duPont v. Standard Arms Co.

The Chancellor: A receiver of the Standard Aims Company was appointed by this Court on the ground of its insolvency, and the receiver has sold all its property and assets, and is about ready to make distribution of the proceeds thereof [328] among its creditors as preliminary to a winding up of the administration of its estate. Several stockholders have filed a petition to be allowed to sue some of the officers of the insolvent company for mismanagement of its affairs by a class bill, with the corporation and the receiver as formal defendants. The basis of this application is the alleged refusal of the receiver to bring the suit, and the correspondence between the petitioners and the receivers on the subject is made part of the petition to show the refusal. It is not necessary to consider this correspondence, except to state that it contains a request that the receiver bring the suit by counsel selected by the petitioners and with them in control of the litigation, or that the receiver resign, and that the receiver disclaimed hostility to the petitioners and offered to bring the suit upon being shown the basis therefor. There does not seem to be a real difference of opinion between counsel for the petitioners and for the receiver as to the law applicable to the situation. It seems settled, that the right and duty to enforce the personal liability of directors or other officers of a corporation for gross mismanagement of the affairs of the company is with the receiver of such company-appointed to administer its affairs on the ground of its insolvency, when there is such a receiver. The receiver has broad, general powers, sufficient for the performance of this duty and the exercise of this right, whether the power be acquired by the statute of the State, or be inherent in or incident to the office and a result of the appointment by the Chancellor. The right to sue its officers for mismanagement of its affairs is a right of the corporation; if money be recovered it belongs to the corporation; and if the corporation becomes insolvent and a receiver of all its estate and'effects is appointed, the receiver is the proper person to bring the suit; for by the appointment of the receiver the Court through its receiver, assumes jurisdiction of all the estate and affairs of the corporation, for the benefit of all those whom the Court shall ultimately adjudge to be entitled to such estate. 4 Thompson on Corporations, § 4635; Porter v. Sabin, 149 U. S. 473. What reasons are assigned why the petitioners, rather than the present or substituted receiver, should bring the suit for [329] the alleged mismanagement by the officers of the company? Beyond asserting that the petitioners would be primarily liable for the expense of the litigation, and so relieve the estate in the hands of the receiver therefrom, and that delajr and loss of evidence would be avoided, no reasons are set out in the petition. These reasons do not strongly appeal to the Court. There will be no serious delay. As to the expense, if a new receiver should be appointed in the place of the ¡present receiver, the substituted receiver will have from the estate ample funds to carry on the litigation in question. If in his judgment the proposed litigation is without reasonable basis and likely to be unprofitable, indemnity to the estate against costs of the litigation may be required of those stockholders who desire the litigation. In this way the Court will have, as it should have, control over the litigation; and if it be fruitful, its benefits belong to all creditors and stockholders and not to those petitioning stockholders only. The probability, if any there be, of loss of evidence is a reason why the books and papers of the company should be retained by the receiver of the Court for the purpose of the suit, and so be under the control of the Court through its receiver. It is urged for the petitioners that from correspondence there appear reasons why the present receiver should not bring the suit; but assuming this to be true, it is not sufficient reason why the petitioning stockholders should have leave to bring the suit. The affairs of the receivership are practically settled, and very speedily the duties of the present receiver will be so concluded as that the receiver will be allowed, according to its commendable offer, to resign and another receiver be appointed, and the person so chosen will be a person free from even a lack of sympathy with the object sought by the petitioners. In this way it seems that all the rights of persons interested will be conserved. As at present advised, then, the Court will deny the prayer of the petitioner for leave to bring the suit referred to therein. Let an order be entered accordingly.