Liken v. Shaffer, Civil Action No. 62.

CourtUnited States District Courts. 8th Circuit. Northern District of Iowa
Writing for the CourtR. S. Milner, of Cedar Rapids, Iowa, for defendant Frank Byers
Citation64 F. Supp. 432
PartiesLIKEN et al. v. SHAFFER et al.
Decision Date26 January 1946
Docket NumberCivil Action No. 62.

64 F. Supp. 432

LIKEN et al.
v.
SHAFFER et al.

Civil Action No. 62.

District Court, N. D. Iowa, Cedar Rapids Division.

January 26, 1946.


64 F. Supp. 433
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64 F. Supp. 434
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64 F. Supp. 435
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64 F. Supp. 436
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64 F. Supp. 437
Irving B. Campbell, of Chicago, Ill., and Edward J. Dahms of Cedar Rapids, Iowa, for plaintiffs

Elliott, Shuttleworth & Ingersoll, of Cedar Rapids, Iowa, for all defendants except Frank Byers.

R. S. Milner, of Cedar Rapids, Iowa, for defendant Frank Byers.

GRAVEN, District Judge.

Trial on the merits on the question of res judicata in a suit wherein certain stockholders of the Shores-Mueller Company claim wrongdoing on the part of the defendants in connection with the affairs of that corporation. A great many issues were raised by the pleadings. Before proceeding with the trial of all of the issues, the court, pursuant to Rule 42(b) of the Federal Rules of Civil Procedure, 28 U.S. C.A. following Section 723c, directed that there be a trial on the merits as to the issue of res judicata, and connected with that issue, proof has been made as to: (1) The juristic status of the Shores-Mueller Company from January 1st, 1931 to the present time, and as to (2) certain other legal proceedings in the state and federal courts having to do with the affairs of that company. The Shores-Mueller Company, a corporation, was organized under the laws of the State of Iowa and was engaged in the business of manufacturing pharmaceuticals and other allied products in the city of Cedar Rapids, Linn County, Iowa. In 1933, certain proceedings were had in the Superior Court of Cedar Rapids, Iowa, whereby Arthur Barlow was appointed receiver for the corporation. Its assets were sold at a receiver's sale. The plaintiffs, who are stockholders in the Shores-Mueller Company, claim that the individual defendants were in 1933 officers and directors of the company, and some of them were also voting stock trustees of a large amount of stock in the corporation. The claim of the plaintiffs is in substance that the individual defendants despoiled the Shores-Mueller Company of its assets by means of a collusive and fraudulent receivership and receiver's sale. It is claimed that as a part of the fraudulent scheme, the defendants caused the defendant, Shores Company, to be organized as a corporation under the laws of the State of Iowa, and that the Shores Company has the assets of which the Shores-Mueller Company was despoiled and that the Shores Company is owned and controlled by certain of the individual defendants. It appears that the receiver, Arthur Barlow, filed his final report as receiver on October 5, 1933, and the receivership has long since been terminated. It further appears that no stockholders' or directors' meeting has been held since 1933, and that the corporation has been inactive

64 F. Supp. 438
since that time. It was stipulated by the parties that: "The Shores-Mueller Company, an Iowa Corporation, was legally incorporated, organized, and existing on January 1, 1931, and at all times subsequent thereto and up to the present time."

Because of certain phases of the question, it is necessary to consider: (1) Certain rules of law having to do with the respective and relative rights of a corporation and its stockholders where there has been wrongdoing in connection with the affairs of a corporation; and (2) Certain matters having to do with practice and procedure.

In the present case, the complaint is, in substance, that the defendants referred to wrongfully despoiled the Shores-Mueller Company of its assets. Whatever else such claimed wrong may be, it was, at the time at least, a wrong against the corporation. It is well settled that the property of a corporation is not the property of the individual stockholders. Stewart v. Pierce, 1902, 116 Iowa 733, 89 N.W. 234. On page 240 of the Northwestern citation in that case, the Iowa Supreme Court states: "The property of a corporation is also entirely distinct from the property in the shares of stock issued by it, and the stockholders are not the owners of its property as individuals." In the case of Klein v. Board of Tax Supervisors, 1930, 282 U.S. 19, on page 24, 51 S.Ct. 15, on page 16, 75 L.Ed. 140, 73 A.L.R. 679, Justice Holmes succinctly states: "But it leads nowhere to call a corporation a fiction. If it is a fiction it is a fiction created by law with the intent that it should be acted on as if true. The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members."

Where loss has been caused to a corporation by the wrongful acts of those managing it, the right of action belongs to the corporation. 3 Fletcher Cyclopedia Corporations, Perm.Ed., Sec. 1282, p. 773; Dillon v. Lee, 1899, 110 Iowa 156, 81 N.W. 245; First National Bank v. Fireproof S. B. Co., 1925, 199 Iowa 1285, 202 N.W. 14; Troutman v. Council Bluffs Street Fair & Carnival Co., 1909, 142 Iowa 140, 120 N.W. 730. In the case of First National Bank v. Fireproof S. B. Co., supra, on page 18 of the Northwestern citation, the Iowa Supreme Court states: "An unlawful diversion of the funds of the corporation is an injury to the corporation. Stockholders may maintain an action therefor, if the directors on demand refuse to do so, but such suit is for the benefit of the corporation and not in their individual right." In the case of Troutman v. Council Bluffs Street Fair & Carnival Co., supra, on page 731 of the Northwestern citation, the Iowa Supreme Court states: "If the action of the directors in appropriating the funds of the corporation to the purchase of the Elks' building stock was an unlawful diversion of funds, then it is for the corporation to complain; and, while stockholders may act for the corporation if on demand the officers and board of directors refuse to take proper action in the premises, the suit thus brought by stockholders must be for the benefit of the corporation, and not in their individual right." In the case of Graham v. Dubuque Specialty Machine Works, 1908, 138 Iowa 456, 114 N.W. 619, 15 L.R.A.,N.S., 729, the Iowa Supreme Court, in dealing with a stockholder's derivative suit, in page 621 of the Northwestern citation, states: "The action is, to all intents and purposes, the suit of the corporation * * *." The same court, on the same page of that opinion, in referring to stockholders instituting a stockholder's derivative suit states: "They did not bring the suit as agents of the corporation `but simply in order to set in motion the judicial machinery,' * * *. The action was instituted for the benefit of the corporation, and the relief could have been granted to no other * * *." In the case of Dillon v. Lee, supra, the Iowa Supreme Court, on page 247 of the Northwestern citation, states: "These profits, if any there were, belonged to the corporation and not to the individual stockholders. A fraud * * * on the part of the directors or officers of a corporation, is an injury done to the corporation itself * * *." In 3 Fletcher Cyclopedia Corporations, Perm.Ed., Sec. 1282, commencing on page 773, the rule is stated thus: "And no individual right of action rests in a stockholder where the directors have caused loss to the corporation through their carelessness and mismanagement. An individual right of action in stockholder against officer of corporation, can arise only from some private relation, contractual or fiduciary, as distinguished from a purely corporate relation common to all of the stockholders." The fact that a stockholder owns all or practically all or a majority of the stock in

64 F. Supp. 439
a corporation does not permit him to sue as an individual for a wrong done to the corporation. 13 Fletcher Cyclopedia Corporations, Perm.Ed., Sec. 5910. The fact that a corporation is no longer a going concern does not deprive it of its right of action for an injury done to it by an officer and director. Dillon v. Lee, supra

It is well settled that the appointment of a receiver does not result in the dissolution of a corporation. 19 C.J.S., Corporations, § 1493. A stockholder's derivative suit may be brought against the directors even though the corporation is in receivership, where a demand upon the receiver to bring the suit would be useless. Reed v. Hollingsworth, 1912, 157 Iowa 94, 135 N.W. 37. See also Weigen v. Council Bluffs Insurance Co., 1898, 104 Iowa 410, 73 N.W. 862, and 1 Cyclopedia Federal Procedure, 2d Ed., Sec. 118, p. 270. Upon discharge of a receiver, the corporation becomes reinvested with the possession and management of its own affairs. Singer v. Allied Factors, Inc., 1944, 216 Minn. 443, 13 N.W.2d 378. A corporation retains its property and rights even though its officers have resigned. Muscatine Turn Verein v. Funck, 1865, 18 Iowa 469. The fact that a corporation has been inactive does not permit an individual suit by a stockholder against the directors charged with misappropriating its assets; as long as it maintains a legal existence the claim belongs to the corporation. Brock v. Poor, 1915, 216 N.Y. 387, 111 N.E. 229. The fact that the value of the shares of stock belonging to a stockholder has been depreciated because of the misappropriation of corporate assets, does not give such stockholder an individual right of action. Smith v. Bramwell, 1934, 146 Or. 611, 31 P.2d 647. In that case the plaintiff alleged that by means of a voting trust the defendants secured control of the board of directors of the American Bancorporation and then proceeded to liquidate certain of its assets; that all was done pursuant to a conspiracy on the part of the defendants to enrich themselves at the expense of the corporation. The defendants were officers of the corporation. The plaintiff was the holder of shares of stock which had been deposited in the voting trust. The plaintiff sued...

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39 practice notes
  • Ross v. Bernhard, No. 42
    • United States
    • United States Supreme Court
    • 2 Febrero 1970
    ...Traders' Trust Co., 154 Misc. 733, 277 N.Y.S. 802 (Sup.Ct.); Metcalf v. Shamel, 166 Cal.App.2d 789, 333 P.2d 857; Liken v. Shaffer, D.C., 64 F.Supp. 432; Miller v. Weiant, D.C., 42 F.Supp. 760. The equitable nature of the derivative suit has been recognized in several decisions of this Cour......
  • State ex rel. Weede v. Bechtel, No. 47986
    • United States
    • United States State Supreme Court of Iowa
    • 16 Diciembre 1952
    ...776; Magale v. Fomby, 132 Ark. 289, 201 S.W. 278, 279; Goodbody v. Delaney, 80 N.J.Eq. 417, 83 A. 988; Liken v. Shaffer, D.C.N.D.Iowa, 64 F.Supp. 432-442 and many cases cited; R. H. McWilliams, Jr., Co. v. Missouri-Kansas Pipe Line Co. (two cases) 21 Del.Ch. 308, 190 A. 569; Colley v. Wolco......
  • Cal. State Teachers' Ret. Sys. v. Alvarez, No. 295, 2016
    • United States
    • United States State Supreme Court of Delaware
    • 25 Enero 2018
    ...Smith v. Waste Mgmt., Inc. , 407 F.3d 381, 386 (5th Cir. 2005) ; Dana v. Morgan , 232 F. 85, 90–91 (2d Cir. 1916) ; Liken v. Shaffer , 64 F.Supp. 432, 443–44 (N.D. Iowa 1946). We observe that, in Pyott II , we cited in a footnote as dicta Justice Ginsburg's concurring and partially dissenti......
  • Rosenfeld v. Schwitzer Corporation
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • 16 Marzo 1966
    ...in a derivative action. See, e. g., Ramsburg v. American Investment Co., 231 F.2d 333, 339-340 (7 Cir. 1956); Liken v. Shaffer, 64 F.Supp. 432 (N.D.Iowa 1946); Pikor v. Cinerama Prods. Corp., 25 F.R.D. 92 (S.D.N.Y. 1960); Frank v. Wilson & Co., 27 Del. Ch. 292, 32 A.2d 277 (1943); Trounstin......
  • Request a trial to view additional results
39 cases
  • Ross v. Bernhard, No. 42
    • United States
    • United States Supreme Court
    • 2 Febrero 1970
    ...Traders' Trust Co., 154 Misc. 733, 277 N.Y.S. 802 (Sup.Ct.); Metcalf v. Shamel, 166 Cal.App.2d 789, 333 P.2d 857; Liken v. Shaffer, D.C., 64 F.Supp. 432; Miller v. Weiant, D.C., 42 F.Supp. 760. The equitable nature of the derivative suit has been recognized in several decisions of this Cour......
  • Rosenfeld v. Schwitzer Corporation
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • 16 Marzo 1966
    ...in a derivative action. See, e. g., Ramsburg v. American Investment Co., 231 F.2d 333, 339-340 (7 Cir. 1956); Liken v. Shaffer, 64 F.Supp. 432 (N.D.Iowa 1946); Pikor v. Cinerama Prods. Corp., 25 F.R.D. 92 (S.D.N.Y. 1960); Frank v. Wilson & Co., 27 Del. Ch. 292, 32 A.2d 277 (1943); Trounstin......
  • State ex rel. Weede v. Bechtel, No. 47986
    • United States
    • United States State Supreme Court of Iowa
    • 16 Diciembre 1952
    ...776; Magale v. Fomby, 132 Ark. 289, 201 S.W. 278, 279; Goodbody v. Delaney, 80 N.J.Eq. 417, 83 A. 988; Liken v. Shaffer, D.C.N.D.Iowa, 64 F.Supp. 432-442 and many cases cited; R. H. McWilliams, Jr., Co. v. Missouri-Kansas Pipe Line Co. (two cases) 21 Del.Ch. 308, 190 A. 569; Colley v. Wolco......
  • Cal. State Teachers' Ret. Sys. v. Alvarez, No. 295, 2016
    • United States
    • United States State Supreme Court of Delaware
    • 25 Enero 2018
    ...Smith v. Waste Mgmt., Inc. , 407 F.3d 381, 386 (5th Cir. 2005) ; Dana v. Morgan , 232 F. 85, 90–91 (2d Cir. 1916) ; Liken v. Shaffer , 64 F.Supp. 432, 443–44 (N.D. Iowa 1946). We observe that, in Pyott II , we cited in a footnote as dicta Justice Ginsburg's concurring and partially dissenti......
  • Request a trial to view additional results

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