Eshleman v. Keenan

• Decision Date: 07 July 1937
• Citation: 194 A. 40,22 Del.Ch. 82
• Court: Court of Chancery of Delaware
• Parties: MILTON C. ESHLEMAN, S. A. SEALS, and GEORGE E. JAMES, JR., v. ROBERT KEENAN, RUSSELL P. BREWER, JULIA A. BREWER, HARVEY W. MARVIN, HARVEY D. RITTER, SANITARY COMPANY OF AMERICA, a Delaware corporation, and WILLIAM S. POTTER, Receiver of CONSOLIDATED MANAGEMENT ASSOCIATION, a Delaware corporation

194 A. 40

22 Del.Ch. 82

MILTON C. ESHLEMAN, S. A. SEALS, and GEORGE E. JAMES, JR., v. ROBERT KEENAN, RUSSELL P. BREWER, JULIA A. BREWER, HARVEY W. MARVIN, HARVEY D. RITTER, SANITARY COMPANY OF AMERICA, a Delaware corporation, and WILLIAM S. POTTER, Receiver of CONSOLIDATED MANAGEMENT ASSOCIATION, a Delaware corporation

Court of Chancery of Delaware, New Castle

July 7, 1937

BILL FOR ACCOUNTING. An opinion was filed on July 8, 1936, holding that a decree should be entered adjudging the defendants Keenan, Brewer and Marvin under a duty to account as prayed. See 21 Del.Ch. 259, 187 A. 25.

The cause came on again before the Chancellor on the terms of the decree to be entered, when the ensuing opinion was filed.

William Prickett, for complainants.

Ivan Culbertson, for defendants, except William S. Potter Receiver.

William S. Potter, receiver, in propria persona.

OPINION

THE CHANCELLOR:

In the former opinion, after the duty of Keenan, Brewer and Marvin to account was declared, the following language was used:

"At the outset of this opinion reasons were stated why the defense of ratification would not be allowed in bar of the bill. Whether ratification and therefore approval by a majority of the stockholders, while not sufficient to bar a remedy to the minority, may nevertheless be shown for the purpose of confining the relief of the decree to the dissentients only, is a question which the proposed supplement to the answer did not present. If the company was solvent and its capital unimpaired, it may be seriously questioned whether restitution should be awarded beyond an amount sufficient to redress the injury to the non-assenting minority only. See Matthews v. Headley Chocolate Co., 130 Md. 523, 100 A. 645. This question has not however, been debated either at the bar or on the briefs. The court in its desire to see justice done is prepared, if the responsible defendants desire, to entertain the question and, if the answer of the law thereto be in their favor, to permit the pleadings to be so shaped as to bring it forward. Views of the solicitors with respect to this aspect of the case may be presented, if desired, before a draft of the decree is submitted."

The query propounded by that paragraph has now been presented to the court for its considered answer thereto.

The company is solvent and its capital unimpaired. It was so at the times when the wrongs complained against were committed. The defendants wish to show that an overwhelming majority of the preferred stockholders have voted, since the evidence was taken in this case, to release and discharge the principal defendants from accountability for the matters charged against them. This is for the present purpose of supplying a basis for the contention that only such amount should be decreed to be paid as is necessary to compensate those stockholders who did not join in the vote of release and discharge--in other words, that the relief afforded should go to the complainants and others in like situation with them as individuals, and not to the corporation.

The question then is, should the defendants pay to the corporation the full amount of restitution, or should they only pay to the complainants individually the pro rata amount of the recoverable sum which the proportion of their shares bears to the total number of shares outstanding?

The bill is one that the complainants filed in behalf of the corporation. The suit is a derivative one. The relief sought is redress of a wrong to the corporation. Nothing is prayed for by way of relief to the complainants as individuals. The nature of such a suit is discussed in Cantor, et al., v. Sachs, et al., 18 Del.Ch. 359, 162 A. 73. In Ainscow v. Sanitary Company of America, 21 Del.Ch. 35, 180 A. 614, 615, it was said, following Cantor v. Sachs, supra, that

"Any relief which may be afforded is in its [the corporation's] behalf and inures to its benefit. The complainant as a stockholder is interested in the alleged wrong and in the relief only in an indirect and derivative sense."

If, therefore, the recoverable amount is to be reduced to a sum sufficient to recompense only the non-waiving stockholders and decreed to be paid to such of them as come forward to assert their respective claims, it is apparent that the suit is immediately turned by the decree from one which asserts a corporate claim to one that seeks individual redress.

The only theory upon which this can be justified is that as the corporation's claim against the officers is a part of its assets, and that as the assets are derivatively the property of the stockholders, it must follow in this case that if the complainants and others in like situation with them get paid their part of the recovery, they are fully compensated for their part of the corporation's loss, and consequently the injury to them is fully repaired.

If this view be accepted, a moment's reflection will show that it treats the recovery as an asset available for dividends. It means further that the court entertains the view that the asset should be paid out immediately as a dividend; and as some stockholders have by their votes in favor of abandoning the claims against the wrongdoers waived their rights to their part of the dividend, payment of the dividend should be ordered only to the stockholders who have not so waived their rights.

This is the only theory capable of advance in support of the defendants' contention, if the conception of the suit as one that seeks a recovery of a corporate claim is adhered to. That conception must in justice to corporations in such cases as this be adhered to. Yet, if individual stockholders may sue to recover individual compensation for wrongs that derive to them through the corporation, on the conception that the allowance of recovery is tantamount to a dividend declaration, it would, contrary to the settled general rule, be taking from the directors of the corporation, whom the law considers as responsible for its policy and management, the discretionary duty of determining when and in what amount the corporation may prudently distribute its assets by way of dividends to the stockholders. Baillie v. Columbia Gold Mining Co., 86 Ore. 1, 166 P. 965, 167 P. 1167. The solicitor for the defendants cites Fougeray v. Cord, 50 N.J.Eq. 185, 24 A. 499, for the proposition that it is proper in this case for the court by the terms of its decree to effect in substance a declaration of a dividend to the complainants of their share of the corporation's recoverable claim against the defendants. The facts in the cited case are much stronger in favor of the defendants' contention than are the facts here. But even so, the cited case was reversed by the Court of Errors of New Jersey on the very point for which the defendants cite it. Laurel Springs Land Co. v. Fougeray, 50 N.J.Eq. 756, 26 A. 886. See, also, South Norfolk Land Co. v. Tebault, 124 Va. 667, 98 S.E. 679. The defendants cite also Eaton v. Robinson, 19 R.I. 146, 31 A. 1058, 32 A. 339, 29 L. R. A. 100, to support the same proposition as Fougeray v. Cord stands for before its reversal. With respect to the Rhode Island case this is to be said--first its prayers were such as to warrant the view that the bill could be treated as one for the declaration of a dividend to the complainant, and so far as the report shows the evidence may have justified a decree of that nature, a circumstance which it cannot be said the evidence here justifies; and second, the Rhode Island court relies entirely on Fougeray v. Cord, supra, unaware apparently that that case had been reversed.

If the case were one where the corporation, had ceased to operate, its controlling stockholder had converted all of its assets and it was denuded of all of its property, it might be that the minority stockholders would be entitled to a decree against the culpable officer for payment to them of their equitable share of the assets which the defendant had in his possession. Dill v. Johnston, 72 Okla. 149, 179 P. 608. There is no suggestion, however, by the complainants in this case, and certainly none by the defendants, that Sanitary Company of America is a defunct corporation whose total assets have been converted and are in the possession of the defendant officers. Quite to the contrary, it is a going concern conducting what appears to be a profitable business.

That courts have the power in proper cases to compel the directors to declare a dividend, is sustained by respectable authorities. But that they should do so on a mere showing that an asset exists from which a dividend may be declared, has never, I dare say, been asserted anywhere. In such a case the court acts only after a demonstration that the corporation's affairs are in a condition justifying the declaration of the...