Gunderson v. Illinois Trust & Sav. Bank

• Decision Date: 25 October 1902
• Citation: 65 N.E. 326,199 Ill. 422
• Parties: GUNDERSON et al. v. ILLINOIS TRUST & SAVINGS BANK et al.
• Court: Illinois Supreme Court

199 Ill. 422

65 N.E. 326

GUNDERSON et al.

v.ILLINOIS TRUST & SAVINGS BANK et al. ^*

Supreme Court of Illinois.

Oct. 25, 1902.

Error to appellate court, First district.

Suit by the Illinois Trust & Savings Bank against the Medinah Temple Company and others. The appellate court (100 Ill. App. 461) affirmed an order denying the petition of Severt T. Gunderson and others to intervene and defend, and they bring error. Affirmed.

Alex. M. Woolfolk, for plaintiffs in error.

Eugene E. Prussing and Castle, Williams & Smith, for defendant in error Illinois Trust & Savings Bank.

CARTWRIGHT, J.

The defendant in error, the Illinois Trust & Savings Bank, filed its bill May 17, 1897, in the circuit court of Cook county against the Medinah Temple Company, a corporation, and its tenants occupying rooms and apartments in the Medinah Temple, to foreclose a trust deed executed March 1, 1894, by said Medinah Temple Company, pursuant to a resolution of its board of directors, to said Illinois Trust & Savings Bank, as trustee, conveying the said building and premises, to secure bonds amounting to $400,000, with interest thereon. The Medinah Temple Company was defaulted, and made no defense to the suit. All of the tenants were also defaulted except the Ancient Arabic Order Nobles of the Mystic Shrine, which answered, and filed a cross-bill claiming rights superior to the lien of the trust deed. The cross-bill was answered, and the cause was referred to a masterin chancery to take the evidence and report the same, with his conclusions. The master proceeded on November 20, 1897, to take the evidence, and the hearing before him continued from time to time thereafter until it was completed. He filed his report November 24, 1900, finding against the Ancient Arabic Order Nobles of the Mystic Shrine, and finding that there was due upon the bonds secured by the trust deed, for principal and interest, $565,641.63. He recommended the court to grant the relief prayed for in the original bill. There were objections and exceptions to the report, and while they were pending the plaintiffs in error, Severt T. Gunderson and 46 others, stockholders of the Medinah Temple Company, presented to the court, on May 16, 1901, their intervening petition, and asked leave to file it. By the petition they charged the directors of the Medinah Temple Company with frauds, and prayed that they might be made parties defendant; that the petition should be considered in the nature of a cross-bill, and said directors should be made defendants thereto; that the petitioners should be decreed to be the only legal stockholders of the corporation; and that the court should cancel the trust deed and dismiss the foreclosure proceedings. The court refused leave to file the petition, and the petitioners excepted, and sued out a writ of error from the appellate court for the First district. The record being brought into the appellate court for review, that court found no error in it, and affirmed the order of the circuit court. The writ in this case was then sued out to review the judgment of the appellate court.

It is agreed by counsel that the stockholders of a corporation are not necessary parties to a foreclosure suit against the corporation, and that they can only intervene in its behalf by showing the existence of a defense which the corporation neglects and refuses to make. There is no doubt that stockholders suing in behalf of themselves and the other stockholders, for the benefit of the corporation, may bring their suit in equity to redress wrongs arising from the frauds, ultra vires acts, or negligence of boards of directors, where the corporation is unable or unwilling to institute the suit, either because it is under the control of the guilty parties or otherwise. Cook, Stock, Stockh. & Corp. Law, § 645. It is also the right of stockholders to intervene and make a defense which the corporation ought to have set up against an illegal claim, where the defense is not made on account of the fraud and collusion of the directors with the complainants in the suit. Id. § 659. Of the various ways by which the assets of corporations are appropriated and the stockholders are defrauded of their legal rights, one of the most frequent is the mortgage on the corporate property and its foreclosure. It is the oldest and most common device of unscrupulous corporate officers to defraud the corporation and its stockholders, and the mortgage is generally expected to appear and be followed by a foreclosure, as a prelude to reorganization. Upon a showing that a fraud is being practiced by that method, it is the duty of a court of equity to permit stockholders to intervene on behalf of themselves and the other stockholders, and set up the defense that the corporation and its officers were in duty bound to make. The question in this case is as to the sufficiency of the facts alleged in the petition to show a defense to the foreclosure suit, and to entitle the stockholders to appear and defend. In determining that question, the facts alleged in the petition must be assumed to be true and capable of being proved.

The material statements of fact contained in the petition are as follows: That in the spring of 1892 John A. May, William A. Stiles, George W. Powell, Frank M. Luce, William M. Knight, and Chester T. Drake combined with the object of securing the erection of a home for the Shrine, a mystic organization known as the Ancient Arabic Order Nobles of the Mystic Shrine, and made application to the secretary of state for a license to open books of subscription to the capital stock of the Medinah Temple Company, a corporation to be organized for that purpose; that such capital stock was fixed at $500,000, and a license to open books was granted to the said parties, who were designated as commissioners; that 11,168 shares were subscribed for, amounting to $116,800; that in addition thereto said May, Stiles, Powell, and Luce each subscribed for 458 shares, and John Eason subscribed for 2,000 shares; that said parties so subscribing for said additional shares were wholly unable to pay the amount subscribed, or any material portion thereof, and had no intention of doing so; that the subscribers for capital stock were convened, and, by means of the fictitious subscriptions, said May, Stiles, Powell, and Luce were elected directors, together with Albert M. Eddy, John R. True, and Canute R. Matson; that May was elected president, Powell vice president, Stiles secretary, and Luce treasurer; that the commissioners made their report to the secretary of state, who issued to them a certificate of the organization of the corporation on August 25, 1892; that when the certificate was received the board held a meeting on August 29, 1892, at which May, Stiles, Powell, and Luce surrendered the stock subscribed by them, alleging their utter...