Baker v. Bankers Mortgage Company

• Decision Date: 22 June 1925
• Citation: 14 Del.Ch. 427,129 A. 775
• Court: Court of Chancery of Delaware
• Parties: MATHIAS H. BAKER, v. BANKERS MORTGAGE COMPANY, a corporation of the State of Delaware, ALFRED SOHLAND and DORA SOHLAND, and the HARRISBURG CORPORATION, a corporation of the State of Delaware, and SAMUEL FISHMAN

129 A. 775

14 Del.Ch. 427

MATHIAS H. BAKER, v. BANKERS MORTGAGE COMPANY, a corporation of the State of Delaware, ALFRED SOHLAND and DORA SOHLAND, and the HARRISBURG CORPORATION, a corporation of the State of Delaware, and SAMUEL FISHMAN

Court of Chancery of Delaware, New Castle

June 22, 1925

STATEMENT OF THE CASE. This is a bill for cancellation of stock and a return of dividends thereon, filed by a stockholder of the Bankers Mortgage Company against said corporation and others. The principal defendant is Alfred Sohland, who while an officer and director of the company is charged with having fraudulently obtained the shares of stock in question.

At the conclusion of the complainant's testimony taken before an examiner, the defendants, Alfred Sohland and Dora Sohland moved under Rule 75 that the bill be dismissed on two grounds. The solicitor for the moving defendants agrees that the complainant's motion to strike the second ground from the record may be granted. The motion to dismiss is therefore based solely on the first ground, which is as follows:

"That the right asserted by the said complainant in his said bill if existent at all, is the right of the said Bankers Mortgage Company and the testimony offered on behalf of the complainant conclusively shows the absence of the condition precedent to any assertion of such right by the complainant."

Motion denied.

Caleb S. Layton, of the firm of Marvel, Marvel, Layton and Hughes and James R. Morford, for the complainant.

Charles F. Curley, of the firm of Saulsbury, Curley and Davis, for the defendants Sohland.

OPINION

THE CHANCELLOR

The majority of the present directors of the Bankers Mortgage Company are the same persons who were directors during a part of the time at least when the alleged frauds were committed and consciously or unconsciously were connected with their perpetration.

On December 22, 1923, the complainant made a demand upon the directors that they take steps in the name of the corporation to correct these alleged frauds and secure redress for the alleged wrongs. Two days latter the directors replied to this demand in part as follows:

"Your letter had the consideration of the board of directors of Bankers Mortgage Company in meeting held this day with the result that it refused to comply with your several demands."

On the day the refusal was resolved upon, the board directed the payment of a sum of money as a retainer to the firm of lawyers who filed the pending bill. The bill was filed two days thereafter.

Under these circumstances, the solicitor for the Sohlands contends that the complainant is not entitled to come into a court of equity as the asserter of his corporation's rights.

It is a clearly established general rule that a cause of action belonging to a corporation must be asserted by the corporation itself. This rule is inflexible at law. But it has its exceptions in equity. A stockholder may under certain circumstances sue in equity in right of the corporation. Where he does so, however, he asserts the right of the corporation. This he is not permitted to do, unless the circumstances be such that the corporation will not sue. Its unwillingness to act must be evidenced by a refusal after proper demand, or by facts which show that by reason of hostile interest or guilty participation in the wrongs complained of, the responsible managers of the corporation cannot be expected to sue, or would be improper persons to conduct the litigation. In the latter case, a demand upon them and a refusal are for obvious reasons not required, as a condition precedent to the stockholder's right to proceed.

These principles are well settled and have received recognition in this State. Ellis v. Penn Beef Co., 9 Del. Ch. 213, 80 A. 666; Roberts, et al., v. Kennedy, et al., 13 Del. Ch. 133, 116 A. 253; Harden v. Eastern States Public Service Co., ante p. 156; Fleer v. Frank H. Fleer Corp., ante p. 277.

In the instant case, in view of the existence in office of a majority of the present board when a part at least of Sohland's alleged frauds were committed and their connection therewith, it is a question for debate whether the complainant was bound to demand of the present board that it institute proceedings against Sohland. This question however, though mentioned at the argument was not pressed. The fact that many of the directors now in office (10, it was stated at the argument, out of 13) by their acts permitted or apparently ratified what was done, may account for their unwillingness to file a bill of complaint against Sohland. Why they should be willing at the same time, however, to assume the apparently contradictory position that the corporate moneys might be used to pay a retainer to the complainant's solicitors for the purpose of encouraging him to proceed against Sohland is not explained. It is not unreasonable to suppose that their reason for this may have been that they apprehended the suit would in some way be prejudiced if conducted by them as managers of the corporation. What their real reason was is left to speculation. One of them testified and gave as the reason for his voting for the refusal, that he preferred not to bother with it. If this was the reason that actuated the others, it was a purely...