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196 U.S.

Statement of the Case.

DOCTOR v. HARRINGTON.

APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES FOR

THE SOUTHERN DISTRICT OF NEW YORK.

No. 477. Submitted January 25, 1905. - Decided February 20, 1905.

The presumption of law that stockholders are deemed to be citizens of the

State of the corporation's domicil must give way to the actual fact proved that complainant is a citizen of a different State from the corporation, and in such a case the stockholder, if other conditions of jurisdiction exist can bring his suit against the corporation in the Circuit Court of the

United States. The ninety-fourth rule in equity contemplates and provides for a suit

brought by a stockholder against the corporation and other parties on rights which may be properly asserted by the corporation, and when such a suit is between citizens of different States and is not collusive, but the corporation is controlled by interests antagonistic to complainant, it involves a controversy which is cognizable in a Circuit Court of the United States, and the defendant corporation is not to be classed on the same side of the controversy as complainant for the purpose of determining the diversity of citizenship on which the jurisdiction of the Circuit Court must rest.

The bill in this case was dismissed by the Circuit Court on the ground that it had no jurisdiction upon the fact alleged, and certified to this court the question of jurisdiction. The following is the question certified:

“Whether or not the complainants' bill of complaint showed that there was such diversity of citizenship between the parties complainant and parties defendant in this cause as would be sufficient under the provisions of the United States Revised Statutes to confer jurisdiction upon the United States Circuit Court for the Southern District of New York, of this cause.”

The court further certified that it entered a decree dismissing the bill, "holding that it appeared from the said bill of complaint that there was no such diversity of citizenship between the parties complainant and defendant as would confer

Statement of the Case.

196 U.S.

jurisdiction upon the United States Circuit Court for the Southern District of New York in the cause within the meaning of the United States Revised Statutes, and that in arranging the parties to this cause relatively to the controversy the Sol Sayles Company must be grouped on the side of the complainants, with the result that citizens of the same State would thus be parties on both sides of the litigation, and thus deprive this court of jurisdiction."

The bill is very voluminous, and, as it is agreed by appellees that the statement of appellants substantially states its allegation, we quote from appellants' brief as follows:

“This action was brought by the appellants, as stockholders of the Sol Sayles Company, a corporation organized under the laws of the State of New York, for the purpose of vacating and setting aside a judgment obtained by the appellees Harrington against the Sol Sayles Company in the Supreme Court of the State of New York, on October 28, 1902, and the levy and sale un ler an execution issued thereunder, and of requiring the appellees Harrington to deliver to the Sol Sayles Company certain shares of stock in the Sayles, Zahn Company, and certain bonds, belonging to the Sol Sayles Company, which had been sold under such execution, and for other equitable relief.

"In substance, the complainants allege in their bill of complaint that they are citizens of Morris County, New Jersey; that the defendants Harrington are citizens of the State of New York, and that the defendants Sol Sayles Company and Sayles, Zahn Company are likewise citizens of said State, both being incorporated under the laws of that State; that the Sol Sayles Company was organized with a capital stock of $100,000, divided into 1,000 shares of the par value of $100 per share, of which the complainants owned 500 shares and the defendants Harrington 500 shares; that by an arrangement made between the owners of the stock, the voting power on a majority thereof was given to the defendant John J. Harrington, who directed the management of the affairs of the corporation, dictated its

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policy, and selected its directors; that on January 26, 1898, the defendant John J. Harrington caused the defendant Sayles, Zahn Company to be organized, for the purpose of taking over the business of the defendant Sol Sayles Company and of one Henry Zahn, and thereupon the property of the Sol Sayles Company and of Zahn was transferred to the Sayles, Zahn Company, which likewise was controlled by the defendant John J. Harrington; that the Sol Sayles Company received, in consideration of the transfer of its property, $50,000 of the capital stock of the Sayles, Zahn Company, and subsequently subscribed for $50,000 additional stock.

“It is further alleged that about February 1, 1899, the defendants Harrington, for the purpose of cheating and defrauding the Sol Sayles Company, and the complainants, of their interest in the assets of the Sayles, Zahn Company, fraudulently caused the Sol Sayles Company to execute and deliver to them, without any consideration whatsoever, its promissory notes, aggregating $23,700, which were utterly fictitious, and thereafter, and on October 3, 1902, the defendants Harrington, in furtherance of their fraudulent scheme, caused an action to be instituted and a judgment to be recovered against the Sol Sayles Company, for the amount of the said promissory notes and interest which was alleged to have accrued thereon, the Sol Sayles Company being in utter ignorance of the nature of the action and omitting to interpose any defense thereto.

“This scheme resulted in the recovery of a judgment against the defendant Sol Sayles Company on October 28, 1902, for $27,357.28, in favor of the defendants Harrington, who thereupon caused an execution to be issued to the sheriff of the county of New York, against the property and assets of the Sol Sayles Company, under which execution the said sheriff levied on the shares of stock in the Sayles, Zahn Company, and also two bonds of the New Jersey Steamboat Company, which belonged to the Sol Sayles Company, and sold all of the right, title and interest of the Sol Sayles Company in the said certificates of stock and in the said bonds, the said defendants

Statement of the Case.

196 U.S.

Harrington causing them to be purchased for their own benefit; said shares of stock being then, as the defendants Harrington well knew, and have ever since continued to be, worth upwards of $200,000

“It further alleged that the complainants caused a demand to be made upon the defendants Harrington, that they transfer the said shares of stock and the said bonds to the Sol Sayles Company, but that they have refused to do so, and have insisted that these shares of stock and bonds are their personal and individual property, and that neither the Sol Sayles Company nor their complainants have any right, title or interest in either the said shares of stock or the said bonds, or any part thereof.

“The twentieth paragraph of the bill of complaint is as follows:

“ 'The complainants were and each of them was a shareholder of the defendant Sol Sayles Company at the time of the transactions herein complained of. This suit is not a collusive one to confer upon a court of the United States jurisdiction of a case of which it would not otherwise have cognizance. The complainants are unable to secure any corporate action on the part of the defendant Sol Sayles Company to redress the wrongs hereinbefore set forth, nor are they able to obtain any redress at the hands of the stockholders of the said defendant Sol Sayles Company. The board of directors of said corporation is under the absolute control and domination of the defendant John J. Harrington, and the said Harrington, by reason of having possession of a majority of the capital stock of the said corporation, likewise controls the action of the stockholders. Although requested for information with regard to the facts hereinbefore set forth, he has refused to give any information with regard thereto, and has declined to redress the wrongs of which complaint is herein made, or to give to the complainants any opportunity to lay before the board of directors or the stockholders of the defendant Sol Sayles Company the facts herein set forth.'”

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Mr. Charles A. Hess for appellants:

There is diversity of citizenship between complainants and defendants, the former being citizens of New Jersey and the latter of New York.

Appellees' contention that appellants are estopped or debarred from asserting the actual facts as to diversity of citizenship because stockholders are presumed to be citizens of the same State as the corporation, may on its face be good reasoning, but it is based entirely on a legal fiction, which has been indulged for the purpose of enabling the Federal courts to exercise jurisdiction over corporations. Legal fictions, however, are not always carried out to their logical conclusion, and this court has entertained jurisdiction in numerous instances, where precisely the same state of facts existed as in the present case. Among the more important precedents are the following: Dodge v. Woolsey, 18 How. 331; Hawes v. Oakland, 104 U. S. 450; Quincy v. Steel, 120 U. S. 241; Pollock v. Farmers' L. & T. Co., 157 U. S. 429; Cotting v. Kansas City Stock Yard Co., 183 U. S. 79; Utah-Nevada Co. v. DeLamar, 133 Fed. Rep. 113.

Even though complainants are seeking to maintain this action in the right of the Sol Sayles Company, in view of the trend of authority that fact is not entitled to weight as against the circumstances that such company is in fact a defendant. De Neufville v. N. Y. & Northern Ry. Co., 81 Fed. Rep. 10, 13.

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Mr. Philip J. Britt and Mr. John J. Adams for appellees:

There is no such diversity of citizenship between the complainants and defendants as is required under the Federal statutes. Complainants sue, not in their own right, but as stockholders of the Sol Sayles Company, and are, therefore, to be conclusively presumed, for purposes of jurisdiction, to be citizens of New York. See also rule 94 in equity.

The action is brought in the right of the corporation. Davenport v. Dows, 18 Wall. 626; Dewing v. Perdicaris, 96 U. S. 197; Porter v. Sabin, 149 U. S. 473; Dickerman v. Northern

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