PARK TERRACE, INC.
v.
R. G. BURGE and Lawson Lester, Jr.
No. 390.
Supreme Court of North Carolina.
January 14, 1959.Dallace McLennan, Spry, White & Hamrick, Winston-Salem and Fletcher & Lake, Raleigh, for plaintiff.
Womble, Carlyle, Sandridge & Rice, Wade M. Gallant, Jr., Winston-Salem and Broaddus, Epperly & Broaddus, Martinsville, for defendants.
DENNY, Justice.
As we construe the facts revealed on the record before us, the question to be determined is not whether these defendants acted in bad faith as officers and directors of the plaintiff corporation in connection with the transactions of which the plaintiff complains; the determinative question, in our opinion, is whether or not the plaintiff corporation, in light of all the facts and circumstances revealed by the record, may maintain an action to recover the consideration paid to these defendants for the purchase and retirement of the B stock. It is difficult to understand how the payment of $221,000 for the purchase and retirement of this stock could have been for the best interest of the plaintiff corporation. Even so, we must consider the factual situation as it existed at the time of the sale of this stock to the plaintiff corporation for retirement.
These defendants and W. B. Pollard owned all the outstanding shares of A stock at the time the B stock was sold to the plaintiff corporation. Therefore, the plaintiff corporation had no stockholders with voting rights other than those who as officers and directors authorized the purchase by the corporation of the B stock from these defendants. Consequently, it would seem that neither the plaintiff corporation nor the holders of the A stock could thereafter attack the validity of the transaction unless the corporation in doing so was acting in behalf of creditors.
The A stock, upon the purchase and retirement of the B stock, represented the total value of all the assets of the plaintiff corporation, subject to the obligation of the plaintiff to the holder of its mortgage, which was insured by the FHA, and the value of the preferred stock issued to and held by the FHA, which consisted of 100 shares of the par value of $1 per share or a total value of only $100, and other creditors of the corporation, if any.
These defendants and W. B. Pollard being the owners and holders of all the A stock of the plaintiff corporation at the time of the transaction complained of, the value of their equity in the plaintiff corporation as represented by the A stock was substantially reduced in value as a result of the purchase and retirement of the B stock. Even so, these defendants could not complain since the reduction in value of the A stock was brought about by their own acts.
Certainly, the creditors of the corporation at the time of the transaction would have had just cause for complaint and would have had the right to require the payment by the defendants of the purchase price of the B stock as originally agreed upon if such payment by the defendants had been necessary to meet the obligations of the plaintiff corporation to them. G.S. § 55-65; Marshall Foundry Co. v. Killian, 99 N.C. 501, 6 S.E. 680, 6 Am.St.Rep. 539; Clayton *482 v. Ore Knob Co., 109 N.C. 385, 14 S.E. 36; Cotton Mills v. C. C. Randleman Cotton Mills, 115 N.C. 475, 20 S.E. 770; Hobgood v. Ehlen, 141 N.C. 344, 53 S.E. 857; Pender v. Speight, 159 N.C. 612, 75 S.E. 851; Whitlock v. Alexander, 160 N.C. 465, 76 S.E. 538. However, the stipulation entered into in the court below eliminates the necessity for any further discussion or consideration of the rights of the creditors.
Since there is no creditor of the plaintiff corporation whose claim was outstanding on 4 November 1950, except the holder of the mortgage executed by the plaintiff to secure its original construction loan, and there is no evidence indicating the mortgage was or is now in default, it is quite clear that a recovery by the plaintiff corporation would inure entirely to the benefit of the present stockholders. This being true, the plaintiff is not entitled to recover unless the present stockholders could maintain an action for prior mismanagement against the defendants and W. B. Pollard. Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W. 1024, 60 L.R.A. 927.
To allow the plaintiff corporation to recover the consideration it paid to the defendants for the B stock would, in substance, allow the present stockholders of the plaintiff corporation to recover an amount in excess of the sum M. P. McLean, Jr., paid these defendants, W. B. Pollard and J. A. Bolich, Jr., for the A stock on 15 February 1951, to wit, the sum of $182,500. See Lester v. McLean (Burge v. McLean), supra.
In the case of Home Fire Ins. Co. v. Barber, supra [67 Neb. 644, 93 N.W. 1028], an individual purchased all of the corporation's outstanding capital stock, the sellers being stockholders, directors and officers of the corporation. After ownership and control had passed to the purchaser, a suit was brought by the corporation to recover from one of the sellers on the ground of alleged prior mismanagement of the corporation's affairs. The opinion of the Court by Pound, C., says: "Sound reason and good authority sustain the rule that a purchaser of stock cannot complain of the prior acts and management of the corporation (citing numerous authorities, including Hawes v. City of Oakland, 104 U.S. 450, 26 L.Ed. 827). * * * It appears to be well settled * * * that stockholders who have acquired their shares and their interest in the corporation from the alleged wrongdoer and through the prior mismanagement have no standing to complain thereof. (Citations omitted) * * * Conceding, then, that all of the present stockholders are so circumstanced that no relief should be afforded them in a court of equity, may the corporation recover, notwithstanding? We think not. Where a corporation is not asserting or endeavoring to protect a title to property, it can only maintain a suit in equity as the representative of its stockholders. If they have no standing in equity to entitle them to the relief sought for their benefit, they cannot obtain such relief through the corporation or in its own name. (Citations) It would be a reproach to courts of equity if this were not so. If a court of equity could not look behind the corporation to the shareholders, who are the real and substantial beneficiaries, and ascertain whether these ultimate beneficiaries of the relief it is asked to grant have any standing to demand it, the maxim that equity looks to the substance, and not the form, would be very much limited in its application. `It is the province and delight of equity to brush away mere forms of law.' Post, J., in Fitzgerald v. Fitzgerald & Mallory Construction Company, 44 Neb. 463, 492, 62 N.W. 899. Nowhere is it more necessary for courts of equity to adhere steadfastly to this maxim, and avoid the danger of allowing their remedies to be abused, by penetrating all legal fictions and disguises, than in the complex relations growing out of corporate affairs. Accordingly, courts and text-writers have been in entire agreement that equity will look behind the corporate entity, and consider who are the real *483 and substantial parties in interest, whenever it becomes necessary to do so to promote justice or obviate inequitable results."
The distinguished jurist (later known to us as Dean Pound), concludes: "To permit persons to recover through the medium of a court of equity that to which they are not entitled, simply because the nominal recovery is by a distinct person through whom they receive the whole actual and substantial benefit, and that nominal person would, in ordinary cases, as representing beneficiaries having a right to recover, be entitled to relief, is perversion of equity. It turns principles meant to do justice into rules to be administered strictly without regard to the result. It is contrary to the very genius of equity. When the corporation comes into equity and seeks equitable relief, we ought to look at the substance of the proceeding, and, if the beneficiaries of the judgment sought have no standing in equity to recover, we ought not to become befogged by the fiction of corporation individuality, and apply the principles of equity to reach an inequitable result."
In view of the fact that none of the present stockholders of the plaintiff corporation was a stockholder at the time of the transactions of which the plaintiff complains; the further fact that they obtained their shares through voluntary purchase or transfer, Park Terrace, Inc. v. Phoenix Indemnity Co., 243 N.C. 595, 91 S.E.2d 584, and not by operation of law, and since the action was not brought in behalf of creditors or for the purpose of "asserting or endeavoring to protect a title to property," but solely as a suit in equity as the representative of its stockholders, it cannot be maintained. Home Fire Ins. Co. v. Barber, supra; Hawes v. City of Oakland, supra; Moore v. Silver Valley Mining Co., 104 N. C. 534, 10 S.E. 679; Park Terrace, Inc. v. Phoenix Indemnity Co., supra. Hence, the judgment of the court below is
Affirmed.