Dana v. Morgan

• Decision Date: 08 December 1914
• Citation: 219 F. 313
• Parties: DANA v. MORGAN et al.
• Court: U.S. District Court — Southern District of New York

219 F. 313

DANA v. MORGAN et al.

United States District Court, S.D. New York.

December 8, 1914

Herbert Parsons, of New York City, for plaintiff.

Ernest E. Baldwin, of New York City, for defendant Corralitos Co.

William W. Cook, of New York City, for defendant Morgan.

Charles F. Brown, of New York City, for other defendants.

HOUGH District Judge.

It will not be necessary to digest or summarize the pleadings herein further than the following: The bill declares that both the original and the amended contract with Mr. Morgan 'was made in bad faith,' and contemplated 'a dissipation of the profits and assets * * * and the waste of the capital' of the Corralitos Company.

I am inclined to think that an allegation of bad faith is an allegation of fact; but, even if it be not anything more than a conclusion, it is to be noted that the bill states as a reason, and a controlling reason, for the making of the contract complained of, that certain of the officers and shareholders of the Corralitos Company were, together with Morgan, interested in certain mining companies, and particularly in the Candelaria Mining Company, and that the contract sought to be set aside is really no more than a scheme or device to pay Mr. Morgan for running the mining company or companies at the expense of the Corralitos Company.

In a proceeding where the complaint is to be construed most favorably to the pleader, I think this statement regarding the Candelaria Company, plus the allegation of bad faith constitutes a sufficient allegation of facts tending to show fraud; so that it may fairly be said that in this bill the Morgan contract is asserted to be fraudulent upon grounds sufficiently stated.

The defenses will be considered in what seems the most convenient order.

1. For reasons appearing in the record, I have declined to consider in advance of trial the defense of laches, except as it may hereinafter be alluded to under the head of res judicata.

2. Equity rule 27 requires a complainant such as Mr. Dana to set forth with particularity his efforts to obtain action on the part of the corporation, 'or the reasons for not making such effort. ' In one sense Mr. Dana has made no efforts to procure action on the part of the Corralitos Company; that is to say, he has never asked that company or its officers to bring this particular suit. But he has shown at great length his reasons for not making such request.

Rule 27 does not require the making of a formal request in every case. The very proviso that a complainant may show his reasons for not 'making such effort' impliedly authorizes suit without request under some circumstances. In my judgment it is within the power of the court to decide in every instance upon the facts shown as to whether or not a request to bring suit would have been an idle ceremony.

In my judgment it is abundantly shown here that request would have been useless. Indeed, it is a part of the legal position assumed by the Corralitos Company that under the doctrine of res judicata, if they had brought suit it would necessarily have been defeated. This defense is therefore overruled.

3. The doctrine in respect of ratification is, I think, sufficiently stated in opinions referred to by all counsel, viz United States Steel Corporation v. Hodge, 64 N.J.Eq 807, 54 A. 1, 60 L.R.A. 742; Russell v. Patterson Co., 232 Pa. 113, 81 A. 136, 36 L.R.A. (N.S.) 199; Pollitz v. Wabash Railroad Co., 207 N.Y. 113, 100 N.E. 721. The substance of that doctrine is that even stockholders cannot ratify a fraud. This must be so, for otherwise a majority of shareholders could work any kind of rascally scheme upon a dissenting minority. As I have stated it to be my finding that this bill charges fraud, I am of opinion that the defense of ratification fails.

It necessarily follows, since the shareholders have ratified the Morgan contracts as far as they are capable of ratification, that Mr. Dana can never succeed in this action without proving the fraud he has alleged. No other ground of recovery is left open to him but fraud, incapable of condonation even by the largest majority of shareholders, short of universal concurrence. Unanimous concurrence would, of course, render fraud impossible.

4. The defense of res judicata is in my opinion well founded and properly pleaded. The Warner suit was in form just what this suit is; i.e., an action brought by a shareholder for the benefit of himself and all other shareholders, and instituted because...