Winter v. Farmers Educational and Co-op. Union of America, 37991

• Decision Date: 06 January 1961
• Docket Number: No. 37991,37991
• Citation: 107 N.W.2d 226,259 Minn. 257
• Court: Minnesota Supreme Court
• Parties: Carl WINTER et al., Respondents, v. FARMERS EDUCATIONAL AND COOPERATIVE UNION OF AMERICA (Minnesota Division), Defendant, (John C. Erp) Rozella Hendrickson, Spec. Admrx. of Estate of John C. Erp, deceased, substituted as appellant, Appellant.

Page 226

107 N.W.2d 226

259 Minn. 257

Carl WINTER et al., Respondents, v. FARMERS EDUCATIONAL AND COOPERATIVE UNION OF AMERICA (Minnesota Division), Defendant (John C. Erp) Rozella Hendrickson, Spec. Admrx. of Estate of John C. Erp, deceased, substituted as appellant, Appellant.

No. 37991.

Supreme Court of Minnesota.

Jan. 6, 1961.

Rehearing Denied Feb. 3, 1961.

Syllabus by the Court

1. Objections which go merely to the form of the pleading are waived and cannot be urged for the first time on appeal. They must be first raised in the court below. However, if there is a complete failure to state a claim upon which relief can be granted, the defect is regarded as a fundamental one which may be raised for the first time in the appellate court.

2. Appellate courts do not view with favor the objection that a complaint fails to state a claim upon which relief can be granted when such objection is made for the first time on appeal. Such objection, even though it might be fatal to the complaint if properly made in the court below, becomes relative when raised for the first time in an appellate court. The pleading will be viewed as part of the entire record and will not be subject to the same scrutiny as if it had been attacked on motion in the court below. If the pleading is good after verdict or sufficient to bar another action for the same cause and if by fair and reasonable inferences a cause of action can be spelled out of the matters pleaded, a construction which will sustain the pleading is favored.

3. Under new Rules of Civil Procedure pleadings are to be liberally construed and a claim for relief examined to determine if it gives fair notice of the claim asserted and permits the application of res judicata.

4. The record supports the conclusion that there was sufficient compliance with conditions precedent required by Rule 23.02 relating to efforts to secure action to protect the interests of the corporation by its managing directors. In light of the negligence and indifference of the members of the board of directors and the influence and position of the wrongdoer, who was president of the corporation, the individuals and directors who are plaintiffs in this action were warranted in proceeding in behalf of the corporation without a further formal demand.

5. A corporation alone has standing to sue for actionable wrongs committed against it. Ordinarily demand should be made on the board of directors unless the wrongdoers constitute a majority of the board, and a demand should be made on the shareholers unless they are powerless to ratify the wrong alleged or unless the majority of their number is interested. The requirement of demand upon the managing directors and shockholders is important in that it gives the management of the corporation an opportunity to consider tha merits of the dispute and to determine, in the interests of the corporation and shareholders, whether it might be disposed of without the expense and delay of litigation. The demand requirement as a condition precedent to a shareholder's suit is not lightly to be dispensed with. Such a demand, however, is not required where it is plain from the circumstances that it would be futile.

6. The individual defendant is not now in a position to urge on appeal an error growing out of a judgment which it is now claimed was based upon an incorrect theory when such theory was his own selection and adopted by the trial court at his request. Since the underlying issue was fully litigated and determined and the principles of res judicata may be applied, the defendant cannot claim that he is prejudiced because he might have raised a different issue in the court below.

R. M. Saltness, Dawson, for appellant.

Charles A. Swenson, Atwater, for respondents.

MURPHY, Justice.

This is an appeal from a judgment entered in a secondary action by stockholders. The trial court made an award in favor of the plaintiffs for the benefit of the corporation requiring the individual defendant, its president, to reimburse the corporation for sums withdrawn. We are concerned here with whether, upon the particular facts of this case, the objection that the complaint fails to state a cause of action may be raised for the first time on appeal.

The Farmers Educational and Cooperative Union of America (Minnesota Division) was incorporated in 1929 as a nonprofit, nonstock association pursuant to G.S.1913, c. 58, M.S.A. § 300.01 et seq., and acts amendatory and supplementary thereto. The general purpose of the association was to promote the interests of agriculture by improving methods of production and distribution along cooperative lines. The defendant John C. Erp was one of the incorporators and was its first president. He held that office until his death, which occurred subsequent to the trial of this action in 1958. It appears that during all this time he was the dominating spirit in the corporation. Two of the plaintiffs are directors of the corporation and the other seven are members. They seek by this action to recover for the corporation the sum of $3,551.23, which they contend Erp has wrongfully appropriated to his own use. Erp admitted that he had withdrawn this sum from the corporate funds but alleged that it belonged to him as back salary.

Much of the record deals with the circumstances under which this money came into the hands of Erp. The evidence is unsatisfactory as to the agreements between Erp and the corporation with reference to his compensation. It appears that the corporation reached its greatest growth in 1930, when it had a membership of over 4,000. At that time it was affiliated with a national cooperative organization. It lost its charter with that group in 1938, and from then on its fortunes declined until in 1951 it had but three dues-paying members and none in 1954. The money in question came into the hands of the defendant Erp legally. It represented part of the proceeds of a settlement involving patronage dividends due from another cooperative. With the approval of the directors, the money was deposited in a bank in Erp's hometown under the name 'Farmers Educational and Co-operative Union of America (Minnesota Division), John C Erp, President.' He appropriated this fund to his own use by 10 withdrawals made during the period of 2 years from May 24, 1950, to May 27, 1952. In 1953 the propriety of these withdrawals was discussed at a directors' meeting. With reference to this meeting, the defendant Erp testified:

'That is the meeting I called. Well, I was asked to call it, yes. At that same meeting that you're referring to, the question of this money that was placed in the bank, and the disposition of that money came up, and I told them that I had checked out on it, and I told them if they wanted to recover that, they'd have to sue for recovery, and that I wouldn't give up without a suit. And at that same meeting, Mrs. (Oelke) protested, and said before we go to a law suit to deprive him of his back pay, I'm not going along with that law suit, she said, count me out.'

The complaint alleged the interests of the individual plaintiffs; the wrongful appropriation of corporate funds to the defendant's personal use; the fact that the question of 'restoration of the funds withdrawn, without authority,' was brought to the attention of the board of directors; that they failed to take action to recover the money for the corporation; and that the action was brought by the plaintiffs in their own behalf and 'on behalf of and for the benefit of * * * Farmers Educational and Co-operative Union of America (Minnesota Division), one of the Defendants herein, and in behalf of all other Members of said Defendant Corporation.' Defendant Erp's answer alleged that the corporation was indebted to him 'in the sum of $25,550.00 for salary due and owing * * * as President of said corporation' and that he 'retained the sum of $3,500.00 * * * and applied the same as a credit against said salary due and owing.' He apparently admitted that the propriety of the withdrawal of these funds was brought to the attention of the board of directors but alleged that he 'then and there advised said Board of Directors that he did not intend to repay said sum to defendant corporation.' He further asserted that the corporation was indebted to him in the sum of $35,198.77 and alleged a counterclaim in that amount.

Although it is apparent from the record that a substantial part of the back-salary claim was for work periods in the 1930's and early 1940's, the plaintiffs did not interpose a reply alleging the statute of limitations as an affirmative defense.

After trial the court found that without authority of the board of directors and without knowledge and consent of its other members or officers the defendant Erp withdrew from the funds of the corporation the sum of $3,551.23 and that he was indebted to the corporation in that amount. The court further found that the corporation was not indebted to the defendant Erp and that he was not entitled to a set-off or counterclaim against the corporation. This particular finding is supported by the record. The judgment provides:

'That the Defendant, Farmers Educational and Co-operative Union of America (Minnesota Division), a Corporation, have Judgment against, and recover of, the Defendant, John C. Erp, the sum of Three Thousand Five Hundred Fifty-one Dollars and Twenty-three Cents ($3,551.23), with Interest * * *.'

No motion for amended findings or a new trial was made by the defendant Erp but he appealed from the judgment. By his assignment of error, the defendant Erp contends that this is a secondary action by shareholders provided for by Rule 23.02 of Rules of Civil Procedure and, since the complaint does not set forth with particularity the conditions precedent for such an action, the complaint does not state a claim upon which relief can be granted. That rule, which is a restatement of a long-recognized rule of equity,...