249 F.2d 482 (D.C. Cir. 1957)
In 1948 Charles W. Easterday, then age 70 and engaged in the roofing and sheet metal contracting business for 45 years, negotiated with Duckworth, then age 37 and employed by a roofing contractor, to form a new corporation.1 The April 1948 contract provided that the new corporation would issue 1500 shares of $10 par value stock, with Easterday receiving 51 percent and Duckworth 49 percent.2 Duckworth was to pay cash for his shares while Easterday was to transfer business assets. The corporation was to issue notes to Easterday for additional assets.3
The contract also required execution of a trust agreement placing each party's stock in trust so that on the death of either (or sooner by mutual consent) the stock would be sold to the survivor at the par value of $10 per share unless modified by subsequent agreement.4
Shortly after the basic contract, a formal survivor-purchase agreement was executed with the Hamilton National Bank as trustee.5 Article II required the surviving stockholder to purchase the deceased stockholder's shares deposited with the trustee.6 Article III fixed the price at $10 per share while providing that during January of any year the parties could increase or decrease the price by a written instrument signed by both and filed with the trustee, the last such filing before death being final and conclusive.7
It is undisputed that the $10 per share price reflected the real net worth of the company when the enterprise began in 1948.8 As of December 31, 1955 the value of the stock was about $80 per share.9 No evidence exists that either party ever proposed a change in price in accordance with the trust agreement.10 Easterday died in September 1956.11 Duckworth then tendered to the trustee his check for Easterday's stock priced at $10 per share.12
Appellant, administratrix of Easterday's estate, sued in the District Court for cancellation of the stock purchase agreement.13 Appellant contended that unless Duckworth agreed to pay the true value of the stock as of decedent's death the agreement should be cancelled.14 Both parties moved for summary judgment.15 The District Court granted summary judgment in favor of Duckworth.16 The case reached the Court of Appeals on appeal from that order.17
Duckworth's own affidavit states that it was never his intention at any time to consent to any change in the price provision and that no request or suggestion for change was ever made by Easterday.18 The record shows that Duckworth, who was trained in both business administration and the law, personally prepared the preliminary agreement that was incorporated into the basic contract.19 Easterday had no independent legal advice.20 The trustee bank participated only to incorporate the parties' prior agreement and define the bank's duties as trustee without advising on price or terms.21
Whether Duckworth's undisclosed intention never to consent to any change in the stock purchase price provides a basis for cancelling the survivor-purchase agreement?22
Stockholders in a close corporation occupy a position similar to that of joint adventurers and partners and bear a fiduciary duty to deal fairly, honestly, and openly with their fellow stockholders and to make disclosure of all essential information.23 A secret intent on the part of either party to refuse to negotiate fairly and in good faith becomes of vital importance.24 It constitutes a flagrant breach of a fiduciary duty warranting cancellation of the agreement by a court of equity.25
Yes. Duckworth's affidavit establishes his fixed intent never to consent to any price change while the agreement required good faith bargaining each January to adjust the $10 per share price to reflect net worth.26 Easterday surrendered his majority powers to dissolve or dispose of assets without Duckworth's consent and relied on Duckworth to draft the price adjustment mechanism without independent legal advice.27 Duckworth, trained in law and business administration, kept this intent secret despite the fiduciary obligation arising from the intimate two-man corporation structure.28
This breach alone justifies equitable cancellation of the survivor-purchase agreement.29
Duckworth's undisclosed intention provides a basis for cancelling the survivor-purchase agreement.30
Whether the District Court erred in granting summary judgment to Duckworth?31
Summary judgment may be granted only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.32 A breach of fiduciary duty arising from a secret intent not to perform an implied promise to bargain in good faith raises a genuine issue that precludes summary judgment for the party charged with the breach.33
Yes. The established facts demonstrate Duckworth's secret intent never to alter the price and his failure to disclose it while Easterday relied on the adjustment procedure and surrendered normal majority rights.34 These facts establish a breach of fiduciary duty that would entitle the estate to cancellation, so Duckworth was not entitled to judgment as a matter of law.35 The district court therefore erred in granting summary judgment in his favor.36
The District Court erred in granting summary judgment to Duckworth.37
Whether the case should be remanded to the District Court for further proceedings rather than directing entry of summary judgment for the appellant?38
When an appellate court reverses a summary judgment it should not direct entry of summary judgment for the appellant on a controlling issue as to which the opposite party had no opportunity to present a defense before the trial court.39 This rule applies particularly where the district court did not consider the claim when passing upon the motions.40
Yes. Although the record would support summary judgment for the appellant on the fiduciary breach, the motions for summary judgment did not address that claim and the district court never considered it.41 Duckworth must be given an opportunity to raise any additional facts bearing on good faith and to attempt to establish the entire fairness of the transaction.42 Remand for further proceedings is therefore required rather than directing entry of summary judgment for the appellant.43
The case should be remanded to the District Court for further proceedings rather than directing entry of summary judgment for the appellant.44