Squair v. Lookout Mountain Co.

• Decision Date: 17 June 1890
• Citation: 42 F. 729
• Parties: SQUAIR v. LOOKOUT MOUNTAIN CO. et al.
• Court: U.S. District Court — Eastern District of Tennessee

42 F. 729

SQUAIR v. LOOKOUT MOUNTAIN CO. et al.

United States Circuit Court, E.D. Tennessee, Southern Division.

June 17, 1890

KEY, J.

The complainant alleges that he is a stockholder in the Lookout Mountain Company; that said company was organized as a statutory real-estate and immigration corporation under the laws of Tennessee, with a capital stock of $1,000,000, but that only $600,000 of said stock were subscribed for; that about 700 acres of land were purchased by the company upon the top and sides of Lookout mountain, valued at $600,000. Books for the subscription of stock were opened, and $600,000 of the stock only was authorized to be subscribed for and issued, but the remaining $400,000 of the stock has never been subscribed for or issued. It is further alleged that the individual defendants are seven of the nine directors of the company, and that they hold a majority of the stock of the company. Complainant avers that he is the owner of 143 shares of the stock of the company, each share being $100; that 133 of these shares were transferred to him July 14, 1887; that on the 28th of July, 1887, the other defendants, by some fraudulent and unauthorized scheme or contrivance, undertook to transfer and issue to the Chattanooga & Lookout Mountain Railway Company the $400,000 of stock in the Lookout Mountain Company which had not been subscribed for. It is charged that those defendants intended at the time this stock was so issued and donated to become stockholders in the Chattanooga & Lookout Railway Company, and that they did become such, and become seven of the railway company's nine directors, so that this stock is now claimed by these defendants, who it is alleged constitute a majority of the directors, and own a majority of the stock in both corporations. The Chattanooga & Lookout Mountain Railway Company is a Tennessee corporation, and the defendants are citizens of Tennessee. The complainant is a citizen of Ohio and alleges that he had no notice of these transactions until May 28, 1890. The present matter for consideration is whether an injunction shall issue restraining any transfer or incumbrance of the stock. Defendants insist that this court has no jurisdiction of the cause, and that, so far from an injunction being awarded, the bill should be dismissed.

The first question with which we are confronted does not arise upon the merits of the case made in the bill, but whether the allegations of the bill are such as are necessary to invest this court with jurisdiction of the case. Rule 94 prescribed by the supreme court for equity proceedings in this court says:

'Every bill brought by one or more stockholders in a corporation against the corporation and other parties, founded on rights which may properly be asserted by the corporation must be verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains, or that his share had devolved on him since by operation of law, and that the suit is not a collusive one, to confer on a court of the United States jurisdiction of a case of which it would not otherwise have cognizance. It must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action.'

In Hawes v. Oakland, 104 U.S. 460, 461, the court says:

'To enable a stockholder in a corporation to sustain in a court of equity, in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff, there must exist, as a foundation of the suit, some action or threatened action of the managing board of directors or trustees of the corporation, which is beyond the authority conferred on them by their charter or other source of organization; or such a fraudulent transaction completed or contemplated by the acting managers in connection with some other party, or among themselves, or with other shareholders, as will result in serious injury to the corporation, or the interests of the other shareholders; or where the board of directors or a majority of them are acting for their own interest in a manner destructive of the corporation itself, or of the rights of the other shareholders; or where the majority of shareholders themselves are oppressively and illegally pursuing a course in the name of the corporation which is in violation of the rights of the other shareholders, and which can only be restrained by the aid of a court of equity. * * * But, in addition to the existence of grievances which call for this kind of relief, it is equally important that, before the shareholder is permitted in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain within the corporation itself the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated, effort with the managing body of the corporation to induce remedial action on their part, and this must be made apparent to the court. If time permits or has permitted, he must show, if he fails with the directors, that he has made an honest effort to obtain action by the stockholders as a body in the matter of which he complains. And he must show a case, if this is not done, where it could not be done, or it was not reasonable to require it. The efforts to induce such action as complainant desires on the part of the directors and of the shareholders, when that is necessary, and the cause of failure in these efforts, should be stated with particularity.'

The decision and the rule predicated upon...