Case Name: COBB et al., Respondents, v. LEE, Appellant
Court: Montana Supreme Court
Jurisdiction: Montana
Decision Date: 1927-10-29
Citations: 80 Mont. 328
Docket Number: No. 6,188
Parties: COBB et al., Respondents, v. LEE, Appellant.
Judges: Associate Justices Myers, Stark, Matthews and Galen concur.
Reporter: Montana Reports
Volume: 80
Pages: 328–338

Head Matter:
COBB et al., Respondents, v. LEE, Appellant.
(No. 6,188.)
(Submitted October 17, 1927.
Decided October 29, 1927.)
[260 Pac. 722.]
Messrs. Ralph J. Anderson and Messrs. Campbell & Toole, of Counsel, for Appellant, submitted a brief; Mr. Warren Toole argued the cause orally.
Mr. E. F. Bunker, for Respondents, submitted a brief and argued the cause orally.

Opinion:
MR. CHIEF JUSTICE CALLAWAY
delivered the opinion of the court.
The plaintiffs, thirteen in number, "as stockholders of Ford Creek Gold Mining Company, for the use and benefit of Ford Creek Gold Mining Company, a corporation," brought this suit against John Lee and Lee Gold Mining Company, a corporation. They alleged that on and prior to January 1, 1917, and at the date of filing the complaint, they were the owners of 158;000 shares of the stock of the Ford Creek Gold Mining Company, a Montana corporation, approximately 750,000 shares of stock of that company having been issued; that John Lee was, and on and for some time prior to January 1, 1917, and ever since that date has been a director, and the president, of the Ford Creek Gold Mining Company, and the person actually in charge of the business and operations and property of the company; that on and for some time prior to January 1, 1917, the Ford Creek Gold Mining Company was the owner of three lode mining claims in'the Cone Butte Mining District, and that Lee, while a director and the president of the company, in violation of his fiduciary relation to the company and to the plaintiffs as stockholders of the corporation, and in fraud of their rights as stockholders, and, in breach of his trust as such officer and director for the use and benefit of the plaintiffs, entered into an agreement with one Lehman whereby Lehman was to relocate the three mining claims and was to hold the same for Lee and on demand was to convey the same to Lee or such person or persons as Lee should designate; and that on January 1, 1917, Lehman, pursuant to the agreement, did relocate the mining claims and thereafter through one Anderson as an intermediary conveyed them to Lee, who conveyed them to the Lee Gold Mining Company. It is charged that Lee thus became the involuntary trustee for the benefit of the Ford Creek Gold Mining Company and its stockholders who owned stock in the company on January 1, 1917; that the stock register, books and all records, seals and office equipment of the Ford Creek Gold Mining Company were in the possession and under the control of Lee, and plaintiffs have no means of inspecting or securing control of the books; that Lee as president of the company has failed, neglected and refused to call a meeting of the stockholders of the corporation since the first day of January, 1917; that Lee was the owner "of shares of stock exceeding fifty per cent of the said stock issued on the corporation's books and that a stockholders' meeting wherein a demand was made that this action be brought, would be futile, useless and unavailing." Plaintiffs then allege that they did not learn of the fraud and deceit of the defendant Lee until the summer of 1925. They ask for a decree adjudging that Lee secured the entire capital stock of the Lee Gold Mining Company by fraud, and in violation of his fiduciary relation to the plaintiffs, and of his position of trust as a director and the president of the Ford Creek Gold Mining Company; that he is the involuntary trustee for the use and benefit of the stockholders of the Ford Creek Gold Mining Company of all the stock of the Lee Gold Mining Company standing in his name; that the Lee Gold Mining Company be ordered to cancel the certificates of stock standing in the name of Lee and to issue in lieu thereof certificates of stock to stockholders of the Ford Creek Gold Mining Company as their interests may appear.
A demurrer interposed to the complaint by the. defendants was overruled by consent of counsel and twenty days allowed for answer. The defendant Lee alone answered.
By reason of the result at which we are constrained to arrive it is unnecessary to narrate the subsequent pleadings of the parties, except to say that Lee denied the allegations which constitute the gravamen of plaintiffs' cause of action. The district court rendered judgment for plaintiffs, and defendant appealed.
In this jurisdiction it is settled law that stockholders may not sue on behalf of the corporation "until they have applied to the officers and directors for relief and have been answered by a refusal, or the course of conduct being pursued by the latter is such as would render an application for relief fruitless." (Deschamps v. Loiselle, 50 Mont. 565, 148 Pac. 335.)
In Brandt v. McIntosh, 47 Mont. 70, 130 Pac. 413, the court said that before minority stockholders may prosecute a suit founded on a right of action existing in the corporation itself they must allege that a demand has been made upon the board of directors or other governing body of the corporation for the relief they seek, or in lieu of a demand and refusal they must show a state of facts disclosing that the demand if made would have been entirely unavailing. In accord with these two cases are McConnell v. Combination M. & M. Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194; Moss v. Goodhart, 47 Mont. 257, 131 Pac. 1071; Kleinschmidt v. American Mining Co., 49 Mont. 7, 139 Pac. 785; Allen v. Montana Refining Co., 71 Mont. 105, 227 Pac. 582.
The governing body of private corporations in this state is the board of directors. (Sec. 5933, Rev. Codes 1921; Deschamps v. Loiselle, supra.) The number of directors must not be less than three nor more than thirteen. (Sec. 5905, Id.)
Presuming that the plaintiffs have stated their cause of action as favorably as they could we must conclude that they did not apply for redress to the directors who were in office immediately prior to the time this action was commenced. It is not asserted that there were not any directors in addition to the defendant Lee. In the absence of an allegation to that effect it must be presumed there were other directors. It is not alleged that the other directors, had they been requested to do so, would not have acted conformably to plaintiff's desires. It is not asserted that the other directors were controlled by Lee, the president of the corporation. (Kleinschmidt v. American Mining Co., supra.) Indeed, there is an entire absence of any allegation respecting a board of directors.. The allegation that Lee was the person actually in charge of the business and operations and property of the company will not suffice. The president was subject to the control of the board of directors. If, demand being made, he refused to begin suit, a majority of the board could have ordered the suit begun.
Neglect or misconduct on part of the president of the board is not sufficient to relieve plaintiffs from the necessity of demanding that a suit be brought in the name of the corporation. (Brandt v. McIntosh, supra.) Before stockholders can go into court they must first exhaust their remedy within the corporation itself. If they hold a majority of the stock, they may control the election of directors (sec. 5937, Rev. Codes 1921), or, if they hold two-thirds of the stock, they may remove an objectionable director, having caused to be called a meeting for that purpose. (Sec. 5940, Id.; Brandt v. McIntosh, supra.)
The court will not do for stockholders that which they may do for themselves. (Allen v. Montana Refining Co., supra.) A minority stockholder must make an earnest effort with the managing body of the corporation to induce remedial action on their part, and this must appear 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." (Hawes v. Oakland, 104 U. S. 450, 26 L. Ed. 827.)
While not essential to this decision we may say that the evidence tends to show that during 1916 two of the plaintiffs, Alphonso Jackman and E. K. Cheadle were directors, and that there was not a stockholders' meeting after that year. If there were but three directors, Jackman and Cheadle were a majority of the board. If so, they could have called a meeting of the board (sec. 5944, Eev. Codes 1921) and have taken the requisite action.
That the defendant Lee did not control the board is made to appear from his testimony in which he relates that at the last meeting of the board all the other directors voted against him.
The evidence fails to sustain the allegation respecting Lee's ownership of over fifty per cent of the stock of the company. On the contrary the books disclose that after March 3, 1915, Lee held 266,465 shares and no more. There were a great many stockholders.
The plaintiffs, as stockholders, had the right to inspect the books of the corporation (secs. 6008, 6009, Eev. Codes 1921), and while they alleged that they had "no means of inspecting or securing the control of said books," no proof was offered to sustain the allegation. It would seem that they were not hindered by lack of time, and no reason appears why they did not demand the right to inspect them. Indeed, upon a proper showing, the remedy of mandamus was available to them. (14 C. J. 862.)
The plaintiffs have failed, both as to pleading and proof. The action cannot be maintained. The law being as it is, the judgment must be reversed and the cause remanded to the district court of Fergus county, with direction to dismiss the action, and it is so ordered.
Reversed, with direction to dismiss.
Associate Justices Myers, Stark, Matthews and Galen concur.