Brewer v. Proprietors of the Boston Theatre , 104 Mass. 378 ( 1870 )

Wells, J.

These three bills are brought by certain stockholders of a corporation, in behalf of themselves and all other stockholders not joined as defendants, to recover, for the benefit of the corporation, profits supposed to have been gained to its prejudice, and damages for losses suffered by it, through the improper conduct of certain of its officers during several years past, in leasing its property to parties with whom they secretly confederated to share in the advantages of the contracts so made. The corporation is joined as a party defendant.

One question raised by the demurrers is, whether the bills show sufficient cause for maintaining actions in this form in the name of other parties than the corporation whose interests alone are affected directly, whose rights are to be vindicated, and to whose use exclusively the judgment, if recovered, must enure.

It is unquestioned that, at law, no action could be maintained for the causes set forth, otherwise than in the name and by the authority of the corporation itself. Ordinarily the same rule will apply in equity. It is only from the necessity of the case, and to prevent a failure of justice, that suits in equity in the form of these bills are allowed. To justify a suit in this form, the bill must show that suitable redress is not attainable through the action of the corporation. To this extent, all an thorities agree. There is some diversity as to what will satisfy the, requirement. Whether there must be an effort to move the corporate body to the redress of its own injuries; and, to that end, an attempt to procure a meeting and vote of the stockholders ; or whether an application to the present board of officers by whom the corporate affairs are managed, and a refusal by them to allow proceedings in its name and behalf, would be sufficient, does not seem to have been determined by any clear concurrence of decision. It may depend somewhat upon the character of the corporate organization, and the extent of powers confided to its officers for the time being. Where the stock holders retain no control of the corporate business, except by means of an annual election of officers, those officers, during their term of service, represent the corporation for all purposes; and a refusal by them to take proper action for the protection of its interests, or to allow the use of the corporate name for that purpose, ought to be sufficient to justify a proceeding in behalf of the individual stockholders, making the corporation a party defendant. A formal application and refusal need not be alleged, if enough appears to show that such an application would be unavailing. When the directors themselves are the parties charged with the wrong, or by whose fraud or wilful collusion the wrong has been accomplished, and the suit is to be brought against them, they are, by the very nature of the case, incapacitated for the service of representing the corporation in any action for the restoration of its rights, whether by suit or proceeding in pais. If the corporate action is under the control of such parties, it is a sufficient reason of necessity to warrant proceedings by suit in the name and behalf of the individual stockholders.

Do these bills allege sufficient grounds for proceeding in this manner, in accordance with the principles above indicated? We think not.

1. It is not alleged that any effort has been made to set the corporation in motion for the purpose of securing its own redress.

2. No application to the directors, to take action in the matter, is alleged. It does not even appear that the directors ia office when the suit was brought had been informed or were aware of the facts upon which these proceedings are founded. These bills were filed August 2, 1869, after the annual meeting of the corporation, as we suppose. It does not appear who are the directors elected in 1869, nor that there is not a majority of them who are free from any charge of violating their trusts, oi of confederation or collusion with those who have perpetrated the alleged wrongs against the corporate interests. In the second bill it is alleged that Prince, Hill and Faxon, defendants in that suit, “ are now members of the board of directors.” But, as the board consists of seven members, they constitute a minority only. The third bill also mentions “ defendant directors ” in several of its allegations; but it does not appear who of the defendants are directors elected in 1869; nor how many of the directors of that year are referred to in the allegations thus made.

3. In the. first and second bills it is alleged “ that a majority of the present board of directors of said defendant corporation are acting in the interest of, and are under the control of, said Tompkins and Thayer.” But this does not show that they are wilfully disregardful of the interests of the corporation ; or that they would so act if informed of the injurious effect of their action; or that they would yield to the influence or control of Tompkins and Thayer, if aware of the purpose and uses for which that influence is exerted. It is not equivalent- to a request and refusal of the use of the corporate name and authority for the redress of the wrongs complained of; nor does it show that such an application, upon a suitable representation of the facts, would be unavailing.

4. The same considerations apply to the allegations in the third bill, so far as they apply to present directors. It is alleged that they “ have allowed themselves to become little else than the creatures of Tompkins and Thayer, and the registers of their wishes, and have come to consider that no duty rested or now rests upon them as directors to do more or other than to make said corporation, and the property of the plaintiffs therein invested, serviceable to Tompkins and Thayer." The phraseology of this general statement does not comport with the distinctness and certainty required of legal averments; and we do not think that any process of elimination would educe from it the proposition that the present directors of the corporation are so hostile to its interests, and to any judicial proceedings for their protection, as to make proceedings in this form necessary. The preceding allegations of undue influence, corruption, negligence, fear and fraud are only statements of the means by which those who have been directors during the period to which the allegations relate have been operated upon by the said Tompkins and Thayer, to bring them into the condition of supposed subserviency. And although “ corruption ” imputes fraudulent conduct on the part of all parties affected, yet those charges are applied generally to the transactions of previous years, and cannot be taken as averments that the present directors are now acting adversely to the interests of the corporation, through corruption or fraud on their part, in respect to the subject matter of these suits.

5. As this question, of the right to maintain actions in the present form, turns entirely upon the capacity to set the corporate body in motion, at the time the suits were commenced; and that capacity depends upon the relations to the corporation and the corporate interests of the directors in office at that time, the several allegations in regard to the conduct of directors in previous years, during which the transactions complained of took place, do not bear upon the point, and need not now be considered.

The plaintiffs having failed to show a necessity for resorting to this mode of proceeding, the bills cannot be maintained as they now stand, and the Demurrers must be sustained.

After this decision, the plaintiffs amended their bills.

The amendment to the first bill was as follows : “ And the plaintiffs further say, that, ever since the year 1866 inclusive, Tompkins and Thayer have owned or controlled a majority of the stock in the defendant corporation, and have controlled the election of directors and all other proceedings at the meetings of stockholders; that, by the charter and by-laws of the said corporation, the whole management of its affairs is intrusted to the board of directors, and a majority of the present board of directors of said corporation have been members thereof, and have constituted a majority thereof, in each year since the year 1866 inclusive; that said majority have long been, and now are, fully acquainted with the breaches of trust and frauds herein charged against Tompkins, Thayer and Faxon, and openly excuse and justify the same; and that said majority have long been, and now are, knowingly, wilfully and fraudulently in collusion with said Tompkins, Thayer and Faxon, in seeking to secure and continue the control of said corporation and its property to Tompkins and Thayer, for the private benefit of Tompkins and Thayer, and in fraud of the stockholders and the corporation; and these plaintiffs have instituted a suit in this court, concurrently herewith, against the present board, for breaches of trust by them committed in their said office, in collusion with Tompkins and Thayer, of a like nature with those herein charged against Tompkins and Faxon, and having in view the same purpose of administering the affairs of said corporation so as fraudulently to promote the private interests of Tompkins and Thayer by sacrificing the interests of the stockholders and the corporation; and a copy of the amended bill ie said last named suit is hereto annexed [being the amended third bill] and the plaintiffs crave leave to refer to the same as a part of this bill.”

The amendment to the second bill was as follows : “ And the plaintiffs further say, that, ever since the year 1866 inclusive, Tompkins and Thayer have owned or controlled a majority of the stock in the defendant corporation, and have controlled the election of directors and all other proceedings at the meetings of stockholders; that, by the charter and by-laws of the defendant corporation, the whole management of its affairs is intrusted to the board of directors, and Prince, Hill and Faxon are now members of the board of directors of the defendant corporation ; that a majority of the said present board of directors have been members thereof, and have constituted a majority thereof in each year since the year 1866 inclusive; that they have long been, and now are, fully acquainted with the breaches of trust and frauds herein charged against Tompkins, Thayer, Faxon, Hersey, Hill and Prince, and openly justify and excuse the same; and that they have long been, and now are, knowingly, wilfully and fraudulently in collusion with Tompkins, Thayer, Faxon, Hersey, Hill and Prince, in seeking to secure and continue the control of the said corporation and its property, to Tompkins and Thayer, for the private benefit of Tompkins and Thayer, and in fraud of the stockholders and the corporation ; and these plaintiffs have instituted a suit in this court» concurrently herewith, against the present board, for breaches of trust by them committed in their said office, in collusion with Tompkins and Thayer, of a like nature with those herein charged against Tompkins, Faxon, Hersey, Hill and Prince, and having in view the same purpose of administering the affairs of the corporation so as fraudulently to promote the private interests of Tompkins and Thayer by sacrificing the interests of the stockholders and the corporation ; and a copy of the amended bill in said last named suit is hereto annexed [being the amended third bill] and the plaintiffs crave leave to refer to the same as a part of this bill.”

The amendment to the third bill was as follows: “ And the plaintiffs further say, that, ever since the year 1866 inclusive, Tompkins and Thayer have owned or controlled a majority of the stock of the defendant corporation, and have controlled the election of directors and all other proceedings at the meetings of stockholders; that, by the charter and by-laws of the defendant corporation, the whole control and management of its affairs is intrusted to the board of directors, and a majority of the present board of directors are now knowingly, wilfully and fraudulently endeavoring, in collusion with said Tompkins and Thayer, to secure and to continue the control of said corpora tian and its property to said Tompkins and Thayer, for the pri vote benefit of said Tompkins and Thayer, and in fraud of the stockholders and the corporation in like manner as aforesaid; and that a majority of said board ha,e long been and now are fully informed as to the frauds and breaches of trust herein charged to have been committed by Tompkins and Thayer, and openly excuse and justify the same.”

S. Bartlett & R. M. Morse, Jr., for the defendants,

in support of the demurrers, cited Foss v. Harbottle, 2 Hare, 461; Mozley v. Alston, 1 Phillips, 790; Allen v. Curtis, 26 Conn. 456 ; Hersey v. Veazie, 24 Maine, 9; Peabody v. Flint, 6 Allen, 52; Orr v. Glasgow, Airdrie & Monklands Junction Railway Co. 6 Jur. (N. S.) 877; Clinch v. Financial Co. Law Rep. 5 Eq. 450; Gray v. Lewis, Law Rep. 8 Eq. 526 ; Kerr on Injunctions, 565, 567, 568, and eases cited.

B. R. Curtis & G. O Shattuck, (J. B. Thayer with them,) for the plaintiffs.

The defendants demurred to the bills as amended; and Tompkins and Thayer filed a motion that the plaintiffs be required to elect in which of the suits the frauds alleged to have been committed in procuring the leases to Jarrett should be heard and tried, and that the other suits, or so much thereof as charged the same frauds, be dismissed. The cases were thereupon reserved by Wells, J., for the determination of the full court, and were argued in March 1871.

Wells, J.

Upon further argument and consideration, the court find no occasion for any material change of the opinion heretofore given in this case. It appearing, however, that the suits were in fact commenced before the annual meeting in 1869, and that all the persons then constituting the board of directors are joined as defendants in the third in order of said suits, the question in regard to that suit stands differently from what was then supposed to be the case. The directors themselves are charged with participation in the fraud upon the corporation ; and, through the corporation, upon the plaintiffs. Redress is sought against the directors as well as against the other defendants. If it were necessary that proceedings should be commenced at once, in order to prevent irreparable wrong or to secure proper relief, this state of facts would alone justify the form of proceeding adopted in this case. But we do not think that such a necessity is made to appear.

The question then comes, whether, in a case which admits of delay for the purpose of attempting to correct or redress the alleged wrong through the action of the corporation in its own behalfi such attempt must not first be made, or shown to be useless. We are inclined to hold that it must. The directors represent the corporation for the time being; but they are not the corporation. Annual meetings, even if special meetings are impracticable, secure to the corporators ample means of correcting abuses practised by their officers, so far as correction is desired by the majority, or by the corporation as a body. It is not to be presumed that the body of the corporators will tolerate a wrong in their elective officers, by which they are themselves defrauded. That the present board of directors sustain or participate in the wrong, and refuse to act, or prevent action in the name of the corporation, delays the initiation of proceedings for its correction or redress. But if the delay is only temporary, and does not defeat or endanger the securing of proper redress ultimately, it does not create that necessity which is the warrant for this mode of proceeding.

¡By the amendment to the bill it is alleged that Tompkins and Thayer, ever since the year 1866, “ have owned or controlled a majority of the stock of the defendant corporation, and have controlled the election of directors and all other proceedings at the meetings of stockholders.” Also that a majority of the directors “ are now knowingly, wilfully and fraudulently endeavoring, in collusion with said Tompkins and Thayer, to secure and continue the control of said corporation and its property to said Tompkins and Thayer.”

These allegations, admitted by the demurrer for the purposes of this decision, may be regarded as sustaining, by implication, the proposition that any attempt to secure redress through the action of the corporate body itself, or to obtain authority to proceed in the name of the corporation against the wrongdoers, would be useless. That proposition is, in effect, equivalent to an attempt so to do and a refusal by the corporation to act or to permit action in its behalf. But such a refusal would again be equivalent to an adoption by the corporation of the very acts sought to be impeached, and a confirmation of the title or right by which the supposed wrongful gains are withheld.

The defendants contend that the corporation cannot be deprived of its right to determine, in all matters not ultra vires, whether to impeach or to ratify transactions supposed to be prejudicial to its interests. Granting this position, it would result that in no case, as to matters intra vires, could a suit be maintained by individual stockholders to enforce rights or redress wrongs of the corporate body, except where the delay necessary in order to secure corporate action might defeat or endanger the attainment of appropriate relief. If, when called upon to act, the corporate body should elect to confirm the supposed wrongful transactions, or should do so indirectly by refusal to act, they would no longer be open to impeachment. If, on the other hand, it should determine to take action, it would do so in its own name and behalf; and there would be no ground of necessity for proceedings in the name of the individual corporator.

We are not prepared to say that this would not be the case in all matters to which the only objection is that they are prejudicial, or supposed to be so, to the corporate interests merely, but not illegal in themselves, and affecting all the corporators alike. Perhaps it would be so whenever the surrender of property or the release of rights, acquired by the corporation through the transactions sought to be impeached, is necessary in order to reach the proper remedy. Great Luxembourg Railway Co. v. Magnay, 25 Beav. 586. The corporation might be entitled to determine for itself exclusively whether it would retain or release property or rights thus acquired, although it thereby precluded, or rendered ineffectual, all proceedings against parties who may have made illegal or fraudulent gains out of the transactions. These questions, however, we need not at present decide.

The cases now before us involve no release of property or rights by the corporation. The alleged wrongs are not merely prejudicial to the interests of the corporation ; but are such as tend- to deprive one part of the corporators of their rightful share in the fruits of the common property and business, for the advantage of others of the corporators This inequality and injustice is'accomplished by means of the control over the corporate organization and management, which has been secured by the parties so benefited. By the amendments to the several bills it is alleged that such control has been exercised since the year 1866, inclusive, by Tompkins and Thayer, with the aid of the other defendants. That which is important is the fact of such control and its exercise for such purpose, rather than the means by which it has been obtained. A majority of the corporators have no right to exercise the control over the corporate management, which legitimately belongs to them, for the purpose of appropriating the corporate property or its avails or income to themselves or to any of the shareholders, to the exclusion or prejudice of the others. And if any have obtained such unfair advantage by fraud or abuse of the trust confided to them as officers or agents of the corporation, it is not in the power of a majority to ratify or condone the fraud and breach of trust, so far as it affects the rights of the others, without reasonable restitution. This proposition, if stated in reference to formal transactions, such as assessments of capital or dividends of income, would not be questioned. Preston v. Grand Collier Dock Co. 11 Sim. 327. Hodgkinson v. National Live Stock Insurance Co. 26 Beav. 473. But the indirect appropriation of the common property, profits or means of profit, to their own benefit, by any portion of the corporators, in fraud of their associates, is equally incapable of being authorized or ratified by the vote of a majority of the corporators, or by any act or omission of the corporate body. Gregory v. Patchett, 33 Beav. 595. Atwool v. Merry-weather, Law Rep. 5 Eq. 464, note. If it were otherwise, the minority would be without méans of protection or redress against inequality and injustice. They would be equally so if they could obtain redress only in the name and through the action of the corporation itself. Such acts are wrongs done primarily to the corporation; and therefore the restitution or redress is to be secured to the corporation. But in their effect and essential character they are wrongs to the individual shareholder, inflicted upon his corporate interests by means of the control over those interests secured through the corporate organization and management. He can seek his redress only through the corporation ; but that does not give the corporation the right to deprive him of all redress. Any attempt to do so, whether regarded as the action of the corporation or of a majority of shareholders, would have the same voidable character as the original wrong. Officers of a corporation, dealing with it in matters of their own individual interest, stand very differently in this respect from strangers, who have no occasion to regard any other than the corporate body. If by means of their relations to the corporate management they secure to themselves undue advantage over their associates, they cannot retain it. Such transactions are voidable, not merely for want of authority in the officers by whom they are done, but because neither the officers nor the corporation itself, by whatever majority of votes it may act, can do, assent to, or confirm them. The wrong to the individual shareholder is the same, whether committed with the concurrence or subsequent approval and adoption of his associates controlling the corporation, or without it.

In our opinion, the facts of these cases, as set forth in the several amended bills, show such abuse of authority and breaches of trust by the defendants, in misappropriating the income of the corporate property to the benefit of themselves or of some of them, as cannot be ratified or remitted by the corporation ; and also such incapacity of the plaintiffs to move the corporation to take action for their redress, as entitles them, from necessity, to seek it in the form of these proceedings.

In the first and second of the bills a majority of the present directors are not joined as parties; but the necessity for the mode of proceeding adopted is shown by the allegations that Tompkins and Thayer own or control a majority of the stock and control all meetings of the corporation, and that a majority of the present directors are knowingly, wilfully and fraudulently endeavoring to continue and secure such control to them.

In support of these conclusions we may cite Atwool v. Merry- . weather, Law Rep. 5 Eq. 464, note; Hichens v. Cosgreve, 4 Russ. 562; Gregory v. Patchett, 33 Beav. 595; Hodges v. New England Screw Co. 1 R. I. 312; Allen v. Curtis, 26 Conn. 456 Hersey v. Veazie, 24 Maine, 9 ; March v. Eastern Railroad Co. 40 N. H. 548, 567; Robinson v. Smith, 3 Paige, 222, 233; Peabody v. Flint, 6 Allen, 52.

We do not think the authorities cited in support of the demurrers are in conflict with these positions. The leading case relied on, Foss v. Harbottle, 2 Hare, 461, was a bill to set aside a sale of property to the corporation. It was dismissed because it did not exclude the supposition that the proprietors might lawfully confirm the transaction; nor show that all means had been resorted to and found ineffectual to set the corporate body in motion, or that such efforts would have been useless. It involved, of course, a surrender of the property by the corporation. The vice chancellor, Sir James Wigram, in his opinion, p. 492, remarks as follows : “ If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights, to which in their corporate character they were entitled, I cannot think- that the principle so forcibly laid down by Lord Cottenham in Wallworth v. Holt, 4 Myl. & Cr. 619, 635, and other cases, would apply; and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.”

The defendants object to the second and third bills as being multifarious; and also that each embraces the whole subject matter of that which precedes it in order. They ask that the plaintiffs be required to elect which of said bills they will prosecute, and that they be restricted to one only.

Both positions, although apparently inconsistent, stand upon the same misconception of the purport of the plaintiffs’ allegations. The bills are somewhat obscurely drawn; but as we understand the purpose of the pleader, from their construction, the recitals, in the second and third bills, of the facts charged in the preceding, are not made as setting forth the ground of action ; and no relief is sought on account thereof. They are recitals merely, setting forth the relations of the parties and the circumstances tending to show a previous fraudulent combination between them, with which they entered upon and carried through the subsequent transactions which are made the ground of action.

The cause of action, and that for which alone relief is sought, in the first suit, is the illicit gains derived by Tompkins from his secret interest in the two leases to Jarrett, in violation of his trust as director, and shared in by Thayer and Faxon, the other defendants, in fraud of the corporation.

The second sets forth like gains, derived from the lease to Booth and Clarke, by Tompkins and Thayer, by the aid and fraudulent collusion of the other defendants as directors.

The third sets forth like gains, derived from the three leases of 1866, 1867 and 1868 to Junius B. Booth, by Tompkins and Thayer; Booth being also joined as defendant. The other defendants are all charged with aiding and fraudulently colluding in the misappropriation of the property and income of the corporation, for the benefit of Tompkins and Thayer.

These are three distinct causes of action; and could not be joined -without being obnoxious to the objection of multifariousness. We think they are not brought together in either bill. Separately neither is multifarious, upon its face. The third may prove to be so, if the allegations of fraudulent collusion and aid should be established against none but directors; Hersey having been director only in the years 1866 and 1867, and Faxon only in 1868. But each is charged with fraudulent participation during the years when not a director; and upon demurrer each must be held equally liable for the whole period covered by the charges of the bill.

It is unnecessary, in this connection, to consider whether tho relief sought is to be based upon the fraudulent gains of Tompkins and Thayer, or upon the loss to the corporation by means of the improper mode in which the leases have been made and the property of the corporation managed. The question is whether the plaintiffs are entitled to any remedy, and not as to its form or extent.

Another objection is, that in the first and second suits the lessees of the property, who confederated with Tompkins to defraud the corporation, and who shared in the profits, are not joined as defendants. If the suit is merely to recover the amount of profits received by Tompkins, Thayer and Faxon, and to require them to account therefor, as trustees for the corporation, the lessees have no interest in that question, and are not necessary parties to enable the court to render full relief, to the extent of what has thus been received by the defendants. The plaintiffs may not in that mode reach a remedy coextensive with the loss to the corporation.

If the redress sought is the loss or damages to the corporation, occasioned by the fraudulent conduct of the defendants, in relation to its property, the only questions are whether the defendants are guilty of the tort, and what damage has been suffered in consequence. The lessees are not necessary parties, either to the inquiry or to the judgment. Neither equity nor law is solicitous in regard to contribution between tortfeasors. Walker v. Symonds, 3 Swanst. 1, 75. Wilson v. Moore, 1 Myl. & K. 127.

It is also objected that the allegations, that a majority of the present board of directors are wilfully and fraudulently in collusion with Tompkins and Thayer, are traversable, and therefore that the directors so charged should be named and made parties defendant. But no injunction or other relief is sought against them. They aré not to be affected by any decree, otherwise than as general stockholders. Their action is not necessary to the execution of any decree sought in these cases. The allegations are made, not as a ground of action, but merely as laying the foundation for resort to this form of proceeding. They cannot be necessary parties therefore in any sense, or for an) purpose.

The necessity of seeking the remedy through and in behalf of the corporation, and therefore of making it a party defendant, is a sufficient answer to the objection that there is an adequate remedy at law.

Upon the whole case, we are satisfied that all three bills are maintainable upon the allegations they severally contain.

Demurrers and motion overruled.