Long v. Stites

• Decision Date: 10 February 1937
• Docket Number: No. 7042.,7042.
• Citation: 88 F.2d 554
• Parties: LONG et al. v. STITES et al.
• Court: U.S. Court of Appeals — Sixth Circuit

88 F.2d 554 (1937)

LONG et al. v. STITES et al.^*

No. 7042.

Circuit Court of Appeals, Sixth Circuit.

February 10, 1937.

Greenberry Simmons, of Louisville, Ky., for appellants.

Squire R. Ogden and E. A. Dodd, both of Louisville, Ky. (Robert G. Gordon and Squire R. Ogden, both of Louisville, Ky., on the brief), for appellees.

Before HICKS, SIMONS, and ALLEN, Circuit Judges.

ALLEN, Circuit Judge.

Appeal from an order dismissing a minority stockholder's bill against The Louisville Trust Company and its former and present directors, upon the ground of non-compliance with Equity Rule 27 (28 U. S.C.A. following section 723). The sole question is whether appellants in instituting their action have averred facts which set forth with particularity their efforts to secure such action as they desire on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of their failure to obtain such action, or the reasons for not making such effort.

Under a trust agreement dated April 22, 1927, appellants became holders of trustees' participation certificates which represented a beneficial ownership in the capital stock of The Louisville Trust Company. They complain of certain alleged illegal investments made by the Trust Company, which closed its doors on November 16, 1929, and went into receivership. Reorganization proceedings were instituted in 1931, and the plan was approved by the court and consummated. The Trust Company was re-opened and a new board of directors was elected. None of the present directors were directors of the company prior to the receivership. Appellants' bill sets up a derivative cause of action for the benefit of the corporation, and prays for an accounting and other equitable relief against the directors of the original Trust Company upon the ground that they permitted the alleged illegal investments to be made, and also joins as defendants the directors of the re-organized Trust Company upon the ground that they failed and refused to sue the old directors in order to compel them to account for their alleged mismanagement.

Appellants filed their amended and substituted bill on June 15, 1934, alleging compliance with Equity Rule 27 in the following terms:

"6. Plaintiffs aver that a demand was made upon the new directors on January 25, 1934, to sue the old directors for the hereinafter set out acts of omission and commission. That, upon that date, they refused to sue as demanded. That on the 19th day of February, 1934, a registered letter was sent to the president and director explaining said demand and refusal. * * * That the plaintiffs are so-called minority stockholders and could not obtain relief through stockholders' meetings."

Appellees filed a motion to require appellants to amend paragraph 6 so as specifically to state the manner in which the alleged demand upon the new directors was made, and this motion was granted. Counsel for appellants in open court refused to comply with the court's order, and thereupon the cause of action was dismissed. Later, and within the time allowed for amending paragraph 6, appellants moved for permission to amend paragraph 7 of the bill to show that "it was a vain and useless act to demand of them the present directors again something which they had already considered and declined to do." The amendment to proffered paragraph 7 reiterated that demand had been made upon the president, and stated that he represented that the present directors had previously considered suing the former directors and had declined so to do. Appellants further alleged upon information and belief that records of the Trust Company would show that the new directors, meeting as a board, previous to the demand had considered bringing suit and had decided against taking action. The court overruled the motion and refused to allow the amendment to be filed. Appellants assign this refusal as error.

Even if the court had permitted the filing of the amendment to paragraph 7 as requested, the bill would not have complied with Equity Rule 27. The allegations of paragraph 6 as to the demand made upon the new directors are insufficient because they fail to relate with particularity the facts of the alleged demand and refusal. While appellants aver that they could obtain no relief from stockholders' meetings, nowhere do they allege that the matter was presented to the stockholders for action. The amplified reasons alleged in the proffered amendment to paragraph 7 for making no demand upon the directors do not dispense with an effort to secure action by the stockholders. The letter sent by counsel for appellants on February 19, 1934, to the president of the Trust Company, referred to in the bill, stating that demand had been made on such president, is a purely self-serving declaration and adds no support to appellants' cause. Equity Rule 27 requires that demand be made not upon an officer or an individual director, but upon the directors or stockholders as a prerequisite to bringing suit.

In addition, it is the spirit of the rule as repeatedly interpreted in federal decisions that stockholders bringing a derivative action shall exhaust every remedy within the corporation before suing the directors on causes of action which in the first instance should be asserted by the corporation. Quincy v. Steel, 120 U.S. 241, 7 S.Ct. 520, 30 L.Ed. 624; Wathen...