Dorrah v. Pemiscot County Bank

256 S.W. 560, 213 Mo. App. 541, 1923 Mo. App. LEXIS 51

• Court: Missouri Court of Appeals
• Decided: December 4, 1923
• Status: Published

Opinion

DAUES, J.

This suit is brought by plaintiff as a stockholder in the Pemiscot County Bank, alleging that he owned fifteen shares of the capital stock of said bank having a certain value, and that by reason of the negligence of defendants as directors the bank became insolvent and plaintiff’s stock was rendered totally valueless. Plaintiff seeks to recover the value of such stock from the defendants. It is alleged that the par value per share was $100; and a surplus value of $36<.66 2/3, making a total value of $136.66' 2/3 per share, or a total of $2050.

The cause was originally instituted in Pemiscot county. Plaintiff obtained a change of venue and the case went to the Ste. Genevieve County Circuit Court. After the issues were made up a referee was appointed upon defendants’ application and over plaintiff’s objection. The referee found for plaintiff, the defendants filed exceptions which were overruled, and judgment was rendered in favor of plaintiff and against defendants J. A. Cunningham, F'. J. Cunningham, S. P. Reynolds, II. C. Schult and A. C. Tindle for $3035'.48, interest being computed. F'rom this judgment defendants bring this appeal.

This suit is one of a lot of eight, all brought at the same time by eight different stockholders on separate petitions which were exactly the same except as to the amount of stock held by the respective plaintiffs and the date of the issuance of the stock. By amendments made long after the case reached the referee, sopae different allegations are contained in some of the cases which will be discussed in the Suggett case, a companion case herewith, by us decided this day and wherein such amendment appears. By agreement of counsel, the testimony in this case applies to all of the eight cases. The appeal was first taken to the Supreme Court, and that court transferred the case here, holding it had no jurisdiction to determine same. [See Dorrah v. Bank, 248 S. W. 960.]

Addressing ourselves strictly to the case now before us, we shall take up and attempt to analyze, in a moderately logical way, the propositions involved.

At the very beginning we are confronted with a disputation of counsel as to the nature of the cause of action attempted to be asserted, and this reaches to the very vitals of the case. We, therefore, examine the petition to determine its real purpose and effect. The petition, as already stated, is brought by a stockholder for a loss which he claims he sustained through the defendants’ negligence in permitting the property of the bank to be dissipated and because of defendants’ mismanagement as directors. The individual directors, the corporation P'emiscot County Bank and one A. C. Tindle are the named defendants. Tindle was cashier and concededly misused the funds of the bank and directly brought this financial loss to all interested in this institution, the total loss being nearly a half million dollars.

The trial petition, after alleging the incorporation of the bank and alleging that same was made a defendant because the corporation refused to institute this proceeding, states that plaintiff was a stockholder in the amount said and that he lost the whole of the stock so owned; that the named directors constituted the board of directors.; that the bank failed and plaintiff lost his stock because the defendants as the board "of directors committed certain acts of negligence, to-wit: First, that they failed to observe the by-laws of the bank; second, that they failed to inquire into the affairs of the bank and ascertain its true condition; third, that the directors neglected their duty in passing upon loans made by the bank and permitted large sums of money to be. misappropriated and loaned to irresponsible parties without security; fourth, that the directors left the entire management of the bank to the cashier who loaned large sums to insolvent corporations and persons interested with the cashier; fifth, that the directors failed to meet and examine into the condition of the bank from time to time; that they were guilty of misfeasance and nonfeasance as officers of the bank; that they permitted the officers of the bank to use the funds in their private-business and overdraw their accounts; that they.failed to require the officers to give bond, and permitted certain officers to use the funds of the bank for their own purposes, and, finally, that the directors and officers of the bank failed to perform their duty as required by law.

The petition recites that the plaintiff has demanded of the bank, through its. directors, that it institute and bring this action to recover “for the loss of the value of the capital stock belonging to plaintiff, Charles Dorrah, hereinafter complained of, ’ ’ but that they have declined to institute this or any other proceeding whatever therefor, and that the Pemiscot County Bank is made a party defendant solely because it refuses to be a plaintiff.

On June 17, 1919, after the referee had completed taking the testimony in the cause, this amendment appears immediately after the averments just mentioned, to-wit:

“Or that said defendants J. A. Cunningham, F. J. Cunningham, S. P. Reynolds and H. C. Schult constitute a majority of the boardpf directors and own a majority of the stock in said Pemiscot County Bank and are the managing officers of and in control of said defendant bank and are the parties guilty of the breach of trust and negligence hereinafter complained of, and therefore demand upon them is useless as they will not -sue themselves. ’1

•It is then alleged that the bank has become insol vent, and the capital stock and surplus wiped out and plaintiff’s interest therein totally lost; that the “shares of stock of plaintiff have become worthless, to the damage of plaintiff in the sum of $2050. ’ ’ The petition concludes with the averment that plaintiff has no adequate remedy at law; that he implores the aid of equity, and if the matters above pleaded be proven to be true, then judgment be rendered in favor of the plaintiff and against the defendants J. A. Cunningham, F. J. Cunningham, S. P. Reynolds, IT. C. Schult and A. C. .Tindle for the sum of $2050', together with the cost of this suit.

Appellants strenuously insist that the petition in many material respects pleads nothing but conclusions, and obviously there is room for this contention. Many of the averments of the petition are couched in language expressing mere conclusions rather th,an stating facts, and under the rule if strictly applied no issue could be founded upon much that the petition relies upon. However, we leave this question for other and more serious difficulties. •

Observably the petition is drawn upon the hypothesis, and is so clearly expressed on its face, that it is a suit for the sole and exclusive use and benefit of the plaintiff, Charles Dorrah, as a stockholder in said bank, and is brought by him as such stockholder to require of the individual directors to pay him the value his stock had before the bank’s insolvency.

We take the doctrine to be undebatable that where directors of a bank have wrongfully or negligently conducted themselves with reference to the affairs of the bank and the bank has thereby suffered loss, that the corporation is vested with a right of action against the directors, or so many of them as caused the loss for the amount lost by reason of such misconduct or negligence. It may be further agreed that in the event the corporation, after request, refuses to bring such suit, then a stockholder may enforce such cause of action accruing to the corpor,ation, and indeed such suit may be brought by a single stockholder for the corporation in the event the other stockholders refuse to participate in such proceed ing. There is authority for the proposition that where demand to sue Avould he futile or useless, or where the persons sought to be sued are in control of the bank, no request to sue is necessary. In case a stockholder’s suit is brought, however, it devolves upon such stockholder to allege and prove the facts which would authorize him in his own name to prosecute the pause of action which vested in the corporation and for which the stockholder interposes the suit. [Stone v. Rottman, 183 Mo. 552, l. c. 571, 82 S. W. 76; Vogeler v. Punch, 205 Mo. 558, 103 S. W. 1001; Bank v. Hill, 148 Mo. 380, 49 S. W. 1012.] And it must be kept in mind that although the stockholder brings the suit, such cause of action undergoes no metamorphosis by reason of the stockholder instituting same rather than the corporation; it remains the same whether brought by the corporation or by a stockholder for the corporation.

Leaving the petition for a. moment in order to clarify, some question arises as to whether the proof shows that a demand was made of the officers or corporation to bring this suit in the first instance. It seems there was no demand made beyond what may be taken from an oral agreement with attorney A. (Li. Oliver, who represented the bank as counsel generally. It is very doubtful whether Mr. Oliver possessed the power to waive any rights on the part of the corporation, and it is not entirely clear that the concessions made by Mr. Oliver to counsel for plaintiff were sufficient for the purposes sought to be made of it. However, we again resolve this dispute on the side of the respondent.

Now, returning to the petition. After reciting the matters aboAre referred to, the petition concludes with the statement that plaintiff has no adequate remedy at law and hence invokes a court of equity to inquire into the matters pleaded .and to render judgment against the individual directors and Tindle, the cashier, in favor of the plaintiff for a definite sum fixed as the value of plaintiff’s stock at a time when the bank was in a sound condition. If it were not for the sentence invoking the court to turn to its equity side nothing would appear in the petition other than that same attempts to state a cause of action at law and not in equity. And it requires a somewhat strained view to see the petition in the light of a bill in equity rather th’an a petition stating a cause of action, at law.

The petition charges neither fraud nor embezzlement against the directors, indeed not against any of the defendants, but states purely and simply that the plaintiff is vested with the right to recover for the loss of his fifteen shares of stock worth $2050' because the Pemiscot County Bank failed through the negligence and misconduct of the defendant directors. Considerable light is thrown upon the nature of the suit by argumentation of e.ounsel for plaintiff made before the referee when the taking of testimony began. The record discloses that Mr. Rosenberger of counsel for plaintiff, in explaining the nature of the- suit to the referee, said in the course of his address:

“These gentlemen say we cannot obtain any judgment for these stockholders until all the creditors have been paid. Let’s eliminate the Trust Company for a moment and see. It would be our duty in the first instance to go to the Pemiscot County Bank and ask them to bring the suit for these stockholders, not the depositors or the other creditors, but that by reason of mismanagement and neglect of duty, the directors^ have permitted this stock belonging to the stockholders to become worthless, the bank refused to bring the suit, and it is made a party defendant, and that allegation is made in the petition. If we recover a judgment for the value of our stock, we recover against these individuals for a violation of duty that they owed as directors of that institution to us as stockholders. We are not interfering with the affairs of the creditors. This is an action, under the decisions of the courts, that the stockholders have against the directors for mismanagement and violating their trust duty.”

And from colloquy between counsel from time to time, as shown by the record, the petition at the trial was understood to be one for the benefit of plaintiff himself and for him individually and alone, and not one to recover for the benefit of the corporation or for any agency standing for all the creditors and stockholders of the bank. This-leaves us constrained to hold that the petition does not state a cause of action upon any theory sanctioned by our law. If we turn to the law side and consider the petition from that angle, that is,'being a suit by plaintiff against the directors for the value of his stock which wlas lost by the failure of this bank, then certainly this action cannot stand.

Now, considering the petition . as seeking relief through equity, does the plaintiff bring himself within the rule allowing a recovery in this case to the use of the corporation for all the stockholders and creditors generally? We think not. Let us consider the rule as already stated, which is to the effect that where a corporation has suffered loss by reason of the negligence of its directors, that then the right to sue for such loss rests solely in the corporation, and such right does not fall upon stockholders individually to recover for iheir personal loss. Coupled with this is the proposition that if the corporation refuses to prosecute its cause of, action to recover its loss for the mismanagement of its directors, then the stockholders are permitted to sue upon such cause of action which in the first instance belongs to the corporation. Such suit is never one for the benefit of such stockholders suing, but for all of the stockholders and creditors of the corporation. The books contain many oases sustaining this principle.

In Bank v. Hill, supra, l. c. 393, our Supreme Court said:

‘ ‘ The directors having been guilty of negligence in the discharge of their duties by reason of which losses were sustained by the bank, they were liable in an action at law to the corporation while a going concern for losses due to such loans, or to the assignee after the assignment, or in equity to the stockholders, in the event of the declination of the assignee to bring suit.”

In Vogeler v. Punch, above cited, our Supreme Court again said, quoting from the early case of Albers v. Merchants Exchange of St. Louis, 45 Mo. App. l. c. 218:

“It js therefore a settled principle of equity jurisprudence that, before a court of equity will open its doors to a single stockholder, although he comes, as he must, not only on behalf of himself, but also in behalf of all the other stockholders, to an inquiry into grievances of this kind he must show that there is no other road to redress; and he does not show this, unless he shows that all remedies within the corporation itself have been exhausted. ’ ’

In Porter v. Sabin, 149 U. S. 473, Mr. Justice Gray for the court says:

“The right to commence a suit against the officers of a corporation for fraudulent misappropriation of its property is a right of the corporation, and it is only when the corporation will not bring the suit that it can be brought by one or more stockholders in behalf of all.”

In Continental Securities Co. v. Belmont, 206 N. Y. 7, the court states the rule thus:

“It is conceded that an action in equity cannot be maintained by the plaintiffs as individual stockholders for themselves and all other similarly interested unless it is necessary because of the neglect and refusal of the corporate body to act.

“It is necessary, therefore, in an action by the plaintiffs to set forth two things, first, a cause of action in favor of the corporation with the same detail of facts as would be proper in case the corporation itself had brought the action; second, the facts which entitle the plaintiff to maintain the action in place of the corporation. [Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121; O’Connor v. Virginia Passenger & Power Co., 284 N. Y. 46.] ...

“It is the governing body or bodies of a corporation with power to enforce a remedy to whom complaining stockholders must go with their demand for relief. The governing body of corporations in this State, as we have seen, is the hoard of directors. A complaining stockholder must go to such board for relief before he can bring an action, unless it clearly appears by the complaint that such application is useless. If the subject-matter of the stockholder’s complaint is for any reason within the immediate control, direction or power of confirmation of the body of stockholders, it should be brought to the attention of such stockholders for action, before an action is commenced by a stockholder unless it clearly appears by the complaint that such application is useless.”

In Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121, l. c. 123, it is said:

‘ ‘ The loss of the corporate funds, resulting from the misconduct of the individual defendants, primarily gave a cause of action to the corporation, not to its stockholders, and no stockholder could maintain an action for the loss he had -individually suffered in the depreciation of the value of the share stock held by him. [Niles v. N. Y. Central & H. R. R. R. Co., 176 N. Y. 119.] ”

Weingreen v. Michelbocher et al., 124 N. Y. Súp. 41, is to this effect:

“This action is a representative action by a stockholder to enjoin certain wrongful acts of the defendants and to compel them to account as officers of the corporation. The Court of Appeals have decided what a complaint in such an action should allege; i. e.: (1) The cause of action in favor of the corporation, which should be stated in exactly the same manner and with the same detail of facts as would be proper in case the corporation had brought the action; (2) the facts which entitle the plaintiff to maintain the action in place of the corporation. [Kavanaugh v. Commonwealth Trust Company, 181 N. Y. 121, 73 N. E. 562.] ”

Cook, in his , work on Corporations, states the rule thus:

“Where, by reason of the negligence of the directors or other officers, the corporate funds, property, or rights have been lost, the injury is practically and ultimately an injury to the stockholders. But, in the eye of the law, the injury is to the corporation itself. The loss has depleted its treasury. Moreover, the negligent act was in reference to the affairs of the corporation. Accordingly, it is for the corporation to call the directors to an account for their negligence. The action is not one which the stockholder is to bring. The negligence affects him not directly, but indirectly. Hence, the law is well settled that a stockholder cannot bring the ordinary action at law for damages against the corporate directors for their negligence in the management of the corporate affairs. It is clear also that the stockholder cannot hold the corporation itself liable for the negligence herein of its directors. To allow such an action would be to make part of the stockholders liable to other stockholders for the loss, when all are equally injured, equally innocent, and equally in position to complain. The usual and proper remedy is for the corporation itself to institute a shit at law against the guilty directors. If, however, the corporation is under the control of the guilty parties, or if it refuses to sue when requested by stockholders to do so, then the stockholder him.self may bring a suit in equity in his own behalf, and in behalf of all other stockholders who may wish to come in, making the corporation and the guilty parties the defendants, and compel them to make good to the corporation the corporate money or property lost by their negligence. The money or property recovered in such an action belongs to the corporation, and not to the stockholder who brings the suit.” [Cook on Corporations (7 Ed.), Vol. 3, sec. 701.] '

Corpus Juris, after collecting a great many cases, states the rule succinctly in the following language:

“The right of action against officers and directors to redress wrongs to the corporation is in the corporation or. its representative and not in the stockholders. A suit by a stockholder to redress such, wrongs must be in the right of and for the benefit of the corporation; and it may be instituted only after compliance with conditions precedent.”

Without further citations we hold that no' individual right of action rests in a stockholder where the directors of a corporation have caused loss to the corporation through their carelessness and mismanagement. From the record before us, it appears that eight stockholders brought eight different suits against the defendants to recover by piecemeal each for himself the stock owned by such respective plaintiff, and so if that procedure would be countenanced it would be one suit after another, beginning somewhere in the roster of stockholders first come first served, until thé litigation of all would run through the courts.

Now, again we say that the only reason a shareholder may resort to a court of equity to require directors of a corporation to respond for carelessness is because' the corporation has suffered loss thereby, and when a stockholder sues on such derivative cause of action he sues for the corporation and upon its right. You cannot, as here, split the cause of action into as many parts as there are stockholders and by a multiplicity of suits recover for each. Furthermore, the petition shows that many creditors, the depositors, have lost through this bank failure and they remain unpaid. Are they to stand back in favor of this suit? And the remaining stockholders, are they likewise to be placed to disadvantage? Can this stockholder obtain relief for himself and put aside the superior rights of creditors and leave such depositors unpaid? Obviously not. It may be well to remark that the record shows that the directors here sued owned forty per cent of the stock; the remaining sixty per cent of the stockholders could have controlled any action that these alleged recalcitrant directors refused to bring for the corporation. However, we do not rest this decision on that phase of the case.

Counsel for plaintiff insist that regardless of the prayer for a personal judgment, the court is authorized to decide the whole issues and award complete relief. This salutary rule in equity practice has its limitations, and to completely reject the petition here and substitute an entirely different theory would be unreasonable and unwarranted.

We have read this long record with care, and it is doubtful whether we could agree with the learned chancellor’s conclusion that actionable negligence was shown against the directors. While bank directors must be held to strict account for the failure to exercise that degree of care that the law requires of them in the management of the bank’s affairs, yet courts must not be deflected from a calm and dispassionate regard for all the facts and circumstances attendant. When a bank closes its doors because of defalcation of an officer or cashier, strong current public opinion is aroused -against the whole management of the bank’s affairs, and in determining the conduct of persons in charge of the bank every importunate influence must be pushed aside and the case judged directly right as the facts warrant. A very learned discussion of this matter is contained in an opinion by Mr. Justice Paxson for the Supreme Court -of Pennsylvania in Swentzel v. Penn. Bank, 147 Penn. l. c. 149. However, by reason of the view we take of ■the law, we do not pass upon the facts in the instant case.

Respondent’s motion attacking the abstract and to dismiss the appeal is overruled.

We. have reached the conclusion that plaintiff has failed to state a cause of action either in law or equity, and accordingly that the cause has proceeded against the principles of law and equity as established by the courts of the land. For that reason the judgment below should be reversed outright. It is so ordered.

Allen, P. J., and Beeher, J., concur.