Doud v. Wisconsin, Pittsville & Superior Railway Co.

The following opinion was filed December 1, 1885: Cole, C. J. It has frequently been decided by this court that where an objection was taken on the trial to any evidence being received, on the ground that the complaint fails to state a cause of action, that this was in the nature of a demurrer ore tenus/ and, upon such demurrer, as upon any other, the court must determine, from the facts stated, whether the complaint was sufficient in law. The decisions upon this point are quite fully referred to in the brief of counsel for the defendants, and need not be cited here. True, it has been said that, where the objection to the sufficiency of the complaint was taken in this manner, a greater latitude of presumption would be indulged in to sustain the complaint than would be where the objection to it was taken in the ordinary way by demurrer; but this qualification of the rule relates to an imperfect statement of facts, and does not mean that the court will, on demurrer ore tenus, supply by presumption necessary averments or material facts which have been omitted from the complaint. The complaint must still bear the test, when all its facts are considered, of substantially stating a cause of action, otherwise it will be held bad. It results from this view that the omission of material allegations in the complaint cannot be aided or helped out by matters stated in the answer. The acute and able counsel for the plaintiffs insist that, inasmuch as the defendants did not formally demur in season, but answered, all the facts, whether stated in the complaint or answer, should be considered, in analogy to certain rules of practice which obtain in other cases. But we think the complaint must stand or fall upon what, by a lib — 113 — eral construction of its averments, it may be said to contain. Its allegations cannot be supplied, if defective, by matters in the answer. This is an action brought by a part of the stockholders of the defendant corporation against the corporation and certain of its officers, directors, and stockholders to obtain certain relief. The objection taken to the complaint on the trial was that the action being for the protection of the property of the corporation, or of the corporate franchises, the right of action vested primarily in the corporation, and could be maintained by the stockholders only upon the refusal of the board of directors to prosecute, or when it appears that it will be useless to call upon the board to act. The learned trial judge on this subject followed tlie rule which has been laid down by courts of the highest authority, both in this country and in England. The able counsel for the defendants has cited in his brief many of these cases, and the number could readily be increased. These decisions are clear and pointed, fully establishing the doctrine that a stockholder has not the right to bring an action in his own name against officers of a corporation for fraudulent acts or waste of the corporate property, unless such corporation, or its officers, upon being applied to for such purpose by the stockholder, refuses to prosecute, or unless it appears that a request to prosecute would be useless. Prof. Pomeroy, in his work on Equity Jurisprudence, states the rule deducible from the authorities as follows: “ In general, where the directors or officers, or some of them, cause a loss of corporate property, by negligence or culpable lack of prudence or failure to exercise their functions; or fraudulently misappropriate the corporate property in any manner, whether for their own benefit or for the benefit of third persons; or obtain any undue advantage, benefit, or profit for themselves, by contract, purchase, sale, or other dealings, under color of their official functions; or misuse — 114 — the franchises; or violate the rules established by the charter or the by-laws for their management of the corporate affiairs; or in any other similar manner commit a breach of their fiduciary obligations towards the corporation, so that it sustains an injury or loss, and a liability devolves upon themselves,— then the corporation is the party which must, as the plaintiff, bring an equitable suit for relief against the wrong-doers. In cases belonging to this class, therefore, whatever be the nature of the particular wrong, whether intentional and fraudulent, or resulting from negligence or want of reasonable prudence, and whatever be the indirect loss occasioned to individual stockholders, no equitable suit for relief against the wrong-doing directors or officers can be maintained by a stockholder or stockholders, individually, nor by a stockholder suing representatively on behalf of all others similarly situated, unless the special condition of cvrcumstcmces exists to be described in the next following paragraph,- — -namely, that the corporation either actually or virtually refuses to prosecute. Even if the stockholder alleges that the value of his own stock has been depreciated by the defendant’s acts, or that he has sustained other special damage, he is not thereby entitled to maintain the suit.” Sec. 1094. This condensed statement quite fully embodies the result of the decisions on this question, therefore we deemed it best to give it at length. It supersedes the necessity of going into any analysis of the cases to which our attention was called on the argument. The rule above stated is too well established to be disregarded, and it only remains to inquire whether the facts set forth in the complaint bring the case within it. There are many acts of fraud and misconduct alleged on the part of the president of the company. It is stated that he has and is about misappropriating the funds of the corporation in divers ways; that he acts as the purchasing — 115 — and general managing officer; buys property at one price and sells it to the corporation at a higher price; that he keeps no account of his transactions; makes false reports to the secretary of state as to the cost of the road and its present indebtedness; aEows his soil to convert fares received from passengers; that he uses cars for the transportation of his logs upon the road without paying freight, or only crediting the company with a nominal sum for freight; that he and the secretary are about to issue and negotiate $300,000 of fraudulent stock for the purpose of ousting the plaintiffs of their rights as stockholders, and to render the genuine stock of the company of little or no value by reason of *such fraudulent and unauthorized over-issue. It seems to us plain that all these acts and breaches of duty are wrongs against the corporation; they show a wrongful dealing with and use of its property, and the corporation itself is directly injured by them. Consequently the corporation is primarily interested in seeking redress for them. There is a further aUegation that at an irregular meeting of the board of directors in October, 1883, of which meeting two of the directors had no notice and were not present, the members of the board present ordered $300,000 of the bonds of the company, running twenty years at eight per cent., to be issued, and a mortgage upon the road, its rolling-stock and franchises, to be executed to a trustee for the holders of such bonds; that by the resolution authorizing the issue of these bonds the money realized by their negotiation was to be used to build an extension of the road, but for no other purpose; that the president and secretary have executed these bonds and mortgage, and the president, without authority, has sold and hypothecated $115,000 of the same for rails and iron for the road already completed. The plaintiffs fear that the president and trustee are about to seE the balance of the bonds to innocent purchasers un — 116 — less enjoined from so doing by the court. We do not understand that it is the purpose of this suit to cancel the bonds which have been hypothecated or sold. In respect to those not negotiated, thejr still belong to the corporation, and if about to be misappropriated by the president or trustee, the corporation should bring a suit in its own name to prevent it. True, the cases show that where the corporation refuses ' to prosecute such a suit, then, in order to prevent a failure of justice, an action may be brought and maintained by stockholders. Blit, in that case, the complaint must show that the managing body ha.ve refused, on request, to bring an action for the benefit of the corporation, or set forth such a state of facts “ as renders it reasonably certain that a suit by the corporation would be impossible, and a demand therefor would be nugatory.” It is insisted bjr plaintiff’s counsel that the facts stated in the complaint show that the directors would have refused to proceed in the name of the corporation, or would, if they had so proceeded, have studied to make the suit fruitless of results. We cannot, however, make that inference from the matters in the complaint. It may well be that the president has such influence over the board of directors that he could control their action in the matter, but we cannot presume that this would be the case. It is further said by the same counsel that the objection is really that the plaintiffs have not capacity to sue, and is therefore waived by failure to demur by taking issue on the merits upon the facts. The decisions do not sustain this position. The rule seems to be where a stockholder brings an action for the misappropriation of the funds and property by an officer of the corporation that the complaint should allege that the corporation, on being applied to, refused to prosecute, and this averment is said to constitute an essential element of the cause of action. Greaves v. Gouge, 69 N. Y. 154; Memphis City v. Dean, 8 Wall. 64; Hawes v. Oak — 117 — land, 104 U. S. 450; Detroit v. Dean, 106 U. S. 537; Dimpfell v. O. & M. R. Co. 110 U. S. 209; Brewer v. Boston Theatre, 104 Mass. 379; Cogswell v. Bull, 39 Cal. 320; Merchants & Planters Line v. Waganer, 71 Ala. 582; Pomeroy’s Eq. Jur. § 1095. The case of Dousman v. W. & L. S. M. & S. Co. 40 Wis. 418, is distinguishable from this. There the wrong complained of was the act of the corporation itself, not the wrongs of individual officers. The right claimed was one denied by the corporation; therefore the stockholder had his remedy against the corporation. So in Wood v. U. G. C. B. Ass’n, 63 Wis. 9, the action was by a stockholder against the corporation to procure the cancellation of stock alleged to have been issued by its board of directors without lawful authority. The officers were not charged with any misappropriation of corporate funds for their own benefit, but were about to act or had acted beyond their powers in attempting to increase the capital stock. Where the corporation or its managing body is about to adopt a measure ultra vines, a suit may be maintained against it by a stockholder to prevent the unlawful act. “ The theory of this class of suits is that a stockholder has a right that the operations of the corporation should be kept by the directors within the powers conferred by its charter.” Pom-eroy’s Eq. Jur. § 1093. It follows from these views that the judgment of the circuit court must be affirmed. By the Court.— Judgment affirmed. Upon a motion for a rehearing, counsel for the appellants cited further, to the point that an action for an injunction is an exception to the rule that actions to protect corporate property must be in the corporate name: March v. Eastern P. Co. 40 N. H. 548; Wright v. Oroville M. Co. 40 Cal. 20, 27; Board, etc. of Tippecanoe Co. v. L., M. & — 118 — B. R. Co. 50 Ind. 85, 102, 115; Field on Corporations, sec. 399; High on Injunctions, secs. 161-8; Manderson v. Comm. Bank, 28 Pa. St. 319; Sears v. Hotchkiss, 25 Conn. 171, 177-8; French v. Gifford, 30 Iowa, 148. The motion was denied February 2, 1886.