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Sohland v. Baker, 15 Del.Ch. 431, 141 A. 277, 58 A.L.R. 693

Facts

Mathias H. Baker, a stockholder in the Bankers' Mortgage Company, filed a lawsuit against the company and its directors, Alfred and Dora Sohland, to cancel stock issued to the Sohlands. The stock was issued in exchange for a $125,000 promissory note from the Harrisburg Corporation, which was backed by shares of the Harrisburg Foundry & Machine Works that were determined to be worthless. The transactions involved complex dealings where Alfred Sohland, who was both a director and president of the Bankers' Mortgage Company, orchestrated the issuance of stock while having significant control over both companies involved.

The record showed that Sohland claimed that the value of the second preferred and common stock of the Harrisburg Foundry & Machine Works was ample to protect the $125,000 note of the Harrisburg Corporation, but the great weight of evidence was to the effect that it had no collateral value at the time of the giving of the note in question.

Issue

Did the court have the authority to cancel the stock issued to Alfred and Dora Sohland based on the fraudulent nature of the transactions involved?

Did the court have the authority to cancel the stock issued to Alfred and Dora Sohland based on the fraudulent nature of the transactions involved?

Rule

A stockholder may file a bill in equity to enforce corporate rights when the corporation refuses to act, especially when the directors are implicated in the wrongdoing.

As a general rule, a cause of action belonging to a corporation can be asserted only by such corporation by a suit in the corporate name. Conditions may, however, exist in a court of equity whereby a stockholder may use in his own name for the purpose of enforcing corporate rights, though the corporation in question is nominally a party defendant.

Analysis

The court analyzed the transactions and determined that the stock issued to the Sohlands was based on a promissory note that was essentially worthless, as the collateral provided was grossly overvalued. The court found that Alfred Sohland had dominated the corporate control of both the Bankers' Mortgage Company and the Harrisburg Corporation, and the transactions were deemed fictitious, designed to benefit Sohland at the expense of the corporation and its shareholders.

The Chancellor stated his conclusions upon the facts proved as follows: ‘That Sohland was not only President of the Harrisburg Corporation and the Bankers' Mortgage Company, but he also succeeded in dominating the corporate control of both companies. That the stock of the Bankers' Mortgage Company sought by the bill to be canceled was issued in consideration of the promissory note of the Harrisburg Corporation, the subscriber, secured by shares of stock of the Harrisburg Foundry & Machine Works, deposited as collateral. That the note of the Harrisburg Corporation was worthless and the Harrisburg Foundry & Machine Works stock was, if not entirely worthless for collateral purposes, at all events extravagantly and grossly overvalued as a fair and adequate security for the note; and that Sohland, who in reality negotiated the deal, had no reasonable ground to believe otherwise.

Conclusion

The court affirmed the Chancellor's decree, canceling the stock issued to the Sohlands and ordering an account of dividends paid, concluding that the transactions were fraudulent.

Based on these conclusions, the Chancellor decreed a cancellation of the Bankers' Mortgage Company stock issued to Alfred Sohland and to Dora Sohland, his wife, and an account of the dividends paid thereon.

Who won?

Mathias H. Baker prevailed in the case as the court found the stock issuance to the Sohlands to be fraudulent and ordered its cancellation.

The complainant, a stockholder in the Bankers' Mortgage Company, sought in the court below to enforce certain alleged corporate rights of that company against the appellants, Alfred Sohland and Dora Sohland.

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