McQuillen v. National Cash Register Co.

• Citation: 112 F.2d 877
• Decision Date: 10 June 1940
• Docket Number: No. 4593.,4593.
• Parties: McQUILLEN et al. v. NATIONAL CASH REGISTER CO. et al.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

112 F.2d 877 (1940)

McQUILLEN et al. v. NATIONAL CASH REGISTER CO. et al.

No. 4593.

Circuit Court of Appeals, Fourth Circuit.

June 10, 1940.

COPYRIGHT MATERIAL OMITTED

Arthur Berenson, of Boston, Mass. (Hans Plaut, of Baltimore, Md., and Bernard Berenson, of Boston, Mass., on the brief), for appellants.

R. Dorsey Watkins, of Baltimore, Md. (James Piper and Piper, Watkins & Avirett, all of Baltimore, Md., and Shearman & Sterling, of New York City, on the brief), for appellee National Cash Register Co.

William L. Marbury, Jr., of Baltimore, Md. (John G. Rouse, Jr., and Marbury, Gosnell & Williams, all of Baltimore, Md., on the brief), for individual appellees.

J. Kemp Bartlett, Jr., of Baltimore, Md., for appellee Lee Warren James.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This appeal involves an unusually complicated factual set-up and, in the lower court, Judge Coleman found it necessary to pass upon many questions of law. He filed three written opinions: 13 F.Supp. 53 (hereinafter designated the first opinion); 22 F.Supp. 867 (hereinafter called the second opinion); and 27 F.Supp. 639 (hereinafter called the third opinion). He also delivered, on July 14, 1936, an oral opinion, found in Appellants' Appendix, pp. 75-78 (hereinafter referred to as the oral opinion).¹ In these opinions, Judge Coleman discussed the facts at issue and the applicable law quite elaborately and our opinion can be appreciably shortened by reference to his opinions.

On July 13, 1939, Judge Coleman (typewritten record, pp. 922-935) filed thirty findings of fact and (typewritten record, pp. 936-939) twenty-four conclusions of law. As we are of opinion that Judge Coleman was correct in his decisions on all the essential points in this case, and as we affirm the judgment of the court below, it will not be necessary to discuss in our opinion a number of questions on which he had to pass, particularly in connection with various motions made by the parties litigant during the long period of time when this case was before the lower court.

This was a suit in equity, sometimes called a derivative suit or a stockholders' bill, in which stockholders of the corporation seek to assert by a bill in equity, making the corporation a defendant, rights of the corporation which the corporate officers or others in control of the corporation refuse, to the hurt of the plaintiffs, to assert. At the time this suit was filed, such bills in equity came under Equity Rule 27, 28 U.S.C.A. following section 723, which was in effect a codification of a decision of the United States Supreme Court in Hawes v. Oakland, 1881, 104 U.S. 450, 26 L.Ed. 827. Equity Rule 27 is now embodied in Rule 23 of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. This equity rule has been before the courts a great number of times. See Moore's Federal Practice, p. 2246 et seq., and Dobie on Federal Procedure, § 175.

It was also necessary in this case to invoke § 57 of the Judicial Code, 28 U.S.C.A. § 118 (concerning venue in special in rem proceedings), and Judge Coleman was called on to discuss at some length this section and the application of its provisions to the facts of the instant case.

The amended bill of the plaintiffs was filed on January 29, 1935. This amended bill was quite voluminous, often redundant and open to serious criticism as to form; but in substance it did state sufficient facts, if true, to constitute a valid cause of action or claim. This bill set out in great detail the corporate reorganization of the National Cash Register Company in Maryland and it alleged, in extenso, a conspiracy on the part of the individual defendants to deplete the treasury of the corporation and to hurt the rights of these stockholders by many illegal and fraudulent acts, which would result in the very substantial enrichment of these defendants.

The objects of the suit, or the relief sought by the amended bill, Judge Coleman thus admirably summarized in his first opinion:

"(1) To cause the cancellation of certain stock on the books of the National Cash Register Company, a Maryland corporation, one of the defendants, alleged by the plaintiffs to have been illegally issued to the other defendants, individuals; (2) to enjoin such of the defendants as are officers and directors of the defendant corporation from paying further dividends on such stock, and to cause restitution to be made to the corporation for such bonuses and dividends as may have been paid thereon to any of the defendants; and, also, restitution of salaries, bonuses, and commissions alleged to have been excessive and illegally paid to certain named defendants; (3) to cause the cancellation of an option given to a certain named defendant in connection with the alleged illegal issue of such stock; (4) to require a general accounting by the defendants for their alleged wrongful acts in connection with the aforegoing; (5) to recover damages from the defendants for the profits realized from, or the injury caused to the company by the aforesaid acts of defendants; and (6) to recover, as general alternative relief, damages from the defendants for such transactions as cannot be enjoined or may not be advantageously or equitably rescinded and canceled, and declared null and void in the defendant company's interests. It is thus seen that all of the causes of action alleged in the bill may be grouped under two general types; first, personal actions against the various individual defendants; and, second, actions in rem against the stock itself alleged to have been illegally issued by and to certain of the defendants." (13 F.Supp. 53.)

In this first opinion, Judge Coleman had to discuss and deal with Judicial Code § 57, 28 U.S.C.A. § 118. Particularly was he concerned with the question whether, under this statute, the stock in question had a situs within the District of Maryland. See Moore's Federal Practice, p. 343 et seq., Dobie on Federal Procedure, § 122, Dobie & Ladd's Cases on Federal Jurisdiction and Procedure, pp. 532-536. It seems that before this section (which permits suit in the district in which property, real or personal, is situated) may be successfully invoked by a litigant, three essential requisites must have been fulfilled: (1) the suit must be one to enforce a legal or equitable lien upon, or claim to, the title to real or personal property, or to remove some encumbrance, lien or cloud upon the title of such property; (2) the proceeding must be in aid of some pre-existing claim, existing prior to the suit in question, and not a proceeding to create for the first time a claim to the property as the effect of the proceeding itself; (3) the property in question must have a situs within the district in which suit is brought in a federal district court. Since the National Cash Register Company was incorporated under the laws of the State of Maryland, Judge Coleman held that its stock, for the purposes of section 57 of the Judicial Code, 28 U.S.C.A. § 118, had a situs within the District (and State) of Maryland. We believe this conclusion is correct. As did he, so do we, believe that this holding is justified by the decisions of the U. S. Supreme Court in Jellenik v. Huron Copper-Mining Co., 177 U.S. 1, 20 S.Ct. 559, 44 L.Ed. 647, and Schultz v. Diehl, 217 U.S. 594, 30 S.Ct. 694, 54 L.Ed. 896. The Jellenik case was cited and approved in this connection by the Supreme Court in Rogers v. Guaranty Trust Co., 288 U.S. 123, 132, 53 S.Ct. 295-298, 77 L.Ed. 652, 89 A.L.R. 720. See also, Rose, Federal Jurisdiction and Procedure (5th Ed.) § 318.

The contention was made that even if this was formerly the law, it was changed by the adoption in Maryland (and the Maryland law should here control) of the Uniform Stock Transfer Act, Code Pub. Gen.Laws Md., 1924, art. 23, §§ 38-60. We do not believe that this Act made any such change, and we believe with Judge Coleman, that a decision to that effect in Harvey v. Harvey, 290 F. 653, by the Circuit Court of Appeals of the Seventh Circuit, is a correct statement of the law.

As error No. 1 in this case, appellants assigned the refusal of Judge Coleman to order, under Jud.Code § 57, 28 U.S.C.A. § 118, substituted service on the defendants Behr, Phillips, Bennett, Haswell, R. D. Patterson, McCain and Rentschler. Judge Coleman justified this refusal on the ground that these individual defendants were not indispensable parties to the proceedings; while, at the same time, he did order such substituted service upon the following as indispensable defendants: Dillon, Read & Co., Frederick B. Patterson, Edward A. Deeds, S. C. Allyn, Ezra M. Kuhns, William Hartman, J. H. Barringer, C. E. Steffey and Lee W. James. Though we are inclined to believe that, in refusing to order this substituted service upon the individual defendants in question, Judge Coleman's ruling was correct, it is not necessary for us to pass definitely on this ruling. Even if the ruling be erroneous, we do not think that there was any substantial impairment of any real right of appellants in the light of the ultimate disposition which was made of this case. This is particularly true of his decision limiting the lower court's jurisdiction to proceedings strictly in rem against the stock of the National Cash Register Company.

As to alleged error No. 2, we think the same observations may be made as to the rescission, made on July 1, 1936, by Judge Coleman of the pro confesso and final decree, which he had previously entered as to the defendants Patterson and Steffey.

The third error assigned by appellants covers the order of the lower court covered in the oral opinion (appellants' appendix, pp. 75-78) delivered on July 14, 1936, when, over the opposition of the appellants, the court granted the motion of the appellees striking out all matters in the amended bill sounding in personam and limiting the jurisdiction of the court to such claims of the appellants as...