Ainscow v. Sanitary Co. of America

• Decision Date: 05 July 1935
• Citation: 180 A. 614,21 Del.Ch. 35
• Court: Court of Chancery of Delaware
• Parties: ALLEN H. AINSCOW, v. SANITARY COMPANY OF AMERICA, a corporation of the State of Delaware, and WILLIAM S. POTTER, Receiver of and for Consolidated Management Association, a Delaware corporation

180 A. 614

21 Del.Ch. 35

ALLEN H. AINSCOW, v. SANITARY COMPANY OF AMERICA, a corporation of the State of Delaware, and WILLIAM S. POTTER, Receiver of and for Consolidated Management Association, a Delaware corporation

Court of Chancery of Delaware, New Castle

July 5, 1935

BILL FOR CANCELLATION OF STOCK. The complainant is the owner of one hundred and fifty shares of the common stock of Sanitary Company of America. The defendant, William S. Potter, as receiver of Consolidated Management Association, holds two thousand shares of the common stock of said Sanitary Company of America and five thousand dollars which was received as the consideration for the sale of twenty-five hundred other of said shares made by said Consolidated Management Association before the appointment of said Potter as its receiver, to the Sanitary Company of America itself.

The bill alleges that the entire forty-five hundred shares which Consolidated Management Association held was illegally issued to it without lawful consideration therefor. It prays that the two thousand shares now held by the receiver be cancelled and that the receiver return to the Sanitary Company of America the five thousand dollars which it paid to Consolidated Management Association for the twenty-five hundred shares.

The receiver has answered. The Sanitary Company of America has appeared, but has not answered. The case was heard on bill answer of the receiver, oral testimony before the Chancellor and exhibits.

Complainant obtains leave to amend his bill, dismissed.

Ivan Culbertson, for complainant.

Caleb S. Layton, of the firm of Richards, Layton & Finger, for receiver.

OPINION

THE CHANCELLOR:

The complainant sues in his derivative right as a stockholder of Sanitary Company of America. The wrong, if any, against which he complains is one that was done to the corporation. Any relief which may be afforded is in its behalf and inures to its benefit. The complainant as a stockholder is interested in the alleged wrong and in the relief only in an indirect and derivative sense. The nature of a derivative suit was commented on in Cantor, et al., v. Sachs, et al., 18 Del.Ch. 359, 162 A. 73. In a case of that type a stockholder has no right to file a bill in the corporation's behalf unless he has first made demand on the corporation that it bring the suit and the demand has been answered by a refusal or unless the circumstances are such that because of the relation of the responsible officers of the corporation to the alleged wrongs, a demand would be obviously futile or, if complied with, it is apparent that the officers are not the proper persons to conduct the litigation. The Supreme Court of this State so decided in Sohland v. Baker, 15 Del.Ch. 431, 141 A. 277, 58 A. L. R. 693. Several cases in this court, which it is unnecessary to cite, have held to the same effect.

There is no allegation in the pending bill of a demand upon and refusal by the corporation to inaugurate this suit. No excusing circumstances are alleged whereby the necessity of a demand and refusal is obviated. No proof of any sort was offered of these essential facts concerning which the bill is silent.

The solicitor for the receiver has therefore moved that the bill be dismissed regardless of the merits of the underlying grievance which the corporation is said to possess.

The question of whether a stockholder may act as a volunteer in taking up the cudgels in behalf of his corporation is not one of jurisdiction. It is one of his right and authority to act. Illinois Central R. R. Co. v. Adams, 180 U.S. 28, 21 S.Ct. 251, 45 L.Ed. 410. The complainant does not deny this. But he argues that as the defendants did not demur or plead to the bill on the ground of its failure to allege the facts necessary to show his right to act in a vicarious capacity for the corporation, it is too late at a hearing on the merits to raise the objection. If the evidence revealed facts which supplied the omissions of allegation of which the bill is guilty, I am of the opinion that the objection to the defective pleading would come too late. Lowman v. Harvey R. Pierce Co., 276 Pa. 382, 120 A. 404, and Granite Brick Co. v. Titus, (C. C. A.) 226 F. 557, cited by the...