Alabama Fidelity Mortgage & Bond Co. v. Dubberly

• Decision Date: 30 June 1916
• Docket Number: 3 Div. 218
• Citation: 73 So. 911,198 Ala. 545
• Court: Alabama Supreme Court
• Parties: ALABAMA FIDELITY MORTGAGE & BOND CO. v. DUBBERLY et al.

73 So. 911

198 Ala. 545

ALABAMA FIDELITY MORTGAGE & BOND CO. v. DUBBERLY et al.

3 Div. 218

Supreme Court of Alabama

June 30, 1916

Rehearing Denied Jan. 18, 1917

Appeal from Chancery Court, Montgomery County; Oscar S. Lewis Chancellor.

Suit by P.R. Dubberly and others against the Alabama Fidelity Mortgage & Bond Company. From a decree overruling demurrer to the bill, respondent appeals. Reversed and remanded.

The bill is filed by a majority stockholder of the Alabama Fidelity & Casualty Company, for himself and others who may desire to join therein, against the Alabama Fidelity &amp Casualty Company, the Fidelity Mortgage & Bond Company, and the Alabama Fidelity Mortgage & Bond Company. The ultimate and primary purpose of the bill is: First, to fasten personal liability upon the directors of the Alabama Fidelity &amp Casualty Company for a wrongful diversion and appropriation of $100,000 of its corporate funds for the purchase, for the personal benefit of one or more of said directors, of the capital stock and bonds of the Fidelity Mortgage & Bond Company, alleged to be worthless, or of small value; second, to charge said directors with certain large premiums wrongfully collected from complainant and the other stock subscribers on the original stock subscribed for by them, it being alleged that the said directors took their own stock at par only; third, to charge said directors with all corporate property improperly disposed of by them, including all assets turned over by them to the Alabama Fidelity Mortgage & Casualty Company, following its organization by the attempted consolidation of the said Alabama Fidelity & Casualty Company with the said Fidelity Mortgage & Bond Company; and, fourth, to procure the dissolution of the said Alabama Fidelity & Casualty Company, and a distribution of its assets among its shareholders, with the appointment of a receiver, and other steps appropriate to that end. As a necessary preliminary to the foregoing relief, the bill seeks to annul and avoid a consolidation of the Alabama Fidelity & Casualty Company with the Fidelity Mortgage & Bond Company, by which was formed the present Alabama Fidelity Mortgage & Bond Company, to the supposed extinction of the two parent companies.

This avoidance of the consolidation is predicated upon three main propositions of law: First, that the Alabama Fidelity & Casualty Company was organized for the primary purpose of conducting an insurance business, and by the express terms of the statute (section 3481, subd. 11, Code 1907), it was prohibited from consolidating with the Fidelity Mortgage & Bond Company, which was not engaged in the insurance business; second, that the agreement of consolidation was, as to Alabama Fidelity & Casualty Company, unlawful and voidable, in that it was the action of a directorate, 7 of whose 13 members, representing a large majority of the corporate stock, were also members of the 9-member directorate of the other consolidated company; third, that said agreement was for the unfair and fraudulent purpose of securing benefit for those directors, who were also directors and large stockholders of the Fidelity Mortgage & Bond Company, to the detriment of minority stockholders, and, as made, voidable at the instance of any stockholder not barred by laches or estoppel.

Among the many grounds of demurrer assigned, all are comprehended under the following heads: First, that the bill showed that there was in fact a valid consolidation, so as to create a new de jure corporation, the Alabama Fidelity Mortgage & Bond Casualty Company; second, in any case, it showed the creation of a corporation de facto, whose existence and powers, as successor to the two antecedent corporations, can be questioned only in a direct proceeding by the state; third, the complainants cannot maintain their bill as stockholders in the Alabama Fidelity & Casualty Company, as against the consolidated corporation is the right of dissentient stockholders in the original corporation to have their stock appraised and paid for as provided by section 3507 of the Code. Fourth, that the stockholders of the Alabama Fidelity & Casualty Company are not made parties to the bill, although they are necessary parties.

John R. Tyson, of Montgomery, for appellant.

W.A. Gunter, of Montgomery, for appellees.

SOMERVILLE J.

There can be no serious controversy as to the right of complainants to maintain their bill for the relief sought against the Alabama Fidelity & Casualty Company and its directors, if that relief is not foreclosed, as to the mode of procedure here attempted, by the de jure or de facto consolidation of said company with the Fidelity Mortgage & Bond Company.

The principles upon which such relief is founded are quite well settled, and the bill makes a case of official malversation and abandonment of the corporation by directors and stockholders, within those principles. Noble v. Gadsden Land Co., 133 Ala. 250, 31 So. 856, 91 Am.St.Rep. 27; Phinizy v. Anniston City Land Co., 71 So. 469; Pepper v. Addicks (C.C.) 153 F. 383; Brewer v. Boston Theater, 104 Mass. 378; Old Dominion Copper Co. v. Bigelow, 203 Mass. 159, 89 N.E. 193, 40 L.R.A. (N.S.) 314; Bosworth v. Allen, 168 N.Y. 157, 61 N.E. 163, 55 L.R.A. 751, 85 Am.St.Rep. 667; 7 R.C.L. § 472, page 490, citing Decatur Mineral Land Co. v. Palm, 113 Ala. 531, 21 So. 315, 59 Am.St.Rep. 140.

The question of paramount importance, by which the fate of the bill must be determined, is upon the power of the chancery court in this proceeding to declare invalid and abortive the corporate consolidation complained of, or to avoid it as a fraud upon these minority stockholders, even though it resulted in the formation of a de jure or de facto corporation at law.

It is, of course, a well-settled general rule of law, as well as equity that, where a corporation could be lawfully created, and a bona fide and colorable attempt is made to do so, a de facto corporation may result, however irregular, informal, or defective the incorporation proceedings may be, and that in such case the existence and powers of the corporation can be questioned only by a direct and appropriate proceeding in the name of the state. Duke v. Cahawba Navigation Co., 16 Ala. 372, 375; Lehman, etc., Co. v. Warner, 61 Ala. 455; Central, etc., Ass'n v. Ala. Gold Life Ins. Co., 70 Ala. 120; Snider's Sons Co. v. Troy, 91 Ala. 224, 8 So. 658, 11 L.R.A. 515, 24 Am.St.Rep. 887; Nat. Com. Bank v. McDonnell, 92 Ala. 387, 9 So. 149; Harris v. Land Co., 128 Ala. 652, 29 So. 611; Cen. Ga. Ry. v. U.S. & N.Ry. Co., 144 Ala. 639, 39 So. 473, 2 L.R.A. (N.S.) 144; R.C.L.§ 45, p. 64; Id. § 49, p. 68; 10 Cyc. 252, 2; Id. 256, p.

By the express terms of the statute (Code, § 3481, subd. 11), the Alabama Fidelity & Casualty Company, being formed for and engaged in the business of insurance, was prohibited from consolidating with the Fidelity Mortgage & Bond Company, a noninsurance company. But it was legally authorized to amend its charter, and so to become qualified for the contemplated merger. The bill shows that the merger agreement made by the directorates of the two companies was made on September 20, 1913, and was ratified and adopted by 70 per cent. of the required 90 per cent. of the stockholders on October 23, 1913; whereas, the charter was amended by action of the stockholders on October 23, 1913, after said partial adoption of the articles of consolidation.

This procedure was undoubtedly irregular and invalid, but we are clear in the conclusion that, since every necessary step was within the legally authorized powers of two consolidating companies--viz., the charter amendment, the joint agreement of merger, and its ratification and adoption by the respective shareholders--the result was at least a de facto corporation, and, further, that the irregularity in its organization is a matter that concerns only the corporation and the state, and therefore...