Court Opinion

ID: 8794926
Source: CourtListenerOpinion
Date Created: 2022-11-26 14:06:40.720102+00
Date Added: 2024-06-11T17:03:34.452297
License: Public Domain

WOLVERTON, District Judge
(after stating the facts as above). [ 1 ] That the term of court had expired at which the first decree was made and entered no one questions, and that a court is without power or authority to modify, set aside, or open tip a decree, rendered properly within the scope of the pleadings, after the expiration of the term at which it was given and entered, is likewise conceded. But it is insisted by respondent and counsel that the court exceeded its jurisdiction in entering the decree, for that the relief granted was such as the court could not properly administer.
The manifest theory and purpose of the original bill is and was, first, to redress a wrong done by the Loan Association, its stockholders participating therein, and its directors and officers, in fraudulently, and without legal or rightful authority, transferring its property and assets to the Trust Company; and, secondly, to wind out the affairs of the Loan Association, it being alleged that it was insolvent and disabled from continuing further with the business for which it was organized and incorporated. Very naturally, the first relief was to recover back the properties that had gone into the hands of the Trust Company fraudulently. This must needs be for the benefit of the corporation, the Loan Association as a corporate entity, and not for the individual benefit of the stockholders, or, in a more limited sense, for the stockholders suing. In such cases, as is said in Dewing v. Perdicaries, 96 U. S. 193, 198 (24 L. Ed. 654):
“The avails of the litigation, if there be any, go to the corporation, and are a part of its means, as if it had itself sued and recovered.”
See, also, Howe v. Barney et al. (C. C.) 45 Fed. 668.
If the relief were not to extend further, the purpose of the suit would be at an end when the property was recovered and restored to the Trust Company. The suit being by a stockholder, in his own behalf and that of all other stockholders similarly situated, it is clear that the interests of all would be subserved by the general decree restoring the property.
[2] But the bill contemplates the restoration of the property to an insolvent concern, and the winding up of its business. In this the stock*355holders have a concern individually, and each is solicitous that the proper proportion of the proceeds of the assets shall be paid to him. The suit then becomes one, in its ultimate analysis, for the distribution of funds among stockholders according as each is entitled in his individual right. In such a suit, all persons interested should be made parties, unless it is one falling within certain well-recognized exceptions. One of these exceptions is where the parties are very numerous, and the court perceives that it will be almost impossible to bring them all before it. In this and analogous cases, if the bill purports to be, not merely on behalf of the plaintiffs, but of all others interested and similarly situated, the court will, notwithstanding a plea of the want of parties, proceed to a decree. The principle which forms the basis of the exception is:
“That the court must either wholly deny the plaintiffs an equitable relief to which they are entitled, or grant it without making other persons parties; and the latter it deems the least evil, as it can consider other persons as quasi parties to the record, at least for the purpose of taking the benefit of the decree, and of entitling themselves to other equitable relief, if their rights are jeoparded.” West v. Randall et al., 29 Fed. Cas., pages 718, 723, No. 17,424.
The whole doctrine is concisely stated by Mr. Justice Nelson in Smith v. Swormstedt, 16 How. 288, 303 (14 L. Ed. 942), as follows:
“Where the parties interested in the suit are numerous, their rights and liabilities are so subject to change, and fluctuation, by death or otherwise, that it would not be possible, without very great inconvenience, to make all of them parties, and would oftentimes prevent the prosecution of the suit to a hearing. For convenience, therefore, and to prevent a failure of justice, a court of equity permits a portion of the parties in interest to represent the entire body, and the decree binds all of them the same as if all were before the court. The legal and equitable rights and liabilities of all being before the court by renresent&tiou, and especially where the subject-matter oí the suit is common to all, there can be very little danger but that the interest of all will bo properly protected and maintained.”
As to the particular exception, see, also, McArthur v. Scott, 113 U. S. 340, 391, 5 Slip. Ct. 632, 28 L. Ed. 1015. See, also, Davis v. Peabody, 170 Mass. 397, 400, 49 N. E. 750, and March v. Eastern Railroad Co., 40 N. H. 548, 566, 77 Am. Dec. 732.
Such in fact is the equity rule prescribed by the Supreme Court, being No. 38, as follows:
“When the question is one of common or general interest to many persons constituíing a class so numerous as to make it impracticable to bring them all before the court, one or more may sue or defend for the whole.”
The rule before the late revision was qualified by the clause:
“But in such cases the decree shall be without prejudice to the rights and. claims ot: the absent parties.”
The rule, says Mr. Bates, in his work on Federal Equity Procedure (section 61, vol. 1), is declaratory of the rule as it previously existed; this without the modification by the clause above quoted, and as: it stands under the revised rules.
There must come a time in such a proceeding where a suit is brought by persons of a class in their representative capacity as representing the whole who may come in and contribute to the expenses of *356the suit and share in the recovery, as this one was, when the judgment or-decree will become final and binding as to all, as otherwise there xould, in many cases, be no end to the litigation. But in this relation it is well to pay heed to Judge Story’s cautious admonition. He says, in West v. Randall et al., supra:
“Yet, in these cases, so solicitous is the court to attain substantial justice, that it will permit the other parties to come in under the decree, and take the benefit of it, or to show it to be erroneous, and award a rehearing, or will entertain a bill or petition, which shall bring the rights of such parties more distinctly before the court, if there be certainty or danger of injury or injustice.”
As to the question of the finality of such a suit, it is declared by Chancellor Walworth, in Gardner v. Heyer, 2 Paige (N. Y.) 11, 19, that:
“If such parties neglect to come in under the decree, after a reasonable notice to them for that purpose, the fund will be distributed without reference to any unliquidated or unsettled claims which they might have had upon the same. But if the rights of such absent parties are known and ascertained by the proceedings in the suit, provision will be made for them in the decree.”
And in Kerr et al. v. Blodgett et al., 48 N. Y. 62, 67, the court says:
“In such a suit, when an order or a decree for an accounting is once made, under which all creditors are authorized to come in and present their demands, it operates as an interlocutory judgment, in favor of each and every creditor of the fund, whether he actually comes in or not, as effectually as if he had been named and had appeared as a party; and after such an order is made, no other creditor will be allowed to bring or to proceed with a separate suit for relief, but he must prove his claim and seek his relief in that suit. If he fails to come in and prove his claim before the final decree for distribution, he will be too late, and his claim will be barred, as it certainly would after the fund was distributed under the decree. After the decree, and before distribution, a creditor who has not proved his claim may, upon a satisfactory excuse for his default, apply to the court, in that action, to be let in, and the court may open his default, as in other cases, upon such terms as may be proper.”
But the procedure seems to be for the court to enter an interlocutory order, whereby all parties interested are required to come in and prove their demand. When such a judgment is entered, as held by the court in Hirshfeld v. Fitzgerald, 157 N. Y, 166, 180, 51 N. E. 997, 1000 (46 L. R. A. 839), it is effectual for all interested parties (in that case creditors), “for the court then gives them an opportunity to come in, prove their claims, and share in the recovery. If, however, they neglect to come in and be made parties at such time, they will be barred and not permitted to share in the distribution of the fund.”
[3] Now, advancing further in the analysis of the cause and the parties, we find there are two classes of stockholders, namely, those who have not exchanged their stock in the Roan Association for-stock in the Trust Company, and those who have exchanged their stock, but who seek to be reinstated in their original right. These latter, such as have appeared, came in by intervention. But many others of the same class did not come in or seek to intervene prior to the entry of the decree, and they are not taken care of by the decree, as it takes care of many nonexchanging stockholders not made parties to the suit *357either as plaintiffs or by intervention. And, furthermore, in such a suit the creditors should be made parties or given their opportunity to come in and share, according to their right, in the distributive funds of the defunct corporation. As fitting the conditions here present, the rule is stated thus:
“In eases where the stockholders sue the directors of a dissolved corporation, on the ground that they have grossly mismanaged its affairs, in that they have permitted directors to take control of the corporate funds and other assets and appropriate them to their own use and the beneiit of their individual creditors, the bill should be so framed as to allow the creditors of the corporation to come in and be made parties, since they have a direct interest in the subject of the controversy. Stated in another way, the bill should bo brought, not only in behalf of the other stockholders, but also in behalf of the creditors.” Section 4636, Thompson on Corporations (2d Ed.).
This is apparent, because there can be no adequate or equitable winding out of the business of any concern unless the rights of the creditors are properly conserved. Now, in view of the law and the practice in such cases, considering the nature of the suit and the scope of the pleadings, namely, eventually to wind out the business of the Loan Association (developing really into a receivership for the Trust Company), that many of the exchanging stockholders were not protected by the decree, and that the creditors of the Loan. Association are not taken into account, nor were they given an opportunity in any way of coming in and establishing their rightful claims and demands, we are of the opinion that the court was without authority to make and enter a decree foreclosing and precluding their rights in the premises. The decree of February 27, 1913, in effect does that, and we hold, therefore, that the decree of March 12, 1914, was not beyond the jurisdiction of the court to make, and should not he expunged.
We come to this conclusion not unmindful of the reasoning of counsel that the decree provides for all the nonexchanging stockholders, as if the exchanging stockholders—that is,' those who had exchanged their stock in the Loan Association for stock in the Trust Company —were not strictly entitled to come in and he made parties to the suit. But the intervening petitions disclosed the fact that there was a large number of exchanging stockholders entitled to essentially the same relief as the nonexchanging stockholders, and, while not absolutely of the same class, that they were similarly situated, and it became at once manifest that the suit could not be equitably disposed of without extending to them the same privilege as to the nonexchanging stockholders. Their interests ought therefore to have been conserved as well, or the proper steps taken to prevent them from further participation, should they not make known their demands.
[4] We may add, by reason of the point being strongly urged by the respondent, that we are firmly impressed that it was not beyond the power and jurisdiction of the court to declare the Trust Company trustee of the property and assets of the Loan Association, and to impress a lien upon the property in favor of the stockholders. The remedy is a common one, and well within the scope of the relief grantable under the pleadings. Erie R. Co. v. Dial, 140 Fed. 689, 691, 72 C. C. A. 183; Jones v. Missouri-Edison Electric Co., 144 Fed. 765, 778, 75 *358C. C. A. 631; Smith v. Township of Au Gres, Mich., 150 Fed. 257, 261, 80 C. C. A. 145, 9 L. R. A. (N. S.) 876.
But, for the reasons hereinbefore stated, mandamus will be denied