Appendix — Miller & Lux Inc. v. Anderson

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APPENDIX

UNITED STATES DISTRICT COURT

. NORTHERN DISTRICT OF CALIFORNIA

SOUTHERN DIVISION

Civil Action No. 34043

Miter & Lex FxcorbOnaten! 4 Nevada corporation,

; ; vee _ Plantiff,

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Str meg Nrcaen, IB ¢f al.. Defendants.

OR on Me

Ouiver J. Carter, District Judge.

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To Temas

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Plaintiff corporation . brings. suit against several of sts

former officers and directors, alleging that’ while these

defendants were in control of the plaintiff, that they ¢on-

spired to defraud the - plaintiff and -did defraud “the

plaintiff by eausing various parcels of real property to

be conveyed from the plaintiff to themselves, dr to be con-

veved from the plaintiff to others who held title for the.

henefit of these defendants. Plaintiff joins mumerous sle-

fendants -who, it is alleged, took title to real property”

with notice of the plaintiff's rights in that property, and

plaintiff also sues numerous defendants by fictitious names.

Jurisdiction of this Court is postulated on a. diversity

of citizenship between the plaintiff, a Nevada corporation,

-and the defendants, who are alleged to be citizens of states

other than Nevada.

The defendants filed a variety of motions attacking the

complaint, and plaintiff elected to file a First Amended

Complaint. Many of ‘the defendants’ motions. were Te-

newed against the First Amended Complaint. In order to

permit an orderly determination of the issies thus raise:l

this Court ordered a stay of all proceedings until the hear-

ingmnd determination of the motions attacking the juri--

diction of the Court; the latter anotions are the subject 0!

this Memorandum and Order.

Some of the defendants contend that plaintiff has failed

to join certain persons Who are indispensable parties: that

the interests of these absent parties are ‘aligned’* with

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the interests of the plaintiff; and that the joinder of those

persons as plaintiffs would destroy diversity of citizen-

ship between tlre plaintiffs and the defendants -because

some of those persons are citizens of California, as are some

of the defendants. This contention is based upon the. fol-

lowing facets and reasoning:

a

The stock of plaintiff corporation is wholly pelea by

the trustees of the Henry Miller Trust. One of the defend-

ants, J. Leroy Nickel, Jr.. who is alleged to have actively

defrauded the plaintiff corporation, is also a_ beneficiary

of the Henry Miller Trust. Other defendants who are-

alleged to have taken title to. real property with notice of

the plaintiff's right in that property, claim that they

are not in pari delicto with J. Leroy Nickel, Jr., and that

any reeevery by the corporation against those defendants

ought to be reduced by the amount that would ultimately

go to J. Leroy Nickel, Jr. The other beneficiaries of the

Henry Miller Trust are indispensable: parties, according

to this argument, beeause there are conflicts of interest

“between J. Leroy Nickel, Jr. and the other beneficiaries

“which necessitate the adjudication of their respective in- —

terests in the Henry Miller Trust, and the interests of

these beneficiaries cannot be determined in their absence.

Put another way, the contention is that tn order to reach

an equitable result this Court must disregard the corpo-

rate entity of the plaintiff and consider that the ge

aries of thé Henry Miller Trust are the true plaintiffs; 1

that way the Court ean settle alleged ‘eonflicts of inte ee

between the beneficiaries, and prevent .J. Leroy Nickel, Jr.

from being an ultizuate beneficiary of the corporate r reeov-

ery.

.

Defendants have not cited any case in witeh a court dis-

regarded a corporate entity and then disregarded a trust

relationship in addition; defendants have cited Wenban -

Estate; Inc. v. Hewlett, 198 Cal. 675, in which the Supreme

Court of California looked through a corpokpte entity. in

accordance with the following principles which are stated:

by the court at. page 697 :

‘*Thus proof that an individual ” owns all of the

‘stock of a corporation and that the corporation is in

truth and in faet but the corporate double of the owner

of the stock, will, in conjunction with ‘a further show:

ing that as a result of the double relationship fraud

or injustice will inure to a third person, suffice to dis-

sipate the separate identity of the corporation. * * °

‘‘In Erkenbrecher v. Girant, 187 Cal. 7 (200 P. 6

it was held that in order to cast aside the lega

“of distinet corporate existence it must appear that

‘they are the “business conduit and altér ego of one

another’’, and that to reeognize their separate. entities

would. aid the consummation of a wrong.’

‘‘Minifie v. Rowley * * * [187 Cal. 481] * * * states

the rule to be: ‘Before the acts and obligation of-a

corporation can, he legally recognized as those of a par-

ticular person, and vice versa, the following combina-

tion of cireumstanees must be made to appear:

First, that the corporation is not only influenced

and geverned by that person, but that there is

such. a unity of interest and ownership that the

individuality, or’ separateness, of the said person

has ceased * * *.’”’ :

oo

These principles are taken by this Court to be a

fair statement of the California law applicable here. Upon

- examination of the faets relied upon by the moving de-

fendants in the ease at bar, it is at onee apparent that the

plaintiff corporation is not the mere alter ego of a stock-

holder or group of stockholders. Miller & Lux, Ineorpo-

rated hax been a bona fide corporation for mrany years;

it has engaged in a variety of business transactions, and

it camniot be said tliat persons dealing with the corpora-

tion were actually dealing with its stockholders. If any

closely-held corporation ean be said to have an existence

separate from its stockholders, this one has.

Defendants cite Western Battery ‘&. Supply Coe. v.

Hazelett Storage Battery Co., 8 Cir., 61 F.2d 220, for the

proposition that if the beneficiaries of a trust are equitably |

‘ 4a

7 precluded from relief, the trustees are likewise precluded: -

but the trust. involved: in that case was little more than

a sham, as indicatéd by the f-llowing portions of the opin-

ion of the court, (61 F.2d at page 231):

‘Considering the nature :of the trust, the sole bene-

-ficiaries thereof could have put.an end to it at any

time. oo ; ="

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: ‘6* ® * the interest of the beneficiaries of a trust of |

‘ the nature, here involved approaches so nearly to

, complete ownership, with all the ineidents thereof, as

to fustify the conclusion that a license agreement en-

tered into by all the beneficiaries may. bind the

trustee.’’ e c .

The beneficiaries of the trust ‘undér consideration ‘in

the case at bar could not end the trust at will, nor could

-they be considered virtually the owners of the trust res.

Furthermore it is significant: that in the Western Battery

case all the beneficiaries participated in the acts which

the defendant relied upon to bar the recovery sought by the

trustee; here, on the other hand, most of the beneficiaries

are not accused of wrongful conduct. Therefore the mov-

. ing defendants have not shown sufficient reason for this

Court to disregard either the corporation or the trust, and

certainly no reason to disregard both of them.

Here as in Sauer v. Newhouse, D.N.J.,- 24 F.Supp. 911,

complete relief can be given as between plaintiff and the

defendants without joinder of other. parties. The Sauer

". ease was a representative suit by stockholder of a cor-

:*

poration against certain directors of the corporation; the

plaintiffs prayed for restitution to the corporation for

losses resulting from alleged misconduct of the defendants.

The defendants moved to join two former direétors who,

the defendants alleged, had concurred in ‘the wrongful acts

and were indispensable parties. The court said, 24 F.Supp.

at page 912: .

“The only ntility in ordering the addition of the

omitted parties would be the avoidance of a possible

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suit for contribution instituted by .those already de-

- fendants against the omitted parties in the event that

judgment goes against the present defendants:in this.

action. * * * Complete relief can. be afforded: plain-

tiffs without the addition of parties demanded. ‘Hence,

‘they are not necessary or indispensable.’’? Compare

Sadler v. Sadler, 9 Cir., 167 F.2d 1.

It is the opinion and conclusion of this Court that the 7

trustee and beneficiaries of the Henry Miller Trust are not

indispensable parties to this action. .. .

Some of the defendants make a further contention with

regard to absent parties. The argument is. that various

persons who have not been fnade: parties to this suit are

indispensable parties defendant, and their joinder as

defendants would destroy diversity judisdiction because.

they are residents of Nevada, as is the plaintiff. These

parties are alleged to be indispensable because if this

Court were to order some of the defendants to reconvey .

to the plaintiff property that was acquired from the

plaintiff, the intervening interests 0 the absent parties ©

would_be ‘destroyed or adversely affected., But this argu-

ment overlooks the fact that the prayer of the First

Amended: Complaint is for specific relief, such as the return

to plaintiff of property held by the defendants, or in the.

alternative for damages. . — ;

An individual who has acquired title to property by

fraud has a voidable title, and has the power to convey

a good title to a good faith purchaser for value. Plaintiff

recognizes the possibility that the rights of innocent third

persons may have’ intervened in some of the transactions

attacked in this suit; consequently this suit is for the re-

turn of the property if that can be done without disturbing .

the rights of innocent parties, or for damages if the prop-

erty cannot be returned.

None of the cases cited in support of defendants’ con-

tention are controlling here, In Baten v. Nona-Fletcher

Mineral Co., 5 Cir., 198 F.2d 629, the relief sought was the

cancellation of deéds. The court said (at pages 620-631) :

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_ tiffs in the

“«“¢ * © the real purpose of this suit is to cancel and

set aside the conveyances * *0°."”

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.

There was no prayer for. money damages. In Keegan

'y. Humble Oil & Refining Co., 5 Cir., 155 F.2d 971, the plain? —- |

tiff asked to be declared owner of certain property, and to

grant that relief would have destroyed an interest in that

property belonging to,an absent_party- Caleote v. Texas

Pacifie Coal & Dil Co.,.5 Cir., 157 F.2d 216, was a suit for

~ eancellation. of an oil tease. If the lease were eancelled, ~

royalty interegts of absent parties would have been de-

stroved. In Yon v. Garrett, 8 Cir., 149 F.2d 223, a state

statute provided that an executor or administrator, rather -

than the heipssof a decedent, were the only proper plain-

in of suit there involved: therefore the ad-

ministrator of the decedeiit was held to be an indispensable

party.: In Hartman Ranch Co. v. Associated Oil @o., 10

Cal.2d 232, the holding of the court on the issue of indis-

pensable parties, and the inapplicability of that case to the

situation in the ease at bar, are both indicated by the fol-

lowing statement of the court at’page 262 :-

«© * *in an action wherein it is to be determined

that the sublessee has committed acts which forfeit

the. parent lease, the sublessors, who are the owners

and holders of such lease, should be parties.”’

In the case of State of- Washington v. United States, i)

Cir:, 87 F.2d. 421, the court held that where the State of

Washington had leased property to a private party, and

the United States. sued to ‘recover possession from the

lessee, ‘claiming to be the owner of that property, that the -

State of Washington was an indispensable party“ becanse

to grant the relief sought by the United States would be

to adversely affect ‘the interest of the State of Washing- -

ton. The court said (87 F.2d at page 430): | :

-s'The lessor is affected * *-*. beeause the.thing, which

ie claims he owned at the time of the.gr mt to the.

lessee, and which he claims -will revert to fim, ix de-

clared by the deeree to be nonexistent.”

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alternative form of relief. If innoce

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which the court said:

.

American Insurance Co. v. Bradley Mining Co.,/

.D.Cal.,

-—— « wlan . . . °

57 F.Supp. 549, is not tven remotely similar to the case at

“bar. There ¢ertain parties were found to be u

ispensable

because they had brought a similar action in a/state court,

and therefore there was a possibility of the/issues being

determined one way in the federal court and the opposite

way in the state court, which would not have/ been equitable ;

in the circumstances of that case. : =

These cases cited by the defendants g

situation in which specific relief is praye

that relief would destroy or adversely

of an absent party. Here the prayer is

for, and ty gratt

ffect the interests

for dumages as an.

third parties have

acquired interests in some of the property which plaineitf

seeks; this Court can award damage¢ in lieu of that prop-

erty (in the event of an.ultimate décision im fave* of the

plaintiff) and frame its decree. so ay to protect the/interests

of those absent parties. See Hudson v. Newell, 5th G3,

172 F.2d 848, $50, subsequent yinion 174 F.2d st, in

.

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. 4 eourt cannot adjudicate the rights of persons who

are not parties before its they will be brought in if /

possible and if they wiil/not destroy diversity. * * *

. Vf diversity will be thefeby, destroyed the court will

nut require them to bé brou t‘in, but will enqui le

if there is any relief it caf properly. give witht

them: if there is, it will give it without prejudiced to

the rights of the absént; if none éan be given tlie/suit

will be dismissed.”’ ie |

2

ypinion of this Court that there are

are indispensable parties defendant.

Therefore it is the

no absent parties wh

Ja eee

A contend that the, executoys of the

rnold, who are defendants in this suit,

vada as is the plaintiff and that there

Defendants furtl

estate of MaX B. ¢

are’ citizens of N

is not complete diversity of citizenship between the plain-

tiff and all the detendants.. Plaintiff has, moved to dismis-

the executors of the Arnold estate as parties. The executors

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erally involve a \

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of the Arnold estate are not indispensable parties and

therefore it is proper to permit a dismissal as to them, .

in order to’establish the furiSdiction of this Court.

The leading case on the point in this circuit is Doliar

S.S. Lines v. Merz, 9 Cir., 68 F.2d 594, 595, where the court

esaid: ~ << ae

“Where, because of the joinder of proper, though

- not indispensable, parties@ defendants, there is not

merely on the record but in fact no such diversity.

of citizenship as to give jurisdiction, the District Court

may permit a dismissal of such parties and thereby

‘establish jurisdiction with retroactive effect."”. (Cita-

‘tions omitted.)

See also Atchison, T. & S. F. Ry. Co. v. Francom, 9 Cir.,

118_F.24 712; Finn v. American Fire & Casualty Co., oth

> Cir. 207 F.2d 113. ire ay

Therefore plaintiff’s motion to dismiss the executors of

the Arnold estate will be granted. ne

Another basis for motions by th@defendants to dismiss

is that the complaint does not establish diversity jurisdic-

tion because the plaintiff has sued a large number of fie-

titious parties. The recent case of Molnar v.: National

Broadcasting Co., 9 Cir., 231 P.2d 684 (Jan. 4, 1956), sup-

ports the defendants’ contention and is controlling here.

In the Molnar case the- plaintiff sued the named defend-

ant and ten ‘‘Doe”’ parties.. Jurisdiction of the court wase!/

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™ yd

predicated. upon diversity of citizenship, and the eed _ €

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plaint contained the allegation that: ‘*Plaintiff is a citizen

and resident of the State of California; defendants, and ©

‘each of them, are citizens,and residents of the State of:

Delaware.”’. The,court of appeals held: | ;

‘If the identity of defendants. were known so that. ie

the pleader could state they were citizens of Delaware,

she could also state their names and allege what part _

- each had in the management and control of the stair-

way. But, if the allegation that theyare citizens of

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Delaware, be, as on®the face of the complaint it is,

unfounded guesswork, the jurisdiction of the court is

* not. established.”’ mi

The pertinent allegations ‘of the First Amended Com-

plaint in the case at bar are found in paragraph I of that —

complaint: - ce : .

- ‘The plaintiff is a corporation incorporated under

the laws of the State of Nevada. * * * The defend-

ants Mae Thirty.to~Doe Two Thousand are citizens

of stated ot ati the. State of Nevada.”’

a ° yer

It is obvifns that the allegations pertaining to the. citi-

zenship of the ‘‘Doe”’ parties in the case a. bar are mere

-guesswork, and therefore” this Court must follow the

Molnar ease by ordering the dismissal of this action tinless

the plaintiff éither drops the fictitious parties or identifies

-them with sufficient clarity so that this Court eould find

that actual persons are coritemplated-by the allegations per-

tnining to those parties. ‘ This action is in accord with the

iolding of ‘Roth v Davis, 9 Cir., 231 F.2d 681 (Jan. S,

1956).

- Plaintiff. will be allowed twenty days in which to amend

its ‘complaint in this respect.

Counsel for plaintiff are directed to prepare and sub-

mit an appropriate order. —

Dated: May 15, 1956

/s/ OLIveR ‘J. CARTER

U.S. District Judge:

[Endorsed :] Filed May 15, 1956

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_UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SOUTHERN DIVISION

| ha ‘ iat ah

Civil Action No. 34043

Mitter & Lux Incorroratep, a Nevada corporation,

So a

, ° 7 Plaintiff,

\ x ‘ - se Pika. y on y A

R. H. Anxverson, et au., Defendants.

WoLLenperc, District Judges |

Mis _ Memorandum Opinion Tees

This is an action by Miller and Lux, a Nevada

corporation, to nullify ¢ertain conveyances of land by

it to various defendants who are residents of states other

than Nevada.. As federal jurisdiction is based on diversity

of citizenship, California law ts controlling.

Plaintiff alleges in its second amended complaint, in

support of its prayer to nullify the conveyances, that

three of its directors, .who were all of. its, shareholders,

dnd certain other persons, including all of the defendants

“herein, who were transferees-of the properties sold, con-

spired to enrich themselves and others at plaintiff's ex-

pense and to defraud plaintiff in violation of their fiduei-

ary obligations to piaintiff by conspiring to:

1. Make profits on the purchase and sale of Jand with-

out revealing to itsuch profits; —

°. Cause it to sell lands to its officer ; and agents directly,

‘or indireetly through dummies, at a price less than that

which should have been obtained ;

3. Conceal from it the existenge of the conspiracy.

Plaintiff further alleges that it was not able to protect

itself from these conspiracies and to enforce its rights. at

an earlier date béeeause it was a ‘‘captive’’ corporation. It

: was ‘“eaptive,”’ plaintiff asserts, because each of its share-

7 holders, directors and officers were either-active parties to

the conspiracy to defraud or were dominated by and sub-

lla

servient to the parties to the conspiracy during its entire

‘ period. as ; - ,

Defendants move to’ dismiss the suit for failure of

plaintiff to state a cause of- action for which relief can be

given. Plaintiff's complaint shows that all those persons

who constitute plaintiff’s corporate being had knowledge

and approved of the transaction complained of and such.

approval may be found on the company’s books. It is an

‘elemeutary proposition of law.that fraud requires com-

_plainant’s lack of knowledge and that affirmance waives

fraud. As stated in Lady Washington C. Co. v. Wood,

113. Cal. 482, 45 P. 809 (1896): **The plaintiff is but the

representative of it» stockholders, and can have no ‘rights

in the matter other than in behalf of its stockholders; and,

‘f all of*the stockholders authorized the release, the plain-

tiff was not defrauded.’’ Notice to all of the stockholders

- of a matter so intimately affecting their rights must be

deemed notice to the corporation. What we have here,

however, is more than mere noticerto the corporation. We

have plaintiff alleging in his complaint actual knowledge

on the part of all the stockholders of the corporation who

would be entitled to complain of the wrong.’ As unani-

mous consent renders fraud impossible, no wrong has been

done to the plaintiff. ~ Seer ees i

But plaintiff also alleges in its ‘seeond amended com-.

plaint that its stock was held in trust and that the bene-

ficiaries of the trust did fot ratify or have knowledge

of the transaction. Plaintiff argues in his briefs that

since it is the beneficiaries who are ultimately defrauded,

the corporation should be allowed to sie in their behalf,

as well as its own. In support of this contention plain-

tiff cites Dolese Bros. Co. v. Brown, 157 A. 2d 784 (1960),

a Delaware case, which holds that those holding stock

as trustees or agents cannot ratify a fraud upon the com-

pany without full disclosure to the beneficiai owners of

the stock. In Dolese, the president and dominating director

of a closely held corporation obtained general powers of

1 See generally, White v. F_D.L.C. 122-F. 2d 770, (4th Cir. 1941) -

cert. den, 316 U.S. 672.(1942).

sot ..

attorney ‘through fraudulent misrepresentations and con-

cealment of certain facts from members of the family who

trusted him and who were without experience and knowl-

edge of business activities. A corporation cannot sue |

when all of the shareholders consent to a transaction; but

the Court agreed that consent not freely given with full

knowledge of the facts is not consent at all and it allowed

the suit.as the rights of third parties. were not involved.

At bar, however, we have no frand on the legal owners

of the stock. It is the legal owners who have acted and

it is they who have a legal right to act. They at no time

were ever required to obtain the consent of the beneficial

owners of the trust to act in their capacities as trustees

or shareholders of Miller and Lux, Incorporated. They

were not mere holders of proxies from the legal owners as

in Dolese. Also, here, it is only the rights of third party

transferees who are involved.

. . Stockholders, who are trustees of stock are nonetheless

siodieabiers with all the powers and rights of stockholders’

Their fiduciary obligations to their beneficiaries do not -

deprive them of their status as shareholders or make ihe

beneficiaries shareholders in their place. They and. they

alone hold the legal title to stock and the right to vote

it and exercise all other rights incidént thereto. ‘‘Shares

standing in the name-ef any person as * * * trustee * * *

may be voted and-all rights incident thereto may be px-

ercised only by thé *.* * trustee * * * in person or by proxy,

and without’ proof of authority.’’. ‘Cal. Corp. Code See.

2218. ; ,

As stated by the Supreme Court of California in Market

Street Ry. Co. v. Hellman, 109 Cal. 571, 42 P. 225 (1895):

‘‘Some of the stock was held and voted by trustees

who not only appeared upon the books of the corpo-

ration as such, but were really and in fact trustees

‘for other persons. The contention of appellant is that

a trustee of ‘stock has no authority to destroy the cor- '

poration by merging it with another corporation. The

“answer to the proposition must be that the trustee

. 13a

is the legal owner of the stock, and as against the

corporation and all ‘the world, except his cestul que

trust, no inquiry may be (had touching hid actions in

the premises. (Civ. Code Sees. 307, 312).’’

If a wrong had been done to the corporation, its claim

would be barred by the statute of limitations. Assum-

ming the three year statute for fraud is applicable (CCP

See, 338(4)), plaintiff alleges its complaint has: been -filed

within the appropriate time. Plaintiff elaims the dis-

covery was not made sooner, even though the records

‘of all the transactions involved were—apparent on the

company’s books and were matters of public record,

because it was a ‘‘eaptive’’ corporation. However, under

the facts as alleged, the plaintiff herein was not a

captive corporation. Lady Washington C. Co. v. Wood,

‘as cited above, at ‘pp. 487-9. If the five year statute

of limitations for the recovery of real property were

applicable (CCP. See, 318), there’ is no doubt plain-

tiff’s claim would. be barred. :

If it ean be said that plaintiff may bring this action

‘t is defendants’ contention that plaintiff has failed

to join indispensable parties whose joinder ‘herein will |

destroy jurisdiction. The interest of the beneficiaries

and the trustees of the Henry Miller trust must be

determined. -It is plaintiff's theory in this ‘argument

that it is the breach of. this. trust that is the founda-

tion of his claims. There is no question. that the

trustees of the trust as legal owners of all of the stock in

plaintiff’s corporation have an interest, nor that the bene-

ficiaries also, have an ititerest as by plaintiff’s argument

they are the ones wronged by the transactions complained

of. It is also’ to be notdd>that plaintiff charges in ,his

complaint that some of the beneficiaries are wrongdoers—

in fact at least one is charged as a party to the eonspiracy.

Therefore, there are conflicting interests among these bene-

ficiaries which’ must be litigated herein. In order for this

Court to enter -any judgment equitable in nature, the

respective positions of the ,various, beneficiaries must be

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‘determined.? It. is apparent, therefore, that this’ action _

will fail on jurisdictional grounds if these indispensable

parties are brought in.

For the reasons stated above defendants’ motions to dis-

miss are hereby granted.

Pending nerein is:a motion of plaintiffs .to substitute the

rsonal representatives of Harry H. Magee,. deceased.

This motion is denied and the plaintiff ‘s complaint dis~

missed as to Harry H. Magee. In view of the above order

dismissing plaintiff’s complaint as to the other defendants,

and as the same reasons would apply to defendant Magee,

it. would be of no purpose to grant all motions to substi-

tute.

Dated: March 12, 1962.

. - /s/ Atpert C. WoLLENBERG,

U.S. District Judge.

[Endorsed:] Filed ‘March 12, 1962.

2 See, State of Washington v. United States, 87 F. 2d 421 ¢9th

Cir? 1936) for a discussion of the test to be applied to determine

who are apdlepenaable parties.

4e

15a

{NITED STATES COURT OF APPEALS

FOR 1E NINTH CIRCUIT

June 18, 1963 :

No. 18,033 — P

Mier & Lux, Ixcorporatep, a Nevada corporation,

se : Appellant,

vs. °

R. H. Awperson; Grate (', Axversos; et au., Appellees.”

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ar: No. 17,929

Minter & Lex, Iscorporatep, a corporation, Appellant, -

WS.

Autes L. Cuickerine, Cxarces R. Biyru, Harry H. Farr,

J. J. Hunter, and. THe Basx or Carport, a National.

Banking Assotiation, Appellees. |

On Appeal from the United States District Court for the

Northern District of California, Southern Division

—_—_—_———_-

Before: Mappex, Judge of the Court of? Claims, and’

Merritt and Brownixe, Circuit Judges.

Mapven, J udge:

These two appeals, which we will treat in one Opinion, are

from orders of the United States District Court for the

Northern District jof California, Southern Division, dis- ~

missing appellant’s complaints. Inf the Anderson case the

complaint names as defendants some sixty individuals,

partnerships and corporations. Iv the Chickering case

there are five defendants, four being individuals and the

fifth a banking corporation. Each complaint: alleges, in

substance, that the appellant is a Nevada corporation, the

stock of which was, at all-times mentioned in the-complaint,

held in trust by three trustees of the Henry Miller “Trust ;

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that, beginning at some time prior to 1927 and continuing

thereafter, one J. Leroy Nickel, Jr., a trustee as well as a

beneficiary Of the. trust, and a director and officer, of the

appellant; James E. Fickett, a director and the president

of the appellant ; J. E. Wooley, a trustee of the trust, and a

director and officer of the appellant; and A. R. Olsen, a

trustee of the trust and a director and officer of the ap-

pellant, acted in violation of their fiduciary obligations to

the appellant, to enrich -themselves and others at the ex-

pense of the appellant and to defraud the appellant. The

activities of Fiekett, Wooley and Olsen did not cover the

entire period from 1927 to 1954, as did those of J. Leroy

Nickel, Jr.

The complaints' recite the misdeeds and wrongs of the

- four persons named above as:

(1) Making and keeping profits om the purchase and sale

of appellant’s land and interests in land, through the use

of their positions! of ‘jnifluence and power in appellant cor-

_poration, without revealing to appellant ‘the existence, .

nature and extent of such profits;

(2) Cansing appellant to sell lands and interests in land

to Fickett and Nickel. and to various other officers and

agents of. appellant, directly or indirectly, through ‘the

device and by means of strawmen, dummies, mominees and

_ by other means, at less than the price that should have been

obtained by the appellant, so as to realize profits by later

or simultaneous-resale, lease, rent or other use of said

land or interests in said land, and. to retain such profit -~

for themselves, the wrongdoers. °

(3) Causing appellant to sell to themselves and others,

at a price less than should have been obtained by appellant,

lands and interests in land without disclosing to appellant

their value as actual or potential oil and ‘gas-bearing lands.

so as to realize and retain for themselves profits upon

'The word ‘complaint’: in this opinion refers to the seeond

amended complaint in the Anderson case, or the first amended

complaint in the Chickering case, as the context will indicate. .

l7a

later or simultaneous resale, lease, rent or other use of or

dealings in-the lands. ~~

(4) Concealing from: appellant and all others the ex-

istence of their conspiracy and wrongdoings. :

The complaints name numerous persons who are said-to

have joined in the conspiracy with full knowledge of the

existence and purposes of the conspiracy. Some of the

persons so aamed are made défendants in the complaint in

the Anderson ease. Many of them are‘not made defend-

ants. They sre alleged to have caused the appellant to

. transfer, lease, assign or otherwise dispose of its lands and

interests in lands; as more particularly described in exhibits

1 to 67 to the complaints. These exhibits contain details

of conveyances, with dates, descriptions and names of

grantees, The exhibits are incorporated.by reference: in

the complaints.

A considerable number of defendants listed in paragraph

XXII of the complaint in the Anderson case seem not to

be charged‘with having knowingly joined in the conspiracy —

to defraud the appellant, but to be charged only with

-having purchased and taken their conveyances, leases,

assignments and tfansfers ‘with notice or knowledge that

in so purchasing, leasing or taking said lands and interests

in land they were participat‘ng-in and helping to accoin- -

plish the defrauding of plainuff [appellant] and the viola-

tion of? fiduciary duties owing to plaintiff [appellant] by

- its directors, officers, agents, and others.”’

The facts stated in this opinion are facts alleged by the -

appellant in its complaint and, in some instances, facts

stated by appellant in admissions and in answers to inter-

rogatories in these cases. There has been no occasion to

introduce any proof of the facts so stated.

The complaints ‘allege that after the various grantees

named in éxhibits 1 to 67 above received their conveyances,

they. drilled oi] and gas wells on the land and took the

products of these wells, and are now in posse ssion of the

lands and of the proceeds of their use.

. *

18a -

The appellant alleges that during the many years that it

was beinz defrauded by its directors, officers and agents,

-it was held completely captive and dominated by its direc-

tors and officers who were parties to-the conspiracy, and

was therefore powerless and unable to protect its interests.

On June 13, 1994, certain beneficiaries of the Henry Miller

Trust filed a snit in the Superior Court -of the State of -

California in and for the City and County of San Fran-

_ciaeo, the principal object of Which suit was to remove

J. Leroy Nickel, Jr., A. R. Olsen and J. E. Wooley, the then

trustees of the Henry Miller Trust, from their positions as

trustees, and to procure the appointinent of successor trus-

tees. The trustees resigned or were removed, new trustees _

- were appointed, they as owners of the stock of appellant.

-eorporation removed.J. Leroy Nickel. Jr., Olsen and Wooley

as directors and officers of appellant corporation, elected an

“gndependent board of directors of appellant, which board

appointed new officers. The new trustees of the Henry

Miller Trust and the new directors and officers of appel-

lant corporation promptly. made an investigation which dis-

closed the wrongs. committed against the appellant. Within

three months after the appointment of the new directors

and Officers of the appellant, the Anderson suit was filed

- in 1954. The Chickering suit was not filed until 1957, be-

cause not until then did appellant discover the part which.

it says, the five defendants in the Chickering case played

in assisting the wrongdoing directors, officers and trustees

to conceal their wrongdoings. ,

_. The ¢omplaint in the Chickering case, in its paragraph

XXIX-F, alleges that directors, officers and ‘agents of the

‘appellant corporation purchased a large number of the

appellant's bonds and notes at less_than their face value

“and enforeed them against appellant at their face value...

in violation of their fiduciary obligation to the appellant. -

The complaint in the Anderson-gase asks for a judgment

‘and decree that the defendants hold the properties de-

scribed in exhibits 1 to 67, together with all proceeds, profits

and income from those properties, as constructive trustees ¢

for the appellant, and restore and return them to appel-

——

‘19a

‘lant; that the defendants he req) ired to make an account-

ing to the appellant 6f profits made at appellant’s expense f

that in the event that the appellant’s properties have been

<o transferred that constructive trusts canfiot be impressed

upon them, the appellant hate judgment against the de-

fendants and each of them for one hundred and ten million

dollars, with interest and costs, and reasonable attorneys’

fees. * .

In the Chickering case, the relief demanded is judgment

“against the defendants in the amount of one hundred and _

“ten million dollars. a ‘

The appellant corporation is a family corporation dating

hack to 1908. Its founder, Henry Miller, by an inter Vivos

‘transfer in 1913 and a testamentary transfer in 1916, put

all the stock of the plaintiff corporation into the Henry

Milier Trust, where it has remained since that time. The

trust resvof the trust is owned by three trustees. The

heneficiaried of the trust, followifie Henry Miller's death in

1916, were his daughter Nellie Miller Niekel and her hus-

band, J. Leray Nickel, Sr., for their lives and the life of the:

survivor of them; then their children and the issne of any

- deceased child, per stirpes, for life, until the death’ of the

. last of the children of Nellie Miller Niekel and J, Leroy

Nickel, Sr., at which time the corpus of the trust was to be

distributed to the descendants of such children, per stirpes.

in fee.

a]

Henry Miller died in 1916. His daughter Nellie Miller

Nickel and her husband J. Leroy Nickel, Sr. and their three

children were then living. The’ children were J. Leroy

Nickel, Jr. George W. Nickel and Beatrice Nickel Morse. .

J. Leroy Nickel, Si, died in 1927 and his wite Nellie Miller

Nickel died in 1944. J. Leroy Niekel, Jr.. married but had

no children; George W. Nickel had four children: Beatrice

Nickel Morse had thiree children. These seven children and

their descendants are the contingent remaindermen under

the Henry Miller Trust. i

. ‘ _- ) ° :

J. Leroy Nickel. Jr., died in 195%. ‘Tue other two childrens?”

of Nellie Miller Nickel and J. Leroy Nickel, Sr.. viz. George

ee oops 20a |

W. Nickel and Beatrice Nickel Morse, were. also life

beneficiaries of the trust. The record does not. disclose

whether-or not they are living. Their respective children

“and more Femete descendints were, as we have seen,

contingent remainder beneticiartes of the trust.

The complaints allege thatJ. Leroy N ickel, Jnr., Wooley,

and Olsen, as trustees of the Henry Miller Trust, owned all

the stock of the appellant corporation from 1944>to 1954.

They elected its directors, selected its officers, and were in

complete eqntrol | of its affairs. In the appellant’s original

complaint, filed in 1954, in the Anderson ease, J. Leroy

Nickel, Jr. J. E. Wooley, and A. R. Olsen headgd the list

‘of the numerous defendants against whom restitution and

damages’ were sought. Qn November 19, 1954, on motion of ~ —

‘the appellant, the action was dismissed, without prejudice, —

as to the defendant A. R. Olsen.. In the appellant’s first

amended complaint filed. October 31, 1955, neither Wooley -

nor Olsen was named as a defendant, but J. Lerey Nickel,

Jr, was so named. But on appellant's motion the action

was disntissed, without prejudice, as to J. Leroy Nickel, Jr.,

on December 20, 1955. In appellant's second amended come

plaint, filed on April 17@1958, neither J. Leroy Nickel, Jr.,

ner Woolty nor Olsen was named as a defendant. How-

ever, in the body of the second amended complaint, as in the

two earlier versions of the-eomplaint, J. Leroy Nicke?: Jr.

Wooley and Olsen, tégether with one James E. Fickett,

then deceased, were named as the persons primarily re-

sponsible for the Jeoting.of the plaintiff ign cnc ald

putting in theim own pockets, profits whieh rightfully be-

longed to the corporation,

From what is recounted above, one gets the impression

that if/the eases are tried ‘on the: present amended coy-

plaints the trial will be a. playing of Hamlet, withont the

presence of Hamlet. There will be munch evidence as to

the wrongs whieh’ J. Leroy Nickel, Jr. Woeley, Olsen, and ¢

Fickett' did to the appellant corporation, and as to the

manner in which they profited from those wrongs. but

there can be no judgment requiring those primary wrong.

doers, or their estates, to disgdrge.the profits and reimburse

the appeilant corporation.

gett.

Pa -

It it be said that this is none of the business of the de

fendants against whom. judgments are sought, that a

wrongdoer cannot complain that another wrongdoer, al-o

responsible for the same tort, is not sued for it, we sup

pose that this doetrine is not necessarily of universaleap.

plication. The instant suit seeks fo impose const ructive *

trusts and liability for damages upon numerous persot-

who now have title.to numerous properties. As to “Oru

of them, all that is ‘charged against theni is that, they togks.

‘title to the property when they knew that. their predecessor

in title had aequired title through a breach, by a director |

or agent of the appellant, of his fiduciary duty to the ap.

pellant. We think a court of equity would not be perform-

ing its role as such if it assumed that the defendants in

cluded in the second amended complaint are in part diliety

with the primary wrongdoers named, but not made de

fendants in the complaint. A court of equity might well

cqnelude that it should not requiré the party least at fanit

to bear alone the entire responsibility for the wrong.

If it ix snegested that these primarily guilty netors mits

have paid back to the appellant corporation what they stele

from it. the court and the remaining defendants would. be

entitled tor know that, To whatever extent such, payment

have heen made, they are provtante eredits on the-elaim-

made by the appellant against the remaining defendants, Tf,

settlements have been made and releases given to the pri.

mary wrongdoers for less than full compensation for thei

wrongs. or for less than would have been practioall,

coverable, that might well be of. interest to the court and,

to the remaining defendants. - . 5 ‘

The epniplaint in the Anderson case, iN} paragraph XI.

SAYS: | wy

From and after 1927 and at all times herein mentioned

until. July 22, 1954, each of eplaintiff’= fayope lant’ |

directors and officers was either an active party to the

conspiracy set out, in varagraph NIT ér dominated

by and. subservient to the parties to said CONSPIPAES .

and plaintiff was a complete captive ef said director=

and ‘officers and was therefore at all times comydetely

yo

powerless and unable to protect its interests and to

seek a remedy :for the wrongs and injuries herein

above set forth: until July 22, 1904.

Jeginning in 1927, which was when’ the operation. of the

conspiracy began, one of the three. trustee-stockholder

directors of appellant was J. Leroy Nickel, Jr. As we

have seen, he is alleged to have been the ringleader of the

conspiracy fo defraud the appellant. His position and his

activities continue down to 1954, when he was removed from

his position ds trustee and as a director and officer of ap-

-pellant. From 1929-to 1944 Nellie Miller Nickel, the

daughter of Henry Miller, was one of the three trustees of

the Henry Miller trust. She was a director of the appel-.

dant corporation from 1941 to 1944. She was a life

beneficiary. of a one-half interest in the trust’ from’ 19J6

until 1987, and the sole life beneficiary from 1937 until her

death in 1944,° Her husband, J. Leroy Nickel, Sr., was the

third trustee of the trust from 1920 until 1937, As such, he’

was a‘stockholder of appellant corporation, of w ‘hich he was

a director from 1920 to 1937 He was a life beneficiary,

-with a ene-half interest, in “the. trust. He died in 1937.

1. FL Wooley succeeded him jin 1937 as,a trustee of the

trust and as a stoekhdlder and director of appellant. He

was not a beneficiary of the trust nora’ member: of, the

‘Miller. family, but, as we have seen, was active in’ “the

econspiraey to defraud the appellant, until he was removed

in 1954. Upon the death of Nellie Miller Nickel in 1944,

A. R. Olsen suceceded her as a trustee, and as a stockholder:

and director of appellant, and continued in those capacities

until he \was removed in.1954. Upon the death of. his

mother, Nellie Millér Nickel, in 1944, J. Leroy Nickel, Jr..

hecame a-life- heneficiary’ of a one-third interest in the

trust. Heidted in 1959. a

As shown in the hia recitals, during: the period

1927 to 193¥,J. ‘Leroy Nickel, Sr.. was a life tenant of a

one-half: tntesent in) ‘be far Miller Trust, He was a

director of appellant corporation-and is allezed in the com-

plait to have been subservient to the. will of the conspira-

tors. Nellie Miller Nickel was the sole life tenant of the

wa.

Sa *

trust from 1937 to 1944.. From 1941 ‘to 1944 she was a

director of appellant. ccrporation and was subservient to”

the will of the conspirators. J: Leroy Nickel, Jr, was a

director of appellant corporation frém 1920 to 1954.. Upon:

the death of his mother, Nellie Miller Nickel, in 1944 he

hecame a life tenant of a one-third interest in the trust.

He was, as we have seen, the ringleader in the conspiracy.

If there should be a recovery in this suit and an account- -

ing by the defendants to the appellant for income, rents

and profits earned by the defendants from the diverted °

‘ lands. i, would seem to follow that a part yf the recover)

should go to the estates of the life tenants who would- have |

received the income, rents and profits if” the appellant ’s

ind had not been frandiently disposed Of. ;

All the. shares of the stock of the appellant. were held by

the three trustees of the Henry Millet Trust from as far

back as 1920. - They elected themselves, and some other

“persons, directors of ‘appellant. In.1939 evidence of what

is alleged to have been the conspiracy to despoil the appel-

-jant was presented to the board of directors in two sneces-

sive meetings, was discussed, atid the following resolution -

was adopted: |

Now, Therefore, Be it Resolved: That this ‘matter “be

\ eons@iPred closed and no further investigation is re-

, qu fe ;

Participating in this meeting ‘were J. Leroy Nickel, Jr.,

A. R. Olsen, and J. E. Wooley, together with the other

directors. Judge Sloss, a director, opposed the resolutign.

As we have seen, J. Lerov Nickel, Jr. was from 1920 te

1954 one of the three trustees of the Henry Miller Trust.

J. FE. Wooley was one of the-trustees from 1937 to 1954.

A. R. Olsen was the thitd trustee from 1944 to 1954.

Judge Wollenberg, in the district court, disinissed the

appellant’s complaints, assigning as one of his grounds of

dismissal the fact that the owners of the appellant were

shown by the allegations of the emnplaint to have “kyow-

ingly consented to and ratified the alleged wrongs to the

.

/

24a

corporation. He said, **As unanimous consent renders

fraud inipossible, no wrong has been done to the plaintiff.”

For that reason, he said, the complaints failéd to state

causes of action.

In these appeals the appellant urges that the district

court was in error in failing to give weight to the fact that

the three shareholder directors of appellant held their title

ty the stock as fiducidries,.i.e. as trustees for the benefici-

aries of the Henry Miller Trust. It recegnizes that ‘ta

person owning ‘all the-legal and equitable interest. in-a

corporation may give those assets away if he desires to—

ignoring the corporaté entity.” He will not later, by use

of the corporate entity, be heard to complain.’’ That a

corporation is hurt, or destroyed, by the intended con@uct

of the owners of its shares, gives rise to no fegal claims.

either in the shareholders, or in the corporation as a legal

entity. If all of the shares of a corporation were owned by

trustees, and an agent of the corporation offered some of its

assets for sale at what seemed to be less than the market

price, and a purchaser cautiously inquired of each of the

shareholders as to whether he was aware of and content

With the price at which the assets were being offered, and

“was assured that the shareholders were content, and there-

npon.made the purchase, and was later sned by the corpora- ,

‘tiow ‘for having committed a wrong against it,he. would.

naturally, wonder what he had done that was wrong. If

he was told that what was wrong was that the shareholder~

did net really own the shares, but owned them as trustees

for other persons, he would wonder hew he was supposed

‘ta have known thet. And if, in fact, he did not know it,

he would not be under any liability. to anyone, and certainly

not to the corporation With which he had dealt. If he did

knéw of the trusts, thereby knowing that the stoekholders

were being generous with asset~ which they did not own,

he would be liable, but the wrong would not be a wrong f

against the corporation but against the henefielariys of the

trust. If the trustees repented of their wrong, they might.

as trustees, bring-suit to recover The assets, and/to restore

them to their plage in the corporation’s stock, if that was

co

}

’

: a ;

where the court thought they belonged. Wetmore v. Porter,

92 N.Y. 76.

In the consideration of such problems, and of the par-.

ticular problem of the, instant cases, the corporation, as -

such is quite irrelevant. The questions are (1) did the

trustees wrong the beneficiaries and (2) were. the persons

whe déalt with the corporation purchasers without notice

of the fact that the trustees were committing breaches of

trust? oO

.

It follows from what we have said that, jn our opinion,

the beneficiaries of the Henry Miller Trust are the persons.

and the only persons, who have rights in the instant situa-

tion. The appellant corporation Was thie instrament by.

which the conspirators despoiled the assets of thetrust. It

ix not in the position of a repentant trustee. Tt was not

the trustee, it was the despeiled trus] res, The interpo=1

tion of the corporation in this litigation is ef no conceivable

use. The beneficiaries have always, in equity, owned the

corporation and its assets. They still own them. depleted

as they are alleged to be. There ix ng need for this imani-

inate entity, the corporation, to spring to life and speak

for them. They can speak forCthemselves. When they

do speak, and when those whom they, acense answer then,

the dialogue will not be obfuscated by doctrines abort

whether, and to what extent, the -corporate veil may he

pierced, Questions as to who were beneficiaries ai, par

-tieular. tines, whether their-conduct was such as to make

recovery for their benefit inequitable, whether and te whit

extent they had already been paid by the wrongdoers.

‘would seem to be highly relevant. “In brief. the obvien-

advantage .of having the eal. parties in ihterest in court

will he present. .

When the frauds of the then tristecs were discovered, or

were first acted upon: it was the beneficiaries of the trust

who brought suit, in 1954, in the Superior Court of Cali

fornia, which suit resulted in the removal of: the unfaithful

‘trustees and the appointment of others. That) direct.

1,

.°

nonecirenitens procedure coud well have been followed by,

cuits by the beneficiaries against the unfaithful trustees.

26a

their confederates, agents, the appellant corporation which .

had been an instrument in their fraudulent acts, and pur-

chasers who took with notice. In such a suit a court of,

equity could have proceeded with confidence that it could

do equity. .

The judgments of the district court ebialnes the com-

plaints are affirmed..

penta ‘Opinion Filed Sune 18, 1963..

. Frank i. Schmid, Clerk.

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 18,033

Minter & Lex Ixcorporaten, a Nevada corporation,

Appellant

vs.

R. H. Anpersox, et av., Appellees

Appear. from the United States District Court for the

Northern District of California, Southern Division.

Tis Catse came on to be heard on the Transcript of the

Reeord from the United States Distrfet Court for the

Northern District of California, Southern Division and

was duly submitted. aa

‘Ox Coxsmweration Wuereor, It is now here ordered and

adjudged by: this Court, that the judgment of the said Dis-~ -

triet Court in this Cause dismissing the complaint be and

hereby is affirmed with costs in favor of the appe lees and

against the appellant.

Iti i< further ordered and ad judge r that appellees recover

‘against appellant for their costs herein expended and have |

execution therefor.

Filed and entered June 18, 1963 —

¥! %a - *.

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

- [Endorsed :]

Filed

Aug. 19,1963

? Frank H. Schmid, Clerk .

| No. 18,033, -

Minter & Lux, Ixcorroraten, Appellant,

vs.

R. H. ANDERSON ; Grace C. ANpErson; ET Ab, Appellees.

aa No. 17,929

Muer & Lrx, -Pxconre mateD, Appellant,

; / VS. ;

Auues I. Curckertne, Cuartes R. Buytn, Harry HI. Farr,

J.J. Hester and THe Bank oF Cariorstia, a National

Banking Astociation, Appellees. ze

——__-

Order

Before: Mappes, Judge of the Court of Claims, and °

Merritt and BrowNxixc, Circuit Judges

The petition for rehearing, suggestion for rehearing

en bane, and motien to hear ‘and determine applications

for indemnity are denied. Judge Madden, sitting on this

court by special assigninent, did not participate in the -

consideration or disposition of the suggestion. for rehear-

- ing en bane.

/s/ J. WARREN Mappen

Judge of the Court of Claims

ys’ Curantes M. Merniny

/s/ James’ R. Brows ine -

United States Cireuit Judges

>.