Before a court of equity will in any way help a party to thwart
the intent of Congress, as expressed in a statute, it should
affirmatively and clearly appear that there is an absolute
necessity for its interference in order to prevent irreparable
injury.
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 irreparable 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.
The fact that this Court entertained the bill of equity in
Pollock v. Farmers' Loan & Trust Co., 157 U.
S. 429, does not determine to what extent a court of
equity will permit a stockholder to maintain a suit nominally
against the corporation, but really for its benefit, and where a
bill is filed by a stockholder to enjoin the officers of a
corporation from paying a tax as required by a statute of the
United States, this Court will examine the bill in its entirety and
determine whether, under all the circumstances, the plaintiff has
made such a showing of wrong on the part of the corporation as will
justify the suit, and if it appears that the suit is collusive or
that the plaintiff has not 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 between himself and
the corporation his prosecution of a litigation for its benefit,
the bill will be dismissed.
This, like the preceding cases, was brought to prevent the
payment of an Alaskan license tax. The method pursued was, however,
different. It is a suit in equity brought by a stockholder against
a corporation -- the stockholder and the corporation being the sole
parties plaintiff and defendant -- to restrain it from paying the
tax. Notice was given to the United States district attorney of the
pendency of the suit, who appeared as
amicus curiae, and,
disclaiming any intention of in any manner representing or binding
the United States, denied the jurisdiction
Page 187 U. S. 456
of the court, its right to enjoin the defendant from paying the
license, and argued in favor of the constitutionality of the
law.
The bill alleged that the defendant was incorporated under the
laws of the State of Minnesota, and engaged in mining and milling
ore in the District of Alaska, with an office and manager in the
district; that
"the general control of the affairs of said company is entrusted
to a board of directors who reside in San Francisco, State of
California, and are nonresidents of the district of Alaska; that
the complete control and management of the affairs of said company
in Alaska are under the supervision and control of its general
superintendent and manager, J. P. Corbus."
It is further averred that the company, by its general
superintendent in Alaska, is intending 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 proceeds:
"Your orator further shows that this suit is not a collusive
one, brought to confer jurisdiction of the case upon this Court, of
which it would not otherwise have cognizance; 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 controlling its business in
Alaska, but they have failed and refused not to make such
application and pay such tax for the reason that, though they doubt
the constitutionality 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 legal 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 incurring the pains and
penalties therein provided for
Page 187 U. S. 457
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 company, in view of the foregoing, has
refused and still refuses and intends omitting to comply with
complainant's demand to refuse 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 mercantile
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 proposed 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 declared
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
injury 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 damage to your orator and other shareholders
in said company."
A demurrer to the bill was sustained and a decree entered
dismissing the suit. A single 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 government not being a party to the suits,
raised not only the question of the jurisdiction of the court
because the plaintiffs had a plain, speedy, and adequate remedy
Page 187 U. S. 458
at law, but insisted that the suits were of a 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 license 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. Treadwell Co.; the bill was filed July 17, the
subpoena served July 19 commanding the defendant to answer the bill
within twenty days. No appearance 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 argument, and
filed no brief in support of the same, and in the very nature of
the case the interests of the plaintiff and defendant are
identical. Then, if the object and purpose of the suit is solely to
test the constitutionality 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 until the constitutionality of the law is
determined? And if he cannot avail himself of this manner of suit,
why should corporations or copartnerships be permitted to do so?
Why should not corporations and individuals have and be permitted
to exercise identically the same legal rights and remedies under
the law?"
From the decree of dismissal, the plaintiff appealed to this
Court.
Page 187 U. S. 459
MR. JUSTICE BREWER delivered the opinion of the Court.
The thought suggested by the quotation from the opinion of the
district judge impresses us forcibly. Evidently the plaintiff
patterned his proceeding upon
Pollock v. Farmers' Loan &
Trust Co., 157 U. S. 429. But
that case does not determine to what extent a court of equity will
permit a stockholder to maintain a suit nominally against the
corporation but really for its benefit.
Hawes v. Oakland,
104 U. S. 450, is
pertinent in this direction. In that case, a citizen of New York, a
stockholder in the Contra Costa Waterworks Company, a California
corporation, filed his bill in the circuit court of the United
States for the District of California against the City of Oakland,
the waterworks company, and its directors. 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 resulted 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 desist 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 furnish 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 answer 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 opinion, which is too long to quote in full, opens with
these observations (pp.
104 U. S.
452-453):
"Since the decision of this Court in
Dodge v.
Woolsey, 18 How. 331, the principles of which have
received more than once the approval of this Court, the frequency
with which the most ordinary and usual chancery remedies are sought
in the federal courts by a single stockholder of a corporation
who
Page 187 U. S. 460
possesses the requisite citizenship, in cases where the
corporation whose rights are to be enforced cannot sue in those
courts, seems to justify a consideration of the grounds on which
that case was decided, and of the just limitations of the exercise
of those principles."
"This practice has grown until the corporations created by the
laws of the states bring a large part of their controversies with
their neighbors and fellow citizens into the courts of the United
States for adjudication, instead of resorting to the state courts,
which are their natural, their lawful, 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 used 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 directors refuse to enforce or to
protect. He instantly 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 chancery -- namely, one against his
own company 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 corporation. These two
causes of action he combines 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
corporation 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
Page 187 U. S. 461
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 additional important litigation
imposed upon them by a simulated and conventional arrangement,
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.
104 U. S.
460-461):
"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 appropriate
plaintiff, there must exist as the foundation of the suit --"
"Some action, or threatened action, of the managing board of
directors or trustees of the corporation which is beyond the
authority conferred on them by their charter or other source of
organization;"
"Or such a fraudulent transaction completed or contemplated by
the acting managers, in connection with some other party, or among
themselves, or with other shareholders, 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 majority of them, are
acting for their own interest, in a manner destructive of the
corporation 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
corporation, which is in violation of the rights of the other
shareholders, and which can only 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 justified in exercising its powers, but the foregoing may be
regarded as an outline of the principles which govern this class of
cases."
"But, in addition to the existence of grievances which call for
this kind of relief, it is equally important that, before the
Page 187 U. S. 462
shareholder is permitted in his own name to institute 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 action in conformity to
his wishes. He 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."
See also Detroit v. Dean, 106 U.
S. 537,
106 U. S. 542;
Quincy v. Steel, 120 U. S. 241.
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 corporation an injunction
which it could not itself obtain, and which no individual similarly
situated can obtain.
Immediately after announcing the decision in
Hawes v.
Oakland, 104 U. S. 450,
this Court promulgated an additional equity rule (Rule 94):
"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. "
Page 187 U. S. 463
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 maintain a bill against the
corporation. This Court will examine the bill in its entirety, and
determine whether, under all the circumstances, the plaintiff has
made such a showing of wrong on the part of the corporation or its
officers and injury to himself as will justify the suit. The
directors represent all the stockholders, and are presumed to act
honestly and according to 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 properly waive a legal right vested in the
corporation in the belief that its best interests will be promoted
by not insisting on such right. They may regard the expense of
enforcing the right or the furtherance of the general business of
the corporation in determining whether to waive or insist upon the
right. And a 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 considerations. It is not a trifling thing
for a stockholder to attempt to coerce the directors 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: "The circumstances of each
case must determine 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 one dollar a
year. This would scarcely be a case of "irremediable injury or a
total failure 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 appear to be such as threatens
Page 187 U. S. 464
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
corporation, although, of course, it may be assumed that every
person is willing to be relieved 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 maintain an injunction suit to restrain a
similar tax upon himself, and why should he be permitted to secure
a relief to the corporation (of which he is a minor stockholder)
which he could not secure for himself individually? 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
accomplished 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 legislation, Congress has
attempted to enforce that rule and to require payment of a tax by
the party charged therewith before inquiry as to its validity will
be permitted.
See Pacific Steam Whaling Company v. United
States, ante, p.
187 U. S. 447.
Now, before a court of equity will in any way help a party to
thwart this intent of Congress, it should affirmatively and clearly
appear that there is an absolute necessity for its interference in
order to prevent irreparable 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
irreparable 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 corporation -- how far short
it comes of anything like irretrievable ruin. It is clearly an
attempt to thwart, in behalf of this corporation, the obvious
purpose of Congress, that a tax must be paid before its
validity
Page 187 U. S. 465
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 between 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 distance 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 dilatoriness 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 district 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 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.
