Hingston v. Montgomery

• Decision Date: 01 October 1906
• Citation: 97 S.W. 202,121 Mo. App. 451
• Parties: HINGSTON v. MONTGOMERY et al.
• Court: Missouri Court of Appeals

97 S.W. 202

121 Mo. App. 451

HINGSTON v. MONTGOMERY et al.

Kansas City Court of Appeals. Missouri.

October 1, 1906.

Rehearing Denied November 5, 1906.

1. CORPORATIONS—MISCONDUCT OF OFFICERS —ACTIONS.

A cause of action, arising from the ultra vires or fraudulent acts of the officers of a corporation in the management of its business, belongs to the corporation as a legal entity, and not to the individual stockholders, and, unless it is impossible for the corporation to act, it is the only party that can maintain an action for the redress of such grievances.

2. SAME—RIGHT OF STOCKHOLDER TO SUE.

Where two of the officers of a corporation controlled a majority of its stock and constituted a majority of the board of directors, an innocent stockholder was entitled to sue such officers on behalf of the corporation to recover for losses sustained by their ultra vires and fraudulent acts in the management of the corporation, without first making a demand on them to bring the action in the name of the corporation.

3. GAMING—DEALING IN FUTURES—SALE OF GRAIN.

The mere making of a written contract, under which a delivery of grain purchased for future delivery or its legal equivalent may be compelled, is not conclusive of a mutual intent to deliver, and, if the real intent is that there should not be an actual delivery, but that there should be a settlement by a payment of differences, the transaction is invalid.

4. CORPORATIONS — OFFICERS — MISCONDUCT— —MISUSE OF FUNDS—LIABILITY.

Where the officers of a corporation used its funds with which to speculate in grain for future delivery, the losses sustained in such transactions, which were wholly fictitious, were recoverable for the benefit of the corporation.

5. EQUITY—"CLEAN HANDS."

Where plaintiff sued for the benefit of a corporation, in which she was a stockholder, to recover losses of the corporation's funds by certain of its directors through gambling transactions in grain, the fact that plaintiff had also similarly speculated with her own money and lost did not bar her right to relief, on the theory that she did not come into equity with "clean hands."

6. CORPORATIONS — OFFICERS — SALARIES—INCREASE.

Where a by-law of a corporation limited the amount of salary that could be paid to an officer to $125 per month, a resolution raising the salaries of certain of such officers in excess of that limit, without any attempt to repeal or amend the by-law, was ineffective.

7. SAME—INTRA VIRES ACTS—SUPERVISION.

The holders of a majority of the stock of a corporation are entitled to dictate its policy and conduct its business in their own way, and so long as they act in good faith, and their acts are intra vires, they will not be supervised by the courts.

8. JUDGMENTS—RES JUDICATA.

Plaintiff brought suit against a corporation and its managers to compel plaintiff's recognition as a stockholder, praying that the stock held by her be transferred to her on the books of the company. Plaintiff also alleged misconduct in the management of the business, and asked that certain directors account to the corporation and restore losses incurred through their maladministration. The corporation sought to foreclose an alleged lien on plaintiff's stock for an indebtedness due it from another, but, in the action, the only issues litigated related to plaintiff's status as a stockholder. Held, that a judgment confirming plaintiff's right as a stockholder was not res judicata of plaintiff's right to sue for the benefit of the corporation to obtain an accounting for losses incurred through the maladministration of the officers.

Appeal from Circuit Court, Jackson County; W. B. Teasdale, Judge.

Suit by Belle Butler Hingston against Emma Montgomery, as executrix, and others. From a decree in favor of plaintiff, defendants appeal. Reversed and remanded.

Lathrop, Morrow, Fox & Moore and Ellis, Cook & Ellis, for appellants. J. C. Rosenberger and J. L. Lorie, for respondent.

JOHNSON, J.

This is an action in equity brought on behalf of a business corporation by one of its stockholders against its managing officers for an accounting and for the recovery of funds belonging to the corporation alleged to have been unlawfully diverted. A trial of the cause resulted in a decree in favor of defendants, but the court sustained the motion for a new trial filed by plaintiff, on the ground "that the finding and judgment was for the wrong party," and defendants appealed.

On or about July 1, 1897, plaintiff (then Miss Belle Butler) bought 33 1/3 shares of the capital stock of the Montgomery Grain Company of the par value of $100 per share, and paid par therefor. This company had been incorporated in 1892 as a business corporation. Its capital stock was $10,000, divided into 100 shares, and the purpose for which it was created was to engage in the grain business in Kansas City as a commission dealer. When plaintiff purchased the stock mentioned, the company was in the enjoyment of a large and profitable commission business, and its assets exceeded liabilities by more than $10,000, the amount of its capital stock. Its managing officers were P. H. Montgomery, president, W. N. Montgomery, secretary, and H. S. Downs, vice president. All of the stock, except one or two shares, was owned by the two Montgomerys. Plaintiff was a stenographer employed by a competing dealer. She had some money to invest, and was induced by the representations of Downs to purchase the stock. To avoid injury to her position with her employers, she gave the money to Downs, who paid for the stock and had a certificate issued in the name of H. D. Smithson, his father-in-law, who on the same day indorsed and delivered it to plaintiff. Soon thereafter the Montgomerys expelled Downs from the corporation on the ground of misconduct, and claimed he owed the company about $1,500. After this plaintiff, who was at the time indebted to the company on a note of about $100, presented the certificate, offered to pay the amount of her debt, and requested the Montgomerys to issue a new certificate to her in her own name. This request was refused, except on condition that plaintiff discharge the debt Downs was owing to the company. Thereupon plaintiff, about July 1, 1898, brought a suit in equity against the corporation and its officers, the principal object of which was to establish her status as a stockholder and to obtain proper recognition as such by the officers of the company without first being compelled to pay the Downs indebtedness. Plaintiff in that case was unsuccessful in the circuit court, but on appeal we held she was entitled to a transfer of the stock on the books of the company, and that no lien existed thereon for the Downs indebtedness, and reversed and remanded the judgment. Butler v. Montgomery Grain Co., 85 Mo. App. 50. Judgment afterwards was entered in favor of plaintiff in accordance with the mandate, and to comply therewith the defendants on August 10, 1900, caused a new certificate for the stock to be issued and delivered to plaintiff. On September 5, 1900, the stockholders of the company held a meeting for the purpose of electing a director to fill a vacancy on the board. The two Montgomerys were directors and owned all of the stock, except that owned by plaintiff, and one other share. The board of directors consisted of three members. Plaintiff was present at the meeting with her attorney, and protested that the meeting was illegal, but notwithstanding her protest she was elected to fill the vacancy. She refrained from exercising the functions of that office, but demanded and obtained permission to examine the books and records of the company, and employed an accountant who made the examination for her. She then brought this present action on February 19, 1901, in which the corporation and the two Montgomerys are joined as defendants. After the suit was brought, W. N. Montgomery died, and some time thereafter P. H. Montgomery died. The cause stands revived in the names of the executrix of the estate of P. H. Montgomery and of the administrator de bonis non of the estate of W. N. Montgomery.

The relief sought is predicated on various wrongful acts alleged to have been perpetrated by the Montgomery brothers in the management of the business, and plaintiff, as a reason for bringing the suit in her own name, alleges that, as they "are a majority of the board of directors of said grain company and hold a majority of the stock of said grain company, it would be a useless and idle ceremony to request said directors to institute this action in the name of said grain company, and that plaintiff is therefore compelled to bring this suit in her own name in behalf of said corporation, and to make said grain company a defendant herein." The facts in proof sustaining this averment are undisputed. When the suit was brought the Montgomery brothers owned two-thirds of the capital stock of the corporation. They were two of the three directors, one was president and the other secretary, and, as they are charged with having injured the artificial creature, the corporation, by misusing its funds, obviously the corporation as such was powerless to act for its own protection. It is true that a cause of action arising from the ultra vires or fraudulent acts of the officers of a corporation in the management of its business belongs to the corporation as a legal entity, and not to the individual stockholders, and the general rule is that the corporation is the only party that may maintain an action for the redress of such grievances, and this rule is enforced strictly, except in cases where it appears to be impossible for the corporation to act. Ordinarily a dissatisfied stockholder should apply to the board of directors for a correction of abuses in the management, and will not be heard in an action brought by him to remedy them without first he shows he has...