Stratton Massachusetts Gold Mines Co. v. Davis

CourtUnited States State Supreme Judicial Court of Massachusetts
Citation222 Mass. 549
Decision Date09 February 1916

November 4, 5, 1915.

Present: RUGG, C.


Corporation, De facto directors. Abatement. Rules of Court.

Persons assuming to act as the directors of a corporation, who represent a minority of the stockholders and never legally were elected directors, although they might be treated as de facto directors in transactions with third persons, have no authority to authorize counsel to bring a suit in the name of the corporation, which is without business or assets, in a factional controversy between rival boards of directors mainly for the purpose of affecting the property rights of the majority of the stockholders or of imposing a liability upon them; and in such a suit a plea in abatement alleging that the suit was brought in the name of the corporation without authority will be sustained.

Rule 3 of the Superior Court, providing that the declaration of an attorney that he has been authorized to appear for any party, when his authority is demanded, shall be evidence of such authority does not prevent the proof of an allegation made in a plea in abatement that the suit in which the plea was filed was brought in the name of the plaintiff without authority to do so.

W. D. Gray, for the plaintiff.

A. N. Hunt & C.

R. Darling, (R.

J. Lane with them,) for the defendant Davis and others.

F. N. Nay & D.

Stoneman, for the defendants Brown and another, filed a brief.

DE COURCY, J. This action of tort is brought in the name of a Colorado corporation to recover damages for alleged wrongful acts hereinafter stated. In at least three of the six counts the defendants are described as de facto directors or officers. At the date of the writ all but one of the original twenty-four were in fact stockholders, and that one had been counsel for the plaintiff in the earlier action against Nathaniel A. Stratton. Answers in abatement were duly filed by most of the defendants, setting up (among other matters) that "this action is brought without the authority, direction or consent of the plaintiff company, and that William Odlin, Esq., who assumes to appear and act as attorney for the plaintiff company in bringing this action, has no right or authority so to do." After a lengthy hearing in the Superior Court, on the pleadings, agreed facts and oral testimony, the answers in abatement were sustained. [*]

Before discussing the questions of law raised by the exceptions it is necessary to set out certain material facts. The certificate of incorporation of the plaintiff company, dated January 2, 1905, named eight directors, referred to as the "Stratton Board." Nathaniel A. Stratton was president, and five of the remaining seven were the present defendants Larkin L. Davis, Charles L. Sprague, Milo M. Comstock, Alfred Stickney and Frank A. Newman. At the stockholders' meeting on January 2, 1906, the so called "Sprague Board" of directors were elected, although there is an unexplained statement in the bill of exceptions that the legality of their election is contested. The defendants George D. Wheeler, Henry R. Johnson, Josiah H. Brown, Charles E. Tingley and said Davis, Sprague, Comstock and Newman constituted this board. Under their authority a bill in equity was brought, on April 10, 1906, in the name of the plaintiff corporation, against Nathaniel A. Stratton, the former president, to obtain the cancellation of an issue to him of its entire capital stock. In that suit Charles R. Darling, one of the present defendants, was counsel for the plaintiff, and William Odlin was counsel for Stratton. The decree for the defendant was affirmed in May, 1910. See Stratton Massachusetts Gold Mines Co. v. Stratton, 206 Mass. 117 . Meanwhile the defendant Charles L. Sprague brought an action of contract against the corporation in Colorado, obtained a judgment by default, and bid in all the property of the company at the execution sale. Later two stockholders, John W. Scott and Jacob Hauck, purporting to act under the Colorado statutes, issued a call for a stockholders' meeting, to be held at Buena Vista,

Colorado, on July 8, 1907. At that time and place H. W. Havens and one M. B. Carpenter assumed to hold the meeting and to elect the so called "Odlin" or "Scott Board" of directors, consisting of William Odlin, John W. Scott and six others. Under their authority the present action was instituted. At the trial in the Superior Court it was ruled that no quorum was present, as the necessary majority of the stock was not represented, and that "the directors assumed to have been elected were not legally elected but that they were de facto directors." To this ruling no exception was taken by the plaintiff. Hereinafter these are referred to as the de facto board of directors.

Since the meeting of July 8, 1907, above mentioned, so far as the record discloses no business has been carried on by or in the name of the corporation, unless we consider as such the litigation among the members. As already stated, all of its property had been bid in by Charles L. Sprague at the execution sale on his Colorado judgment, apparently in the autumn of 1906. This execution sale was set aside later. Subsequently, while the present suit was pending, Mr. Odlin brought an action in Colorado against the company for his services, obtained judgment in the sum of $17,500, and bought in all the property at the execution sale. His circular letter of September 25, 1912, offering the property to the stockholders for $25,000 seems to have elicited no response. A bill in equity brought against Mr. Odlin by several stockholders, to set aside this judgment, was dismissed.

The only activities of the de facto board before the bringing of this suit apparently were the holding of two meetings. At that of July 22, 1907, John W. Scott was elected president, and William Odlin general manager; and votes were passed to authorize legal proceedings, especially to set aside the Sprague judgment in Colorado. At the meeting of June 1, 1910, it was voted to authorize a suit in the name of the company for injury done to it by the bringing of the action against Stratton, already referred to, and to authorize also a suit against Charles L. Sprague for an accounting of his transactions while "unlawfully" acting as an officer of the company.

Turning now to the declaration in the present action: The first count is for the alleged unlawful bringing of the suit against Stratton; the second sounds in conspiracy and is based on the alleged malicious suit of Charles L. Sprague in Colorado; the third is for alleged negligence of the defendants while "unlawfully but in fact the directors," in failing to do the development work required by the mining laws of the United States; the fourth is for breach of contract by the defendants, "being then in fact the directors," in failing to carry out a contract dated November 7, 1905, whereby Stratton was to turn over twenty thousand shares of his stock, to be sold by the company for their and his benefit; the fifth count is for unlawfully paying out of the treasury of the company "a large sum of money, to wit, $5,000;" and the sixth count charges the defendants with acting "unlawfully as de facto officers," conspiring to wreck the company in violation of their duty as such officers, and with taking all its property for themselves, without compensation.

In view of the trial judge's finding for the defendants on the answer in abatement, the controlling question in the case is whether the de facto board of directors were authorized as matter of law to institute and maintain this action. For the purpose of the discussion we assume in the plaintiff's favor that this broad question is open to it under its exceptions to the action of the judge, in giving the tenth, eleventh and twelfth rulings [*] requested by the defendants. And first we shall consider the question of the original authority to institute the action, leaving for later discussion the question of subsequent ratification by the corporation.

The general proposition is not questioned, that the acts of de facto directors of a private corporation are valid as to third persons. Where persons having color of title are permitted by the corporation to act in the position and with the reputation of being directors, third persons who deal with them in ignorance of their want of legal right to the offices are entitled to assume that there is no defect in their appointment. Merchants' National Bank of Gardiner v. Citizens' Gas Light Co. of Quincy, 159 Mass. 505. Mining Co. v. Anglo-Californian Bank, 104 U.S. 192. Brinkerhoff v. Jersey City, 35 Vroom, 225. Baird v. Bank of Washington, 11 Serg. & R. 411. Ann. Cas. 1913 C note page 1042. Nor can such third person collaterally show the illegality of the election of the de facto officers, where no other persons are claiming a right to act as directors, and the incumbents are exercising the usual functions of the office. Charitable Association in Middle Granville v. Baldwin, 1 Met. 359. See Clark v. Easton, 146 Mass. 43; 7 R.C.L. Section 424, and cases cited.

The reason of this rule is stated by Butler, C. J., in the leading case of State v. Carroll, 38 Conn. 449, 467, as follows "The de facto doctrine was introduced into the law as a matter of policy and necessity, to protect the interests of the public and individuals, where those interests were involved in the official acts of persons exercising the duties of an office, without being lawful officers. It was seen . . . that the public could not reasonably be compelled to inquire into the title of an officer, nor be compelled to show a...

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