Sears v. Hotchkiss

Hinman, J. The question in this case arises upon démurrer to the bill for want of equity. The demurrer for want of proper parties has been disposed of by bringing in the Jewett Manufacturing Company, as a party defendant, so that now all' parties in interest are before the court. Without going much into detail, it is sufficient to say that the plaintiffs are holders of stock, and three of them are directors of the Jewett Manufacturing Company, and the defendants are the remaining stockholders, who have a majority of the stock, and also constitute a majority of the directors, together with the corporation itself, which has been brought in since the commencement of the suit. The bill charges the directors who are defendants, with managing the business without regard to the wishes or interest of the plaintiffs, by fraudulently combining to appropriate the funds for their individual benefit, using them in the payment of their private debts, and with depreciating and destroying the business, and the value of the stock ; that, as individuals, and as partners in another private company, they are largely indebted to the corporation for funds improperly withdrawn by them, the amount of which they conceal, and refuse to permit to be charged on the corporation books, or to permit suits to be brought for its recovery; and they threaten to sell the corporation property for less than its value, and to waste and destroy it for their individual benefit. The bill prays for a disclosure and an account, and that the defendants pay whatever may be due to the corporation, and that they be enjoined not to sell or waste the property. It is obvious from this summary that there is equity enough in the bill, provided the suit is regularly instituted by and against the proper parlies. But the defendants insist that the corporation alone should have commenced the suit; or that the remedy should be sought in actions at law against the corporation. It is said the corporation is the party that has been defrauded, and it should therefore be the party to [178] seek redress. In a technical sense, this is so ; and accordingly it has been held that a stockholder in a bank can not maintain an action at law against the directors, for negligence, by means of which the capital is lost, and the shares rendered worthless; Smith v. Hurd,, 12 Met., 371: and it may be admitted that such an action could be sustained in favor of the corporation; Austin v. Daniels, 4 Denio., 299. Still we think the objection ought not to prevail against a bill in equity to which not only the directors, but the corporation itself, and all the stockholders are made parties. Courts of equity will interfere to restrain partners from wasting partnership property, and generally from fraudulent practices injurious to the partnership; and bills for an account will lie against joint-stock companies without seeking a dissolution, or making all the shareholders parties. Story on Part., § 224. Bisset on Part., Part 2, Ch. 9. And joint stdck companies, though formerly mere private partnerships, have now become in England, either under general laws, or by special acts, corporations substantially. Yet the principles applicable to ordinary partnerships have always, to some extent, been applied to them ; and the tendency now is to assimilate them more and more to mere commercial partnerships. 12 Barbour, 27. Bryant v. Warwick Canal Company, 23, E. L. & Eq. Rep., 91. And what good reason can be given why the members of a partnership should be liable to be restrained from misappropriating the partnership funds, that does not apply to the directors of a trading corporation ? At law there may be technical difficulties; but courts of equity look at the parties in interest, and ought not, as we think, to allow defendants to protect themselves from liability on such grounds. In a case very analagous to this, Chancellor Walworth found no difficulty in sustaining the bill, and he well remarked that upon general principles of equity, no injury the stockholders may sustain, can be suffered to pass without a remedy. Robinson v. Smith, 3 Paige, 222. He considered the directors liable as trustees for a misapplication of the funds, and for gross negligence in the execution of the trust. In this [179] case, the corporation, as well as the directors, is made a party, and what difference in principle is there in restraining it from wasting its funds, and restraining a municipal corporation from a similar act at the suit of a tax payer. New London v. Brainard, 22 Conn. R., 553. In Angel and Ames on Corp. §§ 392, 393, it is said that a shareholder may maintain a bill in equity against the directors and the corporation, to have refunded any of the profits improperly appropriated, and this bill charges a misappropriation of all the property, including the profits which the plaintiffs believe to have been made. But it was said, that the plaintiffs have a remedy at law, by a suit against the corporation, which is not alleged to be insolvent; and Gray v. The Portland Bank, 3 Mass., 364, and other cases, are cited in support of the proposition. We have no occasion to question this doctrine, but it appears to us that more adequate relief can be obtained in equity, and that this is the more appropriate remedy. At law the’ suits must be as numerous as the stockholders, whereas in equity the whole controversy can be settled in one suit, and the remedy in equity is more feasible and not attended with difficulties that would have to be encountered at law. To save expense, as well as obtain move adequate and speedy relief, and to prevent a multiplicity of suits, we are satisfied the bill ought to be maintained, and so we advise the superior court. In this opinion, the other judges, Storks and Elksworth, concurred. Demurrer overruled.