Goldberg v. Ball

• Decision Date: 22 May 1940
• Docket Number: Gen. No. 40913.
• Citation: 305 Ill.App. 273,27 N.E.2d 575
• Parties: GOLDBERG v. BALL ET AL.
• Court: United States Appellate Court of Illinois

305 Ill.App. 273

27 N.E.2d 575

GOLDBERG

v.BALL ET AL.

Gen. No. 40913.

Appellate Court of Illinois, First District, Third Division.

May 22, 1940.

Appeal from Circuit Court, Cook County; John Prystalski, Judge.

Suit by Ida Goldberg against Amos Ball and others, brought by plaintiff as a stockholder for benefit of the Standard Oil Company, to compel the director defendants to account for secret profits fraudulently made by them at the expense of the corporation. From a decree dismissing the bill of complaint, complainant appeals.

Affirmed. Mayer, Altheimer & Kabaker and Seymour Goldberg, all of Chicago, and A. Lincoln Lavine, A. L. Pomerantz, and Leonard I. Schreiber, all of New York City, for appellant.

Stuart S. Ball, of Chicago, for appellees.

DENIS E. SULLIVAN, Presiding Justice.

Plaintiff Ida Goldberg brings this appeal from a decree entered in the Circuit Court of Cook County on March 14, 1939, dismissing the bill of complaint which she had filed against the Standard Oil Company of Indiana, a corporation, its directors and the executrix and administrator of the estates of those defendants who have died.

The action was a stockholders' derivative action brought in and for the benefit of the said Standard Oil Company, to compel the director defendants to account for secret profits fraudulently made by them at the expense of the Standard Oil Company.

The original complaint was filed on November 16, 1937 to which Standard Oil Company filed its answer. The individual defendants Edward J. Bullock, Robert H. McElroy, Robert W. Stewart, Edward G. Seubert and Amos Ball filed motions to dismiss. Thereafter, on January 20, 1938, the original complaint was ordered stricken and plaintiff was given fifteen days within which to file an amended complaint. Thereafter an amended complaint was filed to which Standard Oil Company filed its answer and to which the same individual defendants filed motions to strike.

The amended complaint was dismissed on October 24, 1938, and leave was granted to plaintiff to file a second amended complaint within 20 days. Thereafter plaintiff amended her second and supplemental complaint and again the Standard Oil Company filed its answer and the individual defendants filed motions to dismiss. A decree of dismissal was entered on March 14, 1939.

From the complaint it appears that the plaintiff is the holder of 100 shares of Standard Oil Company (Indiana) stock which she acquired in July, 1936; that she seeks redress of alleged wrongful actions of certain of the directors of said corporation committed in the years 1925 and 1927; that she sued on behalf of herself and all other stockholders “who may be entitled to participate in this litigation.”

It appears that no other stockholders joined in this litigation.

Plaintiff's theory of the case is that the individual defendants who comprised the entire Board of Directors of Standard Oil Company in the year 1925 and a majority of said Board in 1927, in breach of their fiduciary duties and obligations, conspired to and did secretly and personally profit in the sum of $1,266,750, at the expense of their company, the defendant Standard Oil Company (Indiana); that said director defendants purchased in 1925, for their own account, common stock of Pan American Eastern Petroleum Corporation instead of permitting Standard Oil Company (Indiana) to purchase said stock and thereafter, in 1927, secretly, by means of a dummy corporation, sold said stock to Standard Oil Company (Indiana) at the profit aforementioned; that plaintiff individually and as a stockholder of Standard Oil Company (Indiana), on her own behalf and on behalf of all other stockholders similarly situated, has brought this action to enforce an accounting by the director defendants to Standard Oil Company (Indiana) for the purpose of restoring to the corporation the illicit profits thus secured by the director defendants.

The theory of the defendants to sustain the judgment of dismissal entered by the Circuit Court, have set forth their propositions relative thereto, as follows:

“1. The complaint shows that plaintiff brought suit in a derivative right without compliance with the conditions precedent imposed by equity on such suits.

“2. Plaintiff was not excused from making demand on the directors or the stockholders of the corporation to bring such action in the name and right of the corporation.

“3. The alleged cause of action arose not later than September, 1927, and was barred by the statute of limitations of the State of Illinois.

“4. The alleged cause of action was barred by laches and acquiescence.

“5. Plaintiff did not acquire her stock until July, 1936, and was not a stockholder at the time the transactions complained of are alleged to have occurred.

“6. Plaintiff's predecessor or predecessors in title ratified and approved the various transactions complained of.

“7. The alleged wrongs charged against the defendants were approved and authorized by the stockholders of the corporation at a special meeting held in September, 1927, more than ten years before the institution of the suit.

“8. The complaint fails to show that the plaintiff or her predecessor or predecessors in title exercised any diligence either in protecting their rights against the alleged wrongs complained of or in discovering same.

“9. The complaint fails to disclose that there was any concealment of the alleged cause of action.

“10. The material allegations of the alleged wrongs and frauds are made only upon information and belief, and not positively, as required by law.

“11. Other material allegations of the complaint are made by way of innuendo and as conclusions of the pleader, and in this regard the complaint is wholly insufficient.

“12. The complaint erroneously assumes that a single stockholder of a corporation may sue to disaffirm and set aside a transaction made by the corporation within its corporate powers upon authority granted by a majority vote of the stockholders.

“13. The complaint fails to disclose that the corporation is in a position, after a lapse of more than ten years, to disaffirm the purchase of the Pan Eastern Shares from Panamex Company.

“14. A former suit, charging substantially the same alleged wrongs, was brought by another stockholder one Wilhelmi on behalf of himself and all other stockholders in the Federal Court in 1933 and dismissed for want of prosecution in 1936.

“15. The complaint was properly dismissed for want of equity on each and every ground set forth in these defendants' motions to dismiss.”

As to whether or not a suit of this kind can be maintained, we think the rule in this State is as stated in Vol. 3, Sec. 884, Fletcher Cyclopedia Corporations: “A director is a trustee for the entire body of stockholders, and both good morals and good law imperatively demand he shall manage all the business affairs of the company with a view to promote, not his own interests, but the common interests, and he cannot directly or indirectly derive any personal profit or advantage by reason of his position, distinct from his coshareholders.”

In Dixmoor Golf Club v. Evans, 325 Ill. 612, at page 616, 156 N.E. 785, at page 787, the court said: “The directors of a corporation are trustees of its business and property for the collective body of stockholders in respect to such business. They are subject to the general rule, in regard to trusts and trustees, that they cannot, in their dealings with the business or property of the trust, use their relation to it for their own personal gain. It is their duty to administer the corporate affairs for the common benefit of all the stockholders, and exercise their best care, skill, and judgment in the management of the corporate business solely in the interest of the corporation.”

One of the first prerequisites necessary in order to maintain a suit of this kind is that a demand for relief be made within the corporation. And, as was said in the case of Babcock v. Farwell, 245 Ill. 14, at page 46, 91 N.E. 683, at page 694,137 Am.St.Rep. 284,19 Ann.Cas. 74: “The stockholders cannot ordinarily maintain a suit to enforce any right of the corporation. That privilege belongs to the corporation itself, acting through its directors. The mere failure of the directors to bring suit does not entitle any stockholder to do so. A demand upon the directors to bring the suit is, in general, essential before a stockholder may himself maintain a bill. His remedy must first be sought within the corporation, and it is only where the majority of the directors are themselves involved in the matters complained of, so that it is evident that the demand would be unavailing, that it can be dispensed with.”

This being the law, in order to maintain a suit, it would be necessary to allege and prove that such a demand had been made on a Board of Directors to commence such suit or that such action in all probability would be futile because the Board, or at least a majority of the directors, are hostile, or had participated in the alleged fraud and they could not be expected to commence a suit against themselves in the name of the corporation.

The allegations of the second amended and supplemental bill regarding a demand, show that no such demand was made and, as an excuse for failure to make a demand on the directors, plaintiff sets forth the following: “(a) The entire board of directors of Standard Oil, except for J. F. Stone who was elected a director in 1937, is composed of persons who participated in the acts of malfeasance and nonfeasance hereinbefore alleged.”

The foregoing paragraph makes no reference to the so–called fraud on the part of the Board.

The second amended and supplemental bill further states: “(b) All the directors of the Standard Oil who did not directly participate in the profits hereinbefore alleged, were under the control and domination of the profiting directors. Upon information and belief, the refusal of the non–profiting directors to assert...