Bartlett v. New York, N.h. & H.r. Co.

• Decision Date: 08 July 1915
• Parties: BARTLETT et al. v. NEW YORK, N.H. & H. R. CO. et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

221 Mass. 530

109 N.E. 452

BARTLETT et al. v. NEW YORK, N.H. & H. R. CO. et al.

Supreme Judicial Court of Massachusetts, Suffolk

July 8, 1915

Case Reserved from Supreme Judicial Court, Suffolk County.

Suit by Ralph S. Bartlett and others against the New York, New Haven & Hartford Railroad Company and others. Case reserved for the full court on demurrers to the bill. Demurrers sustained.

COUNSEL

Whipple, Sears & Ogden, of Boston, for plaintiffs on demurrers, motion to dismiss, and pleas to the jurisdiction.

Coolidge & Hight, of Boston, for defendant Wm. Rockefeller.

Chas K. Cobb, of Boston, for defendant Alex. Cochrane.

E. P Saltonstall and ChaS.W. Blood, both of Boston, for defendants Amos A. Lawrence and others, executors of will of Amory A Lawrence.

Elder, Whitman & Barnum, of Boston, and Sullivan & Cromwell, of New York City, for defendants Chas. F. Brooker, Jas. S. Elton, and Wm. Skinner.

C. F. Choate, Jr., of Boston, John W. H. Crim, of New York City, and Fredk.

H. Nash, J. W. Frothingham, and Choate, Hall & Stewart, all of Boston, for respondent Chas. S. Mellen on demurrer and Chas. M. Pratt.

J. L. Thorndike and R. J. Dodge, both of Boston, for defendant New York, N.H. & H. R. Co.

Powers & Hall, of Boston, and Tillinghast & Collins, of Providence, R. I., for defendants Horatio R. Hunt and others, executors under the will of Edwin Milner.

Jos. P. Warner, of Boston, for defendants J. Pierpont Morgan and others, executors.

Ossian Ray, of Boston, for respondent Dever H. Warner, trustee.

OPINION

RUGG C.J.

This is a suit in equity brought by certain stockholders in the defendant corporation, in behalf of themselves and all other stockholders who desire to join, to enforce liabilities which are alleged to have accrued in its favor against some of its present and former directors. The defendants are the New York, New Haven & Hartford Railroad Company, hereafter referred to as the corporation, certain individuals who either now are or have been directors of the corporation, and the personal representatives of certain deceased directors. The grounds upon which this liability is alleged to rest are negligence of the directors of the corporation in its management, whereby purchases of street railway companies, steamboat lines and railroads at prices vastly in excess of their real value have been made with the moneys of the defendant corporation, and the investment of large sums in ventures ultra vires the defendant corporation, and the establishment of a monopoly in contravention of the Sherman Anti-Trust Act (Act Cong. July 2, 1890, c. 647, 26 Stat. 209), all through the misconduct of these directors, to the great loss of the corporation.

A stockholder of a corporation has no personal right of action against directors who have defrauded it and thus affected the value of his stock Such wrongs are against the corporation itself and, except through that, have no relation to the stockholder. It is the corporation alone whose interests are directly concerned, whose rights are to be asserted, and to whose exclusive use the judgment, if recovered, must be paid. Converse v. United Shoe Mach. Co., 185 Mass. 422, 70 N.E. 444; Id., 209 Mass. 539, 95 N.E. 929. The averments of the first paragraph of the bill, while not specific in this respect, when read in conjunction with other averments and especially with the fourth prayer, are that the plaintiffs bring the bill entirely for the benefit of the corporation and not in their own interest except as indirectly they may profit by having money wrongfully taken from it restored to the corporation.

Demurrers have been filed founded on the omission of the plaintiffs to aver that the directors have failed to act after a reasonable demand made upon them to act, or that such demand would have been useless.

A stockholder, before he can proceed in his own name but in its behalf for the redress of wrongs done to the corporation, must establish that he has exhausted all available means to obtain relief through the corporation itself, unless the circumstances excuse him from so doing. That is a condition precedent. Facts showing that he has complied with this condition must be set forth in unmistakable terms in his bill. He must make an earnest and sincere and not a feigned or simulated effort to induce the managing officers of the corporation to take remedial action in its name. If he fails in this quarter, unless there is adequate reason to the contrary, he must resort to the stockholders and make an honest attempt to convince them that action ought to be instituted. Directors and the majority of stockholders are presumed to be acting, not fraudulently, but with fair discretion in obedience to law, and in good faith toward all concerned, and with a consciousness of duty toward the corporation and all its stockholders. It is an implied condition of becoming a stockholder in a corporation that its general policy shall be determined by the holders of a majority of the stock and that disagreements as to its dominating policy and as to the details of its management shall be settled by the stockholders, and that recourse cannot be had to the courts to adjust difficulties of this sort. It is only from actual necessity, in order to prevent a failure of justice, that a suit in equity for the benefit of the corporation can be maintained by a stockholder. As was said in Dunphy v. Travelers' Newspaper Ass'n, 146 Mass. 495, at 496, 497, 16 N.E. 426, at 430:

'Courts of equity are swift to protect helpless minorities of stockholders of corporations from the oppression and fraud of majorities. But the legal relations into which the members of a corporation enter require them to seek redress for supposed wrongs done them as stockholders from its officers, and from the corporation itself, before applying elsewhere.' Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827;

Wathen v. Jackson Oil Co., 235 U.S. 635, 639, 35 Sup.Ct. 225, 59 L.Ed. 395.

The same principle is applied to unincorporated organizations and beneficiary corporations. Hickey v. Baine, 195 Mass. 446, 81 N.E. 201; Correia v. Portuguese Fraternity, 218 Mass. 305, 309, 105 N.E. 977.

The allegations of the bill upon this point are that the plaintiffs have caused to be sent to each of the directors now in office a letter touching some of the wrongs complained of and asking for notice of their decision respecting it. It is alleged that there are 23 directors, 2 living in Pennsylvania, 1 in Rhode Island, 3 in New York, 4 in different parts of Massachusetts, and 13 in various cities and towns in Connecticut. The letter was mailed in Boston on Friday, July 10, 1914. The bill was filed in court a week later, on Friday, July 17, 1914. Although it is not alleged how the letter was directed, the most that can be assumed is that it reached each of the directors on the following day Saturday. Only five business days thereafter intervened before the bill was filed. It requires no discussion to show that such notice and request, even if sufficient in form, was entirely too short in time for any practical purpose. A meeting of a board so large, composed of members whose residences are so widely separated as these, hardly could have been held, unless previously called, much, if any, before the suit was brought. The magnitude of the claims made, the length of time during which it is alleged that the wrongs to the corporation were perpetrated, and the intricacy of the separate transactions and the subterfuges resorted to by the guilty directors in their efforts to conceal the true nature of their conduct, all as set forth in the bill, manifestly rendered it impossible for any board of directors, however honest and alert, to make even a superficial examination of the matters set forth in the letter. The letter in direct words suggests an investigation as to 'suspicious circumstances' which 'may disclose proof of fraudulent participation by directors in secret and illegal profits, or other forms of fraudulent maladministration.' By fair implication it suggests other investigations, which even with the utmost expedition could not have been completed except after the lapse of some time. Moreover, the latter invites from the directors 'notice of your decision as to compliance' with the letter. A bald acknowledgment of the receipt of such a letter scarcely could have been reasonably expected--certainly no notice of collective decision as to a course of action to be pursued regarding its subject matter--before the suit actually was instituted. The bill does not allege that no action was taken by the directors in response to the letter, nor that no answer was received by the writers. It is quite consistent with all its allegations that a meeting of the directors was held, notwithstanding the shortness of time, at which the letter was referred to competent counsel and notice thereof sent to the writers of the letter. An affidavit pretty nearly to that effect, printed in the record, is not attached to or referred to in the bill, was filed later, and hence cannot be treated as rightly before us; but the existence of such facts are not at all incompatible with the bill. It is not necessary to consider whether the letter contained sufficient information and was a demand adequate in form to be basis of an individual suit by a stockholder. Making all assumptions in its faovr, it is too plain for further discussion that the plaintiffs do not allege any facts which show that they have made a genuine and substantial effort to induce action by the directors with a real purpose to bring about that result before filing their bill. There is no ground for the argument that the bill shows reason for haste. The record is bare of any facts indicating that the rights of...