Rankin v. Frebank Co.

Majority - Stephens, J.

1. No, a controlling shareholder, unaware of minority shareholders due to a concealment scheme, does not breach their fiduciary duty by diverting corporate functions to another entity they control, if they act in good faith and believe such actions benefit all known shareholders. The court reasoned that a controlling shareholder's duty to the corporation is tied to the interests of its shareholders, not an 'empty shell,' and 'good faith' is the controlling test. McCoy had no financial interest in excluding Rankin and Myers from Bancoy and believed he was acting in the best interests of the company with Bankey as the only other shareholder. Furthermore, the plaintiffs were estopped from claiming damages for McCoy's Bancoy dividends and retained earnings because their complicity in concealing their shareholder status led McCoy to act as if he and Bankey were the sole shareholders. McCoy would have received the same share of dividends and retained earnings regardless. 2. Yes, a corporate director may purchase an outstanding corporate obligation at a discount and enforce it at face value, even when the corporation is experiencing financial difficulties, if the corporation itself had no opportunity to purchase the obligation and the transaction is fair. The court emphasized that modern California law does not strictly equate directors' responsibilities with those of trustees. Frebank, being 120 days delinquent on accounts payable, could not afford to purchase the note, and doing so would prejudice other creditors. McCoy offered the note to Tillery at a discount to secure Tillery's continued services, demonstrating a legitimate business purpose rather than self-dealing against corporate interests. The transaction was deemed fair, and there was no evidence Tillery acted prejudicially to other creditors or deprived the corporation of his sound judgment. 3. No, plaintiffs in a shareholder's derivative action or an involuntary corporate dissolution proceeding do not have a right to a jury trial under California law. The court held that California's right to a jury trial, under Article I, Section 7 of the California Constitution, preserves the right as it existed at common law in 1850. Shareholder derivative actions and involuntary dissolution proceedings were not triable by jury at common law and are either equitable in nature or special statutory proceedings. The court explicitly declined to follow federal precedent, like Ross v. Bernhard, noting the Seventh Amendment does not apply to state proceedings. 4. Yes, a court in a shareholder's derivative action can equitably distribute damages directly to specific minority shareholders rather than solely to the corporation, when doing so ensures fairness among shareholders and protects creditors. The court found it inequitable for Bankey's retained earnings and dividends from Bancoy to be distributed to all shareholders (including McCoy, who had already retained his proportional share), as this would dilute the recovery for Rankin and Myers and unjustly enrich McCoy. Therefore, Bankey’s salary from Bancoy should be returned to Frebank and distributed among all shareholders, but Bankey's retained earnings and dividends from Bancoy should be distributed equally among Bankey, Rankin, and Myers.