In Doctor v. Harrington, supra, [ 196 U.S. 579, 25 S.Ct. 357] the Supreme Court said — "The ultimate interest of the corporation made defendant may be the same as that of the stockholder made plaintiff; but the corporation may be under a control antagonistic to him, and made to act in a way detrimental to his rights.Summary of this case from Smallen v. Louisville Fire Marine Ins. Co.
Submitted January 25, 1905. Decided February 20, 1905.
The presumption of law that stockholders are deemed to be citizens of the State of the corporation's domicil must give way to the actual fact proved that complainant is a citizen of a different State from the corporation, and in such a case the stockholder, if other conditions of jurisdiction exist can bring his suit against the corporation in the Circuit Court of the United States. The ninety-fourth rule in equity contemplates and provides for a suit brought by a stockholder against the corporation and other parties on rights which may be properly asserted by the corporation, and when such a suit is between citizens of different States and is not collusive, but the corporation is controlled by interests antagonistic to complainant, it involves a controversy which is cognizable in a Circuit Court of the United States, and the defendant corporation is not to be classed on the same side of the controversy as complainant for the purpose of determining the diversity of citizenship on which the jurisdiction of the Circuit Court must rest.
Mr. Charles A. Hess for appellants:
There is diversity of citizenship between complainants and defendants, the former being citizens of New Jersey and the latter of New York.
Appellees' contention that appellants are estopped or debarred from asserting the actual facts as to diversity of citizenship because stockholders are presumed to be citizens of the same State as the corporation, may on its face be good reasoning, but it is based entirely on a legal fiction, which has been indulged for the purpose of enabling the Federal courts to exercise jurisdiction over corporations. Legal fictions, however, are not always carried out to their logical conclusion, and this court has entertained jurisdiction in numerous instances, where precisely the same state of facts existed as in the present case. Among the more important precedents are the following: Dodge v. Woolsey, 18 How. 331; Hawes v. Oakland, 104 U.S. 450; Quincy v. Steel, 120 U.S. 241; Pollock v. Farmers' L. T. Co., 157 U.S. 429; Cotting v. Kansas City Stock Yard Co., 183 U.S. 79; Utah-Nevada Co. v. DeLamar, 133 F. 113.
Even though complainants are seeking to maintain this action in the right of the Sol Sayles Company, in view of the trend of authority that fact is not entitled to weight as against the circumstances that such company is in fact a defendant. De Neufville v. N.Y. Northern Ry. Co., 81 F. 10, 13.
Mr. Philip J. Britt and Mr. John J. Adams for appellees:
There is no such diversity of citizenship between the complainants and defendants as is required under the Federal statutes. Complainants sue, not in their own right, but as stockholders of the Sol Sayles Company, and are, therefore, to be conclusively presumed, for purposes of jurisdiction, to be citizens of New York. See also rule 94 in equity.
The action is brought in the right of the corporation. Davenport v. Dows, 18 Wall. 626; Dewing v. Perdicaris, 96 U.S. 197; Porter v. Sabin, 149 U.S. 473; Dickerman v. Northern Trust Co., 176 U.S. 188; Alexander v. Donohoe, 143 N.Y. 203; Flynn v. Brooklyn City R.R. Co., 158 N.Y. 493. As to different classes of stockholders' actions and where the damages belong to the corporation and not to individual stockholders see Niles v. N.Y.C. H.R.R. Co., 176 N.Y. 119; Smith v. Hurd, 12 Metc. 371; Allen v. Curtis, 26 Conn. 456. As to the status of corporations as citizens and the stockholders being of the same State as that under whose laws the corporation is organized see Bank of U.S. v. Deveaux, 5 Cranch, 61; Hope Ins. Co. v. Boardman, 5 Cranch, 57; Sullivan v. Fulton Steamboat Co., 6 Wheat. 540; Breithaupt v. Bank of Georgia, 1 Pet. 238; Commercial Bank v. Slocomb, 14 Pet. 60; Louisville c. R.R. Co. v. Letson, 2 How. 497, 558; Marshall v. B. O.R.R. Co., 16 Ohio St. 314, 328; Drawbridge Co. v. Shepherd, 20 How. 227, 233; Ohio Miss. R.R. v. Wheeler, 1 Black, 286, 296; Muller v. Dows, 94 U.S. 444; Steamship Co. v. Tugman, 106 U.S. 118, 121; Memphis Charleston R.R. v. Alabama, 107 U.S. 581; Shaw v. Quincy Mining Co., 145 U.S. 444, 451; St. Louis San Francisco Railway Co. v. James, 161 U.S. 545; Barrow S.S. Co. v. Kane, 170 U.S. 100; Southern Ry. Co. v. Allison, 190 U.S. 326; Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 456; Taylor v. Illinois Central Ry. Co., 89 F. 119; Thomas v. Board of Trustees, 195 U.S. 207; cases cited by appellants and Hanchett v. Blair, 100 F. 817, are not in point, and as to rule 94 in equity see Davis Farnum Mfg. Co. v. Los Angeles, 189 U.S. 220.
The complainants are suing solely for the benefit of the Sol Sayles Company and that corporation, although in form a defendant, is, in legal effect, on the same side of the controversy as the complainants. Arapahoe County v. Railway Co., 4 Dillon, 277; Walden v. Skinner, 101 U.S. 589; and see also as to where defendants may be on same side as complainants, Covert v. Waldron, 33 F. 311; The Removal Cases, 100 U.S. 457; Pacific Railroad v. Ketchum, 101 U.S. 289; Harter v. Kernochan, 103 U.S. 562; Evers v. Watson, 156 U.S. 532; Brown v. Truesdale, 138 U.S. 389, 395; Merchants Cotton Press Co. v. N.A. Ins. Co., 151 U.S. 385; Wilson v. Oswego Agency, 151 U.S. 63; Cilly v. Patton, 62 F. 498; Board of Trustees v. Blair, 70 F. 414; Consol. Water Co. v. Babcock, 76 F. 642; Shipp v. Williams, 62 F. 4; Gardner v. Brown, 21 Wall. 36; Pittsburg, C. St. L. Ry. Co. v. B. O.R.R. Co., 61 F. 705; Boston Safe Dep. Tr. Co. v. Racine, 97 F. 817; Old Colony Trust Co. v. Atlanta Ry. Co., 100 F. 798; 1 Foster's Federal Practice, 64.
The lack of jurisdiction of the court can be raised at any stage of the litigation, and even though the appellees had not raised the question, the court could, of its own motion, have dismissed the cause for want of jurisdiction. Grace v. Am. Cen. Ins. Co., 109 U.S. 278, 283; Mexican Cen. R.R. Co. v. Pinkney, 149 U.S. 194; Thomas v. Board of Trustees, 195 U.S. 207.
Mr. George H. Yeaman by leave of the court filed a brief as amicus curice contending that diversity of citizenship did not exist and that the Circuit Court had no jurisdiction of the case.
To sustain the action of the Circuit Court in dismissing the bill the argument is as follows: (1) By a conclusive presumption of law the stockholders of a corporation are deemed to be citizens of the State of the corporation's domicile. (2) Granting that the complainants are citizens of New Jersey, yet as they are suing for the Sol Sayles Company, a New York corporation, that corporation, although in form a defendant, is in legal effect on the same side of the controversy as the complainants, and since it is a citizen of the same State as the other defendants, the Circuit Court had no jurisdiction, as the suit does not involve a controversy between citizens of different States.
1. This is based on the assumption adopted by this court, that stockholders of a corporation are citizens of the State which created the corporation — an assumption physically possible but hardly true in a single instance; and appellants here contend that it should be classed with the fictions of the law and subject to one of their fundamental maxims, and cannot be carried beyond the reasons which caused its adoption necessarily requisite. It is, however, more of a presumption than a fiction, but whether we regard it as either it cannot be pushed to the end contended for by appellees.
The reason of the presumption (we will so denominate it) was to establish the citizenship of the legal entity for the purpose of jurisdiction in the Federal courts. Before its adoption difficulties had been encountered on account of the conditions under which jurisdiction was given to those courts. A corporation, is constituted, it is true, of all its stockholders, but it has a legal existence separate from them — rights and obligations separate from them; and may have obligations to them. It can sue and be sued. At first this could be done in the Circuit Court of the United States only when the corporation was composed of citizens of the State which created it. Bank of United States v. Deveaux, 5 Cranch, 61; Hope Insurance Company v. Boardman, 5 Cranch, 57. But the limitation came to be seen as almost a denial of jurisdiction to or against corporations in the Federal courts, and in Louisville c. Railroad Company v. Letson, 2 How. 497, prior cases were reviewed; and this doctrine laid down:
"That a corporation created by and doing business in a particular State, is to be deemed to all intents and purposes as a person, although an artificial person, . . . capable of being treated as a citizen of that State, as much as a natural person." And "when the corporation exercises its powers in the State which chartered it, that is its residence, and such an averment is sufficient to give the Circuit Courts jurisdiction."
The presumption that the citizenship of the corporators should be that of the domicil of the corporation was not then formulated. That came afterwards, and overcame the difficulty and objection that the legal creation, the corporation, could not be a citizen within the meaning of the Constitution. Marshal v. B. O. Railroad Company, 16 How. 314. This, then, was its purpose, and to stretch beyond this is to stretch it to wrong. It is one thing to give to a corporation a status, and another thing to take from a citizen the right given him by the Constitution of the United States. Disregarding the purpose of the presumption, it is easy to represent it, as counsel does, as illogical if not extended to every stockholder; but as easy it would be to show its falseness if so applied. But such charges and countercharges are aside from the question. To the fact and place of incorporation the law attaches its presumption for a special purpose. Perhaps, as intimated in St. Louis San Francisco Ry. v. James, 161 U.S. 545, 563, this "went to the very verge of judicial power." Against the further step urged by appellees we encounter the Constitution of the United States.
2. The ninety-fourth rule in equity contemplates that there may be, and provides for, a suit brought by a stockholder in a corporation founded on rights which may properly be asserted by the corporation. And the decisions of this court establish that such a suit, when between citizens of different States, involves a controversy cognizable in a Circuit Court of the United States. The ultimate interest of the corporation made defendant may be the same as that of the stockholder made plaintiff, but the corporation may be under a control antagonistic to him, and made to act in a way detrimental to his rights. In other words, his interests, and the interests of the corporation, may be made subservient to some illegal purpose. If a controversy hence arise, and the other conditions of jurisdiction exist, it can be litigated in a Federal court.
In Detroit v. Dean, 106 U.S. 537, Dean, who was a citizen of New York and a stockholder in the Mutual Gas Light Company, a Michigan corporation, in order to protect its right and property against the threatened action of a third party brought suit against the latter and the corporation in the Circuit Court of the United States for the Eastern District of Michigan. This court ordered the bill dismissed, not because Dean and the corporation had identical interests, but because the refusal of the directors of the corporation to sue was collusive. The right of a stockholder to sue a corporation for the protection of his rights was recognized, the condition only being the refusal of the directors to act, which refusal, it is said, must be real, not feigned. Hawes v. Oakland, 104 U.S. 450, was cited, where a like right was decided to exist. See also Dodge v. Woolsey, 18 How. 331; Davenport v. Dows, 18 Wall. 626; Memphis v. Dean, 8 Wall. 64; Greenwood v. Freight Company 105 U.S. 13; Quincy v. Steel, 120 U.S. 241. It was said in Dodge v. Woolsey, that the refusal of the directors to sue caused them and Woolsey, who was a stockholder in a corporation of which they were directors, "to occupy antagonistic grounds in respect to the controversy, which their refusal to sue forced him to take in defense of his rights." Dodge v. Woolsey was modified by Hawes v. Oakland, as to what circumstances would justify a suit by a stockholder if the directors refuse to sue. See also Quincy v. Steel, supra.
The case at bar is brought within the doctrine of those cases by the allegations of the bill. The defendant corporations are alleged to be under the control of John J. and Dennis A. Harrington, and that complainants are unable to secure any corporate action on the part of the defendant, the Sol Sayles Company, to redress the wrongs complained of. It is also alleged that the Harringtons control the action of the stockholders, and have declined to redress the wrongs complained of or give complainants any opportunity to lay before the board of directors or the stockholders of the Sol Sayles Company the facts alleged. It is also alleged the suit is not collusive. It is manifest that if the matter alleged be true, complainants will suffer irremediable loss if not permitted to sue, and as they had a cause of action they rightly brought it in the Circuit Court of the United States.