Blaustein v. Pan American Petroleum & Transport Co.

This is a stockholders derivative action. It was instituted by Louis Blaustein and his son Jacob Blaustein who, at the commencement of the action, were not only substantial minority stockholders of Pan American Petroleum and Transport Company — to which reference will be made as “ Pan Am” — but also were directors and respectively its president and executive vice-president. The subsequent death of Louis Blaustein led to the substitution of his executors as plaintiffs. Other plaintiffs in the action and the interveners, Haas and Barry, are also minority stockholders of Pan Am.

The defendant Standard Oil Company (Indiana) —hereinafter referred to as “ Indiana ” — is a foreign corporation which at the time of the trial owned approximately 78% of the outstanding stock of Pan Am. The defendants Jackson and

The complaint sets forth three causes of action. In the first cause of action it is alleged in substance that, as the majority stockholder, Indiana exercised a dominating influence over Pan Am and caused the defendant directors to breach duties alleged to be fiduciary by failing to cause Pan Am to carry out the terms of a “ definitive agreement,” presently to be described, which “ reinforced, defined and emphasized ” the duty of Indiana and the defendant directors to conduct the business of Pan Am in good faith and in the sole interest of Pan Am and its body of stockholders; that in violation of such duty the defendant directors and Indiana, with the knowledge and connivance of the defendant Teagle and the defendants Standard Oil Company (N. J.) and Standard Oil Company of N. J. (Del.), in bad faith had fraudulently and intentionally-wasted the assets, profits and business opportunities available to Pan Am, diverted the same to the uses of the corporate defendants Indiana and its affiliate Standard Oil Company (N. J.) and have conducted the business of Pan Am contrary to its best interests with the purpose of suppressing competition which otherwise would have been practiced by Pan Am against these corporate defendants. The second cause of action alleges that the acts of the defendants set forth in the first cause of action were done pursuant to a conspiracy. The third cause of action, under sections 60 and 61 of the General Corporation Law, is by Louis Blaustein and Jacob Blaustein as directors and officers of Pan Am and for its benefit against the individual defendants who were officers and directors of Pan Am. The plaintiffs demand that an accounting be had of all assets and profits of Pan Am alleged to have been illegally

Upon this appeal we review a judgment entered upon an order of the Appellate Division which reversed on the facts and law an interlocutory judgment in favor of the plaintiffs entered at Special Term and dismissed the complaint on the merits.

Before reference is made to the judgment now before us for review a preliminary statement of the factual background of this controversy may serve to make clear the points upon which the decision at Special Term and the decision at the Appellate' Division diverge:

The decedent Louis Blaustein and his son Jacob Blaustein were pioneers in the marketing of petroleum products. In 1910 they were distributing kerosene to customers in Baltimore by a single horse-drawn tank wagon. During the ensuing thirteen years, by skillful marketing methods, including the installation of “ visible ” gasoline pumps and the production of “ Amoco ”, a premium gasoline designed to reduce motor “ knock,” they extended their sale of petroleum products into large areas in the eastern seaboard States. In 1922, when the Blausteins incorporated their business into two corporations of which they were the sole owners — Lord Baltimore Filling Stations, Inc., and The American Oil Company — their gross annual receipts had increased to approximately $4,000,000. However, they found further progress retarded by the fact that they had no crude oil properties, no pipe lines and no refinery. Their ' gasoline and other products were purchased from competitors. At that time Pan Am, then an independent company, owned in abundance in foreign countries and in the United States the crude oil reserves and oil producing facilities which the Blausteins lacked. It was in those circumstances that in 1923 the Blausteins sold to Pan Am a one-half interest in the stock of The American Oil Company and in Lord Baltimore Filling Stations, Inc. At the same time The American Oil Company entered into a contract with Mexican Petroleum Company, a

It is important to note that although the Blausteins and Pan Am since 1923 had each owned one half of the stock of The American Oil Company and Lord Baltimore Filling Stations, Inc., the Blausteins did not become stockholders of Pan Am until April 1932 — at about the time when Pan Am sold its foreign properties. They then purchased' á few hundred shares

The agreement provided in part that Pan Am was to acquire the Blaustein stock in The American Oil Company, which company in turn was to acquire all the stock of Lord Baltimore Filling Stations, Inc., and in payment therefor Pan Am agreed to issue to the Blausteins 1,286,876 shares of its own stock. Pan Am was to provide on or before February 10, 1934, a refining capacity of 40,000 or 48,000 barrels of crude oil per calendar day — “ provided such date of completion is reasonably possible.” It was further agreed that “ Pan-Am shall 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 to be expended under the supervision of the Board of Directors for the acquisition of crude oil producing properties.” Until Pan Am should accumulate a sufficient reserve for its requirements it was given the option to require Indiana to supply “ to the extent of its ability and without loss to itself ” all or any part of the deficiency in crude oil requirements necessary for Pan Am’s requirements at average prevailing field prices. The

In the event disagreement should arise between the Blausteins and a majority of the Board of Directors of Pan Am the Blausteins were given the right to terminate their managing contract and to require Indiana to purchase their stock in Pan Am under a stock option provision within the agreement which permitted the Blausteins during the ensuing four years to sell all or any part of their Pan Am stock to Indiana at its book value at the time of sale, plus $1.00 per share but in no event at less than $13.25 a share. Many of the provisions of the Definitive Agreement became part of the “ Plan of Organization ” which was approved by Pan Am stockholders on March 27, 1933. On the following day, March 28, 1933, consummation of the agreement and plan occurred in part — including the contemplated stock transfers, the election of the

We are thus brought to the time in March, 1933 — a critical period in the financial and economic history of. the nation — when the officers and Board of Directors of Pan Am were called upon to determine problems of business management involving future commitments by the corporation and its future business policy. Those questions of policy at once became controversial matters between the Blausteins and other members of the Board of Directors of Pan Am and led ultimately to the present action. The Blausteins then asserted and have since contended that under the Definitive Agreement it was the duty of the directors of Pan Am to proceed at once to make Pan Am an integrated company — a company equipped to conduct those operations necessary to produce and market petroleum products from crude petroleum as found in the earth to the sale of the finished product. Ih other words, to borrow language found in the Definitive Agreement and in the Plan of Reorganization — “to form a complete cycle and unit in the oil business.”

Since 1933 it has been contended by the Blausteins and has been asserted by the plaintiffs in this action as constituting actionable wrongs, that instead of building in that year a refinery with a daily capacity of 40,000 or 48,000 barrels to meet the requirements of the market supplied by Pan Am, the defendant directors caused to be built a refinery of one half the size mentioned in the Definitive Agreement and gave a profitable three-year processing contract for the balance to Humble Oil & Refining Company, a subsidiary of the defendant Standard Oil Company (N. J.). As to this charge it was the ruling at Special Term — not reversed by the Appellate Division — that it was for the defendant directors to decide whether it would be better to conserve their capital funds over the period of the processing contract rather than invest in a second refinery unit; that in the exercise of their own judgment• they were warranted in making these capital refinery expenditures gradually. The Blausteins have also asserted and the plaintiffs now

It is the position of the defendant directors that the acts mentioned above, which are charged as actionable wrongs in the plaintiffs’ present suit, were the result of careful investigation and a review of factors affecting the welfare of Pan Am at a time after the “ bank holiday ” in 1933 when the business economy of the nation was passing through a critical period;'that their acts as directors of Pan Am were in good faith, in the best interests of the corporation; that, although a slower rate of integration and business expansion for the corporation was adopted than was outlined in the Definitive Agreement, the result was that despite the risks and uncertainties, both economic and scientific, of that particular period, Pan Am passed through those depression years of 1933 and 1935 on a profitable basis; that a majority of the defendant directors determined as a matter of business judgment that the economic conditions affecting the oil industry in 1933 did not warrant the construction at that time of an oil refinery of a daily capacity of 40,000 or 48,000 barrels as provided in the

At Special Term, where the second cause of action, alleging conspiracy, was dismissed on the merits as against all defend

The interlocutory judgment entered at Special Term directed that Indiana account to Pan Am for profits made by certain of its subsidiaries in connection with specified transactions as to which liability of certain named individual defendants was also decreed; that under specified conditions a constructive trust be impressed upon certain oil properties acquired by Indiana’s subsidiary between April 1, 1933, and July 1, 1935, and used to supply crude oil to Pan Am or its subsidiaries and that by the final judgment herein such properties be transferred to Pan Am; that Indiana and certain defendant directors account for and pay to Pan Am all damages which had accrued to Pan Am from April 1, 1933, to the date of the decree in this action by reason of the failure by Pan Am to construct its own oil gathering system and a direct pipe line from the East Texas field; that Indiana account for and pay to Pan Am the benefits accruing to it by reason of a certain contract by which Indiana’s

Upon appeal by all parties except Pan Am and the corporate defendants Standard Oil Company (N. J.), Standard Oil Company of New Jersey (Del.) and the individual defendants Teagle, Jackson and Bullock, the Appellate Division affirmed the interlocutory judgment insofar as appealed from by the plaintiffs and reversed the interlocutory judgment on the facts and law, two justices dissenting, insofar as appealed from by the defendants, and dismissed the amended complaint on the merits. Certain findings of fact and conclusions of law were reversed and new findings of fact and conclusions of law were made.

The Appellate Division found that none of the defendants, in any of the transactions here attacked, had acted fraudulently, negligently or in bad faith, and that they did not profit personally thereby; that at no time had any of the defendant directors been dominated or controlled in any manner or degree by Indiana or by any officer, director or employee of Indiana; that Pan Am and its subsidiaries had at all times been managed by their respective boards of directors, each member of which; in the transactions here involved, had exercised his own honest business judgment for what, in the light of the facts and circumstances confronting him at the time of the decision, he believed to be for the best interests of the corporation for which he was then acting as a director; that at no time since March 28, 1933, or prior thereto, had Indiana usurped the function of, or influenced the action of the Board of Directors of Pan Am, or deprived minority stockholders of Pan Am of their pro rata share of Pan Am assets, or frustrated or destroyed the business of Pan Am or taken over for itself assets or business opportunities in which Pan Am had a tangible expectancy, or prevented Pan Am from obtaining assets vital to its corporate existence. As to transactions involving the purchasing, production and pipe line transportation of crude oil which are challenged by the plaintiffs as breaches of fiduciary duties by Indiana and the defendant directors and upon which rests that part of the decision at Special Term which favors the plaintiffs, the Appellate Division reached a contrary decision and made findings substantially as follows: that the defendant directors

As we consider the problem thus presented it should be noted that this is not an action ex contractu to enforce the Definitive Agreement. That contract was received in evidence and was treated by the Trial Justice as “ * * * 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.” We agree with his conclusion ' that ‘ ‘ Such a statement * * * does not mean that the plan

In this opinion we shall refer to items in the interlocutory judgment as to which we think Special Term erroneously concluded that the rule last quoted above was not applicable.

The interlocutory judgment decrees that Indiana account to Pan Am for all oil properties, <( producing or otherwise,” acquired between April 1, 1933, and July 1, 1935, by Stanolind Oil & Gas Company (hereinafter referred to as SO&G ”) within certain designated areas in Texas, and for the profits made by SO&G on all crude oil produced from those properties and sold to Pan Am or its subsidiaries from April 1, 1933, to the date of final judgment herein; and that Indiana, as a' constructive trustee of the designated oil properties acquired by SO&G between April 1, 1933, and July 1, 1935, be directed by the final judgment herein to cause those properties to be transferred to Pan Am under certain stated conditions.

We find no substantial evidence- which sustains that adjudication. The cause of the delay was the opinion rendered by the defendant Stephens — the only lawyer on the board of directors of Pan Am and the general counsel for Indiana ■— that the anti-trust laws of Texas made it illegal for a subsidiary of Pan Am to engage in oil production in Texas in view of the circumstance that Indiana, which owned a majority of Pan Ana’s stock, already had a wholly owned subsidiary — SO&G- — engaged in oil production in that State. The defendant directors refused to assume the risk attendant upon putting Pan Am in the oil production business in Texas through a new subsidiary until the question of legality was resolved in favor of such a venture. That did not occur until 1935. In the meantime there were numerous conferences between various counsel upon the problem and opinions pro and con by eminent legal authorities. The suggestion by plaintiffs that the opinion by Stephens was crass subterfuge to provide an excuse for the refusal of Indiana to permit Pan Am to enter into the producing business was emphatically rejected by Special Term. Indeed, the Trial Justice stated “ I do not believe that Stephens was actually of a contrary legal opinion from the one actually written by him.” However, that court ruled that although the defendant directors may have relied in good faith upon the legal opinion of Stephens, they had no right to rely upon it. Following the statement that “ Reliance was not compliance with their duties as directors of Pan Am, charged with the duty of looking out solely for the interests of Pan Am,” the court concluded that “ it was their duty to seek outside counsel, and their failure to

We come then to the question whether, during the period from April 1, 1933, to July 1, 1935,— when Pan Am had no subsidiary engaged in producing crude oil in Texas — Indiana, acting through the defendant directors, usurped profitable business opportunities which rightfully belonged to Pan Am. The rule which permits a court of equity to impress with a constructive trust property which is the product of an appropriation of a business opportunity .by a corporation director or officer or a majority stockholder owing some form of fiduciary duty, is not satisfied by proof that after the property is appropriated it occurs that it would have been useful in the corporation’s business. The lack in the present case is the essential proof that at the time the properties in question were acquired by SO&G-they were recognized or identified as properties in which Pan Am had a tangible expectancy — a right which in its nature was inchoate. (Lincoln Stores, Inc., v. Grant, 309, Mass. 417, 421-424; Solimine v. Hollander, 128 N. J. Eq. 228 , 244-246; Loft, Inc., v. Guth, 2 A [2d] 225, 239; Colorado Co. v. Harris, 97 Colo, 309 , 310-312; cf. Hauben v. Morris, 255 App. Div. 35 , affd. 281 N. Y. 652 ; Seymour v. S. F. C. Assn. et al., 144 N. Y. 333 , 344.)

If it be assumed that in the circumstances here involved a measure of fiduciary obligation was owing to Pan Am by the defendant directors and to the minority stockholders by Indiana as owner of a majority of Pan Am’s stock (Farmers L. & T. Co.

In that connection we refer first to the charge by the plaintiffs and the ruling by Special Term that Indiana, acting through the defendant directors, and its subsidiary SO&G, appropriated during the period from April 1, 1933, to July 1, 1935, certain business opportunities to which Pan Am was entitled. Upon this branch of the case the undisputed evidence shows that SO&G and its predecessor companies acquired properties in the East Texas and Gulf Coast fields in the course of the active exploration, experimentation and acquisition of oil lands inaugurated long before that date in 1933 when the plan was decided upon by Pan Am to build a refinery at Texas City. At a time more than thirteen years previously — in 1919 — the Dixie Company — one of SO&G’s corporate predecessors, had been active in the exploration and development of oil bearing lands in Texas, Louisiana, Arkansas and Oklahoma. During the period from 1922-1930 the Dixie Company conducted exploratory work which gave sufficient promise to prompt the leasing of properties in fifteen counties in the Gulf Coast Area and the acquisition of an undivided half interest in a large nonproducing area in Oklahoma and Kansas. In November, 1932, SO&G, aided by geologists and counseled by other experts, undertook extensive seismographic work on the Gulf Coast and in the early part of 1933 it began experiments with a torsion balance — a type of geophysical work. As a result of these experiments and its continued active exploration SO&G leased property in six more counties, much of which was non-productive, only a portion of it being valuable. Among the valuable lands thus discovered was the Hastings oil field — one of the properties which Special Term directed should be turned over to Pan Am. This acreage — a prairie with no surface indications that oil deposits were beneath the ground — came to the attention of SO&G’s production manager in December, 1933, as a result of the company’s torsion balance experiments. Acquisitions in that area were accomplished without the knowledge of Indiana that SO&G had taken leases there. The areas in the East Texas field, in which are located the other crude oil properties which

Prom the evidence mentioned above and from other evidence of record it appears that SO&G for years prior to 1933 and thereafter pursued as a consistent activity — appropriate to its own business and independent of Pan Am — a program of exploration for crude oil. In carrying out that program it purchased a vast acreage of land, much of which proved worthless and a portion yielded oil of great value. This exploration, although in its nature speculative, was legitimate business which, as a result of SO&G’s initiative and by the use of its own funds — not funds of Pan Am — has in many instances yielded deposits of crude oil, which was the objective. The evidentiary history of the acquisition of oil lands by SO&G does not establish that any one of the properties acquired by it between April 1, 1933, and July 1, 1935, was on the date of acquisition identified as property in which Pan Am had a tangible expectancy. (Lincoln Stores, Inc., v. Grant, supra.) We agree with the Appellate Division that the record contains no evidence which will serve as a legal basis for that portion of the interlocutory judgment which impresses with a constructive trust in favor of Pan Am certain crude oil properties acquired by SO&G.

We find no evidence which justifies the conclusion that Indiana so dominated the affairs of Pan Am and the official acts of the defendant directors as to impair the free exercise of honest, independent judgment by those directors. In those matters which related to crude oil production, to which reference has been made, and in meeting the difficult problems of crude oil purchasing and pipe line transportation which faced the Board of Directors of Pan Am in 1933, the arrangements made were in the exercise by the defendant directors of honest business judgment. There was no finding of fraud or bad faith on the part of the defendant directors in any of the transactions

In the complaint herein the plaintiffs charged the defendant directors, the defendant Teagle and the corporate defendants Indiana, Standard Oil Company (N. J.) and Standard Oil Company of Mew Jersey (Del.) with having “ in bad faith, fraudulently, wilfully and intentionally wasted the assets, profits and business opportunities belonging to and available to defendant Pah Am * * *.” The plaintiffs’ evidence was held by Special Term to be insufficient to establish fraud or bad faith by any defendant. In that court the complaint was dismissed on the merits against the defendant Teagle and the two Stand

Our decision should not be understood as approving the “ conclusion of law ” by the Appellate Division that certain subsidiaries of Indiana were “ necessary parties defendant ” in this action. Upon that subject we agree with the ruling at Special Term that “ * * * equity frequently disregards corporate entities even where the subsidiaries are not mere instrumentalities of the parent.” (Rapid T. Subway Constr. Co. v. City of N. Y. 259 N. Y. 472 , 491; Berkey v. Third Avenue Railway Co., 244 N. Y. 84 , 95.)

The judgment dismissing the complaint on the merits should be affirmed, with costs.

(dissenting). Indisputable evidence leads irresistibly to the conclusion that Standard Oil Company (Indiana), herein referred to as Indiana, dominated and controlled Pan American Petroleum & Transport Company, herein referred to as Pan Am, through directors elected by it as majority stockholders. That was implicit in all the discussions and negotiations between Indiana, Pan Am and the Blausteins which culminated in the “ Definitive Agreement.” All the parties so understood and they could not have supposed otherwise. Indiana had previously owned 96% of the stock of Pan Am and it is evident that it did not acquire that stock as an investment, but for the purpose of operating Pan Am in co-operation with other corporations which it controlled, if not, indeed, as part of a single system. When negotiations began with Blausteins for a ‘ ‘ reorganization ” of Pan Am, the officers of Indiana, not the officers of Pan Am, dominated the discussions,and decided upon Pan Am’s future. Indiana was itself a party to the “ Definitive Agreement ’’and undertook that Pan Am would be managed in accordance with its terms. More than that, Indiana assumed on its own behalf financial obligations towards Blausteins which would have been unfair to its own stockholders if Indiana had not controlled the policies of Pan Am. Instinct in every line of the agreement and in all that was said and done is the underlying assump

Blausteins and other minority stockholders cannot complain that Indiana dominated and controlled Pan Am; but, because Indiana did exercise domination and control through the directors it elected, Indiana became subject to the same fiduciary obligation which a director assumes towards the corporation and its stockholders. Pan Am and its minority stockholders may complain if Indiana exercised its control for its own benefit and without honest desire to promote the interests of Pan Am. The serious question presented upon this appeal is whether the evidence establishes dereliction in that respect on the part of Indiana.

The Trial Justice who saw and heard the witnesses found that the evidence established that Indiana and the directors elected by it were derelict in some instances. The Appellate Division reversed these findings and the majority of this court agrees with the Appellate Division. It seems to me that for the most part the weight of evidence sustains the findings of the Trial Justice. Whenever there was conflict of opinion between the directors controlled by Indiana and the directors controlled by Blausteins, the directors controlled by Indiana voted for delay, and always Indiana and its subsidiaries profited by the delay. That consideration is not decisive, but in my opinion it gives strong support to the findings and conclusions of the Trial Justice. Nevertheless, where the evidence is conflicting and there is room for difference of opinion I would probably not dissent from a determination by this court that the weight of evidence lies with the contrary conclusions of the Appellate Division.

Even so, upon the undisputed evidence and conceded facts, I think that the plaintiffs have established their right to a decree that Indiana holds as constructive trustee for Pan Am all prop

This is not a case where proof is made that after the properties were acquired by Indiana it appeared that the properties would have been useful in the business of Pan Am. The proof establishes conclusively that when Indiana acquired the properties it knew that they would be useful if not indispensable in the business of Pan Am and that Pan Am could not acquire the properties at that time because its directors, controlled by Indiana, had not yet determined whether Pan Am could legally buy them. I agree, almost wholly, with the general rules of law set forth in the majority opinion. Our difference of opinion concerns the application of these rules to the facts in the case. In my opinion the plaintiffs have proven conclusively that under the general rules formulated in the majority opinion and the cases cited in support of these rules, Indiana has usurped some profitable business opportunities which rightfully belonged to Pan Am, and the plaintiffs have established by the weight of evidence a right to relief in other instances though, perhaps,, not to the full extent awarded them at Special Term.

The judgment of the Appellate Division should be reversed.

Judgment affirmed, etc. (See 293 N. Y. 763 .)