Louisville Bridge Co. v. Dodd

• Decision Date: 15 February 1905
• Citation: 85 S.W. 683
• Parties: LOUISVILLE BRIDGE CO. v. DODD et al. LOUISVILLE & N. R. CO. v. LOUISVILLE BRIDGE CO.
• Court: Kentucky Court of Appeals

85 S.W. 683

LOUISVILLE BRIDGE CO. v. DODD et al.

LOUISVILLE & N. R. CO. v. LOUISVILLE BRIDGE CO.

Court of Appeals of Kentucky.

February 15, 1905

Extension of Opinion, March 9, 1905.

Appeal from Circuit Court, Jefferson County, Chancery Division.

"Not to be officially reported."

Action by John L. Dodd and others against the Louisville Bridge Company, and the Louisville & Nashville Railroad Company and others against the Louisville Bridge Company. From an order allowing counsel fees to plaintiffs, the Louisville Bridge Company appeals, and from a judgment in favor of the bridge company against the railroad company the railroad company appeals. Order affirmed, and judgment reversed.

Helm Bruce & Helm, for Louisville & Nashville R. Co. Thos. W Bullitt, for Louisville Bridge Co. Kohn, Baird & Spindle, W O. Harris, and J. C. Dodd, for appellees.

O'REAR J.

This case was formerly before this court upon the question of the right of minority stockholders to maintain in their own names, on behalf of their corporation, a suit to redress grievances against debtors of the corporation, where the directors would not, or on account of conflicting interest could not, act for it. It was held that the suit could be maintained. P., C., C. & St. L. Ry. Co., etc., v. Dodd etc., 115 Ky. 176, 72 S.W. 822, 74 S.W. 1096. It was also decided in that case that certain substantial recoveries on behalf of the corporation Louisville Bridge Company be decreed against its debtors, certain railroad companies who were using the bridge under a contract dated June 5, 1872. Certain other claims presented on behalf of the bridge company against the contracting railroad companies were disallowed. Upon a return of the case the circuit court proceeded to correct its decree to conform to the opinion and mandate of this court. In so far as the rights of the parties Pittsburg, Cincinnati, Chicago & St. Louis Railway Company and the Louisville Bridge Company are concerned, they have since been adjusted by settlement. The judgment entered on the reversal in behalf of the bridge company against the Louisville & Nashville Railroad Company is one of the subjects of this appeal. On the return of the case, and after the settlement between the bridge company, by its complaining stockholders, and the Pittsburg, Cincinnati, Chicago & St. Louis Railroad Company, a motion was entered by the plaintiffs in this action, Jno. L. Dodd and others, for an allowance of their extraordinary costs incurred in the prosecution of the suit. These costs comprised counsel fees and traveling and other incidental and proper expenses incurred on behalf of the plaintiffs in the preparation and trials of the case. Defendants objected to the mode of procedure. They claim that these matters are properly an independent claim, and should have been asserted by an independent action at law, triable by jury.

These two questions are the subject of this appeal. We will take up first the matters of costs and counsel fees.

On the former appeal it was held that the directors of the bridge company were so situated with reference to the contract that was the basis of the suit that they could not properly act for it in a dispute between the bridge company and the contracting railroads concerning the rights of the parties under the contract, because the directors of the bridge company were not only elected by the vote of the stockholders of the Pittsburg, Cincinnati, Chicago & St. Louis Railroad Company, who also owned a majority of the stock of the bridge company, but they were also employés or officers of the railroad company, and had only nominal personal interests in the bridge company. In such case the law assumes that one cannot serve two masters in the same matter, where interests conflict. "He will cleave to the one and forsake the other." The general rule that the internal affairs and polity of a corporation is subject alone to the control of its board of directors, elected probably by the majority of its stock, of which the minority have no legal right to complain, has this exception. Then the law allows the minority stockholder to sue, not for himself alone, but on behalf of the corporation. Equity substitutes him for the time being, and in that matter, for the board of directors, but to act only in the action and in behalf of the matter involved in it, and of which it may be shown that the directors cannot properly, or will not act. When such a case is stated in the petition, the court will take cognizance of the suit. If the facts alleged as the basis of the suit are sustained, the relief will be granted. But, obviously, the relief is in behalf of the corporation so represented. Whatever recovery there may be will belong to the corporation, and not individually to the complaining stockholders. A necessary incident of the power and right to maintain such an action is the power to employ counsel to prosecute it, and to incur other necessary expenses in the litigation. In such matters the difference between the discretion and power of the directors of the corporation, and of its minority stockholder who may have and show cause to sue in its behalf, is, the former may incur such expenses on behalf of the corporation if they believe it a prudent thing to do, although it may be proved later that it was not, while the latter must at his own peril establish the fact that the corporation has a valid cause of action in the matter, and that its directors cannot, because of personal and conflicting interest, or will not, sue for it for redress. If this distinction were not enforced, the temptation would frequently be irresistible to minority stockholders to involve the concern in expensive and fruitless litigation to exploit their own theories of management, or to harass their more successful associates with every phase of pulling at cross-purposes, at the expense of all the stock. To allow that would be to destroy the effectiveness of all corporate organization, and would be in irreconcilable conflict with the whole theory upon which the law has authorized them to be formed. The Louisville Bridge Company had, as has been adjudged, a valid cause of action against the railroad corporations who had contracted for its use. It was one, as has also been decided, that the directors of the bridge company were not in position to impartially represent. This suit by minority stockholders was therefore allowed, and has been sustained upon the adjudicated facts. It was, then, within the power of the minority stockholders, plaintiffs, to incur on behalf of the bridge company those necessary expenses, including counsel fees, incident to the maintenance and development of the case.

It does not follow from what has been said, nor is it true, that because there exists a claim or cause of action on behalf of the corporation for which its directors cannot or will not sue, the minority stockholder may therefore couple with it any number of other matters which he may believe should also be redressed, but which in fact are not valid claims, and include the whole in the litigation, thus swelling the cause of action beyond its legitimate scope, whereby counsel employed by him for the corporation may have a fee for services far beyond what the stockholder had a right to contract for. That would be to encourage internal strife, to substitute the discretion of the minority for that of the majority, and to make it possible in certain instances for a single stockholder to wreck the corporation because of an imaginary grievance. It must be borne in mind that, while the minority stockholder is permitted to represent and act for the corporation in the state of case presented by certain discussed features of this record, it is never allowed for him to do so except in a suit in court, and always subject to the control of the court. It is at last the judgment of the latter, in the application of principles of equity, that obtains in lieu of the discretion of the board of directors. The minority stockholder merely sets in motion the action, and presents the facts upon which the court can act. So far as the causes of action set up in this suit have succeeded, counsel representing the plaintiffs are to be deemed as representing the corporation, upon like principles as the plaintiffs themselves are deemed its representatives. Their compensation ought to be commensurate with the labor done and the results obtained. Upon that theory alone the...