A stockholder of a corporation, in order to protect its rights
and property against the threatened action of a third party, filed
his bill against the latter and the corporation alleging,
inter
alia, that the directors, although thereunto requested, had
neglected and refused to institute proceedings.
Held that
he must show a clear case of such absolute and unjustifiable
neglect and refusal of the directors to act as would lead to his
irreparable injury should he not be permitted to bring the suit.
Hawes v. Oakland, 104 U. S. 450,
cited upon this point and approved.
The facts are stated in the opinion of the Court.
Page 106 U. S. 538
MR. JUSTICE FIELD delivered the opinion of the Court.
In December, 1871, the Mutual Gaslight Company of Detroit was
created a corporation under a general law of Michigan for the
purpose of manufacturing, selling, and furnishing gas for
consumption in Detroit. The proposed corporators had previously
made application to the common council to authorize the
corporation, when formed, to lay gas pipes, mains, conductors, and
service pipes in the avenues, streets, lanes, highways, alleys,
public parks, and squares throughout the city, and obtained the
passage of an ordinance granting permission to the company to lay
the pipes, subject, however, to certain conditions. Power was
conferred by law upon the city authorities to grant the permission
"upon such reasonable regulations as they might prescribe," and
they provided that the permission should cease if the company
should at any time combine with any other company concerning rates
to be charged for gas either to the city or to private consumers,
and that the company should not sell its property, franchises, or
privileges to any other gaslight company, under the penalty of a
forfeiture of its works to the city. The company accepted the terms
of the ordinance, erected its manufacturing works in the township
of Hamtramck, just beyond the boundary of the city, laid mains and
service pipes in the streets, and in November, 1872, commenced
distributing and supplying gas to private consumers and to the
city, and continued to do so up to the time this suit was
commenced.
During this period, and previously, another corporation, known
as the Detroit Gas light Company, was in existence and was also
supplying gas to private consumers and the city. In June, 1877, the
two companies entered into an agreement to divide the city between
them, one to take the part lying easterly of the middle of Woodward
Avenue and the other the part lying westerly of it, each to
transfer to the other its property situated in the portion of the
other, and each stipulating not to lay mains or to supply gas in
the portion of the other,
Page 106 U. S. 539
reserving, however, the right to fulfill all obligations resting
upon it with respect to any portion of the city. The difference in
the value of the property exchanged was $140,000 in favor of the
old company, and this sum the new company agreed to pay. The common
council, deeming this division of the city and other things done or
omitted by the company to constitute a breach of the conditions
upon which permission to lay its pipes in the streets had been
granted, passed on the 14th of December, 1877, an ordinance
repealing the previous one, reciting as reasons for it that the
company had not built its gas works in the City of Detroit, but in
the township of Hamtramck; that it had entered into an agreement
with the Detroit Gas light Company to divide the Territory of
Detroit between them for the supply of gas, and that it had refused
to lay mains in streets on petition of owners or occupants of
buildings for a supply of gas.
The repealing ordinance declared that the company had thus
forfeited its gas pipes, mains, conductors, and service pipes lying
within the avenues, streets, lanes, highways, alleys, public parks,
and squares of the city, and all other property situated within its
limits, and that the title to the whole had vested in the City of
Detroit. It therefore directed the comptroller to assume possession
and control of the same and to serve a copy of the ordinance upon
the company. To restrain the enforcement of this ordinance and
protect the rights and property of the company, the present suit
was commenced by the complainant, a citizen of New York. The
company had expended large sums of money in the construction of its
works, and created for that purpose a debt, represented by bonds
secured by mortgage upon its property, which, with interest,
amounted to $650,000. There was therefore an urgent necessity for
legal proceedings to stop the seizure of the property. There were
only three directors of the company, two of them residents of
Detroit and one of New York, and as the company could not maintain
a suit in the federal court against the city, they devised such a
case of refusal on their part to take the necessary legal
proceedings to protect the property and rights of the company as
to
Page 106 U. S. 540
give jurisdiction to the federal court of a suit brought for
that purpose by the nonresident director and stockholder. The three
directors discussed the matter among themselves. The president
represents himself to have been very belligerent in his
disposition. According to his statement, he professed not to want
any legal proceedings taken. He proposed to settle the matter by
force, and if any man attempted to take the property, to shoot him
on the spot. His feelings on the subject must have been very
intense, for more than two months afterwards he testified under
oath that he would "most assuredly" have shot any man who meddled
with him "as quick as wink;" as quick as he would have shot a
burglar in his house at midnight. Dean, the complainant, another
director, favored more pacific methods; he desired legal
proceedings to be instituted. The third director, Meddaugh, was
similarly disposed. He was a member of the bar of Michigan and
acting as one of the attorneys of the company. He favored legal
proceedings, but expressed a want of confidence in the local
tribunals of the state by reason of the then excited condition of
the public mind; he desired to get into the federal court, and so
he resolved in object to a suit in the state courts. A meeting of
the directors was thereupon improvised in his office to carry out
the course resolved upon. Dean then asked that the officers of the
company be instructed to protect its property and rights from the
execution of the threat contained in the repealing ordinance of the
city and for that purpose to bring suit in the proper court. The
matter being discussed, it was resolved:
"That the company, convinced of the improbability of obtaining
redress or justice in the local courts, which would be its only
recourse, in the present excited condition of the public mind --
the press of the city having for some time past continually
aggravated public feeling by exaggeration and falsehood -- cannot
prudently enter into a litigation with the city, and that no such
attempt on its part would now be made."
Dean voted against the resolution, the other two directors in
favor of it. The resolution having passed, Dean on the following
day commenced the present suit, alleging the refusal of the
directors to institute proceedings in the name of the company. The
bill was read in the presence of the three
Page 106 U. S. 541
directors, and one of them, Meddaugh, acted as a solicitor in
the case.
It is impossible to read the testimony of the president
contained in the record, with his hesitating and evasive answers to
the interrogatories of counsel, and not be convinced that the
refusal, which constituted the basis of the present suit, was made
for the express purpose of enabling a suit to be brought in a
federal court, and that no such refusal would have been given if
that result had not been desired. It was an attempt to get into the
federal court upon a pretense that justice was impossible in the
state courts, owing to the excited condition of the public mind.
The only party who could seek redress in a federal court, by reason
of his citizenship, was willing to trust the local courts, and if a
determination had not existed to force the controversy away from
them, we have no doubt that the other directors would readily have
agreed with him. The refusal to take legal proceedings in the local
courts was a mere contrivance, a pretense, the result of collusive
arrangement to create for one of the directors a fictitious ground
for federal jurisdiction. The case comes, therefore, within the
purview, if not the letter, of the provisions of sec. 5 of the Act
of March 3, 1875, c. 137, defining the jurisdiction of the circuit
courts of the United States. That section declares:
"That if, in any suit commenced in a circuit court or removed
from a state court to a circuit court of the United States, it
shall appear to the satisfaction of said circuit court at any time
after such suit has been brought or removed thereto that such suit
does not really and substantially involve a dispute or controversy
properly within the jurisdiction of said circuit court, or that the
parties to said suit have been improperly or collusively made or
joined, either as plaintiffs or defendants, for the purpose of
creating a case cognizable or removable under this act, the circuit
court shall proceed no further therein, but shall dismiss the suit
or remand it to the court from which it was removed, as justice may
require."
A single stockholder in a corporation has undoubtedly the same
right to institute legal proceedings against the corporation for
the protection of his individual rights that a third party, not a
stockholder, possesses, but when he resorts to such proceedings
Page 106 U. S. 542
to protect not simply such interests, but the property and
rights of the corporation against the action or threatened action
of third parties, thus assuming duties properly devolving upon its
directors, he must show a clear breach of duty on their part in
neglecting or refusing to act in the matter, amounting to such
grossly culpable conduct as would lead to irremediable loss to him
if he were not permitted to bring the matter before the courts. And
such neglect and refusal must not be simulated, but real and
persisted in after earnest efforts to overcome it. The opinion in
the case of
Hawes v. Oakland is full of instruction on
this head, and to it we refer for a statement of the law; we can
add nothing to its cogent reasoning.
104 U. S. 104 U.S.
450.
The decree of the court below must be reversed and the case
remanded with directions to dismiss the bill without prejudice to a
suit in the state courts, and it is
So ordered.