Hearst v. Putnam Mining Co.

66 L.R.A. 784, 77 P. 753, 28 Utah 184, 1904 Utah LEXIS 66

• Court: Utah Supreme Court
• Decided: July 28, 1904
• Docket: No. 1543
• Status: Published

Opinion

BARTCH, J.

(after stating the facts). — The decisive question presented in this case is whether the--court erred in overruling the demurrer to the special and separate defense set up in the answer, and in denying the motion to strike out that portion of the answer.

The appellants contend that the judgment in the case of Rogers v. Ferry et al., wherein the Putnam Mining Company was made a defendant, constitutes no bar to this suit, and that their demurrer should have been sustained and their motion granted.

The respondents insist that not only this action is-barred- by the judgment in the Rogers Case, hut also that these plaintiffs must fail because they have brought and are attempting to maintain this suit in their own-right, and not in the right of the Putnam Mining Company, although they claim only as stockholders of the corporation. The position of the respondents seems to he sound. And first as to the suit having been brought for the benefit of the plaintiffs, in their,own right, and not that of the Putnam Mining Company: In their complaint the plaintiffs allege the corporate existence of the Putnam Mining Company; that they are stockholders of the corporation; that the corporation owned and operated certain mining property; that, through certain fraudulent dealings and transactions, the directors and agents of the company conveyed all its property to Ferry and his associates; and that, although the property has since been very productive, and has paid large sums in dividends, no accounting has been made to the plaintiffs, nor to the Putnam Mining Company.' They then demand that the alleged fraudulent dealings and transactions he set aside, and the instruments of conveyance decreednull and void; that an accounting he had of all moneys and stocks received hy or due the vendee; that the just proportion to he paid the plaintiffs be ascertained; and that judgment be entered in their favor for the amount found due them. They then ask “for such further or all other relief as plaintiffs may he entitled to in equity and good conscience.” They thus sue in their own right and for their own benefit only, notwithstanding the general allegation that the suit is also for the benefit of others who are in like situation, and who may appear as parties. They appear to proceed upon the theory that, because of the alleged fraudulent transactions, they are.cestuis que trustent of a constructive trust, or a trust created in their favor, ex maleficio, hy wrongful acts of the defendants, in dealing with the property and assets of the Putnam Mining-Company. Under the facts disclosed by this complaint, no suit can be maintained upon such a theory. As has been seen, the allegations of the complaint clearly show that all the property in controversy was owned by and belonged to the corporation, and not to the plaintiffs, 1 and it is not disputed that the corporation could own and hold its corporate property in absolute right, same as an individual. Nor can it be, for a. corporation is a distinct entity, an artificial person,. created by law, and, as snob, in this State, is capable of suing and being sued, of acquiring, owning, and disposing of property, within the objects of its creation, the same as a natural person; and one may deal with it, respecting its property, the same as with an individual owner, and without any greater danger of being held to have received property into his possession burdened with a direct trust or lien. Being a creature of statute, and having conferred upon it its individuality by law, which has endowed it with a legal existence, independent of any or all of its stockholders, the corporation has the same dominion over its corporate property,' with the same right of disposition, as a private person has over his.

In Weyeth H. & M. Co. v. James-Spencer-Bateman Co., 15 Utah 110, 121, 122, 47 Pac. 604, it was said: “The natural person has such powers and rights as are conferred upon him by nature, except as' restricted by human laws for the good of society. The artificial person or corporation has such powers and rights as are conferred upon it by the law of its creation, and such as áre incidental and necessary to its corporate existence. Both the natural and artificial personages act in an individual capacity. Among the most important attributes of a natural person are his absolute dominion over his property and his right of disposition, and the same may be said of a corporation aggregate as to its corporate property. It has the right to contract and be contracted with, to sue and be sued, to implead and be im-pleaded, the same as a natural person; and it has the right to do all other acts in regard to its property that a natural person may do in regard, to his. ’ ’

Since, then, the corporation was capable of owning, and in fact did own, the property in controversy, absolutely, as a distinct entity, how could that property be held to be property in trust for the benefit of persons 2 who are admittedly. not the owners thereof, and who have, at most, but an interest in the fund created by the operation or disposition of the property? The very fact that the plaintiffs were not the owners of the property in dispute precludes the idea of a trust having arisen in their favor, ex maleficio or otherwise, for in the existence of every trust there are three essential elements, the absence of any one of which is fatal to the trust. These are a trustee, a beneficiary or cestui que trust, and property belonging to the cestui que trust. Here the'property proposed to be impressed with a trust does not belong to the plaintiffs, and, as to them, is not in trust, they having but an indirect interest therein; and neither the plaintiffs nor any other stockholders have any interest or estate in the property, legal or equitable, which they can enforce in their own right and for their own special benefit. Nor is there any trust relation which enables a stockholder to sue in such a case. “The relation of trustee and cestui que trust, or of debtor and creditor, or of partnership, does not exist between the stockholders of an incorporated company and the corporation itself. But the corporation and the individual shareholder may deal with each other at arm’s length, the same as two strangers may, and a shareholder may contract with his corporation, and sue and be sued on his contracts.” 1 Thomp. Corp. section 1076.

If a right of action exists, because of the alleged fraudulent acts and dealings in relation to the property in controversy, it exists in favor of the corporation, and of necessity the action must be brought in1 the right of the corporation, and for its benefit. If the defendants must account to any one for the property in litigation, the accounting must be to the corporation, and not to the plaintiffs or any other stockholders. The prayer of this complaint, in effect, asks the court to adjudge that the defendants have obtained for themselves, through fraudulent acts and dealings, the property of the corporation, and, instead of asking that the property so ■obtained, or its proceeds, be returned to the rightful owner, demands that the plaintiffs, for their own benefit, be decreed a portion of tlie fruits of the fraud. In other words, according to their prayer, they seek to obtain a portion of the property and assets of a third party, which they say was1 obtained from such third party by fraud. That a stockholder of a corporation cannot recover corporate property, fraudulently or otherwise disposed of by the officers or agents of the corporation, by suing in his own right and for his own benefit, is settled by the authorities. It is true, where the property or assets of a corporation have been sequestered and dissipated by fraud or otherwise, a stockholder may, if the board of directors will not act, and a suit clearly ought to be brought, sue in the right of the corporation to have its property restored to it, or to obtain for it such other relief as the circumstances may demand, but in no such ease can he sue for himself in his own right. This right of a stockholder to sue, in cases of fraud, for the benefit of the Corporation, when it will not sue, is an exception to the general rule ‘•‘that actions to redress wrongs done to a corporation must be brought by the corporation itself, and that such actions cannot be brought by its stockholders.” 4 Thomp., Corp. section 4488.

In Gorham v. Gilson, 28 Cal. 479—a case much like the one at bar — where a mining company was induced by the fraudulent representations of a part of its stockholders to make a conveyance of its property, and the plaintiffs, stockholders, brought suit in their own right to have conveyed back to themselves such part of the property as was proportional to their stock, Mr. Chief Justice Sanderson, speaking for the court, and holding that the innocent stockholders could not maintain an action in equity to' compel a conveyance to them of such portion of the corporate property, said: “This action proceeds upon the theory (and it could be maintained upon no other) that, in equity, the defendants, by reason of their fraudulent acts, have become the trustees of the plaintiffs to the extent of an undivided half interest in the property in question. But we think it is clear that the facts set oat in the complaint do not sustain that theory. Where, by fraud and deceit, a party is induced to do that which, hut for the fraud and deceit, he would not have done, equity will-interfere, and, so far as it can be done, restore him to his original rights. If the defrauding party has obtained by such means the title to property, equity will convert him into a trustee for the defrauded party, and will compel the execution of the trust by ordering the deed so obtained to be cancelled, or the property reconveyed, thus placing the property and the parties where they were originally; thus undoing what has been done, and putting the title where it was before, or, in other words, adjudging that the title remains unchanged and unaffected by the conveyance, because the same is, in equity, null and void, by reason of the fraud and deceit by which it was obtained. Such relief, however, the plaintiffs are not in a position to claim. They never had any title, legal or equitable, to the property in question. They have not only not conveyed anything to the defendants, but they had nothing to convey. The property belonged to the corporation, and not to them, and the corporation, and not they, conveyed it away under the fraudulent inducements in question. So far as anv right to the form of relief sought in this action is concerned, the fraud was committed against the corporation, and not against them.”

So, in Abbott v. Merriam, 8 Cush. 588, Mr. Chief Justice Shaw, speaking of the rights of stockholders, said: “As stockholders, they have rights undoubtedly and interests in the affairs and management of the concerns of the corporation; but these are derivative and indirect, and are limited and regulated by law. They have no right by any direct suit, legal or equitable, to call the directors or other' officers of the corporation to account for mismanagement. Nor, if all the stockholders were to unite in a suit in equity, could they have any better ground to recover. The directors and other officers and agents are amenable only to the corporation, and to give every individual stockholder a right of action would lead to a multiplicity of suits.”

In Forbes v. Memphis, etc. R. R. Co., 2 Woods, 323, Fed. Cas. No. 4926, Bradley, Circuit Judge, said: “A commercial or other business corporation is constituted for the specific purpose of suing and being sued, granting and receiving, buying and selling, and doing other business in a corporate name and capacity, totally distinct from that of any or all of its members, considered as individuals. They have only an indirect interest therein. . . . All remedies for injuries to the property must be prosecuted in the name of the company, and all demands against the company must be prosecuted against the company, by name, unless its officers or agents, by fraud and misrepresentation, have rendered themselves personally liable. A stockholder, in his character of stockholder, cannot sue, nor, unless specially made liable by the charter, can he be sued for any of the company’s transactions.” 4 Thomp. Corp., sections 4443, 4445; 1 Thomp. Corp., section 1071; Smith v. Hurd, 12 Metc. (Mass.) 371, 46 Am. Dec. 690; Smith v. Maine Boys Tunnel Co., 18 Cal. 112; Davenport v. Dows, 18 Wall. 626, 21 L. Ed. 938; Church v. Citizens’ Street Ry. Co. (C. C.), 78 Fed. 526; Big Creek G. C. & I. Co. v. American L. & T. Co. (C. C. A.), 127 Fed. 625; Mickle v. Rochester Bank, 11 Paige 118, 42 Am. Dec. 103; Spurlock v. Missouri Pac. R. Co., 90 Mo. 200, 2 S. W. 219; Verplanck v. Mercantile Ins. Co., 1 Edw. Ch. (N. Y.) 84; Hawes v. Oakland, 104 U. S. 450, 26 L. Ed. 827.

There are instances, however, where a stockholder may apply to a court of equity for a preventive remedy by injunction to restrain those who are administering the affairs of the corporation from doing acts which are ultra vires, or to prevent a misapplication of the corporate funds which might result injuriously to the stockholders, where the acts intended to be performed would amount to a breach of trust. In such and like cases a preventive remedy may be applied at the instance of a stocHiolder, but such cases are wholly different from those like the one at bar.

Mr. Thompson, in his Commentaries on the Law of Corporations, vol. 4, section 4491, states the distinction .thus: “Where an action is brought by one or more stockholders to enjoin the performance of ultra vires, fraudulent, or oppressive acts on the part of the directors, the remedy is preventive; consisting of an'injunction against the performance of such acts, to which may be superadded, in appropriate cases, other forms of equitable relief. Where, on the other hand, the action is brought to undo frauds and breaches of trust already committed, and to restore to the corporation assets thereby wasted, the action does not, as in the former case, proceed in right of the stockholder, but it proceeds in the right of the corporation, and consequently whatever is restored accrues to the- corporation.” 2 Where, then, as in this case, the acts complained of have been fully consummated, and the title to the property has passed into the hands of third parties, a stockholder has no remedy to recover, in his own right, any specific or proportionate part of the property for his own benefit. And where the corporate property of such a corporation, in whole or in part,'has been sold or disposed of in good faith, under the powers of its charter, and not as a result of fraudulent purposes, the minority stockholder has no cause for complaint, for, as we have seen, a corporation of this character may, in the absence of restraint by the law of its creation, lease, sell, or dispose of any or all of its property, the same as an individual may do respecting his property. This may be done by a majority of the members. The principle that the majority must rule in the management of the affairs of a corporation “is rigidly upheld in equity,, in the absence of fraud, oppression, and ultra vires acts.” 4 Thomp., Corp., sec. 4533; 2 Kent, Com., 280-282; Weyeth H. & M. Co. v. James-Spencer-Bateman Co., 15 Utah 110, 47 Pac. 604; Ardesco Oil Co. v. N. A. Min. & Oil Co., 66 Pa. 375; Treadwell v. Salisbury Mfg. Co., 7 Gray 393, 66 Am. Dec. 490; Central Transp. Co. v. Pullman’s Car Co., 139 U. S. 24, 50, 11 Sup. Ct. 478, 35 L. Ed. 55; Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328.

But suppose this suit were regarded and treated as brought, not in the right of the plaintiffs nor for their -own benefit, but in right of all the stockholders, and 3 hence for the corporation, and for its benefit; then could the plaintiffs recover? We think not, because, viewing this suit in that light, they are met at the very threshold with the judgment in the case of Rogers v. Ferry et al., where Ahe Putnam Mining Company was a defendant, and which forms the special plea in the answer herein. The plaintiffs, by their demurrer to that plea, have admitted, for the purposes of this case, all the averments properly pleaded therein to be true. Among such averments, it appears that that suit was brought and tried in a district court of this State— a court of competent jurisdiction; that the plaintiffs therein sued in right of the corporation, the Putnam Mining Company; that the Putnam Mining Company and the Quincy Mining Company were there, same as here, parties defendant; that the identical cause of action and the identical matters which are herein charged as fraudulent were therein pleaded and tried; that the court adjudged and determined that all the transactions and dealings complained of were lawful and made in good faith, and were without any fraud done or intended; and that neither the Putnam Mining Company, nor the plaintiff therein, was entitled to any accounting in respect of the matters charged in that complaint; and that such judgment is of record, and is still in full force and effect. Thus it clearly appears that the Bogers' suit was brought and intended for the purpose of undoing the very transactions complained of in this action as being a fraud on the Putnam Mining Company and its stockholders, and the judgment was that neither the plaintiff nor the corporation was entitled to an accounting. As that suit was brought in the right of the corporation, that judgment is binding upon the corporation, and, by the rule of representation, all the stockholders are equally bound by it. It follows that, since the transactions and dealings complained of in that suit are exactly the same transactions and dealings complained of in this action, that judgment, being in full force and effect, is conclusive against the right of the plaintiffs to recover herein; they being stockholders in the corporation. The court having decided that there was no fraud in the transactions in controversy, and that the corporation has no right of recovery, no stockholder can make the same transactions the basis for complaint.

In Hawkins v. Glenn, 131 U. S. 319, 9 Sup. Ct. 739, 33 L. Ed. 184, where the plaintiff in error, who was a stockholder, claimed that a certain order or decree which was binding upon the corporation was void, as against him, because he was not a party to the suit in which the order was made, the Supreme Court of the United States held that, “in the absence of fraud, stockholders are bound by a decree against the corporation in respect to corporate matters, and such a decree is not open to collateral attack.” Mr. Chief Justice Fuller, delivering the opinion of the court said: “Sued after such an order of court, the defendant does not deny the existence of any one of the facts upon which the order was made, but contends that there has been no call, as to him, because he was not a party to the cause between creditor and corporation. We understand the rule to be otherwise, and that the stockholder is bound by a decree of a court of equity against the corporation in enforcement of a corporate duty, although not a party as an individual, but only through representation by the company. A stockholder is so far an integral part of the corporation that, in the view of the law, he is privy to the proceedings touching the body of which he is a member.” Freeman on Judgments, sections 176, 178; Glenn v. Williams, 60 Md. 93; Kessler v. Ensley Co. (C. C.), 123 Fed. 546.

The fact that this suit was brought by different parties plaintiff is immaterial, since these plaintiffs, as 3 stockholders, were privy to the proceedings in the former suit, and since both suits were identical as to cause of action, subject-matter, purpose, and object, quality of persons for or against whom claim is made, and as to the thing adjudged. These legal identities existing, dnd the same questions involved herein having been judicially settled and determined in the Rogers suit, the judgment in that case is an effectual bar to this action. Freeman on Judgments, sections 252, 253, et seq.; New Orleans v. Citizens’ Bank, 167 U. S. 371, 17 Sup. Ct. 905, 42 L. Ed. 202; Cromwell v. County of Sac, 94 U. S. 351, 24 L. Ed. 681; Lyon v. Perin & Goff Manufacturing Co., 125 U. S. 698, 8 Sup. Ct. 1024, 31 L. Ed. 839.

Prom the foregoing considerations, and from the authorities, the conclusion is inevitable that the court did not err in overruling the demurrer or denying the motion directed at the special plea, nor in rendering' judgment in favor of the defendants on the merits.

We find no reversible error in the record. The judgment is affirmed, with costs.

BASKIN, C. J., and McCARTY,v J., concur.