Equitable Trust Co. v. Columbia National Bank ( 1928 )

In its essence, this is an action by a single stockholder of a corporation, for damages on account of injury to its individual stock, resulting from the alleged unlawful disposition by the defendantsof the assets of the corporation.

It is characterized in the statement contained in the transcript as "an action for actual and punitive damages for thealleged conversion of certain property described in the complaint."

Naturally, one would expect to find in the complaint or evidence some showing that the property alleged to have been converted was the property of the plaintiff. On the contrary, there is no question but that the property was that of the Commercial Investment Company, a corporation in which the plaintiff held 25 shares of stock.

The gravamen of the complaint is that the total assets of the corporation, consisting of the lot and building on Main Street, have been unlawfully transferred by the Commercial Investment Company, the corporation in which the plaintiff held its stock, to the Palmetto National Bank, by it to the Columbia National Bank, and by it to the Carolina Realty Trust Company, and that by these successive conveyancesthe value of the plaintiff's stock has been totally destroyed.

It seems to be assumed that the Carolina Realty Trust Company, the last purchaser and apparently the present owner, is a bona fide purchaser for value, without notice of any want of authority to convey, in the preceding grantors. At any rate that company is not a party to this action, and its title, or the right of the plaintiff, in the right of the corporation, to proceed against it, is not involved herein.

Hence it seems to me clear that, as stated in the opening paragraph above, this action must be considered as an action by a single stockholder of a corporation, for damages on account of an injury to his individual stock, resulting from an alleged unlawful disposition of the assets of the corporation.

It may be assumed that there is evidence tending to establish the following facts; in fact they may be assumed to betrue; and yet it may not follow by any means that the plaintiff can maintain the present action:

(1) That the plaintiff was and is a bona fide stockholder in the Commercial Investment Company to the extent of 25 shares, fully paid for.

(2) That the Commercial Investment Company, without notice to the plaintiff, and without authority, conveyed the real estate in question to the Palmetto National Bank.

(3) That consequently the Palmetto National Bank acquired no title, and could not convey a valid title to the Columbia National Bank, which it attempted to do.

(4) That consequently the Columbia National Bank acquired no title, and could not convey a valid title to the Carolina Realty Trust Company, which it attempted to do.

(5) That both the Palmetto National Bank and the Columbia National Bank, at the dates of the several conveyances to and by them, respectively, had actual notice of the plaintiff's status as a stockholder in the Commercial Investment Company, whose property was being disposed of unlawfully.

(6) That the plaintiff has duly qualified itself, under the principles announced in Latimer v. Railroad Co., 39 S.C. 44;17 S.E., 258, and cases following that case, to institute the present action, in the right of the corporation.

The real estate unquestionably belonged to the corporation. An unlawful disposition of it was a wrong to the corporation. If the property was disposed of at a price below its value, of course the interest of each stockholder was affected by such disposition; it indirectly caused a loss to them. But the plaintiff, as a stockholder, had no title or interest in the property disposed of, or in the damages which might be recovered for an injury to it; he had no title or interest in it which was entitled to individual protection; whatever interest the plaintiff possessed was an interest, as a stockholder,in the right which the corporation had in or in respect to its assets. The right and remedy of a stockholder must be worked out through the interest of the corporation in the damage which may have been done its property; and that must be the injury sustained, in this particular case, by reason of an illegal disposition of the assets of the corporation.

Outside of authority upon the proposition, it must appear just and proper. There may have been 100 stockholders. Shall each one be allowed to maintain an action, regardless of the question whether, as a matter of fact, the corporation has suffered any damages at all, by the disposition of its assets, and recover the amount paid for his stock, plus punitive damages? I cannot think so.

The action is specifically characterized as "an action for actual and punitive damages, for the alleged conversion ofcertain property described in the complaint." Extract from transcript of record. The property described is real estate, and of course an action for the conversion of real estate will not lie. 38 Cyc., 499, 2002.

But if it could be entertained, the wrong is one to thecorporation, and must be redressed in the right of the corporation.

The authorities cited in the opinion of Mr. Justice Blease, which sustain the right of an individual stockholder to maintainan action, upon the ground that application under circumstances to the corporation or to its managing directors, would be a vain and useless ceremony, are unquestioned; but they all hold that the action by the stockholder is in the rightof the corporation; they are very far from holding that, because he may have this right, he has also the right to maintain an action based upon a consequent depreciation of his stock. That which depreciates his stock, is a withdrawal of certain assets of the corporation; that is an injury to the corporation; it justifies the corporation in seeking redress therefore, which inures to the benefit first of the creditors of the corporation, and then of the stockholders.

In 6 Fletcher Corp., § 4051, it is said:

"While an injury to the corporation resulting from wrongdoing, fraud, or negligence of corporate officers operates, indirectly, as an injury to stockholders, the injury to stockholders is secondary and the injury to the corporation primary. It is for the corporation, therefore, to institute action for wrongs inflicted upon it by corporate officers or to set aside a contract made in fraud upon corporate rights. * * * Illustrating the general principle further, * * * if the property of a corporation is converted by a stranger, or if a trespass is committed thereon, or if any injury to its property is caused by the negligence of another, or if an injury is threatened, the injury is to the corporation, not to the stockholders individually, and it is for the corporation, and not for the stockholders as individuals, to take proper steps, by action or otherwise, to prevent or redress the injury."

And:

"The action is derivative — i. e., in the corporate right if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or seeks to recover assets for it, or prevent dissipation of them."

And at Section 4052:

"Since the rights arising out of the contracts of a corporation belong to it, and not to the stockholders individually, and injuries to the property of the corporation caused by the wrongful acts or negligence of others are injuries to the corporation itself, it necessarily follows that any action at law to enforce such a contract, or recover damages for its breach, or to obtain redress for such injuries, must be brought by the corporation in the corporate name, and through its managing officers. Neither a single stockholder nor all the stockholders, as individuals, can maintain an action at law in their own names upon a contract made by the corporation, or for injuries committed against the property of the corporation, as trespass, trover for the conversion of property, an action on the case for injuries caused by the acts or negligence of another or an action of replevin or ejectment to recover corporate property. All such actions must be brought in the corporate name, and cannot be maintained by stockholders in their own names, either on their own behalf because of their equitable interest in the property of the corporation, or on behalf of the corporation. This principle applies whether the wrongs complained of are the acts or negligence of strangers, or the fraudulent or wrongful acts or negligence of the directors or managing officers of the corporation. A statutory cause of action for damages is within this rule if it accrues to the corporation. The fact that one person owns all the stock of a corporation does not enable him to sue in his own name for an injury to the corporation, for the corporation is none the less a separate and distinct person in the law."

"As stated above, it makes no difference in the application of this rule that the injury is caused by the officers of the corporation in their management of its affairs. Misfeasance or negligence on the part of the managing officers of a corporation, resulting in loss of its assets, is an injury to the corporation, for which it must sue. A stockholder cannot sue for damages because his stock is rendered worthless."

And at page 6868:

"At law there is no exception to this rule, even when the corporation refused to sue. In such a case, however, as we shall see in the following sections, the stockholders have their remedy in equity."

Supporting the text he cites California — Gorham v. Gilson,28 Cal., 479. Connecticut — Allen v. Curtis,26 Conn., 456. Georgia — McAfee v. Zettler, 103 Ga. 579;30 S.E., 268. Steele Lumber Co. v. Laurens Lumber Co., 98 Ga. 329;24 S.E., 755. Bethune v. Wells, 94 Ga. 486;21 S.E., 230. Indiana — Tomlinson v. Bricklayers' Union No. I,87 Ind., 308. Cutshaw v. Fargo, 8 Ind. App. 691;34 N.E. 376; 36 N.E., 650. Louisiana — Faurie v. Millaudon, 3 Mart. (N.S.), 476. Maine — Kennebec P.R. Co. v.Portland K.R. Co., 54 Me., 173. Smith v. Poor,40 Me., 415; 63 Am. Dec., 672. Drinkwater v. Portland MarineRy. Co., 18 Me., 35. Hodsdon v. Copeland, 16 Me., 314. Massachusetts — Bartlett v. Brickett, 14 Allen, 62. Smithv. Hurd, 12 Metc., 371; 46 Am. Dec., 690. Michigan —Randall v. Dudley, 111 Mich., 437; 69 N.W., 729. Talbotv. Scripps, 31 Mich., 268. People v. State Treasurer,24 Mich., 468. New York — Moran v. Vreeland,81 Misc. Rep., 664; 143 N.Y.S., 522. Niles v. New York Cent. H.River R. Co., 35 Misc. Rep., 69; 71 N.Y.S., 271. Thompsonv. Stanley (Sup.), 20 N.Y.S., 317. Bennett v. AmericanArt Union. 7 N.Y. Super. Ct., 614. Wisconsin —Button v. Hoffman, 61 Wis. 20; 30 N.W., 667; 50 Am.Rep., 131.

At Section 4064, it is said:

"If the directors or other officers of a corporation exceed their authority, not under an honest mistake, or are guilty of fraud or negligence in the management of the affairs of the corporation, threatening or causing loss to the corporation the corporation, by action of the majority, may remove them, and may sue them for redress. In such a case, the right to remove them and to sue for redress is in the corporation, for the injury is to the stockholders collectively, and individual stockholders cannot maintain a suit for relief or redress, unless for some reason it cannot be obtained through the corporation. If for any reason, however, relief or redress cannot be obtained through the corporation, as where the guilty directors own a majority of the stock or the majority of the stockholders approve or acquiesce in the fraud or mismanagement, or will not sue or take other steps to prevent the same, or hold the directors liable, or where there is no time to obtain action by the stockholders, any stockholder may obtain appropriate relief for the benefit of the corporation by a suit in equity on behalf of himself and other stockholders."

In Thomps. Corp. (3d Ed.), § 4560, it is said:

"In other words, a stockholder cannot sue individually for injuries affecting the corporate or collective rights. This duty the law devolves on the directors as the trustees and agents of the corporation, and, in the absence of a charge of fraud or collusion, it will generally be presumed that the directors are acting for the best interests of the corporation. * * * The fact that one has become the sole owner or a majority owner of the stock of a private corporation does not entitle him to sue in his own name on a claim belonging to the corporation. The reason for the rule is that the duty, the breach of which constitutes the ground of action, is a duty to the corporation considered as a legal entity and not a duty to any particular stockholder, and that the officers, directors, or agents guilty of the breach of duty are not in theory of law the agents of the shareholders, but are the agents of the company. The right of action at law to redress such wrongs therefore vests exclusively in the corporation while it is going concern or in its receiver or other legal representative after it has passed into liquidation. The suit, if allowed, is to redress wrongs to the corporation and not to redress individual wrongs to the stockholders. A stockholder has no direct interest in such a suit. His interest is merely contingent and subordinate."

At Section 4561 it is said:

"It follows from the foregoing rule that shareholders cannot maintain a bill to redeem corporate property which has been sold under a mortgage * * * nor to collect the corporate assets," etc.

The rule is very clearly stated in the case of Kickbusch v.Ruggles, 105 S.C. 525; 90 S.E., 163:

"The general rule is that one or more stockholders cannot maintain such an action, as the right is in the corporation. But the Courts have recognized exceptions to the rule. One is that, when one or more stockholders make it appear that their rights and interests are jeopardized or are being injured, or have been injured by the unlawful acts of the corporation, or its governing body, and that they have endeavored, in good faith and without effect, to have their just grievances redressed within the corporation, by proper appeals to the governing body or the majority of the stockholders, or when they alleges facts and circumstances which induce the conclusion that such appeals would have been useless, they may maintain such action in equity in their own names for their own benefit and for the benefit of all other stockholders in like plight who may come into the action and contribute to the expenses thereof."

The fact that in such an action, the proceeding is instituted for the benefit of the individual stockholder and all otherstockholders is necessarily conclusive of the fact that the suit has been instituted in the right of the corporation which could not be induced to do so. It can only be instituted inequity, and in the right of the corporation; it cannot be instituted under any circumstances at law, or to redress an injury to the indirect interests of the stockholder; that is, to his derivative interests derived solely from his relation as stockholder. Wells v. Dane, 101 Me., 67; 63 A., 324.Bartlett v. R. Co., 221 Mass. 530; 109 N.E., 452. Brockv. Poor, 216 N.Y., 387; 111 N.E., 229. Niles v. RailroadCo., 176 N.Y., 119; 68 N.E., 142. Kelly v. MississippiRiver Coaling Co. (C.C.), 175 F., 482. Elmergren v. Weimer, 138 Wis. 112; 119 N.W., 836. Caffall v. BanderaTel. Co. (Tex.Civ.App.), 136 S.W. 105.

This is an action at law, for damages; it was so treated, placed on calendar 1, tried by a jury; a verdict in favor of the plaintiff for $5,000 rendered; judgment entered.

The plaintiff's cause of action which he might have presented, upon a showing that the corporation would not act, was a cause of action in the right of the corporation, just as if the corporation itself were the plaintiff; he could not have presented this cause of action at all by an action at law, even if he had made the proper showing of the corporation's failure to act; the action is cognizable only in equity.

The question whether the plaintiff, in view of the alleged unlawful sale, had the right to require an accounting by the purchaser of the real value of his stock prior to the sale, is suggested but not decided, for this is not such an action. See Tanner v. R. Co., 180 Mo., 1; 79 S.W. 155; 103 Am. St. Rep., 534.

I think, therefore, that the judgment of the Circuit Court should be reversed, and the case remanded to that Court for the direction of a verdict in favor of the defendants under rule 27.

MR. JUSTICE CARTER concurs.