Watts v. Vanderbilt

• Citation: 45 F.2d 968
• Decision Date: 15 December 1930
• Docket Number: No. 169.,169.
• Parties: WATTS et al. v. VANDERBILT.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

45 F.2d 968 (1930)

WATTS et al. v. VANDERBILT.

No. 169.

Circuit Court of Appeals, Second Circuit.

December 15, 1930.

Isidor Unger, of New York City, for appellants.

Leo Levy, of New York City (Merritt Lane and David Stoffer, both of Newark, N. J., of counsel), for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge (after stating the facts as above).

Equity Rule 27 (28 USCA § 723) requires a shareholder's representative suit to 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, or the reasons for not making such effort." The bill is silent as to any efforts by the plaintiffs to procure the corporation to bring suit for the redress of its wrongs. If the allegations that the board of directors has not functioned for the past five years and that there is no existing board of directors be sufficient to excuse a demand upon the directors, it would but emphasize the necessity of demanding action on the part of the shareholders. Under the New Jersey statutes (2 Comp. St. N. J. 1910, title, "Corporations," p. 1629, § 46) three shareholders may call a meeting in the manner there provided. If there is no board of directors, as the bill alleges, an appeal to the shareholders to elect directors or other officers to conduct the litigation was a condition precedent to the plaintiffs' right to represent the corporation. See Hawes v. Oakland, 104 U. S. 450, 461, 26 L. Ed. 827; Taylor v. Holmes, 127 U. S. 489, 492, 8 S. Ct. 1192, 32 L. Ed. 179; United Copper Co. v. Amalgamated Copper Co., 244 U. S. 261, 264, 37 S. Ct. 509, 61 L. Ed. 1119; Heinz v. Nat. Bank of Comm., 237 F. 942 (C. C. A. 8); Macon, D. & S. R. Co. v. Shailer, 141 F. 585, 591 (C. C. A. 5). No excuse is offered for the failure to make such an appeal during the five years since the corporation's cause of action arose, although during all this time the board of directors had not functioned. It is alleged that defendant Vanderbilt dominated and controlled the corporation, but the allegation as to his ownership and control of stock is merely that he is "a substantial holder" of common and preferred shares. In the light of the cases above cited, the insufficiency of the bill in respect to any efforts of the plaintiffs to procure action by the shareholders is ample justification for dismissal of the bill.

But the plaintiffs now contend that Alexander Morrison & Co. was not an indispensable party, although the contrary was apparently admitted in the court below. This contention is based upon the fact that on January 28, 1928, the corporation was dissolved by proclamation of the Governor of New Jersey for default in payment of taxes. Such dissolution was not alleged in the bill, and is first asserted in appellants' reply brief, with a reference to page 828 of the official publication of the 1928 Laws of New Jersey, where the proclamation appears. The argument assumes that we may take judicial notice of this proclamation, as we may of state statutes and judicial opinions. Vagaszki v. Consol. Coal Co., 225 F. 913, 915 (C. C. A. 2). But, if this assumption be accepted, the appellants' position is not made better, for reasons now to be stated.

Under the statutes of New Jersey (2 Comp. St. N. J. 1910, title "Corporations," pp. 1634-1637, §§ 53-60), upon dissolution, corporate existence is continued for the purpose of prosecuting and defending suits, and of liquidation (section 53); the directors are made liquidating trustees for creditors and shareholders (section 54); they have authority to sue in the name of the corporation, and are suable by the same name, or in their own names (section 55); the Court of Chancery, on application of any creditor or shareholder, may continue the directors as such trustees, or may appoint a receiver with power to prosecute and defend suits and to liquidate the corporate affairs (sections 56-58); pending suits do not abate upon dissolution, but judgment shall not be thereafter entered without notice to the trustees or receiver (section 59). These provisions apply to a dissolution proclaimed for nonpayment of taxes as well as to dissolutions otherwise brought about. American Surety Co. v. Great White Spirit Co., 58 N. J. Eq. 526, 43 A. 579; Harris-Woodbury Lumber Co. v. Coffin, 179 F. 257, 263 (C. C. W. D. N. C.). Hence, if we may take notice that Alexander Morrison & Co. was a dissolved corporation when the present suit was begun, it is apparent that discretion as to asserting the rights of the dissolved corporation was lodged in its liquidating trustees; or, if the allegation that there is no existing board of directors be deemed sufficient to deny that there are liquidating trustees, then the discretion as to suit rested in a receiver to be appointed and instructed by the Court of Chancery of New Jersey upon application of a creditor or shareholder. Whether the fact of dissolution might excuse the plaintiffs from seeking action by shareholders of the corporation, we need not say (cf. Taylor v. Holmes, 127 U. S. 489, 492, 8 S. Ct. 1192, 32 L. Ed. 179); in any event it would not excuse a demand upon the liquidating trustees, if there were such (Taylor v. Holmes, supra; General Electric Co. v. West Asheville Imp. Co., 73 F. 386, 388 C. C. W. D. N. C.); and, if there were no liquidating trustees, we can see no reason why the plaintiffs should not be required to resort to the statutory remedy, which provides a receiver as a substitute for such trustees, before they undertake to represent the corporation whose corporate life is continued for purposes of enforcing its causes of action (cf. Quinton v. Equitable Inv. Co., 196 F. 314 C. C. A. 9).

The cases relied upon by appellants are McClean v. Bradley, 282 F. 1011 (D. C. N. D. Ohio); Gardiner v. Automatic Arms Co., 275 F. 697 (D. C. N. D. N. Y.); Ervin v. Oregon Ry. & Nav. Co., 20 F. 577 (C. C. S. D. N. Y.). None of them discusses whether after dissolution a demand upon the liquidating trustees is a prerequisite to assertion by a shareholder of the corporation's right of action against a tort-feasor; but it must be conceded that they contain language to the effect that a dissolved corporation is not an indispensable party in a shareholder's suit. If neither it nor its liquidating trustees need be brought in, there can, of course, be no necessity for demanding that they bring the suit. In McClean v. Bradley, the wrong complained of was...