Stahn v. Catawba Mills

The opinion of the Court was delivered by Mr. Justice Jones. This appeal comes up from an order overruling a demurrer to the complaint with leave to answer. The complaint is by a stockholder in the Catawba Mills, a manufacturing corporation, against said corporation, its directors and others, seeking redress for alleged mismanagement and misappropriation of the corporate property. The grounds of demurrer may be stated to be substantially: (1) That the complaint does not state facts sufficient to constitute a cause of action, in that it does not appear that the Catawba Mills or its officers have been requested and have neglected or refused to institute this suit,. . nor does it appear that such request, if made, would have been useless. (2) That several causes of action have been improperly united, in that plaintiff seeks judgment in favor of the Catawba Mills against the Chester Mills for goods sold and delivered, and also against the officers of the Catawba Mills, who should be found responsible for said loan or credit to the defendant, Chester Mills. 1 At the same time, and, indeed, in the same paper containing the demurrer, defendants also answered to the merits. The Circuit Court, on motion, duly noticed, required defendants to elect whether they would stand upon the demurrer or the answer. This ruling is the basis of one of the grounds of appeal, but appellants have not argued or pressed the point, and we need only say that was not erroneous. 2 Does the complaint state facts sufficient to constitute a cause of action? Judge Aldrich, in his opinion overruling the demurrer, shows conclusively that it does, and we can add very little to what he has said. In the case of Wenzel v. Brewing Co., 48 S. C., 80, which followed — 529 — Latimer v. R. R. Co., 39 S. C., 44, this Court stated the principle which must govern this case, in this language: “The general rule undoubtedly is, that when the directors or managing board of a corporation are charged with mismanagement or misappropriation of the corporate property, the action to restrain or redress such wrong must be instituted by the corporation, since the conduct complained of is a breach of the trust relation between the directors and the corporation. But to this general rule there are well recognized exceptions, viz: when the directors or managing board do, or threaten to do, some act ultra vires, or some, act of fraud, oppression or illegality, injurious to the corporation, or in violation of the rights of the stockholders, to prevent injustice, a stockholder is permitted to maintain an action in his own name. This is substantially the rule declared in Latimer v. R. R. Co., 39 S. C., 44, following and approving the principles announced in Hawes v. Oakland, 104 U. S., 450. Further, before a stockholder can maintain a suit in these exceptional cases, he must show that he has endeavored to get redress of his grievances within the corporation, or he must show facts which would justify a court in concluding that an effort for redress within the corporation would be unavailing.” It is also a well established rule that an application for redress within the corporation, and refusal, need not be alleged, if it be shown that the directors or managing board are themselves the wrongdoers in some alleged breach of trust or fraudulent misappropriation of the corporate property, and have control of a majority of the stock, so as to control corporate action. In such a case it is reasonable to infer that an effort for redress within the corporation would be unavailing. Brewer v. Boston Theatre, 104 Mass., 387; Eschweiler v. Stovell, 78 Wis., 316; s. C., 23 Am. St. Rep., 411; Miner v. Belle Isle Ice Co. (Mich.), 17 L. R. A., 417, and cases cited; Wheeler v. Pullman Iron and Steel Co. (Ill.), 17 L. R. A., 821, and cases cited. The complaint alleges, substantially, that the board of directors of both the Catawba Mills and the Ches — 530 — ter Mills consist of seven each, and that the defendants, Tompkins, Wylie, Smyly, and Miller, are directors of the Catawba Mills and Chester Mills; that Tompkins, Wylie, and Miller are respectively, president, vice-president, and secretary and treasurer of both mills; and that Smyly, director of both mills, is superintendent of the Chester Mill; •that neither Smyly nor Miller are bona fide owners and holders of stock in the said Catawba Mills, but that they hold their said stock for the use and benefit of the said Tompkins and his “dummies” on the said board of directors; that said Tompkins is in actual control of both mills, holds stock in the Chester Mills of the par value of $35,000, while his stock in the Catawba Mills is only of the par value of $2,100; that said Tompkins, Wylie, Smyly, and Miller, a majority of the directors in both mills, have, in the aggregate, larger pecuniary interests as shareholders and bondholders of the Chester Mills than of the Catawba Mills; that the Chester Mills is insolvent, or in imminent danger of insolvency, and has been so for some time past; that with full knowledge thereof, the officers of the Catawba Mills (which must rhean the directors, or the president, vice-president, secretary and treasurer thereof,) have, for months past, sold, on open account and without security, to the said Chester Mills, and are continuing to furnish to said insolvent corporation, large quantities of yarns, &c.; that the said Chester Mills is now indebted to the Catawba Mills on account of products so furnished in an amount aggregating $20,000; that said officers of the Catawba Mills have made no arrangement to collect or secure said indebtedness, although repeatedly urged to do so by plaintiff and other stockholders of the Catawba Mills; that, on the contrary, they are ever increasing the amount of said indebtedness; that the Catawba Mills has no business office in this State, but conducts its business in the office of said Tompkins and Miller, in Charlotte, N. C., where all the books and financial accounts are kept; that- a personal inspection of said books has heretofore been denied to other stockholders of — 531 — the Catawba Mills; that on application by letter on the part of plaintiff to said Miller, secretary and treasurer, failed to elicit the definite information desired, &c.; that the capital stock of Catawba Mills is not excessive, its plant practically new and well equipped, its indebtedness not large, and that, if wisely, discreetly, and honestly managed in the interest of its stockholders, it would earn a reasonable dividend upon its stock, &c. Then follows paragraphs 10, 11, and 12 of the complaint, which we quote in full: “10. That by reason of the gross mismanagement on the part of the defendant, the said D. A. Tompkins, president, and his coadjutors and dummies in control of the said Catawba Mills, and of his and their unreasonable, unwarranted and fraudulent extension of credit to the Chester Mills, in which said corporation he and they hold much larger pecuniary interests, as aforesaid, the Catawba Mills has not only failed to pay any dividends to its stockholders under their management, but the stock of the said corporation has depreciated in market value more than fort3r per cent., and, as the plaintiff verily believes, will continue to depreciate as long as the said managing officers are permitted to conduct the business of said mills in the State of North Carolina, in an arbitrary and secretive manner, and to operate the same in the interest of the said insolvent Chester Mills, to the great and irreparable damage of this plaintiff and other stockholders of the said Catawba Mills. 11. That no regular monthly meetings of the board of directors of said Catawba Mills, of which this plaintiff is a member, have been held, as required by the by-laws of the said corporation, or, if held, they have been had without this plaintiff’s knowledge; that the failure to hold said directors’ meetings has been due, as plaintiff is informed and believes, to the machinations of the said D. A. Tompkins, president, in endeavoring to invest himself with absolute control in the management of the said corporation; that at such irregular and infrequent intervals as the said board of directors may have met for the transaction of business, the said D. — 532 — A. Tompkins, president, submitted inadequate and evasive reports as to the condition of said corporation, and of his administration of its said affairs; that by reason thereof the said unwarranted and fraudulent credit or loan of $20,000 to the insolvent Chester Mills, as aforesaid, was made without the knowledge or consent of this plaintiff, and, as he is informed and believes, without the knowledge or consent of other members of said board of directors, being in effect a credit sale by D. A. Tompkins, president of the Catawba Mills, to D. A. Tompkins, president of the Chester Mills. 12. That by reason of the fact that the said defendant, D. A. Tompkins, and his coadjutors, inclined and committed by pecuniary interest in the said Chester Mills to a continuance of the present policy of managing and operating the said Catawba Mills, either own or control by proxy a majority of the stock of the said Catawba Mills, this plaintiff and other stockholders similarly situated are powerless to obtain redress or the protection of their property rights within the corporation itself. That the said parties, interested as aforesaid in the continuance of the present management of the Catawba Mills, have, for some time past, been engaged in a canvass of the stockholders of said corporation, for the purpose of obtaining proxies of stock for the approaching annual stockholders’ meeting; and that by so obtaining the proxies of a number of shareholders, unaware or ill-informed, as plaintiff believes, of the true condition of said corporation’s affairs, and by the purchase in the market of a number of shares of its said depreciated stock, the said parties have secured, as plaintiff is informed and believes, a sufficient majority to control in said stockholders’ meeting. And that unless this plaintiff can obtain at the hands of this honorable Court the relief hereinafter prayed for, his stock and the stock of other shareholders in the said Catawba Mills will continue to depreciate in value, to his and their irreparable damage and injury.” We think the complaint shows facts from which the Court could reasonably infer that plaintiff could — 533 — not obtain redress within the corporation, in which case it is not necessary to allege facts showing an honest effort to procure corporate action. 3 4 5 As to the second ground of demurrer, we agree with the Circuit Court in overruling the same. Directors are personally liable to the corporation, or in a proper case to any stockholder, for losses arising from their fraud, breach of trust or gross negligence in the management or disposition’of the corporate property, and any person or corporation participating in such fraudulent conduct, or corruptly receiving the corporate property fraudulently disposed of, is likewise liable. The complaint does not attempt to declare on two or more causes of action, it states but a single cause of action, based on the right of a stockholder to fidelity and ordinary care on the part of directors in the management and disposition of corporate assets, the duty of the directors in that regard, and the alleged delict or wrong, whereby, it is said, loss to the corporation or stockholder has been sustained. The demurrer in this case is joint as to all defendants. Being bad as to such defendant directors as are properly alleged to have fraudulently disposed of corporate property, or allowed it to be so disposed of by their gross negligence, it must be held bad as to all other defendants joining in the demurrer. Lowry v. Jackson, 27 S. C., 318. The judgment of the Circuit Court is affirmed.