Gray v. New York & Virginia Steamship Co.

First, can a stockholder in a corporation, in behalf of himself and other stockholders similiarly situated, maintain an action against such corporation and its directors, to set aside and enjoin transactions done by such directors, in the name of the corporation, for their own personal gain and benefit, and in fraud of the rights of the plaintiffs and other bona fide stockholders, when the directors have been requested to bring such action and refused ?

"It would seem that a bare statement of the proposition ought, of itself, to be sufficient. It would be monstrous to hold that a stockholder had no standing in court to protect his property in a corporation, which, fraudulent managers, for their own gain, were misapplying. Such a rule would place every stockholder in a corporate body completely at the mercy, and in the power, of fraudulent trustees and directors. If the cases were not numerous where stockholders have been allowed to maintain bills in equity for frauds committed by directors, as Judge Fancher truly said they were, . we would now at least make a precedent for the maintenance of such an action, believing that sound public policy and the honest and discreet management of corporations require it.

The right of the present plaintiffs to bring an action in behalf of themselves and others, is recognized by section 119 of the Code, where it is, among other things,, provided: “ When the parties are very numerous and it may be impracticable to bring them before the court, one or more may sue or defend for the benefit of the whole.”

Angelí & Ames, in their work on Corporations,^[15] thus state the rule: “ The general rule is, that a suit, brought for the purpose of compelling the ministerial officers of a private corporation to account for 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. * * * But as a court of equity never permits a wrong to go unredressed merely for the sake of form, if it appear 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

In Grant on Corporations,^[15] it is declared: “ A corporator may not only sue singly in equity the directors, etc., dr the company, on behalf of himself and other shareholders, etc., but he may also join other parties as defendants, who may be receiving benefits from, the transactions which he impeaches.”

This doctrine contained in the elementary works, has been repeatedly recognized in the courts. Koehler v. The Black River Falls Iron Company^[8] was an action brought to foreclose a mortgage giveu by the defendant. William M. Hally, a stockholder, on petition showing that the directors did not intend to make defense, was allowed to appear and defend. The bill was dismissed, and the complainants appealed. The Supreme Court of the United States affirmed the decree, Mr. Justice Davis writing the opinion, who^[9] cites the before quoted paragraph from Angel! & Ames on Corporations, approvingly, for the purpose of showing that a stockholder has a standing in court, to maintain or defend a suit which involves illegal or fraudulent .acts of the directors of a joint-stock corporation.

In Zabriskie v. The Cleveland, Columbus and Cincinnati Railroad Company and others,^[10] the Supreme Court of the United States affirmed the same doctrine. Mr. Justice Campbell^[11] says:

There are also many other cases which hold the same principle. Among these are Robinson v. Smith,^[9] Cunningham v. Pell,^[10] Peabody v. Flint,^[11] Blatchford v. The New York and New Haven Railroad Company,^[12] Cross v. Sackett,^[13] Butterworth v. Fox.^[14]

The cases referred to, abundantly establish that if the allegations of this complaint are true, there is a cause of action stated against The New York and Virginia Steamship Company and its directors. Upon their part, the appeal was argued as if it was necessary that the complaint should justify all the relief prayed for, whereas it is sufficient if it states a cause of action, the demurrer assuming that none is averred. No opinion is expressed upon the extent of the relief which can be granted in this action. It seems very clear,. however, if the truth of the allegations contained in the complaint be established, that the plaintiff will be entitled to the relief, at least, of setting aside the alleged fraudulent, transfer of the corporate property. This would be justified, if the proofs supported the averments.

Second. Can the action be sustained against The Old Dominion Steamship Company, upon the allegations of the complaint ?

It is claimed in behalf of this defendant, that the present suit cannot be maintained, because the pleading states that that corporation has'parted with its property for the vessels purchased of The New York and Virginia Steamship Company, and without restoring to it its property, the sale and purchase cannot be set aside.

It is undoubtedly .a general rule, that he who seeks to repudiate a contract with another upon the ground of fraud, must restore (&

He who has been engaged in an attempt to defraud another, should be left to relieve himself as best he can; and as this corporation must, on this appeal, be regarded as occupying just that position, it will be left to establish its case by proof. When the cause is tried, and its exact status as to the transactions ascertained, a decree protecting its rights, if it has any worthy of being protected, can be made. Its demurrer is.of no force, if the history of the dealings between the defendants, and the objects thereof, as stated in-the pleading demurred to, be true.

The authorities referred to above,^[15] establish that The Old Dominion Steamship Company, as one receiving benefits of the transactions which are impeached, is a proper party to the action. Occupying the position- it does, that of an active participant in a fraud upon the plaintiffs and their associates, the argument based upon the doctrine of principal and agent, does not apply.

' It is true that a principal who adopts a fraud of an agent, by taking its fruits, has no standing to maintain an action to set aside the fraudulent act; but surely, when the party implicated has aided the agent in committing a fraud upon a principal, and was, in fact, a party to it, he cannot make this point when the fruits of the transaction have not come into the principal’s hands. The complaint shows that the stock of The Old Dominion Steamship Company, received in payment of the vessels, have not come into the