Price v. Gurney

• Decision Date: 05 February 1945
• Docket Number: No. 410,410
• Citation: 89 L.Ed. 776,324 U.S. 100,65 S.Ct. 513
• Parties: PRICE v. GURNEY et al
• Court: U.S. Supreme Court

324 U.S. 100

65 S.Ct. 513

89 L.Ed. 776

PRICE

v GURNEY et al.

No. 410.

Argued Jan. 12, 1945.

Decided Feb. 5, 1945.

As Amended Feb. 26, 1945 on Denial of Rehearing

Feb. 26, 1945.

Mr. William W. Keifer, of Springfield, Ohio, for petitioner.

Mr. Charles W. Stiefel, Jr., of Chicago, Ill., for respondent.

Mr. Justice DOUGLASdelivered the opinion of the Court.

The Western Tool & Manufacturing Co. is an Ohio corporation.It has outstanding some 1,100 shares of stock and also bonds which total in principal amount $73,000 with large arrearages of interest.Some twenty years ago, following a default in payment of interest on the bonds, more than 50 per cent of the shares of stock were placed in a voting trust, the voting trustees being designated by the bondholders.The bonds were deposited with a bondholders' committee.The voting trustees were members of the bondholders' committee; and some of the voting trustees were also directors and officers of the company.Since the voting trust was formed the bondholders have been in control of the company.Directors have been elected by the voting trustees.In 1942the trustee under the mortgage deed of trust filed a petition to foreclose the lien of the bondholders in an Ohio court.The court appointed one of the voting trustees receiver; and he has operated the company as a going concern since that time.The company filed its answer in the foreclosure proceeding, admitting the allegations of the bill and consenting to the appointment of a receiver.Thereafter a judgment was entered on the mortgage for some $134,000.Respondent acting on behalf of himself and other holders of shares or of voting trust receipts moved to set the judgment of the state court aside.We are told that that motion was denied.It does not appear whether there was an appeal from that denial or whether respondent sought to intervene in the foreclosure proceedings.Respondent as owner of 7 shares of stock and as agent for owners of some 675 shares (including certain shares deposited under the voting trust) also filed a petition in the name of Western Tool & Manufacturing Co. in the District Court asking that the company be given relief under Chapter X of the Bankruptcy Act. 52 Stat. 883,11 U.S.C. § 501 et seq.,11 U.S.C.A. § 501 et seq.The petition stated, among other things, that the value of the assets of the company was greatly in excess of the indebtedness and that that value would be lost to the stockholders in the foreclosure action.Respondent accompanied the petition with an affidavit which stated that an unsuccessful attempt had been made to have the corporation file the petition.The affidavit set forth rather serious charges against the management of the company.It alleged that the directors were unlawfully elected and that the corporation was without a de jure board.It alleged that certain of the directors were occupying conflicting and inconsistent fiduciary positions, i.e., as members of the committee their fiduciary responsibility was to the bondholders, as voting trustees their fiduciary duties were to the depositing stockholders, as directors and officers their fiduciary obligation was to all the stockholders, depositing and nondepositing.It charged them with acts of mismanagement, with dissipation of the assets of the company, and with management of the company solely for the benefit of the bondholders and against the interests of the stockholders.It alleged that the voting trust was illegal and void and was no longer in effect since it had by its terms expired.And it asserted that the only way in which the value of the stockholders' equity in the company could be preserved was by reorganization in bankruptcy.

The District Court first approved the petition as properly filed.Later the bondholders' committee and the corporation filed motions to dismiss the petition on the grounds, among others, that the board of directors of the company had not authorized it.A hearing was held, following which the District Court dismissed the petition.The Circuit Court of Appeals reversed, one judge dissenting.142 F.2d 404.The case is here on a petition for a writ of certiorari which we granted because of the importance of the problem in the administration of the Bankruptcy Act.

Chapter X provides in § 126 that 'A corporation, or three or more creditors who have claims against a corporation or its property amounting in the aggregate to $5,000 or over, liquidated as to amount and not contingent as to liability, or an indenture trustee where the securities outstanding under the indenture are liquidated as to amount and not contingent as to liability, may, if no other petition by or against such corporation is pending under this chapter, file a petition under this chapter.'

A creditor is defined in § 106(4) as the holder of any 'claim'.A claim is defined in § 106(1) so as to exclude stock.And a petition is defined as one filed under Chapter X by a debtor, creditors, or indenture trustee.§ 106(9).It is therefore apparent that Congress has not given to stockholders the right to file petitions under Chapter X.The absence of that right is emphasized when we turn to other provisions of the chapter which define the rights of stockholders in these reorganization proceedings.When a debtor is continued in possession, a plan may be filed 'by any stockholder, if the debtor is not found to be insolvent.'§ 170(3).Any stockholder has the right to be heard 'on all matters arising in a proceeding under this chapter.'§ 206.And detailed provisions are included for the protection of such equity as the stockholders may have in the business.See for example§ 179,§ 180,§ 196,§ 197,§ 216,§ 221.Thus the rights which the stockholders are granted by the Act arise after the proceedings have been instituted.Thereafter they need not be represented solely by the debtor corporation.They may appear in their own right.Indeed, the Act contemplates their participation in the proceedings for the protection of such equity as they may have.But the initiation of the proceedings, like the run of corporate activities, is left to the corporation itself, i.e. to those who have the power of management.

These principles are not seriously questioned.And respondents make no pretense of saying that they in fact have the power of management over this Ohio corporation or that § 8623-55 of Ohio's General Corporation Act which vests the management of Ohio corporations in the board of directors¹ is inapplicable here.Their theory rather is that the directors have breached their trust and have caused the corporation to commit acts which are confiscatory of the stockholders' interests, that the corporation has a defense against or a remedy in alleviation of the foreclosure action which the directors refuse to invoke, and that therefore the stockholders under the familiar rules governing derivative actions (Dodge v. Woolsey, 18 How. 331, 15 L.Ed. 401;City of Davenport v. Dows, 18 Wall. 626, 21 L.Ed. 938;Hawes v. City of Oakland, 104 U.S. 450, 26 L.Ed. 827) may proceed on behalf of the corporation.That was the view which prevailed in the Circuit Court of Appeals.But we do not think it stands analysis.

There is a misconception running through the presentation of this case which should be noted at the outset.It is a misnomer to speak of the filing of the petition on behalf of the corporation as a derivative action.A derivative action is a suit by a shareholder to enforce a corporate cause of action.The corporation is a necessary party to the suit.And the relief which is granted is a judgment against a third person in favor of the corporation.That is the rule in Ohio as well as elsewhere.10 Ohio Juris.§ 244 et seq.;Dodge v. Woolsey, supra;Davenport v. Dows, supra;Hill v. Murphy, 212 Mass. 1, 98 N.E. 781, 40 L.R.A.,N.S., 1102, Ann.Cas.1913C, 374;Groel v. United Electric Co., 70 N.J.Eq. 616, 61 A. 1061;Continental Securities Co. v. Belmont, 206 N.Y. 7, 99 N.E. 138, 51 L.R.A.,N.S., 112, Ann.Cas.1914A, 777.Similarly if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.10 Ohio Juris.§ 257;Eggers v. National Radio Co., 208 Cal. 308, 281 P. 58;Fitzwater v. National Bank of Seneca, 62 Kan. 163, 61 P. 684, 84 Am.St.Rep. 377.Moreover, equity has evolved numerous remedies to protect not only the...