57 F. 262 | U.S. Circuit Court for the District of Western Virginia | 1893
This suit was brought by William Mc-Dcorge, Jr., in his own right and as trustee, John C. Bullitt, Samuel
Prior to the filing of the same, John C. Bullitt, Samuel Dickson, and Joseph I. Dale, who are named as complainants in the bill, through counsel, stated to the court that their names had been used as such without their authority, and filed a motion to strike the same from the hill and record of this canse. On considering the same, it appearing that there had been a misunderstanding among several of the complainants about the use of said names, and a misconstruction of the authority given relative thereto, it was ordered that the names mentioned be stricken from the bill, and that as to said parties the suit stand dismissed; and for like reasons it was at the same time ordered that the names of Bullitt, Dickson, and Dale, as counsel for complainants, be withdrawn from the bill and record of this cause.
It is stated in the bill that the Big Stone Gap Improvement Company was organized under the laws of the state of Virginia, its ob-' ject being to lay off and sell town lots. That about $1,000,000 in first mortgage bonds and $1,500,000 in capital stock were issued to the original holders of the lands that had been conveyed to the' company, the complainants being part of them; and also that $1,000.000 in stock was retained by the company as treasury stock. That the present management of the company has exercised almost absolute authority over the affairs of the company since its organization. That the funds and assets of said company have been wasted, misappropriated, and diverted to purposes wholly foreign to that for which the company was organized, to the great loss and injury of complainants. That the company has defaulted for five years in the payment of interest on its bonds, and is also in default in the payment of state, county, and municipal taxes. That by the mortgage given on the property of the company to secure the issue of bonds it was provided that whenever $50,000 should accumulate from the sale of lots or otherwise, 5 per centum should
The ■ answer denies that the funds and assets of the company have been wasted, misappropriated, or diverted to purposes other than those for which it was organized. It claims that the dona-1 tions made and the assistance rendered by the defendant to other ■enterprises were for the purpose of increasing the value of its property, and to carry out the object for which it was organized, and that they were so made with the assent of all the stockholders :and bondholders, the complainants included. It admits that the company has failed to pay the interest due on its bonds since July T, 1890, and that it has not paid certain taxes, but it denies all charges of fraud and mismanagement, and claims that the defendant’s inability to pay is the result of its misfortune, caused by hard ■times, and the consequent depression of real estate. It claims ■‘that the assets of the defendant are valuable, and will, if time is given, more than pay all its liabilities. I do not think it necessary to here set forth all the claims, explanations, and charges in :the answer contained. They will be, in effect, alluded to and disposed of, as I state the conclusion I have reached.
I I find that the defendant was organized to purchase and sell ■lands in Wise county, Ya., and, among other things, to erect build
The company, after organizing under the provisions of a special, act of the legislature of Virginia approved February 14, 1888, pro
It was provided in the mortgage that—
“No suit, action, or proceeding in law or in equity for tlie foreclosure of this mortgage or deed of trust, or the execution of the trusts thereof, or for any other remedy, shall be brought or instituted except by, through, or in the name of the trustee for the time being, and then only after notice in writing to the trustee of default having occurred and continued as aforesaid, upon the request in writing of one-fifth in amount of the holders of bonds then outstanding, and the offer to the trustee of adequate security and indemnity against the costs, expenses, liabilities, and charges to be incurred therein or thereby; and such request and offer of indemnity are hereby declared to be conditions precedent for the' execution of the powers and trusts of this mortgage or deed of trust to any action or cause of action for tlie foreclosure, or for any other remedy hereunder.”
It must be kept in mind that the complainants are not proceeding as creditors of the defendant, except as they may be regarded as such from the fact that they are bondholders. What are their rights as bondholders, under the facts and the mortgage mentioned? Before considering that question I will say that the allegations of fraud and mismanagement made in the bill are not, in my judgment, sustained in a single instance, and that consequently the complainants must stand alone on their rights and privileges as bondholders and stockholders, unaided by the help that courts of equity give in cases where fraud and misconduct is shown on the part of the officers of the company complained of. And also we must remember that the rules applicable to the appointment of receivers in cases where bonds are secured by an ordinary trust, where no special and restrictive stipulations are found relative to foreclosure proceedings, do not apply to this case. In the deed of trust made by the defendant to secure the bonds held by complainants the requirements I have quoted are found, and they were placed there with the knowledge and approval of complainants, in order to enhance the value of the bonds secured, aid the credit of the company, and enable the holders of the bonds to dispose of them advantageous^. They are part of the consideration offered by the company and accepted ‘by the bondholders when the contract was made, and they are as valid as the other provisions of the trust, and as binding on the bondholders as those other stipulations .are on the company. State v. North
The complainants claim that they and the interests they represent, own over one-half of the capital stock of the Big Stone Gap Improvement Company. This is denied in the answer, defendant insisting that complainants do not own over one-tenth part of * such stock. In orden- to sustain the allegations of the bill in this regard, complainants insist, that, the 7,336 shares of said stock now owned by the Virginia, Tennessee & Carolina Steel & Iron Company should be classed with them, as opposed to the present management of the defendant company. It appears that at the last two meetings of ilie stockholders of defendant there were controversies relative to the representation of said stock, it being claimed by complainants that J. M. Bailey, as receiver of the Virginia, Tennessee &. Carolina, Steel & Iron Company, was entitled to represent and vote the stock owned by said company, while other stockholders held that Haskell and Conklin were the legally appointed receivers of that; company, and that J. B. Richmond, its attorney, was the proper person to represent and vote its stock. This court in this proceeding will not determine the questions involving the rights of those claiming to be receivers of said com-pan v, nor will if, decide who was entitled to represent the stock held by that company in ¡he Big Htone Gap Improvement Company. The decision of those matters would not dispose of the questions now in controversy; in fact they have no proper connection with the present issue. Complainants, by this contention, seek to show that a majority.of the shares of stock of defendant is opposed to its present management, and in favor of the course pursued by them. If such be the fact, it is worthy of consideration, and should not he overlooked by the court. The controversy as to the stock owned by said iron and steel company may be solved as claimed by the complainants, and still (.heir position in the matter now under consideration would not be sustained. I think that a majority of the stock of defendant company not only refuses to indorse the action of complainants, but actively and strenuously resists it. As the complainants have invited the consideration of this rule they will not object to its proper application to
■ As stockholders, the complainants are interested in the proper ■management of the company, in the payment of all its liabilities, in the sale of its real estate, and the distribution of its assets. They charge that the funds of the company have been wasted, and its assets misappropriated and diverted to purposes wholly foreign to those for which it was organized, to their loss and injury. I do not find that these charges are sustained. The appropriations, donations, and subscriptions to stock by the company to the various purposes and enterprises set forth, in the bill were all made with the assent of the stockholders, including complain- « ants, most of whom voted for them, as they were in the line of the enterprise in which the company was engaged, and to which the stockholders were committed. It was simply an effort to carry out the object had in view when the company was organized, for which the one-fourth portion of the income received ■from the sale of lots was set apart, as was provided in the charter, and nominated in the bond. I find that the stocks and bonds held and owned by defendant, issued by other corporations, were purchased and secured with the one-fourth part so received, and not with trust funds' to which the bondholders were entitled. The directors of the defendant seem to have advised ■ fully with its stockholders and consulted with its bondholders, more so than is usually done; and, as the evidence discloses, they were always governed by the advice received. ' It is true that a number of the enterprises that were assisted with the funds of the company have not as yet developed into remunerative investments by demonstrating their dividend-earning capacities. Still the evidence shows that the officers honestly endeavored in these instances to enhance the interest of the company, and that in their efforts they had the approval of the stockholders and the commendation of the present complainants.
It is clearly shown that complainants were not only aware of the ’ proceedings had at the meetings of the stockholders and directors, when the expenditures now complained of were authorized, but that they gave them their cordial support. Will they now be permitted in a court of equity to complain of those things which they did, to charge others with wrongdoing, when those others have simply done that which they were directed by complainants to do? Stockholders of a corporation that has been managed without fraud' will not be permitted, after they, for reasons of their own, have become dissatisfied with the plan of organization or the management thereof, to force the abandonment of the business, and compel the
The charters under which, corporations are organized, and the laws by virtue of which they are created, provide the way in which they shall he managed, as well as the mode of voting the stock and the manner of electing the officers thereof; and, if these provisions have been fairly complied with, then there is no ground for the interference of' a court of equity on the complaint of a dissatisfied minority shareholder. If be disapproves of the management that has been conducted without fraud and under the requirements of the law, bis only remedy is to elect new officers in favor of another policy by appealing to the stockholders, or, failing-in that, to sell bis stock and rediré. Certainly the equity courts of the country will not undertake to manage it for him, nor will they, under such circumstances, take jurisdiction for the purpose of closing up the affairs of the corporation. Such power is never exercised in the absence of a statute giving the jurisdiction, and I find no such enactment applicable to this case. In the absence of such legislation the business matters of a corporation can only be controlled, or its charter privileges taken from it, by the proper and usual proceedings in such cases provided in the courts of law. Chancellor Kent, in a leading case on this subject, said:
“I admit Unit the persons who from time to time exercise the corporate powers may, in their character of trustees, he accountable to this court for a fraudulent breach of trust, and to this plain and ordinary head of equity the jurisdiction of this court over corporations ought to he confined.” Attorney General v. Utica Ins. Co.. 2 Johns. Ch. 371.
"It cannot he concealed,"’ said the chancellor in Bayless v. Orne. 1 Freem. Ch. (Miss.) 173. “that to decree the prayer of complainants’ bill would be to decree a dissolution of the corporation. In this respect it differs materially from bills which have frequently been entertained by courts of equity at the instance of stockholders against the directors of a corporate company to compel them to account for the improper use of funds, or to restrain them from violating their trust. That a court of equity, as such, has not jurisdiction or power over corporate bodies for the purpose of restraining their operations or winding up (heir concerns is, 1 think, well settled by various authorities.” See, on (his subject. Verplanck v. Insurance Co., 1 Edw. Ch. 84; Attorney General v. Bank of Niagara. 1 Hopk. Ch. 354; Neall v. Hill, 16 Cal. 145.
In Treadwell v. Salisbury Manuf'g Co., 7 Gray, 393, it is said:
“Indeed, it is too well settled to admit of question that a court of chancery has no peculiar jurisdiction over corporations to restrain them in ihe exercise of their powers, or control their action, or prevent them from violating their charter, in cases where there is no fraud or breach of trust alleged as the foundation of the claim for equitable relief. Their rights and duties are regulated aud governed by the common law, which in most cases furnishes ample remedies for any excess or abuse of corporate powers and privileges, which may injuriously affect either public or private rights. It is only when*270 there is no plain and adequate remedy at law, and a case is presented which entitles a party to equitable relief, under some general head of chancery jurisdiction, that a bill in equity can be maintained against a corporation. And this rule is applicable to stockholders as well as to other persons.” See Ang. & A. Corp. § 312; Grant, Corp. 71, 271; Mozley v. Alston, 1 Phil. Ch. 790; Hodges v. Screw Co., 1 R. I. 350; Baker v. Railroad Co., 31 La. Ann. 754.
The rule is also well established that a corporation claiming redress for wrongs must proceed through its regularly appointed agents. It is only when the company has been dissolved, or is prevented from proceeding by the misconduct of its officers that the stockholders may themselves proceed in chancery for the protection of their equitable rights. If the directors refuse to act, or are themselves guilty of a wrong that the majority of the stockholders refuse to correct, equity will interfere at the suit of a stockholder. Mor. Priv. Corp. § 239, 381, 386; Moore v. Schoppert, 22 W. Va. 282, 291; Hawes v. Oakland, 104 U. S. 450, 460; Foss v. Harbottle, 2 Hare, 493. In this case the complainants allege that they control, a majority of the shares of stock of the defendant. If that is so, they will have no trouble in calling a stockholders’ meeting of the company and therein so voting their stock as to correct the wrongs of which they now complain, and fully protect their interests in the iuture. TJnless they are mistaken in this claim, it seems strange that they have not so acted before this, provided they believed the company was mismanaged.
The appointment of a receiver — always in the discretion of the court — -will not be made if it' is for the best interest of those concerned that the property in controversy should remain in the hands and under the control of the owners thereof. This discretion of the court should be a reasonable one, governed to a grjeat extent by the facts as they are presented in each particular case, as no rule generally applicable has been or can be established. Nor will this discretion be controlled by the technical legal rights of the parties, but all the equities of the entire case will be considered. The power of appointment is extraordinary in its nature and. far-reaching in its effects, and will be resorted to with the utmost caution, and only .under such circumstances as demand summary relief. Williamson v. Railroad Co., 1 Biss. 206; Crawford v. Ross, 39 Ga. 44; Furlong v. Edwards, 3 Md. 112; Verplank v. Caines, 1 Johns. Ch. 57. Mr. Justice Bradley, in Vose v. Reed, 1 Woods, 650, says:
‘•But all tbe circumstances of the case are to be taken into consideration, ancl if the case be such that a greater injury would ensue from the appointment of a receiver than from leaving the property in the hands now holding it. or if any other considerations of propriety or convenience render the appointment of a receiver improper or inexpedient, none will be appointed.”
In the case of Tysen v. Railway Co., 8 Biss. 247, Mr. Justice Harlan, applying these principles, refused to appoint a receiver;, although there had been default in the payment of interest on bonds, and insolvency was in effect admitted. The circumstances in that case demonstrated, as the facts in this case do, that the appointment of a receiver would imperil the interests of others whose
My conclusion is that sufficient canse has not been shown to justify the court in appointing permanent receivers in this case. Certainly the complainants, as bondholders and stockholders, have given the court no such facts as authorize if, to retain tlu* possession and control of defendant’s property, and they sue in no other capacity, not. claiming to be general creditors, and not making the trustee a party, nor charging him with fraud or failure to discharge his duties. The charge in the hill that many persons claiming to be creditors of defendant have instituted suits for the recovery of their claims is not supported by tin* evidence. That, the company is indebted to various parties is conceded, hut its creditors do not seem to he pressing for the collection of ihe sums due them, hut, on the contrary, appear to favor the policy insisted on by the majority of the bondholders, stockholders, and directors of pursuing the present plan of management, and depending upon the return of the prosperity with which they were heretofore favored, and which they confidently, and not, without reason, expect,, as the best means of protecting the common interests of all concerned in the Big Stone "(lap Improvement Company.
The order granted in this cause on the 20th day of May, 1893, appointing provisional receivers, was founded on the allegations of the hill as to the misconduct; of the officers of the defendant company, and the misappropriation of its funds by them, and was intended to prevent great, and irreparable injury to the stockholders hv the improper use aud delivery of $500,000 in amount of the treasury stock of the company; the* complainants representing that they and others represented by them owned over one-half of all the bonds and stock issued by the defendant. These* allegations were supported by affidavits anel exhibits. From the conclusion I reach it: is evident that I find that the complainants were mistaken in several particulars, and that the inference drawn by some of them from the circumstances alludeel to are not justified by the facts, at least as they are now presented for my consideration.
I will now pass a decree dissolving the injunction herein heretofore granted, and directing the provisional receivers to restore to rlie Big Stone Gap Improvement Company all of its property now in their hands; requiring them to make a report of their proceedings as such receivers to this court preliminary to the settlement of their accounts and their discharge as such officers; refusing the prayer of the hill, which, after the court, has passed on the receivers’ accounts, will he disndssed, at cost of complainants.