Kelly v. Thomas

83 A. 307, 234 Pa. 419, 1912 Pa. LEXIS 664

• Court: Supreme Court of Pennsylvania
• Decided: January 2, 1912
• Docket: Appeal, No. 237
• Status: Published

Opinion

Opinion

by Mr. Justice Moschzisker,

The material facts in this case fully appear in the opinion of the court below published in connection herewith. The plaintiff alleged that the defendants, as officers of the Mississippi Biver Coaling Company (referred to by the court below as the “Dock Company”) had refused to enforce certain contracts against another corporation known as C. Jutte & Co., in which they were interested as stockholders and officers; that they had neglected to secure other valuable contracts for the Coaling Company; that they had failed to keep the property of said company in repair and had permitted it to be sold for an inadequate price under a judgment secured by C. Jutte & Co. through fraudulent collusion with them. These facts, if established, would constitute breaches of the defendants’ duties to the Coaling Company, for which they would be directly liable to that corporation — not to its stockholders.

The plaintiff avers in his bill that “No demand has been made upon the officers and directors of the Mississippi Biver Coaling Company to bring or conduct this suit, for the reason that the same is brought against them, charging them with the misfeasance herein set out, and that such demand would therefore have been useless.” It appears, however, that of the seven officers and directors of the Coaling Company only three are named as defendants in this proceeding and the appellant expressly admits that he has no case against Albert G. Thomas, one of the three. He does not aver in detail specific acts done by any of the defendants showing fraudulent collusion, but contents himself with general allegations of fraud based upon the averment “That the principal and controlling officers and directors of said Coaling Company, especially G. W. Thomas and J. F. Friend, and not including your orator, were also the controlling officers and directors, and the principal owners of the stock of the said C. Jutte & Co., and had a larger and greater interest in said C. Jutte & Co. than they had in said Coaling Company.”

In Wolf v. Railroad Co., 195 Pa. 91, 95, the plaintiff charged collusion on the part of the directors of a corporation, and we said, “The averments of collusion relied on by the plaintiff are that as the lessee is the owner of a majority of the shares of the lessor, the former elects and controls the acts of the officers of the latter. * * * * The defect of this charge is that it does not rest on any facts averred, but on an inference that by reason of the circumstances of their election, the directors will violate their duty and commit a breach of trust. There is no presumption that officers will commit a breach of trust; the charge should rest on some act, affirmative or permissive, manifestly in violation of duty, and manifestly the result of fraud and not of erroneous judgment.” Fraud is largely a conclusion of law, and all our cases agree that general allegations which do not set forth the particular circumstances are not sufficient. Where it satisfactorily appears that a demand upon the officers of a corporation would be useless, such a course need not be pursued; but here the plaintiff has not made it plain from facts stated that a majority of the Board of Directors of the corporation in question had been, or probably would have been, faithless to their trust; hence he has not shown a right to maintain the suit in his individual capacity. We have held, “The right of an individual stockholder to act for the corporation is exceptional and only arises on a clear showing of special circumstances, among which inability or unwillingness of the corporation itself, demand upon the regular corporate management, and refusal to act are imperative requisites. A refusal by the corporate management must appear affirmatively to be a disregard of duty and not an error of judgment, a nonperformance of a manifest official obligation, amounting to a breach of trust. There must be averred and proved an actual application to the directors, and refusal by them to bring suit or to allow plaintiff to do so in the corporate name, and where misconduct of the directors themselves is alleged, the bill must show an effort to secure plaintiff’s rights through meetings of the corporation:" Wolf v. Railroad Company, 195 Pa. 91, 94; McCloskey v. Snowden, 212 Pa. 249. A shareholder has no distinct and individual title to the moneys and property of a corporation: Bidwell v. Railway Co., 114 Pa. 535, 541. In McMullen v. Ritchie, 64 Fed. Repr. 253, 262, Mr. Justice Lurton, then a U. S. Circuit Judge, stated, “The injury done by the defendants, if any, was done to the corporation. The wrong, if objectionable, was one to be remedied by an action by the corporation, or by a shareholder for the benefit of the corporation upon the refusal of the corporation to sue. A stockholder cannot maintain a suit for the indirect injury done to him as an indirect result of an injury to the corporation. This is too obvious to need elaboration.” These words are applicable to the present case.

While the Mississippi River Coaling Company was named as a defendant, it was never served and did not appear. The learned court below rightly decided that the presence of this corporation as a party to the record was indispensable to the maintenance of the action. The rights of the plaintiff depended upon those of the Coaling Company, and the latter was not before the court. Not only was its presence necessary to the plaintiff, but the defendants were entitled thereto so that the corporation might be concluded by any decree entered against them, and the company itself was entitled to notice in order that its interests and the rights of its creditors might be protected. (See quotations from standard text-books upon this point in Willoughby v. Chicago Junction Rys. & Stockyards Co., 25 Alt. Repr., 277, 280, 281, and Eldred v. American Palace-Car Co., 105 Fed. Repr. 457, 458). There is nothing upon the record to show that it was impossible to secure service upon the individual defendants in the domicile of the foreign corporation; they were officers of that company, and in the absence of any averment to the contrary it is but reasonable to assume that they could have been served in the State in which that corporation had its being and transacted its business.

It appears from the bill that the dealings between Jutte & Co. and the Coaling Company were adjudicated in an action at law brought by the former against the latter in the year 1907, in the United States Circuit Court for the Eastern District of Louisiana, and that a judgment for a considerable sum was secured against the Coaling Company. The plaintiff sought to have the court below inquire into and practically set aside that judgment as fraudulent, upon the general averment that the suit was “kept wholly secret from your orator;” that the service was upon the secretary and treasurer of the Coaling Company who was the son of one of the other defendants and in the employ of Jutte & Co.; that the claim adjudicated was “wrongfully and fraudulently excessive”; that Jutte &' Co. “had no proper legal cause of action against the said Mississippi River Coaling Company”; that the proceedings were “wrongful, fraudulent and oppressive, and the judgment in said suit was procured by deceit upon the court * * * and was part of the general wrongful and fraudulent scheme and design of the defendants * * * for the purpose of preventing your orator from getting the benefit to which he was entitled as a stockholder of the said * * * Coaling Company.” Had it been proper for the court below to review this judgment, it was not called upon to do so under these general averments. We are convinced that no error was committed in determining that, “it would be highly improper * * * under the averments of this bill, to undertake to ascertain whether or not the Dock Company was properly served with process and whether or not the judgment of that court was excessive in amount.”

In the eyes of the law as laid down in this State the gravamen of the bill, so far as respects the demurrents, concerns the management of the internal affairs of a foreign corporation. As to this, we have said, “A Pennsylvania resident has no right to call upon the courts of his own State to protect him from the consequences of a voluntary membership in a foreign corporation. By the very act of membership he entrusted his money to the management of a corporation owing its existence to and governed by the laws of another State * * * * Without doubt, Courts of Equity in Pennsylvania, have * * * jurisdiction to enjoin unlawful acts by such corporations ; * * * but they have no jurisdiction as to their internal management. What constitutes internal management is well defined by Stone, J., in North State Copper & Gold Mining Company v. Field, 64 Md. 151: ‘Where the act complained of affects the complainant solely in his capacity as a member of the corporation, whether it be as a stockholder, director, president or other officer, and is the act of the corporation, whether acting in stockholder’s meeting, or through its agents, the Board of Directors, then such action is the management of the internal affairs of the corporation; and in case of a foreign corporation our courts will not take jurisdiction:’ ” Madden v. Electric Light Co., 181 Pa. 617, 621-2. This was said in a case where the business and tangible property of the foreign corporation were within onr own State, and where stockholders charged the corporate management with conduct “which depreciated and rendered valueless their stock,” and it was repeated under like circumstances in McCloskey v. Snowden, supra. The present corporation has no property and does not conduct its business in this State.

We have examined Sloan v. Clarkson, 105 Md. 171; Miller v. Quincey, 179 N. Y. 294; Babcock v. Farwell, 245 Ill. 14, State, ex rel. North American Land & Timber Co., 106 La. 621, Beale on Foreign Corporations Secs. 309-312, 3 Clark & Marshall on Private Corporations, Sec. 865, and the other cases cited by the appellants, and while some of these do. not entirely agree with the Pennsylvania doctrine, it is to be noted that in each instance where other jurisdictions have taken a more liberal view than our own in reference to granting relief involving an inquiry into the management of the internal affairs of a foreign corporation, the business and property of the corporation affected were within the jurisdiction of the court. In view of the circumstances of the present case we do not feel that a departure from our own rule would be justifiable; but in a case free from the peculiar difficulties of this one, where the foreign corporation was served and all the parties or property directly involved was within the jurisdiction of the court, if the actual exercise of visitorial powers is not requisite to the relief, the rule as to non-interference should be restricted and not carried further than is absolutely required by universal fixed rules of law; for, where possible, we should prevent its use as a cloak to cover apparent fraudulent conduct on the part of officers of foreign corporations to the prejudice of Pennsylvania stockholders.

For the reasons already stated, the court could have done nought else than dismiss the plaintiff’s case; but in addition, the demurrer raised the point that the bill was multifarious, and this also was well taken; for in effect it seeks to maintain, first, an action by the plaintiff as a stockholder of the Coaling Company on behalf of that Company to recover against certain of its directors and one of its stockholders for losses growing out of an alleged fraudulent and collusive management of its affairs; next, an action of the same character against C. Jutte & Co. to recover profits made by that concern on coal sold which should have been disposed of through the Coaling Company; lastly, an action by the plaintiff individually against the directors of the Coaling Company and C. Jutte & Co. to recover for the depreciation in the value of his stock in the former company.

The assignments of error are overruled and the decree of the court below is affirmed at the cost of the appellant.