Opinion ID: 1518197
Heading Depth: 1
Heading Rank: 5

Heading: The Plaintiff's supplemental claim for derivative relief.

Text: The Justice also rejected the second ground. He noted that Plaintiff alleged Loew's taking the title to the property in his own name in his first supplemental pleading which was filed October 3, 1969; that Plaintiff was not a stockholder at the time of Loew's alleged mismanagement of corporate property; that in his second supplemental pleading Plaintiff alleges he bought Laskey's stock on May 29, 1970; that therefore (being charged with knowledge of all facts well pleaded) Plaintiff is held to have known of the alleged wrong of Loew as an officer dealing with corporate property at the time he purchased Laskey's stock. The Justice inferred that Plaintiff acquired stock in the corporation for the purpose of gaining standing, if possible, to bring a stockholders derivative action. The Justice concluded that the correct governing principle applicable to such a situation, absent a controlling statute or rule of court, is that the Court should not and will not under ordinary circumstances lend its aid to such litigation of a purchased grievance and a stockholder situated as is this plaintiff in this case has no standing to bring a derivative action. The derivative action is distinguished from an individual's action which is brought by a stockholder for a loss separate and distinct from that suffered by the other stockholders. The right of a stockholder to sue on behalf of a corporation to protect or restore the assets of the corporation from ultra vires actions and other acts of mismanagement developed in equity. In theory the action is one to protect the corporation itself against acts from which its management is unwilling or unable to protect it. The wrong complained of is one to the corporation and the shareholder is a nominal plaintiff. Ulmer v. Maine Real Estate Co., 93 Me. 324, 45 A. 40 (1899). With the proliferation and increased complexity of problems of stockholder-management relationship the principle has become extended and refined and is covered by statute and rule in many jurisdictions. Experience has taught us that this exercise of the stockholder's right frequently results in preventing corrupt or careless managerial dissipation of corporate assets and that it has the effect of elevating corporate morality. On the other hand, it has also resulted in some abuses of the right and in the bringing of strike suits with grim prospects of expensive and time consuming litigation which are finally settled for nuisance value. We know that even a deluge of meritorious actions might overwhelm the corporation and stifle its operating capacity to the loss of all the shareholders. Koster v. (American) Lumbermens Mutual Casualty Co., 330 U.S. 518, 67 S.Ct. 828, 91 L.Ed. 1067 (1946); Note, Extortionate Corporate Litigation: The Strike Suit, 34 Colum.L.Rev., 1308, N. 1 (1934). A principal cause for concern in the application of the principle of derivative right of action has been the question of whether a stockholder has standing to bring a derivative action to remedy a wrong which occurred prior to his acquisition of his shares of stock. There is conflict on this issue with the majority favoring the rule that to entitle a minority stockholder to attack a wrongful transaction it must appear that he was a stockholder at the time of the commission of the act complained of (or that his shares of stock have devolved upon him since by operation of law.) Jepsen v. Peterson, 69 S.D. 388, 10 N.W.2d 749, 148 A.L.R. 1087 (1943); Sorin v. Shahmoon Industries, Inc., 30 Misc.2d 408 and 429, 220 N.Y.S.2d 760 (1961); Annotation 32 A.L.R.2d 854, § 3; 69 A.L.R.2d 569, § 4 [a]; 19 Am.Jur. 2d, Corporations § 564; 18 C.J.S. Corporations § 518. Ownership of stock contemporary with the occurrence of the wrong is necessary for standing under the Federal Rules of Civil Procedure. F.R.C.P. 23(b). It is proposed as a requirement under the American Bar AssociationAmerican Law Institute Model Business Corporation Act, § 43A. The philosophy of the courts pro and con is discussed in a frequently quoted opinion by the late Dean Roscoe Pound, written while he was Commissioner for the Supreme Court of Nebraska. Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W. 1024, 1028-1031 (1903). The Nebraska Court was convinced that a bystander should not be entitled to purchase a grievance against the Corporation. Equitable principles would be offended, the Court said, by a situation in which the owner of stock who consented to or participated in acts of bad management might subsequently sell his shares to a purchaser who then made a profit by contesting these very acts. The Court's decision was based upon the theory that the purchaser of stock buys only the vendor's present interest in the corporation and its assets and not any cause of action which his vendor may have had. This later view, it is said by the Courts holding to this position, is supported by the rationale that the stockholders had the option to complain or to acquiesce in the mismanagement and as they have tacitly exercised this option by inaction the option is not capable of being later transferred. Besides, the Court said, except where mismanagement continues or affects him specially or peculiarly in some manner the subsequent purchaser should take things as he found them. Equitable principles have been invoked to bar the standing of a subsequent purchaser who has bought stock with knowledge of the wrongs of which he complains. Bateson v. Magna Oil Corp., 414 F.2d 128 (5th Cir. 1969). Some courts have applied the principle of estoppel where the vendor of the subsequent purchaser participated in or consented to the wrongs later the subject of complaint. Matthews v. Headley Chocolate Co., 130 Md. 523, 100 A. 645 (1917); Annotation 16 A.L.R.2d 497, § 8. A substantial minority of jurisdictions take the view that the right to sue for past wrongs is a corporate asset and that the subsequent purchaser acquires all the rights of the person from whom he bought the stock, including the right to bring a derivative action for past mismanagement. Just v. Idaho Canal & Improvement Co., 16 Idaho 639, 102 P. 381 (1909); Continental Securities Co. v. Belmont, 206 N.Y. 7, 99 N.E. 138 (1912). Some doubt has been expressed as to the position of our own Court on this issue. 1 Field, McKusick and Wroth, Maine Civil Practice § 23.3 at 393 (2d ed. 1970). Hyams v. Old Dominion Co., 113 Me. 294, 93 A. 747 (1915) presented a complaint of mismanagement which was not significantly different from our own problem. Defendant company was a Maine holding company which in fact owned shares of a New Jersey corporation that had never been transferred to the Defendant company but were actually held in the names of two of its directors. The two directors persisted in keeping the record title to the stock in their own names as individuals without any formal authority to do so from either the Board of Directors or the stockholders. Although the majority stockholders were informed of the irregular situation, the record did not indicate that the predecessors in title of the Plaintiffa subsequent purchaser of stock in the Defendant corporationwere aware of the mismanagement. Plaintiff's bill in equity sought to secure record legal title to the property in the Defendant corporation. It was urged in defense, in part, that the Plaintiff cannot complain because the wrong, if any, was done before the Plaintiff became a stockholder. The Court on appeal disposed of this argument without extended analysis of the principle with which we, too, are concerned saying only: One answer to this, and a sufficient one, is that the wrong is a continuing one. If there was a wrong before the Plaintiff became a stockholder it is no less a wrong since. It is an existing condition, alleged to be a corporate wrong, that he complains of. We realize that the continuing wrong theory has been criticized (Pergament v. Frazer, 93 F.Supp. 9, 12 (D.C.Mich.1949); Weinhaus v. Gale, 237 F.2d 197 (7th Cir. 1956)) and that, in a sense, all unrectified wrongs done to a corporation's financial stability are continuing as, theoretically, at least, the corporation will continue indefinitely to be X dollars poorer than it would have been if mismanagement had not cost it X dollars on the occasion complained of. [9] We interpret the Hyams Court's holding on this issue to mean that when officers of the corporation have taken possession of corporate property wrongfully and are holding it wrongfully, a stockholder is not barred from seeking to restore it to the corporation by the fact that the original wrongful taking occurred prior to his acquisition of the stock. [10] In the case before us we have the similar situation of corporate property allegedly taken without justification by an officer before Plaintiff bought his stock but still retained by the officer in what Plaintiff claims is a defiance of the Corporation's right to have it returned. Certainly the Hyams opinion makes clear that Maine decisional law does not bar the use of the derivative action by a subsequent purchaser per se, and the same attitude is reflected in our Maine Rules of Civil Procedure. Unlike its Federal counterpart, our M.R.C.P., Rule 23 does not require that shareholders who bring derivative actions to enforce duties owed by officers to the corporation must have owned their stock at the time of the wrong. We must bear in mind that a stockholder's derivative action is an equitable remedy and equitable principles are controlling. At least when it is not established by statute, the rule of required ownership contemporary with the wrong does not appear to be absolute in jurisdictions which have accepted the rule. We find frequent use of qualifying language such as unless the mismanagement or its effects continue and are injurious to him, or it affects him specially in some other manner. Jepsen v. Peterson, supra; Home Fire Ins. Co. v. Barber, supra. While we share the frequently expressed belief that a subsequent purchaser of stock should not be held to have purchased a grievance, we find nothing inequitable in a person's acquiring stock for the purpose of gaining a base from which to seek to redress a grievance which both he and the Corporation had previously suffered. We do not consider it necessary that the Plaintiff's motive in bringing the action be exclusively or even primarily for the benefit of the Corporation and its stockholders. [11] If, as Plaintiff claims here, an act of fraud and mismanagement has deprived him of property he has attached to secure his pending action, we see nothing inequitable in his attempting to broaden the base of his action by asserting a derivative right which would, if successful, also secure corporate assets for the benefit of other creditors, if any.