W.K. WARREN, Natalie O. Warren, John Joseph King, Jr., the William K. Warren Foundation, William K. Warren and the First National Bank and Trust Company of Tulsa, Trustees for Elizabeth Warren Blankenship Trusts D-1, D-2 and D-3, Dorothy Warren King Trusts D-2, D-3, D-4 and D-5, and Patricia Warren Swindle Trusts D-1, D-2, D-3 and D-4, W.K. Warren, Jr. and the First National Bank and Trust Company of Tulsa, Trustees for Warren Young Trust A, Marilyn Warren Cowart Trusts B-1 and B-2, and Marilyn Warren Vandever Trust C-3, Plaintiffs-Appellees, v. CENTURY BANKCORPORATION, INC., an Oklahoma corporation, Joseph P. Byrd, III, Jack M. Cochran, John O. Dean, Jack O. Dickson, Gerald J. Estep, John R. Forrester, H.D. Hale, Jewell Russell Mann, Mike Robinowitz and M. Milton Wolff, Directors of Admiral State Bank, an Oklahoma corporation, Action Financial Corporation, an Oklahoma corporation and Admiral Bank, an Oklahoma corporation, Defendants-Appellants.
No. 60414.
Supreme Court of Oklahoma.
Feb. 3, 1987.
Rehearing Denied Sept. 15, 1987.
741 P.2d 846
As Corrected Feb. 4, 1987.
Kevin M. Abel, Abel & Associates, Tulsa, for defendant-appellant Admiral State Bank, now Century State Bank.
Floyd L. Walker, Pray, Walker, Jackman, Williamson & Marlar, Tulsa, for all other defendants-appellants.
OPALA, Justice.
The minority shareholders of Century Bank [Bank] brought this shareholders’ derivative suit1 against the Bank‘s directors [directors], Century Bankcorporation, Inc. [Century] and Action Financial Corporation [Action]. Century owns more than 80% of the Bank‘s stock. Action is a wholly-owned subsidiary of Century and is in the business of making loans. The minority stockholders alleged that Century‘s ownership and operation of Action violated then existing statutes which prohibited branch banking. The minority stockholders also claimed that Action was unfairly competing with the Bank and that the directors and Century have caused the Bank to pay excessive management fees to Century.
The management of the Bank, Century and Action, are all closely related; the Board of Directors of both the Bank and Century are comprised of the same individuals. One board member, John Dean, serves as the president and chief executive officer of Century and Action. Another board member, Jack Cochran, is vice-president of Century and later became the vice-president of Action as well. The Bank paid Century management fees for the consulting services of both men. A loan officer at the Bank, Larry Johnson, was transferred to Action upon its creation and named its chief operating officer and vice-president.
Action was the brain child of John Dean. After the Bank‘s officers conducted a survey to determine the best location for a loan office, Action was placed on the outer edge of the Bank‘s market area. It was hoped that Action could attract new, hope-
Although the majority of Action‘s loans were made to borrowers who had not previously been Bank customers, the district court held that Action had unfairly competed with the Bank by making loans to previous Bank customers or customers who knew Larry Johnson from his days as a loan officer for the Bank. The district court enjoined Action‘s operations and ordered Action and Century to account to the Bank for all income derived from loans to borrowers with either characteristic. The trial court also found that the management fees for Dean and Cochran were unreasonable and improper and ordered Century to return the monies paid by the Bank to Century for their services. The accounting was then reduced to a decreed monetary award in the amount of $208,179.83 for the excessive management fees and $339,405.00 for the diverted loan business. The plaintiffs (minority stockholders) were awarded $108,506.98 for attorney‘s fees and costs in prosecuting the action—$103,846.09 from the Bank and $4,659.89 from Century and Action.
The five issues presented for our decision are: [1] Did the defendants—Century and Action—impermissibly divert loan business from the Bank to Action? [2] If so, did the trial court correctly determine the amount of damages for the diverted loan business? [3] Did Century cause the Bank to pay excessive management fees? [4] Are counsel fees and costs recoverable in a stockholders’ derivative action? and [5] Did Century‘s ownership of Action constitute branch banking in violation of state banking laws? We resolve the first four issues by answering them in the affirmative. The fifth issue need not be reached for decision because we find that other grounds amply justify our affirmance of the trial court‘s decree and its monetary award.2
I
CENTURY‘S DIVERSION OF LOAN BUSINESS FROM THE BANK WAS NOT “INTRINSICALLY FAIR”
A
THE “INTRINSIC FAIRNESS” TEST
Ordinarily, a court will not second-guess a decision of the majority interest in a corporation. The “business judgment” rule, which is a reflection of this policy, is bottomed on the rationale that the majority in a corporation have the right to dictate corporate policy for better or for worse.3 Under this rule, majority decisions are left undisturbed unless there is a clear showing that the majority interest has committed a breach of trust.4
Courts have recognized that the “business judgment” rule is sometimes insuffi-
Although this court has not yet expressly adopted the “intrinsic fairness” test, its application is consistent with Oklahoma‘s extant jurisprudence. Our case law recognizes that corporate directors stand in a fiduciary relationship to their corporation and its stockholders.8 It also notes that a majority stockholder has a fiduciary duty not to misuse his power for his benefit and at the expense of the minority shareholder.9 Equity will closely scrutinize a transaction when it is shown that one occupying a confidential relationship gains an undue advantage over another.10
The relationship of the parties and the transactions under attack in the instant case activate the “intrinsic fairness” test.11 There was ample testimony to support the
Century argues that the creation and operation of Action was intrinsically fair. Century‘s evidence showed that during Action‘s operations the Bank‘s revenues increased. Century also introduced several other economic ratio studies to show that the Bank had benefited from Action‘s operations. This argument misses the main point. Assuming that one could attribute the Bank‘s increased profitability to Action‘s operations, the fact remains that Action competed with the Bank. Century, in effect, argues that Action can compete with the Bank and deprive the Bank‘s minority shareholders of the lost profits so long as the Bank benefits in some way. We cannot accept this argument. The Bank should not have to settle for a piece of the pie when it is entitled to all of it.
By making loans to past customers of the Bank and by transferring a Bank loan officer to Action, Century enabled Action to make loans that the Bank could have made.12 Any income Action derived from these loans would be lost to the Bank‘s minority shareholders as Action was a wholly-owned subsidiary of Century. We cannot say that the district court‘s finding—that Century failed to sustain its burden to show the entire transaction was intrinsically fair—is clearly contrary to the weight of the evidence heard below.13
THE AWARD OF DAMAGES IN AN AMOUNT EQUAL TO “ALL INCOME” FROM THE DIVERTED LOAN BUSINESS WAS NEITHER CLEARLY CONTRARY TO THE WEIGHT OF THE EVIDENCE NOR TO THE APPLICABLE PRINCIPLES OF EQUITY JURISPRUDENCE
The district court ordered Century and Action to furnish an accounting of loans made by it to former bank customers as well as to borrowers who knew Larry Johnson while he was a Bank employee. The amount adjudicated against Century was equal to “all income” from these loans. Century reported that while its total income from the loans was $339,405, it had incurred expenses in excess of that amount in order to generate these loans. The trial court declined to allow Century‘s expenses. It decreed a monetary award against Century and Action for the full amount of income from the diverted loans.
Century attacks this disposition on two grounds. First, it asserts that the money award represents the entire amount of both principal and interest received by Action, the principal having been derived from Action‘s separate capital. It argues that because the award bears no relationship to any profit made by Action, it constitutes unjust enrichment to the Bank. Second, Century asserts that its expenses in conducting the loan business should have been taken into consideration when the award was made. The overhead expenses for all of Action‘s loan business during the accounting period—February 1, 1980 to March 31, 1983—were in excess of the income from the diverted loan business. Furthermore, if the Bank (instead of Action) had used its capital in generating the loans, it would have incurred an additional interest expense of $151,562. We do not find merit in these arguments.
The monetary award was based upon the figures provided by Century and Action in their accounting rendered to the court. The term “income,” which has a well-recognized meaning in legal parlance, does not include a return of principal.14 The accounting made to the court does not indicate that the income figure included any items other than Action‘s total income from the diverted loan business. There is a presumption of correctness that attaches to the trial court‘s decision. Thus, its decree may not be reversed in the absence of legal error affirmatively demonstrated by the complaining party.15 Because the record before us fails to show that the $339,405 award does include principal payments on the subject loans, we cannot say that the minority shareholders were unjustly enriched by their forensic victory in the trial court. Century did not meet its burden to show error on this ground.
Assuming that the award includes gross16 rather than net income,17 the relief
dy in restitution rests on the ancient principles of disgorgement. Beneath the cloak of restitution lies the dagger that compels the conscious wrongdoer to “disgorge” his gains.22 Disgorgement is designed to deprive the wrongdoer of all gains flowing from the wrong rather than to compensate the victim of the fraud. In modern legal usage the term has frequently been extended to include a dimension of deterrence.23 Disgorgement is said to occur when a “defendant is made to ‘cough up’ what he got, neither more nor less.”24 From centuries back equity has compelled a disloyal fiduciary to “disgorge” his profits.25 He is held chargeable as a constructive trustee of the ill-gotten gains in his possession.26 A constructive trustee who consciously misappropriates the property of another is often refused allowance even of his actual expenses.27 Where a wrongdoer is shown to have been a conscious, deliberate misappropriator of another‘s commercial values, gross profits are recoverable through a restitutionary remedy.28
There is ample Oklahoma precedent for disallowing the cost of producing business wrongfully diverted from its rightful owners.29 Moreover, we note that when as
II
THE MANAGEMENT FEES PAID TO CENTURY ARE NOT “INTRINSICALLY FAIR”
The “intrinsic fairness” test is also applicable to the management fees paid by the Bank to Century for the services of Dean and Cochran. Although Century argues that Dean and Cochran did not receive personal gain from the fees paid to Century because their salaries were fixed, the focus here should be on Century‘s gain. Century received a benefit from the fees at the Bank‘s, and hence the minority shareholders‘, expense. Century, as majority stockholder, controlled the Bank‘s decision to employ Dean and Cochran. The situation becomes more suspect because these two men were on the Bank‘s Board of Directors when the decision was made. Under these circumstances, it was Century‘s burden to show the transaction was intrinsically fair. Century introduced evidence that these men performed needed services which benefited the Bank. The plaintiffs’ (minority shareholders‘) evidence was that the services performed by the two men were duplicative and unnecessary. Faced with this conflicting evidence, we are not free to alter here the district court‘s conclusion that Century had failed to meet its burden to establish the fairness of the transaction. Its finding is not clearly contrary to the weight of the evidence in the record.
III
ATTORNEY‘S FEES AND COSTS MAY BE RECOVERABLE IN A STOCKHOLDERS’ DERIVATIVE SUIT
Century‘s argument that the plaintiffs (minority shareholders) are not entitled to their costs and attorney‘s fees is totally without merit. Extant case law clearly pronounces that, where a stockholder is successful in a suit instituted in behalf of the corporation and that entity is thereby enriched, the plaintiff who brought the action in a representative capacity is entitled to recover reasonable costs and expenses that include counsel fees.31
The trial court‘s decree and its restitutionary award are affirmed.
DOOLIN, C.J., HARGRAVE, V.C.J., and HODGES, LAVENDER and SIMMS, JJ., concur.
KAUGER and SUMMERS, JJ., concur in part and dissent in part;
ALMA WILSON, J., dissents.
ALMA WILSON, Justice, dissenting:
A necessary element of the corporate opportunity rule is that the opportunity in question be one of practical advantage to the complaining corporation. Equity-Corp. v. Milton, 43 Del.Ch. 160, 221 A.2d 494 (1966) Thus, in advancing the determination of whether any particular appropriation of a business opportunity is fair to the corporation, the interest of the corporation in the opportunity (or the absence thereof) is relevant.
In the case of Gross v. Neuman, 40 A.D.2d 772, 337 N.Y.S.2d 623 (N.Y.App.Div.1972), the Court held that a corporate president had not deprived the corporation of an opportunity where the corporation had two hospital properties that it could not operate due to a public health statute. With the approval of the board of directors, the president entered into a twenty year lease arrangement for the properties. Inasmuch as the corporation, by law, was precluded from operation of the opportunity in question, the corporation was not deprived of the opportunity. It is similarly my opinion that inasmuch as the bank in this case, by law, was at the relevant time precluded from operation of the independent business opportunity in question, it was not deprived of that opportunity by Action. The bank had no expectancy/business interest in the opportunity involved until after the repeal of the law prohibiting branch banking. The furnishing by one corporation to another, having common directors, of information advantageous to the latter‘s business and which relates to matters in which the former has no business interest or expectancy, does not constitute diversion of its assets or business opportunities for which the directors are chargeable. Diedrick v. Helm, 217 Minn. 483, 14 N.W.2d 913 (1944). The opportunity did not embrace an area adaptable to the bank‘s business which it could legally pursue at that time and into which it might easily or logically expand.
Moreover, the proof proffered to support a conclusion that the bank necessarily would have realized any of the loan transactions of Action, but for the operation of Action, is untenable. The evidence actually shows the bank‘s business dealings with Action resulted in increased revenues for both majority and minority stockholders of the banking corporation.
Finally, the undue restraint of business judgment, for better or for worse, on the part of corporate officers and directors is contrary to fundamental concepts of free enterprise and independent innovation for the benefit of all. The law imposes business management of a corporation on its board of directors. A business corporation being profit oriented, the decisions of the directors involve risk evaluation, assumption or avoidance, and some of these decisions may eventually prove erroneous. In the case at hand the officers and directors were advised by legal counsel before-the-fact that the operation of Action as proposed would not violate banking law. In this respect, it is said, that,
“... courts recognize that after-the-fact litigation is a most imperfect device to evaluate corporate business decisions; the circumstances surrounding such decisions are not easily reconstructed in a courtroom years later. The rule [Business Judgment Rule] recognizes that shareholders to a very real degree voluntarily undertake the risk of bad business judgment; investors need not buy stock, for investment markets offer an array of opportunities less vulnerable to mistakes in judgment by corporate officers. In the exercise of what is genuinely a free choice, the quality of a firm‘s management is often decisive and information is available from professional advisors. For these reasons corporate decisions by directors enjoy the presumption of sound business judgment.” 18B Am.Jur.2d Corporations § 1705.
Courts traditionally have been reluctant to impose personal or vicarious liability for corporate business decisions upon those charged with the weight of those decisions. Doctrinally, this principle has been labeled
I recede from this Court‘s abrogation of the Business Judgment Rule.