Big Creek Gap Coal & Iron Co. v. American Loan & Trust Co.

• Decision Date: 13 February 1904
• Docket Number: 1,214.
• Citation: 127 F. 625
• Parties: BIG CREEK GAP COAL & IRON CO. et al. v. AMERICAN LOAN & TRUST CO.
• Court: U.S. Court of Appeals — Sixth Circuit

127 F. 625

BIG CREEK GAP COAL & IRON CO. et al. v. AMERICAN LOAN & TRUST CO.

No. 1,214.

United States Court of Appeals, Sixth Circuit.

February 13, 1904

The following is the opinion of the Circuit Court by CLARK District Judge:

In the treatment and disposition of a case like the one at bar, the distinction between the entirely separate legal identity of the corporation and its rights, and of the stock and shareholder and his rights, must never be forgotten. The separate and distinct property and rights of the corporation and those of the shareholder give rise to distinct obligations and liabilities in respect to those separate rights and property.

A question which suggests itself at once is whether or not the defendants have intervened, and who are defending against this foreclosure suit, are permitted to set up a defense on behalf of the corporation, and such as the corporation itself, acting in good faith, could present, or whether they are permitted to assert as a defense any fraud or wrong practiced upon them as individuals and separate shareholders by virtue of rights which belong to them as such shareholders, as distinguished from the corporation. It has been long settled and well understood that, when stockholders bring suit on behalf of a corporation against third persons to assert corporate rights, the remedy is such as the corporation itself only could avail itself of, if acting in good faith and with proper diligence, and the separate or individual rights of the stockholders cannot be presented or considered in such a suit; and when such a suit is brought it must be one which inures to the benefit of the corporation itself directly, and to all the stockholders as a class indirectly. This is for the obvious reason that the separate and individual rights of the shareholders may be different and distinct, and one shareholder may have suffered an injury which does not affect the other shareholders, or which may affect them favorably as between themselves as shareholders. Now, does the same rule apply when shareholders on a proper showing are permitted to intervene to defend on behalf of the corporation, upon showing that such corporation itself is failing to make the proper defense? A proper understanding of the answer to this question will avoid confusion in a case like the one at bar. The entirely separate and distinct identity of the rights and remedies of the corporation itself and these separate and individual shareholders has been often stated and restated and it is quite sufficient to refer to some of the leading cases: Bronson v. La Crosse Railroad Co., 2 Wall. 283, 17 L.Ed. 725; Davenport v. Dows, 18 Wall. 626 21 L.Ed. 938; Church v. Citizens' St. R. Co. (C.C.) 78 F. 526; Forbes v. Memphis R. Co., Fed. Cas. No. 4,926. This distinction and its consequences, as respects the proper remedy, is elaborately pointed out by Mr. Justice Bradley in the Forbes Case, and quite clearly by Judge Baker in Church v. Citizens' St. R. Co. (C.C.) 78 F. 526, in which last case it was held, and properly, of course, that rights which belong to the individual shareholders and those which belong to the corporation cannot be joined.

Much of the discussion at bar has been devoted to the proposition that these interveners were deceived and defrauded in regard to the scheme of reorganization pursuant to which the bonds in question were issued. Their contention in this behalf is that the fact of a bond issue was concealed from them, and that by such concealment they were induced to surrender bonds held against the old company, and to take in exchange therefor preferred stock in the defendant Cumberland Coal & Iron Company. Whether or not the court may consider this element in the case depends upon the answer to the inquiry whether or not these interveners are limited in their defense to such objections as would be open to the defendant mortgagor corporation in this suit, or whether their separate and individual rights may be considered. The very recent case of Dickerman v. Northern Trust Co., 176 U.S. 181, 20 Sup.Ct. 311, 44 L.Ed. 423, is in this regard undistinguishable from the case at bar. In that case Mr. Justice Brown, in relation to this question, speaking for the court, said: 'This case presents primarily the question whether a minority of the stockholders of a corporation have a right to intervene, in the foreclosure of a mortgage upon the corporate property, for the purpose of showing that the property was sold to the corporation by the connivance of the mortgagees at a gross overvaluation, and to compel the bonds held by them to be subjected to a set-off of their indebtedness to the corporation for unpaid stock. It should be borne in mind, in connection with the several defenses set up by the interveners, that they do not appear here in the capacity of creditors, but as stockholders; that their rights are the rights of the corporation, and must be asserted and enforced through the corporation; and upon the theory that the latter has or threatens, by collusion or otherwise, to neglect the proper defense of the foreclosure suit. Dodge v. Woolsey, 18 How. 331, 341, 343 (15 L.Ed. 401); Koehler v. Black River Falls Iron Co., 2 Black, 715 (17 L.Ed. 339); Bronson v. La Crosse, etc., Railroad, 2 Wall. 283 (17 L.Ed. 725); Davenport v. Dows, 18 Wall. 626 (21 L.Ed. 938); Dewing v. Perdicaries, 96 U.S. 193 (24 L.Ed. 654); Hawes v. Oakland, 104 U.S. 450, 460 (26 L.Ed. 827); Greenwood v. Freight Co., 105 U.S. 13 (26 L.Ed. 961); Detroit v. Dean, 106 U.S. 537 (1 Sup.Ct. 560, 27 L.Ed. 300); Cook on Stockholders, Secs. 645, 659, 750. ' The question has been fully considered in its practical phases and application in the several cases cited by Mr. Justice Brown. See, also, Cook on Corporations, Sec. 848, where the same principle will be found laid down as applicable to foreclosure suits. The defendants are consequently limited to such objections to the mortgage and bonds as might have been urged by the defendant corporation itself, the mortgagor, and they cannot in this suit assert, or influence the result by asserting, any wrong to them as individual shareholders. Indeed, it may be inferred on this record that all other shareholders are satisfied with the situation as it is, and would offer no objection to this suit if offered an opportunity to do so. It is conceivable that in a given case the rights and interests of the separate shareholders might be different, and any defense which may be offered in a suit like this must be one which avails directly to the corporation, and indirectly to all the shareholders alike. In determining the case, therefore, I am constrained to hold that the defendants are limited in the defense to such objections as would be open and available to the mortgagor company itself in an answer setting up all valid objections which might be set up by the mortgagor. The observation, not necessarily called for, may be made that these interveners have brought no independent suit, and have presented no cross-bill asking any affirmative relief. The organization scheme has been fully executed, and stock delivered to them pursuant to their agreement, and they are now holding said stock and exercising the rights of shareholders by their petition of intervention in this case. This is all in affirmance of the contract of reorganization as executed, and is manifestly inconsistent with the claim and objection that they were defrauded by the plan of reorganization, as it would be manifestly antagonistic to say that they were defrauded, and the scheme of reorganization invalid, while they still hold to the results which have come to them from the execution of such a contract. Davis v. Peabody, 170 Mass. 397, 49 N.E. 750; Savings & Trust Co. v. Bear Valley R.R. Co. (C.C.) 112 F. 693. If the rights of these interveners as members and shareholders, and any fraud practiced on them as distinguished from a fraud practiced upon the company, could be considered and determined in this suit, it is extremely probable that such rights would have to be presented by a cross-bill, and that they are not available simply in an answer, and this point may be suggested, but it is not necessary to be decided. Green v. Turner (C.C.) 80 F. 41; Springfield Milling Co. v. Barnard & Leas Mfg. Co., 81 F. 261, 26 C.C.A. 389; Meissner v. Buek (C.C.) 28 F. 161. See, also, the closing observations of Mr. Justice Bradley in the Forbes Case already referred to.

But I pass at once to the consideration of such objections as can properly be made on behalf of the mortgagor company itself, taking them up in the order in which I find them disposed of by the special master.

1. It is objected that the execution of the mortgage securing the bonds in question was ultra vires, because not executed as security for borrowed money, nor to secure bonds issued or indorsed to raise money for railroad stock subscriptions by the mortgagor company, and, as supporting this contention sections 2054-2057 and section 2339 of Shannon's Revisal are cited. It will be observed by an inspection of the statutes carried into these sections that under subdivision 3 of section 2054, express power is conferred upon the corporation, without limitation, to purchase and sell and convey real estate for 'corporation purposes.' This provision is simply declaratory of the common law, as we shall presently see. All corporations, at the common law, possess the power to purchase and hold property, real and personal, and to convey, in mortgage or otherwise, such property for any corporation purposes, keeping in view the ordinary prosecution of the business for which the corporation was organized. And so, too, subdivision 7 of the same section, expressly authorizing a mortgage or mortgages on the corporation...