Green v. Victor Talking Mach. Co.

• Decision Date: 06 February 1928
• Docket Number: No. 139.,139.
• Citation: 24 F.2d 378
• Parties: GREEN v. VICTOR TALKING MACH. CO.
• Court: U.S. Court of Appeals — Second Circuit

24 F.2d 378 (1928)

GREEN v. VICTOR TALKING MACH. CO.

No. 139.

Circuit Court of Appeals, Second Circuit.

February 6, 1928.

Jeffery & Redmond, of New York City (Joseph F. Murray and William P. Jeffery, both of New York City, of counsel), for plaintiff in error.

Hughes, Rounds, Schurman & Dwight, of New York City (George W. Schurman, Augustus L. Richards and J. Harold Merrick, all of New York City, of counsel), for defendant in error.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

Federal jurisdiction is based on diversity of citizenship. The complaint sets forth that plaintiff owns all the capital stock of the Pearsall Company, having acquired the same as executrix and sole legatee under the will of her deceased husband; that the only business of the Pearsall Company was to resell products purchased by it from defendant; that prior to Mr. Green's death, and at a time when he owned two-thirds of the shares of said corporation, defendant had requested him to purchase shares which one Ornstein claimed to own, being the remaining one-third of its capital stock, and had informed said Green that, if he failed to do so, defendant would terminate its dealings with Pearsall Company, but, if he complied with its request, defendant would continue to sell its products to Pearsall Company so long as said corporation should remain financially sound and successful in the sale of defendant's products; that said Green relying on defendant's statements, purchased the Ornstein shares; that immediately after Green's death, on March 23, 1924, defendant and its directors entered into a malicious scheme and conspiracy to secure for itself or its nominee the assets and good will of the Pearsall Company, and in furtherance of such scheme sought to induce plaintiff to sell her stock, by falsely pretending to give her disinterested advice to sell, and by attempting to intimidate her into selling by notifying her that, unless she would do so, defendant would cease to deal with Pearsall Company after December 14, 1924, although Pearsall Company had remained financially sound and a successful distributor of defendant's products; that defendant sought to cause employees of Pearsall Company to leave it, gave its competitors confidential information concerning its business and finances, damaged its credit, and by secret and unfair means interfered with its business; that defendant offered to withdraw its refusal to sell its products to Pearsall Company after December 14, 1924, if plaintiff would sell her stock, and, upon her declination, defendant did cease to sell to Pearsall Company after said date; and that by reason of the unlawful and malicious acts of defendant the value of Pearsall Company as a going concern was destroyed, and all the benefits accruing to plaintiff through her ownership of its stock were lost, to her damage in the sum of $500,000. Judgment is asked for this sum and for a like amount as exemplary damages.

By stipulation it was agreed that the complaint should be construed as declaring solely upon a cause of action in tort, and not for any alleged breach of contract between the defendant and any other person or corporation. We are limited, therefore, to considering whether the allegations charge defendant with committing a tort.

The allegations of false pretense of friendship in advising the sale of stock amount to nothing as a cause of action, for they were not effective. See Ming v. Woolfolk, 116 U. S. 599, 602, 6 S. Ct. 489, 29 L. Ed. 740. The same is true with respect to the charge of attempted intimidation by threat of conduct toward the Pearsall Company which would impair the value of her shares. Plaintiff was not induced by fraud or intimidation to part with her property. She still has her shares, though their value has been impaired through destruction of the corporation's business.

The essence of her complaint is that defendant, after inducing her testator to purchase certain shares in the Pearsall Company, impaired the value of them (1) by affirmative interference with its business; and (2) by refusing to continue to deal with it; and did these things with the purpose of inducing her to sell her stock to the defendant's nominee, and, failing in that, with the purpose of destroying the value of her shares.

Considering first the affirmative interference with the corporation's business: The attempt to induce employees to leave the Pearsall Company, not only is nowhere alleged to have been successful, but, if so, would have given rise to a cause of action to the corporation, rather than to its shareholders. See Hodge v. Meyer, 252 F. 479, 483 (C. C. A. 2); De Neufville v. New York & N. R. Co., 81 F. 10, 12 (C. C. A. 2); Niles v. N. Y. Cent. & H. R. R. Co., 176 N. Y. 119, 68 N. E. 142. The allegations of disclosure of confidential information, damage to credit, and unfair interference with business are mere conclusions of the pleader; but, even if they were treated as adequately pleaded, they would be subject to the same objection that they charge a breach of duty owing to the corporation rather than to its shareholders. The shareholders' rights are derivative, and, except through the corporation, the shareholders have no relation with one who commits a tort against the corporation's rights. Converse v. United Shoe Machinery Co., 185 Mass. 422, 70 N. E. 444; United Copper Securities Co. v. Amalgamated Copper Co., 244 U. S. 261, 37 S. Ct. 509, 61 L. Ed. 1119; Hodge v. Meyer, supra; Niles v. N. Y. Cent. & H. R. R. Co., supra.

When there are numerous shareholders, it is apparent that each suffers relatively, depending upon the number of shares he owns, the same damage as all the others, and that each will be made whole if the corporation obtains restitution or compensation from the wrongdoer. Obviously it is sound policy to require a single action to be brought by the corporation, rather than to permit separate suits by each shareholder. In logic the result is justified, because the only right of the shareholder which has been infringed is what may be called his derivative or corporate right. Having elected to conduct their business in a corporate form, the men behind the corporation have, in the phrase of Justice Holmes, "interposed a nonconductor" between themselves and those who deal with them in their corporate enterprise. Donnell v. Herring-Hall-Marvin Safe Co., 208 U. S. 267, 273, 28 S. Ct. 288, 52 L. Ed. 481. Even when all the stock is owned by a sole shareholder, there seems no adequate reason to depart from the general rule that the corporation and its shareholders are to be treated as distinct legal persons. Therefore even a sole shareholder has no independent right which is violated by trespass upon or conversion of the corporation's property. Only his "corporate rights" have been invaded, and consequently he cannot sue the tort-feasor in an action at law. Button v. Hoffman, 61 Wis. 20, 20 N. W. 667, 50 Am. Rep. 131; Farrar v. Pillsbury, 217 Mass. 330, 104 N. E. 737; see Ulmer v. Lime Rock R. Co., 98 Me. 579, 57 A. 1001, 66 L. R. A. 387; 1 Morawetz, Corporations (2d Ed.) §§ 232, 233.

Admitting this to be the general rule, the appellant contends that the result is different when a tort-feasor is animated by malice toward a particular shareholder, and that in such circumstances the principle that intentional harm without justification is actionable gives the shareholder a personal right of action, whether he is a sole shareholder or one of many. With this contention we cannot agree. Assuming that the allegations of the complaint are adequate to charge that the defendant's motive in doing the above-mentioned affirmative acts to the injury of the corporation's credit and business was a malicious desire to damage plaintiff as a shareholder, the cause of action is still the corporation's. The intention of the defendant is to invade the "corporate rights" of the shareholders; that is, the corporation's rights, whether this end is desired as a means of satisfying a grudge against some particular shareholder or all of them, or for some other motive. A defendant's motive in interfering with the corporation's business may be material in determining whether his interference is tortious or privileged, as in the case of fair competition; but his motive will not of itself create an independent cause of action in favor of shareholders, because only their derivative or corporate rights have been infringed. The policy of having their remedy lie in a suit by the corporation is not affected by the wrongdoer's malice toward an individual shareholder....