable of the connections with SCOP as of June 14, 1933, had shrunk correspondingly.

Even with this additional help from Humble, it was not until May, 1934, that the 48,000 barrels of connections were reached. The deficiency between the day the refinery started and May, 1934, was filled from accumulated storage in the field. The question is whether the directors could have done the same by May, 1934, without Humble.

I conclude from the evidence that in the East Texas field during 1933 Pan Am could have obtained the necessary additional connections of crude oil required by its refinery, or, at least, as many as it actually received from Humble as a result of the pipe line arrangement. It certainly could have obtained as many as were definitely promised by Humble in June, 1933, viz., 132.

The East Texas field, on May 1, 1933, was some forty-seven miles in length and between four and eight miles wide. At that time there were about 10,000 wells in operation, and the allowable for the field was about 810,000 barrels, or an average of about eighty-one barrels per well. During 1933 there were about thirteen major companies purchasing crude in the East Texas field. These *651 major companies or their affiliates owned about fifty per cent of the East Texas field’s production, or about 5,000 wells; the remainder was owned by some 1,100 small independent producers.

The production from crude oil producing properties owned by the purchaser, or by one of its affiliates, is known as “ controlled ” production; and the production from all other properties is known as “ free ” production.

Out of the fifty per cent of the East Texas field’s production which was owned by independent producers, about thirty-five per cent was sold to the major companies. Therefore, the major producers of crude in 1933 purchased and transported outside the field about eighty-five per cent of the production of the East Texas field.

Exhibit 503 shows that during 1933 the number of producing oil wells had gone up from 9,390 on January first to 11,891 at the end of December — an increase of 2,501 new wells. During that same period 263 new leases were developed. The number of free wells in April, 1933, was 4,789, according to the scout reports, a concededly reliable source of information gathered by representatives of the major oil companies called “ scouts.” This had increased to 5,486 by the end of December, 1933.

The average allowable for May, 1933, was about 813,000 barrels per day for the whole field, or about 81 per day per well; for June, 668.000 barrels, or 66 per well; for July, 561,000 barrels, or 55 per well; for August, 601,000 barrels, or 58 per well; for September, 516.000 barrels, or 48 per well. The allowable then gradually dropped so that on January 1, 1934, it was about 408,000, or 35 per well.

It appears, therefore, that approximately half the oil produced in the East Texas field was produced by the approximately 1,100 independent producers in the East Texas field; and this independent production ranged from about 400,000 barrels per day in May of 1933 to approximately 200,000 barrels per day at the end of the year. These independents were engaged only in producing oil, and were not interested in any of the major companies, which owned the remaining fifty per cent of the total allowable production. While substantially all of these independent producers were connected to purchasers at the time, the physical connection was simply the result of a business relationship between the buyer and producer which would be continued only so long as the arrangement was satisfactory to both parties. It is primarily from these free wells that Pan Am could have acquired connections, even though there were then connected to the major companies thirty-five per cent of the free field production. The task was to get some *652 of the wells to change their connections from the other companies to Pan Am; and also to get some of the remaining wells not connected with major companies to connect • with Pan Am. In addition, Pan Am could have approached the major companies also for a transfer of some of their connections which they did not need.

An examination of the evidence shows that there were in fact a great many changes in connections during the year 1933. The scout reports show that practically every major company (except SCOP and two others) had fewer connections to leases at the end of 1933 than at the beginning of 1933. It is true, as pointed out in the defendants’ answering brief, that the reports cover a whole year rather than the nine months of 1933 which lay ahead of the directors of Pan Am. "The fact, however, remains that many changes in connections were being made in spite of the testimony of the defendants’ connections witnesses that their companies were not giving up connections during 1933. I have also taken into consideration Hudnall’s testimony that not every change in a pipe line connection necessarily means a shift in purchasers.

This loss of connections, in spite of the fact that new leases were being developed and new wells completed; the fact that most of the major companies had never paid any kind of premium to obtain a connection or to prevent the loss of one; the fact that the scout reports show that the smaller independent pipe line companies in the East Texas field were able practically to double their connections between April, 1933, and January 1, 1934, gaining about 650 wells; the fact that Sinclair Prairie Oil Marketing Co., which had to get additional connections because its contract with SCOP was to expire in September, 1933, and because it was building a larger pipe line, had succeeded, without the payment of any premium, in increasing its connections by 351 wells between April and October, 1933 (almost three times the amount Soper said it would be difficult to get without Humble’s assistance) — all these facts added to those hereinbefore discussed, show that the defendants have not sustained their burden of proving that it was impossible under any circumstances to have obtained as many connections for Pan Am as they were promised by Humble, or even as many as they actually received from Humble.

In order to get connections, it was, of course, necessary for representatives of Pan Am to go out in active search for them. If need be, they should have been ready to offer inducements for them. Inducements could have been of several kinds, as described by the various witnesses at the trial. First of all, a premium could have been offered in price. Other possible inducements *653 were: paying for oil delivered while check was being made on the title; furnishing the producer with power with which to move his oil into the gathering systems; purchasing back allowable oil, which is legal oil stored as unsalable and later allowed to be sold in part; making loans to the producer; paying him a gathering charge for oil run from his wells; favoring him in the matter of drilling contracts and rig building contracts; paying him on the basis of one hundred per cent instead of ninety-eight per cent tank tables; paying for his necessary cleaning and maintenance of equipment; and helping to operate his lease.

The difficulty with Pan Am’s endeavors was that the persons charged with the duty of going out into the field to solicit these connections were closely associated with a company which had a financial interest in seeing to it that the connections were not found. If the connections were obtained and a direct pipe line were built for Pan Am, it would have meant that the subsidiaries of Indiana would not have been able to make the profit which they did from Pan Am. Not only would SCOP have lost on purchasing; but SPL, whose pipe line agreement with Sinclair from Mexia to Sinco was going to expire next September, might not have obtained a steady customer like Pan Am.

Peake, the director and vice-president of Indiana, in his letters to Seubert of May 24 and May 25, 1933, indicated very clearly and frankly that his intention was to benefit the Indiana subsidiaries. He said: “ The three Indiana subsidiaries, Stanolind Oil and Gas Company, Stanolind Crude Oil Purchasing Company, and Stanolind Pipe Line Company, have stayed in the East Texas and Gulf Coast picture, with production purchasing activities and pipe lines; have stored a great amount of crude in order to stay in the picture; have established contacts with the Humble which result in our being able to make favorable arrangements for the future; all of which things make possible the starting up of a 48,000 barrel refinery on the Gulf Coast with the initial crude supply assured and transportation to the refinery site provided at competitive rates. These tilings have been burdensome in the past and have caused the expenditure of money which would not otherwise have been made.”

Soper, as Peake’s assistant, naturally had the same interests. Dietler, who had been told to go out and get connections, was a director and vice-president of SCOP. Obviously it was to the interest of SCOP that the pipe line arrangement should be made with HPL, and that, therefore, the connections for a direct independent pipe fine should not be found. The people whose employers’ interest would be served by making the pipe line arrange *654 ment with Humble were the very ones who were deputed by the majority of the Pan Am board, dominated by Indiana, to go out into the field and accomplish a task which, if successful, would hurt the interests of their own company.

It must also be remembered that it was not absolutely necessary that a full quota of 48,000 barrels of connections per day be furnished by January 1, 1934. The fact is that even with the Humble connections turned over, there were only 37,000 barrels available on January 1, 1934. Deficiencies in the meantime could have been made up in a number of ways, as they actually were. It was possible to pinchase spot oil in the field. There was a large amount of spot oil available in 1933 that could have been purchased at the very low prices which prevailed during parts of 1933. This oil could have been stored in storage tanks, which could have been built awaiting the completion of the refinery in 1934. There were also in the field many independent gathering systems which had no major pipe line outlets. In July there were sixty-one such systems. The scout reports indicate that independent gathering systems were connected to approximately fifteen per cent of the wells in the field, and that a substantial portion of the oil from these connections was delivered to the major companies. Pan Am could have entered into arrangements with them, or could have bought out some of them. In these ways Pan Am might have obtained oil for delivery into its pipe lines during the interim period which was necessary to build up its actual connections.

It was not until May that any estimate was made of the actual cost of building a direct line from East Texas to the coast. However, for months prior to that time negotiations had been going on between the Indiana subsidiaries and Humble with reference to this pipe line.

Back in December, 1932, Humble was anxious to get rid of 20,000 barrels and was willing to offer these connections to any purchaser who would take them.

Early in April Dietler was instructed to make a survey of how many connections in the East Texas field could be obtained. On April sixth the East Texas field had been shut down, and remained shut until April twenty-fourth. On April twenty-fourth the field opened with allowables of 660,000 barrels per day, which were increased to 810,000 on May first. The price fell as low as ten cents per barrel.

During March and April and up to May 15,1933, Humble followed the policy of purchasing and paying for only seventy-five per cent of the crude oil which it received from its connections and storing the rest for the producer’s account. Humble also knew that it *655 was going to lose a considerable outlet for crude oil at the end of 1933, when the gasoline contract between Pan Am and New Jersey was to expire. It was during this same period that Sun Oil Company, for example, on May 19,1933, stated that it was taking 57,000 barrels per day more than they wanted from their East Texas connections, and that others were worse off. With all the chaotic conditions existing in the East Texas field, it is impossible to believe that an active negotiator representing a financially able company like Pan Am with a large, steady demand, really interested in getting connections, could not have obtained them without paying a premium, or, if necessary, with the payment of a small premium. It is also impossible to believe that during such a period the policy of all the major companies suddenly changed from one of trying to get rid of connections in January, 1933, to one of holding on to connections by April, 1933, because of the fear of a decreased allowable. Exhibit 196 even indicates that Humble wanted to get rid of some of its connections sooner than SCOP intended to take them.

It is, therefore, found as a fact that the unavailability of connections as the justification for the pipe line arrangement with HPL has not been proven.

When the various pipe line agreements of 1933 expired, they were, with modifications, renewed from time to time. The Blaustein directors objected, in vain, to the renewals. Some of the modifications were in major details. It is not necessary to discuss them. The important fact is that no direct pipe line from East Texas to Sinco was every constructed for Pan Am; and its crude is still being transported over the same Humble-SPL lines.

I find also that as part of the 1933 pipe line arrangement, Indiana, through SPL, got for itself from Humble a reduction from twenty-one and five one-hundredths cents to fifteen cents in the cost of transporting Indiana crude from the Winkler field in West Texas to Whiting, Ind. The memorandum of the conference of June 27, 1933; the letter from Peake to Humble of September 9, 1933; the fact that the Winkler arrangement and the SPL-Humble pipe line agreement were discussed together and became effective the same day — all indicate that the one was part consideration for the other.

On this branch of the case, the relief demanded by the plaintiff is: (1) An accounting of the profits made by the Indiana subsidiary SPL on its pipe line operations; and (2) the damages caused to Pan Am by compelling it to pay out the alleged sum of $1,000,000 (less storage cost) each year from 1934 to date for transportation of its crude, in excess of what it would have cost over an independent Pan Am pipe line.

*656 Crude Oil Purchasing.

Crude purchasing is very closely allied with crude pipe line transportation. The purchasing department or the purchasing subsidiary of an integrated oil company has the function of locating sources of crude oil, and keeping in constant touch with them. It seeks to make the most advantageous purchases of oil for the requirements of the company. It takes care of securing connections and arranging for a gathering system and providing for transportation of the oil from the oil field to its refinery by a pipe line affiliate or by some other pipe line company.

Practically all of the large companies have purchasing departments or subsidiaries. They are generally considered parts of an integrated company. They not only furnish independence to a company, but they do the purchasing more cheaply than an outside organization would do it.

Under the definitive agreement and plan of reorganization which were arranged for the purpose of making Pan Am an integrated and independent oil company, it was certainly by inference intended that Pan Am should have its own purchasing department or subsidiary. The plaintiffs, at the various meetings following the signing of the definitive agreement, continually urged that such a department be organized. Peake, the vice-president and director of Indiana and a director of SCOP and SPL, who had been asked to make a survey of the crude oil supply situation, disclosed in his letters of May twenty-fourth and twenty-fifth to Seubert the plan to use the facilities of SCOP, the wholly owned subsidiary of Indiana, to supply the requirements of Pan Am. SCOP had an organization which was already purchasing crude oil in the East Texas field. It also had a large tank storage farm at Bullock which was on the pipe line of the SPL, another wholly owned subsidiary of Indiana. The capacity of this tank farm was over 5,000,000 barrels, and at the end of March there were stored therein about 4,275,000 barrels.

Peake’s original proposal was that for five years SCOP should purchase all of Pan Am’s requirements at a flat five cents per barrel marketing charge. This proposal, which would have been much more onerous than the contracts which were finally entered into, was withdrawn, as a result of the Blaustein objections at the meeting of May thirty-first. At that time the entire board agreed on the general policy that SCOP would “ handle the purchase of all crude for Pan Am and subsidiaries on the basis of a charge of five cents per barrel until the end of 1933 ” and then to be revised downward if it actually cost SCOP less or if Pan Am could do it for less. This *657 really would make SCOP a purchasing agent for Pan Am until the end of 1933, at a five cents per barrel charge.

At the next meeting, June 28, 1933, nothing was done about the purchasing contract.

At the July twenty-eighth meeting, however, a formal contract was submitted to the meeting which provided that for three years Pan Am would buy all of its requirements from SCOP. (See pp. 635 and 648 of this opinion.) Objection was made by Blaustein on the following grounds: (1) That this would keep Pan Am out of production of crude for three years since it would have to buy all its crude from SCOP; (2) that it bound Pan Am for three years instead of merely up to January 1, 1934, as had been understood at the meeting of May thirty-first; (3) that it did not make SCOP merely a purchasing agent; but that it also made SCOP a seller of crude, with opportunity to make a profit from Pan Am on the crude which it had bought and was buying.

Although there is dispute about it, I find that it was primarily these objections which caused the withdrawal of the contract for revision.

It was amended and finally passed at the September nineteenth meeting, again over Blaustein’s objections. The final contract provided that SCOP should charge Pan Am a five-cent marketing charge for all the crude which it bought for Pan Am up to the end of 1933, and that thereafter it should charge Pan Am only the actual cost to SCOP of the purchasing operations. Pan Am was given the right to cancel the contract if it could do the purchasing more cheaply per barrel than SCOP would agree to do it. The contract provided, in effect, that whatever oil SCOP should purchase and store or had purchased and stored, could be sold to Pan Am at the posted price, thereby enabling SCOP to make a profit on the crude which it had bought or would buy at cheap prices. In this way, SCOP became a seller as well as a purchasing agent, could store oil at cheap prices and sell it to Pan Am when prices rose, and at the same time charge Pan Am the cost of purchasing the oil, including the cost of storing it.

SCOP in the meantime, between March and September, 1933, when the purchasing contract was made, kept buying oil at the cheap prices then prevailing and storing it at Bullock. The increase during those months in the stored oil at Bullock was over 1,500,000 barrels.

At the end of the three-year term the contract was renewed with slight modifications, over Blaustein’s objections; and again renewed in 1938, over similar objection. As a result, Pan Am still does not have any crude purchasing department. Exhibit 232 shows *658 that out of the 88,000,000 barrels of crude purchased by Pan Am from 1933 through 1939, about 80,000,000 of them were purchased through SCOP. Even at the present time SCOP is selling Pan Am over fifty per cent of all its crude requirements, and practically all the crude it gets from East Texas, Hastings and South Houston.

The marketing charge was revised downward after January 1, 1934, from time to time in accordance with what SCOP claimed its actual cost of operation was. The average marketing charge paid by Pan Am to SCOP for its services from 1933 through 1937 was two dollars and twenty-four cents per barrel.

The inference is clear that a substantial profit was made by SCOP on the crude oil which it stored and sold to Pan Am at posted prices. Exhibit A 69 shows the prices which SCOP paid for oil as it went into storage at Bullock. Deducting this from the price it charged Pan Am leaves a handsome profit to SCOP.

On this branch of the case the relief demanded by the plaintiffs is: (1) An accounting of all the profits made by SCOP on its marketing charge; (2) an accounting of all its profits made on the sale of crude oil by it to Pan Am.

In connection with the foregong matters — refinery, production, pipe line, transportation, and crude purchasing — the plaintiffs seek relief against Indiana and the majority directors of Pan Am. In connection with the refinery and pipe line matters, relief is also asked against the New Jersey defendants and Teagle on the claim of conspiracy between them and the other defendants, and also on the ground that they were knowing participants in the breach of tiust by the other defendants and recipients of the profits made as a result thereof.

Forum Non Conveniens.

In limine, objection is made to the whole cause of action under the doctrine of forum non conveniens. Pan Am, the nominal defendant but actual plaintiff, is a Delaware corporation; New Jersey is a New Jersey corporation; New Jersey (Del.) is a Delaware corporation; Indiana is an Indiana corporation. The plaintiffs Blaustein are residents of Maryland. On the ground that the courts of one State do not assume to pass upon or regulate the internal affairs of a corporation of another State, this court is asked not to assume jurisdiction of this suit.

The doctrine, however, is not one of jurisdiction but rather one of discretion, convenience and expediency. (Levy v. Pacific Eastern Corporation, 153 Misc. 488 ; Rogers v. Guaranty Trust Co., 288 U. S. 123, 130, 131 .) It is an instrument of justice; and one type of action where courts should be sparing in its application is a stockholders’ action where fiduciaries are charged with breaches *659 of trust. (See dissenting opinions in Rogers v. Guaranty Trust Co., supra, at pp. 149, 151; Travis v. Knox Terpezone Co., 215 N. Y. 259, 264 .) To adopt a rigid rule which would in all circumstances relegate a stockholder to a suit in some distant State would be often to delay, if not to obstruct, justice.

That the rule is one of convenience and expediency rather than one of jurisdiction appears from other authorities: Williamson v. Missouri-Kansas Pipe Line Co. (56 F. [2d] 503, 508); American Creosote Works v. Powell ( 298 Fed. 417,419 ; certiorari denied, 265 U. S. 595 ); Ernst v. Rutherford & B. S. Gas Co. ( 38 App. Div. 388, 391, 392 .)

In this jurisdiction it was possible to make service of process upon most of the necessary defendants, including Pan Am itself. It is doubtful whether the same could have occurred in any other State. Pan Am is itself doing business here. Certainly no jurisdictional obstacle could have been raised against a suit by it in this State against its own directors and Indiana. No objection should, therefore, be sustained against this action which, though nominally by the plaintiffs as stockholders and directors, is in essence a suit by, and for the benefit of, Pan Am.

Indiana’s Domination and Control op Pan Am.

The first question to be determined is the legal relationship between Indiana as a majority stockholder, and Pan Am, its subsidiary corporation. If the relationship were merely that of an investor or stockholder, then many of the transactions for which the plaintiffs charge that Indiana is liable to account, would not give rise to any liability. On the other hand, if Indiana took advantage of its stock ownership and its resulting power to nominate a majority of the board of Pan Am, and stretched out to manage and control and dominate Pan Am, then certain fiduciary obligations devolved upon Indiana which it could not with impunity violate.

The plaintiffs claim that Indiana did exercise that type of domination and control. They have the burden of establishing that contention by a preponderance of the evidence. I find that the burden has been sustained.

The domination of Pan Am by Indiana did not begin merely with the advent of the plaintiffs as minority stockholders in the reorganization of 1933. It had begun when Indiana acquired stock control of Pan Am in 1927 and commenced to expand into eastern markets. By 1932 Indiana’s control had become so complete, with its ninety-six per cent stock ownership of Pan Am, that the negotiations concerning the sale of all of Pan Ana’s foreign properties were considered to be an Indiana matter rather than a Pan Am *660 matter. They were, in fact, conducted and consummated almost entirely by officers of Indiana, principally by Seubert.

The contract for this sale and the method of the sale show how thoroughly subservient Pan Am was, at that time, to the domination of Indiana. The contract was between Indiana and New Jersey; Pan Am was not even a party. By its terms, Indiana was to cause Pan Am to do certain things, which Pan Am subsequently did, viz., segregate its foreign properties into a new subsidiary, Pan Am Foreign; distribute the stock of Pan Am Foreign as a stock dividend so that ninety-six per cent of it went to Indiana. Indiana thereupon sold this stock to Jersey for some $50,000,000 in cash and stock of Jersey worth $106,000,000,, all of which was retained by Indiana, and none of which went to Pan Am.

The White Sulphur agreement and the definitive agreement were negotiated, not by the officers of Pan Am, but by Seubert and Barkdull (directors but not officers of Pan Am at the time), and Stephens (neither an officer nor director of Pan Am at the time). McKeever, the titular president of Pan Am, was told about the White Sulphur agreement when it was all completed, and was then informed that he was to be superseded as president.

This domination has continued down to date. The disputes involving the refinery, the pipe line contracts, the crude oil purchasing arrangements, and the purchase of crude oil properties — all show how complete it has been. In each instance, the course of conduct urged by the plaintiffs would have been, at least immediately, to the advantage of Pan Am; other courses of conduct, however, were adopted by the majority directors nominated by Indiana; all of these courses, except with respect to the refinery, resulted in a substantial profit to Indiana which could have been made by Pan Am. In every one of them except the refinery, Indiana, through its Pan Am nominees, was allowed to appropriate business opportunities which belonged to Pan Am.

Under the definitive agreement of 1933, the Blausteins were permitted to name three directors. But the majority of six on the board of Pan Am were named and have ever since been named by Indiana by virtue of its majority stock ownership.

It is illuminating to detail the relationship to Indiana of the six members of the Pan Am board of directors who since the reorganization have been named by Indiana. In 1933 four of the six (Seubert, Barkdull, Jackson, and Bullock who was succeeded by Stephens on May 9, 1933) were at the same time also directors of Indiana. In addition to being directors, all of these, except Stephens, were high executive officers of Indiana; and Stephens was the general counsel of Indiana.

*661 Seubert, while chairman of the board of Pan Am and a member of its executive committee, was at the same time president and a director of Indiana. There were only twelve members of the board of Indiana. His salary from Indiana was $110,000 while his salary from Pan Am was $5,400. He owns 16,000 shares of stock in Indiana, which is about fifty per cent more than he owned in 1933. He owned no stock in Pan Am in 1933, and still owns none.

Barkdull, who was a director, executive vice-president and treasurer of Indiana, was at the same time a director and member of the executive committee of Pan Am. His salary from Indiana was $45,000 in 1933 and now is $60,000; his salary from Pan Am was $5,000. He owned approximately 2,000 shares of stock of Indiana in 1933, and now owns about 3,850 shares. He owned no shares of Pan Am and still owns none.

Stephens was a director and general counsel of Indiana while he was a director and member of the executive committee of Pan Am. He received $45,000 per year from Indiana and no compensation from Pan Am. He owned 1,000 shares of stock in Indiana and none in Pan Am. He is now retired from Indiana cm an employee annuity retirement fund.

It may be true, as testified by Seubert, Barkdull and Stephens, that the salaries they received from Indiana and Pan Am were not so disproportionate to each other as they appear, when the relative amount of time and work spent on the affairs of the two corporations is considered. But the fact is that here were the chief executive officer, the second chief executive officer and the general counsel of the parent corporation, serving in what was clearly a dominating position on the board of the subsidiary. It was the same, in effect, as if Indiana itself was on the board of Pan Am.

Bullock served until May 9, 1933, when he was succeeded by Stephens. He was during the same time a director, vice-president and stockholder of Indiana, receiving a salary. He owned no stock in Pan Am.

Carroll was a Pan Am vice-president and was on its executive committee. He had been the general auditor of Indiana, He joined Pan Am in 1927 and became a director, treasurer and vice-president and a member of the executive committee. However, for seven years, i. e., until 1934, he remained on the Indiana payroll. This was true of other Indiana employees who went to the Pan Am organization. The purpose of this arrangement was to permit them to take advantage of the Indiana stock purchase plan for employees. He is a stockholder of Indiana but not of Pan Am. He is also a director and treasurer of Pan Am Southern Corp., ©f which Indiana owns ninety-nine per cent of the stock and Pan Am owns none. _ ...

*662 Robert E. Wilson had been a director and vice-president of Indiana, largely connected with its refining department. In November, 1934, he was elected to the board of Pan Am and to its executive committee. On December 31, 1934, he resigned from the board of Indiana. He had been with Indiana since 1922, and had acted as an expert for Pan Am in 1933, even while he was still a director and vice-president of Indiana and was attending operating conferences of SO&G.

All of the six members of the board of directors of Pan Am nominated by Indiana as of March 28, 1933, when the reorganization became effective, had been members of the Pan Am board in the years prior thereto, at a time when Indiana owned ninety-six per cent of its stock: Barkdull, since 1929; Bullock, since 1927; Carroll, since 1930; Jackson, since 1927; McKeever, since 1932; Seubert, since 1925.

It is a fair inference from the evidence that McKeever and Carroll were essentially dependent upon the good will of Seubert and Bark-dull to keep their jobs. Neither of them, according to the minutes, ever expressed any independent, positive opinions on any Pan Am matter. Besides, McKeever was president of three other corporate subsidiaries of Indiana.

This interlocking set-up, alone, had all the potentialities of domination and control by Indiana. It would have been almost contrary to normal assumptions to expect that when a conflict in interest between Indiana and Pan Am arose, these six men would have divorced themselves from consideration of the welfare of Indiana and would have concentrated wholly on the interest of Pan Am. Relationships, such as these men bore to the dominant corporation, are realities motivating business conduct, which loom up clearly to any one intent on looking through the fog of inter-corporate artificialities.

Although it is not even charged that Indiana has tried affirmatively to damage its subsidiary as was the fact in Farmers’ Loan & Trust Co. v. New York & Northern R. Co. ( 150 N. Y. 410 ), some of the language used in the opinion in that case is appropriate to the relationship between Indiana, Seubert, Barkdull and Stephens on the one hand, and Pan Am on the other: “It is hardly to be supposed that a board of directors who was not under the control of another corporation would appoint three of the friends of the president of that corporation as directors of the company, and place the officers of that company In control of its financial affairs, especially when it was the owner of competing lines of railroad. The clear and legitimate inference to be drawn from the circumstances proved in this ease is that after the New York Central and Hudson River *663 Railroad Company purchased a majority of the stock and bonds of the New York and Northern Railway Company, it controlled its officers and directors as fully and completely as though they had been elected by its votes ” (pp. 424, 425).

The potentialities of the situation making for domination by Indiana over Pan Am, which had been effective even before the reorganization of March 28, 1933, continued to be equally effective after the Blausteins came on the board.

The votes on controversial matters of importance were nearly always unanimous among the directors named by Indiana. A reading of the corporate minutes of Pan Am, and of its subsidiaries, shows that at the meetings there were a leadership by Seubert and an acquiescence by the others, from which an inference is clear of domination by this chief executive officer of Indiana over the majority of the board of Pan Am.

The majority group in the board called upon, and relied almost exclusively upon, the expert and technical employees of Indiana, such as Wilson, Peake and Paulus, who were not at the time in the employ of Pan Am. This subservience was particularly apparent in the reliance of the Pan Am board upon Stephens’ legal opinion, and by their insistence upon the necessity of satisfying this Indiana counsel on the Texas anti-trust question.

Reliance was complete even in matters where the interests of Indiana were clearly adverse to the interests of Pan Am, as in crude purchasing, transportation and production. The plans and estimates of the experts in the employ of Indiana were apparently received without question by the majority members of the board. Such doubts and suggestions for amendment as were made at the meetings were made by the Blaustein group. The Blausteins’ request that an independent expert be called in for the pipe line and crude purchasing matters was refused.

This reliance was particularly striking with respect to the letter of April 14, 1933, which was supposed to be sent by Pan Am to the Blausteins, in accordance with the definitive agreement, in order to apprise the Blausteins of the plans for the refinery. But it was not Pan Am that drew up the letter. It was Paulus and his Indiana staff. After the letter was revised by Seubert, Wilson and Stephens, it was sent to McKeever to sign on behalf of Pan Am, and it was then sent to the Blausteins by McKeever without a change of a syllable.

In many instances the record shows that the entire Pan Am system and its operations were treated as a part of the Indiana system. This attitude is revealed, for example, in the correspondence between the Indiana representatives and the Texas lawyers, explain *664 ing the corporate set-up of the various subsidiaries of Pan Am and Indiana in order to obtain their legal opinion on the Texas anti-trust laws. The exhibits indicate a proposed degree of domination by Indiana of Pan Am, which goes beyond any control which would come merely from stock ownership.

The accounting practices of Indiana and Pan Am, the furnishing of various reports from Pan Am officials to Indiana officials on management operations, the semi-monthly news letters, the exchange of refinery information, the contractual management by SPL of the pipe line and gathering system for crude for Pan Am, the presence of a number of Indiana subsidiaries in the Pan Am New York offices — all these and other bits of evidence, added to the foregoing discussion, confirm the conclusion that Pan Am was, for all the intents and purposes of the majority of its directors, a part of the Indiana system.

This was not the kind of control which can be explained or justified merely as protection of the investment of Indiana. It was actual managerial domination, exercised through its three leading executive officers and directors, Seubert, Barkdull and Stephens, and its other three nominees on the board'of Pan Am.

There is, of course, nothing necessarily wrongful or illegal in the control by one corporation over the affairs of another which is exercised merely as an incident to stock ownership. That is the control which any individual majority stockholder usually has over his corporation by virtue of his power to name a majority of the board of directors and, through the board, the power to name the executive managers of the corporate affairs. But when that control is exercised, not merely as a stockholder, but as an active participant in the management, then the relationship is fraught with danger whenever the interests of the parent corporation come in conflict with those of the subsidiary. It is inconsistent with all human experience to expect that when Seubert, Barkdull and Stephens walked into a meeting of the board of Pan Am, or of any of its subsidiaries, they should forget that they were the directing heads of Indiana, which owned seventy per cent of all the stock of Pan Am, and to which its other three nominees on the board of Pan Am owed their positions. Even if they conscientiously set out to promote the welfare of Pan, Am, they were at least just as much concerned in promoting the interest of Indiana. Indeed, from their relationship to Indiana it is natural to assume that their primary interest lay in the larger dominant corporation. But even if priority of Indiana interest be not assumed, their loyalties were obviously, in any event, divided. They were seeking to serve two masters. That road of service is hard to travel at any *665 time. It becomes impassable where the two masters develop interests which conflict with each other.

It is no answer to say that this type of relationship of interlocking directorates has become commonplace in modern corporate complexities. As corporate structures develop layers and layers of separate entities, pyramided in a form which centralizes control in the hands of a few and insulates the various enterprises from general liability or from taxation, a court of equity must become especially vigilant to protect the minority stockholder, whose money is in the control of those at the top but whose voice receives no attention through the maze.

The modern growth of the corporate form of business has been accompanied by ingenious and artificial legal devices designed to divorce the stockholder from any semblance of control over his investment. The more tenuous that vestige of control becomes, the more keen must be the eyes of equity to safeguard the investment in the hands of those who have the power to waste it.

Where the corporations in a corporate pyramid are all owned one hundred per cent by the parent as in two of the Stanolind organizations, and where there are no minority interests in the subsidiary corporations which require protection, the relationships between the parent and subsidiary, although they still involve important social and economic questions, do not involve the legal fiduciary problems which arise from the use by a parent corporation of “ other peoples’ money ” invested in the subsidiary corporation.

In the case of Pan Am, however, there was a substantial minority interest of over twenty per cent. The dominant stockholder had agreed to protect Pan Am in its independent existence, so that it would not have to depend on others for its sustenance. Even without that agreement this parent corporation, having the full power of management ,of the subsidiary and freely exercising that power, must be governed by the same standards of conduct as those applied to any formal board of management of a corporation, even though it did not assume the actual title of management and even if it actually disclaims any conscious pretensions at management.

Indiana As a Fiduciary of Pan Am.

The position and conduct of Indiana as a dominating and majority stockholder of Pan Am, assuming control of Pan Ana’s business and affairs in the manner just described, create the fiduciary relationship between Indiana and Pan Am spoken of in Southern Pacific Co. v. Bogert ( 250 U. S. 483 ); Kavanaugh v. Kavanaugh Knitting Co. ( 226 N. Y. 185 ); Farmers Loan & Trust Co. v. New York & Northern R. Co. (150 id. 410), and Cleary v. Higley ( 154 Misc. 158, 168, 169 ).

*666 The corporation which actually induces management action in its subsidiary will be treated itself as manager, and will be made subject to all the fiduciary obligations toward the subsidiary which are imposed on corporate directors themselves.

In Southern Pacific Ry. Co. v. Bogert (supra, at p. 487 ) the doctrine was thus expressed: “ The majority has the right to control; but when it does so, it occupies a fiduciary relation toward the minority, as much so as the corporation itself or its officers and directors.”

The rule is stated to the same effect in Wheeler v. Abilene National Bank Building Co. ( 159 Fed. 391, 393 ), as follows: “ The holder of a majority of the stock of a corporation has the power, by the election of biddable directors, and by the vote of his stock, to do everything the corporation can do. His power to control and direct the action of the corporation places him in its shoes, and constitutes him the actual, if not the technical, trustee for the holders of the minority of the stock. ’* * * They can act and contract regarding the corporate property, they can preserve and protect their interests in it, only through him and through the courts.”

The duties of majority stockholders toward the minority are succinctly set out in Hyams v. Calumet & Hecla Mining Co. ( 221 Fed. 529, 537 ): “ On the other hand, the rule, independently of State or National anti-trust statutes, is fundamental that one in control of a majority of the stock and of the board of directors of a corporation occupies a fiduciary relation towards the minority stockholders, and is charged with the duty of exercising a high degree of good faith, care, and diligence for the protection of such minority interests. Every act in its own interest to the detriment of the holders of minority stock becomes a breach of duty and of trust, and entitles to plenary relief from a court of equity.” (Citing many cases.)

The indicia of a trust relationship are inherent in the control and management by the majority of the property and affairs of the corporation, all of which belong in good conscience to both the majority and the minority, and not to the majority alone.

“ ‘ The law requires of the majority of the stockholders the utmost good faith in their control and management of the corporation as regards the minority, and in this respect the majority stand in much the same attitude towards * * * all the stockholders. Thus, where the majority are interested in another corporation, and the two corporations have contracts between them, it is fraudulent for that majority to manage the affairs of the first corporation for the benefit of the second. A court of equity will intervene and protect the minority upon an application by the latter.’ * * *

*667 “ While the question in some of the cases cited arose between stockholders and the directors and officers of a company who as such held a position of trust as to the former, still, where, as in this case, a majority of the stock is owned by a corporation or a combination of individuals, and it assumes the control of another company’s business and affairs through its control of the officers and directors of the corporation, it would seem that for all practical purposes it becomes the corporation of which it holds a majority of the stock, and assumes the same trust relation towards the minority stockholders that a corporation itself usually bears to its stockholders, and, therefore, under such circumstances, the rule stated in the Sage [Sage v. Culver, 147 N. Y. 241 ] and other similar cases applies to majority st

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