Court Opinion

ID: 9545644
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:16:40.796342+00
Date Added: 2024-06-11T15:15:15.737679
License: Public Domain

MR. JUSTICE ANGSTMAN
(dissenting) :
I of course agree with many of the fundamental principles of hornbook law contained in the majority opinion.
I agree that courts will not interfere with the internal management of a corporation at the instance of minority stockholders when such management involves discretionary matters within the scope of the powers of the corporation. I will go further and say that courts will not interfere in such matters even at the instance of a majority of the stockholders.
But we are not here concerned with the internal management of a corporation by its directors acting within their discretionary powers. Here it is alleged that the corporation is the sole and exclusive owner of the property and that it is the only land owned by the corporation and that Wiggins ‘' claims some right, title, interest or estate in, or lien or encumbrance upon the real property” involved but that “every such alleged claim is without foundation and void.”
Notwithstanding his lack of any interest in the property it is alleged that he has been demanding and the corporation has been paying him $70 per month as alleged rental and this demand has since the commencement of this action been increased to $100 per month.
The property of a business corporation is held in trust by the corporation for its members, and “it is clearly beyond the power of such business corporation, at least as against their creditors and members, to make a donation or gift of their property for a purpose in no way tending to further their business.” 13 Am. Jur., “Corporations,” see. 806, p. 820; and see McConnell v. Combination Min. & Mill. Co., 30 Mont. 239, 76 Pac. 194, 104 Am. St. Rep. 703.
It seems clear to me that if the allegations of the complaint *545are true, and for the purposes of the demurrer, they must be taken as true, the acts complained of are ultra vires and amount to a fraud upon the stockholders.
On that vital point I disagree with the majority opinion. I also think the majority opinion is grounded upon the palpably erroneous notion that we are here concerned only with what is therein denominated the internal management of a corporation. Cases are legion that when that internal management amounts to the practice of fraud upon the stockholders or is ultra vires or illegal, courts of equity will intercede on behalf of and to protect minority stockholders.
I concede that ordinarily where a cause of action at law exists in favor of a corporation, suit must be brought by the corporation itself and in its corporate name and may not be brought by a stockholder.
“In equity, however, the rule is not inflexible, as it is at law. In a proper case, a court of equity will look beyond the corporate body as a legal entity distinct from its members, and, disregarding the fiction, will recognize the fact that a corporation is in reality an association of individuals for the purpose of private gain, like an ordinary partnership, and that, while they have not the legal title to the assets of the corporation, they are nevertheless the beneficial or equitable owners. And if an injury is committed or threatened against the corporation which will constitute a violation of the equitable rights of stockholders, and for any reason a dissenting stockholder cannot obtain redress or relief through the corporation, a court of equity will grant appropriate relief in a suit brought by him in his own behalf, or in behalf of himself and other stockholders who may come in and be made parties, according to the circumstances. Such a suit is generally brought and sustained because the corporation is under the control of the persons who have committed, or threatened to commit, the wrongs complained of.
“A suit may be maintained in equity although the corporation might have maintained an action at law on the same cause. *546Equity lias power to redress such wrongs independently of any statute.” Fletcher Cyc., Corporations, Vol. 13, sec. 5945, p. 302, et seq.
The United States Supreme Court, in speaking of this question in the early case of Dodge v. Woolsey, 18 How. 331, 15 L. Ed. 401, had this to say: “It is now no longer doubted, either in England or the United States, that courts of equity in both, have a jurisdiction over corporations, at the instance of one or more of their members; to apply preventive remedies by injunction, to restrain those who administer them from doing acts which would amount to a violation of charters, or to prevent any misapplication of their capitals or profits, which might result in lessening the dividends of stockholders, or the value of their shares, as either may be protected by the franchises of a corporation, if the acts intended to be done create what is in the law denominated a breach of trust. ’ ’
In Hawes v. Oakland, 104 U. S. 450, 26 L. Ed. 827, the court enumerated the grounds on which a stockholder has an equitable remedy 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;
*547“Or where the majority of shareholders themselves are oppressively and illegally pursuing a course 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. ’ ’
The precise point before us is, has plaintiff as a stockholder performed all the conditions precedent to his right to maintain the action.
Courts are generally agreed that one of the conditions precedent to a stockholder’s right to maintain an action for the benefit of the corporation is that he first make demand upon the directors to act and their refusal to do so. That condition has been met here.
As to whether a minority stockholder must seek relief through the body of stockholders before he may maintain an action in behalf of the corporation is a question on which the courts are not in agreement. Some courts have held that he must apply to the stockholders as a condition precedent to his right to bring the action and others take the contrary view. Some of the cases which require him to resort to the stockholders are cases in which the relief sought by the minority stockholder was such that he might have been able to obtain by and through the stockholders without the necessity of anyone going to court. Those cases would have no application here because the question here sought is that of having the title to real estate quieted in the corporation. The stockholders were powerless to grant such relief themselves. The only question so far as this case is concerned is whether plaintiff or the corporate officers must bring the suit to quiet title.
This court in the following cases has either expressly held that a minority stockholder may proceed with an action after he has applied to the directors and met with their refusal or after he has shown that application to the directors would be futile and no suggestion was made that resort must also be made to the stockholders. Gerry v. The Bismarck Bank, 19 Mont. 191, 47 Pac. 810; Forrester v. Boston & Montana Consolidated Cop*548per & Silver Min. Co., 21 Mont. 544, 55 Pac. 229, 353; McConnell v. Combination Min. & Mill. Co., supra; Brandt v. McIntosh, 47 Mont. 70, 130 Pac. 413; Kleinschmidt v. American Mining Co., Ltd., 49 Mont. 7, 139 Pac. 785; Deschamps v. Loiselle, 50 Mont. 565, 148 Pac. 335.
The uncertainty of procedure has arisen by reason of language used in what the courts treat as the bellwether case of Hawes v. Oakland, supra. In that case after enumerating grounds for which equity would entertain a suit by a minority stockholder, the court said: “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.”
That language, like every court opinion, should be considered in the light of the facts before the court. In that ease all that the plaintiff sought was to prevent the corporation in which he was a minority stockholder from furnishing water to the city of Oakland free of charge. That was a matter that could have been stopped - by the stockholders. Here the stockholders could not quiet title to the land in question. Likewise in the Oakland case the court pointed out that: “There is no allegation of fraud or of acts ultra vires, or of destruction of property, or of irremediable injury of any kind.”
The court also pointed out that the question involved in that *549case was one o£ discretion and that a minority stockholder could not interfere with the discretion of the board of trustees. The court on that point said: “ It may be the exercise of the highest wisdom, to let the City use the water in the manner complained of. The directors are better able to act understandingly on this subject than a stockholder residing in New York. The great body of the stockholders residing in Oakland or other places in California, may take this view of it and be content to abide by the action of their directors.
“If this be so, is a bitter litigation with the City to be conducted by one stockholder for the Corporation and all other stockholders, because the amount of his dividends is diminished ?
“This question answers itself, and without considering the other point raised by the demurrer, we are of opinion that it was properly sustained, and the bill dismissed, because the appellant, by that bill, shows no standing in a court of equity — no right in himself to prosecute this suit. ” It is apparent that the court would have reached the same result had unsuccessful application been made by the minority stockholder to the body of stockholders before instituting action.
That the ease has no application to the facts here involved is readily apparent. Here we must assume on demurrer that the facts alleged are true. There is not involved here any matter of discretion. If the facts alleged are true, the corporation is paying rental for the use of property which it already owns. Such acts are clearly ultra vires. Furthermore the relief sought here, that of quieting title to the land, is one that the stockholders could not grant without resort to a court of equity. Whether plaintiff resorts thereto directly, or induces action by the stockholders, affects no substantial right of defendant Wiggins.
On the authority of the Oakland case this court in Allen v. Montana Refining Co., 71 Mont. 105, 227 Pac. 582, 587, made a statement upon which the trial court based its conclusion. In that case this court said: “ It appears from the allegations of the complaint that plaintiffs own some of the common stock of the Montana Refining Company, and that if they, in connection with *550other holders of common stock friendly to them, own or control a majority of that stock, and if it be a fact that the directors were acting contrary to the best interests of the corporation, manifestly their duty was to oust the recalcitrant directors and elect members who will promote and protect the company’s interests. In any event, in the absence of a showing that a majority of the voting stock was held by persons who refused their aid to obtain redress for the alleged wrong of which complaint is now made, and in the absence of any showing that the case will not admit of delay necessary to obtain action by the stockholders, it was incumbent upon plaintiffs that they appeal to the stockholders and that they be denied relief before they could institute this action; in other words-, a court will not do for minority stockholders what they may do for themselves. ’ ’
If the stockholders had it in their power to grant the relief asked for by plaintiff, then the statement was justified.
So far, however, as the Allen case suggests that recalcitrant directors should be ousted, the court seems to have given little consideration to the question. The opinion implies that a majority of the stockholders may oust recalcitrant directors, whereas under the statute it requires a vote of two-thirds of the stockholders. R. C. M. 1947, sec. 15-408. "When the president and the board of directors refuse to act, it requires stockholders holding at least one-half of the votes in order to even call a stockholders’ meeting for the purpose of removing a director. Id. The Allen case quotes with apparent approval from the case of Continental Securities Co. v. Belmont, 206 N. Y. 7, 99 N. E. 138, 51 L. R. A., N. S., 112, Ann. Cas. 1914A, 777, but the court in the Belmont case used further language not quoted in the Allen case, which applies to the facts here as follows: ‘ ‘ If the body of stockholders has no adequate power or authority to remedy the wrong asserted by the individual stockholders, it is unreasonable aud unnecessary to require an application to it to redress the wrong before bringing a representative action” [206 N. Y. 7, 99 N. E. 142].
*551This court again made reference to the rule of the Allen case in State Bank of Outlook v. Sheridan County, 72 Mont. 1, 230 Pac. 1097, and in Cobb v. Lee, 80 Mont. 328, 260 Pac. 722.
The latest case by this court on this subject is that of Sullivan v. Mountain, 117 Mont. 224, 160 Pac. (2d) 477, 479, wherein this court held that sufficient foundation was laid for action by a minority stockholder when unsuccessful application had been made to the board of directors. This court in that case said: “From the complaint it is made to appear, and the court found, that the Shelby bank had a valid claim against the defendant for failure to pay to the bank the money received as a commission from Haeh. The facts constituting this claim had been brought to the attention of the several Boards of Directors of the bank by the plaintiff, and it had then become the duty of the Board of Directors to take the necessary steps to obtain redress. Since in the instant case the last sitting Board of Directors took no action, and gave no reason for refusing to do so, we believe the trial court was fully justified in finding that the showing made was sufficient to lay a foundation for the bringing of this action by Doctor Sullivan, as a stockholder. ’ ’ There was no suggestion in that ease that resort must be had to the stockholders or a showing made that it would have been futile so to do. Lawyers and litigants have the right to rely upon the reasons given in the opinion as the law applicable and to me it seems a novel doctrine that this court can now say that there were other reasons not mentioned in the opinion which would have compelled the same result, but which “merely lurk in the record.” Valier Co. v. State, 123 Mont. 329, 215 Pac. (2d) 966.
The majority opinion in this case undertakes to justify the Sullivan case upon the ground that it appears from the allegations of the complaint in that case that resort to the stockholders would have been useless. I think it is too late to rewrite the opinion in the Sullivan ease. But if we were permitted to do so we would have to go further than has been attempted by the majority in this ease. The allegations made in the Sullivan case to the effect that R. D. Mountain dominated three of the *552other directors were flatly denied in the answers filed in that ease. Appellant in his brief in this court questioned the sufficiency of the evidence to show plaintiff’s right to maintain the action. Were we permitted to rewrite that opinion we would be obliged to consider the evidence and not merely the allegations of the complaint and the findings of the lower court thereon.
Furthermore if we give the same liberal interpretation to the allegations of the complaint in this case that is now attempted to be applied in the Sullivan case we would be obliged to sustain the complaint before us. The complaint is the second amended complaint. The record shows that the action has been pending since March 1947. The complaint invited all stockholders, of which there were alleged to be 75 or more, to join in the action. So far as we are advised not a single stockholder has joined plaintiff in the action. To me it seems unlikely that plaintiff would be able to accomplish anything in applying to them for redress and that sufficient appears from the record to so show.
In legal effect the opinion in the Sullivan case overrules the holding in the Allen case and others of like import to the effect that a minority stockholder must first attempt to oust the directors before he may bring an equitable action for the benefit of the corporation and thus protect his equity in the corporation. While the opinion in the Sullivan case makes no reference thereto, the fact is it reached the same conclusion as did Mr. Schmidt in his excellent treatment of this subject in the Montana Law Review, 1942, p. 105.
Reference should be made to the rule in the federal courts. Because of abuses in resorting to the federal courts on the ground of diversity of citizenship and the added work placed upon those courts, there was adopted a rule that in a stockholders’ action the complaint must set forth the efforts used to secure the desired action from the directors and the stockholders. This rule does not, however, apply to state courts. Forrester v. Boston & Montana etc. Min. Co., supra.
And even in the federal courts it is not always necessary to *553resort to the stockholders. Berg v. Cincinnati, New Port, etc. R. Co., D. C., 56 F. Supp. 842.
And the federal courts are lenient in dispensing with the rule or in discovering facts under which it can be held the rule does not apply. Delaware & Hudson Co. v. Albany etc. R. Co., 213 U. S. 435, 29 S. Ct. 540, 53 L. Ed. 862.
The rule which I think applies here is stated in 3 Cook on Corporations, 7th Ed., sec. 740, p. 2700, as follows: “* * * The fact, however, that the stockholders in meeting assembled cannot control the discretion of the directors in bringing such a suit; that the remedy of refusing to re-elect them involves delay, and involves the assumption that a minority of the stockholders can by the election control such a suit; that irreparable injury or the vesting of great financial interests may occur in the meantime; and that laches may arise as a bar to the stockholder’s suit — has settled the rule that the stockholder’s request to the corporate directors to institute the suit is sufficient. He need not also apply to a stockholders’ meeting * *
Mr. Fletcher on Corporations, Vol. 13, see. 5964, p. 327, after referring to the Hawes case, supra, said: ' ‘ There is considerable authority, however, denying the necessity for a demand upon the stockholders as a body, at least where they retain no control of the corporate business except by means of an annual election of officers. One line of cases makes a distinction between causes of action which can be ratified by the corporation as a body and those which cannot be so ratified, holding that an appeal to the stockholders is not necessary where the breach of duty by the stockholders cannot be ratified by the stockholders as a body, but that if the subject matter of the stockholders’ complaint is for any reason within the immediate control, direction, or power of confirmation of the body of stockholders, it must be brought to the attention of such stockholders, for action, before suit is brought, unless such application would clearly be useless. ’ ’
The statement made in the note in 72 A. L. E. 628, quoted in the majority’ opinion to the effect that the cases are uniform *554in holding that a stockholder may not bring an action in court in the interest of the corporation until he has first made a request that the stockholders sue the directors, or that an action be brought for their benefit, is too broad and not justified by the facts.
No useful purpose would be subserved here in examining all the cases cited in support of that statement. A cursory examination of a representative group of those cases will disclose that at least some of them do not in any respect support that text. In the case of Difani v. Riverside County Oil Co., 201 Cal. 210, 256 Pac. 210, 213, which is the first one cited from the state of California, the only question decided was that the stockholder had no standing in court because he had not “exhausted all the means within his reach to obtain redress from the managing body of the corporation.” There was no suggestion in the opinion of the court that the stockholder must also apply to the body of stockholders.
In Fleming v. Black Warrior Copper Co., 15 Ariz. 1, 136 Pac. 273, 51 A. L. R., N. S., 99, it was held that demand on the management of the corporation need not be made by a minority stockholder before he may sue where the managers had complete control of the affairs of the corporation. There was no suggestion of any necessity to appeal to the body of stockholders.
I have not examined all the cases there cited but most of those which I have examined are cases involving.merely the internal management of the corporation as to matters resting in the discretion of the board of directors. They do not involve ultra vires acts, and acts which work a fraud upon stockholders such as those alleged here.
Others have to do with desired relief unlike that here which it was within the power of the stockholders to grant.
The case of Goodwin v. Castleton, 19 Wash. (2d) 748, 144 Pac. (2d) 725, 150 A. L. R. 859, so strongly relied upon in the majority opinion was one wherein the stockholder was seeking to interfere with the internal management of a corporation in *555effecting a settlement agreement which was clearly a discretionary matter for the board of directors.
It is my conclusion that the court erred in sustaining the demurrer to the second amended complaint.
I think the judgment should be reversed and the cause remanded with directions to overrule the demurrer and to allow the demurring defendants a reasonable time in which to file and serve an answer.