Evans v. Diamond Alkali Company

• Decision Date: 21 May 1934
• Docket Number: 74
• Parties: Evans et al. v. Diamond Alkali Company et al. (Freeman et al., Appellants)
• Court: Pennsylvania Supreme Court

172 A. 678

315 Pa. 335

Evans et al. v. Diamond Alkali Company et al. (Freeman et al., Appellants)

No. 74

Supreme Court of Pennsylvania

May 21, 1934

Argued March 23, 1934

Appeal, No. 74, March T., 1934, by John M. Freeman et al from decree of C.P. Allegheny Co., Oct. T., 1932, No. 3924 in case of Howard S. Evans et al. v. Diamond Alkali Company et al. Decree affirmed.

Claim for counsel's fees. Before MACFARLANE, P.J.

The opinion of the Supreme Court states the facts.

Decree entered dismissing claim. John M. Freeman et al. appealed.

Error assigned, inter alia, was decree, quoting record.

Decree affirmed at appellants' costs.

William S. Dalzell, with him H. F. Stambaugh, for appellants.

Edwin W. Smith, of Reed, Smith, Shaw & McClay, with him Maynard Teall, for appellee.

Before FRAZER, C.J., SIMPSON, KEPHART, SCHAFFER, MAXEY, DREW and LINN, JJ.

OPINION

MR. JUSTICE LINN:

This appeal is from the refusal to order the Diamond Alkali Company to pay counsel fees to appellants.

Appellants were retained by Howard S. Evans in April, 1931. In his name, as plaintiff, on September 30, 1932, they issued a summons in equity against that corporation and certain directors to redress frauds alleged to have been perpetrated by the directors. Plaintiff was then a stockholder and had been a director. They contend that, as a result of their efforts, though without trial of the suit, the alleged grievances were settled by the corporation by the restoration to the corporation of valuable property; that, on familiar equitable principles, the property so restored is liable to a charge for their services as the attorneys of Howard S. Evans. The Diamond Alkali Company denied liability on the ground that appellants were never authorized to do anything on behalf of the corporation; that they have not brought themselves within the rules governing the allowance of counsel fees to a stockholder redressing a wrong to the corporation. The learned court below adopted that view and dismissed the claim.

These governing rules are well settled and have recently been stated: Pellio v. Bulls Head Coal Co., 231 Pa. 157, 160, 80 A. 71; Passmore v. Allentown & Reading Traction Co., 267 Pa. 356, 359, 110 A. 240. In Wilson v. Brown, 269 Pa. 225, 227, 112 A. 1, we said: "We have said in a number of cases that the right of an individual stockholder to act for the corporation is exceptional and arises only on a clear showing of special circumstances, among which inability or unwillingness of the corporation to proceed, demand upon the regular corporate management and a refusal to act, are imperative requisites, and the refusal of the corporate management must appear affirmatively to be a disregard of duty and not an error of judgment -- a nonperformance of a manifest official obligation amounting to a breach of trust: Beech on Corporations, section 878. Where it appears that fraudulent acts, prejudicial to the interests of the corporation, have been committed, so interwoven with the conduct of the corporate managers and of such nature that it might be presumed the officers would commit a breach of trust in refusing to proceed, a demand is not necessary, as it would be 'vain and useless.' Ordinarily there is no presumption that officers will commit such breach of trust, and the charge that they will should rest on acts, affirmative or permissive, duly averred, manifestly in violation of duty, and manifestly the result of fraud and not of erroneous judgment. It is not always necessary for the complaining shareholder to appeal to stockholders at a meeting, but he is in duty bound to make every reasonable effort to prevail on the corporate management to bring action: Wolf v. Railroad, 195 Pa. 91; Glenn v. Kittanning Brewing Co., 259 Pa. 510; Passmore v. Allentown & Reading Traction Co., 267 Pa. 356; Kelly v. Thomas, 234 Pa. 419." See, also Equity Rule 37. Where such diversion of property occurs, the parties taking it become constructive trustees for the benefit of the corporation, the owner; equity will order it restored in appropriate proceedings. It is settled that, when equity decrees the return of the property of a corporation at the suit of a stockholder acting for the corporation, it may charge the property with the reasonable expense of the litigation, including compensation to counsel: Hechelman v. Geyer, 252 Pa. 123, 97 A. 193; Hempstead v. Meadville Theological School, 286 Pa. 493, 134 A. 103; see, also, Trustees v. Greenough, 105 U.S. 527.

In the light of these rules, does the record support appellants' claim? Had Howard S. Evans exhausted the means within his reach to obtain action by the Alkali Company, when he brought his suit? Does it appear that he was authorized to sue as the representative of the corporation?

T. R Evans, who was president of Diamond Alkali Company, a defendant, died March 17, 1931. His brother, the plaintiff, Howard S. Evans, owned 3,501 of the 6% preferred and 5,710 shares of the common stock of the company, and, on April 16th, was elected a director. On his brother's death, he claimed, under some arrangement with decedent, to be entitled to a part of the shares of stock held by decedent in Diamond Investment Company, a subsidiary of the Diamond Alkali Company. Apparently obtaining no satisfaction with regard to his claim from the executrix of T. R. Evans, or from her attorney, Howard S. Evans retained appellants to obtain redress from his brother's estate. Their investigation led them to conclude that certain directors had diverted to their own use certain property of the Alkali Company and had otherwise mismanaged corporate affairs with resulting loss. They advised their client of this conclusion. Although he was a member of the board of directors, he made no formal complaint to the board until April 21, 1932, but, even then, did not demand that the corporation proceed to right the wrong. In consequence of that complaint, however, a committee of two members of the board was at once appointed to "make a thorough investigation of all matters complained of, with...