North v. Union Sav. & Loan Ass'n

• Decision Date: 17 January 1911
• Parties: NORTH et al. v. UNION SAVINGS & LOAN ASS'N et al.
• Court: Oregon Supreme Court

117 P. 822

59 Or. 483

NORTH et al. v. UNION SAVINGS & LOAN ASS'N et al.

Supreme Court of Oregon

January 17, 1911

On Rehearing, September 19, 1911

Appeal from Circuit Court, Multnomah County; Robert G. Morrow Judge.

Action by Mattie North and others against the Union Savings & Loan Association and others, judgment for defendants, and plaintiffs appeal. Reversed as to all parties except defendant Sheffield, and as to him it is affirmed.

This is a suit by the stockholders of the Union Savings & Loan Association to compel the respondents to account for assets of the association which they are alleged to have unlawfully absorbed. At the trial, after the taking of testimony had begun, respondents objected to the admission of further evidence on the ground that the amended complaint did not state facts sufficient to constitute a cause of suit. The objection was sustained and the court refused to receive further evidence. This action by the court constitutes the first assignment of error. Appellants applied for leave to amend, at the trial, as to respondent F.W. Sheffield, by adding an allegation that he knew the insolvent condition of the association at the time he received a certain note and mortgage in lieu of his stock. The court held that such amendment would not be sufficient, and denied the application. This ruling constitutes the second assignment of error.

The amended complaint, in substance, is as follows: The Union Savings & Loan Association is a corporation under the laws of Oregon, and it complied with the law relating to such association by depositing all its mortgages and other securities in trust for all its stockholders and creditors and by making annual statements to the Secretary of State. Plaintiffs are stockholders of the association in amounts aggregating $11,616. Defendants Billings, McArdle, Downing Baldwin, and G.W. Miller are directors of the association and they constitute a majority of the directors. Defendant Co-operative Investment Company is a corporation, organized by the directors of the association for the express purpose of absorbing the assets of the association and procuring the same for the Individual benefit of the directors. The officers of the association have transferred nearly all of its assets to the investment company and to preferred stockholders at grossly inadequate prices, a particular description of which is unknown to plaintiffs. They have transferred to defendant Sheffield a certain mortgage upon which the sum of about $3,000 was due in settlement of certain stock held by him in the association for a much smaller amount, the association at that time being insolvent and being now unable to pay its stockholders any sum whatever. The directors persuaded many stockholders of the association to exchange their stock therein for stock in the investment company, and such stock in the association was reissued in the name of defendant Baldwin for the purpose of obtaining a controlling interest therein. In this manner he did procure enough stock to control a majority of the votes of the association. The directors, with intent to defraud plaintiffs and other stockholders, withdrew all of the mortgages and other securities held in trust, which they disposed of to preferred creditors and stockholders and left plaintiffs without any securities whatever, thus making an unlawful disposition of the assets and the proceeds applied in payment of stock held by the directors. They then held a stockholders' meeting for the alleged purpose of electing a trustee to close the affairs of the association, but such action was taken to elect as trustee one of their number to conceal their past transactions, and to prevent plaintiffs and other stockholders from obtaining the amounts invested by them or any portion thereof.

The objections urged against the amended complaint and sustained by the trial court were: (1) That it fails to state that plaintiffs had requested the directors to begin suit in the name of the association to recover the assets; and (2) that plaintiffs are not alleged to have been stockholders at the time the wrongs complained of occurred. Respondent Sheffield objected, further, that as to himself it was not shown that his actions were either fraudulent or wrongful.

L.E. Latourette, for appellants.

John H. Hall (Jesse Stearns, on the brief), for respondents, except McArdle and Sheffield. J.B. Cleland, for respondent Sheffield.

McBRIDE, J. (after stating the facts as above).

We are of the opinion that the court below erred in holding that the complaint failed to state a cause of suit. As a general rule, a stockholder in a corporation is not allowed to sue to prevent misappropriation of corporate securities without first requesting the board of directors, and, in case of their refusal to act, then stockholders to proceed against the wrongdoers in the name of the corporation. Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827; Brewer v. Boston Theater, 104 Mass. 378; Foss v. Harbottle, 2 Hare, 461. But the rule above announced has its exceptions, and one of these is in that class of cases in which it appears from the complaint that an application to the board of directors or to the stockholders would be useless. Thompson on Corp. § 4504; Cook on Corp. (6th Ed.) § 741; Morawetz on Corp. (2d Ed.) § 242.

The complaint in this case sets forth sufficiently that the directors, the trustee, and a majority of the stockholders are engaged in a conspiracy to unlawfully make away with the assets of the corporation, and such being the case it would be useless to apply to them to cause a suit to be brought against themselves for an accounting.

It is also claimed by respondents that the complaint is defective because it does not show that plaintiffs were stockholders at the time the alleged wrongs were perpetrated. The complaint is not clear in this respect, though it does allege that the directors disposed of the assets with intent to defraud plaintiffs and other stockholders, thus alleging by fair implication that plaintiffs were stockholders. In the absence of a demurrer or motion to make more definite and certaing we think this was sufficient, and, if it were not, we do not think the absence of such allegation fatal to the complaint. The assets of the corporation constitute a trust fund for all the stockholders, and this is especially the case with building and loan associations in this state, where by section 6748, L.O.L., all mortgages and other securities are required to be kept and held in trust for all the members and creditors of the corporation.

The United States courts have held that complaints in cases of this character should show that the plaintiff was a stockholder at the time the alleged wrongs were committed, but this seems to be a holding peculiar to these courts, and having for its object the prevention of collusive assignments of stock between citizens of different states made with the intent to avoid the Jurisdiction of the state courts. The operation of such a rule in the United States courts is just and salutary because it still leaves the injured party to his remedy in the local courts of his own state, but to apply it generally in the state courts would work injustice and hardship, and the better opinion is against it. Cook on Corp. (6th Ed.) § 736; Montgomery Light Co. v. Lahey, 121 Ala. 131, 25 So. 1006; Earle v. Seattle, etc., Co. (C.C.) 56 F. 909; Forrester v. B. & M. Mining Co., 21 Mont. 544, 55 P. 229, 353.

The complaint did not state facts sufficient to constitute a cause of suit against defendant Sheffield, and we will not interfere with the court's exercise of its discretion in refusing to allow plaintiffs to amend. There had already been one amended complaint filed, and the plaintiffs had allowed this litigation to slumber for several years without attempting to urge it to issue or trial, and they were not in a position to demand leniency from the court. It is also urged by defendants that the complaint is defective because plaintiffs sue only in their own name and not on behalf of themselves and all others similarly situated. If such an allegation were necessary, which we do not decide, its omission in the complaint merely amounts to a defect of parties plaintiff. Hiscock v. Lacy, 9 Misc.Rep. 578, 30 N.Y.Supp. 860; Stewart v. Erie &amp Western Transportation Co., 17 Minn. 372 (Gil. 348). And such defect is waived by failure to raise it by demurrer or answer. Sections 68, 72, 395, L. O.L. Notwithstanding the form of the complaint, the recovery is still for the corporation or those stockholders similarly situated, and the court may, in its discretion, direct such parties to be brought in, or may, by final decree, so dispose of any proceeds of the suit as to do justice to all entitled to share in the...