City of Quincy v. Steel/Opinion of the Court

In the cases of Hawes v. Oakland, 104 U.S. 456, and Huntington v. Palmer, Id. 482, the question of the growth of the form of invoking federal jurisdiction, where it does not otherwise exist, by the attempt of a corporation, which cannot sue in the federal court, to bring its grievance into that court by a suit in the name of one of its stockholders who has the requisitecitizenship, was very much considered. In order to give effect to the principles there laid down, this court at that term adopted rule 94 of the rules of practice for courts of equity of the United States, which is as follows: 'Every bill brought by one or more stockholders in a corporation, against the corporation and other parties, founded on rights which may properly be asserted by the corporation, must be verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains, or that his share had devolved on 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 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 failure to obtain such action.'

The bill in the present case, although verified by oath, is far from complying with the letter or the spirit of this rule. It does not contain an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains, although the allegation on that subject includes a part of the time in which the city of Quincy failed to pay for its gas; but inasmuch as the sworn allegation in the bill was made on the eighteenth day of August, 1885, and he there swears that he had been the owner of the stock on which he brings this suit over four years, it is easy to suppose that he acquired this stock after the eleventh day of May, 1881, on which day the city, by its official action, notified the gas company that it repudiated the contract, and would no longer be bound by it. And it is not an unreasonable supposition that the gas company, foreseeing litigation which it might be desirable for that company to have carried on in a federal court, immediately after receiving notice of that resolution, had this stock placed in the hands of Mr. Steel for the purpose of securing that object, and, though the suit was delayed for two or three years, it was probably because the city continued to pay some part of the demand for the gas furnished by the company. The bill does not contain the allegation, expressly prescribed by this rule, 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 otherwise have cognizance.' The allegation of the bill 'that this suit is brought in good faith, and for the collection of, and to compel the collection of, what your orao r believes to be a meritorious claim,' is by no means the equivalent of this provision of the rule, for it may very well be understood that the party who is seeking to enforce a debt which he believes to be due is acting in good faith for the purpose of compelling its collection, while he may be well aware that he is imposing upon the court to which he actually resorts a jurisdiction which does not belong to it. The rule also requires that he must set forth with particularity his efforts to secure action on the part of the managing directors or trustees of the corporation of which he is a member, and, if necessary, of the shareholders, and the causes of his failure to obtain such action. In the case before us he seems to have made but a single effort to induce the directors of the gas company to institute a suit against the city to recover the money, and this was by a communication in writing, addressed to the board August 1, 1885. No copy of that letter is produced; but it is said that the board of directors laid the communication on the table. No copy of the order of the board upon that subject is produced. No effort at conversation with any of the directors, or any earnest effort of any kind upon his part to induce the directors to bring the suit, is shown in the bill. No attempt to call the attention of the shareholders to this matter during the four years in which he said he was a shareholder, and during which time the city was failing to pay its debt to the gas company, nor any effort at any of the meetings of the shareholders or of the directors to induce them to enforce the rights of the company against the city, is shown. The most meager description possible of a bare demand in writing, made 16 days before the institution of this suit, is all we have of the efforts which he should have made to induce this corporation to assert its rights. This letter was addressed to the board of directors August 1, 1885, from what point is not stated, but it may reasonably be inferred that it was from Alabama, of which state he was a citizen. The bill itself is sworn to the thirteenth day of August thereafter. How long a time was left for the consideration of this question by the board of directors, and what earnest efforts Mr. Steel may have made to induce their favorable action, may be easily inferred from the speed with which the bill was sworn to in Alabama and filed after he addressed his letter to the board. The inference that the whole of this proceeding was a preconcerted and simulated arrangement, to foist upon the circuit court of the United States jurisdiction in a case which did not fairly belong to it, is very strong.

In the case of Hawes v. Oakland, 104 U.S. 461, in speaking of this perfunctory effort to induce the trustees of the corporation to act, it is said: 'He (the plaintiff) must make an earnest, not a simulated, effort with the managing body of the corporation to induce 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 matter of which he complains. And he must show a case, if this is not done, where it could not be done, or it was not reasonable to require it.' Again it is said: 'He merely avers that he requested the president and directors to desist from furnishing water free of expense to the city, except in case of fire or other great necessity, and that they declined to do as he requested. No correspondence on the subject is given; no reason for declining; * *  * no attempt to consult the other shareholders, to ascertain their opinions or obtain their action. But within five days after his application to the directors this bill is filed.'

In the case of Huntington v. Palmer, 104 U.S. 483, the court says: 'Although the company is the party injured by the taxation complained of, which must be paid out of its treasury, i paid at all, the suit is not brought in its name, but in that of one of its stockholders. Of course, as we have attempted to show in the case just mentioned, (Hawes v. Oakland, supra, 450,) this cannot be done without there has been an honest and earnest effort by the complainant to induce the corporation to take the necessary steps to obtain relief.' See Detroit v. Dean, 106 U.S. 537, 1 Sup. Ct. Rep. 560.

We think, upon the face of the bill in this case, there is an entire absence of any compliance with the rule of practice laid down for equity courts in such cases, and of any evidence of an earnest and honest effort on the part of the complainant to induce the directors of the gas company to assert the rights of that corporation. On the contrary, the clear impression left upon reading the bill is that it is an attempt to have a plain common-law action tried in a court of equity, and the rights of parties decided in a court of the United States who have no right to litigate in such a court, and that there is no sufficient reason in the bare fact that Mr. Steel is a stockholder in the corporation, which justifies such a proceeding. If other evidence were wanting of the soundness of our inferences on this subject, it is to be found in the fact that while the decree in this case was rendered on the first day of March, 1886, a suit was commenced by the gas company against the city of Quincy, on the same causes of action, in the circuit court of Adams county, in the state of Illinois, on the thirty-first day of March of the same year. This fact was brought to the attention of the circuit court of the United States at the same term in which the decree now appealed from was rendered, by a petition to vacate and set aside the decree, which that court overruled. It seems very obvious that the gas company, having obtained, through the instrumentality of this collusive suit by Mr. Steel, a decree setting its rights against the city of Quincy, then brought in its own name a suit in the state court, which it had not dared to do until those rights were adjusted in a court of the United States.

We are of opinion that the demurrer to the plaintiff's bill ought to have been sustained, and the bill dismissed. The decree is therefore reversed, and the case remanded to the circuit court with instructions to that effect.