Kelly v. Dolan

• Decision Date: 22 May 1916
• Docket Number: 2096.
• Citation: 233 F. 635
• Parties: KELLY v. DOLAN et al.
• Court: U.S. Court of Appeals — Third Circuit

233 F. 635

KELLY v. DOLAN et al.

No. 2096.

United States Court of Appeals, Third Circuit.

May 22, 1916

Strong & Mellen, of New York City (Alfred J. Niles, of Philadelphia Pa., of counsel), for appellant.

Morgan Lewis & Bockius, of Philadelphia, Pa., Samuel F. Moran, of New York City, and Ellis Ames Ballard and John G. Johnson both of Philadelphia, Pa., for appellees.

Before BUFFINGTON, McPHERSON, and WOOLLEY, Circuit Judges.

BUFFINGTON Circuit Judge.

In the court below, Richard B. Kelly, a citizen of New York, filed a bill in equity against the executors of Thomas Dolan, the executors of Peter A. B. Widener, and George W. Elkins, all of whom were citizens of Pennsylvania and were the real defendants. The bill also named the receiver of the Central Park North & East River Railroad Company as a formal defendant. On final hearing, the court below entered a decree dismissing the bill, whereupon the plaintiff took this appeal.

The suit is a stockholder's bill; the plaintiff being a stockholder, and the defendant Elkins and the decedents, Dolan and Widener, having been directors, of the Central Park North & East River Railroad Company, a street railway company of New York City, hereafter called the Central Company, and for which company a statutory receiver by a New York state court was appointed. The Central was an underlying company of the Metropolitan Street Railway system in the city of New York, under a lease made in 1892. Messrs. Dolan and Widener were directors of the Central Company from 1893 to 1905, both inclusive. Elkins was a director in 1905 and 1906. The bill was brought eight years after Elkins, and nine years after Dolan and Widener, had ceased to be directors of the Central Company.

The action is not for an accounting or discovery, and there is no charge that the defendants profited in any way as directors. In substance, it charges that they neglected to require the lessee to perform all the covenants of the lease, in that they failed, on the maturity in 1902 of a mortgage bond issue of the Central Company, to have the lessee renew the same, in consequence of which the same was subsequently foreclosed; that they failed to compel the lessee to pay certain taxes assumed against the Central Company, and that they did not compel the lessee to keep up the rolling stock, etc., of the Central Company. The answer, which we need not quote, denied the charges. After the plaintiff's proofs were taken on final hearing, the defendants moved the court to dismiss the bill. This motion was granted, and the plaintiff not having, within the 30 days allowed by the court, amended his bill by allegations which would have removed the bar of the statute of limitations, the court entered a decree dismissing the bill. Thereupon the plaintiff took this appeal.

To our mind, three principal questions arise on this appeal: First, has the plaintiff shown his right to maintain this bill? Second, is the Pennsylvania statute of limitations a bar to his recovery? And, third, is the action barred by laches? An answer adverse to the plaintiff on any one of these questions justifies an affirmance of the decree entered below.

Turning to the first question, it is clear that the gravamen of the plaintiff's complaint is the negligence of the three defendant directors. That the negligence of a director is an injury to his corporation, and that the right to recover for such negligence is a legal as contrasted with an equitable right, and that the corporation is vested with the right to recover for such injury, is established by authority. In some cases this right is asserted in equity; in some at law, according to circumstances; but in whatever form it is litigated the right to recover for negligence is a legal right. Loan Society v. Eavenson, 241 Pa. 65, 88 A. 295; National Bank v. Wade (C.C.) 84 F. 10; Cockrill v. Cooper, 86 F. 7, 29 C.C.A. 529; Horn S. M. Co. v. Ryan, 42 Minn. 196, 44 N.W. 56; Emerson v. Gaither, 103 Md. 564, 64 A. 26, 8 L.R.A.(N.S.) 738, 7 Ann.Cas. 1114.

In this case, under the general principles of receiverships, and specifically by virtue of sections 232 and 239 of the General Corporation Law of New York, as amended by chapter 766 of the Laws of 1913, viz.:

'Sec. 232. Such receivers shall, from the time of their having filed the security required by law, be vested with all the property, real or personal, vested or contingent, of the corporation.'

'Sec. 239. General Powers of Receivers. The said receivers shall have power: (1) To sue in their own names or otherwise, and recover all the property, debts and things in action, belonging or due or to become due to such corporation, whether accruing or maturing before or after the dissolution thereof and whether vested or contingent at the time of such dissolution, in the same manner and with the like effect as such corporation might or could have done if no receivers had been appointed.'

-- this legal right of action against the directors for negligence was vested in the receiver on his appointment. Such being the case, the corporation originally, and the receiver on his appointment, being possessed of such legal right, and of the right to sue for its redress, how has this right been vested in the plaintiff so as to enable him to maintain this action? Manifestly, he could not maintain a suit at law to assert a legal right vested in the receiver. If so, what gives him a right to resort to equity?

Of course, where a corporation, through the fraud of those controlling it, refuses to bring suit against a director and redress a wrong, this calls into being an equitable right which equity will enforce on a stockholder's bill. Foss v. Harbottle, 2 Hare, 461. But, as said in that case:

'It was not, nor could it successfully be, argued that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law, the corporation, and the aggregate members of the corporation, are not the same thing for purposes like this; and the only question can be whether the facts alleged in this case justify a departure from the rule which prima facie would require that the corporation should sue in its own name and in its corporate character, or in the name of some one whom the law has appointed to be its representative.'

No such state of facts here exists. The Central Company is not under the domination of its directors; there is no allegation of mala fide control on their part. On the contrary, the corporation has passed from their control into that of a court of competent jurisdiction, and that court has on application declined to allow the receiver of such company to bring suit against the directors. Such being the case, it is manifest that the right of action of the corporation still remains in the corporation and its receiver, and forms part of the estate which that court is administering. To the present situation we may apply the language of the Supreme Court in Porter v. Sabin, 149 U.S. 480, 13 Sup.Ct 1008, 37 L.Ed....