Harris v. Brown

• Decision Date: 15 July 1925
• Citation: 6 F.2d 922
• Parties: HARRIS v. BROWN et al.
• Court: U.S. District Court — Western District of Kentucky

6 F.2d 922 (1925)

HARRIS v. BROWN et al.

District Court, W. D. Kentucky.

July 15, 1925.

Miller, Dailey & Thompson, of Indianapolis, Ind., and Beckham, Hamilton & Beckham and Woodward, Warfield & Hobson, all of Louisville, Ky., for plaintiff.

Trabue, Doolan, Helm & Helm, Ben S. Washer, and Gardner K. Byers, all of Louisville, Ky., for defendants.

DAWSON, District Judge.

This is a stockholders' bill, brought by an Indiana stockholder of the Inter-Southern Life Insurance Company, a Kentucky corporation, against that company and those acting as its board of directors and the insurance commissioner of the commonwealth of Kentucky and A. C. Ernst, an accountant appointed by the insurance commissioner to examine into and report to him the financial condition of the Inter-Southern Life Insurance Company.

The bill contains the formal allegations required to be made by equity rule 27, alleges diversity of citizenship between the plaintiff and the parties defendant, and that the amount in controversy exceeds the sum or value of $3,000, exclusive of interest and costs. The bill alleges that the plaintiff is now, and has been since 1916, the owner of 4,325 shares of the common capital stock of the defendant company, of the par value of $1 per share and of the actual value of $2 per share, that the defendant company has assets of $11,500,000 and has $106,000,000 of insurance in force, and that there are issued and outstanding 675,000 shares of the common capital stock of the company, of the par value of $1 per share and of the actual value of $2 per share.

The causes of action attempted to be set up against the defendant Ernst and the defendant Saufley, as insurance commissioner, are so defectively stated, and, when viewed in the light of the testimony heard and the exhibits filed, are so lacking in merit, that on this hearing these phases of the case will be disregarded altogether.

As the court views the matter, the only real cause of action which can be constructed out of the allegations contained in the petition is that involving the right of the defendants James B. Brown, James C. Stone, C. C. Mengel, E. J. O'Brien, Jr., J. Graham Brown, Walter I. Kohn, T. B. Wilson and B. S. Washer, to act as members of the board of directors of the defendant company. In substance the bill in this respect states that the board of directors which had been regularly elected by the stockholders of the defendant company, and known in the record as the "old board," met on the 21st day of February, 1925, and elected the eight defendants last above named to act as members of the board of directors of the defendant company for the ensuing year. This action on the part of the board of directors is attacked as invalid, because it is alleged that none of these defendants were stockholders of the defendant corporation at the time of their attempted election by the board of directors, and for the further reason that at the time of their attempted election there were no vacancies existing which the board of directors was authorized to fill, under the provisions of section 551 of Kentucky Statutes.

It is charged that this board, as constituted after the addition of the eight named defendants, and known in the record as the "new board," organized and elected the defendant James B. Brown as chairman of the board of directors, and that ever since its organization has been acting as the board of directors of the defendant company. It is further claimed that under a call therefor issued by the defendant James B. Brown, as chairman of the new board of directors, a meeting of the board as now constituted would be held on July 9th, and a temporary restraining order, without notice, was asked for, to prevent the holding of this directors' meeting. At the time of the application for a temporary restraining order, counsel for a number of the defendants appeared in court, and, at the suggestion of the court, the proposed meeting of the board of directors was adjourned for one week, and the case then proceeded as if on application for a preliminary injunction, upon notice.

The bill contains some allegations to the effect that, at the meeting called by James B. Brown, as chairman of the board of directors, it was proposed to remove the defendant Duffin as president of the company. This fact of itself, however, no matter how harmful the removal of Duffin might be to the company, would afford no basis for a court of equity to interfere. If the board is a legal board, it possesses the power to remove the president without the interference of the court; if not a legal board, then the threatened removal of the president would not be the basis upon which a court of equity would intervene at the suit of a stockholder, suing for the benefit of the corporation, but the real ground for the court's intervention would be the illegality of the board and its want of power to represent and act for the company in any matter whatever. Therefore the question of the removal of Duffin in this suit is not the subject of the controversy. The sole controversy which the court will consider is the right of the eight defendants, chosen as directors on February 21, 1925, to act as members of the board of directors.

The first question necessary to determine in this matter is the jurisdiction of the court, which is challenged by the defendants on three grounds: (1) That the jurisdictional amount is not involved; (2) that when there has been a proper realignment of parties, there is no diversity of citizenship; (3) that the suit is a collusive one.

In injunction cases such as this one, it is now well setled that the value of the matter in dispute, for jurisdictional purposes, is not tested by the mere immediate pecuniary damage resulting from the acts complained of, but by the value of the business or property right for which protection is sought. Hunt v. New York Cotton Exchange, 205 U. S. 322, 27 S. Ct. 529, 51 L. Ed. 821; Bitterman v. L. & N. R. R. Co., 207 U. S. 205, 28 S. Ct. 91, 52 L. Ed. 171, 12 Ann. Cas. 693; Prest-O-Lite Co. v. Bournonville (D. C.) 260 F. 440; Larabee v. Dolley (C. C.) 175 F. 365; Humes v. City of Ft. Smith (C. C.) 93 F. 857; Board of Trade of Chicago v. Cella Commission Co., 145 F. 28 (8th Circuit), 76 C. C. A. 28; Bureau of National Literature v. Sells (D. C.) 211 F. 379; N. C. & St. L. Ry. Co. v. McConnell (C. C.) 82 F. 65; L. & N. R. Co. v. Smith, 128 F. 1 (5th Circuit), 63 C. C. A. 1; Jewell Tea Co. v. Lee's Summit, Mo. (D. C.) 198 F. 532; Evenson v. Spaulding, 150 F. 517 (9th Circuit), 82 C. C. A. 263, 9 L. R. A. (N. S.) 904.

It must be borne in mind that the rights which the stockholder seeks to assert in this case are the rights of the corporation. Upon no other theory could he maintain this suit. Therefore the amount involved, for the purpose of testing the jurisdiction of this court, is the value of the property and property rights of the defendant company for which the plaintiff seeks protection. He seeks to have the corporation protected against having its property and its business managed and administered by an alleged illegal board. The value of this property and of this business is the amount in controversy, within the meaning of the Judicial Code. The plaintiff affirmatively alleges that this is in excess of $3,000, exclusive of interest and costs. Furthermore it appears from the bill that the company has assets of $11,500,000, with $106,000,000 of insurance in force. In view of these allegations, the court has no hesitation in concluding that the jurisdictional amount affirmatively appears.

Neither is there any merit in the defendants' contention that, when there is a proper alignment of parties, diversity of citizenship is lacking.

Defendants hinge their second objection to the court's jurisdiction upon the contention that, inasmuch as this is a suit for the benefit of the corporation and for the protection of the interests of the corporation, its interests and the plaintiff's interests are identical, and that likewise, inasmuch as the primary object of the suit is the retention of Duffin as president, and as the record discloses that he desires the plaintiff to win, his interests and the plaintiff's interests are identical; that, these facts appearing, it becomes necessary for the court to rearrange the parties so as to place them on that side of the litigation where their real interests lie. It is claimed that when this is done, the defendant corporation and Duffin will be made parties plaintiff, and that, they both being citizens of Kentucky, there will be no diversity of citizenship — consequently this court would have no jurisdiction.

The court has no disposition to question the general rule that, in determining whether it has jurisdiction or not, it is the duty of the court to look beyond the mere formal arrangement of the parties as made by the plaintiff, and to arrange the necessary parties according to their real interests. This rule, however, has never been invoked in stockholders' bills; if so, it would be impossible for a nonresident stockholder to ever bring a stockholders' bill in the federal court, no matter how flagrantly the officers of the company were violating their duty to the corporation and to its stockholders. This question is so well settled that it is no longer debatable. Dodge v. Woosley, 18 How. 331, 15 L. Ed. 401; Cotting v. Kansas City Stockyards Co., 183 U. S. 79, 22 S. Ct. 30, 46 L. Ed. 92; Doctor v. Harrington, 196 U. S. 579, 25 S. Ct. 355, 49 L. Ed. 606; Venner v. Great Northern Ry. Co., 209 U. S. 24, 28 S. Ct. 328, 52 L. Ed. 666.

Counsel for the defendants do not seriously press their contention that the defendant corporation should be aligned with the plaintiffs for the purpose of defeating jurisdiction, but strenuously insist that the defendant Duffin should be so aligned. A sufficient answer to this suggestion would be that Duffin is not a necessary party to this suit, and, not being a...