Jepson v. Peterson

• Decision Date: 20 August 1943
• Docket Number: 8597
• Parties: VICTOR T. JEPSON, Appellant, v. LEO PETERSON, et al, Respondents.
• Court: South Dakota Supreme Court

69 SD 388, 10 NW2d 749 (1943)

VICTOR T. JEPSON, Appellant v. LEO PETERSON, et al,

Respondents.

South Dakota Supreme Court

Appeal from Circuit Court, Pennington County, SD

Hon. A. R. Denu, Judge.

#8597—Affirmed

Dan McCutcheon, Belle Fourche, SD

Attorney for Appellant

Philip & Leedom, of Rapid City, SD

Attorney for Respondent

Opinion filed Aug 20, 1943

ROBERTS, P.J.

This action was instituted by plaintiff as a minority stockholder in the Black Hills Amusement Company in behalf of himself and all other stockholders similarly situated. Plaintiff appeals from an order dismissing the complaint on the ground that it fails to state a claim upon which relief may be granted. Plaintiff applied for and obtained an order allowing the appeal.

The complaint alleges that defendant Peterson and two other officers and directors of the corporation, owning a majority of the outstanding stock, exercised during the years from 1935 to 1939 entire control, management and supervision of the business of the corporation, and that a demand was made on the officers and directors of the corporation to commence an action in the name of the corporation, and that they refused to bring an action. The complaint further alleges that defendant Peterson, through collusion and conspiracy between himself and the two officers mentioned in the complaint, unlawfully and fraudulently and without any corporate authority for so doing misappropriated and converted to himself certain assets of the corporation. The complaint sets forth the specific acts complained of, but it is unnecessary to make a recital of such alleged facts.

The question presented on appeal is whether a stockholder may maintain a derivative action of this nature charging mismanagement or malfeasance on the part of the officers of the corporation prior to the acquisition of stock. The question has not been decided in this jurisdiction, and there appears to be a direct conflict of authority as to the right of a subsequent stockholder to complain of prior acts. The rule obtaining in the federal courts and in many of the state courts is that to entitle a minority stockholder to attack a wrongful transaction it must appear that he was a stockholder at the time of the commission of the act complained of or that his shares of stock have devolved on him since by operation of law. Hawes v. Oakland, 104 US 450, 26 LEd 827; Dimpfel v. Ohio & Mississippi R. Co., 110 US 209, 3 SCt 573, 28 LEd 121; City of Quincy v. Steel 120 US 241, 7 SCt 520, 30 LEd 624; Taylor v. Holmes, 127 US 489, 8 SCt 1192, 32 LEd 179; McQuillen v. National Cash Register Co., 4 Cir., 112 F2d 877. The decision in the case of Hawes v. Oakland resulted in the adoption of a rule in the federal courts (Federal Rules of Civil Procedure, Rule 23(b), 28 US C. A. following section 723c) requiring the plaintiff in such an action to plead that he “was a shareholder at the time of the transaction of which he complains or that his share thereafter devolved on him by operation of law.” 13 Fletcher, Cyc, of Private Corporations, Perm. Ed., § 5981; Annotation: 38 LRA, NS, 988; 13 AmJur, Corporations, § 457.

In Venner v. Great Northern R. Co., 209 US 24, 28 SCt 328, 330, 52 LEd 666, it is said: “But this argument overlooks the purpose and nature of the rule. The rule simply expresses the principles which this court, after a review of the authorities, had declared in Hawes v. Oakland (Hawes v. Contra Costa Water Co.), 104 US 450, 26 LEd 827, to be applicable in the decision of a stockholder’s suit of the kind now under consideration.”

In Home Fire Insurance Company v. Barber, 67 Neb. 644, 93 NW 1024, 1028, 60 LRA 927, 108 AmStRep 716, Roscoe Pound, Commissioner, speaking for the court said:

“Sound reason and good authority sustain the rule that a purchaser of stock cannot complain of the prior acts and management of the corporation. ... The rule that a suit for mismanagement cannot be maintained by one who was not a stockholder at the time has been criticised as based on jurisdictional considerations peculiar to the federal courts and on obsolete common-law doctrines as to champerty and maintenance.4 Thomp. Corp. §§ 4569-4571; 1 Morawetz, Priv. Corp. § 270. In our judgment it does not depend upon either. The Federal equity rule, while designed in part to prevent collusive proceedings in fraud of the jurisdiction of those courts, goes far beyond the requirements of such a purpose. ... The rule has its foundation in a sound and wholesome principle of equity, namely, that the rules worked out by chancellors in furtherance of right and justice shall not be used, because of their technical character, as rules to reach inequitable or unjust results. Resting on this basis, ‘the value and importance of the rule ... are constantly manifested.’ Field, J., in Dimpfell v. Ohio & M. R. Co., 110 US 209, 3 SCt 573, 28 LEd 121. The right of the stockholder to sue exists because of special injury to him for which otherwise he is without redress. If his interest is trifling, and the injury thereto of no consequence, he cannot sue to compel righting of wrongs to the corporation. ... Hence there is obvious reason for holding...