Ebbert v. Plymouth Oil Co.
| Decision Date | 22 November 1943 |
| Docket Number | 161 |
| Citation | 34 A.2d 493,348 Pa. 129 |
| Parties | Ebbert, Appellant, v. Plymouth Oil Company et al |
| Court | Pennsylvania Supreme Court |
Argued October 1, 1943.
Appeal, No. 161, March T., 1943, from decree of C.P Allegheny Co., Oct. T., 1938, No. 2923, in case of Sara F Ebbert v. Plymouth Oil Company et al. Decree affirmed.
Bill in equity. Before PATTERSON, J.
Decree entered dismissing bill. Plaintiff appealed.
Decree affirmed; costs to be paid by Plymouth Oil Company.
Earl F Reed, with him Charles M. Thorp, Jr., of Thorp, Bostwick, Reed & Armstrong, Drayton Heard, of Heard & Heard, and J. Roland Johnston, for appellant.
Elder W. Marshall, with him John O. Wicks, of Weller, Wicks & Wallace, Fred O. Blue, of Blue, Dayton & Campbell, Reed, Smith, Shaw & McClay, and T. W. Pomeroy, Jr., for appellees.
Before MAXEY, C.J., DREW, LINN, STERN, PATTERSON and STEARNE, JJ.
The story of this litigation begins in 1925. In that year a stockholders' bill was filed in the Court of Chancery of the State of Delaware against Plymouth Oil Company and thirty-one individual defendants. Among the plaintiffs was William M. Henderson, acting in part for the present plaintiff, Sara F. Ebbert, whose stock was then held in his name. The bill alleged that the individual defendants therein named, organizers and promoters of Plymouth Oil Company, had illegally and fraudulently acquired 700,000 shares of the company's stock. The prayer was for cancellation of this stock, the compulsory election of a new board of directors, and the appointment of receivers. The case was decided by the Delaware court in 1928 in favor of the defendants and the bill was dismissed.
At various times, beginning July 31, 1925, and ending November 30, 1929, Plymouth Oil Company made payments out of its corporate treasury, in connection with this Delaware litigation, of sums aggregating $787,500 for counsel fees and $45,646.36 for other expenses, a total of $833,146.36. [1] Sara F. Ebbert, owner of 600 shares of the company's stock, filed the present bill in equity against the company and nine individuals, of whom Michael Benedum, Trees, Huston, Hallanan, Holliday, Dally and Davenport were defendants in the Delaware suit, all of these except Davenport having been promoters of the corporation, and Michael Benedum, Huston, Holliday, Hallanan and Davenport having been members of the board of directors when the payments were made; Jones, Trees, Dally and Paul Benedum became members of the board at a later period. The bill alleges that practically all the payments for counsel fees and expenses were for the benefit of the individual defendants in the Delaware and Farquhar [2] proceedings and therefore constituted an unlawful diversion of corporate funds. It further alleges that this sum of $833,146.36 was included in assets, under the designation "Deferred Charges," in the consolidated balance sheets contained in the annual reports submitted to the stockholders for the years 1930 to 1937 inclusive, that this constituted a representation that it was a collectible claim against the individual defendants in the Delaware and Farquhar suits, and that it was not removed as an asset until 1938, when it was charged off against the earned surplus of the corporation. Defendants are accused of having been "negligent in the performance of their offices" in that they failed to take any action to recover this money. It is further stated that plaintiff made no demand on the board of directors to remedy the wrongs complained of for the reason that "it would be futile and useless to do so." The bill prays an accounting to the corporation for the losses which it suffered.
Defendants filed preliminary objections, which the court sustained, and the bill was dismissed on the ground that it showed on its face the action was barred by laches and the statute of limitations. On appeal to this court the action of the lower court was reversed with a procedendo (Ebbert v. Plymouth Oil Co., 338 Pa. 272, 13 A.2d 42) because the designation "Deferred Charges" apparently amounted to a concealment which relieved plaintiff, until the amount was charged against surplus, from the duty of inquiring as to its true nature. The case being remanded for trial, hearing was had and, on the basis of the testimony taken, the court below found that there was not in fact any fraudulent concealment by defendants of the making of the payments; accordingly the bill was again dismissed for the same reason as before.
While this suit is brought by a shareholder it is one in which relief is sought for the benefit of the corporation, whose rights plaintiff is derivatively asserting because of the board's failure to act. It should be noted at the outset that the case as now presented is wholly different from what it was when the bill was attacked on demurrer. We now have facts found by the court instead of the mere averments of a pleading.
Naturally the basic issue is whether, as defendants contend, the payments for counsel fees and expenses in the Delaware suit were justified because the company was obliged to defend the action in order to protect its vital interests, or whether, as plaintiff claims, those interests were nominal and the individual defendants, as the parties really involved, should have borne all but a negligible part of the cost. If, however, the court below was correct in dismissing the bill because of plaintiff's delay in instituting the action it will be unnecessary to decide whether the expenditures were for a lawful corporate purpose or whether they constituted a fraudulent diversion of the company's funds.
The latest of the payments for which restitution is sought was made November 30, 1929, and the present action was begun September 26, 1938, that is, after a lapse of approximately nine years. The Act of March 28, 1867, P.L. 48, provides that "no suit, at law or in equity, shall be brought or maintained against any . . . director in any corporation . . . to charge him . . . with any neglect of duty as such . . . director, except within six years after . . . the commission of such act of negligence by such . . . director." In Link v. McLeod, 194 Pa. 566, 45 A. 340, the directors of a corporation passed an illegal resolution making an appropriation of corporate funds to the president, and payment thereunder was accordingly made. A bill in equity having been brought against the directors for an accounting, with the company named as a party defendant, it was held that the Act of 1867 barred the action, which was instituted more than six years after the passage of the resolution. It was apparently assumed that, although the passage of the resolution and the payment of the money were both wilful rather than negligent acts, they constituted a neglect of duty within the meaning of the statute. Accepting that case as a precedent, it would follow that the Act of 1867 is applicable to the present proceedings. But in any event, and even if there is no statute of limitations which in terms governs this action, it is well established that equity will frequently adopt and apply the statute of limitations which controls analogous proceedings at law: Dalzell v. Lewis, 252 Pa. 283, 287, 97 A. 407, 408; Bailey v. Jacobs, 325 Pa. 187, 195 n. 5, 189 A. 320, 325 n. 5; Bell, Secretary of Banking, v. Brady, 346 Pa. 666, 668, 31 A.2d 547, 549. This is especially, if not invariably, true if the cause of action is not exclusively cognizable in equity (34 Amer. Jur. 55, sec. 59), which is the situation here, because, where an accounting is desired, it may be obtained in a common-law proceeding, the practice being outlined in sections 11 and 19 of the Act of May 14, 1915, P.L. 483 ( Act of May 26, 1937, P.L. 895); Shaw v. Newingham, 279 Pa. 180, 182, 183, 123 A. 783, 784; Williams v. Finlaw, Mueller & Co., 292 Pa. 244, 247, 141 A. 47, 48. Equity takes jurisdiction (under the Act of October 13, 1840, P.L. 1, sec. 19) only when the accounts are mutual or complicated, or when discovery is needed and is material to the relief: Gloninger v. Hazard, 42 Pa. 389, 401; Holland v. Hallahan, 211 Pa. 223, 60 A. 735; Williams v. Finlaw, Mueller & Co., 292 Pa. 244, 141 A. 47. [3] Because of this concurrent jurisdiction the statute of limitations is generally held to be a bar to proceedings in equity for an accounting when it would be a bar to an action at common law for the same matter: Bank of the United States v. Biddle and Andrews, 2 Pars. Eq. *31, *46; Hamilton v. Hamilton's Executors, 18 Pa. 20; McKelvy's Appeal, 72 Pa. 409, 413; Bickel's Appeal, 86 Pa. 204, 213; Miller v. Fulton, 206 Pa. 595, 599, 56 A. 74, 75; 34 Am. Jur. 81, sec. 99. The action for an accounting at law being on the same plane, in practice, as an action in assumpsit (Miller v. Belmont Packing & Rubber Co., 268 Pa. 51, 64, 110 A. 802, 806; Duggan v. Duggan, 291 Pa. 556, 560, 140 A. 342, 344) is subject to the same six-year limitation: Guldin v. Lorah, 141 Pa. 109, 21 A. 504; Miller v. Fulton, 206 Pa. 595, 599, 56 A. 74, 75; Borland's Appeal, 234 Pa. 280, 286, 287, 83 A. 110, 112. From all of which it follows that, whether we consider the Act of 1867 applicable to the present proceedings ex proprio vigore, or that a six-year limitation should be adopted by way of analogy to proceedings at law (especially because of the concurrent jurisdiction of law and equity in proceedings for an accounting), the result is the same, leaving as the only remaining question, when did the statute begin to run?
At the latest, in the absence of any circumstances modifying the general rule, the statute started to operate at the time of the allegedly unlawful diversion of the company's funds. [4] It is the breach of duty which gives rise to the...
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