# Opinion — Del. & Hud. Co. v. Albany & Susquehanna Railroad Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386020_0578%3A4 ## Record - **Collection:** Supreme Court brief - **Document type:** Opinion - **Published:** January 1, 1909 - **Citation:** 213 U.S. 435 ## Text DELAWARE AND HUDSON COMPANY ». ALBANY AND SUSQUEHANNA RAILROAD COMPANY. CERTIFICATE FROM THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT. No. 416. Argued February 23, 24, 1909.—Decided May 3, 1909. Equity rule No. 94, which is intended to secure the Federal courts from imposition upon their jurisdiction, recognizes the right of the corpo- rate directory to corporate control, and expresses primarily the con- ditions which must precede the right of the stockholders to protect the corporation in cases where the directory is derelict; but the re- quirements of the rule may be dispensed with where they do not apply by reason of antagonism between the directory and the corporate interest. Equity rule No. 94 is intended to have a practical application and it does not apply where the corporate interests can only be protected by a suit, which, if successful, would be detrimental to all the directors in other capacities. Where, as in this case, stockholders of a lessor corporation sued, for its benefit, the lessee corporation, the directors of the two corporations being almost identical and the lessee corporation also owning, or 436 OCTOBER TERM, 1908. Argument for the Delaware & Hudson Company. 213 U.S. holding the voting power, of sufficient stock of the lessee corporation to control a stockholders’ meeting, the fact that the stockholders bringing the suit made no demand for relief upon the board of directors nor any effort to obtain relief at a stockholders’ meeting does not pre- vent them from maintaining the bill. Quere, and not decided, whether stockholders have power to compel directors to institute suits to which the latter are opposed. Tue facts, and the questions certified, are stated in the opinion. Mr. James M. Beck, with whom Mr. Alfred Opdyke was on the brief, for the Delaware & Hudson Company: Before a shareholder “is permitted in his own name to insti- tute and conduct a litigation which usually 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 itself the redress of his grievances or ac- tion in conformity to his wishes. He must make an earnest, not a simulated, effort with the managing body of the corpo- ration to induce remedial action on their part, and this must be made apparent to the court.” Hawes v. Oakland, 104 U.S. 450; Foss v. Harbottle, 2 Hare, 461; Macdougall v. Gardiner, 1 Chancery Div. 13. The stockholder of a corporation cannot on his individual responsibility commence an action for the benefit of the corpo- ration against another corporation, without first applying to the managing body of his corporation to do so, and the fact that a majority of such managing body are also officers, di- rectors, or employés of the corporation against which the suit is sought to be brought will not, in the absence of fraud, excusc the failure of the stockholder to make such application. The only question which seems open to discussion is whether the mere fact that a majority of such board were also “ officers, directors or employés”’ of the company sought to be sued, and that some of them had only a nominal stock interest in the Susquehanna Company, in itself and in the absence of any DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 437 213 U.S. Argument for Delaware & Hudson Company. circumstances of fraud, so conclusively demonstrates the futil- ity of such application as to excuse it. This conclusion could be justified only on the assumption that there is a conclusive presumption of law that the directors of a corporation will not institute a suit against another corporation, with which a majority are identified either as “officers, directors or em- ployés.”’ The vice of the appellees’ position is that they gratuitously assume that the directors of the Susquehanna Company, men of recognized standing and probity in the business world, would have been faithless to the trust reposed in them, and this solely for the reason that a majority were, as officers, di- rectors or employés, also identified with the Delaware Com- pany. Certainly the presumption that directors will fully discharge their duties to all the stockholders should not be overborne at least until they have first refused, upon demand, to bring suit under conditions that will fully safeguard the interests of the stockholders, and until such demand and refusal the ordinary presumption of fidelity to a trust, as anounced by this court, still remains. Hawes v. Oakland, 104 U. S. 450; Detroit v. Dean, 106 U.S. 537; Dimpfell v. Ohio Ry. Co., 110 U. S. 209; Quincy v. Steel, 120 U. S. 241; Taylor v. Holmes, 127 U.S. 489. This rule is laid down in Corbus v. Alaska Co., 187 U. S. 455, and also in Dodge v. Woolsey, 18 How. 331; Greenwood v. Freight Co., 105 U. 8. 13; Pollock v. Farmers’ Loan & Trust Co., 157 U.S.429. Doctor v. Harrington, 196 U. 8. 579, relied upon by appellees, was exceptional and bears no resemblance to this case. And Chicago v. Mills, 204 U.S. 321, and Ex parte Young, 209 U. S. 123, 143, can also be distinguished. Rule 94 itself assumes that the directors are presumed to act honestly and according to their best judgment for the in- terests of all, and this presumption cannot be overborne by the mere assertion of futility or by the pleader’s license in the use of adjectives or adverbs. The fraud charged and proven once er esa ae ORAM IE SEO SRR tas ipa etes tra Poelg poo 438 OCTOBER TERM, 1908. Argument for Albany & Susquehanna R. R. Co. 213 U.S. must be actual and not constructive. ‘“Epithets do not make out fraud.” Kent v. Canal Co., 144 U.S. 91; Fogg v. Blair, 139 U. S. 127. In the following cases in state courts the bill was held not to be maintainable. Wolf v. R. R. Co., 195 Pa. St. 91, 95; Sieg- man v. Maloney, 65 N. J. Eq. 372; Brewer v. Boston Theatre, 104 Massachusetts, 378; Dunphy v. Traveller Assn., 146 Massachu- setts, 495; O’Connor v. Virginia, 184 N. Y. 46, 53. If the complainants were excused under the facts certified from making any preliminary demand upon the directors, they nevertheless must show, in order to maintain their suit, that they could not have secured corporate action by an appeal to the stockholders of the Susquehanna Company. Hawes v. Oakland, 104 U.S. 450; Foss v. Harbottle, 2 Hare, 461; Hunting- don v. Palmer, 104 U.S. 482; Quincy v. Steel, 120 U.S. 241; Chicago v. Mills, 204 U. S. 321: Doctor v. Harrington, 196 U.S. 579. Mr. E. Parmalee Prentice, with whom Mr. George Welwood Murray and Mr. Charles P. Howland were on the brief, for The Albany and Susquehanna Railroad Company et al: Complainants are entitled under the facts stated by the Circuit Court of Appeals to sue as stockholders in the Susque- hanna Company asserting rights due that corporation. They were not required before instituting this suit to demand relief from the directors of the Susquehanna Company. The present case is not within the purpose of Equity Rule 94 which is to prevent the maintenance of suits in Federal courts by collusion between complainants and the defendant corporation whose rights they assert. Hawes v. Oakland, 104 U.S. 450; Citizens’ Trust Co. v. Illinois Central R. Co., 205 U. 8. 46, 47; Doctor v. Harrington, 196 U.S. 579, 588; Chicago v. Mills, 204 U.S. 321; Young v. Mining Co., 71 Fed. Rep. 810; Eldred v. American &c. Co., 99 Fed. Rep. 168. The certificate shows that this suit is not collusive. The present case is not within the requirements of Equity DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 439 213 U.S. Argument for Albany & Susquehanna R. R. Co. Rule 94, as to demand upon directors. The bill shows under oath that directors were hostile, that demand upon them would be idle and nugatory. Equity will not permit double directors, by contracts made with themselves in other capacities, to bind shareholders or the corporation. Wardell v. Railroad Co., 103 U.S. 651; Twin- Lick Oil Co. v. Marbury, 91 U.S. 587. A court will not entertain litigation in which both sides are controlled by one dominus litis. South Spring Gold Co. v. Amador Gold Co., 145 U.S. 300; Mills v. Green, 159 U.S. 651, 654; East Tennessee &c. Co. v. Telegraph Co., 125 U.S. 695; Hatfield v. King, 184 U.S. 162. In fact parties who bring such litigation without disclosing the relationship of parties are guilty of punishable contempt of court. Lord v. Veazie, 8 How. 251; Little v. Bowers, 134 U. 8. 547, 557; Hatfield v. King, 184 U. S. 162. When directors are under adverse control stockholders may sue without demand for relief from a hostile board. Citizens’ Trust Co. v. Illinois Central Railroad, 205 U. 8. 46; Doctor v. Harrington, 196 U.S. 579; Corbus v. Gold Mining Co., 187 U.S. 455; Heath v. Erie Railway Co., 8 Blatch. 347, 409; Bill v. Telegraph Co., 16 Fed. Rep. 14, 19; Columbia Dredging Co. v. Washed Bar Sand Dredging Co., 136 Fed. Rep. 710; Bigelow v. Calumet & Hecla Mining Co., 155 Fed. Rep. 869; Dickinson v. Traction Co., 114 Fed. Rep. 232; Eldred v. American &c. Co., 99 Fed. Rep. 168; Berwind v. Canadian Pac. Ry. Co., 98 Fed. Rep. 158; Ball v. Rutland R. Co., 93 Fed. Rep. 513; Weir v. Bay State Gas Co., 91 Fed. Rep. 940; Rogers v. Nashville &c. Ry. Co., 91 Fed. Rep. 299; De Neufville v. Railroad Co., 81 Fed. Rep. 10. Complainants were not required before instituting this suit to demand relief at a meeting of Susquehanna stockholders. See Brewer v. Boston Theatre, 104 Massachusetts, 378, 387. Demand on stockholders was not necessary in this case be- cause under the Susquehanna charter stockholders could not grant relief. Laws, New York, 1850, Ch. 140. 440 OCTOBER TERM, 1908. Argument for Albany & Susquehanna R. R. Co. 213 U.S. In all litigation involving the action of the corporation they (the directors) are its representatives in court. Stockholders cannot control or interfere with their management. Railway Co. v. Alling, 99 U.S. 463, 472; Pullman Co. v. Missouri Pacific R. Co., 115 U. S. 587; Beveridge v. New York &c. R. Co., 112 N. Y. 1, 21, 23; Robinson v. Smith, 3 Paige, Ch. 222; McCul- lough v. Moss, 5 Denio, 567; Conro v. Port Henry Iron Co., 12 Barb. 27; Morawetz on Corps., 2d ed., §§ 283, 510; Cook on Corps., 5th ed., §§ 684, 750. Even if stockholders could by resolution require directors to institute litigation against the Delaware Company, they could not oust directors from office, before expiration of their terms. Laws, New York, Act of 1850, ch. 140, § 5. No court would entertain a suit against the Delaware Com- pany conducted by the Delaware administration of the Susque- hanna Company. South Spring Gold Co. v. Amador Gold Co., 145 U. 8. 300; Mills v. Green, 159 U. S. 651; East Tennessee &c. Co. v. Telegraph Co., 125 U. 8. 695. Suits are regularly maintained in Federal courts without demand upon stockholders for a resolution directing litigation. Ex parte Young, 209 U.S. 123; Cotting v. Kansas City Stock Yards Co., 183 U.S. 79; Dinsmore v. Southern Express Co., 183 U.S. 115; Smyth v. Ames, 169 U. S. 466; Pollock v. Farmers’ &ce. Trust Co., 157 U.S. 429; Greenwood v. Freight Co., 105 U.S. 13; Schultz v. Highland Gold Mines Co., 158 Fed. Rep. 337; Perkins v. Northern Pacific Co., 155 Fed. Rep. 445; Monmouth Investing Co. v. Means, 151 Fed. Rep. 159; Weir v. Bay State Gas Co., 91 Fed. Rep. 940; Ball v. Rutland Railroad Co., 93 Fed. Rep. 513; Dinsmore v. Southern Express Co., 92 Fed. Rep. 714. No case was ever dismissed from a Federal court for want of an application to stockholders for a resolution directing liti- gation on behalf of the corporation. There was nothing to submit to stockholders. When a stockholders’ vote makes a voidable act valid or void, it acts upon something which directors have done. In DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 441 213 U.S. Argument for Albany & Susquehanna R. R. Co. this case directors have done nothing and stockholders cannot control their course. Stockholders cannot, by anything short of a unanimous vote, authorize or ratify gifts of corporate property. Brewer v. Bos- ion Theatre, 104 Massachusetts, 378; Jackson v. Ludeling, 21 Wall. 616; Ervin v. Oregon R. & N.Co., 27 Fed. Rep. 625, 631; Mumford v. Ecuador Development Co., 111 Fed. Rep. 639; Menier v. Telegraph Works, L. R. 9 Ch. App. 350; Gamble v. Queens County Water Co., 123 N. Y. 91; Farmers’ &c. Trust Co. v. New York &c. R. Co., 150 N. Y. 410. Complainants desiring institution of a law-suit were not re- quired by Rule 94 to ask for election of a new board of directors. When this suit was instituted the Delaware Company con- trolled the Susquehanna stock vote. Stockholders whose corporation is in adverse control are entitled to protection by injunction. Complainants are entitled to maintain this bill by reason of their direct relations to both defendant corporations. Rule 94 does not apply to this case. The Delaware Company has not only agreed with the lessor corporation by covenant in the lease to pay rent for the Susque- hanna property, but by the guarantee on stock certificates has also agreed with individual stockholders that payment of this rent shall be made by dividing the corporate income as pro- vided in the lease. The Delaware Company has, therefore, in respect to corpo- rate rights of the Susquehanna Company, entered into privity of contract with every. Susquehanna stockholder, concerning division of the entire rent. Hawes v. Oakland, 104 U.S. 450. Stockholders’ suits cannot be at law, for the guarantees are part of the entire covenant to pay the entire rent arising from a single demise of corporate property. An action to divide corporate income among stockholders must be brought in equity,—otherwise the lessee’s right of off- set would be defeated and unequal division of income made among stockholders. Barr v. New York &c. Co., 96 N. Y. 444. 442 OCTOBER TERM, 1908. Opinion of the Court. 213 U.S. Mr. Justice McKenna delivered the opinion of the court. The certificate of the court is as follows: “This cause comes here upon appeal from a final decree of the Circuit Court, Southern District of New York, which directs that the defendant Delaware and Hudson Company (herein- after called the Delaware Company) pay to the defendant the Albany and Susquehanna Railroad Company (hereinafter called the Susquehanna Company) the amount of $1,107,923.24. “The case was fully argued and submitted on briefs. It thereupon developed that there was a question presented whether the bill could be maintained under the ninety-fourth equity rule. That question is a preliminary one, it has been held to be jurisdictional in character (City of Chicago v. Mills, 204 U. 8. 321; Doctor v. Harrington, 196 U. 8. 579), and this court desires the instruction of the Supreme Court for its proper decision. Statement of Facts. “The facts upon whith the question arises are as follows: “The defendant corporations are both citizens of the State of New York; the complainants are citizens of the States of Connecticut and Rhode Island. The bill was brought to ob- tain an accounting for various sums of money which it was al- leged became due at intervals during a series of years from the Delaware Company to the Susquehanna Company as rental or in the nature of rental under a lease made in 1870. For the convenience of all a copy of the pleadings is hereto annexed, marked Exhibit ‘A,’ which may be referred to for a more de- tailed statement of the cause of action. The bill does not ‘set forth with particularity the efforts of the plaintiffs to secure such action as they desire on the part of the managing direc- tors or trustees.’ Nor did the proofs show any such efforts. Nor does the bill set forth any efforts to secure ‘such action on the part of the shareholders.’ Nor did the proofs show any such efforts. Nor did the bill set forth, or the proofs show, ‘the DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 443 213 U.S. Opinion of the Court. causes of their failure to obtain such action’ otherwise than is hereinafter disclosed. “The complaint was filed on June 12, 1906. The Susque- hanna Company was organized under the act of April 2, 1850, which provides that ‘there shall be a board of thirteen direc- tors . . . to manage its affairs,’ and for many years be- fore this suit was brought a majority of the board of directors of the Susquehanna Company consisted of persons who were officers, directors or employés of the Delaware Company. At the time this suit was instituted, the directors and officers of the Susquehanna Company, the dates of their election as such, and their relations to the Delaware Company with dates of election were as shown on the following statement: Names of directors of Susquehanna a > Company and dates of election as Position in Delaware and Hudson directors and officers. Company and dates. Robert M. Olyphant, 1878 Director since 1872 President from 1884 to 1903 Chairman of the Board since 1903 George I. Wilber, 1883 Director since 1901 David Wilcox, 1894 (Vice Pres- General counsel 1894 to 1903 ident, May 9, 1906) Director since 1899 President since 1903 R. Suydam Grant, 1901 Director since 1886 Charles A. Peabody, 1902 Director since 1902 William S. Opdyke, 1903 General counsel since 1903 Director since 1905 Abel I. Culver, 1903 A Vice President since 1903 Charles A. Walker, 1892 Treasurer 1892 Robert Olyphant, 1887 (Presi- Son of Robert M. Olyphant dent since 1889) William L. M. Phelps, 1873 Secretary of the Albany and (Secretary since 1870) Susquehanna Company, elected by the board of di- rectors. Robert C. Pruyn, 1890 Nominees of the Delaware Com- pany as stated in the Dela- James H. Manning, 1890 ware Company’s answer. 444 OCTOBER TERM, 1908. Opinion of the Court. 213 U.S. “Of these, Robert M. Olyphant, R. Suydam Grant, Charles A. Peabody, William S. Opdyke, Abel I. Culver and Robert C. Pruyn at the time this suit was begun did not own or hold in their own right any shares of stock in the Susquehanna Com- pany, but shares of stock of that company owned by the Dela- ware Company were transferred to each of them on the books of the Susquehanna Company by the Delaware Company for the purpose of qualifying them as such directors. Charles A. Walker owned five shares of Susquehanna stock from 1901 to 1906; it does not appear that he owned any stock in the Susque- hanna Company during the year 1906. “So far as appears from anything shown in this record none of the directors or officers of the Delaware Company ever, be- fore or after the bringing of this suit, treated the claim therein set forth otherwise than as one of doubtful validity the pay- ment of which was to be resisted. “On June 12, 1906, and for thirty years prior thereto, the capital stock of the Susquehanna Company had been fixed at and limited to 35,000 shares. Of this capital stock on June 12th, 1906, the Delaware Company owned 4500 shares and its direc- tors or officers owned or controlled 4340 shares; the com- plainants owned 1312 shares and a so-called Protective Com- mittee who from and after December, 1905, had been opposing the administration of the Delaware Company upon the ques- tions involved in this bill controlled 6688 shares. The entire 35,000 shares were held by 546 different persons, of whom 423 owned 50 shares or less, and of whom 383 resided in the State of New York. “An annual meeting of the Susquehanna Company was held subsequent to the beginning of this suit, on October 16, 1906. At that meeting the nominees of the protective committee were elected, receiving 15,501 ballots, the nominees of the former management receiving 15,441 ballots. About two weeks before such annual meeting the Susquehanna Company being then controlled by the directorate above named, filed a demurrer to the bill which is hereto annexed as Exhibit ‘B.’ Copies of REITING ND: SSR DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 445 213 U.S. Opinion of the Court. such demurrer were sent by stockholders opposed to the existing control to all stockholders and thereafter and before the meet- ing proxies for several thousand shares were received by the persons who voted for the nominees then elected. Questions Certified. ‘Upon the facts above set forth the questions of law concern- ing which this court desires the instruction of the Supreme Court are: “First. ‘Does the fact that before institution of this suit complainants made no demand for relief upon the Board of Directors of the Susquehanna Company prevent them from maintaining this bill?’ “Second. ‘Does the fact that before institution of this suit complainants made no effort to obtain relief at a stockholders’ meeting prevent them from maintaining this bill?’”’ The questions in connection with the ninety-fourth equity rule present the issue in the case. The rule is as follows: “94, Every bill brought by one or more stockholders in a corporation against the corporation and other parties founded upon the rights which may properly be asserted by the corpo- ration must be verified by oath, and must contain an allegation that the complainant was a shareholder at the time of the transaction of which he complains, or that his share had de- volved upon him since by operation of law, and that the suit is not a collusive one to confer on a court of the United States jurisdiction of a case of which it would not have otherwise 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 share- holders, and the causes of his failure to obtain such action.” Do the facts show a compliance with the rule, or rather that part of it which we have expressed in italics? The other parts of it are not involved. It is the contention of appellant that the averments in the bill as exhibited in the certificate do not satisfy either the 446 OCTOBER TERM, 1908. Opinion of the Court. 213 U.S. language of the rule or its substance. The argument is that (1) a shareholder, as a condition of his suit, must show that he has exhausted all the means within his reach to obtain within the corporation itself the redress of his grievances, that his efforts must be earnest, not simulated, and this must be made apparent to the court; (2) his failure to apply to the managing body of the corporation will not, in the absence of fraud, be excused by the fact that such managing body are also officers, directors or employés of the corporation against which the suit is brought; (3) if the facts of this case excused from a preliminary demand upon the directors, the complainants were required to show “that they could not have secured appropriate action by an appeal to the stockholders of the Susquehanna Company.”’ The appellees counter these con- tentions by asserting that (1) the case is not within the require- ments of Rule 94. “The bill shows, under oath,” it is said, “that the directors were hostile, and that demands upon them would be ‘idle and nugatory.’ .’ (2) Complainants (appellees here) were not required to appeal to the stockholders of the Susquehanna Company because (a) the stockholders, under the charter of the company, could not grant relief; (b) even if such power existed, the stockholders “could not oust directors from office before expiration of their terms.” And it is further contended that at the time the suit was in- stituted “the Delaware Company controlled the stock vote of the Susquehanna Company.” These opposing contentions present a not unusual case where the rule or principle of law is clear enough, but its application to a particular case is not so clear, and there is a contest of plausi- ble constructions between which it is not always easy to decide. The purpose of Rule No. 94 hardly needs explanation. It is intended to secure the Federal courts from imposition upon their jurisdiction and recognizes the right of the corporate directory to corporate control; in other words, to make the corporation paramount, even when its rights are to be pro- tected or sought through litigation. Cases in this court have earners snerseecnnes erence DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 447 213 U.S. Opinion of the Court. indicated such right. But the directory may be derelict and the interests of stockholders put in peril, and a case hence arises in which the right of protecting the corporation accrues to them. Rule 94 expresses primarily the conditions which must precede the