Debaun v. First Western Bank and Trust Co.
Court of Appeals of
46
Cal.App.3d 686, 120 Cal.Rptr.
354.
Facts: Johnson started a company
and gave minority stakes in the company to two employees. He died and left his controlling shares in
the company to the defendant bank to be administered in trust. A few years later, the bank decided that it
should sell the shares and invest the trust assets in something else, so it
started looking for a buyer without consulting the minority shareholders. They found a buyer, Mattison,
who looked a little sketchy. They didn’t
check him out very carefully and sold the controlling shares to him. He proceeded to more
or less loot the corporation of all its assets and thus take all the value from
the minority shares. The minority
shareholders sued the bank for damages, both as shareholders and in a shareholder
derivative action. The shareholder
derivative action was allowed to proceed and the corporation won. The bank appealed.
Issue: Did the bank, as the majority
shareholder, have a duty to the corporation to basically not sell the company
to someone who the bank should have known was likely to ruin it?
Rule: The majority shareholder has
a duty of “reasonable investigation and due care” to the corporation.
Analysis: Basically, the court says
that if the bank had just looked past the assurances of Mattison’s
attorney and looked at the public record, they would have known that he was not
to be trusted and that they shouldn’t sell the company to him.
Conclusion: The judgment of the district
court is affirmed, and the case is remanded to make the appellants pay the
respondent’s fees related to the appeal.