Klein v. Peter

• Decision Date: 02 November 1922
• Docket Number: 6004.
• Citation: 284 F. 797
• Parties: KLEIN et al. v. PETER et al.
• Court: U.S. Court of Appeals — Eighth Circuit

284 F. 797

KLEIN et al. v. PETER et al.

No. 6004.

United States Court of Appeals, Eighth Circuit.

November 2, 1922

Homer N. Boardman, of Oklahoma City, Okl., for appellants.

Thomas D. Lewis, of Salt Lake City, Utah, for appellees.

Before LEWIS and KENYON, Circuit Judges, and YOUMANS, District Judge.

KENYON Circuit Judge.

This case comes to this court upon appeal from the decision and decree of the trial court sustaining motions to dismiss appellants' bill and the further order of the court sustaining a motion to quash service of the writ of subpoena upon the appellee, Mascot Mining & Milling Company, Limited of Idaho.

Appellants consisting of a large number of individual stockholders of the Mascot Mining & Milling Company, Limited, of Idaho, filed suit in the United States District Court for the Central Division of the District of Utah against the Mascot Mining &amp Milling Company, Limited, of Idaho, and the officers and managers of said company, claiming that they, as stockholders, had been defrauded by the acts of said officers out of large sums of money, and that said officers had conspired and confederated together to bring about a situation where said appellants would lose the amounts they had invested in the stock of the Mascot Mining & Milling Company of Utah and the Mascot Mining & Milling Company, Limited, of Idaho. Question was raised as to the first bill of complaint that it did not comply with federal equity rule No. 27 (198 Fed.xxv, 115 C.C.A. xxv). The court allowed time for filing a supplemental and amended complaint.

Previous to tendering the supplemental and amended complaint appellants applied to the district court of the Fifth judicial district of the state of Idaho for the county of Bannock, requesting authority on the part of the receiver of the Mascot Mining & Milling Company, Limited, of Idaho, to bring action against appellees in this case, setting forth substantially the same claims as are set forth in this action. Said application was refused by the court. Appellants tendered for filing a supplemental and amended complaint in equity, setting forth that the Mascot Mining & Milling Company, Limited, of Idaho, was in the hands of a receiver, and also attempting to bring the case within federal equity rule No. 27. The court, sustaining motions to dismiss, practically found that appellants had no authority to bring said action. A large part of the brief of appellants is devoted to a discussion of rule No. 27. We deem this immaterial, as it is conceded in the brief of solicitor for appellees that the amended and supplemental complaint brought the case within federal equity rule No. 27 before referred to. This rule sets forth the method in which suits in equity may be brought by stockholders in a corporation, against the corporation and other parties, founded on rights which can properly be asserted by the corporation.

The right, under certain circumstances, of a stockholder to bring suit to protect the interest of himself and other stockholders in the corporation is well recognized. The general doctrines are summed up in Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827. See, also, Detroit v. Dean, 106 U.S. 537, 542, 1 Sup.Ct. 500, 27 L.Ed. 300; Quincy v. Steel, 120 U.S. 241, 7 Sup.Ct. 520, 30 L.Ed. 624; Corbus v. Alaska Treadwell Gold Mining Co., 187 U.S. 455, 23 Sup.Ct. 157, 47 L.Ed. 256; Doctor v. Harrington, 196 U.S. 579, 25 Sup.Ct. 355, 49 L.Ed. 606; Rogers v. Nashville, C. & St. L. Ry. Co., 91 F. 299, 33 C.C.A. 517; Delaware & Hudson Co. v. Albany, etc., R.R. Co., 213 U.S. 435, 29 Sup.Ct. 540, 53 L.Ed. 862; Ross v. Quinnesec Iron Mining Co., 227 F. 337, 142 C.C.A. 33. These cases illustrate the general line of authority on the subject. In Dodge v. Woolsey, 18 How. 344 (15 L.Ed. 401) the Supreme Court of the United States said:

'The circumstances of each case must determine the jurisdiction of a court of equity to give the relief sought.'

The question, however, of the right to bring a suit by stockholders in a corporation against officers and directors, and the circumstances under which such suits can be brought, is not at issue in this case. Concededly, were it not for the fact that the Mascot Mining & Milling Company, Limited, of Idaho, appellee, is in the hands of a receiver, this action could be prosecuted by appellants. What effect does the receivership have as to their authority to bring the action? It is the general rule that, where a corporation is in the hands of a receiver, a stockholder cannot sue without the sanction of the court appointing the receiver. And it is further the general rule that such stockholder cannot sue, even where the court has granted him permission to do so, where there is no order purporting to assign to him or to confer on him the right to enforce the claim vested in the receiver. The property of the corporation, which would include claims of action on behalf of the corporation is in the possession and custody of the court, held by the receiver as an officer of the court. In a suit by a stockholder in behalf of the corporation the real controversy is between the corporation and the person whose acts are complained of, and the suit is for the benefit, not of the individual, but of all the stockholders. Where the corporation is in the hands of a receiver, the right of action by the receiver to protect the interest of the corporation is exclusive. We believe such is practically the unanimous voice of the authorities.

There are a few decisions in state courts holding that stockholders may bring suit against the corporation, and its officers, even when the corporation is in the hands of a receiver and where the receiver had refused to bring the case. Farwell v. Great Western Tel. Co., 161 Ill. 522, 44 N.E. 891, points rather strongly in that direction. Two cases frequently cited as so holding are Brinckerhoff v. Bostwick, 88 N.Y. 52, and Ackerman v. Halsey, 10 Stew. (37 N.J. Eq.) 356. In Porter v. Sabin, 149 U.S. 473, 479, 13 Sup.Ct. 1008, 37 L.Ed. 815, the Supreme Court points out that in these cases the receiver was not appointed by a judicial tribunal, but by the Comptroller of the Currency, an executive officer. It seems to us the case of Porter v. Sabin, hereinbefore referred to, puts this question at rest. The court (149 U.S.at page 479, 13 Sup.Ct.at page 1010, 37 L.Ed. 815) says:

'When a court exercising jurisdiction in equity appoints a receiver of all the property of a corporation, the court assumes the administration of the estate; the possession of the receiver is the possession of the court; and the court itself holds and administers the estate, through the receiver as its officer, for the benefit of those whom the court shall ultimately adjudge to be entitled to it. Wiswall v. Sampson, 14 How. 52, 65; Peale v. Phipps, 14 How. 368, 374; Booth v. Clark, 17 How. 322, 331; Union Bank v. Kansas City Bank, 136 U.S.

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