Weslosky v. Quarterman

Fish, P. J. (After stating facts.) 1. Among the reasons assigned why the refusal of the court to sustain the motion was erroneous are: (1) that the suit authorized to be instituted is premature, as the affairs of the corporation are still being liquidated; there is no certainty that'the shares of its capital stock will be depreciated, or, if so, that they will become depreciated in any particular amount; and (2) because the petitioning stockholders [315] have been guilty of laches in failing to institute their suit within a reasonable time. , It would seem that the action, if prosecuted at all, should be commenced before the affairs of the bank are finally wound up. Petitioners distinctly allege that while depositors and general creditors will probably be paid in full, the available assets of the corporation' will be insufficient to meet the claims of its stockholders, and they will practically lose the entire value of their holdings. If they be unduly apprehensive, and the assets prove sufficient to meet their claims, in whole or in part, the defendants will profit by their good fortune; and’ in no event will the defendants, if subjected to liability, be called upon to pay more than is sufficient to discharge the just demands of the petitioners. The court may be relied on to so frame its decree. As to the inconsistent charge of laches, we are of the opinion that the petitioners have moved in ample time to protect their rights. They are not chargeable with fault because they did not find out the alleged misconduct of the bank’s governing officials before it was claimed to have been wrecked and placed by the directors in the hands of a receiver; and even though they might then have ascertained the true condition of affairs, it was not unreasonable to wait twenty-six months, at which time it became apparent that the assets of the bank would be insufficient to meet the demands of its stockholders. The status was in no way changed by the delay, and the defendants are not in a position to complain thereof. 2. Unfaithful officials of a corporation are primarily liable to it for their misconduct. But where they are. in control and minority stockholders are unable to secure relief within the corporation, such stockholders may usually maintain an equitable proceeding and thus call the managing officials to account for fraud or acts which are ultra vires. 3 Cook, Corp. (5th ed.) § 735. To such a proceeding, the corporation is a necessary party defendant, in order that the result may bind it and bar any future action which it might bring for the same cause. Bethune v. Wells, 94 Ga. 486. Had not the bank been placed in the hands of a receiver, the right of petitioners to bring the present proceeding would not be open to question. It is insisted, however, that after a receiver for the corporation has been appointed, all actions must proceed in his name, as he represents not only the corpora [316] tion, but all persons concerned in the due winding up of its affairs. Ordinarily it is undoubtedly true that the receiver is the proper party to bring suit against offending officials. But when, as in the present case, the receiver is himself charged with having been one of the officials guilty of the wrong-doing, an equitable proceeding may be maintained by the stockholders, the receiver and the corporation both being made parties to the action. 2 Morse, Banks & Banking (4th ed.), §718, p. 1151; Brinkenhoff v. Bostwick, 88 N. Y. 52. And it is unnecessary to allege any demand made upon the receiver to. sue, since he could not be permitted to sue himself nor would he be a proper person to prosecute a suit against his fellow wrong-doers. 3 Cook, Corp. (5th ed.) § 741, and note on page 1911, citing Flynn v. Third Nat. Bank, 122 Mich. 642. The receiver must, however, be made a party defendant, that he may be given an opportunity to defend the action. 3 Cook, Corp. § 738, pp. 1898-9. To allow such a proceeding does not bring about a multiplicity of suits, as contended; for some one .must prosecute a suit against the corporation’s unfaithful officials, in order to establish their liability and call upon them to account. Nor is there anything in the suggestion that the remedy of the complainants was to apply to the court to have another receiver appointed to take the place of Weslosky. To remove him from office on the ex parte application of the complainants would be manifestly unjust; whereas to inquire into the truth of the charges of misconduct brought against him, on which they base their right to sue, would involve a trial of the ease made in their petition, as a preliminary step towards granting their prayer to be allowed to maintain an action against him and his fellow-directors. One trial of the controlling issue should suffice to settle it once and for all. Certainly it was within the discretion of the court to allow petitioners to maintain the action, notwithstanding the corporation had been placed in the hands of a receiver. Stephens v. Augusta Telephone Co., 120 Ga. 1082, and cit. It does not appear that the court abused its discretion. 3. Another assignment of error upon the refusal of the court to vacate its order allowing suit to be instituted is, “Because the petition on which the order was issued does not allege fraud or the commission of any ultra vires acts on the part of the directors.” In this connection the Civil Code, § 1860, is cited, [317] and plaintiffs in error insist that no ultra vires acts were shown, since the provisions of law the directors were charged with having violated did not apply to the Commercial Bank of Albany, but only to State banks which issue circulating notes, and that there is no charge against the directors of actual fraud. Of course, if the complaint of the stockholders were idle and obviously without merit, this would have afforded ground for refusing to grant them permission to bring their suit. But is it so? It is somewhat amplified in the petition they were allowed to file against the defendants below who sought to have the action stayed. In that petition the charge is made, that, a few weeks before the suspension of the bank, the directors declared a semiannual dividend of three per cent, on the capital stock of the bank, which dividend was not taken from the net profits arising from the business, and which crippled the bank by withdrawing cash assets, and led petitioners and others to believe ■that the bank was in a sound and solvent condition. There are other allegations indicating that the conduct of the directors in making loans to themselves and relatives and endeavoring to conceal the true state of the bank’s affairs was fraudulent. Clearly the petition was such as to withstand a general demurrer. The motion to vacate the order granting permission »to sue can not be said to supply the place of a special demurrer to the petition filed. That motion in the most general terms alleges that “as matter of law, under the allegations of the petition [for leave to institute suit], no legal right existed in the plaintiffs to exhibit said petition against any of the defendants named therein, nor- to institute any action, nor to recover any judgment or decree against the corporation nor any of its officers or directors; nor is it competent in law or equity to wind up the affairs of the bank nor to fix the rights of stockholders in the proceeding which the plaintiffs have instituted.” The most the court below was called on to determine, in passing upon this motion, was: (1) Were the complainants proper parties to institute such a proceeding? (2) Did they set forth a cause of action ? (3) Was it expedient to allow them to maintain the suit in behalf of themselves and other stockholders similarly situated? Accordingly, we can not undertake at this time to deal with the question whether or not the acts of the directors [318] complained of amounted to a violation of the banking laws of the State, nor to pass upon any other question which can and should be raised by special demurrer to the petition. Suffice it to say, the court below rightly held it was incumbent on the defendants to defend the proceeding in the usual and regular way, by demurrer or answer, or both. Judgment affirmed. AU the Justices concur, except Simmons, O. J., absent.