Ned McDaniel Mary E. McDaniel and Robert A. Collier v. R. D. Painter, Dale Painter and Rhodes Danehower, 418 F.2d 545, 10th Cir. (1969)

418 F.
2d 545
Ned McDANIEL, Mary E. McDaniel and Robert A. Collier,

Appellants,
v.
R. D. PAINTER, Dale Painter and Rhodes Danehower,
Appellees.
No. 241-69.
United States Court of Appeals Tenth Circuit.

Dec. 1, 1969.
Thomas A. Wood, Wichita, Kan., for appellants.

Thomas D. Kitch and Paul R. Kitch, Wichita, Kan. (Gerritt H.
Wormhoudt, Wichita, Kan., on the brief), for appellees R. D. Painter and
Dale Painter.
Benjamin C. Langel, Wichita, Kan. (Robert C. Foulston, Wichita, Kan.,
on the brief), for appellee Rhodes Danehower.
Before MURRAH, Chief Judge, and LEWIS and HILL, Circuit Judges.
HILL, Circuit Judge.
This diversity suit was brought by three minority stockholders against the
vendors and vendee of a majority block of stock in The First National Bank of
Chanute, Kansas, seeking redress for alleged breaches of fiduciary duties which
they contend have resulted in diminution of minority stock valuation.
Following interparty depositions, argument on a motion for summary judgment
was made to the court and granted in defendants' favor. Appellants now
contend that the limited discovery suggests breaches of a fiduciary duty and
request that the order be vacated and the case remanded for more extensive
discovery and a trial on the merits.
Appellants urge that a fiduciary relationship existed between majority and

minority stockholders of the banking corporation, which obligation was
breached by the act of selling and purchasing, in five particulars: (1) by
unlawfully financing the stock purchase with a pledge of corporate assets and
relinquishment of control to the lender in violation of 12 U.S.C.A. 83; (2) by
failure of sellers to investigate the financing method; (3) by conflicts of interest
in contracting for the continued services of the former bank president; (4) by
failing to inform minority shareholders of the offer to purchase; and (5) by the
sale of stock by insiders at a price not available to minority stockholders. The
suggested remedy is to place the responsibility upon the majority for making
the purchase offer ratably available to all corporate stockholders.
3
From a review of the briefs and record on appeal there appears no genuine
issues of material facts which command the reversal of the summary judgment
order.1 The controversy centers around and was precipitated by a sale of
controlling interest stock in The First National Bank of Chanute, Kansas, on
March 2, 1966. Prior to the sale, Dale and R. D. Painter owned 5157 of the
10,000 outstanding shares of capital stock in the Chanute bank; appellants
cumulatively control 770 shares. During the preceding ten years very little
trading was done in the bank's capital stock, with the per share book value
fluctuating upwards from $46.40 in 1955 to approximately $98.00 in 1966.
Early in 1965, Dale Painter, with the aid of a disinterested bank, evaluated the
worth of the Painter family's interest in the Chanute bank. Several banks in the
vicinity were informed of the Painters' willingness to sell to a qualified buyer
and requested those banks, in a confidential manner, to refer prospective
purchasers to Dale. Ultimately, appellee Danehower was directed to the
Chanute bank and, following several months of negotiation and investigation, in
March, 1966, bought the Painters' fifty-one per cent interest for $690,000
consideration. Included in the sales contract was provision for assignment of a
credit life insurance agency and its assets as well as an agreement that Dale
would be retained on the bank's staff for five years at an annual salary of
$10,000, personally guaranteed by Danehower in the event the bank released
Dale. Of the Painter family, only Dale remains, serving as Chairman of the
Board; 2 Danehower is now bank president. After the election of new officers,
Dale and Danehower entered into another agreement, the substance of which
was that Dale would be retained as a bank employee for five years at $10,000
per annum, to provide the bank his knowledge, experience and business
acumen. Since the sale of controlling stock, there is absolutely no indication in
the record that the bank has suffered from the change in ownership.
Our decision is premised on the conviction that all material facts are before the
court and that all inferences from those facts, when drawn most favorably to
appellants, do not require reversal.3 By construing all facts and allegations in a
light most promising to appellants, we are left with the conclusion that of the
five alleged breaches of duty, only the latter two may be considered on appeal.
The failure to inform of the sale, and the price discrimination reflected therein
pose the possibility of individual injury. The remaining allegations are phrased
in terms of corporate injury, for which these appellants may not personally
recover.4 Even if the damage to a stockholder results indirectly, as the result of
an injury to the corporation, he may not sue as an individual.5
5
This is a diversity case dependent upon the substantive law of the forum for
resolving the questions of law.6 In the course of arguing the question of 'arising
under' jurisdiction, the appellants have candidly admitted that there is no
appearance of a federal question on the face of the complaint. It is therefore
clear that this controversy does not depend upon federal question jurisdiction.7
This is not a derivative stockholder's suit directly involving the national bank;
rather, it is a suit seeking personal recovery and, resultingly, appellants may not
rely upon the federal organization of the bank to invoke federal question
jurisdiction. This is purely a case for Kansas law. As yet, however, the
questions for review have not been squarely presented to the Kansas courts and
we are put to the difficult task of anticipating their decision, were the issues
before them. In that regard, the trial court's view of state law will not be
disturbed on appeal absent clear error.8 We are convinced that the trial court
did not err.
The cornerstone of appellants' case proposed that a fiduciary duty exists

regarding the sale of corporate stock by dominant stockholders and that a
breach of that obligation may be redressed by individual stockholder suits. The
universally accepted rule was stated by this court in Roby v. Dunnett, 88 F.2d
68, 69 (10th Cir. 1937): '* * * Every stockholder, including a majority holder,
is at liberty to dispose of his shares at any time and for any price to which he
may agree without being liable to other stockholders * * * as long as he does
not dominate, interfere with, or mislead other stockholders in exercising the
same rights.'9 In other words, a dominant or majority stockholder does not
become a fiduciary for other shareholders by reason of mere ownership of
stock. It is only when one steps out of the role as a stockholder and acts in the
corporate management, with disregard for the interests and welfare of the
corporation and its stockholders that he assumes the burden of fiducial
responsibility.10 Thus, when transferring control of the corporation, the
managing majority are dutybound not to sell controlling interest to outsiders if
the circumstances surrounding the proposed transfer would alert suspicion in a
prudent man that the purchasers are an irresponsible group who will
mismanage and loot the corporate assets.11
The fact that controlling stock sells for more than book value, as it did here, is
not evidence of fraud since it is generally recognized that majority stock is
more valuable than minority stock.12 Neither is there merit in the argument that
appellees, as dominant shareholders, must refrain from receiving a premium
which reflects the control potential of the stock. Christophides v. Porco., 289
F.Supp. 403, 405 (S.D.N.Y.1968). Mayflower Hotel Stockholders P.C. v.
Mayflower Hotel Corp.,89 U.S.App.D.C. 171, 193 F.2d 666 (1951) does not
stand for the broad proposition, as urged by appellants, that majority
stockholders have a duty to disclose sales terms when selling control stock.
That case dealt with interlocking directorates and the sale of one corporation to
another, with the minority selling their interest upon misinformation supplied
by the majority. Clearly such a duty exists in those circumstances and falls
within the ambit of the Roby rule. We have read the law review articles cited
by counsel and conclude that they neither state the law of the forum nor the
rules generally applied in other jurisdictions.13
8
The cases relied upon by appellants graphically illustrate the imposition of a

fiduciary duty in a multiplicity of situations involving stock sales.14
Notwithstanding, while each stands for a well stated principle, their rules are
inapposite to the facts of this case. In those decisions in which recovery had
been granted, the sales involved elements of fraud, misuse of confidential
information, looting, siphoning off for personal gain of a business advantage
rightfully belonging to the corporation and shareholders in common, or
wrongfully appropriating corporate assets.15 The inappropriateness of these
cases is highlighted by appellants' admissions that they know of no specific
misconduct on the part of the new management other than the propriety of the
loan and the employment contract with Dale Painter.
The sale to Danehower appears in all respects to be fair, free of secret or

undisclosed arrangements which could create a suspicious atmosphere, and was
consummated in the utmost of good faith. The confidential nature of the
transaction and the continued employment of Dale Painter are not indicative of
a plot to loot and mismanage the bank but rather reflect the high concern of all
parties that the transition period be as smooth and business-like as possible.
There is not even a scintilla of evidence to the contrary. To condemn the kind
of transaction involved in this case would tend strongly to discourage stock
investments and would be a menace to the efficient management of corporate
business.
10
The general rule in Kansas provides that 'shares of stock of a corporation are
personal property, and may be transferred like any other property, unless the
transfer is restrained by the charter or articles of association * * *.' Van Demark
v. Barons, 52 Kan. 779, 35 P. 798 (1894). 16
11
No mention has been made about restraints on alienation within the corporate
charter or articles of incorporation. The spirit and letter of the law have not been
violated by parties to the sale. Appellees were free to sell their ownership in the
bank to persons who, upon satisfactory investigation, proved to be of sufficient
financial worth and good character.
12
We affirm.
See McCullough Tool Co. v. Well Surveys, Inc., 395 F.2d 230 (10th Cir.
1968); Frey v. Frankel, 361 F.2d 437 (10th Cir. 1966); Norton v. Lindsay, 350
F.2d 46 (10th Cir. 1965)
Dale Painter presently owns 57 shares of bank stock
Building Mart, Inc. v. Allison Steel Mfg. Co., 380 F.2d 196 (10th Cir. 1967)
See 13 Fletcher Cyc. Corp. (Perm. Ed.) 5911
Id
Erie Rd. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)
See Gold-Washing and Water Co. v. Keyes, 96 U.S. 199, 24 L.Ed. 656 (1878);
Wright, Federal Courts, 18 (1963 ed.)
See Fulton v. Coppco, Inc., 407 F.2d 611 (10th Cir. 1969); Gates v. Willford,
406 F.2d 890 (10th Cir. 1969); Continental Casualty Co. v. Fireman's Fund Ins.
Co., 403 F.2d 291 (10th Cir. 1968)
See cases cited in Annot., 50 A.L.R.2d 1146, 1147-1150
10
13 Fletcher Cyc. Corp. (Perm. Ed.) 5805
11
Insuranshares Corp. of Delaware v. Northern Fiscal Corp., 35 F.Supp. 22

(E.D.Pa.1940); 13 Fletcher Cyc. Corp. (Perm.Ed.) 5805, at pp. 145-146 and
cases cited therein
12
See Essex Universal Corp. v. Yates, 305 F.2d 572, 13 A.L.R.3d 346 (2d Cir.
1962); Levy v. Feinberg, 29 N.Y.S.2d 550 (Sup.1941); Tryon v. Smith, 191 Or.
172, 229 P.2d 251, 254 (1951)
13
Berle, 'The Price of Power: Sale of Corporate Control,' 50 Cornell L.Q. 628
(1965); Andrews, 'Stockholder's Right to Equal Opportunity in the Sale of

Shares,' 78 Harv.L.Rev. 505 (1965); Jennings, 'Trading in Corporate Control,'
44 Cal.L.Rev. 1 (1956); contra 'Sales of Corporate Control and the Theory of
Overkill,' 31 U.Chi.L.Rev. 725 (1964)
14
Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939) (fraudulent
confession of corporate debt); Southern Pacific Co. v. Bogert, 250 U.S. 483, 39
S.Ct. 533, 63 L.Ed. 1099 (1919) (sale of corporate assets); Seagrave Corp. v.
Mount, 212 F.2d 389 (6th Cir. 1954) (derivative suit urging constructive fraud);
Soderstrom v. Kungsholm Baking Co., 189 F.2d 1008 (7th Cir. 1951)
(fraudulent appropriation of business assets); Zahn v. Transamerica Corp., 162
F.2d 36, 172 A.L.R. 495 (3d Cir. 1947) (fraudulent stock redemption); Lebold
v. Inland Steel Co., 125 F.2d 369 (7th Cir. 1941) (fraudulent corporate
dissolution)
15
Annot., 50 A.L.R.2d 1146, 1150-1156 and cases cited therein
16
See also Dewey v. Barnhouse, 83 Kan. 12, 109 P. 1081, 1083, 29 L.R.A.N.S.,
166 (1910); Merrill v. Meade, 6 Kan.App. 620, 49 P. 787 (1897)

Ned McDaniel Mary E. McDaniel and Robert A. Collier v. R. D. Painter, Dale Painter and Rhodes Danehower, 418 F.2d 545, 10th Cir. (1969)

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418 F.

Ned McDANIEL, Mary E. McDaniel and Robert A. Collier,

United States Court of Appeals Tenth Circuit.

Thomas A. Wood, Wichita, Kan., for appellants.

Appellants urge that a fiduciary relationship existed between majority and

The cornerstone of appellants' case proposed that a fiduciary duty exists

The cases relied upon by appellants graphically illustrate the imposition of a

The sale to Danehower appears in all respects to be fair, free of secret or

Dale Painter presently owns 57 shares of bank stock

See 13 Fletcher Cyc. Corp. (Perm. Ed.) 5911

See cases cited in Annot., 50 A.L.R.2d 1146, 1147-1150

13 Fletcher Cyc. Corp. (Perm. Ed.) 5805

Insuranshares Corp. of Delaware v. Northern Fiscal Corp., 35 F.Supp. 22

(1965); Andrews, 'Stockholder's Right to Equal Opportunity in the Sale of

Annot., 50 A.L.R.2d 1146, 1150-1156 and cases cited therein

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