*A. W. CORBUS, Appt.,

v.

ALASKA TREADWELL GOLD MINING COMPANY.

(See S. C. Reporter’s ed. 455-465.)

Equity — suit by stockholder against corpo¬ ration — collusion — irreparable injury — demand on directors.

A suit in equity by a stockholder against the corporation to restrain it from paying an Alaskan license tax was properly dismissed,

Note. — As to the right of stockholders to sue oil right of action existing in the corporation — see note to Mack v. De Bardeleben Goal & I. Co.

(Ala.) 9 L. R. A. 650.

187 U. S.

Corbus v. Alaska Treadwell Gold Mining Co.

455-458

where the corporation made no serious de¬ fense, and there was no showing of irrepara¬ ble injury or of any effort to secure action by the corporation or its directors, as is re¬ quired by equity rule 94, other than a de¬ mand on the resident managing agent, the distance of such directors from the place where plaintiff resides and in which the court is held being relied upon as an excuse for not making any further effort.

[No. 10.]

Argued April 25, 1901. Ordered for reargu¬ ment April 29, 1901. Reargued December 8, 1902. Decided January 5, 1903.

APPEAL from the District Court of the United States for the District of Alas¬ ka to review a decree dismissing a suit by a stockholder against the corporation to re¬ strain it from paying a tax. Affirmed.

See same case below, 99 Fed. 334.

Statement by Mr. Justice Brewers This, like the preceding cases, was brought to prevent the payment of an Alas¬ kan license tax. The method pursued was, however, different. It is a suit in equity brought by a stockholder against a corpora¬ tion — the stockholder and the corporation being the sole parties plaintiff and defend¬ ant — to restrain it from paying the tax. Notice was given to the United States dis¬ trict attorney of the pendency of the suit, who appeared as amicus curiae, and, dis¬ claiming any intention of, in any manner, representing or binding the United States,

denied the jurisdiction *of the court, its right to enjoin the defendant from paying the li¬ cense, and argued in favor of the constitu¬ tionality of the law.

The bill alleged that the defendant was in¬ corporated under the laws of the state of Minnesota, and engaged in mining and mill¬ ing ore in the district of Alaska, with an office and manager in the district; that “the general control of the affairs of said com¬ pany is intrusted to a board of directors who reside in San Francisco, state of California, and are nonresidents of the district of Alas¬ ka; that the complete control and manage¬ ment of the affairs of said company in Alaska are under the supervision and con¬ trol of its general superintendent and mana¬ ger, J. P. Corbus.”

It is further averred that the company by its general superintendent in Alaska is in¬ tending to pay the license tax which, for the year beginning July 1, 1899, amounted, with the clerk’s fee, to the sum of $1,875. After denying the legality of the tax the bill pro- ceeds !

“Your orator further shows that this suit is not a collusive one, brought to confer ju¬ risdiction of the case upon this court, of which it would not otherwise have cogni¬ zance; that your orator has not been able, because of the great distance at which the directors of said company reside, to request them to refuse to pay said tax and to apply for said license, but has made such request of the officers or agents of said company con¬ trolling its business in Alaska, but they 187 U. S. U. S., Book 47.

have failed and refused not to make such application and pay such tax, for the rea¬ son that, though they doubt the constitu¬ tionality of said law, the pains and penalties imposed by said act for the omission so to do are so severe that said company and its said officers and agents fear, and have reason to fear, the great loss and injury in defending prosecution that might be brought against it for the failure to comply with said law; that they deem it better to submit to the le¬ gal tax than to incur the consequences of the failure to comply with it; that your orator is advised that there is no procedure provided by law whereby said company could test the validity of said law and the constitutionality of said tax without incur¬ ring the pains and penalties therein pro¬ vided for *the violation thereof, inasmuch as

the said act requires the voluntary payment of the tax imposed under a penalty of heavy forfeiture and fines for the failure to make such voluntary payment; that the said com¬ pany, in view of the foregoing, has refused and still refuses and intends omitting to comply with complainant’s demand to re¬ fuse to pay said tax, and has resolved and determined and intends to comply with all and singular the provisions of said chapter 44 of said act of Congress, and to pay said tax upon its stamps and upon its said mer¬ cantile establishment, amounting to the said sum of $1,875 for the said year, and to continue the payment of a like or greater sum for each year hereafter.

“Your orator further shows that if said company and its officers, as they have pro¬ posed and declared their intention to do, shall pay said tax, the assets of the said company will be thereby diminished and lessened, as well as the dividends to be de¬ clared upon the stock thereof, and the value of the shares of said company, including the shares owned by your orator and all others in whose behalf this suit is brought; and your orator further shows that this involves more than the sum of $5,000; that, unless the company should comply with said act, or this court grant the relief herein prayed for, the said company would be exposed to a multiplicity of suits and prosecutions for the violation of said act, and would be put to great expense and suffer irreparable in¬ jury in defending said suits and avoiding the fines and forfeitures provided by the said act, and its assets and the value of its shares would be thereby greatly lessened, to the great and irreparable injury and dam¬ age to your orator and other shareholders in said company.”

A demurrer to the bill was sustained, and a decree entered dismissing the suit. A sin¬ gle opinion was filed by the district judge in disposing of all of these tax cases. In that opinion, and with special reference to the present case, he said:

“In the cases at bar the district attorney, so far as he had the right to do so, the gov¬ ernment not being a party to the suits, raised, not only the question of the jurisdic¬ tion of the court because the plaintiffs had a plain, speedy, and adequate remedy *at

law, but insisted that the suits were of a 17 257

458-400

Supreme Court of the United States.

Oct. Term,

friendly nature, collusive in character, and brought for the sole purpose of conferring jurisdiction upon the court, to the end that the defendants might escape paying the li¬ cense fee imposed by law. And when all the facts are taken together, as disclosed by the record, some color is lent to the latter contention. Take the case of Corbus v. Alaska Treadwell Gold Min. Co. The bill was filed July 17, the subpoena served July 19, commanding the defendant to answer the bill within twenty days. No appear¬ ance was made by defendant, however, and no pleading filed until November 15, nearly four months after the filing of the bill, and not until about the time the matter was called up for hearing, when a demurrer was interposed. Counsel for defendant did not contend for his demurrer, made no argu¬ ment, and filed no brief in support of the same, and in the very nature of the ease the interests of the plaintiff and defendant are identical. Then, if the object and purpose of the suit is solely to test the constitution¬ ality of the law without first paying into the United States Treasury the amount of the license tax (and there can be no other object), and if the court will sustain the plaintiff and enjoin the defendant as prayed, how is the private citizen to avail himself of a similar remedy? Who shall enjoin him and save him from paying his tax un¬ til the constitutionality of the law is de¬ termined? And if he cannot avail himself of this manner of suit, why should corpora¬ tions or copartnerships be permitted to do so ? Why should not corporations and in¬ dividuals have and be permitted to exercise identically the same legal rights and reme¬ dies under the law?” [99 Fed. 338.]

From the decree of dismissal the plaintiff appealed to this court.

Mr. L. T. Michenor for appellant on original argument. Messrs. IF. W. Dudley, J . T. Malony, and J. II. Cobb were with him on the brief.

No counsel for appellee.

Mr. S. M. Stockslager for appellant on reargument. Messrs. George C. Heard, John R. Winn, and John G. Held were with him on the brief.

Solicitor General Richards for the United States on reargument. Assistant Attorney General Beck also filed a brief for the United States.

*Mr. Justice Brewer delivered the opin¬ ion of the court:

The thought suggested by the quotation from the opinion of the district judge im¬ presses us forcibly. Evidently the plain¬ tiff patterned his proceeding upon Pollock v. Farmers’ Loan & T. Co. 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Rep. 673. But that case does not determine to vyhat extent a court of equity will permit a stockholder to maintain a suit nominally against the cor¬ poration but really for its benefit. Hawes v. Oakland, 104 U. S. 450, sub nom. Hawes v. Contra Costa Water Go. 26 L. ed. 827, is pertinent in this direction. In that case a 258

citizen of New York, a stockholder in the Contra Costa Waterworks Company, a Cali¬ fornia corporation, filed his bill in the cir¬ cuit court of the United' States for the dis¬ trict of California against the city of Oak¬ land, the waterworks company, and its di¬ rectors. The gravamen of the bill was that the city claimed and received from the company without compensation a supply of water for all municipal purposes whatever; that the claim had no legal foundation, and that such supply without compensation re¬ sulted in a diminution of the dividends which should come to the plaintiff and other stockholders, and a decrease in the value of their stock. The bill further alleged that the plaintiff applied to the directors to de¬ sist from such illegal practice and take immediate proceedings to prevent the city from taking water from the waterworks without compensation, but that they declined to do so, and threatened to continue to fur¬ nish water to the city of Oakland free of charge for all municipal purposes, as had theretofore been done. TO this bill the company and its directors failed to make an¬ swer or other defense. The city of Oakland filed a demurrer, which was sustained and the bill dismissed, and from such decree the case was appealed to this court. The opin¬ ion, which is too long to quote in full, opens with these observations (pp. 452, 453, L. ed. p. 829) :

“Since the decision of this court in Dodge v. Woolsey, 18 How. 331, 15 L. ed. 401, the principles of which have received more than once the approval of this court, the fre¬ quency with which the most ordinary and usual chancery remedies are sought in the Federal courts by a single stockholder of a corporation who * possesses the requisite citi-

zensliip, in cases where the corporation whose rights are to be enforced cannot sue in those courts, seems to justify a considera¬ tion of the grounds on which that ease was decided, and of the just limitations of the exercise of those principles.

“This practice has grown until the corpo¬ rations created by the law's of the states bring a large part of their controversies with their neighbors and fellow citizens into the courts of the United States for ad¬ judication, instead of resorting to the state courts, which are their natural, their law¬ ful, and their appropriate forum. It is not difficult to see how this has come to pass.

A corporation having such a controversy, which it is foreseen must end in litigation, and preferring for any reason whatever that this litigation shall take place in a Federal court, in which it can neither sue its real antagonist nor be sued by it, has recourse to a holder of one of its shares, who is a citizen of another state. This stockholder is called into consultation, and is told that his corporation has rights which the direct¬ ors refuse to enforce or to protect. He in¬ stantly demands of them to do their duty in this regard, which, of course, they fail or refuse to do, and thereupon he discovers that he has two causes of action entitling him to equitable relief in a court of chan¬ cery ; namely, one against his own company

187 U. S.

Corbus v. Alaska Treadwell Gold Mining Co.

460-468

of which he is a corporator, for refusing to do what he has requested them to do, and the other against the party which contests the matter in controversy with that corpo¬ ration. These two causes of action he com¬ bines in an equity suit in the circuit court of the United States, because he is a citizen of a different state, though the real parties to the controversy could have no standing in that court. If no nonresident stockholder exists, a transfer of a few shares is made to some citizen of another state, who then brings the suit. The real defendant in this action may be quite as willing to have the case tried in the Federal court as the corpo¬ ration and its stockholder. If so, he makes no objection, and the case proceeds to a hearing. Or he may file his answer denying the special grounds set up in the bill as a reason for the stockholder’s interference, at the same time that he answers to the merits. In either event the whole case is prepared

for hearing *on the merits, the right of the stockholder to a standing in equity receives but little attention, and the overburdened courts of the United States have this addi¬ tional important litigation imposed upon them by a simulated and conventional ar¬ rangement, unauthorized by the facts of the case or by the sound principles of equity jurisdiction.”

After a full discussion, with the citation of many authorities, the conclusion is summed up in these words (pp. 460, 461, L. ed. p. 832) :

“We understand that doctrine to be that to enable a stockholder in a corporation to sustain in a court of equity, in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appro¬ priate plaintiff, there must exist as the foun¬ dation of the suit —

“Some action, or threatened action, of the managing board of directors or trustees of the corporation which is beyond the au¬ thority conferred on them by their charter or other source of organization;

“Or such a fraudulent transaction com¬ pleted or contemplated by the acting man¬ agers, in connection with some other party, or among themselves, or with other share¬ holders, as will result in serious injury to the corporation, or to the interests of the other shareholders;

“Or where the board of directors, or a ma¬ jority of them, are acting for their own in¬ terest, in a manner destructive of the cor¬ poration itself, or of the rights of the other shareholders ;

“Or where the majority of shareholders themselves are oppressively and illegally pursuing a course in the name of the corpo¬ ration, which is in violation of the rights of the other shareholders, and which can onlv be restrained by the aid of a court of

equity- . . . . ,

“Possibly other cases may arise in which, to prevent irremediable injury, or a total failure of justice, the court would be justi¬ fied in exercising its powers, but the forego¬ ing may be regarded as an outline of the principles which govern this class of cases. 187 U. S.

“But, in addition to the existence of griev¬ ances which call for this kind of relief, it is equally important that, before the *share-

holder is permitted in his own name to in¬ stitute and conduct a litigation which usu¬ ally belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation it¬ self, the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated, effort, with the managing body of the corporation, to in¬ duce remedial action on their part, and this must be made apparent to the court. If time permits, or has permitted, he must show, if he fails with the directors, that he has made an honest effort to obtain action by the stockholders as a body, in the mat¬ ter of which he complains. And he must show a ease, if this is not done, where it could not be done, or it was not reasonable to require it.” See also Detroit v. Dean, 106 U. S. 537-542, 27 L. ed. 300, 302, 1 Sup. Ct.

Rep. 560; Quincy v. Steel, 120 U. S. 241, 30 L. ed. 624, 7 Sup. Ct. Rep. 520.

While this case is unlike that in that it does not attempt to transfer from a state to a Federal court a controversy which really belongs in the former, — there being none other than Federal courts in the territory,

— yet the principle is the same, for it is an effort to secure for the benefit of the corpo¬ ration an injunction which it could not it¬ self obtain, and which no individual simi¬ larly situated can obtain.

Immediately after announcing the deci¬ sion in Uaices v. Oakland, 104 U. S. 450, sub nom. Haioes v. Contra Costa Water Co.

26 L. ed. 827, this court promulgated an additional equity rule (rule 94) :

“Every bill brought by one or more stock¬ holders in a corporation against the corpo¬ ration and other parties, founded on rights which may properly be asserted by the cor¬ poration, must be verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time of the transac¬ tion of which he complains, or that his share had devolved on him since by opera¬ tion of law; and that the suit is not a col¬ lusive one to confer on a court of the United States jurisdiction of a case of which it would not otherwise have cognizance. It must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his fail¬ ure to obtain such action.”

*It must not be understood that a mere

technical compliance with the foregoing rule is sufficient, and precludes all inquiry as to the right of the stockholder to main¬ tain a bill against the corporation. This court will examine the bill in its entirety, and determine whether, under all the cir¬ cumstances, the plaintiff has made such a showing of wrong on the part of the corpo¬ ration or its officers and injury to himself ns will justify the suit. The directors rep¬ resent all the stockholders, and are. pr e¬ sumed to act honestly and according to

259

468 466

Oct. Term,

Supreme Court of 1

their best judgment for the interests of all. Their judgment as to any matter lawfully confided to their discretion may not lightly be challenged by any stockholder or at his instance submitted for review to a court of equity. The directors may sometimes prop¬ erly waive a legal right vested in the corpo¬ ration in the belief that its best interests will be promoted by not insisting on such right. They may regard the expense of en¬ forcing the right or the furtherance of the general business of the corporation in deter¬ mining whether to waive or insist upon the right. Andfa court of equity may not be called upon~ at the appeal of any single stockholder to compel the directors or the corporation to enforce every right which it may possess, irrespective of other consider- ationsAlt is not a trifling thing for a stockholder to attempt to coerce the direct¬ ors of a corporation to an act which their judgment does not approve, or to substitute his judgment for theirs. As said in Dodge v. Woolsey, 18 How. 344, 15 L. ed. 406: “The circumstances of each case must deter¬ mine the jurisdiction of a court of equity to give the relief sought.”

It appears from the bill that the capital stock of the corporation is divided into 200,- 000 shares of the par value of $25 each, of which the plaintiff is the owner of 100 shares ; that the total, annual tax, including fees, amounts to $1,875, which results in a charge upon the plaintiff’s interest of less than $1 a year. This would scarcely be a case of “irremediable injury or a total fail¬ ure of justice,” as indicated in next to the last paragraph of the quotation from the opinion of this court in Hawes v. Oakland. Indeed, the tax upon the company of $3 a stamp for each of the 540 stamps used by it in the crushing and reduction of ore does not

a,ppear to be such as threatens *ruin to the company. It does not appear from the bill that any other stockholder shares with the plaintiff his belief in the illegality of the tax, or objects to its payment by the corpo¬ ration, although, of course, it may be as¬ sumed that every person is willing to be re¬ lieved from the payment of a tax if other parties will bring about that relief without any trouble to himself.

Again, as suggested by the district judge in his opinion, the plaintiff could not main¬ tain an injunction suit to restrain a simi¬ lar tax upon himself, and why should he be permitted to secure a relief to the corpora¬ tion (of which he is a minor stockholder) which he could not secure for himself indi¬ vidually? Are corporations the favored parties in respect to the enforcement of taxes? And when the assistance of a court of equity is invoked, the purpose of the suit and the object which is sought to be accom¬ plished are frequently matters which may properly be considered. Not only is it the general rule that equity will not restrain the collection of a tax on the mere ground of its illegality, but also, as appears by its legisla¬ tion, Congress has attempted to enforce that rule and to require payment of a tax by the party charged therewith before inquiry as to 260

?he United States.

its validity will be permitted. See Pacific Steam Whaling Go. v. United States, 187 U.

S. 447, ante, 253, 23 Sup. Ct. Rep. 154. Now, before a court of equity will in any way help a party to thwart this intent of Con¬ gress, it should affirmatively and clearly ap¬ pear that there is an absolute necessity for its interference in order to prevent irrepar¬ able injury. No considerations of mere convenience are sufficient. And if the party primarily and directly charged with a tax is unable to make a case for the interference of a court of equity, no one subordinately and indirectly affected by the tax should be given relief unless he shows, not merely ir¬ reparable injury to the tax debtor as well as to himself, but also that he has taken every essential preliminary step to justify his claim of a right to act in behalf of such tax debtor. We have seen how small the burden of this tax is upon the plaintiff, and how comparatively light it is upon the cor¬ poration, — how far short it comes of any¬ thing like irretrievable ruinv It is clearly an attempt to thwart, in behalf of this cor¬ poration, the obvious purpose of Congress, that a tax must be paid before its validity is ’challenged. Under those circumstances,

a court of equity should scrutinize with the utmost care the conduct of the plaintiff, and see that he has done everything which ought to have been done to secure action by the corporation and its directors, and justify under the assumption of a controversy be¬ tween himself and the corporation his prosecution of a litigation for its benefit.

It appears affirmatively that no demand has been made on the directors to protect the corporation against this alleged illegal tax.

The only demand shown is that upon the managing agent of the corporation in charge of the business in Alaska, and the excuse is that the directors (living in San Francisco) are too far away to be reached by notice.

The act went into effect March 3, 1899, and this bill was filed July 17, 1899. The rule requires that the plaintiff must set forth with particularity the efforts made by him to secure action by the directors. It does not appear that he made any effort to secure such action, but he relies simply on the dis¬ tance of the directors from the place where he resides and in which the court is held, as an excuse for not applying to them. We are of opinion that the excuse is not sufficient.

He should at least have shown some effort.

If he had made an effort, and obtained no satisfactory result, either by reason of the distance of the directors, or by their dilato¬ riness or unwillingness to act, a different case would have been presented, but to do nothing is not sufficient. For aught that the bill discloses, he may have been in San Francisco from the time of the passage of the act until he left to come to Alaska for the purpose of bringing this suit. ' The dis¬ trict judge, in his opinion, said that the facts disclosed by the record lend color to the contention that the suit was collusive.

In addition to the matters pointed out by him, it may also be stated that since the case was brought to this court the company has

187 U. S.

1902. Stewart v. Washington & A.S.S. Co. ; Hartford F. Ins. Co. v. Wilson. 465-467

not appeared by counsel in either brief or argument.

Putting all these things together, we are of opinion that the action of the District Court in dismissing the suit was right, and it is affirmed.

The Chief Justice took no part in the decision of this case.