Isaac v. Milton Mfg. Co.

• Decision Date: 29 June 1940
• Docket Number: No. 210.,210.
• Citation: 33 F. Supp. 732
• Parties: ISAAC v. MILTON MFG. CO. et al.
• Court: U.S. District Court — Western District of Pennsylvania

33 F. Supp. 732

ISAAC v. MILTON MFG. CO. et al.

No. 210.

District Court, M. D. Pennsylvania.

June 29, 1940.

Charles C. Lark, of Shamokin, Pa., and Charles J. Stamler, of Elizabeth, N. J., for plaintiff.

Seth T. McCormick, Jr., of Williamsport, Pa., and Frederick V. Follmer, of Milton, Pa., for defendants.

Harry S. Knight, of Sunbury, Pa., for intervening stockholders.

JOHNSON, District Judge.

July 31, 1939, complaint was filed against the Milton Manufacturing Company and the above-named officers, charging misconduct and mismanagement by the directors. Defendants moved to dismiss the complaint, whereupon plaintiff filed an amended complaint in which the only substantial change was the addition of a prayer for an accounting of dividends declared and paid, of assets and liabilities of the company, of the sale of its assets, and generally, of all the financial transactions of the Board of Directors and its officers from the time of the company's reorganization in 1928 until the present time. The case is now before the court on motion to dismiss the amended complaint.

The motion to dismiss states four grounds: (1) the amended complaint does not comply with Rule 23 (b) of the Rules of Civil Procedure, 28 U.S.C.A. following section 723c; (2) the appointment of a receiver is asked for an indefinite period and not as ancillary relief to some other object; (3) the matters of accounting requested pray for no ultimate relief upon which a final decree may be founded; (4) the plaintiff in effect asks for removal of directors who are not defendants, and for the removal of whom there is a complete and adequate remedy in the courts of the Commonwealth of Pennsylvania.

The first question to be determined is whether this court has jurisdiction of the parties and of the cause of action. The requisite diversity of citizenship and the jurisdictional amount in controversy are shown by the record and unchallenged. There is no doubt the court has jurisdiction of the parties. The objection that the bill does not make a case properly cognizable in a court of equity does not go to this court's jurisdiction as a federal court. Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 500, 43 S.Ct. 454, 67 L.Ed. 763; Smith v. McKay, 161 U.S. 355, 16 S.Ct. 490, 40 L.Ed. 731; Blythe v. Hinckley, 173 U.S. 501, 19 S.Ct. 497, 43 L.Ed. 783; Gordon v. Washington, 295 U.S. 30, 35, 55 S.Ct. 584, 79 L.Ed. 1282; Pennsylvania v. Williams, 294 U.S. 176, 55 S.Ct. 380, 79 L.Ed 841, 96 A.L.R. 1166. Plaintiff has sustained his burden of showing the jurisdiction of this court as a federal court.

The second question is whether the complaint states a cause of action cognizable in a court of equity. This involves two points: first, whether the allegations of the complaint are sufficient to justify the appointment of a receiver, and secondly, whether the allegations are sufficient to sustain the prayer for an accounting.

The prayers of the bill are for the appointment of a receiver, for an injunction restraining the defendant corporation from exercising any of its rights or franchises or dealing with any of its property or assets except to turn them over to a receiver appointed by this court, for authority to the receiver to continue the business, for an accounting by the defendants "of the improper declaration and payment of dividends; of the assets and liabilities of the Milton Manufacturing Company, its gains and losses, of the sale of its assets and generally, of all the financial transactions of the Board of Directors and its officers from the time of reorganizing the defendant company to the present time", and for such further relief as the nature of the case may require. In brief, the complaint asks two things — the appointment of a receiver and an accounting.

A receivership is not final relief. The appointment determines no substantive right, nor is it a step in the determination of such a right. A receivership is only a means to reach some legitimate end sought through the exercise of the extraordinary powers of a court of equity. It is not an end in itself. Where a final decree involving the disposition of property is appropriately asked, the court in its discretion may appoint a receiver pending its final disposition, but to justify a court of equity in appointing a receiver for a corporation, it is essential that the bill should entitle the complainant to some final equitable relief to which the receivership is appropriately incidental. There is no occasion for a court of equity to appoint a receiver of property of which it is asked to make no further disposition. Pusey & Jones Co. v Hanssen, 261 U.S. 491, 497, 43 S.Ct. 454, 67 L.Ed. 763; Gordon v. Washington, 295 U.S. 30, 36, 37, 55 S.Ct. 584, 79 L.Ed. 1282; Booth v. Clark, 17 How. 322, 331, 15 L.Ed. 164; Hutchinson v. American Palace-Car Co., C.C., 104 F. 182; Zuber v. Micmac Gold Mining Co. et al., C.C., 180 F. 625, 627; Burton v. Carey, 9 Cir., 82 F.2d 657, 660.

There is no final relief sought in the present bill to which a prayer for a receiver is properly incidental. There is no request for a final decree involving disposition of property of the corporation. The only relief asked in addition to the appointment of a receiver, is an accounting of past acts and transactions of the directors. The outcome of the prayer for an accounting would not involve the making by this court of any final decree for the disposition of the assets and property sought to be placed in the hands of a receiver, and, as already stated, the settled law is that a receiver is properly appointed only where the bill contemplates a final decree disposing of the property to be placed in the receiver's hands. Cases, supra, and Edwards v. Bay State Gas Co. of Delaware, C. C., 91 F. 942, 943.

Therefore, the several prayers for a receiver, for certain powers to him, and for an injunction restraining the corporation from exercising dominion over its property and assets are not properly in this bill, and a receiver could not be appointed on the basis of the allegations of the amended complaint.

The next question is whether the complaint avers facts which would entitle plaintiff to the accounting prayed for.

The prayer for an accounting asks "that the defendants be required to render an account of the improper declaration and payment of dividends; of the assets and liabilities of the Milton Manufacturing Company, its gains and losses, of the sale of its assets and generally, of all the financial transactions of the Board of Directors and its officers from the time of reorganizing the defendant company to the present time". The corporation was reorganized in 1928, and plaintiff asks an account of virtually every business transaction of the corporation in the past eleven years.

The law is well settled in Pennsylvania that where an account is asked of past acts, receipts and disbursements, the bill should aver that the plaintiff communicated to the directors that the monthly or annual accounts received were erroneous or false, that he requested the directors to proceed to have an accounting on the basis of the erroneous accounts rendered. Wolf v. Pennsylvania Railroad et al., 195 Pa. 91, 45 A. 936.

In the case of Passmore v. Allentown & Reading Traction Co., 267 Pa. 356, 110 A. 240, 241, a bill was filed by a single stockholder for an accounting and for the appointment of a receiver. After recognizing the duty on the stockholder first to make demand for action from the corporate board of directors before himself instituting legal action against the corporation, the court said: "When a demand is made by a stockholder preparatory to filing a bill, statements should be presented to the directors, showing the wrong complained of, * * * facts essential to sustain a complaint of wrongdoing should be submitted. Mere general charges and blanket averments, without a statement of facts, will not be sufficient. * * * Sufficient responsible data should be given to enable the directors * * * to determine whether litigation (could be engaged in) with some hope of success."

The same rule of reason applies where one stockholder demands that the voting stockholders in a corporation take appropriate action against directors charged with improper conduct. The stockholder or stockholders who make demands of the proper corporate bodies must state facts, not mere general charges and conclusions, or their demand for action will be a nullity.

The only demand on corporate directors and shareholders for action in the present case is that disclosed in a letter which another stockholder, not now plaintiff, presented at a meeting of the board of directors and at an annual stockholders' meeting. The letter reads as follows:

"To the Stockholders and Directors of the Milton Manufacturing Company, Milton, Pennsylvania:

"Gentlemen:

"The undersigned stockholders of the Milton Manufacturing Company desire to bring to your attention the following matters which we deem detrimental to the company and the stockholders thereof, and ask that steps be taken by the stockholders and by the Board of Directors which may be elected at the annual meeting on March 23, 1939, to wit: —

"1. The Company now employs seventy-one persons who are paid a monthly or weekly salary whether the plant of the company is in operation or not, and whether or not there is any work to be done by them.

"It is the contention of the undersigned stockholders in your company that there are entirely too many overhead employees receiving salaries for time which they are not actually employed, which number is entirely disproportionate to the total number of employees and the tonnage production of the company.

"It is requested that steps be taken by the Stockholders and the Board of Directors to immediately rid the company of all unnecessary overhead employees.

"2. It is requested that no dividends of any kind be paid on any class of stock until the earnings of the company and its financial...