Deaderick v. Wilson

• Decision Date: 30 September 1874
• Citation: 67 Tenn. 108
• Parties: JAMES G. DEADERICK et al. v. R. T. WILSON et al.
• Court: Tennessee Supreme Court

67 Tenn. 108

JAMES G. DEADERICK et al.

v.R. T. WILSON et al.

Supreme Court of Tennessee.

September Term, 1874.

FROM HAMBLEN.

Appeal from the Chancery Court. H. C. SMITH, Chancellor.J. T. SHIELDS for complainants.

BARTON and BAXTER & SON for defendants.

FREEMAN, J., delivered the opinion of the court.

This bill is filed by James G. Deaderick, N. M. Taylor, John H. Miller (administrator of the estate of Ann C. Taylor), John W. Harle, Wilson Wyatt, Isaac P. Tipton--a portion of whom are stockholders, and a part had sold their stock before filing the bill--in behalf of themselves and all other persons who are the share and stockholders in the corporation under the style and name of the East Tennessee, Virginia and Georgia Railroad Company, excepting such of the shareholders as are made defendants; and is against the said railroad company; R. T. Wilson, who is sued both as president and director and in his own wrong; C. M. McGhee, as vice president and director and in his own wrong; Joseph Jaques, who is sued as vice president, superintendent, director and individually; R. H. Richards, a director and in person; R. C. Jackson and W. C. Kyle; the said Wilson, Jaques, McGhee, Richards and Jackson being sued both as present and former officers and directors of said corporation. In addition to these, by amendment, Rufus T. McAdden and Hiram Libby, non-residents, were made parties--the first as representing the Western North Carolina Railroad, and the second as the party from whom certain bonds of said last mentioned road have been purchased.

We may remark at the commencement of this opinion, that it is difficult to state the general scope of the bill, from the incongruity of the matters alleged and the wide range of statement contained in it, combined with the diverse characters in which defendants are sought to be charged.

The bill was dismissed on demurrer by the chancellor, said demurrer reaching in its specifications all the matters alleged in the bill. We will dispose of the questions raised in the order presented by the prayer of the bill mainly, and not in the order as presented by the demurrer, or it may be, group the questions so as to include several propositions under the general view.

The first question we discuss is raised by the first and part of the fifth, the sixth and seventh prayers of the bill, together with the subordinate prayers in aid of the relief thus sought. They are as follows:

1. That the defendants be required to produce and file the genuine original contract in writing made with the Southern Railway Security Company, or with Thos. A. Scott, for the sale of the said ten thousand shares of stock, and that the same be decreed to be null, void, and of no validity.

The clause of the fifth prayer is: “But if your Honor shall hold they are not entitled to the relief for which they above pray, that is, to have the sale of ten thousand shares of stock set aside, then they pray that Wilson, Jaques, McGhee and Jackson, with such other directors and officers as were confederated with them in the purchase and sale of said stock, be held to account to the stockholders from whom they purchased the same, for all profits made and realized by said purchase and sale; but if said sale and transfer is set aside, they pray for an account of such profits and advances in value as may have accrued, and that the parties be required to show from whom they purchased stock, when each purchase was made, the price paid, and through what agency purchased.”

The facts on which this latter branch of relief is prayed, may be substantially stated as follows: It is alleged that Wilson, Jaques, McGhee and Jackson, with other officers and directors of the corporation, receiving salaries as such, conceived and formed the design and scheme of speculating in the stock owned by complainants, and others on whose behalf they sue, to the damage of the owners of the stock, and profit of said respondents; that they availed themselves of their superior knowledge, influence and power, and other advantages incident to their positions as such officers and directors, and as trustees for the stockholders, to carry said scheme into execution, and procured the smaller stockholders to transfer to them their shares of stock at prices far below their par value, and far below the prices that their superior information enabled them to foresee said shares would command.

Stripped of all verbiage, this charge is, simply, that officers and directors of a railroad corporation have purchased stock of parties owning small amounts of stock at below the par value of the stock, and below the value which they foresaw it would command--that is, in the future--and that they so purchased because of their superior knowledge of the real value of the stock, or their superior foresight as to its future value, which knowledge was obtained by means of their official positions.

The legal proposition that underlies it, on which relief is sought, and the charge made, is, that the officers and directors of a corporation of this kind are trustees for the stockholders, or individual owners of the stock, and, as such, cannot be allowed to make a profit out of their trust--the rule applicable to all trustees in courts of equity. On the correctness and accuracy of this proposition all this branch of the case made by the bill turns, assuming for the present, but not deciding, that complainants have presented themselves properly before the court to obtain this relief. To this question we now address ourselves.

Numerous cases, both in England and this country, have settled that the position of a director is in some sense one of a fiduciary character; in most of them, directors are stated to be trustees for the stockholders. That this is true in some particulars, is beyond all question. See cases of Overend, Gurney & Co. v. Gibb, 3 vol. Eng. R., 7-17; Liquidators v. Coleman, 6 vol. Eng. R., 26-33; 1 Redf. on Railw., 576; and numerous authorities cited in printed brief of Shields' counsel, pp. 29, 30, 31; also cases collected in Board of Commissioners of Tippecanoe County v. Reynolds, June number Amer. L. Reg., p. 376, decided by Supreme Court of Indiana. To call directors of a corporation trustees for the stockholders, however, without limiting the use of this term by the facts of the cases in which the question has been presented for adjudication, is calculated to mislead, and induce a very wrong conclusion as to the liabilities of officers, or rather agents, of corporations.

As said by Judge Sharswood in Spering's appeal, 71 Pa. Amer. Rep. vol. 10, p. 689, “It is by no means a well settled point what is the precise relation which directors sustain to stockholders. They are undoubtedly said in many authorities to be trustees, but that, I apprehend, is only in a general sense, as we term an agent or any bailee instructed with the care and management of the property of another. It is certain they are not technical trustees.”

This statement of the learned judge, we think, is correct beyond doubt. The officers and directors of a railroad corporation do not have the legal title of the corporate property vested in them as such, to be held by them for the use of the company nor the stockholders; much less have they the title to or control of the individual shares of stockholders.

The corporation, the legal entity, owns the franchise and corporate property. The officers and directors are the agents through whom this legal entity acts, and, in the performance of the duties pertaining to their positions, represent the corporation. And so, with reference to the stockholder, who, by virtue of his ownership as his individual property, is entitled to the dividends properly accruing to him as owner of such shares of stock, the officers and directors are under obligations to the faithful management and use of the corporate franchise and property, so as to secure him the benefit of such dividends. In both cases they are responsible, under certain circumstances, in a proper proceeding in a court of equity, and probably in some cases in a court of law, for any wrong conduct in violation of the rights of either the corporation or injuriously affecting the interests in which the stockholder is concerned. In a word, they are agents charged with the performance with fidelity of the duties that grow out of their position, as defined by the powers, objects and purposes of the charter of the company. To this extent is their position fiduciary, and for breaches of good faith in the performance of these trusts they are held responsible. These general propositions, though sound in our judgment, may, in their application to particular cases, require some qualification; but, as general propositions, we think they embody the true idea on which the responsibility of such parties rest, as deducible from the cases and the nature of the positions themselves.

But do these principles sustain the argument of complainants, and the theory of their bill on this branch of the case? It is, first, that the shares of stock, amounting to ten thousand, sold by defendants Thomas A. Scott, or Security Company, be declared null and void, for reasons that will be referred to hereafter. Second, if this is not done, then that defendants be held to account to the stockholders from whom they purchased, on what stock they purchased from them, for all profits realized by said purchase and sale; and this on the ground that the officers and directors were trustees in such a sense as to forbid their purchasing the shares of stock owned by individual stockholders, except under the stringent rules that govern as between trustee and beneficiary in a technical trust, or as between principal and agent, attorney and client.

It suffices to say, first, on this proposition, that we have been pointed to no case that holds such a doctrine, and we feel sure none can be found going this length. We are totally unable to see the...