Bell v. Arnold

• Decision Date: 06 July 1971
• Docket Number: No. 23309,23309
• Citation: 175 Colo. 277,487 P.2d 545
• Parties: , 48 A.L.R.3d 588 Kenneth G. BELL et al., Plaintiffs in Error, v. Leslie B. ARNOLD et al., Defendants in Error.
• Court: Colorado Supreme Court

Page 545

487 P.2d 545

175 Colo. 277, 48 A.L.R.3d 588

Kenneth G. BELL et al., Plaintiffs in Error, v. Leslie B. ARNOLD et al., Defendants in Error.

No. 23309.

Supreme Court of Colorado, En Banc.

July 6, 1971.

Elias J. Candell, Lakewood, Fred R. Rehmer, Aurora, for plaintiffs in error.

Henry, Cockrell, Quinn, & Creighton, Richard C. Cockrell, Peter J. Wiebe, Jr., Denver, for defendants in error.

HODGES, Justice.

Bell, and the other named plaintiffs in error as minority stockholders, brought a derivative action against the directors of Consolidated Mutual Water Company, which was also named as a defendant. In their complaint, these plaintiffs allege that the directors were guilty of illegality, fraud, and negligence in the handling of the corporate affairs and finances of the water company. The demand was for an accounting and for a money judgment including exemplary damages against the directors to be recovered by the water company with the net amount, after certain expenses are paid, to 'be distributed as a special distribution to the shareholders of said mutual non-profit corporation.'

This complaint was filed in June of 1967 and is therefore governed by R.C.P.Colo. 23(b) which relates to secondary actions by shareholders. This rule provided that a proper complaint '* * * shall also set forth with particularity the efforts of the plaintiff to secure from the managing directors or trustees and, if necessary, from the shareholders such action as he desires, and the reasons for his failure to obtain such action or the reasons for not making such effort.'

The complaint states that no efforts were made by the plaintiffs to make demands upon the directors or the shareholders of the water company. It is alleged that no demand was made upon the directors because they comprise all the directors of the company and are the alleged wrongdoers. Because of this, demands upon them would be futile.

The complaint asserts that no demands were made upon the shareholders because the shareholders are not in a position to ratify the wrongs complained of because of the illegal nature of the wrongs. Also the complaint alleged that the attempts of the plaintiffs to acquire a list of the corporate shareholders and their addresses were frustrated because of the unreasonable limitations placed upon the securing of this list. In this respect, it is alleged that the defendant directors insisted that the plaintiffs hand copy the shareholders list using no more than two persons working two hours per day. The defendant directors allegedly refused to allow the plaintiff shareholders to photocopy or microfilm the shareholders list. According to the complaint, there are over 26,000 shareholders of the water company.

The defendants filed a motion to dismiss the complaint because it failed to state a cause of action. The trial court granted this motion, on the basis of its finding that the reasons stated in the complaint for not making a demand upon the directors or the shareholders are insufficient. We agree with the trial court to the extent that the reasons set forth by plaintiffs for not making a demand on the shareholders are insufficient and we therefore affirm the trial court's judgment dismissing the complaint.

Initially, we note that when ruling upon a motion to dismiss a complaint for failure to state a claim, the trial court, and this court on review, must view the allegations of the complaint in a light most favorable to the plaintiff. In other words, the allegations of fact are deemed to be true when such a motion to dismiss is considered. Harrison v. City and County of Denver, 102 Colo. 98, 76 P.2d 1110; 2 A J. Moore, Federal Practice 12.08 (2d ed. 1968).

I.

The general rule is that demands need not be made by shareholder plaintiffs upon directors allegedly involved as wrongdoers. See Rude v. Wagman, 71 Colo. 499, 207 P. 992; 13 W. Fletcher, Private Corporations § 6008 (1970 Rev.); See also Note, Demand in Derivative Suits, 73 Harv.L.Rev. 746, 759 (1960). In the instant case, plaintiffs' allegations are of sufficient particularity and of such a nature to excuse them from making the otherwise required demands for relief upon the directors of the water company.

II.

The central issue here is whether or not the reasons stated in the complaint for the plaintiffs' failure to make demand upon the shareholders are insufficient as a matter of law. We hold they are insufficient.

The purpose underlying the requirements of R.C.P. Colo. 23(b) and our present C.R.C.P. 23.1 entitled 'Derivative actions by stockholders' is to avoid the possibility of a multiplicity of lawsuits against corporations by individual stockholders or small groups of stockholders. Theoretically, a corporation could be subject to as many suits as it has stockholders. As a general rule therefor, courts will not interfere with the internal affairs and management of a corporation on the complaint of an individual stockholder or a small group of stockholders, unless it appears from the allegations of the complaint that all efforts to obtain redress from the directors have been exhausted or would have been futile, as is the case here. Either or both of these situations existing, the stockholder must then make demand upon and seek relief from the stockholders of the corporation. If no effort whatsoever is made in this respect, the complaint must specify the reasons why such an effort was not made. Courts have generally been careful to regard the derivative suit as an extraordinary remedy, which is available to the shareholder, as the corporation's representative, only when there is no other road to redress.

The foregoing is in brief the rationale underlying the demand requirements of our previous and present rule pertaining to derivative lawsuits. The foregoing also represents the case law in Colorado, and is the prevailing law of other jurisdictions. See Rude v. Wagman, Supra; Box v. Roberts, 112 Colo. 234, 148 P.2d 810; Holmes v. Jewett, 55 Colo. 187, 134 P.2d 665; Horst v. Traudt, 43 Colo. 445, 96 P. 259; Caldwell v. Eubanks, 326 Mo. 185, 30 S.W.2d 976, 72 A.L.R. 621. See generally 3B J. Moore, Federal Practice 23.1.19 (2d ed. 1969).

One reason set forth in the complaint for not making a demand on the shareholders is that they could not ratify the alleged wrongs because of the illegal nature of the wrongs. We hold this is...