National Bankers Life Ins. Co. v. Adler

• Decision Date: 29 April 1959
• Docket Number: No. 13436,13436
• Citation: 324 S.W.2d 35
• Parties: NATIONAL BANKERS LIFE INSURANCE COMPANY, Appellant, v. Vernon T. ADLER, Individually and as Executor of the Estate of H. O. Adler, Deceased, et al., Appellees.
• Court: Texas Court of Appeals

Page 35

324 S.W.2d 35

NATIONAL BANKERS LIFE INSURANCE COMPANY, Appellant, v. Vernon T. ADLER, Individually and as Executor of the Estate of H. O. Adler, Deceased, et al., Appellees.

No. 13436.

Court of Civil Appeals of Texas, San Antonio.

April 29, 1959.

Brundidge, Fountain, Elliott & Bateman, Dallas, for appellant.

Rosson & McGown, San Antonio, for appellees.

POPE, Justice.

National Bankers Life Insurance Company, hereafter called corporation, appealed from an order which dismissed its plea of privilege to be sued in Dallas County after the trial court sustained special exceptions to the plea. Plaintiffs excepted on the basis that they brought the suit in Kendall County as minority stockholders in a purely derivative suit, and that the corporation could not urge a plea of privilege as a defendant, because it was the actual plaintiff. Whether the court properly sustained the special exceptions to the plea of privilege is the first question presented. The other question is, whether the corporation has waived its plea pending this appeal.

Plaintiffs, Vernon T. Adler, individually and as Executor of the H. O. Adler Estate, and Dorothy Virginia Helm and husband, on behalf of all minority stockholders, sued Pierce P. Brooks and the corporation. Plaintiffs alleged that Pierce P. Brooks, as a director and majority stockholder in the corporation, entered into a scheme with Ben Jack Cage by which Brooks caused the corporation to convert into cash several million dollars worth of its good securities. With the cash the corporation bought worthless assets from Ben Jack Cage and firms controlled by him. The large cash sums thus transferred from the corporation to Cage and his controlled companies were then used to buy stock from Brooks personally. Plaintiffs alleged that this was a fraud upon and theft from the corporation. Plaintiffs sought a recovery of three million dollars on behalf of the corporation.

Defendant Brooks asked for no change of venue, but the corporation filed a plea of privilege. Plaintiffs then filed exceptions and a motion to dismiss the plea of privilege, on the grounds that the corporation was the actual party plaintiff and only a nominal defendant. In a true derivative action, the minority stockholders bring suit for and on behalf of the corporation because the corporation has failed to bring the action. In such a suit, though the corporation is named as a nominal defendant, it is the actual plaintiff. 3 Hildebrand Texas Corporations, Secs. 764, 773, 774; Providential Investment Corporation v. Dibrell, Tex.Civ.App., 320 S.W.2d 415; 13 Fletcher Cyclopedia, Corporations, (Perm.Ed.) Sec. 5953; 19 C.J.S. Corporations Sec. 830.

In some situations, the corporation is something more than a nominal defendant. If the derivative action threatens rather than advances the corporate interests, the corporation may actually defend the action. Blish v. Thompson Automatic Arms Corp., 30 Del.Ch. 538, 64 A.2d 581, 607; Godley v. Crandall & Godley Co., 181 App.Div. 75, 168 N.Y.S. 251; Kanneberg v. Evangelical Creed Congregation, 146 Wis. 610, 131 N.W. 353, 39 L.R.A.,N.S., 138. Such is the rule when the pleadings attack the corporation by a suit to enjoin performance of contracts, Kirby v. Schenck, Sup., 25 N.Y.S.2d 431; or pray for the appointment of a receiver, McHarg v. Commonwealth Finance Corp., 44 S.D. 144, 182 N.W. 705, 707, Esposito v. Riverside Sand & Gravel Co., 287 Mass. 185, 191 N.E. 363; or seek to interfere with a corporate reorganization, Corey v. Independent Ice Co., 226 Mass. 391, 115 N.E. 488; or seek to interfere with corporate management when there is no allegation of fraud or bad faith. Oshrin v. Celanese Corp., Sup., 37 N.Y.S.2d 548, 550; Otis & Co. v. Pennsylvania R. Co., D.C., 57 F.Supp. 680, affirmed, 3 Cir., 155 F.2d 522. Hence, it is not every stockholders' suit which will cast the corporation on the side of the minority stockholders. Sometimes the corporate interests lie on the side of resisting the suit. Otherwise matters of corporate and business judgment would be governed entirely by the minority, which sometimes, but not always, acts in the interest of the corporation. Neutrality is not the course of sound corporate procedure when the welfare of the corporation itself is in issue.

The problem in this case arises procedurally. The corporation filed its plea of privilege which was in proper form. Plaintiffs, the minority stockholders, controverted the plea and urged, in limine, special exceptions which asserted that the corporation was in truth the plaintiff. The court sustained the exceptions and dismissed the corporation's plea of privilege, on the theory that the corporation was the actual plaintiff. Strictly, on the basis of the plaintiffs' pleadings, the corporation is the actual plaintiff instead of an actual defendant. Plaintiffs' petition and controverting affidavit excluded the idea that the corporation could suffer from the prosecution of the suit, and there was no prayer for recovery against it, except for attorney's fees.

At that stage of pleading, however, the corporation could urge nothing but its privilege. Due order of pleading is not excused with respect to the plea of privilege. Rule 84, Texas Rules of Civil Procedure. The corporation finds itself in the position that it must assert its plea first or waive it. If it asserts it, the corporation has not yet reached the stage of pleading in which it is called upon to plead or make known its defenses, and the defenses need not be pleaded in due order. If the corporation pleads its defenses before its privilege, then it waives its privilege. If a defendant is limited to what a plaintiff has alleged, a corporation would lose its privilege merely because it has never had a chance to plead the real issue and real defense.

When we look alone to a plaintiff's petition it sometimes appears that there can be no valid defense, but experience shows the wisdom of reserving judgment until we have an opportunity to learn the whole story. The corporation may, if it ever reaches the opportunity to do so, plead that the minority stockholders failed to comply with the condition precedent of first calling upon it to file the suit, which fact the plaintiffs must not only plead but prove. Barthold v. Thomas, Tex.Com.App., 210 S.W. 506; Joy v. North Texas Compress & Warehouse Co., Tex.Civ.App., 151 S.W.2d 342; 3 Hildebrand, Texas Corporations, Sec. 765; 13 Fletcher Cyclopedia, Corporations, (Perm.Ed.) Sec. 5963. If permitted, the corporation may prove that it has already filed a suit which is a prior pending suit, or that the corporation has recovered, or that, by a final adjudication, it has failed to recover on the same cause of action. There conceivably may be other defenses. 13 Fletcher Cyclopedia, Corporations, (Perm.Ed.) Secs. 5859-5889. In any event, until the corporation has had an opportunity to plead or prove something, its defenses or lack of them may not be assumed.

We have found only one case in which a change of venue was urged by the corporation named as a defendant in a derivative action. In McHarg v. Commonwealth Finance Corp., 44 S.D. 144, 182 N.W. 705, 706, the Court held that at the venue stage of a case, it cannot be foreseen that the plaintiff will prevail and that the corporation will be benefited at all. The Court said:

'Of course, this is a representative action, and the corporation is a necessary party to the action; but because a minority stockholder charges a wrongdoing by directors of a corporation which, if he succeeds in the action, will inure to the benefit of the corporation, he does not thereby become possessed of the right to dictate the defense or manner of defense that the corporation may undertake, nor may the plaintiff minority stockholder dictate in which county the cause shall be tried.'

Courts, as a practical matter, may be called upon to determine who is the actual plaintiff and which one of the competing parties should control the suit. That may be a disputed issue. Whether the corporate defendant is in truth the actual plaintiff or whether it has also a defensive interest, may require not only pleading but also proof. If the court at an early stage of trial cannot determine who is the actual plaintiff then the corporate defendant should be permitted to raise the venue matter and to answer. McHarg v. Commonwealth Finance Corp., supra. The corporate defendant has the right to object to and question the power of the minority stockholder to bring suit in its behalf. Slutzker v....