Garber v. Beachy

• Decision Date: 10 December 1921
• Docket Number: 23,291
• Citation: 202 P. 628,110 Kan. 60
• Parties: W. R. MITCHELL and C. A. GARBER, Appellants, v. RICHARD BEACHY et al., Appellees
• Court: Kansas Supreme Court

202 P. 628

110 Kan. 60

W. R. MITCHELL and C. A. GARBER, Appellants, v. RICHARD BEACHY et al., Appellees

No. 23,291

Supreme Court of Kansas

December 10, 1921

Decided July, 1921

Appeal from Jewell district court; A. E. JORDAN, judge pro tem.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. CORPORATIONS--Rights of Former Stockholders to Sue Officers of Corporation for Illegal Appropriation of Corporate Funds. Where stockholders of a corporation have parted with their stock, they cannot thereafter maintain an action against the officers of the company as individuals, for an alleged illegal appropriation of corporate funds to pay the individual obligation of the officers of the company, where it appears that such stockholders had knowledge of the alleged illegal appropriation before they sold their stock.

2. SAME--Corporation a Necessary Party to Action. In an action by stockholders to compel officers of a corporation to make restitution of corporate funds unlawfully appropriated to the private use of the officers of the corporation, the corporation itself is a necessary party.

3. SAME--Nonstockholders May Not Question Validity of Corporate Acts. A private individual who is not a stockholder of a corporation or who has ceased to be such stockholder cannot question the validity of the acts of the corporation.

R. C Postlethwaite, of Mankato, for the appellants.

J. R. White, of Mankato, and F. W. Mahin, of Smith Center, for the appellees.

OPINION

DAWSON, J.:

This is a sequel to an earlier lawsuit in which the plaintiffs sought unsuccessfully to compel the defendant, Richard Beachy, as cashier of the State Bank of Esbon, to transfer certain shares of bank stock, and to issue to plaintiffs new certificates therefor. (Mitchell v. Beachy, 104 Kan. 445, 179 P. 365.)

In this action it is alleged that the gist of the former lawsuit was a contest between plaintiffs and Beachy individually as to the ownership of certain of the bank shares sought to be transferred, and that the cause proceeded to trial and to a determination that Beachy was the owner of one share of the bank stock; and that the State Bank of Esbon was only a nominal party. It is also alleged in this action that Richard Beachy and J. K. Beachy employed a firm of lawyers to defend Richard Beachy in the former lawsuit, and paid them an attorney's fee of $ 1,250 out of the bank's accrued profits for that service, thereby unlawfully appropriating the bank's funds to pay the individual obligation of Richard Beachy. At the time of this payment plaintiffs were the owners of 124 1/2 shares of the capital stock of the bank, the total number of shares was 250, the cash capitalization was $ 25,000, and plaintiffs asked judgment against the defendants, Beachy & Beachy, for plaintiffs' proportionate share of the alleged unlawful appropriation of the bank's funds, $ 622.50, and other damages.

After the questioned payment of the bank's funds, the plaintiffs sold their bank stock to one Duncan, giving him a bill of sale therefor, with this qualification:

"First parties hereby sell all their interest in the undivided profits and all their interest in said bank except whatever claim first parties may have against the Beachys by reason of the payment of $ 1,250.00 attorneys' fee to White, Mahin and Mahin attorneys out of the undivided profits of said State Bank of Esbon, it being understood that no claim is to be made against the bank for said claim by first parties."

This action was thereafter begun, and the petition, after narrating various pertinent matters, alleged that the misappropriation of the bank's funds had depleted the value of plaintiffs' stock to the extent alleged, and for which sum and consequent damages they prayed judgment against Beachy & Beachy.

The trial court ordered that the State Bank of Esbon be made a party, which was accordingly done, and the allegations of the amended petition which relate to the bank read:

"The State Bank of Esbon is a corporation duly organized and existing under and by virtue of the laws of the state of Kansas. . . .

"Plaintiffs further allege that said Richard Beachy is president of said Bank of Esbon and J. K. Beachy is cashier of said bank and the said Richard Beachy and J. K. Beachy and the immediate members of their family own the majority of the capital stock and the controlling interest in said bank and have charge of said bank as the executive officers thereof and constitute and represent the majority of the Board of Directors of said Bank and that said Bank is at this time under the control, direction and management of said defendants and that it would be mockery, a farce and utterly useless to require a suit to be brought and prosecuted under the management and direction of said Richard Beachy and J. K. Beachy, the directors and managers of said bank, against themselves for the recovery of the $ 622.50 wrongfully appropriated by them."

Defendants' demurrer to the amended petition was sustained, and the correctness of that ruling is the subject of this appeal.

It is the law that one or more stockholders who have a substantial amount of corporate stock, i. e., more than a trivial amount, have the right to maintain an action in behalf of their corporation to protect its rights or to redress or prevent injuries to it, where the duty of its officers to do so is clear and imperative and where the latter will not discharge that duty. In Ryan, et al., v. L., A. & N. W. Rly. Co., 21 Kan. 365, it was held:

"As the corporation itself holds its property as trustee for the stockholders, who have a joint interest in all its property and effects, and each of whom is related to it as cestui que trust, if the corporation refuses to call to account, by proper legal proceedings, its directors and officers who are abusing their trust, misapplying the funds of the corporation, and receiving profits from contracts made by other parties with the corporation, through their aid, or if such corporation is still under the control of those who necessarily must be made defendants in such proceedings, so that it would be a mockery to require or permit a suit against them to be brought and prosecuted under their management, the stockholders who are the real parties in interest, or a part of them, may maintain an action to make such officers, and all parties who have participated with said officers in their unlawful transactions, account for their wrongs and frauds; and the corporation is a proper party defendant with them." (Syl. P 4.)

(See, also, Burnes v. City of Atchison, 48 Kan. 507, 518, 29 P. 579; Mining Co. v. McKibben, 60 Kan. 387, 56 P. 756; Fry v. Rush, 63 Kan. 429, 65 P. 701; 14 C. J. 934 et seq.; Notes, 4 L. R. A. 745; 9 L.R.A. 654; 7 R. C. L. 308, 318-321.)

But all the authorities seem to agree that only a stockholder in good standing--not one who has ceased to be a stockholder--can maintain such an action. The right to sue on the corporation's behalf only devolves upon the individual stockholder when the corporate...