Court Opinion

ID: 6638591
Source: CourtListenerOpinion
Date Created: 2022-07-20 20:43:27.671162+00
Date Added: 2024-06-11T15:59:09.286122
License: Public Domain

De Witt, J.
— The question in this case is simply whether under the facts, as recited in the statement above, the district court had jurisdiction to appoint a receiver. (State ex rel. Murphy v. District Court, 10 Mont. 401. See, also, French Bank case, 53 Cal. 550.) There is here no question of the court’s discretion under consideration.
The relators in this application rely very largely upon the decision in the French Bank case, but we think that the case at bar is distinguishable from that case in many respects, and, in order to make the distinction apparent, we quote as follows from the California case:
“Irrespective of the effect of the fifth subdivision of section 564 of the Code of Civil Procedure, which will be presently considered, there is no jurisdiction vested in courts of equity to appoint a receiver of the property of a corporation in a suit prosecuted by a private party. This is only to say that there is no jurisdiction vested in these courts in such a case to dissolve a corporation; for the power of a receiver, when put in motion, of necessity supersedes the corporate power. It necessarily displaces the corporate management and substitutes its own, and assumes, in the language of the order under review, ‘to do all and every thing necessary (in the judgment of the receiver, under the advice of the court) to protect the rights of the creditors and depositors of said corporation.’ This precise question was brought directly under consideration here in the case of Neall v. Hill, supra, where, in a suit brought by a stockholder, a receiver had been appointed by the district court *332to take possession of the property of the ‘ Gold Hill and Bear River Water Company,’ a corporation existing under the laws of this state. The opinion in that case, rendered by Mr. Justice Cope, and concurred in by the whole court, after referring to the adjudicated cases in England and in this country, uses this language: ‘ This decree, if permitted to stand, must necessarily result in the dissolution of the corporation; and in that event the court will have accomplished, in an indirect mode, that which, in this proceeding, it had no authority to do directly. It is well settled that a court of equity, as such, has no jurisdiction over corporate bodies for the purpose of restraining their operations, or winding up their concerns. We do not find that any such power has ever been exercised in the absence of a statute conferring the jurisdiction.’ Of course it is not to be doubted that the trustees of a corporation, the persons who constitute its direction, and from time to time exercise the corporate authority in the management of its affairs, are subject to the control of courts of equity, or, as observed by Chancellor Kent, ‘ that the persons who from time to time exercise the corporate powers may, in their character of trustees, be accountable to this court [the court of chancery] for a fraudulent breach of trust; and,’ he adds, ‘to this plain and ordinary head of equity the jurisdiction of this court over corporations ought to be confined.’ (Attorney General v. Utica Ins. Co., 2 Johns. Ch. 388.) And in exercise of these admitted equity powers of the court, referable to the well-known grounds upon which its jurisdiction ordinarily proceeds, embracing the cognizance of fraud, accident, trust, and the like, the rights of natural persons injured or put at hazard through corporate proceedings unauthorized by law will find ample protection and redress. But even in such a proceeding as that the trustees must, of course, be made parties defendant; and it will be observed, upon looking at the complaint of Gallagher in this view, that it is not substantially sufficient in its scope to put the equity powers of the court in motion for any purpose. The corporation itself being the sole party defendant the trustees — those persons upon whom the management of its affairs is devolved — are not parties, nor is any relief sought against them personally. That there is no inherent power in *333the district courts, as being courts of equity, to appoint a receiver in such a case as that presented by the complaint of Gallagher, is, therefore, apparent both upon principle and authority.”
In the California case an important element in the decision, as it appears, was that the appointment of the receiver acted as a dissolution of the corporation. In the case at bar no such result is intended by the order appointing the receiver or is accomplished by that order. It is true that in the complaint the case in the district court asks for a dissolution of the corporation, but whether such relief may be granted in that action is not now before us for review. The complaint also asks another relief, as set forth in the statement, namely, that the negotiation of the notes described be restrained; that the foreclosure of the mortgage be prohibited, and that the notes and mortgage be declared null and void. While the determination of these matters is pending in the action the receiver is to act. His appointment is pendente lite only, and he is authorized to do only those acts which are peculiarly pendente lite. Again, in the French Bank case, supra, one ground of the decision was that the action was against the corporation only (see page 546 of the decision) and not against the mal-feasing trustees, that is, the “persons upon whom the management of its affairs is devolved.” (Page 551.) But in the case at bar the managing officers of the corporation are joined as defendants, and their unlawful acts are sought to be set aside, and their future wrongful conduct enjoined. The receiver is not to wind up the corporation under his appointment; he is simply to manage the affairs of the same, while charges of the most outrageous frauds by the managers and controllers of the corporation are being investigated in the trial of the action. We are fully aware of the reluctance of courts of equity to interfere by receivership in the management of corporations, or to take that management from trustees elected by the shareholders,
It is said in Morawetz on Private Corporations, section 281, as follows: “A court of equity will grant all relief to a shareholder which the nature of his case may require. But it has always been a settled principle that no interference with the *334management of a corporation can be justified, unless such interference is absolutely necessary to the attainment of justice. The reason of this rule is obvious. The officers of a corporation are generally elected by a vote of the shareholders. Every shareholder has a voice in their appointment, and may insist that they shall represent the corporation when duly appointed. If an officer is guilty of a breach of duty he may, in many cases, be removed by act of the corporation; but no minority of the shareholders has any authority to restrain his action, or remove him and appoint another officer in his place. Nor can a court of chancery interfere at the suit of a portion of the shareholders and remove an offending officer, or even enjoin him generally from acting for the corporation, unless this be essential to the protection of the corporate rights; as, for example, where the directors have conspired to defraud the corporation, or have otherwise shown themselves to be totally unfit to be intrusted any longer with the management of the company’s affairs. The court must ordinarily confine its remedy to the redress of the specific wrongs which have been charged.”
But the case before us is not an ordinary one, and perhaps it may be doubted that many such histories of fraud will be found in the conduct of human affairs. It is difficult to imagine a case more thoroughly saturated with fraud than this which was presented to the district court on the application for the appointment of a receiver. Four shareholders of two small corporations, which were paying handsome dividends, obtained control of the majority of the stock, and elected their own officers. These four conspirators, instead of paying $500 a month dividends which the corporations were earning, proceeded to put that money into their own pockets. They kept false books to deceive the shareholders. They pretended to buy for the corporations an absolutely worthless franchise, when they already owned two good and valid franchises, which were more than ample for the same purpose. They gave the corporations’ notes for this worthless franchise, and mortgaged all of the property of the corporations for the purpose of having the mortgage foreclosed and the property of the corporations wiped out. It is needless to enlarge upon these facts; they are all set forth in the statement preceding this *335opinion. This is a story of wrecking and robbing that would make a pirate of the Spanish main exclaim, in the language of Lord Clive, “I am surprised at my own moderation.” Is not interference here absolutely necessary, as Morawetz says, to the attainment of justice? Again Morawetz remarks, as quoted above, the court of chancery will not interfere at the suit of the shareholders unless this be essential to the protection of the corporate rights. We can scarcely conceive of a case where it would be more essential than it is here, for the protection of the corporate rights; for, if the interference is not had, the corporate property will be swept away from the corporations into the grasp of the conspirators. And, while the investigation into the acts of the Sommers-O’Kourke party is being made by the court, should the court allow this same band of marauders to remain in possession of the corporations and their property, and continue to convert the assets to their own use, and exercise their own pleasure as to the trusts imposed upon them? To allow such a proceeding, it seems to us, would shock the conscience of the most indifferent court. Our statute provides that “ a receiver may be appointed by the court in which an action is pending, or by the judge thereof .... 6. In all other cases where receivers have heretofore been appointed by the usages of courts of equity.” (Code Civ. Proc., § 229.) We are of opinion that the decisions of the courts sustain the doctrine of the powers and the usages of courts of equity in such a case as that which was made in the showing before the district court.
We note the following language from a very recent decision (January, 1894) of the Kansas supreme court. While the Kansas statute is broader than ours, and the case of In re Lewis, 52 Kan. 660, is decided largely upon the statute of that state, still the following remarks of the Kansas court are valuable, as is also the collection of authorities appended to the decision. We extract from the opinion as follows:
“By the averments of the petition it would appear that all the officers of the corporation have conspired together to divert its business to another company, and to absorb its earnings and assets, and appropriate the same to their own uses. Under those circumstances it would be useless to apply to the officers to bring *336an action against themselves, and in such cases the law permits the appointment of a receiver at the instance of a stockholder. In most cases of this character no other adequate remedy exists. The appointment of a receiver is not necessarily a proceeding to dissolve a corporation, nor will it necessarily result in its extinction. The property and assets of the corporation, which are being dissipated and fraudulently absorbed, will be preserved and rightfully applied under the supervision of the court, and may be restored to the officers of the corporation, when there has been a change of officers, or when it is deemed prudent and safe to restore the property and afiairs of the corporation to its duly constituted officers. (See Bank v. United States etc. Tile Co., 105 Ind. 227; Pike Co. v. Hammons, 129 Ind. 368; Order of Iron Hall v. Baker (Ind. Sup. Ct.), 33 N. E. Rep. 1128; Haywood v. Lumber Co., supra; Consolidated Tank Line Co. v. Kansas City Varnish Co., 43 Fed. Rep. 204; Morawetz on Private Corporations, § 281; Pomeroy’s Equity Jurisprudence, § 1334; High on Receivers, § 313; Spelman on Private Corporations, § 1001; 20 Am. & Eng. Ency. of Law, 272.)”
We also find it stated in High on Receivers, section 313, as follows: “It has already been shown that in most of the states of this country the general jurisdiction of courts of equity over corporations has been enlarged to the extent of authorizing the appointment of receivers in behalf of creditors and shareholders.”
The supreme court of Michigan (October, 1892) in Miner v. Belle Isle Ice Co., 93 Mich. 97, after reviewing the history of a fraud, which perhaps is worthy to be ranked with that of the case at bar, says: “ The present case furnishes an instance of gross abuse of trust. Must the eestui que trust be committed to the domination of a trustee who has for seven years continued to violate the trust? The law requires of the majority the utmost good faith in the control and management of the corporation as to the minority. It is of the essence of this trust that it shall be so managed as to produce for each stockholder the . best possible return for his investment. The trustee has so far absorbed all returns. What is the outlook for the future? This court, in view of the past, can give no assur-*337anees. It can make no order that can prevent some other method of bleeding this corporation, if it is allowed to continue. If Lorman be removed, who shall take his place? He has the absolute power to determine. Once deposed he may elect a dummy to fill his place? There are practically but three persons concerned, Miner, Lorman, and Lorrissa Carpenter, and she has for seven years, in fraud of complainant’s rights, been paid a dividend to secure her acquiescence. Who has any right to complain if ample and complete justice is awarded to Miner? Who shall be permitted to stand between him and an adequate remedy? This corporation has utterly failed of its purpose, not because of matters beyond its control, but because of fraudulent mismanagement and misappropriation of its funds. Complainant has a right to insist that it shall not continue as a cloak for a fraud upon him, and shall not longer retain his capital to be used for the sole advantage of the owner of the majority of the stock, and a court of equity will not so far tolerate such a manifest violation of the rules of natural justice as to deny him the relief to which his situation entitles him. I think a court of equity, under the circumstances of this case, in the exercise of its general equity jurisdiction, has the power to grant to this complainant ample relief, even to the dissolution of the trust relations. Complainant is therefore entitled to the relief prayed. A receiver will be appointed, and the affairs of this corporation wound up.”
In the Michigan case the decision went to the winding up of the corporation; but in the case before us the receiver is only to hold until the charges of fraud are investigated. The Michigan decision is an able discussion of the powers of the court of equity in this respect, and a valuable review of decisions. It may be said here, as was said in the Michigan case, that the corporations have utterly failed of their purpose, not because of matters beyond their control, but because of the fraudulent mismanagement and misappropriation of their funds. An equal, if not greater, mismanagement and misappropriation has been done by the officers of the corporations who are here made defendants, and whose acts are sought to be restrained and set aside and declared null and void. We also *338find tbe same general subject mentioned in the following language in Waterman on the Law of Corporations, volume 2, section 356: "The power to appoint a receiver is necessarily inherent in a court which possesses equitable jurisdiction. It is exercised when an estate or fund is in existence and there is no competent person entitled to hold it; or the person so entitled is in the nature of a trustee and is misusing or misapplying the trust; or the property is about to be removed beyond the reach of the court; and generally when it is necessary to secure rights and prevent a failure of justice. The property is thus placed in the hands of an officer of the law in order that it may be under the protecting care and control of the court and be delivered unimpaired to the persons to whom it is legally ascertained to belong.” (See, also, Ranger v. Champion C. P. Co., 52 Fed. Rep. 611; Morawetz on Private Corporations, § 642.)
Upon questions of equity and jurisdiction aid is always found in the records of the courts of chancery of New Jersey, and from a decision rendered in May, 1894, by that learned court we quote as follows. “ The power of this court to appoint a receiver of a corporation either because it lias no properly constituted governing body or because there are such dissensions in its governing body as to make it impossible for the corporation to carry on its business with advantage to its stockholders, I think must be regarded as settled, but I think it is equally well settled that this power is subject to certain limitations, namely, it must always be exercised with great caution, and only for such time and to such an extent as may be necessary to preserve the property of the corporation and protect the lights and interests of its stockholders. As soon as a lawfully constituted and competent governing body comes into existence, whether it is brought into existence by an adjustment of the dissensions or by the election of a new body, and such body is ready to take possession of the property of the corporation, and proceed in the proper discharge of its duties, the court must lift its hand and retire. This is the doctrine as I understand it, which was laid down by Vice-Chancellor Malins in Featherstone v. Cooke, L. R. 16 Eq. 298, and Auxiliary Co. v. Vickers, L. R. 16 Eq. 303, and which was approved *339by Chancellor Runyon in Einstein v. Rosenfeld, 38 N. J. Eq. 309, and by Chancellor McGill in Archer v. Water Works Co., 50 N. J. Eq. 33; 24 Atl. Rep. 508.” (Edison v. Edison United Phonograph Co., 29 Atl. Rep. 197.)
It is true, of course, that the power must be exercised with great caution, but we are of the opinion that the most scrupulous caution would not cause a court to hesitate in the matter which was before the district court. Furthermore, the district court did not go any further in the appointment than was necessary to preserve the property of the corporations and protect the rights and interests of its stockholders, as was stated in the New Jersey case.
It does not seem necessary to go further in this discussion. The facts of this case will not afford a precedent in the future, for any imprudent or unauthorized appointment of a receiver for corporations, or the unwise withdrawal of the business of a corporation from the management of its duly elected and lawfully acting trustees. The case is a precedent only as to its own facts. Here the object of its existence, and, indeed, the practical existence itself, of the corporations are being totally destroyed by the unlawful (not to use a stronger term) acts of its managers; and one object at least of the action in the district court is to set aside aDd prevent such unlawful acts of such managers; and the action itself is against such unlawfully acting persons. If they are allowed to go on in their course which they are pursuing the corporations are to be totally wrecked, their funds are to be embezzled, and their property is to be taken from them by a fraudulent conspiracy of the managers whose position is one of trust towards the plaintiffs in the action in the district court.
Under such a vigorous showing of facts we believe that the decisions of the courts of equity uphold the powers and usages of those courts to interfere by a receivership. See the cases cited in this opinion and the cases referred to in those citations.
We are therefore of the opinion that the writ of certiorari must be dismissed, and it is so ordered.
Writ dismissed.
PembertoN, C. J., and Hunt, J. concur.