Hyde Park Gas Co. v. Kerber

McAllister, J. By the decree in this case, if the defendant, John C. Woolley, did not within thirty days take up and return to the Hyde Park Gas Company, the defendant corporation, the fourteen second mortgage bonds in question, and pay to the corporation the sum of $2,873.80, which was adjudged to be due from him to said corporation, and did not produce to the court satisfactory evidence within that time that he had done so, then a receiver of the corporation was to be considered as appointed. If he complied, then there was tobe no receiver under that decree. The non-performance, therefore, by a delinquent director of the corporation of "that which in the view of a court of equity was due by such delinquent to the corporation, the injured party, was made the express ground of visiting upon the injured party the consequences of being deprived of the possession and management of its own property and business by the appointment of a receiver. This power of the court to take from a party in possession, and into its own hands, funds and property, some title to or the distribution of property or funds, is ultimately to be decided or made by the court for the purpose of preserving the property pending the litigation, is a power fully recognized, and in proper cases one of great usefulness; but at the same time its exercise is attended with such incidents and consequences as to -render it one of the most delicate duties devolved upon a court of equity, and it is never to be resorted to except in a clear case, and with great caution and circumspection. Bank v. Gage, 79 Ill. 207. If there had been satisfactory evidence, of which there was none, of a case within the statute conferring power upon courts of chancery to decree the dissolution of corporations and wind up their affairs, and the court had decreed sucli dissolution, then, in view of having to wind up its affairs and make distribution of its assets among creditors, according to their priority, and the residue among the stockholders, in proportion to their interest, there would have existed a proper case for the appointment of a receiver awaiting the time of such final disposition. But in decreeing the dissolution of a corporation by a court of equity, regard should be had to its condition not only, but to the nature of its business. This corporation was in operation. Considering the youth and growing prospects of the suburb in which it is located, the pressure of the times for the past few years, it was doing a very fair business. It was carrying on a quasi public business—that of furnishing the most desirable means in use at present for lighting dwellings, places of business and of public meetings; also the public streets. All these things should be taken into consideration upon the question of dissolution, and induce the court to require proof of a clear case within the law before it will enter such a decree. There were no judgments, orders or decrees against this corporation; and no creditors were pressing any demands against it. It was performing its quasi public functions with satisfaction to its patrons and the public, so far as the case shows; was keeping well above water, though making no dividends. It is comparatively a new enterprise and requires time for its development, as does the place of its location. There was no case shown for a dissolution, nor, as we think, for a receiver under the facts in evidence. There has been bad management and serious and reprehensible breaches of trust by individual ministerial officers; and in one aspect the bill in this case is for redress of those violations of trust. But the bill in this respect does not present the whole case; nor are the j>arties involved in those violations ranged as they should be. “ The general rule is, that a suit brought for the purpose of compelling the ministerial officers of a private corporation to account for a breach of official duty, or misapplication of corporate funds, should be brought in the name of the corporation, and cannot be brought in the name of the stockholders, or some of them.” Ang. & Ames on Oorp. Sec. 312, and cases in note 1. To such a rule there are, of course, exceptions. And the same authors say: “ But as a court of equity never permits a wrong to go unredressed merely for the sake of form, if it appears that the directors of a corporation refuse in such case to prosecute, by collusion with those who had made themselves answerable by their negligence or fraud, or if the corporation is still under the control of those who must be the defendants in the suit, the stockholders, who are the real parties in interest, will be permitted to file a bill in their own names, making the corporation a party defendant.” Ib. note 4. The bill in this case, in one feature, is under that theory. It contains this allegation: “ That your orator, J ohn F. Temple, is the principal stockholder of said Hyde Park Gas Company in respect to all the stock that has any footing; that your orator, Henry Kerber, is the equitable owner of 36 shares of the stock of said company, to be taken out of the number of shares which has so heretofore belonged to your orator, John F. Temple.” This blind statement is all there is in the bill relating to the interest of Kerber, and we cannot but regard him as a mere adjunct to Temple, who is the real and substantial, the sole plaintiff in the suit. It is therefore at his instance virtually that a decree has been rendered declaring that the issuance of the second mortgage bonds was unauthorized; that twenty of them were temporarily loaned to Partridge, and that the Hyde Park Gas Company received no consideration therefor; that the pledging of six of the bonds to Davies and all the issues and transfers of said second mortgage bonds were in fraud of the rights of said company and its stockholders. How, if-there are any grounds for the appointment of a receiver, back of those stated provisionally in tlm decree, it is these several matters found by the decree and above stated. It is a familiar rule of equity jurisprudence that a suitor must come into a court of equity with clean hands. Thus, if a party seeks to set aside a transaction for fraud, he must himself be free from any participation in the fraud. If he come as a stockholder of a corporation to arraign ministerial officers of such corporation for breaches of trust, he himself must be free from any participation in such breaches, or the misappropriation of the corporate funds or property. What, then, are the facts which go to constitute the whole case, part of which only are set out in the bill and found by the decree? As to the original issue of the second mortgage bonds, the evidence clearly shows that Temple participated to the same extent that John 0. Woolley did, only that the former acted as President, and the latter as Secretary of the Gas Company; so that if that act was unauthorized and in fraud of the rights of the company and its stockholders, Temple, the plaintiff in this suit, was a participator in that fraud. Then, as to the fourteen second mortgage bonds which the decree requires Woolley to take up and cancel, and return to the company in thirty days, under the evidence Temple should have been included in that requirement. What are the facts in regal’d to those bonds? There was a corporation in Michigan—The Northwestern Gas and Water Pipe Company —of whose stock Temple owned $25,400 and Woolley $12,000. After these parties had issued some thirty of these second mortgage bonds of the Hyde Park Gas Co., the Partridge mentioned in the decree came here as agent of the Michigan corporation, and proposed borrowing a portion of these bonds for the Michigan corporation, and Temple and Woolley being both stockholders in the latter, loaned to it twenty of those bonds for one thousand dollars each without security or consideration. This was a plain, palpable breach of trust on the part of the President and Secretary of the Hyde Park Gas Co., for which they both made themselves liable to the corporation of which they were such officers as for a wrongful' conversion of those bonds. What is the sequel? Why the Michigan corporation, as was to be expected, turned them out here and there as security either for loans or debts; six of them ■ got stolen from a bank in Michigan and have not since been heard from; the remaining fourteen were thrown upon the market. The northwestern Gas and Water Pipe Co. became insolvent, and these fourteen bonds coming upon the market, Temple talked of buying them, but Woolley got them for fifteen cents on the dollar, paid for them with corporate funds which the court has decreed he shall pay back, and now Temple demands the appointment of a receiver, because these fourteen bonds have been transferred in fraud of the rights of said corporation and its stockholders, of which he is the principal as respects all the stock of said company that has any footing. ¡Nor is this all; the preponderance of the evidence shows that Temple, as President, consented to the pledging of six of' the second mortgage bonds to ¡Davis, also mentioned in the decree. This bill was filed in several aspects, the first of which was for the court to make an equitable partition between Temple and Woolley of 241 shares of the Hyde Park Gas Co.’s stock, as to which Kerber had nothing to do, and the corporation was but a formal party. Secondly, for redress to the corporation for the various breaches of trust on the part of Woolley, as respected the unauthorized issuance and fraudulent transfer of the fourteen second mortgage bonds and misapplication of corporate funds. As to that part of the case, the corporation is theoretically the plaintiff, and any decree would be in its favor and not in that of the stockholders. Then the third aspect is that of using these breaches of trust in issuing and transferring the bonds, misappropriation of the funds, etc., against the corporation, and asking for a dissolution of the corporation, or at all events a receiver. In that aspect Temple is the real plaintiff, and the rule of equity that a suitor must come into its court with clean hands applies. The facts show that he should have been made defendant by some other actual stockholder, if any there be, who has not participated in these breaches of trust. Joining Kerber as a complainant cannot relieve the court from looking at Temple’s relation to, and participation in, the matters in question. The other condition was that a receiver should be appointed unless Woolley paid to the corporation, in thirty days, the sum of $2,873.80, which had been adjudged against him. The decree previously finds that he is unable to pay it. The logic of the decree is this: Woolley is the debtor, the Hyde Park Gas Co. is the creditor; the former owes the latter $2,873.80, which he is unable to pay; but if this debtor shall not pay his debt- in thirty days, the creditor shall be punished by being thrown into the hands of a receiver. In principle this is very much like sending the creditor to jail because his debtor cannot pay him, and is so opposed to that spirit of justice which pervades all the true doctrines of equity jurisprudence that it will not hear discussion. The decree of the court below, so far as it relates to the appointment of a receiver of the Hyde Park Gas Company, will be reversed. In all other respects it is affirmed. Reversed in part.