Felsenheld v. Bloch Bros. Tobacco Co.., (CC 561)

• Decision Date: 26 June 1937
• Docket Number: (CC 561)
• Citation: 119 W.Va. 167
• Court: West Virginia Supreme Court
• Parties: Emanuel Felsenheld, Trustee, et al. v. BlochBrothers Tobacco Company et al.

119 W.Va. 167

Emanuel Felsenheld, Trustee, et al.

v.Bloch Brothers Tobacco Company et al.

(CC 561)

Supreme Court of Appeals of West Virginia.

Submitted April 21, 1937.

Decided June 26, 1937.

1. Corporations

For the benefit of a corporation and its stockholders, a stockholders' derivative suit may be prosecuted by a trustee and the cestui under a testamentary trust whereof certain shares of stock of the corporation constitute the corpus.

2. Corporations

"The directors of a corporation occupy the relation of trustees to such corporation and its property." Sweeny V. Sugar Refining Co., 30 W. Va. 443, 4 S. E. 431, 8 Am. St. Rep. 88.

3. Equity

Statutes of limitations are not applicable in equity to subjects of exclusively equitable cognizance. Matters pertaining to fiduciary relationships come within the rule.

Certified question from Circuit Court, Ohio County.

Suit by Emanuel Felsenheld, trustee, and another against the Bloch Brothers Tobacco Company and others, wherein the Circuit Court certified to the Supreme Court of Appeals its rulings on demurrers to the amended bills.

Affirmed in part; reversed in part; remanded.

Nesbitt & Nesbitt, McCamic & Clarke, Hughes, Schurman & D wight, A. L. Richards and A. E. Stewart, for plaintiffs.

J. M. Ritz, Schmidt, Hugus & Laas and Edwards & Smith, for defendants.

Maxwell, Judge:

The circuit court has certified herein to this court the question of the sufficiency of an amended bill as amplified and supplemented in some of its features by a second amended bill. The allegations of the bills present different elements of controversy arising from the same subject matter. The circuit court sustained demurrers to certain features of the bills and overruled them as to others. The original bill is not involved as it was entirely supplanted by the amended bills.

The plaintiffs are Emanuel Felsenheld as trustee under the will of Aaron Bloch, deceased, and Nita Helen Fraser, individually, suing on behalf of themselves and all other stockholders of the Bloch Brothers Tobacco Company, a corporation, similarly situated. The defendants are the Bloch Brothers Tobacco Company, a corporation, Reliance Investment Company, a corporation, Samuel S. Bloch, Jesse A. Bloch, individually and as trustees under the will of Aaron Bloch, deceased, and numerous other persons, individually, and as officers or directors of one or both of the corporations named.

This is a stockholders' derivative suit. Such suit may be defined as an equity proceeding by a stockholder in a corporation for the purpose of sustaining, in his own name, a right of action existing in the corporation itself, and in which suit the corporation itself would be an appropriate plaintiff. Dodge V. Woolsey, 18 Howard (U. S.) 331, 15 L. Ed. 401. Consult: 13 Fletcher's Cyc. of Corporation Law, section 5911, and 6 Thompson on Corporations (3d Ed.), section 4562.

The plaintiffs' assertion of right to maintain this suit is based on a provision of the will of Aaron Bloch who died in 1903. By the pertinent testamentary provision, being section 4 of Item III of the will, there was created a trust in a large block of the testator's shares of stock in Bloch Brothers Tobacco Company. This trust was for the benefit of the children of decedent's sister, Jennie Bloch Felsenheld. She died in 1930, survived by the plaintiff, Nita Helen Fraser, her sole descendant. The trustees under the recited trust are Samuel S. Bloch, Emanuel Felsenheld, Jesse A. Bloch and Harold S. Bloch. Under the terms of the trust the income, issues, profits and avails of the trust property are to be received by the trustees and applied for the benefit of the cestui que trust.

Generally stated, it is alleged by the plaintiffs that the three Blochs, defendants, trustees under the will of Aaron Bloch, deceased, have practically excluded Emanuel Felsenheld from participating in the trust; that they have suppressed vital information pertaining to the business of the Bloch Brothers Tobacco Company, though the same has often been requested by the plaintiffs; that the said trustees have voted the trust stock in furtherance of their own designs and plans in connection with the management of the Bloch Brothers Tobacco Company; that the three defendants mentioned dominate the affairs of the Bloch Brothers Tobacco Company; that the business of the Bloch Brothers Tobacco Company has been so directed, in some of its aspects, by the defendants, that great losses have come to the company and its stockholders. The plaintiffs sue to recoup, for the benefit of the Tobacco Company and its stockholders, the alleged losses, and to enjoin the continuance of afeged unlawful practices.

On their demurrer to the bills the defendants initially draw in question the right of the plaintiffs to maintain this suit. The demurrants say that the plaintiffs do not have a sufficiently tangible interest in the Tobacco Company to warrant the prosecution by them of a stockholders' derivative suit; that there is no allegation that any amount retrieved in this suit for the corporation would result in benefit to the plaintiffs.

The defendants' broad challenge of plaintiffs' right to prosecute this suit is not well taken. If the Blochs, defendants, have indulged in the improper practices alleged against them, in conducting the business of the Tobacco Company and its subsidiary, Reliance Company, the stock of the Nita Fraser trust has the right to protection of a court of equity. If, through wrongful activities of the Blochs, the assets of the Tobacco Company have been materially reduced, as alleged by the plaintiffs, the value of the trust stock has been lessened thereby. Nita Fraser and the trustee, Felsenheld, are justified in seeking to have the corpus of the trust preserved in its entirety and to be augmented to the extent to which it is entitled, with improper practices eliminated from the company management. If, when proper basis of corporate management is established (if it does not now exist), the questions of adequacy of dividends and proper care in application of surplus present themselves, such matters may be considered in due course. The doors of equity will not be closed to a cestui que trust merely because his interest in the corporation, a portion of the stock whereof constitutes the corpus of the trust, is less direct than that of a legal stockholder with certificates of stock in his own right. Many cases confirm the right of cestuis que trustent to vindicate their rights in equity.

The defendants lay much stress on Item VII of Aaron Bloch's will. The item reads: "As to such part of my estate as at the time of my death shall be invested in stock of The Bloch Brothers Tobacco Company, and so long as and to the extent to which it shall remain so invested, I hereby direct my trustees aforesaid, to whom I have given and bequeathed the same in trust, to deal with and manage the same, and every interest, property and right which by means of the same they can control, direct, or otherwise affect, and in especial The Bloch Brothers Tobacco Company's business, in such manner as my said brother Samuel S. Bloch during his lifetime may direct, and after his decease, as a majority of such trustees as may survive him may direct, in each case free from any other restriction or obligation, express or implied, I having entire confidence in their judgment and good faith." Defendants say that this item carries wide grant of discretionary powers to Samuel S. Bloch; that, in effect, he is by said paragraph vested with exclusive power and authority over all the matters complained of by the plaintiffs; that the only responsibility of the other trustees is to follow the direction of Samuel S. Bloch. We do not share this view of the extent of authority vested in Samuel S. Bloch. The construction urged would mean that within the realm of the trust his authority is absolute, without regard to whether it be reasonable or arbitrary. The proposed construction would further mean that though Samuel S. Bloch is dealing with a matter of high fiduciary relationship, for the protection and maintenance of which matters equity is always vigilant, he would nevertheless be above and beyond the reach of equity. This cannot be. We approve the trial chancellor's appraisement of Item VII. Respecting it, he said in his opinion: "It is simply a provision that the management of the company was not to be interfered with by the co-trustees. The management of the company means the legitimate management. As long as Mr. S. S. Bloch voted this stock in the carrying out of matters which he and his associates had a light to carry out, the judgment, providence and sagacity of his decisions could not be questioned. It is only if and when Mr. Bloch and his co-trustees go into forbidden fields that any right accrues to the plaintiffs." The conduct of the trustees, including Samuel S. Bloch, must be evaluated on a much more narrow basis than that urged by the defendants. Item VII affords no warrant of authority to the trustees to engage in unusual or unreasonable conduct respecting the trust, or so to manage the trust property as to advance the interests of favored persons at the direct or indirect expense of the cestui que trust.

Consideration thus having been given to pertinent generalities essentially prefacing a detailed discussion of the several elements of complaint, categorical discussion thereof proceeds, by articles.

ARTICLE ONE. Alleged speculation on the stock market by the defendant officers and directors with funds of the Tobacco Company through the instrumentality of Reliance Investment Company.

The trial chancellor sustained the demurrer to this feature of the bill.

Reliance Company was chartered in Delaware, in 1914. It is alleged that all of its original stock, except qualifying shares, was acquired by the Tobacco Company; that the Tobacco Company has acquired all the subsequent issues of stock of Reliance; that the Tobacco Company now owns 74,...