Opinion
41146.
SUBMITTED FEBRUARY 1, 1965.
DECIDED APRIL 15, 1965.
Action for damages. Chatham Superior Court. Before Judge McWhorter.
Jack Miller, Duffy, Hendrix Miller, for plaintiff in error.
Ralph L. Crawford, Crawford, Lieb Calhoun, contra.
1. In an action for damages based on fraud, mere general allegations are insufficient, but the facts constituting the fraud should be specifically stated.
2. The act of a majority stockholder having control and direction of a corporation in allowing the corporation to default on payment of a note owed to him as an individual creditor, and thereafter foreclosing on all the corporate assets and and buying them in, thus rendering the corporation insolvent, if done in bad faith for the purpose of converting the assets to his own use, is a tort directly against the corporation and indirectly against the individual stockholder whose stock is thereby rendered valueless. In any action based on such a state of facts, the corporation is a necessary party.
SUBMITTED FEBRUARY 1, 1965 — DECIDED APRIL 15, 1965.
Coy Short sought recovery of an initial investment and punitive damages against John A. McKinney in the Superior Court of Chatham County for alleged tortious misconduct of the defendant in the purchase of stock and management of West Side Cab Company, a corporation in which the plaintiff was a minority stockholder. The petition recites that Short and one Davis formed a partnership called the West Side Cab Company in September, 1962; in March, 1963, they borrowed $10,800 from McKinney to be repaid in monthly installments assigning all the assets of the company to him as security for the loan. The partners had incorporated the business the previous December but had continued operations on a partnership basis. Because McKinney expressed an interest in becoming a stockholder, an incorporators' meeting was held on April 30, 1963, activating the new charter; all assets and liabilities of the partnership were transferred to the corporation, and 1,000 shares of stock were issued of which 100 went to McKinney and 450 each to Davis and Short. On October 15, 1963, the defendant through fraud and misrepresentation persuaded Davis to sell him Davis' shares by convincing him that the corporation was becoming insolvent. This action was taken by McKinney for the sole purpose of gaining a controlling interest in the corporation to the exclusion of the plaintiff. On October 22 there was a purported special joint stockholders meeting, shown on the minutes of the corporation and reciting that the plaintiff was elected president and the defendant secretary-treasurer. It is alleged that the minutes were false, that the plaintiff was never notified he was elected president, and that the defendant knew the minutes were false because on the same day he caused different names to be listed as corporate officers on the books of the Savannah Bank Trust Company. Plaintiff attended a special meeting of stockholders on November 12, and was then informed that the corporation had two pending damage suits against it and no liability insurance; that the corporation had not paid the current monthly installment due on the note held by the defendant, and that the latter intended to foreclose his bill of sale. McKinney, although he promised Short that he would take no further action without notifying him, did in fact foreclose his security instrument, buy in all the corporate assets at a private sale, and has since refused the plaintiff's requests for an accounting as to the status of the corporation or for a settlement, but has converted all the assets to his own use and rendered the corporation insolvent, and continues to operate the West Side Cab Company in his own name as a trade name.
The trial court, pointing out that the action is not one in equity but a suit for damages based on alleged fraud, held that the plaintiff's right, if any, is by reason of the diminution in value of his stock resulting from the defendant's acts, and dismissed the petition because of non-joinder of the corporation, a necessary party to the litigation.
1. "Mere general allegations of fraud are not good against a general demurrer, but the specific facts constituting the fraud must be stated." Johnson v. Ellington, 196 Ga. 846 (2) ( 28 S.E.2d 114) and cit. Since the ruling of the trial court was to the effect that the action was not direct but derivative, an analysis of the petition should address itself first to what fraud is properly alleged, and then to a determination of the party injured thereby. Complaint is made that McKinney, a minority stockholder, purchased the interest of Davis, which would make him majority stockholder and within limits guarantee him the exclusive and sole power to operate the corporation as against the only other stockholder, the plaintiff. The alleged misrepresentation and fraud is that the defendant convinced Davis that the corporation "was becoming insolvent and in financial difficulties" and that Davis should sell "while he can still get his money back." It is not alleged that the defendant failed to pay the full value of the stock purchased or that the corporation was not in financial difficulties; in fact, subsequent statements show that it was, either at the time or soon thereafter. Allegations that a statement is fraudulent which fail to allege that it is untrue are insufficient. Mann v. Showalter, 145 Ga. 268 (5) ( 88 S.E. 968). It does not appear that the defendant committed any actionable wrong against the plaintiff's individual interest by persuading the other stockholder to sell the shares so that he might acquire a majority of the stock, even though he intended to use his interest to control corporate policies. Secondly, the bill of sale to secure debt is not attached to the petition, and it is not alleged that the foreclosure proceeding, at which the defendant who was a creditor of the corporation purchased its assets, was in any way illegal. He might by the terms of the instrument have been given this power. If the failure of the defendant to notify the plaintiff that he was proceeding with the foreclosure action was a breach of a fiduciary relationship (in which connection see Oliver v. Oliver, 118 Ga. 362 (3), 45 S.E. 232) the plaintiff fails to allege that he relied upon the promise or was injured by the failure of the defendant to give him further notice. Again, the allegation that corporate minutes were falsely prepared stating that the plaintiff was elected president is not related to the injury for which he seeks redress in such manner that it appears the one stems from the other, and failure to procure liability insurance is not charged as a fraudulent or negligent act against the defendant individually.
2. What remains in the case, then, is that the defendant, having purchased a majority of the shares of stock, conducted the affairs of the corporation to the exclusion of the plaintiff, a minority stockholder. By reason of the failure of the corporation under the guidance of the defendant to pay the installments on money borrowed from the defendant, the defendant was enabled to place himself in a position to foreclose on the assets of the corporation, which he did, rendering the corporation insolvent and converting the assets to his own use. Also by reason of the failure of the corporation under the guidance of the defendant to protect itself by liability insurance, there are other creditors who have pending damage suits against it and a claim on its assets, in case of favorable verdicts, superior to that of the plaintiff.
Under these circumstances, it necessarily follows that the trial court's decision holding this action to be derivative rather than direct, that is, one to which the corporation itself is a necessary party rather than one which is personal between the plaintiff and defendant, was correct. What the plaintiff seeks is the investment represented by his stock. That investment has deteriorated to the extent the stock has become valueless, but "if a director converts corporate assets, the corporation is injured directly, while the shareholders suffer only indirectly through a decrease in the book value of their stock. The corporation may sue and recover its misappropriated assets, and its recovery will also repair the shareholders' indirect injury. If the corporation is unwilling to sue, however, a shareholder may be able to `instigate' a suit to enforce the corporate cause of action; any amount recovered will not go directly to the plaintiff-shareholder, but will be added to the assets of the corporation," not only for the benefit of the shareholder, but for creditors as well, but he cannot sidetrack claims by and against the corporation to this fund by recovering it directly for his individual use on the theory that it represents the value of his original investment in the corporation. U. of Pa. Law Review, Distinguishing between Direct and Derivative Shareholder Suits, Vol. 110, p. 1147. In such an action the corporation is a necessary party without which the court has no jurisdiction. "The wrong done by the defendants, if any, was a wrong done to the corporation. Primarily the right to recover against the defendants for the wrong done was in the corporation itself, and not in the stockholders. Stockholders can not sue at law the officers or directors of a corporation, or others, for damages, for fraud, embezzlement, misfeasance, or gross negligence, whereby the property of the corporation is wasted, the stockholders are deprived of dividends, or their shares are depreciated or rendered worthless." Greenwood v. Greenblatt, 173 Ga. 551 ( 161 S.E. 135). See also, Smyly v. Smith, 216 Ga. 529 ( 118 S.E.2d 188); Nadler, Georgia Corporation Law, § 414, p. 396. The failure to make the corporation a party here was fatal to the prosecution of the suit. Nor would the situation be any different if the action were against two people, one an officer of a corporation and the other a third person who had conspired with him to steal or otherwise convert corporate assets. In either event, the money or assets acquired by the defendant belong to the corporation, and must be replaced there. It was the corporation that suffered the loss. The investor may then (after the loss to the corporation is made good) recover whatever the value of his shares may be, whether more or less than his original investment, after the debts of the corporation have been paid. This petition affirmatively shows that there are as of the present time claims against the corporation by persons having no concern with this litigation with priority over the claim of this plaintiff to these corporate assets, and there may well be other creditors of the corporation not mentioned in the petition, unknown to this court and who know nothing about this litigation.
This action differs from Bromley v. Bromley, 106 Ga. App. 606 ( 127 S.E.2d 836) which is a good example of a direct rather than a derivative suit; there the defendant, an officer of a corporation of which the plaintiff was an employee and both were shareholders, was individually liable because he as an individual procured another, the corporation, to effect a tortious discharge of the plaintiff.
The trial court in his order dismissing the action stated that it was being dismissed for lack of a necessary party. He did not pass upon the merits of the case, but did state: "Ordinarily a non-joinder can be met by amendment, but this is not a suit in equity and no equitable relief is sought. It is simply a suit for damages based on an alleged fraud, and as the plaintiff's rights are derived from the corporation, the non-joinder of the corporation is fatal."
The trial court did not err in sustaining the second ground of demurrer.
Judgment affirmed. Felton, C. J., and Jordan, J., concur.