Quirke v. St. Louis-San Francisco Railway Company

• Decision Date: 04 May 1960
• Docket Number: No. 16310-16314.,16310-16314.
• Citation: 277 F.2d 705
• Parties: Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY, Daniel K. Catlin et al., Appellees (two cases). Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY and David Roberts, Jr., Appellees. Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY and E. L. Bruce, Jr., Appellees. Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY, Hugh L. Harrell and R. Otis McClintock, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

277 F.2d 705 (1960)

Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY, Daniel K. Catlin et al., Appellees (two cases).

Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY and David Roberts, Jr., Appellees.

Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY and E. L. Bruce, Jr., Appellees.

Edward F. QUIRKE, Appellant, v. ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY, Hugh L. Harrell and R. Otis McClintock, Appellees.

Nos. 16310-16314.

United States Court of Appeals Eighth Circuit.

May 4, 1960.

Aaron Kravitch, Savannah, Ga., for appellant.

Ralph L. McAfee, New York City, for appellee.

Before GARDNER, WOODROUGH and BLACKMUN, Circuit Judges.

GARDNER, Circuit Judge.

There are involved in this appeal five actions consolidated for the purpose of trial and likewise consolidated on appeal. Basically they all stem from the same transaction; to-wit, the purchase of stock in the Central of Georgia Railway Company by the St. Louis-San Francisco Railway Company, and represent two causes of action. The first is a stockholder's derivative action brought by appellant on behalf of the St. Louis-San Francisco Railway Company, hereinafter referred to as the Frisco, against its directors and certain of its officers. The second is a bondholder's action, the bondholders reportedly represented by appellant, against the same directors and officers. Hereinafter we shall refer to appellant as plaintiff and appellee as defendant or the Frisco.

Defendant moved to dismiss both actions. Its motion to dismiss the stockholder's action is based upon the grounds that: (1) plaintiff's interests are adverse to those of Frisco and its other stockholders and that, therefore, he does not represent them; (2) the court lacks jurisdiction over the subject matter because the issues are within the exclusive primary jurisdiction of the Interstate Commerce Commission, and the proceedings before the Commission have not been concluded; and (3) the complaint fails to show plaintiff's efforts to secure shareholder action as required by Rule 23(b) of the Federal Rules of Civil Procedure, 28 U.S.C.

Its motion to dismiss the bondholder's action is based upon the grounds that: (1) the complaint fails to state a claim for fraud because the allegedly fraudulent representations were not made to plaintiff and plaintiff acquired his bonds before those representations were made; (2) the notice, demand and offer of indemnity requirements of the mortgage indentures, which are a condition precedent to the bringing of this action, have not been satisfied; (3) this is not a proper class suit because plaintiff does not adequately represent the interests of the class; (4) the requisite jurisdictional amount has not been established; and (5) the Interstate Commerce Commission has exclusive primary jurisdiction and plaintiff's administrative remedy has not been exhausted.

The court sustained both motions and this appeal followed. In seeking reversal plaintiff contends that the court erred in dismissing the stockholder's suit for failure to allege that plaintiff had sought relief from Frisco's stockholders. Likewise plaintiff contends that the court erred in dismissing the bondholder's suit for failure to allege compliance with the conditions precedent to suit imposed by the indentures which govern plaintiff's rights under his bonds, and that the court erred as to both causes of action in holding that plaintiff could not maintain these actions because he brought both actions in furtherance of interests adverse to those of Frisco and its stockholders and bondholders and therefore lacks standing to sue on their behalf and does not come into court with clean hands.

Plaintiff at all times here pertinent was the owner of 100 shares preferred and 200 shares common stock of the Frisco. In his complaint he charges that as a part of the plan of reorganization of Frisco certain bond issues were authorized to be issued and sold for certain specific purposes; that the officers and directors of Frisco, in disregard of the authorization for the issuance and sale of the bonds, devoted a large part of the proceeds of the bond sale to the purchase of Central of Georgia preferred and common stock. He asks that Frisco be restrained from disposing of the Central of Georgia stock and requests that it be sequestered, seized and impounded by the court and that a trustee be appointed to take possession of that stock. He also seeks compensatory, punitive, and exemplary damages, plus expenses of the litigation, including counsel fees.

The complaint contains no allegations that prior to the institution of his stockholder's suit he had exhausted his remedies within the corporation by seeking remedy from either the directors or stockholders. By amendment he charges that such action on his part would have been futile because the directors were hostile and had themselves committed the alleged wrong from which he sought relief, and that the stockholders were numerous and widely scattered and that it would be expensive, time-consuming, and impossible to reach them.

Section 23(b) Federal Rules of Civil Procedure, Title 28, United States Code, provides in effect that as a condition precedent to the bringing of a stockholder's derivative action his complaint must allege "* * * the efforts of the plaintiff to secure from the managing directors or trustees and, if necessary, from the shareholders, such action as he desires, and the reasons for his failure to obtain such relief or the reasons for not making such efforts." We think the allegations with reference to his failure to obtain relief within the corporation quite inadequate. Heinz v. National Bank of Commerce, 8 Cir., 237 F. 942; Stone v. Holly Hill Fruit Products, 5 Cir., 56 F.2d 553; Haffer v. Voit, 6 Cir., 219 F.2d 704. In Heinz v. National Bank of Commerce, supra, in referring to the failure of the plaintiff to exhaust his remedy within the corporation, we said 237 F. 949:

"The matter would be one preeminently for the consideration of the stockholders as a body, and the objection of the plaintiff to the pension fund plan should first have been brought to the attention of that body for redress of any wrong that he claims to have suffered. This is not an emergency suit, and no irreparable injury is threatened. Indeed, the wrong, if any, was committed long prior to the commencement of the suit. * * * It is not shown that any attempt was made to bring the matter to the attention of the stockholders at this meeting, and no showing is made why this was not done. The record does not show that any attempt was made to bring about action by the stockholders in regard to the matter, or to call it to their attention. * * * There is no showing that the directors hold or have ever held a controlling, or even a large, interest in the stock of the bank. * * * There is no showing that any of the stockholders were antagonistic to the bringing of such suit, or that the interests of the other stockholders were in any way antagonistic to the interest of the plaintiff."

What is said in Haffer v. Voit, supra, points out the inadequacy of the excuse offered by the plaintiff for not seeking redress through the stockholders. In the course of that opinion it is said 219 F.2d 705:

"* * * plaintiffs made no earnest and honest effort to secure from the stockholders such action as they desired, Cf. Rule 23(b) Rules of Civil Procedure, 28 U.S.C.A.; Long v. Stites, 6 Cir., 88 F.2d 554; * * plaintiffs\' explanation that they made no effort to secure such action from the stockholders upon the ground, among others, that they were widely scattered and that there would be expense and delay incident to such demand, is legally insufficient."

What is said in Stone v. Holy Hill Fruit Products, supra, is here peculiarly apposite. It is there said, inter alia 56 F.2d 554:

"If it had been distinctly alleged that all four of the directors who are joined as defendants were so involved as to make application to them obviously futile, there should have been an effort made through the stockholders to control or supplant them. It is not alleged that there is any wrong combination of a majority of the stockholders, but only that they live at a distance, are ignorant of the situation,

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