Unpublished Disposition, 898 F.2d 157 (9th Cir. 1988)

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U.S. Court of Appeals for the Ninth Circuit - 898 F.2d 157 (9th Cir. 1988)

WILSON COUNTY LAND CO., # 1, a Texas limited partnership, byTEXAS RANCH PARTNERS, INC., a Texas corporation, its GeneralPartner, and; Wilson County Land Co., # 2, a Texas limitedpartnership, by Texas Ranch Partners, Inc., a Texascorporation, its General Partner, Plaintiffs-Appellants,v.Richard C. CHAPMAN; William J. Dale; Dale & Lloyd, aCalifornia corporation, Defendants-Appellees.

No. 88-6680.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 2, 1989.Decided March 12, 1990.

Before HUG, CANBY and BOOCHEVER, Circuit Judges.


MEMORANDUM* 

The Wilson County Land Companies # 1 and # 2 (Wilson) appeal from the district court's entry of summary judgment for defendant William Dale. The district judge held that no reasonable jury could find that Dale owed the Wilson partnerships a fiduciary duty. We affirm.

FACTS

In 1974, Great Plains Western Corporation (GPW) purchased a 2,035 acre ranch in Wilson County, Texas. In 1976, GPW sold the ranch to Triple C Brangus Ranch, Inc. (Triple C), a wholly owned subsidiary. The contract of sale was not recorded. In March of 1977, Triple C organized a limited partnership, the Wilson County Land Co. # 1, to acquire the ranch, and offered $2 million in limited partnership interests. In June of the same year Triple C organized the Wilson County Land Co. # 2, which offered investors the balance of the unsold limited partnership units. Triple C then sold the ranch to the two limited partnerships, duly recording the installment land contract.

Richard Chapman was president of both GPW and Triple C. Dale, an attorney, was vice-president, secretary, and general counsel of GPW and its second largest shareholder with twelve percent of the stock, and secretary and general counsel of Triple C. As general counsel to GPW, Dale drafted the offering memoranda for the Wilson limited partnerships. He also included his biography, as well as those of the other officers, in the memoranda. The offering memoranda provided that the "General Partner [Triple C] is accountable to a limited partnership as a fiduciary and, consequently, must exercise good faith and integrity in handling partnership affairs." It also provided that the original contract of sale from GPW to Triple C, and the contract of the sale from Triple C to the limited partnership, were to be recorded to protect the partnerships' interests in the ranch. Dale resigned in March of 1978, but continued to perform legal work for GPW.

GPW and Triple C merged just before GPW filed for bankruptcy in October 1982. GPW was appointed debtor in possession. In January of 1983, Wilson filed an action in the bankruptcy court against GPW as debtor in possession to determine the nature and extent of the security interest in the ranch, to enforce a constructive trust, to quiet title, and for declaratory and injunctive relief. On December 1, 1983, GPW filed a motion for summary judgment under 11 U.S.C. § 544(a) (3), based on the failure to record the first land contract from GPW to Triple C. The bankruptcy court granted the motion on May 7, 1984. The limited partnerships appealed the decision to the district court, which rejected the appeal. Pending appeal to the this court, GPW sold the ranch, and settled with the Wilson partnerships in March 1985.

PROCEDURE BELOW

In November 1985, Wilson filed this action in the district court. Chapman defaulted. In a second amended complaint, Wilson alleged that Dale owed a fiduciary duty to the members of the limited partnerships, and breached that duty by his failure to record GPW's original sale of the ranch to Triple C. On October 14, 1988, the district court granted summary judgment to Dale, holding that no reasonable jury could find that Dale was a fiduciary or had a fiduciary relationship with the partnerships.

DISCUSSION

We review the district court's grant of summary judgment de novo. T.W. Elec. Serv. v. Pacific Elec. Contractor's Ass'n, 809 F.2d 626, 629-30 (9th Cir. 1987).

Did Dale have a fiduciary duty to the limited partners?

Wilson's second amended complaint alleged that Dale, "as promoter [ ], and as sponsor [ ], of the [Wilson] partnership offerings, and as [a] controlling person [ ] of GPW, Triple C, and the partnerships" owed a fiduciary duty to the limited partnerships and to the limited partners. The complaint further alleged that Dale breached his fiduciary duty to the limited partnerships by his failure to record the land sale from GPW to Triple C.

"Claims involving 'internal affairs' of corporations, such as the breach of fiduciary duties, are subject to the laws of the state of incorporation." Davis & Cox v. Summa Corp., 751 F.2d 1507, 1527 (9th Cir. 1985). GPW was a California corporation. In California, an officer such as Dale owes a fiduciary duty to the corporation and to its shareholders under a " 'comprehensive rule of "inherent fairness" ' which 'applies alike to officers, directors, and controlling shareholders in the exercise of powers that are theirs by virtue of their position....' " Kirschner Bros. Oil v. Natomas Co., 185 Cal. App. 3d 784, 795, 229 Cal. Rptr. 899, 906 (1986) (quoting Jones v. H.F. Ahmanson & Co, 1 Cal. 3d 93, 110, 81 Cal. Rptr. 592, 600, 460 P.2d 464, 472 (1969)). Whether the duty exists is a question of law. Kirschner, 185 Cal. App. 3d at 790, 229 Cal. Rptr. at 902.

A director's fiduciary duty to a corporation and to its shareholders does not extend to limited partners whose general partner is a wholly-owned subsidiary of the corporation. See Frances T. v. Village Green Owners Ass'n, 42 Cal. 3d 490, 506 & n. 12, 229 Cal. Rptr. 456, 464 & n. 12, 723 P.2d 573, 581 & n. 12 (1986) (directors not personally liable to third persons for breach of fiduciary duty owed to corporation alone). The district court did not err in determining that no reasonable jury could find a fiduciary relationship between Dale as an officer of GPW and Wilson.

The question remains whether Dale's other corporate office, secretary and general counsel of Triple C, created a fiduciary relationship to Wilson. Triple C was a Texas corporation, and the Wilson partnerships were formed under Texas limited partnership law. We therefore apply the law of Texas, the state of incorporation of the general partner and the state where the limited partnerships were created. Under Texas law, "the fiduciary obligations of corporate officers are often identical to those of directors ... [t]he directors' [fiduciary] duties of loyalty and care run to the corporation, not to individual shareholders or even to a majority of the shareholders. Accordingly, a cause of action for breach of directors' fiduciary duties belongs to the corporation and cannot be brought by a stockholder in his own right...." Gearhart Indus. v. Smith Int'l, Inc., 741 F.2d 707, 719, 721 (5th Cir. 1984) (citations omitted). The fiduciary obligation imposed on Dale by his status as a corporate officer of Triple C was thus to the corporation only.

Wilson urges, however, that Triple C, as general partner of the limited partnerships, had a fiduciary duty to Wilson, and that Dale also had such a duty as Triple C's secretary and general counsel. Under Texas law a general partner has a fiduciary duty to the limited partnership similar to the duty owed by a trustee to a trust beneficiary. Moncrief v. United States, 730 F.2d 276, 285 (5th Cir. 1984). Wilson had already recovered from the general partner in 1985 when GPW (after merging with Triple C) settled with the limited partnerships. Wilson now contends that Dale as an officer had an individual fiduciary duty to the limited partnerships, under which the limited partnerships may recover again.

We note that when a corporate officer breaches his fiduciary duty to the corporation by diverting a corporate opportunity to himself, he holds the opportunity as a constructive trustee for the corporation, and creditors or nonconsenting shareholders may challenge the breach. Safety Int'l, Inc. v. Dyer, 775 F.2d 660, 662 (5th Cir. 1985); see Middlesex Ins. Co. v. Mann, 124 Cal. App. 3d 558, 568, 177 Cal. Rptr. 495, 501 (1981) ("a managing director of a corporate trustee is liable to the trust beneficiary if, with his knowledge or reason to know, the trust property is wrongfully utilized for corporate purposes (Knoblock v. Waale-Camplan Co. (1956) 141 Cal. App. 2d 870, 872, 874 [297 P.2d 765]"). Wilson's second amended complaint did not allege, however, that Dale usurped any corporate opportunity or that he was in any other way an interested director.

We hold that Dale's status as an officer of GPW and of Triple C did not create a fiduciary duty under which he is individually liable to Wilson.

B. Dale as promoter or sponsor of the limited partnerships

Wilson's complaint also alleged that Dale owed a fiduciary duty as a promoter or sponsor of the limited partnerships. The promoter of a corporation owes a fiduciary duty to the corporation. Public Inv. Ltd. v. Bandeirante Corp., 740 F.2d 1222, 1234 n. 72 (D.C. Cir. 1984). Similarly, general and managing partners occupy a position of trust toward those they seek to enlist as limited partners. See Bartels v. Algonquin Properties, 471 F. Supp. 1132, 1147 (D. Vt. 1979). Wilson claims that Dale's involvement in drafting the offering memoranda and his inclusion of his biography made him a promoter, and that the trust reposed in Dale by the prospective limited partners created a fiduciary duty.

It was the corporation Triple C, however, and not Dale as an individual, who " [took] initiative in founding and organizing" the Wilson partnerships. See 17 C.F.R. Secs. 230.251, 230.405 (1976) (defining "promoter" under securities law). Dale's activities in drafting the offering memoranda were entirely appropriate to his position as secretary and legal counsel to Triple C. The memoranda included biographies of all Triple C's officers; Dale's like the others', was a brief paragraph. The biographies appear to have been more of a disclosure than an inducement to invest. Depositions of the secretary and president of the limited partnerships bringing this action indicated that neither had ever met or spoken with Dale prior to investing and Wilson presented no evidence that Dale himself made the kind of personal representation to the limited partners that would justify finding that he was a promoter.

CONCLUSION

Because Dale's fiduciary duty to the corporations he served did not extend to Wilson, we AFFIRM the district court's order of summary judgment.

 *

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3

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