to, are considered as a part of the same.31 "As to exhibits, they are a mere matter of indulgence. In good pleading, strictly, the bill should give the requisite full information of itself; but indulgence to loose practice and convenience has allowed exhibits with explicit reference to them in the bill, and they may be referred to in aid of the bill; but they may not be omitted altogether, as here, and the pleader content himself with a naked reference by its date to some document of record in a far-away place." 32 "Good pleading requires that everything that is material to the case should be set forth in the pleading itself by proper averments. This may be done in general terms, and the exhibit may be referred to for greater certainty as to particular details, but the pleading ought to contain the substance of the case." 33 Where the plaintiff's title is intelligently shown, there is no need for profert of the documents upon which it is founded.34 § 145. Stockholders' bills. By the Equity Rules of 1912, "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, or the reasons for not making such effort."1 This, with the exception of the last clause, is the new promulgation of a former equity rule, adopted during the October term, 1881.2 The original object of the rule was to prevent suits brought by stockholders, in collusion with the corporation, in Federal courts, which otherwise would not have had jurisdiction thereof, and to remedy abuses in this respect, which had then become a common practice. It has been extended in the lower courts so as often to defeat the rights of shareholders and shield and encourage dishonesty by directors and officers of corporations. It has been held by one Circuit Court to apply to a suit removed from the courts of the State, the practice of which required no such allegations.5 That part of the rule which forbids such a suit by a party who has bought the stock in good faith and for a valuable consideration, since the cause of action arose, might well be attacked as unconstitutional. That such a purchasing stockholder has the right to bring such a suit has been held by the court s of New Hampshire, Illinois,7 Alabama, Montana, Idaho,1 Pennsylvania,11 New Jersey, 12 and New York. 13 The opposite 6 3 Hawes v. Oakland (Hawes v. Contra Costa Water Co.) 104 U. S. 450, 460, 461, 26 L. ed. 827, 832, where Mr. Justice Miller said that a stockholder could not file a bill founded upon rights which might properly be asserted by his corporation against the company and other parties, unless these facts existed. See also Huntington v. Palmer, 104 U. S. 482, 26 L. ed. 833; Greenwood v. Freight Co., 105 U. S. 13, 26 L. ed. 961; Detroit v. Dean, 106 U. S. 537, 27 L. ed. 300; Quincy v. Steel, 120 U. S. 241, 30 L. ed. 624. 4 For an extraordinary case, see Bartlett v. N. Y. N. H. & H. R. R. Co., 221 Mass. 530. 5 Venner v. Great Northern Ry. Co., 153 Fed. 408, affirmed on question of jurisdiction only, 209 U. S. 24, 52 L. ed. 666. Contra, Earle v. Seattle, L. S. & E. R. Co., 56 Fed. 909; s. c., Eabens v. Union Pac. Ry. Co., 58 Fed. 497; Maeder v. Buffalo Bill's Wild West Co., 132 Fed. 280. 9 6 Winsor v. Bailey, 55 N. H. 218. 7 City of Chicago v. Cameron, 22 Ill. App. 91, affirmed 120 Ill. 447. 8 L. & P. Co. v. Lahey, 121 Ala. 131. 9 Forrester v. B. & M., etc., Co., 21 Mont. 544, 565. 10 Just v. Idaho Canal, etc., Co., 16 Idaho, 639, 133 Am. St. Rep140, 102 Pac. Rep. 381. 11 Rafferty v. Donnelly, 197 PaSt. 423. 12 Appleton v. Am. Malting Co., 65 N. J. Eq. 375. 18 Pollitz v. Gould, 202 N. Y. 11, 38 L.R.A. (N.S.) 988, Ann. Cas 1912D, 1098. The argument of Judge Hiscock seems unanswerable. "As an original proposition it would seem to be clear that a right of action by or in behalf of the corporation for fraud to set aside a conveyance of its assets or to avoid obligations imposed upon it is part of its rights, property and assets in which a stockholder has this indivisible interest transferable by the transfer of his certificates. I am unable to see any real or substantial distinction by virtue of which a stockholder transferring his certificates would transfer all of his indivisible interest in bonds or real estate on hand, but would not transfer his interest in a right of action to recover bonds or real estate which had been fraudulently withdrawn from the possession of the corporation, and which it was entitled to recover. And if the subsequent holder by acquiring the certificates does acquire such latter interest, it seems to follow that he may, if necessary, in behalf of the corporation, assert and prosecute an action to protect and enforce the same. "Brief reference may be made to some of the reasons advanced in opposition to this view. Counsel points out practical inconvenience which he says will result from its application, owing to the difficulties in tracing stock and distinguishing that which has not assented to the transaction from that which has or from that which perhaps has been issued since its consummation. These arguments, however, are SO counterbalanced by corresponding claims from the opposite standpoint as to be of little weight. "Again, it is argued that if one buys stock subsequent to the transaction he should be regarded as buying subject to it and not be permitted to question it. If the prior holder should give binding consent to the transaction, this under certain circumstances undoubtedly would prevent the subsequent purchaser from questioning it. But, in the absence of special circum stances, I fail to see any principle of estoppel or logic which makes a subsequent purchase of stock so subject to a fraudulent corporate transaction that the purchaser may not insist upon its being set aside. There is scarcely any analogy be tween the situation of one who buys property from an individual which the latter has subjected to a transaction which has not been disaffirmed and that of one who purchases stock in a corporation which has the continuing right before and after the purchase to disaffirm a wrong which has been perpetrated on it by its agents. There is little or no basis for the practical consideration that one who buys stock should be deemed to have adjusted his price to an existing transaction even though voidable. If he knows of it he may just as properly be assumed to have adjusted his price to the knowledge that the transaction may still be disaffirmed and avoided. "Then, lastly, an argument is made which seems to be founded on the idea that in order to bring an action of this nature the stockholder must in effect disaffirm the corporate transaction and that this disaffirmance involves a personal right of election which vests in the one holding the stock when the transaction is consummated and which cannot be transferred. said the right to question a fraud is not a purchasable commodity,' and is not 'capable of assignment and transfer,' and does not pass 'as an implied incident to every sale of corporate stock,' and this view seems to be supported by some of the many cases which have been It is position is taken by the courts of Georgia,14 Colorado,15 New Mexico,16 North Carolina,17 Iowa,18 Nebraska.19 This doctrine does not apply to a bill by the stockholder to enforce rights held by him in his own capacity such as to enjoin the execution or enforcement of a contract beyond the powers of the corporation,20 or a contract to which a statute requires collected and reviewed by counsel with manifest industry and care. "So far as this argument means to assert that a mere naked right to question a corporate transaction could not be transferred to a stranger, if such an attempt can be conceived of, it may be assumed to be true. But the assertion that the right to protect stock by procuring an improper corporate transaction to be vacated does not pass on a transfer of the stock is a very different proposition. "The election to disaffirm a fraudulent corporate transaction belongs to and is exercised in the right and name of the corporation and not of the stockholder. The stockholder demands that the right shall be exercised and the cause of action he prosecuted by the corporation or does it himself for the corporation. It is conceded that the one holding the stock when the fraud is consummated has this right. When he transfers his certificates the transaction still stands a continuing wrong impairing the surplus of the company and affecting the stock. If the transferee has the right to have it avoided it will protect and increase the value of his stock. If he has not acquired this right it is the only one held by his predecessor in or through the corporation which has been thought of which has not been transferred by the transfer of the stock. It will be an anomalous exception if the prior holder retains the right to maintain or have maintained this action while he passes all of his other rights by the transfer of his stock. The only justifica tion pleaded for this is the idea suggested of a personal and non-trans ferable right of election to disaffirr n vested in the original holder. But this theory is entirely unsubstan tial. Such prior holder does not acquire this right to object to the transaction and bring an action to set it aside as a power conferred] upon him by reason of any persona 1 qualities, but because of his character as a stockholder, and when he loses this character and transfers i to another with his stock there is no reason why the latter should not exercise the right as a proper and necessary incident to and for the benefit of his stock ownership." 14 Alexander v. Searcy, 81 Ga. 536, 12 Am. St. Rep. 337. 15 Boldenweck v. Bullis, 40 Colo. 253. 16 Rankin v. S. W. B. & I. Co., 12 N. Mex. 54. 17 Moore v. Silver Valley Co., 104 N. C. 534. 18 Clark v. Am. Coal Co., 86 Ia. 436, 17 L.R.A. 557. 19 Home Fire Ins. Co. v. Barber, 67 Neb. 644, 60 L.R.A. 927, 108 Am. St. Rep. 716. 20 Fortney v. Carter, C. C. A., 203 Fed. 454; Westerlund v. Black Bear Min. Co., C. C. A., 203 Fed. 599; Elder v. Western Min. Co., C. C. A., 237 Fed. 966, 974. Contra, Gen. the consent of a majority of the stockholders, 21 nor it seems to restrain the execution of a contract authorized by the other stockholders to the injury of the complainant's rights as a stockholder and creditor; 22 or to rescind a contract made by the stockholders individually for the transfer of the corporate property 23 or for the appointment of a receiver of the corporate assets because of insolvency.2 24 Nor to a bill to enforce a contract by the promoters of the company.25 The rule does not apply where the suit arises under the Constitution or laws of the United States; 26 nor to a suit by a mortgagee,27 or a bondholder.28 Nor to a bill by a depositor on behalf of himself and the other depositors to hold the directors of a bank responsible for losses caused by their misconduct.29 The rule applies to a suit by a stockholder to enforce a cause of action under the Anti-Trust Laws.30 It has been held that prior to the distribution of an estate, general or residuary legatees cannot bring such a suit,31 and in New York, that a suit to set aside a transfer made by a testator cannot be brought by a legatee or next of kin when the executor opposes the relief.32 The rule when a receiver has been appointed has not yet been settled. It seems clear that in such a case no previous application to the corporation or to the director is required.33 The proper practice is for the stockholder Inv. Co. v. Lake Shore M. S. Ry. 22 Granite Brick Co. v. Titus, C. C. A., 226 Fed. 557. 23 Old Colony Trust Co. v. Du buque, L. & Tr. Co., 89 Fed. 794. 24 Re Cleland, 218 U. S. 120, 54 L. ed. 962; Adler v. Campeche Laguna Corp., 257 Fed. 789. 25 Rogers V. Penobscot Mining Co., 154 Fed. 606. 26 Ball v. Rutland R. Co., 93 Fed. 513. See Smyth v. Ames, 169 U. S. 466, 42 L. ed. 819; Pollock v. Farmers' L. & Tr. Co., 157 U. S. 429, 39 L. ed. 759. Contra, Corbus v. Alaska Treadwell Gold Min. Co., 187 U. S. 455, 47 L. ed. 256. 27 Consolidated Water Co. v. City of San Diego, 89 Fed. 272; Dawson 28 Fortney v. Carter, C. C. A., 203 Fed. 454. 29 Foster v. Bank of Abingdon, 88 Fed. 604. 30 United Copper Securities Co. v. Amalgamated Copper Co., 244 U. S. 261; infra, § 251a. 31 Whitaker v. Whitaker Iron Co., 238 Fed. 980. 75. 32 McQuade v. Perret, 223 N. Y. 38 Kelly v. Dolan, 218 Fed. 966, 970. |