Word v. Union Bank & Trust Co.

• Decision Date: 08 July 1940
• Docket Number: 8065.
• Citation: 107 P.2d 1083,111 Mont. 279
• Parties: WORD v. UNION BANK & TRUST CO. et al.
• Court: Montana Supreme Court

107 P.2d 1083

111 Mont. 279

WORD v. UNION BANK & TRUST CO. et al.

No. 8065.

Supreme Court of Montana

July 8, 1940

Rehearing Denied Dec. 7, 1940.

Appeal from District Court, First District, Lewis and Clark County R. H. McHugh, Judge.

Action by Augusta J. Word against Union Bank & Trust Company, a corporation, and others, for breach of defendant's obligation to wind up affairs of an insolvent corporation. From an adverse judgment, plaintiff appeals.

Reversed and remanded, with directions.

Robert L. Word, Jr., of Helena, and Geo. E. Hurd, of Great Falls for appellant.

Gunn Rasch, Hall & Gunn, of Helena, for respondents.

ERICKSON Justice.

This appeal is from a judgment entered in favor of the defendants after a demurrer to the plaintiffs' second amended complaint had been sustained. The question before us is the correctness of the trial court's ruling on the demurrer.

The allegations of the complaint set out the following:

That the Beaverhead Ranch Company was incorporated under the laws of this state in 1907 and its charter expired in the year 1927, at which time Lewis Penwell, C. B. Witter, H. H. Pigott and Mathias Staff were four of the five qualified directors that ever since the dissolution they have been and now are trustees of the property and assets of said company for its creditors and stockholders solely for the purpose of settling and liquidating its affairs; that at the time of the dissolution and ever since the plaintiff was the owner of 50 shares of capital stock of said dissolved corporation and the owner of two bonds of the value of $500 each; that after dissolution the individual defendants, as trustees for the creditors and stockholders, borrowed money from the defendant bank and invested the money in the purchase of sheep, in violation of their trust and that the investment resulted in a loss, whereby the value of the stock and bonds of the plaintiff was destroyed; that the money was loaned pursuant to a conspiracy between the bank and the individual defendants, which had for its purpose the acquisition of all the property of the corporation by or for the bank; that in May, 1934, defendant Pigott was appointed receiver of the assets and property of the dissolved corporation.

The gist of the plaintiffs' cause of action is the breach of the obligation to wind up the affairs of the corporation under the duty imposed by section 6011, Revised Codes; instead of doing this it is alleged in effect that the trustees branched out into further business enterprise and thereby caused the trust estate to become insolvent. Judgment is sought against the defendants personally and plaintiff does not seek any remedy against the corpus of the trust estate.

The grounds of the demurrer are that (1) the complaint does not state facts sufficient to state a cause of action, and (2) that there is a defect of parties plaintiff for the reason that the action cannot be maintained except by or through the corporation, or on behalf of all stockholders and creditors.

The argument of the defendants in support of the demurrer is contained in the following excerpt from their brief: "It will be noted that the plaintiff and appellant bases her right of recovery solely on the allegation that she is a stockholder and a creditor. She does not allege or claim that she has suffered any damage except the depreciation of the value of her stock and bonds and the wrongs complained of had the same effect upon the value of all of the stock and the claims of all of the creditors."

Many cases are cited by defendants in support of the rule that an individual stockholder cannot maintain a suit of this character for the reason stated in 3 Fletcher on Corporations, section 1282: "Individual stockholders cannot sue the officers at law for damages on the theory that they are entitled to damages because the mismanagement has rendered their stock of less value or worthless, since the injury is, in law, not to them individually, but to the corporation--to the stockholders collectively." See Niles v. New York Central & H. R. R. Co., 176 N.Y. 119, 68 N.E. 142; Gary v. Matthews, 148 S.C. 125, 145 S.E. 702; Converse v. United Shoe Machinery Co., 185 Mass. 422, 70 N.E. 444; Hayden v. Perfection Cooler Co., 227 Mass. 589, 116 N.E. 871; Seitz v. Michel, 148 Minn. 474, 181 N.W. 106; Roscower v. Bizzell, 199 N.C. 656, 155 S.E. 558; Backus-Brooks Co. v. Northern Pac. R. Co., 8 Cir., 21 F.2d 4. But compare McConnell v. Combination Mining & Mill. Co., 30 Mont. 239, 76 P. 194, 104 Am.St.Rep. 703; and Id., 31 Mont. 563, 79 P. 248; and Moss v. Goodhart, 47 Mont. 257, 131 P. 1071. All of the cases cited deal with a corporation which has retained its legal entity.

Since the facts in this case involve a dissolved corporation, it becomes unnecessary to determine whether the complaint would be sufficient as against a going concern. We deal only with the directors of a dissolved corporation. On this question we are impressed by the rule set out in the following cases:

After reciting the general rule, the federal court thus said: "When, however, a corporation ceases to be a going concern and a receiver is appointed, all rights of the corporation vest in the receiver. Porter v. Sabin, 149 U.S. [473] 475, 13 S.Ct. 1008, 37 L.Ed. 815. By the same token upon the dissolution of a corporation, the trustees at the time of the dissolution shall be trustees of the creditors and stockholders (section 3707, Rem. & Bal.Code), 'and shall have full power and authority to sue for and recover the debts and property of the corporation.' Upon dissolution of the corporation, the corporate entity ceased. The corporation has no power to sue. All rights of the corporation are ended, and the property and funds of the corporation are vested in the trustees for the stockholders. All debts are paid, it is alleged. The trustees are trustees not of the corporation, but by operation of statute, of the individual stockholders, to the extent of the interest of the stockholder in the fund or property. If the trustee is guilty of wrongdoing, the remedy of the stockholder cannot be through the corporation because it has no entity." Denman v. Richardson, D.C., 284 F. 592, 593, certiorari denied 266 U.S. 619.

In the case of McClean v. Bradley, D.C., 282 F. 1011, 1016, affirmed, 6 Cir., 299 F. 379, certiorari denied 266 U.S. 619, 45 S.Ct. 98, 69 L.Ed. 471, the court said: "At the outset we are met by defendants' insistence that this action is one brought in the right of the corporation, that it is what is known as a derivative action, and that in such an action the corporation itself is an indispensable party. This doctrine was held inapplicable by Judge Cooper in the companion case of Gardiner v. Automatic Arms Co. [D.C.], 275 F. 697. When the franchise of the corporation was revoked by the state of New Jersey, by the laws of that state the members of its last board of directors, which included Bradley, Calfee, and Cowles, became trustees for the settlement and determination of its affairs. It was their duty to get in the outstandings, reduce them to cash, pay the creditors, and distribute the balance, if any, to the stockholders. No creditor now complains. Any assets in the hands of the trustees are not for the corporation, as such, but for the stockholders, subject to the claims of the creditors. Any sum recovered would not pass to the treasury of this corporation, but to the corpus of the trust estate [the suit being one in equity to set aside a sale of the corporate patents and for an accounting of the profits made thereby]. The stockholders, therefore, sue in their own right, not in the right of the corporation. Under such circumstances, there would seem to be no necessity of making the defunct corporation a party, or of allowing the administration of justice to be defeated by the impossibility of getting it and the other defendants [other stockholders] into the same court anywhere. Therefore it is thought that the well-settled principle that, when stockholders sue in the right of the corporation, it must be made a party (Davenport v. Dows, 85 U.S. 626, 21 L.Ed. 938) has no application to this case (Southern Pacific Co. v. Bogert, 250 U.S. 483, 488, 39 S.Ct. 533, 63 L.Ed. 1099; Ervin v. Oregon Ry. & Navigation Co. (C.C.), 20 F. 577; Stearns Coal & Lumber Co. v. Van Winkle [6 Cir.], 221 F. 590, 137 C.C.A. 314). Consequently the case is to be considered upon its merits." Compare Watts v. Vanderbilt, 2 Cir., 45 F.2d 968.

Assuming that trustees under section 6011, Revised Codes (the amendment of Chapter 198, Laws 1937, not affecting this case) are subject to the same rules as in the case of an ordinary trustee, may they be sued individually and not in their trust capacity in tort by the beneficiaries of the trust, and if so may one of the beneficiaries bring suit alone for his damage?

65 Corpus Juris, p. 1008, states, "Where there has been a breach of trust or where trust property has been misappropriated, one beneficially interested may at his election bring an action either at law or equity." There are numerous citations of authorities of which many cases allow damages for conversion--a tort.

As to the specific nature and extent of liability (65 C.J. 661, § 525) the following statement is made: "A trustee is not personally liable in a suit to enforce a trust if he has acted in good faith in executing it; but he is personally liable to the cestui que trust for any loss or damage occationed to the trust fund or property by a violation of his trust, and this liability, where more than one trustee participates in the breach of trust, is both joint and several. Thus a trustee is personally liable for a loss occasioned by his improperly disposing of the trust property or wrongfully distributing or...