Latimer v. Richmond, &c., R. R. , 39 S.C. 44 ( 1893 )

The opinion of the court was delivered by

Mr. Chief Justice McIver.

The plaintiffs, as stockholders of the Chester and Lenoir Narrow Gauge Railroad Company, bring this action for the purpose of enjoining the Richmond and Danville Railroad Company, and the Charlotte, Columbia and Augusta Railroad Company, from doing certain acts alleged to be injurious to and destructive of the corporate property of the company of which they are stockholders. The defendants demurred, upon the ground that the complaint does not state facts sufficient to constitute a cause of action, and upon their demurrer being overruled, they have appealed upon the several grounds set out in the record.

We propose to consider whether the complaint is fatally defective in the several particulars mentioned in the grounds of appeal, which may be stated substantially as follows: 1st. That there is no allegation that the directors or managing board of the corporation, in which plaintiffs claim to be stockholders, “have been guilty of some act of oppression, illegality, ultra vires or fraud.” 2d. That there is no allegation that the said board of directors, upon demand, have refused to apply for the relief demanded by plaintiffs. 3d. That there are no facts stated in the complaint, “showing an earnest effort on the part of the plaintiffs to obtain within the corporation itself the relief desired.”

It is necessary, therefore, to consider whether any of these allegations are wanting in the complaint, and if so, whether they are necessary to give the plaintiffs a good cause of action. For this reason, the complaint in extenso, without the exhibits, should be embraced in the report of the case, as it is too long for insertion here. We may say, however, that according to the allegations contained in the complaint, some time in the year 1883, the Charlotte, Columbia and Augusta Railroad Company leased the Chester and Lenoir Railroad, and immediately took possession thereof, and proceeded to use and operate the same; that thereafter, to wit: some time in the year 1886, the Charlotte, Columbia and Augusta Railroad Company undertook to sub-let the Chester and Lenoir Road to the Richmond and Danville Railroad Company, who soon thereafter took possession of the said road and assumed control thereof; that there was no authority conferred by statute or by agreement for such sub-letting' of the Chester and Lenoir Road; that in the property thus taken under its control was the station house of the Chester and Lenoir Company at Yorkville; that on or about the 9th of December, 1890, through the negligence of the Richmond and Danville Company, said station house was partly destroyed' by fire; that both the lessee and sub-lessee have neglected and refused to keep in good order and repair the said house, and, on the contrary, the said Richmond and Danville Company are tearing down the standing walls and removing the brick, stone and other material contained in the said building, and transferring the same to some point on some other line of railroad, and appropriating the same to its own use; that the Richmond and Danville Railroad Company, without authority of law or consent of the parties, has threatened to abandon the use of the locality upon which said building stood, as a station for receiving and delivering passengers and freight, and that the last two of the three companies named as defendants, “through their directors, have failed and neglected to interfere to prevent the commission of said injurious acts to the stockholders of the Chester and Lenoir Narrow Gauge Railroad Company, although said directors have been requested so to do, or to join in this action as plaintiffs, or to enter the same.

1 From this brief summary of the allegations of the complaint, it is very obvious that there is an absence of any allegation that the directors have been guilty of any “act of oppression, illegality, ultra vires, or fraud,” and it is equally obvious that no facts are stated “showing an earnest effort on the part of the plaintiffs to obtain within the corporation itself the relief desired.” Nor is there any allegation, distinctly made, that the board of directors have been applied to, to redress the wrongs complained of by plaintiffs, and that they have refused to comply with such demand. For while it is loosely stated in the sixth paragraph of the complaint that the directors “have failed and neglected to interfere to prevent the commission of said injurious acts, * * * although said directors have been requested so to do, or to join in this action as plaintiffs, or to enter the same,” yet there is no allegation of any formal demand upon the board of directors to take action, and of their refusal to do so, as seems to have been done in most, if not all, of the cases which we have consulted. But, as will be seen, we do not propose to rest our conclusion upon the absence of allegation of such formal demand and refusal, and, therefore, we do not deem it necessary to say more on this point, except to suggest that it would be much better pleading to allege a formal demand upon the board of directors and a refusal by them to act, as it might be entirely true that the application was made to some one or more of the directors, individually, and not to the board, which alone had the power to act officially in the matter.

2 Our inquiry, then, is, whether these allegations áre necessary to give the plaintiffs, as stockholders, the right to bring this action. While it is true that directors of a corporation are regarded as occupying the position of trustees, or at least quasi trustees, yet this trust relation is of a two-fold character — towards the corporation and towards the stockholders. The corporation having the full legal as well as equitable title to all the corporate property, while the stockholders have such title to their respective shares only-, it follows that, so far as the trust embraces or is concerned with the corporate property, the directors occupy the relation of trustees, or rather quasi trustees, for the corporation only; and, as to such property, there is no relation of trust between the directors and stockholders. Hence it follows, that when the directors are charged with the mismanagement or misappropriation of the corporate property, the action to restrain or redress such wrong must be instituted by the corporation, because the con-.duet complained of is a breach of the trust relation existing between the directors and the corporation, but is no breach of •any trust relation to the stockholders,' as no such .relation, in regard to the corporate property, exists between the directors and the stockholders. Accordingly, the general rule is, that in such a case, an individual stockholder, or one or more of them, cannot maintain an action for the redress of such wrong. 3 Pom. Eq. Jur., §§ 1090-1095. But with a view to prevent a .failure of justice, Courts of Equity recognize certain exceptions to tliis general rule; and these exceptions are nowhere better or more fully stated than in the leading ease of Hawes v. Oakland, 104 U. S., 450.

3 In that ease, Mr. Justice Miller, after showing what is the doctrine of the English Courts, as well as many of our State Courts, on the subject, and after saying that the case of Dodge v. Woolseg, 18 How., 331, relied on by counsel for respondents, does not establish, and was not intended to establish, any different doctrine, proceeds as follows: “We understand that doctrine to be, that to enable a stockholder in a corporation to sustain in a Court of Equity, in his own name, a suit founded on a right of action existing in’the corporation itself, and in which the corporation itself is the appropriate, plaintiff, there must exist as the foundation of the suit, some action, or threatened action, of the managing board of directors or trustees of the corporation, which is beyond the authority conferred on them by their charter or other source of organization; or such a fraudulent transaction completed or contemplated by the acting managers in connection with some other party, or among themselves, or with other shareholders, as will result in serious injury to the corporation, or to the interests of the other shareholders; or where the board of directors, or a majority of them, are acting for their own interest, in a manner destructive .of the corporation itself, or of the rights of the other shareholders; or where the majority of shareholders themselves are oppressively and illegally pursuing a'eourse in the name of the corporation, which is in violation of the rights of the other shareholders, and which can only be restrained by the aid of a Court of Equity.”

And he adds, what seems to us to be of especial importance: “But in addition to the existence of grievances which call for this kind of relief, it is equally important that, before the shareholder is permitted, in his own name, to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation itself, the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated, effort with the managing body of the corporation, to induce remedial action on their part, and this must be made apparent to the court. If time permits, or has permitted, he must show, if he fails with the directors, that he has made an honest effort to obtain action by the stockholders as a body in. the matter of which he complains. And he must show a case, if this is not done, where it could not. be done, or it was not reasonable to require it. The efforts to induce such action as-complainant desires on the part of the directors, and of the-shareholders, when that is necessary, and the cause of failure in these efforts, should be stated with particularity,” &c. That case has been recognized and affirmed in several subsequent cases in the Supreme Court of the United States as well as in the courts of several States. See Huntington v. Palmer, 104 U. S., 483; Detroit v. Dean, 106 Id., 537; Dimpfell v. Ohio, &c., R. R. Co., 110 Id., 209; Quincy v. Steel, 120 Id., 241; Slattery v. St. Louis, &c., Transportation Co., 91 Mo., 217; s. c. 60 Am. Rep., 245; Doud v. Wisconsin, &c., Railway Co., 65 Wisc., 108; s. c. 56 Am. Rep., 620; Alexander v. Searcy, 81 Ga., 336; s. c. 12 Am. St. Rep., 337; Rathbone v. Parkersburg Gas Co., 8 S. E. Rep., 570 (a West Virginia case). To same effect, see Cates v. Sparkman, 73 Texas, 619; s. c. 15 Am. St. Rep., 806; and Wallace v. Lincoln Savings Bank, 89 Tenn., 630; s. c. 24 Am. St. Rep., 625.

This dootorine, thus abundantly supported by authority, is also well founded in reason. For while it may be very true that a court of equity will and ought to permit a stockholder to bring an action for the redress or prevention of a wrong done or threatened to the corporate property, in order to prevent a failure of justice, in certain well defined exceptional cases, yet it is manifest that, to allow a single stockholder, or one or more of them, to force a corporation or its managing agents into a litigation, which the majority of the body or its officers may think unwise or unnecessary, would place it in the power of a single stockholder who may be dissatisfied with the management of the business of the corporation to involve the corporation in expensive litigation, which might be destructive to the interests of such corporation, and would permit a single diseontented, stockholder to force the majority, who have the right to control, to adopt his views of policy or incur the expenses and hazards of a lawsuit. The business of a corporation must, necessarily, be committed to the management of its officers or agents, by whatever name they may be called, and as it would be unreasonable to expect that their views of the proper policy to be adopted in such management can always command the approval of every individual stockholder, it is very manifest that if one or more of the dissatisfied stockholders should be permitted to precipitate the corporation into litigation, whenever the policy of the managing board does not meet with their approval, it would be impossible to conduct the affairs of a corporation with ayy success. It seems to us, therefore, that there is good reason for the general rule laid down above, and that when one or more stockholders undertake to bring an action like this, they should be rigidly required to state such a case as falls within one of the exceptions to such rule.

4 The practical inquiry, therefore, is whether the plaintiffs here have stated such a case. We think it clear that they have not. There is no allegation in the complaint imputing any fraud to the directors; no allegations that the directors have done, or threatened to do, any thing ultra vires; no allegation that the directors are acting for their own interest in a manner injurious to or destructive of therights of the other shareholders; and no allegation of an earnest effort on the part of the plaintiffs to obtain redress within the corporation itself. For even assuming that the loose and indefinite allegations in the sixth paragraph of the complaint amount to an allegation that the plaintiffs have demanded of the directors that they should bring this action, and that they have refused to do so, that would not bring this case within any one of the exceptions to the rule, as it may be that the directors had good reasons for so refusing, deeming it the best policy for the company whose interests were committed to their charge, to take no action in the premises. Furthermore, there is no pretense of any allegation that the plaintiffs have ever appealed to the stockholders, and no reason is stated why such an appeal has not been made. In fact, the whole case, so far as it rests upon the destruction of the station house, amounts simply to this: That the Richmond and Danville Railroad Company have done certain acts, deemed by the plaintiffs to be so injurious to the interests of the Chester and Lenoir Company as to call for redress by action at law, and that the directors (whether as individuals or asa board, does not appear), upon being applied to, have failed and neglected to interpose. This certainly does not bring the case within any of the recognized exceptions to the general rule, forbidding such an action as this on the part of the stockholders. cannot afford any ground for this action, for there is no allegation in the complaint that either the board of directors or the stockholders have ever been applied to, to

5 The matter of the lease, alleged to have been made without authority, relied upon by one of the counsel for respondents, bring an action for the purpose of having the same declared void, and have refused so to do. And as the complaint shows that this lease was entered into as far back as 1886, about five years before this action was commenced (3d August, 1891); and as it does not show that any dissatisfaction even has heretofore been expressed therewith, either by directors or stockholders, it is very clear that even if the lease was made without authority originally (as to which we express no opinion), yet it can afford no grounfi for this action brought by two of the stockholders.

6 The judgment of this court is, that the judgment of the Circuit Court be reversed, and that the case be remanded to that court, with' instructions to sustain the demurrer and dismiss the complaint.