Gary v. Matthews

• Decision Date: 04 December 1928
• Docket Number: 12537.
• Parties: GARY et al. v. MATTHEWS et al.
• Court: South Carolina Supreme Court

145 S.E. 702

148 S.C. 125

GARY et al. v. MATTHEWS et al.

No. 12537.

Supreme Court of South Carolina

December 4, 1928

Appeal from Common Pleas Circuit Court of Richland County; W. H Townsend, Judge.

Creditors' bill by T. A. Gary and others against J. Pope Matthews and others. From an order overruling certain demurrers of the defendants to the complaint, defendants appeal. Reversed, and complaint dismissed.

Nelson & Mullins, Herbert & Dial, Weston & Aycock, C. N. Sapp, J. L Nettles, J. J. Earle, and T. H. Moffatt, all of Columbia Steve C. Griffith, of Newberry, Dial & Todd, of Laurens Butler & Hall, of Gaffney, Lide & McCandlish, of Marion, and Wyatt Aiken, of Greenville, for appellants.

R. T. Jaynes, of Walhalla, L. D. Jennings, of Columbia, and S. B. Craig, of Pickens, for respondents.

COTHRAN J.

This is an appeal from an order of his honor, Judge Townsend, overruling certain demurrers of the defendants to the complaint.

The action is in the nature of a creditors' bill, brought by the plaintiffs as stockholders of the defunct American Bank & Trust Company, on behalf of themselves and all such other stockholders of the bank as may come in and contribute to the expenses of the action.

The complaint states two separate and distinct causes of action:

1. An action against the directors of the bank for damages on account of loss and damage suffered by the plaintiffs as stockholders, by reason of the alleged mismanagement and negligence of the defendant directors, which they seek to recover, not in the right and on behalf of the corporation or its representative, the receiver, for the benefit of general creditors, depositors, and stockholders, but solely for the benefit of themselves as stockholders.

2. An action against certain managing officers, also directors, of the bank for damages on account of loss and damage suffered by the plaintiffs, as stockholders, by reason of the willful appropriation by said officers of certain assets of the bank, and against the American Surety Company, indemnitors of the bank against loss from the dishonest acts of its employés, which damages also they seek to recover, not in the right and on behalf of the corporation or its representative, the receiver, for the benefit of general creditors, depositors, and stockholders, but, as in the other cause of action, solely for the benefit of themselves as stockholders.

The complaint alleges that on June 25, 1926, the bank was taken over by the state bank examiner, as being insolvent, and that on July 19, 1926, James E. Peurifoy was appointed and duly qualified as receiver of the bank. It is also alleged that by reason of the charges against the directors it would have been useless to apply to them for redress, and that an application to the receiver to institute an action against them had been refused.

The complaint states, therefore, sufficient grounds to sustain an action by the stockholders, in the right of the corporation, or its representative, the receiver, to redress the wrongs alleged to have been done to the corporation.

The concrete question at issue is: Can several stockholders in a corporation which is in the hands of a receiver maintain an action in the nature of a creditors' bill to recover assets belonging to the corporation, where recovery is sought solely for the benefit of the stockholders instead of for the benefit of all persons entitled to share in the distribution of the assets of the corporation?

The defendants interposed demurrers to the complaint raising this question. The defendant American Surety Company interposed a separate demurrer raising this question and also the question of misjoinder of causes of action. In the view which the court takes of the matter, it is necessary to consider only the question above indicated.

The demurrers were overruled in an order by his honor, Judge Townsend, dated October 14, 1927, as follows:

"On considering demurrers to the amended complaint in the above entitled action, I am of the opinion that the complaint states facts sufficient to constitute a cause of action against the defendants, directors of the American Bank & Trust Company of Columbia, and also against the American Surety Company of New York, primarily in favor of said American Bank & Trust Company, Adams v. Haselden, 112 S.C. 32, 99 S.E. 762; Fletcher, Cyc. Corporations, § 4051, p. 6852. It also alleges that the American Bank & Trust Company is insolvent and has been placed by this Court in the hands of a receiver, who is administering its affairs, and that the plaintiffs have applied to the receiver to bring an action against the defendants on account of the alleged wrongs done by defendants to the corporation and that he has refused to bring such action. His refusal is in good faith, because of his discretion in determining what actions should be prosecuted on behalf of the corporation. The receiver having refused to prosecute the action, the plaintiffs have a right to prosecute it on behalf of the stockholders as a class, under the principle announced in Kickbusch v. Ruggles, 105 S.C. 525, 90 S.E. 163; Craig v. James, 71 A.D. 242, 75 N.Y.S. 813; Fletcher, Cyc. Corporations, § 4056, p. 6884; Section 4080, p. 6973; Section 4092, p. 7021.

It is therefore ordered, adjudged and decreed, that the demurrers interposed to the complaint in the above entitled action, and the motion to require the receiver of the American Bank & Trust Company to be made a party to the action, be and the same is hereby overruled and refused, with leave to the defendants to answer to said complaint within twenty days after written notice of the filing of this order."

From this order the defendants have appealed.

The basis of the demurrers is that the losses alleged to have been sustained by the mismanagement and negligence of the defendant directors, and by the willful appropriation of assets of the bank by certain officers, constitute assets which belong to the corporation, or to its representative, the receiver, for the benefit of general creditors, depositors, and stockholders, and that damages on account thereof cannot be recovered in an action by the stockholders solely for their benefit.

The law is thoroughly settled that such damages, if recoverable, constitute assets which belong to the corporation, or to its representative, the receiver, and that any action therefor must be brought in the right of the corporation, for the benefit of all persons entitled to participate in the distribution of its assets. Charleston, etc., Co. v. Sebring, 5 Rich Eq. 342; Browne v. Hammett, 133 S.C. 446, 131 S.E. 612; Hernlen v. Vandiver, 145 S.C. 412, 143 S.E. 222; Niles v. N.Y. Central & H. R. R. Co., 176 N.Y. 119, 68 N.E. 142; Flynn v. Brooklyn City Ry . Co., 158 N.Y. 493, 53 N.E. 520; McMullen v. Ritchie (C. C.) 64 F. 253; Ames v. Am. T. & T. Co. (C. C.) 166 F. 820; Lawrence v. So. Pac. Ry. (C. C.) 180 F. 822; Morse on Banks & Banking (5th Ed.) vol. 1, § 129; 7 Corpus Juris, 747. See, also, 6 Fletcher, Corp., §§ 4051, 4064; Thomp. Corp. (3d Ed.) § 4560; Kickbusch v. Ruggles, 105 S.C. 525, 90 S.E. 163.

In Browne v. Hammett, supra, the court said:

"The right of action against the officers and directors of a corporation, for

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