Martin v. The D. B. Martin Company
| Decision Date | 28 October 1913 |
| Citation | 102 A. 373,10 Del.Ch. 211,88 A. 612 |
| Court | Court of Chancery of Delaware |
| Parties | WILLIAM J. MARTIN and SOPHIE MARTIN v. THE D. B. MARTIN COMPANY, JOSEPH J. MARTIN, HENRY LAMMERTZ and HARRY F. COOK |
Hearing on motion for the production by the defendants of the several books and documents mentioned in the answers filed in this cause, and in the schedules thereto, in order that the complainants and their agents may take copies and abstracts thereof and extracts therefrom. The facts appear in the opinion.
Saulsbury and Morris, with them Richard B. Tippett, of Baltimore, Md for the complainants.
Herbert H. Ward, with him Walter Biddle Saul, of Philadelphia, Pa for the defendants.
The bill was filed by two stockholders of a corporation which owns practically no property except shares of stock of eight other corporations and uses its capital for the benefit of these certain corporations allied with it. All of the allied corporations are engaged in the same general business as the defendant company. The defendant company is admittedly a holding company. The president of the defendant company is president of all but one of the allied corporations. The defendant company owns all the shares of stock of seven of them, although some shares of each are in the names of persons to qualify them as directors. All the members of the boards of directors of four of the allied corporations are directors of the defendant company, and a majority of the members of the boards of directors of the other four are directors of the defendant company.
In brief, the bill alleges that the officers of the defendant company are grossly mismanaging its affairs in their own interests and fraudulently and wrongfully misappropriating its property, and that of the several allied or subsidiary corporations, for their individual profit, and in addition to general charges, specific instances are set out. The subsidiary corporations are not defendants. The president and two of the directors of the defendant company and of the allied corporations are co-defendants, and it is charged that the misconduct alleged was for their personal benefit. It is sought to have a receiver of the defendant company in order to effect reparation of the injury done, and there are also prayers for relief against specific acts of misconduct.
By the answer the allegations of misconduct and other equities of the bill are denied.
The matter now considered, after argument, is a motion for the production of books, papers and documents, not only of the defendant company, but also of the allied corporations, for the inspection of the complainants for the purposes of discovery. It is admitted that they have a right to inspect the books of the defendant company, under certain restrictions. The question is whether this extends to the books, etc., of the other corporations. It may also be assumed that the books, etc., sought are such as naturally contain evidence pertinent to the issues raised in the cause. The business of all the corporations is transacted in the same suite of offices.
The defendant company denies that it has the possession, or custody of, or control or power over, the books of the other corporations, but it is not denied that by stock ownership it has control of them through the power to elect their boards of directors and so to influence their business. But it is urged that this court should not make an order requiring the defendant corporation to produce books of corporations, over whose books, employes or business it has no direct or immediate control or custody.
There is no direct precedent for or against such an order, so far as I can learn. It is well settled that a court of equity may disregard formalities and break through the shell of fictions in order to prevent or undo fraud, where the formalities and fictions have been used to accomplish a fraud. This has been extended to cases where the legal fiction of a distinct corporate entity is used to accomplish a fraud. As for instance, in the case of In re Horgan, et al., ( D. C.) 97 F. 319, failing partners, to avoid creditors, turned over their business to a corporation, of which they were the stockholders and officers. There, a trustee in bankruptcy of the partnership was allowed to inspect books of the corporation to discover whether it had any assets belonging to the partnership. The court declared that under the circumstances before it the corporation was not a bona fide outside concern and that the books must be regarded as in substance and reality those of the bankrupts themselves and not of a genuine outside corporation.
But it is quite truly urged that this principle is not necessarily applicable here, where the corporations in question were not created to accomplish fraud. The defense to the right to discovery is based upon the principle that the identity of company B is not destroyed or merged into company A, and the ordinary relations of stockholders toward its property and affairs are not altered by the ownership by A of all the stock of B, or because all the officers of B are also officers of A. It is, of course, true that the fact that one person owns all of the stock of a corporation does not make him and the corporation one and the same person. The cases cited by the defendant company were these: The franchise of a bridge company was not forfeited because all its shares were owned by a municipality, for the company had not lost or misused any of its functions by reason of such ownership. Commonwealth v. Monongahela Bridge Co., 216 Pa. 108, 64 A. 909, 8 Ann. Cas. 1073. The debt due from a construction company, which owned all the shares of a railroad company, operated and managed by it, could not be collected from property of the railroad company. Exchange Bank v. Macon, etc., Co., 97 Ga. 1, 25 S.E. 326, 33 L. R. A. 800. Nor would process against corporation A be good against corporation B. Peterson v. Chicago, etc., Co., 205 U.S. 364, 51 L.Ed. 841, 27 S.Ct. 513. Neither could company A be taxed for the business carried on by company B. People v. American, etc., Co., 117 N.Y. 241, 22 N.E. 1057. Nor could a mechanic's lien be filed against property of company B on an agreement made with company A, when the law required an agreement with the owner of the property. Sparks v. Dunbar, 102 Ga. 129, 29 S.E. 295.
But these principles do not necessarily settle the point in dispute. It is a settled principle that the fiction of a legal corporate entity should be ignored when it has been used as a shield for fraudulent or other illegal acts.
2 Cook on Corporations, § 317, p. 881 (6th Ed.). See also section 663, for instances of applications of the rule.
In dealing with corporations with interlocking directors, and other devices, legal and illegal, useful and harmless, or fraudulent and harmful, for the control of other corporations, the court may rightly ignore corporate existence, when such existence serves as a barrier to the righting of wrong done to the stockholders of the dominant corporation. Courts must scrupulously refrain from exceeding their powers, or stretching out too long an arm. Still, a court must not allow its eyes to be blinded with theoretical abstractions, or trammeled in conserving and enforcing rights by the logic of corporate entity considered as separate from those persons who constitute its membership. The following language is quoted by Judge Sanborn in the case of U. S. v. Milwaukee, etc., Co., 142 F. 247, 254, though the source of it does not appear:
" It is true that for certain purposes the law will recognize the corporation as an entity distinct from the individual stockholders; but that fiction is only resorted to for the purpose of working out the lawful objects of the corporation. It is never resorted to when it would work an injury to any one, or allow the corporation to perpetrate a fraud upon anybody.'"
In the case of U. S. v. Milwaukee, etc., Co., supra, where one corporation was organized and owned by the officers and stockholders of another, whereby their interests were identical, they were treated as identical when the interests of justice required it. Judge Sanborn in that case said:
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