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Everett v Asia Banking Corp| 1926 | Ostrand., J.

Plaintiff: Stockholders of Teal & Co. Everett, Clifford, Teal and Robinson (these 4 owned 4,478 shares & Barclay owned the other 1 share)
Defendant: Asia Bank, Officers & Agents of Asia Bank; Mullen, Kelly, Mears, McIntosh

SUMMARY: When Teal & Company, to which plaintiff is a SH, became a lucrative enterprise, it’s creditor, Asia Bank, induced the SHs to enter into a
voting trust which would enable the bank to finance the Teal & have temporary control over the corporation. The SHs relying on their good & long-
standing friendship with the bank’s officers signed away their voting rights only to experience a complete take over by the bank leading to the
disposition of its assets through foreclosed mortgages & reckless borrowing. RTC dismissed the complaint since this action should be brought by the
Board of directors of Teal and not a SH. SC ruled that to demand from Teal’s BoD would be a frivolous matter and the SHs of Teal are entitled to
equitable relief.
FACTS:
 Teal & Co is a company that sold cars, trucks, tractors, spare parts & accessories & repairs. Organized in 1919
 Peabody is a guarantor in several of Teal’s credit financing
 Asia Bank is Teal’s main creditor
 1921; Teal & Co had a bad business year. The owed P 300k to Peabody & Co (Guarantor of a draft)
o They had bought tractors & parts from America through drafts with Asia Bank
o Teal had accepted the drafts but was unable to pay off the draft, thereby requiring Peabody & Co to shoulder the burden
o America & its colonies were experiencing the Great Depression
o Teal had managed to pay 150k to Peabody
 Teal bought some more tractors under a letter of credit
o The shipment had been delayed and ultimately rescinded via telegraph
o But the tractors arrived so Teal, on the advice of the Bank, accepted the draft and store the tractors
 Asia Bank convinced Teal and Peabody to enter into a Creditor’s Agreement with Asia Bank
o Forcing a debt moratorium; disallowing debt collection from Teal for 2 years; the contract is in the bank’s possession
 1922; Teal & Co had a good business year & had a long standing relationship with Asia Bank.
 1922, Dec; Eventually Teal’s debt rose to 750k; secured by a mortgage on the valuable land owned & used by it, and personal property
 Mullen, defendant & Asia Bank’s GM convinced Teal’s stockholders, plaintiffs, to execute a voting trust in favor of the bank
o Asia bank was to temporarily take control by the corp
o This would enable Asia bank to finance the Teal
o The trust was supposedly to protect both parties
o When Teal was strong and independent, the trust would be cancelled & control would be returned
o Muller said that to protect Asia Bank and Teal’s mutual interest that the voting trust would be better executed without disclosure
to the creditors (Peabody)
o The stockholders, relying on these promises, were induced to sign away their voting rights
 They relied in good faith & good will by their long standing friendship
 The Voting trust wasn’t used in good faith
o The voting trust was used according to the letter despite the stockholder’s claim that it didn’t reflect their true agreement
o True agreement: finance Teal without Creditor interference, protect Bank & teal from Creditor, cancellation upon NYC Bank’s
disapproval
o The SHs were removed from the Board, disallowed from participating, the current directors don’t own even a single share of Teal
o Teal’s Secretary was removed, the old & responsible managers & foremen who were loyal to the SHs were also removed
o Company activity wasn’t disclosed to the SHs
o The Bank controlled board allowed several more mortgages in favor of the Bank recklessly
o The Bank controlled board permitted the bank to foreclose, sue & left the company hopelessly undefended in court
 1923; These same defendants, who were Asia Bank’s employees sitting on the board of Teal, incorporated the Philippine Motor Company
o The foreclosed property & premises of Teal were subsequently to be used by the Phil Motor Corpo
o All the assets of Teal eventually moved Phil Motor Corp
 RTC: Plaintiff stockholders sued the defendants for equitable relief; RTC dismissed based on a demurrer by Asia Bank
o Complaint was vague & confusing, Teal had to be joined as plaintiff
o Plaintiffs not being SHs of PMC had no legal rights to proceed against PMC’s acquisition
o SHs cannot sue in equity to redress wrongs done by the Board

ISSUES + RULING:
Do Teal’s SHs have recourse against the incorporators of PMC? Yes they do
 Rule: SHs cannot sue in equity to redress wrongs done by the Board
o Exception; When the corporation under complete control by the defendant to such an extent that a demand upon the board to
institute said action would be a useless act
 Conclusion of the RTC is incorrect
 The complaint was necessarily detailed to as to make a full disclosure on the history of the transactions that lead to the loss Teal’s
property.
o The reference to PMC was inevitable
 The plaintiffs have a good cause of action for equitable relief
Judgment is reversed. Defendants must answer the complaint