11 F. Cas. 976 | U.S. Circuit Court for the District of Southern New York | 1871
It is to be noted, that the demurrers are to the whole bill, and the causes of demurrer set forth are set forth as causes of demurrer to the whole bill, and there is no demurrer to any separate part of the bill. The first cause of demurrer set forth is a general want of equity in the bill, and an absence of title therein to any of the relief prayed for. The second cause of demurrer is the want of parties, the absent and necessary parties being specified. The third cause of demurrer is the waiver of an answer on oath.
Under the first cause of demurrer, the defendants advance the propositions: (1.) That the bill states no cause of action, even in favor of the plaintiffs other than Burt (2.) That Burt is improperly a plaintiff, because he is not a stockholder in the company. (3.) That if, on that ground, the bill cannot be sustained on behalf of Burt, it cannot be sustained on behalf of any of the plaintiffs. The principal discussion, on the hearing, was on the first of these three propositions.
The argument on the part of the defendants, succinctly stated, is, that the charges in the bill amount to allegations that Gould, Fisk and Lane, holding such offices of trust and confidence under the company, misused, in breach of their trust, and for their own profit, powers actually confided to them by the corporation, and usurped powers not granted to them by the corporation, and, in breach of their duty, used such powers for their own profit; that the corporation alone can come into court, as plaintiff, and challenge an act that is within the limit of the corporate powers of the corporation; that a stockholder in a corporation can come into court, as plaintiff, to restrain the corporation from doing an illegal act which it is about to do, joining as parties defendant the corporation and directors whom he accuses of a breach of trust; that, where a corporation, or its governing body, has actually do.ne illegal acts, with injurious consequences, a stockholder, before he can come into court and assert the title of the corporation, must show that he has exhausted all means to set the corporate body in motion; that, in this case, there is no allegation in the bill showing any corporate act, either within or without the powers of the corporation, but only allegations of misuse of corporate powers by Gould, Fisk and Lane, and usurpation by them of powers beyond the corporate powers; that it is within the power of the corporation to call them to account for such misuse and usurpation; that the bill Is brought to enforce such corporate right; that it must fail, unless the plaintiffs have laid a sufficient legal- foundation for taking away such power from the board of directors of the corporation, and vesting it in the plaintiffs; that the bill must show that the directors of the corporation have committed a breach of trust, by not pursuing the remedy which the plaintiffs ask for; that, as the bill does not show any application to the board of directors -to bring a suit for the relief sought by this suit, and a refusal or neglect by such board thereafter to bring such suit, it must show a sufficient excuse for not making such application, by averments from which it can be legally con eluded that, if such board had been so- applied to, it would have been guilty of the breach of trust of not bringing such suit; and that, within these principles, the foundation is not laid for any title in the plaintiffs to bring this suit
The doctrines of equity jurisprudence involved in these propositions on the part of the defendants are not controverted by the plaintiffs. The difference between the parties arises in the application of such doctrines to this case.
A text-book of authority on the subject of corporations lays down the law thus, on the subject under consideration: “The general rule is. that a suit brought for the purpose of compelling the ministerial officers of a private corporation to account for breach of official duty, or misapplication of corporate funds, should be brought in the name of the corporation, and cannot be brought in the name of the stockholders, or some of them. * * * And, generally, where there has been a waste or misapplication of the corporate funds, by the officers or agents of the company, a suit in equity may be brought by, and in the name of, the corporation, to compel them to account for such waste or misapplication, directors being regarded as trustees of the stockholders, and subject to the obligations and disabilities incidental to that relation. But, as a court of equity never permits a wrong to go unredressed merely for the sake of form, if it appear that the directors of a corporation refuse in such case to prosecute, by collusion with those who had made themselves answerable by their negligence or fraud, or if the corporation is still under the control of those who must be-the defendants in the suit, the stockholders, who are the real parties in interest, will be permitted to file a bill in their own names, making the corporation a party defendant” Ang. & A. Corp. § 312. As authorities for these views, the authors cite, among other cases, those of Hersey v. Veazie, 24 Me. 12; Hodges v. New England Screw Co., 1 R. I. 312; and Robinson v. Smith, 3 Paige, 222, 233.
The leading case on the subject in the courts of this state is that of Robinson v. Smith, in 1832, (above cited). In that case, Chancellor Walworth declares it to be the
In the case of Cunningham v. Pell (1836) 5 Paige, 607, the liability of the directors of a corporation to the parties injured by a fraudulent breach of trust was again asserted, and it was held not to be necessary to make all the fraudulent directors parties to a bill filed for the purpose of obtaining satisfaction for a fraudulent breach of trust.
In the case of Hodges v. New England Screw Co. (1850) 1 R. I. 312, a stockholder in a corporation brought a bill in equity against the corporation and its directors, charging various acts of mismanagement and fraud and a violation of the charter of the corporation. The defendants took the ground that the wrong, if any, was a wrong to the corporation, and that the suit should have been brought by the corporation. In reply to this it was contended for the plaintiff, that the application of the funds of a corporation, by its directors, to purposes not authorized by its charter, was a breach of trust cognizable by a court of equity; and that, where the corporation was in- the control of the directors who had committed the breach of trust, a stockholder might bring his bill against them and make the corporation a party. The court held, that the directors of the corporation were liable in equity, as trustees, for a fraudulent breach of trust; that the primary party to sue for such fraudulent breach of trust was the corporation, as being the party injured, but, if the corporation refused to sue, or was under the control of the guilty directors, the stockholders might sue; that, in the case then before the court, the defendants who were charged with the fraudulent breach of trust were still the directors of the corporation, and still controlled its action; that, therefore, the bill, so far as it sought a remedy against directors, came within the settled jurisdiction of the court; and that the plaintiff was, under the circumstances, the proper party to sue.
In the case of March v. Eastern R. Co. (1860) 40 N. H. 548, five stockholders in tire Eastern Bailroad in New Hampshire, a New Hampshire corporation, brought a bill in equity, in behalf of themselves and all other stockholders in the corporation who should come in and join in the suit, against the corporation, and its five directors, and a Massachusetts railroad corporation, setting forth a fraudulent combination between such directors and the officers óf the Massachusetts corporation, to defraud the plaintiffs, as stockholders in the New Hampshire corporation. The court sustained the bill. It says: “It is now no longer doubted, either in England or the United States, that courts of equity in both have a jurisdiction over corporations, at the instance of one or more of their members, to apply preventive remedies, by injunction, to restrain those who administer them from doing acts which would amount to a violation of charters, or to prevent any misapplication of their capital or profits which might result in lessening the dividends of stockholders, or the value of their shares, as either may be protected by the franchises of a corporation, if the acts intended to be done create what is in law denominated a breach of trust. And the jurisdiction extends to inquire into and to enjoin, as the case may require that to be done, any proceedings by individuals, in whatever character they may profess to act, if the subject of complaint is an implied violation of a corporate franchise, or the denial of a right growing out of it, for which there is not ail adequate remedy at law'.” For this principle the court cites, as authority, the case of Dodge v. Woolsey, 18 How. [59 U. S.] 341. It also refers, with approval, to the case of Robinson v. Smith (before cited), as establishing the principles before referred to as laid down in that case.
In the case of Peabody v. Flint (1863) 6 Allen, 52, two stockholders in the Lowell and Salem Bailroad Company, for themselves and in behalf of the other stockholders, brought a bill in. equity against certain directors and agents of said company, and of the Lowell and Lawrence Bailroad Company, and others, charging various acts of conspiracy and fraud, by which the interests of the stock
Several cases were cited and relied on by the defendants in support of the demurrers in this case, especially the two English cases of Foss v. Harbottle (1843) 2 Hare, 461, and Mozley v. Alston (1847) 1 Phill. 790, the first before Sir James Wigram, and the second before Lord Cottenham. In regard to those cases, it is apparent, from the opinion of the court in the case of Gray v. Lewis (1869) L. R. 8 Eq. 526, 541, that those cases are regarded by the court of chancery in England only as holding, that a shareholder cannot maintain a suit on behalf of himself and the other shareholders, where the acts complained of are capable of being released or confirmed by the corporation, and that, in such a case, the corporation itself is the only proper plaintiff; but that those cases are not regarded as holding, and that it is not the law in the court of chancery in England, at this day, that a shareholder cannot maintain a suit on behalf of himself and the other shareholders where the acts complained of are ultra vires of the corporation. The case of Gray v. Lewis also holds, that where the ground of complaint is that the powers of the corporation have been exceeded, a bill may properly be filed by a shareholder to assert the rights of himself and his co-share^ holders against the illegal acts of the corporation.
Such, also, is the principle established by the. decision of the present lord chancellor of England, when vice-chancellor, Wood, in the case of Atwool v. Merryweather (1868) L. R. 5 Eq. 464, note.
The case of Hoole v. Great Western Ry. Co. (1867) 3 Ch. App. 262, was a case before the same vice-chancellor. A shareholder- in a corporation, on behalf of himself and all his co-shareholders who were not defendants, filed a bill in equity against the corporation, its directors and its secretary, alleging that the corporation had acted ultra vires in issuing certain shares, and was about further to act ultra vires in issuing certain other shares, and praying for a declaration that the corporation was not entitled to issue such shares, and that those which had been issued be cancelled, and that the corporation be enjoined from paying dividends on those which had been issued, and that the corporation and its directors be enjoined' from issuing any more of such shares. The corporation demurred to the bill for want of equity, and the vice-chancellor overruled the demurrer. He also enjoined the corporation from issuing further shares, and gave liberty to apply for an injunction, in case a dividend should
The cases of Foss v. Harbottle and Mozley v. Alston were cited and relied on by the defendants in the case of Gregory v. Patchett (1864) 33 Beav. 595, in which case the master of the rolls, Sir John Romilly, says, that he has examined the various cases on the subject, and the result of them is, that, in matters strictly relating to the internal management of a company, even though the court should come to the conclusion that the course adopted is not warranted by the terms-of the charter, the court will not interfere, even though the minority should have summoned a meeting of all the shareholders, and the majority should have persisted in the course complained of, (the general body of the shareholders, at meetings duly convened for the purpose, being the ultimate governing body); but that, if the measures adopted are plainly beyond the powers of the company, and are inconsistent with the objects for ■which the company was constituted, the court will, at the instance of the minority, interpose to prevent the performance of the act complained of, and it will do so whether an appeal has or has not been made by the minority to the shareholders generally.
The following cases in courts in the United States were cited and relied on by the defendants: Hersey v. Veazie, 24 Me. 9; Dodge v. Woolsey, 18 How. [59 U. S.] 331; Allen v. Curtis, 26 Conn. 456; Bronson v. La Crosse R. Co., 2 Wall. [69 U. S.] 283; Memphis City v. Dean, 8 Wall. [75 U. S.] 64; and Samuel v. Holladay [Case No. 12,288].
The case of Hersey v. Veazie (1844) was-this: Two stockholders in a corporation filed a bill in equity against one Veazie, the collector of tolls, treasurer and agent of the corporation, charging him with having abstracted the funds of the corporation, and with-having fraudulently sold and received the pay for the franchise of the corporation, and praying that he might account for and pay to the plaintiffs their proportion of the funds-of the corporation in his hands. The bill was demurred to. The court, in its opinion, allowing the demurrer, adverts to the fact that there was no allegation in the bill that the corporation had refused to call the defendant to account, or had acted collusively with him, except as represented by him as-agent, or that a corporate meeting could not be obtained, it being the law of the state-that a minority of the shareholders could cause a meeting of the corporation to be called; and that, therefore, it did not appear-by the bill that the corporation had not the power and the disposition to settle with the defendant according to its own pleasure. The fact was also noted, that the corporation was not a defendant, and that the wrongs were primarily committed against the corporation-
In the case of Dodge v. Woolsey (1855) the court uses the language hereinbefore quoted from the opinion of the court in March v. Eastern R. Co. Woolsey, a shareholder in a corporation, brought a bill in equity against the corporation and its directors and Dodge, a state tax collector, to enjoin the collection of a state tax from the corporation, alleging that the tax was illegal, and that he had requested the directors of the corporation to take measures by suit or otherwise to prevent the collection of the tax, and that they had. ref used to do so. He obtained from the circuit court the relief he asked. The case was taken to the supreme court by appeal. That court lays down the principles before referred to, in regard to the jurisdiction of a court of equity over a corporation, at the instance of a shareholder, to restrain a violation of its charter or any other act amounting to a breach of trust. It also refers with approbation, to the view that it is a breach of trust towards a shareholder in a joint-stock corporation, to divert its funds, without his consent, from the purposes prescribed by its charter, though the' misapplication be sanctioned by the votes of a majority, and that, therefore, he may file a bill in equity, in his own behalf, against the corporation, to restrain such diversion or misapplication; and to the view, that a corporation has no power to apply its profits, any more than its capital, to objects not contemplated by its charter, and that, therefore, a shareholder may maintain a bill in equity against the directors, and compel the corporation to refund any of the profits thus improperly applied. These views it cites, from Ang. & A. Corp. §§ 391, 392. It also quotes the following remarks from the same work (sections 391, 393), as stating properly the result of the eases: “That, in cases where the legal remedy against a corporation is inadequate, a court of equity will interfere, is well settled; and there are cases in which a bill in equity will lie against a corporation by one of its members.” “Although the result of the authorities clearly is, that, in a corporation acting within the scope of, and in obedience to, the provisions of its constitution, the will of the majority, duly expressed at a legally constituted meeting, must govern, yet, beyond the limits of the act of incorporation, the will- of the majority cannot make an -act valid; and the powers of a court of equity may be put in motion at the instance of a single shareholder, if he can show that the corporation are employing their Statutory powers for the accomplishment of purposes not within the scope of their institution. Yet it is to be observed, that there is an important distinction between this class of cases and those in which there is no breach of trust, but only error and misapprehension, or simple negligence on the part of the directors." Holding, then, that the refusal of the directors of the corporation, on request, to take measures to test the question of the legality of the tax referred to was a breach of trust, it also held, that such breach of trust amounted to an illegal application of the profits due to the stockholders of the corporation, by suffering them to be applied to pay the tax, into which a court of -equity would inquire, to prevent its being made, and that the directors were properly made parties to the bill, because they had committed such breach of trust This decision is very far from sustaining the principle for which it is invoked by the defendants, namely, that no suit can be brought -by a stockholder unless he avers and proves that -he has applied to the corporation to bring the suit itself, and it has refused.
The case of Allen v. Curtis, in 1857, wag a suit at law and not one in equity, brought by a stockholder in a corporation against its directors, to recover damages for the destruction of the value of his stock by the fraudulent acts of the defendants as such directors. The declaration was demurred to and the demurrer was sustained, -the objection being taken, in support of the demurrer, that the remedy -was in equity and not at law, and that the corporation must be a party. The court held that such an action at law, by a stockholder, would not lie, adding, that -if, for any cause, the corporation was unable to bring suit, or if, through fraud and collusion, the directors refused or neglected to bring suit in the corporate name, and would not seek redress, a ground would be laid for invoking the interposition of a court of equity.
The case of Bronson v. La Crosse R. Co. (1863) holds, that where the directors of a corporation, for the fraudulent purpose of sacrificing the interests of the stockholders, refuse to appear and defend a suit in equity against the corporation, the court, in its discretion, will permit a stockholder to become a party defendant, for the purpose of protecting his own interests against unfounded or illegal claims against the corporation, and will-also permit him to appear on behalf of other stockholders, who may desire to join him in the defence. The cou.rt, in its opinion, says, that the remedy is an extreme one, and should be admitted by the court with hesitation and caution, but that it grows out of the necessity of the ease, and may be the only remedy to prevent a flagrant wrong, but that
In the case of Memphis City v. Dean (1868) the bill filed by the stockholder in the corporation averred that the corporation declined to sue. The court held, that the corporation had brought a suit in the state court, which was still pending, presenting the only question of which the plaintiff could compel the presentation, and that, therefore, the stockholder could not maintain in his own name, in another court, a suit presenting the same question.
In the case of Samuel v. Holladay (1868), before Mr. Justice Miller, of the supreme court of the United States, in the circuit court for the district of Kansas, there was, as the court says, in its opinion, no attempt to transcend the powers of the corporation, and no breach of trust on the part of the directors, but merely a neglect, on request, to bring a suit which one of the stockholders believed ought to be brought. The learned judge admits that the doctrine of the case of Dodge v. Woolsey recognizes the jurisdiction, where other parties are concerned, as extending to preventive remedies, to be used for the protection of rights endangered by the neglect of the directors and the threatened aggressions of others; and the doctrine he combats is, that an individual stockholder in a corporation can decide for the corporation when suits shall be brought to assert supposed rights, and, assuming the place of the corporation, “use the courts to enforce his private views in opposition to the sense of the directors, and probably of all the other shareholders.” The' case he was considering was a totally different one from that presented by the bill in this case. See the same case, reported as Samuel v. Holladay [Case No. 12,2.8].
In the bill before us there are many acts set forth which are ultra vires. On the allegations in the bill, it would appear that all issues of stock by the company, other than such as were specially authorized or approved by the acts of April 4th, 1860, April 2d, 1861, March 28th, 1862, May 4th, 1864 [supra], and April 21st, 1868 [1 Laws (N. Y.) p. 674], were unauthorized and illegal, and that no authority for the issuing of any stock by the company can be derived from the tenth subdivision of the twenty-eighth section of the general railroad act of April 2d, i860 [Laws Í850, p. 225], Besides the issues of stock not covered by the acts of 1860, 1861, 1862, 1864 and 1868, there are in the bill many acts charged in respect to the use and application of the corporate funds of the corporation, which were ultra vires of the corporation, and breaches of trust on the part of Gould, Fisk and Lane, who constituted a majority of the executive committee, to which committee, according to the bill, the administration of the affairs and funds of the company appears to have been wholly given up by the board of directors. The bill, among other things, prays for preventive relief, by injunction, to restrain the corporation from issuing any new certificates of stock, except on the surrender and cancellation of certificates for existing valid stock, on a regular transfer thereof, and to restrain Gould, Fisk and Lane, who have committed such breaches of trust, from exercising any further powers as directors, executive officers or executive committee of the company, and from interfering with or disposing of its property, funds or affairs.
■ Now, so far as the bill sets out acts ultra vires, in issuing stock, and breaches of trust, which are frauds on the stockholders, such acts and breaches of trust are beyond the power of the corporation or its directors to-affirm, or sanction, or make good; and, in such case, the authorities agree, that the reason of the rule for an application to the corporation, or its board of directors, to-bring the suit, does not exist Such reason is, that, while the stockholder is prosecuting his suit, the corporation, through its board of directors, may affirm and make good the acts complained of. But the rule ceases when the reason ceases. The bill is, therefore, clearly maintainable, in respect to the acts ultra vires which it sets forth, and the preventive relief it seeks, founded thereon, without reference to anything else contained in it.
It is a rule of equity pleading (Story, Eq-Pl. § 443) that, if a demurrer covers the whole bill, when it is good to a part only, it will be overruled. Livingston v. Story, 9 Pet. [34 U. S.] 632, 658. The demurrers, in this case, cover the whole bill. The first cause of demurrer assigned in each, the want of equity, or, that the plaintiffs have not stated such a case as entitles them to any such relief as they seek, is a cause of demurrer to the whole bill, and to each and every part of it. The demurrer for want of equity must, therefore, be overruled, as the bill is, at least, good in part. The thirty-second of the rules in equity prescribed by the supreme court allows a defendant to demur to the whole bill, or to a part of it.
But I think the bill states a case which brings it within the settled principles as to allowing a bill by a stockholder, where the corporation is under the control of the defendants who must be sued, and an excuse is given for the bringing of the suit by the stockholder, which is equivalent to a refusal by the directors, on request, to bring the suit.
The bill alleges, that, from July, 186S, to October, 1868, the board of directors of the company held no meeting, but left the management and control of the affairs of the company to Gould, Fisk and Lane, as executive officers, and to the executive committee of five, of whom Gould, Fisk and Lane were three. It also avers that, from and after the day of the election, in October, 1S6S, until the election of a new board of directors, in
Burt is not a stockholder, and is improperly joined as a plaintiff. As the suit is a joint one, his want of interest is a good ground of demurrer to the whole bill. Story, Eq. PL § 509. The objection is one to the substance of the bill. But the plaintiffs may, if they desire, under rule 35 of the rules in equity
It is set forth as a ground of demurrer to the bill, that Eldridge, Thompson, Underwood, Bardwell, Jordan and Whitney are necessary parties to the bill, as being stated therein to have been concerned in the illegal and fraudulent acts in respect of which the bill asks relief. Those six persons were six of the directors from October, 1867, to October, 1868. This objection, if of avail, would apply equally to. Evans and Gregory, who were directors during the same period, and to Groves, Sweeny, Miller, and G. M. Diven, who were directors from October, 1868, to October, 1869, :for, while there are allegations in the bill, of complicity in breaches of trust and in fraudulent acts, that are applicable to the six directors so specified in the causes of demurrer,. there are other such allegations that áre applicable, some of them to the first two, and the others to the last four, of the last named six directors, who are not specified in the causes of demurrer as necessary parties. I exclude Work, Da•vis and Skidmore, because of the allegations in the bill in regard to them. But it is not necessary to make any of such twelve persons parties. The well settled rule is, that, if there are several trustees who are all implicated in a common breach of trust, for which the cestui que trust seeks relief in equity, he may bring his suit against all of them, or against any one of them separately, at his election, the tort being treated as several as well as joint. Story, Eq. Pl. § 213; Cunningham v. Pell, 5 Paige, 607, before cited.
Nor is it necessary that the Boston, Hartford and Erie Railroad Company, or Schell, or Vanderbilt, or the Narragansett Steamship Company should be parties to the bill. No relief is prayed for against them. The transactions tvitli them by Gould, Fisk and Lane, which are complained of, are set forth, but the bill seeks to charge Gould, Fisk and Lane as tort-feasors. If the parties named have been in collusion with Gould, Fisk and Lane, in wrongfully obtaining the funds of the company, Gould, Fisk and Lane have no right of contribution over against such parties, and, therefore, cannot require them to be made parties to the suit. As to the company, the tort of each wrong-doer against it is several, and, neither in a suit by it nor by its stockholders, is every one of the wrong-doers a necessary party, because some one wrong-doer is a proper party. The doctrine above referred to in regard to several trustees implicated in a common breach of trust, applies equally to any wrong-doer confederated with a fraudulent trustee.
' It is alleged, as a case of demurrer to the whole bill, that the fourteen persons, other than Gould, Fisk and Lane, who were, with them, elected directors of the company in October, 1869, are necessary parties to the bill, inasmuch as the bill prays to have the classification of directors of October, 1869, set aside, and thus shorten the term of such fourteen persons, who appear by the bill still to be directors of the company. Even if such fourteen persons be necessary parties in respect of the relief prayed in regard to such classification, and even if a demurrer to such relief would be maintainable for want of such parties, yet the demurrer in this particular is too general and must be overruled, because it covers the whole bill, and should have been a demurrer only ■to the relief prayed in regard to such classification. Story, Eq. PI. § 443; Livingston v. Story, 9 Pet. [34 U. S.] 632, 658.
The objection that such fourteen persons ought to be made parties, as appearing to have been directors when the bill was filed, for the reason that the bill asks for an injunction against the corporation, and for a receiver of the corporation, is not well taken. The relief so asked is against the corporation. If such fourteen persons were made parties, they would be merely nominal parties and not real parties, in respect to any relief that is asked against the corporation; and no relief is asked as against them, except in respect to the matter of the classification, which has already been disposed of. This question was fully considered in the case of Hatch v. Chicago, R. I. & P. R. Co. [Case No. 6,204].
The views already stated dispose of the objection that Tweed is not a party to the bill. Though he is charged to have been in complicity with Gould, Fisk and Lane, relief is not asked against him.
As to the case of demurrer assigned, that the plaintiffs have waived an answer on oath, there is no doubt that the defendants have a right to answer on oath notwithstanding such waiver, and that the plaintiffs cannot, by tendering such waiver in their bill, deprive the defendants of the right to answer on oath. But, for the very reason that such waiver can deprive the defendants of no right, the waiver amounts to nothing, unless the defendants choose to accept it. Yet the plaintiffs have the right to tender it, as they have done, and, if the defendants should choose to answer without oath, the plaintiffs could not complain. The tender of the waiver is, however, no ground of demurrer. Notwithstanding the provision of rule 43 of the rules in equity prescribed by the supreme court, a plaintiff may tender such a waiver, if he chooses. If the defendant does not accept the tender, it is to be regarded as surplusage; but the defendant is still bound to answer the bill, either without oath or on oath.
It results, therefore, that the demurrers, are overruled, and the bill is sustained in all particulars, except as to the joining of Burt as a party plaintiff, as to which the