Opinion
12590
February 13, 1929.
Before GRIMBALL, J., Charleston, January, 1928. Affirmed.
Action by L.C. Peeples, as liquidating trustee in the dissolution of the Hornik-Peeples Company, against M. Hornik. Judgment for plaintiff on demurrer, and the defendant appeals.
The following are the complaint (except paragraph 9), the demurrer, and the order of the Circuit Court:
COMPLAINTThe plaintiff above-named, complaining of the defendant above-named, alleges and says:
First. That L.C. Peeples, the plaintiff herein, at the times hereinafter mentioned was, and now is, a stockholder, director, and officer of Hornik-Peeples Company, a body corporate organized under the laws of the State of South Carolina, and having its principal place of business in the City of Charleston, in the said State, and is the owner of twenty-five thousand ($25,000.00) dollars par value of the common stock of the said corporation.
Second. That M. Hornik, the defendant herein, at the times hereinafter mentioned, was, and now is, the only other officer and director of the said corporation, and the owner of the remainder of the common stock of the said corporation.
Third. That on the 5th day of July, 1927, at a meeting of the stockholders of the said corporation called by this plaintiff, after ascertaining the facts as to defendant's wrongful and fraudulent acts and omissions hereinafter set forth, the said corporation was dissolved by a resolution of its stockholders, and went into liquidation under the laws of the State of South Carolina.
Fourth. That at the dissolution of the said corporation as aforesaid the plaintiff herein and the defendant herein, as the only directors of the said corporation, became trustees under the statute of South Carolina for the liquidation of the said business and the collection of its assets.
Fifth. That inasmuch as the said corporation is in dissolution, and the trustees under the statute are the plaintiff herein and the defendant herein, the defendant cannot be joined as a party plaintiff in this action, for the reason that he is defendant in this action in his individual capacity, and the only person who can bring this action for the corporation its cause of action against the defendant is the plaintiff, as liquidating trustee under the statute.
Sixth. That the said defendant, M. Hornik, was at the times herein mentioned the president and treasurer of the said Hornik-Peeples Company, and as such assumed and took upon himself the complete conduct, management, and control of the Hornik-Peeples Company, directing its affairs and transacting its business entirely.
Seventh. That at the times hereinafter and hereinbefore mentioned the plaintiff, L.C. Peeples, was the vice president and secretary of the said Hornik-Peeples Company, but his duties in the said corporation consisted in collecting accounts receivable and making some sales of merchandise, and plaintiff had no part in the management of and control over the said corporation, or its business or affairs.
Eighth. That on or about December, 1921, the said corporation, Hornik-Peeples Company, had assets of over six hundred thousand ($600,000.00) dollars above its liabilities, and, in addition, that the good will of the said corporation in its business was conservatively worth over two hundred thousand ($200,000.00) dollars; that the said business was in a flourishing condition and of the highest credit standing and rating, enjoyed the confidence of the business world, of its business connections, of its customers, and of the community; that the business of the said Hornik-Peeples Company was that of a wholesale character, the said corporation dealing in merchandise, goods, and notions, and that the said corporation in its business depended to a large extent upon the confidence of the business world, and of the persons and corporations through whom it financed its affairs, and of its customers, and of the community as a whole.
Tenth. That, on information and belief, during the period commencing on or about the 1st day of December, 1921, and ending on the 15th day of July, 1927, the said M. Hornik, the president of said corporation, and in full control and charge and direction of its management and of its affairs, negligently and willfully mismanaged the said corporation, conducted it in violation of the duty which he as such officer owed to the said corporation, employed it for his own ends and for his own gain, fraudulently concealed from this plaintiff, as the other director, officer, and stockholder, and from the corporation, the true state of its affairs and of its operations, abused the credit of the said Hornik-Peeples Company for his own benefit, and for the benefit of other companies and corporations in which he was interested, fraudulently and willfully abstracted and diverted its assets for his own use and benefit, and for the benefit of other corporations and companies in which he was interested, and misled and defrauded this plaintiff and the said corporation, so that as a result of his said willful, negligent, wrongful, and fraudulent acts and omissions, the said corporation lost its assets, lost its good will, lost the confidence of its creditors, of its banks, of its business connections, of its customers, and of the community in which it did business, so that, as a result thereof, the said corporation, instead of being worth over eight hundred thousand ($800,000.00) dollars, lost more than eight hundred thousand ($800,000.00) dollars, and became worthless, or nearly so.
Eleventh. That on August 1, 1927, said M. Hornik high-handedly, and in utter disregard of the rights of the said corporation, and of the plaintiff's rights as liquidating trustee under the statute, and of plaintiff's rights as director and stockholder in the said corporation, took over all of the assets of the said corporation, converted them to his own use, refused to allow the plaintiff to perform his duties as such liquidating trustee in respect to said assets, and continued the business which had formerly been done by the Hornik-Peeples Company under the name and style of M. Hornik Co.
Twelfth. That, on information and belief, the damages to the said corporation as hereinbefore and hereinafter set out were due to and caused by the willful, wanton, negligent, wrongful, and fraudulent acts and omissions of the defendant, as aforesaid, and in the following particulars, to wit:
(a) In willfully and negligently mismanaging the affairs of the said Hornik-Peeples Company.
(b) In fraudulently concealing from the said corporation the true state of the affairs of the said corporation and his acts as such president.
(c) In willfully and negligently employing the credit of the said Hornik-Peeples Company for his own benefit and for the benefit of other companies and corporations in which he was interested, so as to damage the credit of Hornik-Peeples Company and impair the same.
(d) In willfully and negligently causing and allowing the said Hornik-Peeples Company to lose its high credit, standing, and rating, and the confidence of its creditors, and of those through whom it financed its affairs.
(e) In willfully and fraudulently abstracting from the said corporation and diverting to his own use, and to the use of companies and corporations in which he was interested, the assets of the said Hornik-Peeples Company, and in failing to make a record of the same on the books of the said Hornik-Peeples Company, and in failing to inform the corporation thereof.
(f) In conducting the business and affairs of the said corporation with an utter disregard of the rights of the said corporation, and his duties to it as such officer, and solely for his own interests.
(g) In failing to employ competent credit men and salesmen.
(h) In employing and retaining in its employ members of his family as credit men and salesmen, whom he knew, or should have known, were incompetent, negligent, and totally unfitted for such work.
(i) In willfully, negligently, and fraudulently failing to keep full and correct records of said corporation, and of its affairs, and in making false and inadequate records of the same.
(j) In willfully and high-handedly seizing and converting to his own use the property, goods, assets, and good will of the said corporation.
Thirteenth. That through the willful, wanton, negligent, wrongful, and fraudulent acts and omissions of the defendant as aforesaid in the management, direction, and control of the said corporation, and through the high-handed seizure and conversion to his own use of the property, goods, assets, and good will of the said corporation, the defendant, M. Hornik, caused damage and loss to the said corporation of one million ($1,000,000.00) dollars.
Wherefore, plaintiff, as liquidating trustee of Hornik-Peeples Company, prays judgment against the defendant, M. Hornik, for the sum of one million ($1,000,000.00) dollars, and the costs of this action.
(Complaint verified.)
DEMURRERThe defendant, M. Hornik, without waiving in any way his right to make the motion in this case, notices of which were this day duly served on plaintiff's attorneys, viz., the motion to strike out certain portions of the said complaint, on the grounds that same are irrelevant and redundant, and the motion to make the complaint more definite and certain, but specifically reserving all of his rights to insist upon and urge the granting of said motion, hereby demurs to the complaint herein on the following grounds, to wit:
I. That it appears on the face of the complaint that this is an action for damages due to the corporation known as the Hornik-Peeples Company, and the suit should have been brought in the name of the said Hornik-Peeples Company, and not in the name of the liquidating agent, as provided in the statutory law in this State in regard to the winding up and dissolution of corporations, and that the plaintiff, as only one of the liquidating trustees, has no capacity to sue as such.
II. That it appears on the face of the complaint that the facts stated therein are not sufficient to constitute a cause of action, in that it does not appear on the face of the complaint that the plaintiff has suffered any damage by reason of the wrongful acts and omissions of defendant as alleged in the complaint herein.
III. That it appears on the face of the complaint that the defendant, M. Hornik, was, and is, a director in the Hornik-Peeples Company, and as such was, and is, a liquidating trustee under the terms of the Act in such cases made and provided, and as such is as necessary a party to this suit as L.C. Peeples, and that, therefore, the complaint is defective, in that the said M. Hornik as such trustee is not made a party thereto.
IV. That it appears on the face of the complaint that the Hornik-Peeples Company is a necessary party plaintiff to this suit.
ORDERThe demurrer to the complaint herein, served on the 24th day of August, 1927, was heard before me, upon the grounds therein set forth. After hearing arguments by counsel for the parties hereto, it is my opinion that the said demurrer should be overruled.
The first ground upon which the demurrer is based is "that it appears on the face of the complaint that this is an action for damages due to the corporation known as the Hornik-Peeples Company, and the suit should have been brought in the name of the said Hornik-Peeples Company, and not in the name of the liquidating agent, as provided in the statutory law in this State in regard to the winding up and dissolution of corporations, and that the plaintiff, as only one of the liquidating trustees, has no capacity to sue as such."
Section 4282 of the Civil Code (1922), Vol. 3, provides: "Upon the dissolution in any manner of any corporation, the directors shall be trustees thereof, with full power to settle the affairs, collect the outstanding debts, sell and convey the property and divide the moneys and other property among the stockholders after paying its debts, as far as such money and property shall enable them," etc.
Under this section, the directors are constituted trustees of the corporation, and given full power to collect the outstanding debts. This would include the power to collect the debts of the corporation by suit, if necessary, and to handle the proceeds of a suit so maintained by such directors, as trustees, in the manner authorized and directed by that section.
It seems clear that such trustees of the corporation would have the right and privilege, under Section 356, Code of Civil Procedure (1922), Vol. 1, of bringing such an action in their name, as such trustees, as being trustees of an express trust, and also persons authorized by statute to bring the action. Section 4283, Civil Code (1922), Vol. 3, provides that "the directors constituted trustees as aforesaid shall have authority to sue for and recover the aforesaid debts and property by the name of the corporation," etc.
In my opinion, this confers the additional right and privilege of bringing such actions in the name of the corporation, where this procedure would be preferable, for any reason, to bringing the actions as trustees. It seems clear to me that this section does not abrogate or destroy the right and privilege of bringing suit in their names as trustees, which is conferred in Section 4282. If Section 4283 were not on the statute books, the trustees, as such, could bring actions on the causes of action of the corporation, for its benefit, but could not bring such actions in the name of the corporation. It is this latter right and privilege which is conferred by Section 4283, and that section does not limit the actions by the trustees to actions in the name of the corporation alone.
L.C. Peeples and M. Hornik appear from the complaint to be the only two directors of the Hornik-Peeples Company, the corporation here involved. Upon its dissolution, they both became liquidating trustees. One is here the defendant in his individual capacity, charged with legal liability in the particulars enumerated in the complaint to the corporation, and the cause of action is that of the corporation. It is properly brought by the sole remaining liquidating trustee who is not incapacitated, who must hold the proceeds as liquidating trustee to be distributed as such according to law.
I can conceive of no reason why, nor does the law require that the defendant, Hornik, who is sued in his individual capacity for alleged wrongful acts to the corporation, be joined as a party plaintiff in his trustee capacity, nor is the corporation a necessary party as such to the action, because the plaintiff as liquidating trustee represents the corporation, sues on its cause of action, and is charged with the proper administration of the proceeds of the suit according to law.
What I have said above disposes of the second, third, and fourth grounds of the demurrer, which are that the plaintiff as liquidating trustee has not suffered any damage by reason of the wrongful acts and omissions of the defendant as alleged; that the defendant, Hornik, as the other liquidating trustee, is a necessary party to the suit; and that the corporation, Hornik-Peeples Company, is a necessary party to the suit.
In my opinion, the rights of all parties of the corporation, of the defendant as liquidating trustee and director, and as stockholder, and of creditors of the corporation, if any there be, are amply protected by the manner in which the suit is brought, and the same is properly brought by the plaintiff, as liquidating trustee of the corporation, for the corporation, under the statutes which I have discussed.
It is ordered, therefore, that the said demurrer be, and the same is hereby, overruled. As I have granted in part the defendant's motion to require certain allegations of the complaint to be made more definite and certain, which was argued herewith, the defendant will have the time allowed by law in which to answer the amended complaint, when the same shall be served.
Notice of appeal from this decree was duly served on January 11, 1928.
Messrs. H.L. Erckmann and Edwin J. Blank, for appellant, cite: Present action should be brought in name of corporation: Secs. 4281, 4282, 4283, Code; 13 S.C. 451; 143 S.E., 229; 101 S.C. 364.
Messrs. Hyde, Mann Figg, and Stoney McGowan, for respondent, cite: As to actions by or against officers of a corporation: Fletcher, Cyc. on Corp., 3267; 131 S.E., 612; 144 S.E., 57; Secs. 4281-4288, Code. Cases distinguished: 101 S.C. 364. As to actions by trustee: 47 A.L.R., 1282-1569; 5 S.C. Eq., 281; 10 Rich., 604; 23 S.C. 297; 3 S.C. 502; 28 S.C. 476; 89 S.C. 440. Each of joint trustees liable for his own acts alone, and not for acts of co-trustees except where he has contributed to them: 117 S.C. 195; 10 Rich. Eq., 247; 3 Rich. Eq., 132. Absence of corporation as a party does not prejudice appellant in any wise: 140 S.C. 471; 144 S.E., 61.
February 13, 1929. The opinion of the Court was delivered by
The order of his Honor, Judge Grimball, overruling a demurrer to the complaint, is entirely satisfactory to this Court, and, for the reasons stated by him, is affirmed. See Browne v. Hammett, 133 S.C. 446, 131 S.E., 612; Hernlen v. Vandiver, 145 S.C. 412, 143 S.E., 222; Gary v. Matthews, 148 S.C. 125, 145 S.E., 702.
The following will be reported: (1) The complaint, except paragraph 9. (2) The demurrer. (3) The order of the Circuit Court.
MR. CHIEF JUSTICE WATTS, and MESSRS. JUSTICES BLEASE and CARTER concur.
MR. JUSTICE COTHRAN dissents.
This case presents a very anomalous situation. There are only two stockholders of the corporation; both are directors. The corporation is in liquidation, and, under the statute, the directors become liquidating trustees. The gravemen of the complaint is that the corporation has been damaged by the wrongful conduct of one of the directors.
If, as doubtful under the statute, the liquidating trustees may sue in their representative capacities to recover an asset of the corporation, such action must be brought in the combined names of the trustees and by their joint authority. This, of course, is impossible under the peculiar situation; the alleged defaulting director will certainly not authorize an action against himself.
It would be equally impossible, for the same reason, to secure the co-operation of the defaulting director in the authorization of an action in the name of the corporation against himself. In this situation, I think that the action should have been brought by the plaintiff, Peeples, as a stockholder, in the right of the corporation, alleging the circumstances which made it impossible to institute the action in the name of the corporation.
I have very serious doubt whether the action could have been brought in the name of the trustees, even in the absence of the complicated and obstructing conditions prevailing. Section 4282 prescribes specifically the duties and powers of the liquidating trustees: "To settle the affairs, collect the outstanding debts, sell and convey the property and divide the moneys and other property among the stockholders after paying its debts, as far as such moneys and property shall enable them." Section 4283 provides that actions may be brought "by the name of the corporation."
There is some force in the position of the Circuit Judge that the trustees were empowered under Section 356 of the Code of Civil Procedure to bring such actions, and that Section 4283 simply provided an additional remedy, in an action by the corporation; in other words, that the action might be brought by either. This would be true ordinarily, but for the fact that the statute which creates the trusteeship, specifically defines the duties and powers of the trustees, omitting the power to sue in their own names, a power which is specifically conferred on the corporation, which, under Section 4282, is continued, notwithstanding its insolvency, as a corporation "for the purpose of prosecuting and defending suits by or against them."
I think that it is clear that the statute intended that all such suits should be brought in the name of the defunct corporation. It is not a matter of great consequence, one way or the other, but I think that the method should be clearly outlined, so that in the future there could be no doubt.
But, passing this bar, there still remains the impossibility of a single trustee, without authority from the board as such, to institute such an action, either in his own name, or in that of the corporation. There would remain, therefore, open to the complaining stockholder, the course above indicated, a suit by him in his own name as a stockholder, but in the right of the corporation.
I think, therefore, that the demurrer should have been sustained, with leave to the plaintiff to amend his complaint conformably with the foregoing suggestion.