Waller v. Waller

Delaplaine, J., delivered the opinion of the Court. This suit was brought by Max J. Waller, appellant, against his brother, Harry A. Waller, and Anne S. Waller, his wife, Isaac Shapiro, Harry S. Hyman, David Gerber, Joseph Shapiro and Joseph W. Zerivitz to recover damages for destruction of the value of his stock in M. Waller Corporation, which dealt in petroleum products. Demurrers to the declaration with bill of particulars were sustained, and judgment was rendered in favor of defendants. This appeal is from that judgment.

Plaintiff alleges in the declaration that an arbitration award made in October, 1941, after the corporation had entered suit for injunction against his brother, provided that plaintiff should be elected president and general manager of the corporation and should receive 101 shares of its voting stock, while his brother should be elected secretary and sales manager and should receive 99 shares of the voting stock; that, in violation of the award, his brother conspired with the other defendants to obtain control of the corporation and did everything he could to ruin plaintiff financially and destroy the value of his stock; and finally defendants succeeded in accomplishing the purpose of their conspiracy when the corporation was placed in the hands of receivers. The bill of particulars alleges that in 1937, while plaintiff was the president and general manager, and his brother Harry was the sales manager, Isaac Shapiro, Harry’s father-in-law, plotted the scheme to acquire control of the corporation; that Harry, in order to carry out the conspiracy, committed various wrongful acts until September, 1940, when the corporation applied for injunction; that the dispute was submitted to Judge Eli Frank as arbitrator, who appointed the two brothers and Samuel J. Fisher, a member of the Baltimore bar, as the directors; but that Harry still continued to commit the wrongful acts; and in September, 1942, when ¹⁸⁹ plaintiff was in the Coast Guard, creditors forced the corporation into receivership. The specific acts recited by plaintiff as breaches of trust by his brother were: (l)That he appeared at meetings of the directors with written questions to harass plaintiff in the performance of his duties; (2) that although the award required all checks to be signed by two directors, he continuously refused to sign checks until “he had made it a source of extreme aggravation and irritation”; (3) that he usurped authority to discharge employees, so that plaintiff sometimes found it necessary to rehire them; (4) that he received money from the sale of products, and failed to pay it over until forced by the other directors; (5) that he induced employees to leave the company to work at the Maryland Baking Company; (6) that he and the other defendants diverted customers to competitors; (7) that he gave discounts to practically every customer, whereas he should have allowed them only to large-volume purchasers; and (8) that he also failed to cooperate with the receivers and they discharged him as sales manager in 1943. It is a general rule that an action at law to recover damages for an injury to a corporation can be brought only in the name of the corporation itself acting through its directors, and not by an individual stockholder though the injury may incidentally result in diminishing or destroying the value of the stock.

The reason for this rule is that the cause of action for injury to the property of a corporation or for impairment or destruction of its business is in the corporation, and such an injury, although it may diminish the value of the capital stock, is not primarily or necessarily a damage to the stockholder, and hence the stockholder’s derivative right can be asserted only through the corporation. The rule is advantageous not only because it avoids a multiplicity of suits by the various stockholders, but also because any damages so recovered will be available for the payment of debts of the corporation, and, if any surplus remains, for distribution to the stock ¹⁹⁰ holders in proportion to the number of shares held by each. Miller v. Preston, 174 Md. 302 , 199 A. 471 ; Wells v. Dane, 101 Me. 67 , 63 A. 324 ; Caldwell v. Eubanks, 326 Mo. 185 , 30 S. W. 2d 976 , 72 A. L. R. 621, 625; Stinnett v. Paramount-Famous Lasky Corporation, Tex. Com.

App., 37 S. W. 2d 145 ; Cullum v. General Motors Acceptance Corporation, Tex. Civ. App., 115 S. W. 2d 1196 ; Commonwealth of Massachusetts v. Davis, 140 Tex. 398 , 168 S. W. 2d 216 ; Green v. Victor Talking Machine Co., 2 Cir., 24 F. 2d 378 , 59 A. L. R. 1091, certiorari denied 278 U. S. 602 , 49 S. Ct. 9 , 73 L. Ed. 530 . Generally, therefore, a stockholder cannot maintain an action at law against an officer or director of the corporation to recover damages for fraud, embezzlement, or other breach of trust which depreciated the capital stock or rendered it valueless.

Where directors commit' a breach of trust, they are liable to the corporation, not to its creditors or stockholders, and any damages recovered are assets of the corporation, and the equities of the creditors and stockholders are sought and obtained through the medium of the corporate entity. Pritchard v. Myers, 174 Md. 66, 77 , 197 A. 620 , 116 A. L. R. 775; Smith v. Hurd, 12 Metc. (Mass.) 371, 46 Am. Dec. 690 .

It is universally accepted that officers and directors of a corporation are not allowed to derive from their position any profit or advantage in conflict with the proper discharge of their duty. If it appears that any corporate official subordinated the interests of the corporation to his own interests, he may become liable to it for any loss he occasioned. Booth v. Robinson, 55 Md. 419, 437 ; Coffman v. Maryland Publishing Co., 167 Md. 275, 289 , 173 A. 248 . It is,' therefore, beyond question that directors have no right to participate in a conspiracy with the object of divesting the corporation of its property and making profit for themselves at the expense of the corporation and its creditors.

Jackson v. Ludeling, 21 Wall. 616 , 22 L. Ed. 492 . The rule is applicable even when the wrongful acts were done maliciously with intent to injure a particular stock ¹⁹¹ holder. It is immaterial whether the directors were animated merely by greed or by hostility toward a particular stockholder, for the wrongdoing affects all the stockholders alike. Seitz v. Michel, 148 Minn. 80 , 181 N. W. 102 , 12 A. L. R. 1060, 1068.

It is accordingly held that a stockholder cannot sue individually to recover damages for injuries to the corporation, notwithstanding that the directors may have entered into an unlawful conspiracy for the specific purpose of ruining the corporation. Niles v. New York Central & Hudson River R. Co., 176 N. Y. 119 , 68 N. E. 142 ; Parascandola v. National Surety Co., 249 N. Y. 335 , 164 N. E. 242 , 62 A. L. R. 551, 558. We specifically hold that where conspirators ruin a person financially by forcing into receivership a corporation in which he was a large stockholder, in order to eliminate him as an officer and to acquire control of the corporation, the wrongs are suffered by the injured person in his capacity as a stockholder, and the action to recover for resulting injuries should be brought by the receiver. Miller v. Preston, 174 Md. 302, 313 , 199 A. 471 .

Equity, however, disregards the corporate