123 F. 546 | N.D. Ala. | 1903
(after stating the facts as above). This case has been ably and elaborately argued. It is unnecessary, however, to decide all the interesting questions discussed. The right to maintain the bill depends upon a few controlling issues, which will now be considered;-
Equity permits a stockholder to maintain a bill to enforce the rights of his corporation, solely to prevent a failure of justice. “The circumstances of each case determine the jurisdiction to give the relief sought.” Dodge v. Woolsey, 18 How. 344, 15 L. Ed. 401. To entitle the stockholder to relief, it is not enough that the governing body has refused to act, or that the refusal evinces mistaken judgment. The stockholder who seeks redress as to any corporate act. which the charter permits the corporation to perform must show either that the governing body is so disorganized that it cannot act; or that it is' interested adversely to the corporation, or under the dominion of those who are; or will be required to disapprove its own breaches of trust, as distinguished from mistakes or errors of judgment; or that its refusal will endanger the rights and franchises of the corporation, or result in irreparable loss and injury; or that its attitude, under the situation presented by the bill, discloses negligence or indifference to the interest of the corporation, in such degree as amounts to the practical equivalent of bad faith; or else bring forward other pertinent facts which challenge and impeach the fitness of the governing body to properly decide the question at issue. Even then, if the case will admit of delay, the complaining stockholder must appeal from the decision of the directors to the
It not being charged in this case that either of the two boards, or the body of the stockholders, who declined to bring or authorize the bringing of this suit, were themselves guilty participants in any of the frauds complained of, or in any wise interested adversely to the corporation, or under the dominion or control of those who were instrumental in bringing about the sales sought to be avoided, or that they acted otherwise than in the exercise of honest judgment as to the interest of the Land Company, their decision not to litigate is binding upon the court, unless that refusal will result in enforcing some ultra vires or illegal act of the corporation, or evinces such recklessness and indifference to the rights of the corporation as amounts to bad faith or fraud, or will needlessly work the practical destruction of the corporate enterprise. To properly determine these questions the court must look to the status and condition of affairs as they reasonably appeared to the stockholders, under the facts set forth in the bill, at the time of entering into the transactions now sought to be set aside, and then weigh their decision not to disturb them in the light of existing conditions at the time that decision was made.
The Land Company, in January, 1898, when these transactions were entered into, had been incorporated for more than 10 years. Its assets consisted of “more than thirty-seven hundred acres of valuable lands” in and about Ensley, at which place the company sought to found a town. The lands originally belonged to the Tennessee Coal, Iron & Railroad Company, which conveyed the property to the Ensley Land Company for $10,000,000, at which sum its stock was capitalized. Capital stock was issued to that amount to the Tennessee Company, which all the while retained the majority of the stock, though it sold much of it to third persons. The capital stock was afterwards scaled to $500,000, without withdrawing any of the assets. The Land Company had improved a portion of its lands for the purpose of inviting settlement, and laid off what was considered the best parts into lots and streets. Steam and street railroads ran through Ensley, and gave it almost hourly communication with Birmingham. A hotel and other buildings had been erected and improvements made, upon which upwards of $60,000 had been expended, and the company owed “about one hundred and twenty thousand dollars” in 1893. There was then, and for that matter still is, no claim that these expenditures and debts were not fairly made and incurred in the interest of the corporation. The company had not been able to attract any industries, or to make any considerable progress in securing purchasers of its property. As far back as 1893 it had not been able to meet its liabilities, and a number of its debts had been put in judgment. The financial stringency of 1893 and its consequences, to which the bill alludes, came on. In 1894, while the ef
“To the Stockholders of the Ensley Land Company: Since your last annual meeting, all the property of the Ensley Land Company has been sold by its creditors. On the 25th day of January, 1897, the realty was sold by the sheriff, and bought in by the executrix of the estate of James C. Warner, deceased, who was the owner of what is known as the Birmingham Railway & Electric Company judgment, for fifteen thousand, one hundred, sixty-eight and 91/100 dollars. About the 18th of September last, the personal property was sold for five hundred and twenty-five dollars, under an execution obtained by Napoleon Hill, of Memphis, Tennessee, for thirteen thousand, three hundred forty-eight and 96/100 dollars. The result of these sales left the Ensley Land Company nothing except the statutory right of redemption. The aggregate amount of indebtedness due is about one hundred and thirty thous- and dollars. For the purpose of liquidating these debts, the creditors have agreed upon a plan of having the property conveyed to two trustees, Messrs. N. E. Barker and James Bowron, with the understanding that when a sufficient amount of property has been sold to pay off the debts of the Ensley Land Company, and the expenses incident to the execution of the trust, that all the remaining property shall be conveyed to the Ensley Land Company. For the purpose of enabling the trustees to make absolute title to the property they may sell, it is necessary that the Ensley Land Company shall waive its statutory right of redemption. I suggest that our attorneys be requested to draw up such papers as will make effective the will of the directors in this respect, and that the directors be authorized to consummate an agreement with the trustees appointed-by the creditors.”
This report was spread upon the minutes. At the same meeting, by a vote of 2,597 shares in the affirmative to 30 in the negative, a resolution, moved by defendant McCormack and seconded by defendant Shook, reciting the sale of the real estate under the Warner judgment, and that Barker and Bowron were now the owners of said
“Therefore, resolved, upon the execution by said Barker and Bowron of a declaration of trust, in and by which they shall declare that they hold and own said real estate in trust for the benefit of the creditors of the company, the terms and conditions of which declaration of trust and the priority of the claims of creditors secured thereby, shall be satisfactory to the board of directors of the company, the company will make and execute a conveyance to said Barker and Bowron, releasing and conveying the statutory right of redemption of the company in and to all the said real estate. Resolved further, that the board aré authorized and required to cause and procure the said Barker and Bowron to make and execute such declaration of trust as shall, in their judgment, protect the interest of the company, its creditors and stockholders. Resolved further, upon the execution of such declaration of trust, the terms and conditions of which shall be satisfactory to said board of directors, the president and secretary of the company, be and are authorized and required to execute such conveyance to said N. E. Barker and James Bowron.”
At the same meeting a resolution was adopted recommending “the trustees to donate free sites for manufacturing enterprises proposing to locate at Ensley.” The minutes further show the following proposition from the Ensley Company was submitted for the action of the stockholders: “We will give you fourteen thousand and six hundred dollars for two hundred and twenty acres of land described as follows”—naming certain lands. “We will guarantee the building of twenty houses on this land in six months, forty houses in twelve months, and fifty houses in two years. You can name a price on each lot and block you are willing to put on the market, and give us the exclusive right to sell the same, paying us ten per cent, commission on all such sales. When lots are sold on time, we to pay the fixed price ourselves.” The proposition also “guaranteed” to sell - number of lots within a certain time; also “to cause to be erected in one year at Ensley a foundry and machine shop sufficient to do all work obtainable, and enlarge it as the business required ; to put in operation a red brick making plant “with capacity to furnish brick for local demand; to erect and operate a planing mill sufficient for the needs of the town; to locate a drug store at Ensley, and a lumber yard and supply store. The proper material being made at Ensley and furnished us at competitive prices, we will cause to be erected a plant for the manufacture of bolts and nuts for rivets, steel plow shapes, boilers, and bridges. Suitable material being found, to erect a plant for the manufacture of lime. If found practicable, and molten steel is sold us at reasonable prices, we will cause to be built a plant for the manufacture of steel castings. For the location of industries, free sites will be donated by you. It is understood in the location of manufacturing enterprises we are to have the support and approval of the trustees, and the Tennessee Company would be expected to give industries at Ensley as low' net rates on raw' material as given any one located elsewhere.” As the
The facts heretofore outlined show the situation as it presented itself to the minds of the stockholders in January, 1898. The apparent situation was the real situation, except that the stockholders did not know that the defendants had any concern in the purchases, and were not advised that there would be an early erection of “the large steel plant” of the Tennessee Company at Ensley; or as charged in the bill, upon “information and belief,” that the sale under the Warner judgment the year before had been needlessly brought about by the machinations of the defendants who controlled the judgment, when the Tennessee Company would have come to the rescue if it had been applied to; or that the Tennessee Company’s stock would not have voted for the transactions complained of if the defendants, who were also its officers, had truly advised it as to the facts; or that the title had already been vested in Barker and Bowron by the machinations of the defendants, as alleged in the bill. The Tennessee Company could hardly have long been ignorant of the sale under the Warner judgment. Payment of that judgment would not have satisfied the other creditors. Redemption from the sale under it, in the name of the Land Company, would have invited other sales, unless the Tennessee Company provided for the claims of other creditors, whose debts, some of which were in judgment, amounted to over $100,000. That sale finally resulted in a declaration of trust in the lands \ for creditors, and, after paying debts, to return the refnainder to the Land Company. If the Tennessee Company had taken up the debts, it would probably have required something of the sort. The fact that it was a majority stockholder did not put it under legal' or moral duty to bear all the burdens of the corporation. The effect of the sale, save as it formed part of the device which enabled the defendants to accomplish their purpose, as charged, was not harmful to the Land Company. Under the conditions disclosed by the bill, the law imposed upon the property in the hands of the company the very trust upon which Barker and Bowron declared they held it. The reliability of the “information and belief” that the Tennessee Company would have come to the rescue of the Land Company in 1898, and would not have permitted the majority stock to be voted for the transactions then entered into, if the stockholders had been fairly informed, is somewhat weakened, if not overthrown, by the significant fact that four years afterwards the vote
What was the situation in 1902, when the stockholders were asked •to bring this suit? Four years had then elapsed, and no complaint or objection had been interposed from any source against the transactions entered into in 1898, and for the first time sought to be avoided in 1902. The bill is silent as to the effect of the plan, in the meantime, in paying off the debts of the Land Company, or as to the disposition of the remaining 3,460 acres of “very valuable land,” which had not been sold to the Ensley Company and McCormack and associates. The -just inference from the allegations of the bill in other respects, and its peculiar silence in the particulars named, is either that these creditors of the Land Company had then all been paid off, and the lands of the company, with the exception of the 240 acres and such portions as the trustees might have sold to pay debts, had been reconveyed to the Land Company, or else that whatever remained of the property was held by Barker and Bowron, who were still executing the trust. It would be a most unjustifiable presumption, in view of the recitals in the bill, that the cash received from the sales complained of had not been used in the payment of the debts of the Land Company. At all events, the creditors had remained quiet. This they would not have done if the plan had not been a success, so far as they were concerned. If it had resulted badly in other respects, so that practically nothing was left for the Ensley Land Company, the 'just presumption is that complainants
The stockholders themselves knew in 1902 of the defects in the call for the first meeting in January, 1898, which adjourned to another day, and that it was held in Birmingham, and not at Ensley, as required by the by-laws. The Tennessee Company, which all the while owned the majority of the stock of the Ensley Land Company, certainly knew in 1902 whether its stock had been voted on a wrongful proxy, or against its wishes and interests, regarding the matters complained of, which transpired four years before. At the meeting in 1902 the defendants were no longer officers or directors of the Tennessee Company or of the Eand Company. It is stated in the bill that McCormack and Bowron retired in January, 1898, and that the other defendants remained “such officers and directors, and members of the governing committee, until within the last few months.” The “few months” are those elapsing in the interval between the date of the jurat to the bill, in March, 1902, and the refusal of the stockholders to bring this suit, January 23, 1902, and the like refusal of its board of directors shortly before and shortly after the stockholders’ meeting. It must be inferred, therefore, that the defendants retired as officers or directors of both companies before the Eand Company’s meeting at which the Tennessee Company’s stock was voted against the authorization of the suit. Moreover, it is not charged that the defendants at that time either exercised or attempted to exercise or had any control or influence over the stockholders of either company. Under the circumstances reviewed, the stockholders of the Eand Company, who voted, in the proportion of over 80 to 1, not to authorize the suit to redress a grievance happening over four years before, may well have thought, on the whole, that it would not be advantageous, or that their company had acquiesced too long, and that its silence and knowing retention of the benefits of the transaction would defeat the suit if brought, and entail useless cost and expense upon the corporation. In view of all these considerations, their decision is not open, in the absence of any charge of improper motive on the part of the majority, to reasonable condemnation, as evincing such negligence or criminal indifference to the interest of the corporation as amounts to bad faith, fraud, or oppression of the minority.
Complainants cite Mason v. Harris, L. R. 11 Chan. Div. 97, in support of their contention that the grievances complained of were either incapable of ratification, or that the refusal to redress them, under the circumstances here disclosed, amounts to a fraud upon the minority. They quote the following paragraph from the opinion in that case:
“Whenever a fraud Is committed by persons who command the majority vote, the minority can sue. The reason is plain, as, uiiless such suit were allowed, it would put it in the power of the majority to defraud the minority with impunity. If the majority were to make a fraudulent sale and put the money in their own pockets, would it be reasonable to say that the majority could affirm the sale?”
The court was there speaking of the injustice of compelling a stockholder to abide the judgment of those who were interested in
The recovery sought by this bill is for the benefit of the corporation. The bill is filed solely in right of the corporation, and does-not seek to enforce any separate or individual right of the stockholders. The corporation is only a nominal defendant. It is the real plaintiff. It is clear upon principle, in such a case, that the stockholders cannot maintain the suit, if the corporation itself is. not in-position to do so. It is an elementary principle of law that one claiming through and in subordination to a party estopped is himself estopped. The cases which permit a recovery in behalf of the corporation, in avoidance of transactions which it is estopped to rescind,.
An analysis of the premises of the argument in support of the contrary conclusion shows that it is unsound. The transactions here complained of not being void, but merely voidable, who can avoid them? Certainly, only the parties to the transaction, no rights of creditors being involved. There are only two parties—the corporation and the fraudulent grantees. The latter cannot set up their own misconduct to avoid the transaction. The former can act only by its governing body or by the stockholders collectively. There is but ■one subject-matter, and that is the sale and purchase of the land. The transactions must either be good as to the Land Company or bad as to the Land Company. They must either be avoided in toto -or must stand in toto. If one stockholder, acting for himself, can affirm, another, acting for himself, can disaffirm. There is but one thing to affirm, and it must either be binding upon all the stockhold■ers or not binding on any of them. The power to affirm or to dis-affirm in a case of this kind is not an individual prerogative, but the right and power of the whole body of stockholders collectively. This collective body must act and decide according to the vote of the majority. “The rule is that the majority governs, and every stockholder ■contracts that such shall be the rule.” Morawetz on Corporations, § 474. When, therefore, the majority, in such a case as this, refuses to disaffirm, all right of the majority to disaffirm is gone. There can be but one disaffirmance, and that must be the disaffirmance of the governing body of the corporation. A majority of the stockholders, in a case of this kind, represent the ultimate corporate sovereignty, within the limits of its charter, and can bind the minority by its
Take it, however, that the rights of the complainants depend upon their own conduct; the result, upon well-settled principles, must be the same. Everything complained of is intra vires. The wrongs involved are private, not public, wrongs, and they may be condoned and ratified. It is unnecessary to decide whether, under subdivision 7 of section 1256 of the Code of Alabama, the stockholders had any authority to relinquish the statutory right of redemption, except by vote at a meeting specially called, after 30 days’ notice, etc. The object of the statute was to prevent the incumbering or selling of property to which the company had title, or at least right of possession, and not to put obstacles in the way of redemption contracts which affect a mere statutory right in property, the title and possession of which has already passed out of the corporation, and which but for the arrangement would be finally lost to it. There might arise an emergency preventing the giving of 30 days’ notice. Nor is it necessary to decide whether the stockholders, in view of the broad powers of the directors as to the management of the property and control of the business of the corporation, were without authority to order a conveyance of its lands, under the conditions in which the Hand Company found itself. It cannot be denied that the corporation, acting through' the proper instrumentality and in the proper mode, could have done both the things complained of. The complaint is not that the corporation could not do these things, but that they were done by the wrong body in the wrong way. Such acts may be cured by acquiescence or ratification.
Complainants insist that their delay of over four years, under the circumstances disclosed by the bill, cannot bar them of relief, because this is a suit in equity for the recovery of land; that the limitation to such actions by the statute of this state is ten years (Washington v. Norwood, 128 Ala. 383, 30 South. 405); that the statute, by its terms, applies to suits in chancery as well; that complainants have brought their suit within the statutory period, and the federal court sitting in this state is bound by the statute, or, if not bound, ought to follow the decision cited, construing the state statute, which gives complainants the full statutory period in which to sue, to establish a constructive trust, and regain possession of the lands from the purchaser mala fide. As supporting this contention, they cite Bryan v. Kales, 134 U. S. 126, 10 Sup. Ct. 435, 33 L. Ed. 829. Thére are two sufficient answers to this contention. The Supreme Court of this state has never construed these statutes to abolish the doctrine of laches where the owner of lands, who has been defrauded into making a conveyance and seeks to recover possession, has failed to make his election to avoid the transaction in a reasonable time after he discovers, or should have discovered, the fraud; nor has it held that the owner of lands who knows that another is in possession, improving the prop
Complainants’ excuse for their delay, to use their own language, is “that all the acts and doings of said defendants, and the real truth pertaining to said conveyances and the fraud and deceit practiced, were unknown to the complainants until within the last three months, and that since being informed they have been guilty of no delay in taking the proceedings set forth to obtain their rights.” This is a very cautious statement. It gives the court little information as to the nature, time, or extent of complainants’ ignorance. They say they did not know of “all the acts and doings” and “the real truth” pertaining to “said conveyances and the fraud practiced.” They thus admit that they did know some of the “acts and doings” or some of “the real truth.” Of what parts of “the real truth” were they in ignorance, and for how long before the filing of their bill? When did they first acquire knowledge of the acts of which they do not claim ignorance so recent as “within the last three months?” What led to the discovery of the fraud? The bill nowhere answers' these questions. It is not claimed that the defendants failed to give published notice of the stockholders’ meeting of the Land Company, or ever took any steps to conceal what its minutes showed as to their action on-the Ensley Company’s proposition, or as to the creation of the trust in Barker and Bowron, or as to any of the deeds by which the purchasers went into open, adverse possession, or by which the legal title was divested out of the Land Company. The bill shows that some of these deeds were recorded, and the presumption from its silence is that the others were also recorded. All these things were very openly and publicly done. The gravamen of the deceit charged is that the defendants, to carry out a secret plot of more than one year’s duration, which culminated in the sale of 240 acres, made prior statements with the intent to deceive as to their motives and purposes, and kept from the stockholders’ meeting, at the time it authorized the sale to the Ensley Company, the fact that the defendants were interested in it, and also failed to disclose, as they were under duty to do, the fact that “the large steel plant” would be speedily constructed. It is not alleged that the defendants have done anything since the meeting in 1898 to conceal their relations to the sale or the evidences of it. The first step in the fraud charged was that two of the defendants, after they had bought the Warner judgment, needlessly procured the enforcement of it by execution sale at a time when it could have been avoided by applying for aid to the Tennessee Company. This was in 1897. Inquiry of the Tennessee Company within one or two years thereafter would have informed the complainants whether the Tennessee Company would then have come to the rescue. The next concealment charged is of the fact
The facts alleged as to the misstatements and the doings of the defendants before the sale, and their silence and concealment at the time of the sale, excused the failure to discover the motives and interest of the defendants while they were developing the transactions complained of, and for a reasonable time thereafter. The law is more liberal as to the period for discovery in the case of actual fraud than in a case involving mere constructive breaches of duty. Complainants do not aver that they ever heard, until recently, of any of the misrepresentations made prior to the sale, or of the concealment made at the time, or that they were thereby lulled into security or prevented from making earlier inquiry. For aught that appears, complainants learned of the secret purposes of the defendants, and their silence and failure to make disclosures at the time of the sale, long afterwards, when the complainants were put upon inquiry as to the bona fides of the sale by the open and notorious facts of the case. These things do not excuse complainants’ supineness and long delay after the mask had been definitely thrown off, and the fact proclaimed by notorious, adverse possession, openly taken in the face of the multitude, under deeds which were spread upon the public records. Quite true it is that one is not ordinarily bound to suspect his trustee, and may presume, without inquiry, until he is advised to the contrary, that his trustee is acting fairly; but the right to rely upon this Dresumption is destroyed when the cestui que trust is warned by
The language of the excuse here set up is almost identical in terms with that condemned in Wood v. Carpenter, 101 U. S. 140, 25 L. Ed. 807. The excuse there was that the plaintiff “had no knowledge of the facts concealed by the defendant until the year A. D. 1872, and a few weeks only before the bringing of this suit.” Here, as the court remarked there, “there is nothing further upon the subject.” The common language of the books is that general allegations of ignorance at one time, and knowledge at another, is of no effect. “If the plaintiff made any particular discovery, it should be stated when it was made, what it was, and how it was made, and why it was not made sooner. There must be reasonable diligence, and means ,of knowledge is the same thing in effect as knowledge itself.” The delay which has occurred must be shown to be consistent with the requisite diligence. Badger v. Badger, 2 Wall. 87, 17 L. Ed. 836; Harwood v. R. R. Co., 17 Wall. 78, 21 L. Ed. 558; New York City v. Pine, 185 U. S. 93, 22 Sup. Ct. 592, 46 L. Ed. 820; Hardt v. Heidweyer, 152 U. S. 547, 14 Sup. Ct. 671, 38 L. Ed. 548; Otis v. Dargan, 53 Ala. 178; Wood v. Carpenter, 101 U. S. 140, 25 L. Ed. 807. In Broderick’s Will Case, 21 Wall. 319, 22 L. Ed. 599, the Supreme Court, in speaking of persons who sought to vacate the probate of a will, and excused delay on account of absence from the country and ignorance of the fraud, said:
“Parties cannot thus, by their seclusion from the means of information, claim exemption from the laws that control human affairs, and set up a right to open up all the transactions of the past. The world must move on, and those who claim an interest in persons or things must be charged with knowledge of their status and condition, and of the vicissitudes to which they are subject.”
Counsel is mistaken in supposing that the strictness of discovery required in Wood v. Carpenter, 101 U. S. 140, 25 L. Ed. 807, is applied only in actions for relief on the ground of fraud after the statute of limitations has barred the right. It is declared in that very case, and numerous others, that the strictness required as to discovery is “only the application to cases at law of principles which have alwáys been acted upon in courts of equity.” Equity always charges the conscience of the defrauded party who desires to rescind because he has been induced to part with his title by fraud, whether actual or constructive, with the duty not to speculate upon his adversary, and in a reasonable time after discovery to elect whether he will stand by his bargain or rescind it. He has no option to wait an unreasonable time after knowledge or fair notice, to determine whether he will take the profit or let the loss fall upon the purchaser, as may suit
The demurrers are sustained, and the cost decreed against complainants. If the complainants desire to amend, they may apply for