Hurt v. Cotton States Fertilizer Co., 11122.

• Decision Date: 13 December 1944
• Docket Number: No. 11122.,11122.
• Citation: 145 F.2d 293
• Parties: HURT v. COTTON STATES FERTILIZER CO. et al.
• Court: U.S. Court of Appeals — Fifth Circuit

145 F.2d 293 (1944)

HURT v. COTTON STATES FERTILIZER CO. et al.

No. 11122.

Circuit Court of Appeals, Fifth Circuit.

November 3, 1944.

Rehearing Denied December 13, 1944.

N. J. Durant, of Miami, Fla., for appellant.

Charles J. Bloch and Ellsworth Hall, Jr., both of Macon, Ga., for appellees.

Before HOLMES, WALLER, and LEE, Circuit Judges.

WALLER, Circuit Judge.

Plaintiff's father, and testator, owned stock in the defendant corporation which he residuarily bequeathed to the plaintiff, and five others. When the then sole surviving and qualified executor, being financially unable, declined to bring suit for alleged fraudulent acts of the corporate management, plaintiff and his sister-in-law purchased all of the stock held by the executor and shortly thereafter filed suit herein.

Diversity of citizenship is appropriately alleged but it was asserted successfully in the Court below that under Section 22-711, Code of Ga. of 1933, and Rule 23 (b) of the Federal Rules of Civil Procedure, 28 U.S. C.A. following section 723c, the plaintiff could not maintain this action against the corporation for the reason that he was not "a stockholder in a corporation so as to be in position to bring a derivative action against that corporation." (Prior to final decree the cause was voluntarily dismissed as to the sister-in-law.)

The point was also vigorously asserted below, and here, that the plaintiff did not file the affidavit, required under the second provision of Federal Rule 23, that the action was not collusively brought in order to confer jurisdiction upon the Court.

Answers and motions to dismiss were filed and it appears that evidence was taken on the motions to dismiss. The Court below entered an order of dismissal, after making findings of fact and conclusions of law.

Several defects in the complaint were noted by the lower Court, but the rationale of its decision was stated thusly: "A residuary legatee under a will, which, among other property disposes of corporate stocks, where there are outstanding debts and the estate has not been wound up, where no distribution in kind has been made of the stocks, where the Executor has power to sell the stocks for payment of debts of the estate, and where the legatee has never been in a position to demand or require a distribution of the residuary, is not a stockholder in a corporation so as to be in position to bring a derivative action against that corporation under Section 22-711 of the Code of Georgia of 1933 and/or under Rule 23 of the Federal Rules of Civil Procedure."

The other defects in the complaint, as pointed out by the lower Court, could have been cured by amendment, but in view of the Court's conclusion that the plaintiff had never been a stockholder in the corporation so as to be in position to bring a derivative action against it under the statute and rule, it was needless for the Court below to make findings on the question of collusion and other amendable defects in the complaint. It was doubtless because of the conclusion that no cause of action lay in the plaintiff under the facts and circumstances that the privilege of amendment to the complaint was not deemed worthwhile by the Court below.

As discerned by the lower Court, the chief question is whether or not a legatee of stock in a corporation has such an equitable interest that he may seek to protect the value of such stock by a suit in behalf of the corporation for the redress of wrongs committed against the corporation by the controlling officers and directors, in the light of the aforementioned statute and rule. In the event the answer is in the affirmative, other questions will be presented for discussion.

Whether the case is considered in the light of the Federal Rule or the Georgia Statute is immaterial because in each the allegation that the petitioner was a stockholder at the time of the transaction of which he complains, or that his shares have devolved upon him by operation of law, is required. Since there is no devolution of title to the shares by operation of law in the present case we have to consider whether or not one must have the legal title to shares of stock in the corporation at the time of the transaction complained of or whether the owner of an equitable title, or an equitable interest, in such stock might not also resort to the Court for the protection of that title or interest from depredation by the corporate management.

We think the question must be answered in the affirmative. The executor under the will, having the right to sell stock to pay the debts of the estate, had the legal title thereto, nevertheless he was a trustee of the legal title with the beneficial, or equitable, title in the legatees, charged with the liability for payment of debts of the testator and expenses of administration. Since equity regards substance rather than form, the equitable title, in the absence of intervening rights of third parties, is superior to the naked legal title. In equity, therefore, the owner of the...