Court Opinion

ID: 3867645
Source: CourtListenerOpinion
Date Created: 2016-07-06 09:01:41.823293+00
Date Added: 2024-06-11T14:14:59.268325
License: Public Domain

This is a petition by the defendant, Thomas C. Durant, who has been adjudged to be in contempt for violating an injunction of this court, to be purged of the contempt, or to be permitted to defend the suit without being purged. Several grounds have been assigned in support of the petition.
The first ground is that the suit is without equity. It is a suit by the plaintiffs, as stockholders of the Credit Mobilier of America, for themselves and such other stockholders as may join them in the suit, to charge Durant for fraudulently converting to his own use the funds of the corporation, while acting as its president and controlling its affairs. It is said the proper party to bring such a suit is the corporation, and that a stockholder, if he can do it at all, cannot do it unless the corporation is under the control of the guilty party, which in the case at bar is not pretended, or unless the corporation or its directors, being requested, refuse to bring the suit. And it is claimed that no such request and refusal are alleged or are sufficiently alleged in the bill. The only allegation of request and refusal is the following:
"And your orator had well hoped that the said defendant corporation, the Credit Mobilier of America, would protect the rights and interests of its stockholders in the premises, and by proper proceedings at law or in equity compel the said defendant, Thomas C. Durant, to account for said moneys wrongfully and fraudulently converted to his own use, and withheld from said company as aforesaid, and that he would account for and pay over the same. And that said corporation would compel the said Durant to transfer all stock, bonds, moneys, and other rights and interests aforesaid, procured with and by the proper moneys of said corporation, to the same and to its stockholders. But now so it is, may it please your honors, that the said defendants, though requested so to do, have wholly neglected and refused to comply with these reasonable expectations and requests of your orator."
The request might have been more explicitly alleged, but we do not think it can be fairly said that it is not alleged at all. But it is claimed that, if it is alleged, it is not sufficiently alleged, inasmuch as it is not alleged to have been made to the stockholders at any corporate meeting, nor to the directors in office at the commencement *Page 203 
of the suit. The allegation in the bill is simply an allegation of a request to the corporation, without particularizing how or when it was made. The allegation will be sustained by proof of a request to the stockholders in corporate meeting, or to the directors in office when the suit began, or in any other mode, so that it be in legal effect a request to the corporation. We have examined the cases cited for the petitioner, and do not find that they show that any fuller allegation is required. In Brewer v.Boston Theatre, 104 Mass. 378, 389, which is chiefly relied on, no request was alleged to have been made either to the corporation or to the directors, and it did not even appear that the directors in office when the suit was brought knew of the facts on which it was grounded. A demurrer filed by the corporation was sustained. But even in that case the court remark, that "a formal application and refusal need not be alleged, if enough appears to show that such an application would be unavailing." Generally in equity pleading the allegations are sufficient, if under them proof of facts can be made which entitles the plaintiff to relief. Dike et al. v. Greene,4 R.I. 285. We see no reason why greater strictness should be required in this allegation. And we therefore think the bill is not in this respect devoid of equity.
It is claimed that the request, if duly alleged, never was in fact made. Upon this point affidavits have been submitted by both sides. It does not appear from them that any request was ever made directly to the corporation or to the directors at any meeting of their board. It does appear, however, that the board consisted of seven members; that they had delegated the full powers of the board to an agency in New York, which from May, 1867, to May, 1870, was managed by an executive committee of the board, composed of Sidney Dillon, then the president of the corporation, John B. Alley, and the plaintiff, Rowland G. Hazard; and that, after the creation of the New York agency, the other four directors did little or nothing except attend the annual meetings of the board for the purpose of organization. It also appears that, in 1867, Rowland G. Hazard was assiduous in urging the executive committee to prosecute Durant for his alleged frauds, and that the committee undertook the prosecution, employed counsel, and had them draft bills of complaint; but that they deferred from time to time to enter *Page 204 
the suits in court, and finally, after October 16, 1867, refused to proceed further and let the prosecution drop. This suit was commenced August 22, 1868.
The request, therefore, though not made directly to the corporation or to the board of directors, was made to a committee having the powers of the board in so far as they could be delegated; and it does not appear that the action of the committee in refusing to comply with the request is either repudiated or disapproved; but, on the contrary, the corporation, although it has entered its appearance in this suit, makes no answer nor defence, thus virtually confessing the allegation that it has been requested to prosecute Durant for his alleged fraud, and has wholly neglected and refused so to do. It appears, moreover, that the members of the Credit Mobilier, and Durant among them, subscribed for their stock in it upon the express condition that the full powers of the board of directors should be delegated to the New York agency. We think the action of the committee is, under the circumstances, to be regarded as the action of the corporation, and that Durant, therefore, fails to show that the corporation has not been requested to sue him, or that, being requested, it has refused to do so.
Another point made under this head is, that the suit cannot be maintained because it is within the power of the corporation to release or condone the wrong; meaning, we suppose, that it may do this gratuitously and by mere refusal or neglect to prosecute. To this point are cited Gray v. Lewis, L.R. 8 Ch. App. 1035, 1051; In re London  Mercantile Discount Company, L.R. 1 Eq. 277; Atwool v. Merryweather, L.R. 5 Eq. 464, note.
In Gray v. Lewis, L.R. 8 Ch. App. 1035, the suit was by a shareholder in behalf of himself and other shareholders against certain directors and others. The bill did not allege that the corporation was under the control of the guilty parties, nor that any effort had been made to get the corporation to bring the suit. The court held that the corporate body was the proper plaintiff and the only proper plaintiff. The suit, however, was so entirely devoid of merit, that the court said there was not only a wrong plaintiff, but a wrong forum, and "no cause of suit by a right plaintiff in a right forum." Sir W.M. James, *Page 205 
L.J., with reference to the point that the suit ought to have been brought by the corporation, said: "If the company sued in its corporate character, the defendant might allege a release or a compromise by the company in its corporate character, — a defence which would not be open to a suit where a plaintiff is suing on behalf of himself and other shareholders." The language is broad, and yet it should not be taken too literally, for the lord justice, in the course of his opinion, refers with approval to Atwool v. Merryweather, L.R. 5 Eq. 464, note, in which a suit by a shareholder to enforce a right of the corporation was maintained. And we do not understand, moreover, why the release of a claim by the corporation, or the compromise of a claim with the corporation, if made fairly and without fraud, would not be as effectual a defence to a suit by a shareholder as by the corporation; for the suit, whether brought by a shareholder or by the corporation, could not be maintained after the claim on which it was brought had been lawfully discharged or satisfied.
In Gray v. Lewis, L.R. 8 Ch. App. 1035, Lord Justice James refers in support of his views to the cases of Foss v.Harbottle, 2 Hare, 461, and Mozley v. Alston, 1 Ph. 790.
In Foss v. Harbottle, 2 Hare, 461, the defendants in their character of directors purchased their own land for the corporation, and paid themselves an extravagant price out of the corporate funds. The suit was by two stockholders to set aside the purchase. It did not appear that any effort had been made to get the corporation to bring the suit. The court held that the suit was not well brought, because the purchase being merely voidable might be confirmed by the corporation. In giving judgment, however, Vice-Chancellor Wigram said: "I follow, with entire assent, the opinion expressed by the vice-chancellor inPreston v. The Grand Collier Dock Company et als. 11 Sim. 327, that if a transaction be void and not merely voidable, the corporation cannot confirm it so as to bind a dissenting minority."
In Mozley v. Alston, 1 Ph. 790, the bill was held to be demurrable, not because the act complained of was capable of being condoned or confirmed, but because it did not allege any effort to have the suit brought by the corporation, nor explain why it was not or could not be so brought. *Page 206 
We do not think the doctrine of Lord Justice James, if it is to be understood as broadly as it was expressed, is warranted by either of these cases.
In In re London  Mercantile Discount Company, L.R. 1 Eq. 277, there was no question of any release or condonation. The corporation was engaged in voluntarily winding up under an act of parliament. Certain shareholders petitioned the court to supervise the winding up, or to appoint a liquidator to take proceedings in the name of the company, in respect of certain fraudulent or improper transactions alleged to have been perpetrated by some of the directors, and by other persons with their connivance. The court refused to grant the petition, not because the fraud had been or could be condoned or released, but because a majority of the stockholders were opposed to suing, and because there was no evidence that there had been "an overbearing majority got together or influenced fraudulently by those whose acts are impeached." In denying the petition the judge also said: "I should ultimately be forcing on a litigation at vast expense to the company against the wishes of a majority; whereas, by abstaining from interference, I throw no obstacle in the way of the petitioners prosecuting any litigation they may think rightat their own risk. I only throw on them the risk of such litigation; they may file their bill, and my refusal to make an order on this petition will in no way prevent their doing so."
In Atwool v. Merryweather, L.R. 5 Eq. 464, note, a suit by a shareholder in behalf of himself and other shareholders was sustained, and the suggestion that the majority of a corporation could sanction or gratuitously condone a fraud upon the corporation, in spite of a dissenting minority, was pointedly condemned. "The whole thing," said Vice Chancellor Wood, referring to the alleged wrong, "was obtained by fraud, and the persons who may possibly form a majority of the shareholders could not in any way sanction a transaction of that kind."
The jurisdiction does not appear to be so firmly settled and defined in England as in this country, but we do not believe any English judge has ever decided that a president or director, who fraudulently converts or embezzles corporate funds, cannot be sued in equity by a stockholder, when the corporation wilfully *Page 207 
neglects or refuses to bring the suit. Indeed, to hold that a corporation could gratuitously condone or release such a fraud, by anything short of unanimous consent, would be monstrous; for it would be in effect to hold that a president or director, who can control a majority vote in the corporation, may rob or despoil it with impunity. There are numerous American cases which hold that, in such circumstances, a stockholder may sue for himself and other stockholders, making the corporation a co-defendant with the guilty parties. Robinson et al. v. Smithet als. 3 Paige, 222; Verplanck et al. v. The Mercantile Ins.Co. 1 Edw. Ch. 84; Bayless v. Orne Bybee et al. 1 Freem. (Miss.) 161; Cunningham v. Pell, 5 Paige, 607; Butts v.Wood, 88 Barb. S.C. 181; also in 37 N.Y. 317; Hodges v. N.E.Screw Co. et als. 1 R.I. 212, 340, 341; Spering's Appeal, 71 Pa. St. 1. A mere majority, in our opinion, could no more condone such a wrong gratuitously than it could originally have sanctioned it. And if the claims in suit have been compromised or released in any lawful and binding manner, we think that is matter of defence which should be pleaded, not presumed.
We do not find enough in the first ground assigned for the petition to support it.
The second ground assigned in support of the petition is, that the petitioner is not guilty, and has been erroneously adjudged to be guilty, of contempt. This ground, if allowable at all, being contrary to the finding of the court, should be sustained by full, clear, and convincing proof.
The injunction was ordered August 22, 1868. It prohibits Durant from transferring any interest in the Oakes Ames contract, so called, "and from receiving dividends thereon, in money, stock, bonds, or otherwise, to which the said Durant may be or may become entitled." Durant was adjudged guilty February 7, 1870, of receiving a dividend of 11,316 shares of Union Pacific Railroad stock, issued to him December 31, 1868, under this contract. This is the contempt of which he is now seeking to purge himself. He says the dividend was in fact a dividend of profits accruing under the Davis contract, so called, and should have been made under that contract, and not under the Ames contract.
The Ames and the Davis contracts were contracts for building *Page 208 
connecting sections of the Union Pacific Railroad. Both contracts, after being made, were assigned to the same trustees for the benefit of cestuis que trust, some of whom were different, or were differently entitled under the two contracts. The petitioner claims that the two contracts were so confused by the trustees, that, inadvertently, the dividend was charged to the Ames contract, when, in fact, the property from which it was made belonged to the Davis contract. The error, if it occurred, occurred several years ago, and has been acquiesced in ever since. Even the petitioner, though at first protesting, accepted the dividend and has spent it. He ought not, in such circumstances, to ask us to believe in the existence of such an error without fully exposing the doings under both contracts, and showing how and when the error occurred. He does not do this, but merely submits a brief and blind statement of receipts and disbursements under the Ames contract, verified by the oaths of Henry C. Crane, secretary of the trustees, and Benjamin F. Bunker, and accompanied by their affidavits asserting simply the existence of the error. The statement differs from other sworn statements made by Crane. If the error exists it can certainly be better proved, and before we act upon it as existing it ought to be better proved. We refuse to allow the petition on the second ground assigned.
The third ground is, that the contempt was not intentional. We should look with more favor on this ground if the petitioner, when found guilty, had made all the reparation he could. He could then have deposited in court the certificate of shares improperly received. He was ordered by the court so to deposit it and other certificates. Instead of doing it he disposed of the stock. His excuse for this is, that the plaintiff waived the injunction. He refers in proof to an agreement which waives the injunction in respect of the Union Pacific Railroad Company, but which, in respect of him, instead of waiving the injunction, expressly provides that it shall not be waived except on fulfilment of certain agreements which he does not pretend to have fulfilled. We must refuse to relieve him from his contempt upon the ground that it was not intentional.
Other grounds are assigned, but they are not such, in our opinion, as entitle the petitioner to be purged of his contempt *Page 209 
without giving bond as required by the previous order of the court.
The petitioner asks, that, even if his petition to be purged is not granted, he may, nevertheless, be permitted to appear and defend the case by demurrer, plea, answer, and proofs. He rests this request upon the ground that he cannot give the bond required for his purgation, and that the court will be doing great injustice if it proceeds without allowing him to defend, inasmuch as he has a good defence. He cites no precedent in support of his request. We are not prepared to grant it. It does not follow, however, that we are to abandon the suit to the plaintiffs. A decree pro confesso is not to be entered unless the plaintiffs, upon the face of their bill, are entitled to equitable relief. And in the peculiar circumstances of this case, where the principal defendant denies the allegations of the bill, and asks to be permitted to defend against them, and is only refused the privilege of defence because he is in contempt, the question arises whether we ought, in any event, to enter a decree against him, without first referring the case to a master to ascertain the truth of the allegations, so that our minds or consciences may be satisfied upon that point. This is a question, however, upon which we have not heard the views of counsel, and upon which we do not desire to express an opinion until we have heard them.
The petition upon which the hearing has been had will be dismissed.
Petition dismissed.
NOTE. — POTTER, J., did not sit with the court when this last petition was heard. *Page 210