Case ID: ny-st-rep_70/html/0226-01.html
Source: Caselaw Access Project
Author: {"author": "Putnam, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

William T. Hart et al., App’lts, v. Ogdensburg and Lake Champlain Railroad Company et al., Resp’ts. (Two Cases.)
    
      (Supreme Court, General Term, Third Department,
    
    
      Filed September 27, 1895.)
    
    1. Corporations—Contracts—Directors.
    A contract, made by the directors of a corporation with another corporation, of which they are also- directors, is voidable by the corporation.
    2. Same.
    A lease entered into between two corporations, voidable because of their having common directors, cannot be disaffirmed by a minority of the stockholders.
    3. Same.
    The mere fact that the same persons were directors of the corporation which made a lease, and of that which took it, is not, of itself, sufficient to avoid the contract at the instance of one or more stockholders, against the will of the corporation.
    4; Same—Laches.
    The bondholders or stockholders cannot, after the lapse of six years, sue to disaffirm such lease.
    5. Same—Minority op stockholders.
    To justify the interference of the court with the management of a corporation, on the application of á minority of the stockholders, it must be shown that the action of the governing body complained of has been so clearly against the interests of the minority of the stockholders as to amount to a wanton and fraudulent destruction of the rights of such minority.
    6. Pleadings—Complaint—Corporations.
    The complaint by a minority of the stockholders to disaffirm the act of the directors was held insufficient and, therefore, demurrable.
    
      * Appeal from an interlocutory judgment in the first action, sustaining a demurrer to the complaint, and from a final judgment in the second action, sustaining a demurrer to, the complaint.
    
      Marcus T. Hun, for app’lts; Louis Hasbrouck., for resp’ts.
   Putnam, J.

The plaintiffs in the first above entitled action appealed from an interlocutory judgment sustaining the separate demurrer of defendants to the complaint, and in the second action to the final judgment in. favor of defendants on a like demurrer. As the complaints in each action are substantially alike, the cases may be considered together.

I think the judgments, as far as they sustain the demurrer to the first cause of action in the complaints, should be affirmed. The complaints allege the right of the Central Vermont Railroad Company, by its charter, to contract for the purchase of any railroad, or the stock, bonds, or property thereof. It therefore had the same right as an individual or individuals to buy a majority of the stock of the Ogdensburg & Lake Champlain Railroad Company, and obtain control thereof. I am unable to perceive any legal objection to one or more persons purchasing the majority of the stock of a railroad company, with the intent to obtain control thereof. Nor did the Central Vermont Railroad Company, in obtaining a majority of the stock of the Ogdensburg & Lake Champlain Railroad Company, with the intent to obtain a controlling interest in said road, do an unlawful or objectionable act. But, if such purchase was made with an intent to mismanage the affairs of such road, and to conduct its business in such a way as to defraud the minority of the stockholders, or with a view of conducting the affairs of such road in the interest of the Central Vermont Railroad, and if such intent was in fact carried out, the minority of the stockholders of the Ogdensburg & Lake Champlain Railroad Company have a right to complain, and may obtain relief by an action in a court of equity. The question then arises, whether the complaints alleged such a state of facts as authorizes the court, on the application of income bondholders, or a minority of the stockholders, of the Ogdensburg & Lake Champlain Railroad Company, to grant relief in these actions.

The objections made by the plaintiffs to the lease made by the Ogdensburg & Lake Champlain Railroad Company to the Central Vermont Railroad Company, on the ground that it violates the rights of the income bondholders, holding bonds of the first-named company', to receive in payment of interest on their bonds the net earnings of the said railroad company after defraying the expenses of conducting its business, as provided in said bonds'and the mortgage by- which the same are secured, by authorizing the lessee to use said earnings for the “development and improvement ” of said road, were passed upon by the court of appeals in Day v. O. & L. C. Railroad Co., 107 N. Y. 129; 11 St. Rep. 335, and hence need not be considered by us. - The court of appeals, in the case cited, where the same question was raised, held adversely to the claim of plaintiff. See, also, Thomas v. N. Y. & G. L. Railroad Co., 139 N. Y. 163; 54 St. Rep. 498.

The objection is also made to the lease that, when exebuted, tlxe Central Vermont Railroad Company, through its agents, controlled the Ogensburg & Lake Champlain Railroad Company, and that directors, officers, and agents of the former were directors of the latter. It is held that a contract made by a director of a corporation with it is voidable by the corporation, and it has also been decided that the same rule applies to a contract by the directors of a corporation with another corporation of which they are also directors. This principle is considered in the very able and exhaustive opinion of Van Brunt, J., in Metropolitan El. R. Co. v. Manhattan El. R. Co., 11 Daly, 373, 502, 503. The case cited, however, recognized the doctrine laid down in Wallace v. Railroad Co., 12 Hun, 460, that a contract entered into between two corporations, voidable because of their having common directors, could not be disaffirmed by a minority of the stockholders ; that “the rule that persons acting in a fiduciary capacity shall not, directly dr indirectly, make any profit by means of such acts, or be interested in contracts made by their principals, undoubtedly applies to directors of corporations. It is a valuable principle, and ought not to be impaired by any subtle or refined distinctions. Still, the mere fact that the same persons were directors of the corporation which made the lease, and of that which took it, is not, of itself, sufficient to avoid the contract at the instance of one or more stockholders, against the will of the corporation. That fact alone might entitle either corporation to avoid the lease, but I apprehend it does not give that right to a stockholder.” Van Brunt, J., remarks, in Metropolitan El. R. Co. v. Manhattan El. R. Co., supra, referring to the doctrine laid down in Wallace v. Railroad Co.:

“The principle is here recognized that the majority of the stockholders may ratify a lease made by the directors, and that a minority cannot disaffirm; that therefore it must be the majority of the shareholders, acting through the corporation, who repudiates, and no shareholder has the power to exercise that right against the will of the majority.”

I concur in the views thus stated. See, also, Gamble v. Queens Co. Water Co., 123 N. Y. 92-98 ; 33 St. Rep. 88. I therefore conclude that the objection, alleged in the complaints, to the lease on the ground that some of the directors of the Ogdensburg & Lake Champlain Railroad Company were also directors, agents, officers, or attorneys of the Central Vermont Railroad Company, was properly overruled by the court below.

I am also of the opinion that the conclusion reached below in x-egard to the lease was correct, because of the great delay in attempting to repudiate it. The lease was entered into between the two corporations on June 1, 1886. These actions were commenced on October 30, 1892, over six years after the making of the contract. Owing to the large lapse of time since the execution of the lease, the Ogdensburg & Lake Champlain Railroad Company itself could not have disaffirmed it on the ground that it was entered into by two corporations with common directors. ■ See U. S. Rolling Stock Co. v. Atlantic & G. W. R. Co., 34 Ohio St. 450; Oil Co. v. Marbury, 91 U. S. 587, 592 ; Kent v. Mining Co., 78 N. Y. 159. It will rot be claimed that plaintiffs, as individual bondholders or stockholders, can sustain an action to set aside the lease on the ground stated, which the corporation itself could not maintain.

, The complaints also allege, in the first count, that the Central Vermont Railroad Company, since the execution of the said lease, in apportioning the earnings of the two corporations for through business, has taken more than its proper share of the receipts, and ask for an accounting. This is, in fact, a separate cause of action from that previously set out in the pleading seeking an annulment of the lease, although not separately stated. The first cause of action contained in the first count seeks to vacate the lease. This cause of action is for an alleged wrong done by the Central Vermont Railroad Company to the Ogdensburg & Lake Champlain Railroad Company after the execution of and under the lease. I concur in the views of the court below that the allegations in regard to the alleged improper division of the earnings of the two corporations by the Central Vermont Railroad Company contain no cause of action. Sufficient facts are not stated to justify interference by a court of equity in the affairs of the two corporations. It does not appear to what extent the Central Vermont Railroad has taken earnings that should have gone to the other defendant. Et is well settled that, ordinarily, the court will not interfere with the control of a corporation by its directors and a majority of its stockholders. It will not interfere, although the directors may have acted unwisely, and not for the best interests of the corporation they represent. To justify the interference of the court with the management of a corporation, on the application of a minority of the stockholders, it must be shown that the action of the governing body complained of has been so clearly against the interests of the minority of the stockholders as to amount to a wanton and fraudulent destruction, of the right of such minority. It must appear that the action of the majority of the stockholders and directors is a clear, substantial, and flagrant violation of the rights of the minority. Gamble v. Water Co., supra. The complaints do not show such a state of facts; No allegations are made to the effect that, in the division of the receipts for through business between the two companies, the Ogdensburgh & Lake Champlain Railroad Company was wronged to an extent that will justify interference by a court of equity. The complaints do not allege such a state of facts as shows a fraud on the minority, and are not sufficient under the doctrine laid down in Gamble v. Water Co., supra, and kindred cases.

The complaints allege that the Ogdensburg & Lake Champlain Railroad Company owned three boats, under a conditional contract, on which it had made large payments; that the Central Vermont Railroad Company, after it bad obtained control of the former road, wrongfully allowed a payment on said contract to be omitted, whereby the interest of said Ogdensburg & Lake Champlain Railroad Company therein became forfeited, and that the Central Vermont Railroad Company thereupon organized a corporation known as the “ Ogdensburg Transit Company,” the stock of which it owned. Said transit company purchased the said boats, being allowed by the vendor the amount previously paid by the Ogdensburg & Lake Champlain Railroad Company on said contract. This alleged cause of action, although stated in the first count of the complaint and not separately numbered, is, in fact, also separate and distinct from that alleging the invalidity of the lease. The wrongful act of the Central Vermont Rail-' road Company in procuring or suffering the transfer of the title to the three boats to the Ogdensburg Transit Company has no relation to its alleged illegal act in obtaining the lease. The act of which plaintiff complains is the omission of the directors of the Ogdensburg & Lake Champlain Railroad Company controlled by the Central Vermont Railroad Company, to make payment on the conditional contract. The demurrers do not admit the statements in the complaints that the act of omitting to make such payment was wrongful. Thomas v. Railway Co., supras. That word being omitted from the complaints, all that remains in the pleading is a mere statement that the directors, controlled by the Central Vermont Railroad Company omitted to make a payment on the conditional contract. It seems clear, therefore, that the pleading does not state a cause of action.- No sufficient facts are alleged The complaints contain neither a copy nor the substance of the contract. It is not allaged that the directors had money under their control to make the payment. We are unable to say, from the pleading, whether the conditional contract was one that should have been carried out. The demurrer does not admit ^acts alleged fn the pleading sufficient to constitute a cause of action. I conclude, therefore, that the court below reached the proper conclusion in sustaining the demurrer to the first count or cause of action contained in the complaints.

The second and subsequent causes of action in the complaints, to which the demurrers were interposed, relate to the proposed consolidation of the two defendants. The agreement for such consolidation between the directors of said corporations was made • about six years after the execution of the lease. The position taken by plaintiffs, that the agreement for consolidation, made by the directors of the two corporations when the actions were commenced, was of no force, because the Central Vermont Railroad Company had elected as directors of the Ogdensburg & Lake Champlain Railroad Company some of its own directors, officers, and agents, and because said corporations, with common directors, could not lawfully contract with each other, has already been considered. The contract was voidable, but not void. It could be ratified by a majority of the stockholders. If it was so ratified, and otherwise valid and legal, it could not be set aside at the suit of the minority of the stockholders.1

Several objections made by plaintiffs to the proposed consolidation of the two defendants, alleged in the second and subsequent causes of action in the complaints, have been considered and passed upon by this court in Hart v. O. & L. C. Railroad Co., 60 Hun, 378; 52 St. Rep. 799. A discussion of such objections, therefore, is not now called for. In the case cited the plaintiffs claimed, as alleged in the complaints in these actions, that the proposed consolidation, if carried into effect, would impair the obligation of the contract between the income bondholders and the Ogdensburgh k Lake Champlain' Eailroad Company:

“ First, by depriving them, as bondholders, of the right to vote for those persons whose judgment as to the application of earnings is practically decisive of their rights to interest; second, by depriving them of directors who would have any motive to promote the interests of the plaintiffs, and who, from their position, would be familiar with the facts, and in whose selection, they, as bondholders, have a right to participate; third, that the net earnings of the property of the company belong to the bondholders, and that by the article of consolidation no provision is made, for keeping separate accounts, and no accounting is provided for, for the same; fourth, that the bondholders are deprived of their share in the extension of the business of the company.”

The court, in the case cited, overruled the objections of plaintiffs to the proposed action of the two companies, and held that such intended consolidation might -be legally made.

The plaintiffs allege that the proposed agreement is in every way disadvantageous to and opposed to the interests of the Ogdensburg & Lake Champlain Eailroad Company; that the earnings of said road had greatly increased during the six years of the exis-' tence of said lease; that it is a connecting link between the states of Hew England and the West, and is of great" value by reason thereof; that the Central Vermont Eailroad Company has never paid a dividend, and its stock has never been dealt with in the market, and has no market value, yet the agreement of consolidation proposes that one share of stock of the new company to be formed shall be given in return for ten shares of the capital stock of the Ogdensburg k Lake Champlain Eailroad Company, while one share of said new stock shall be exchanged for one share of the stock of the Central Vermont Eailroad Company. The case in which an action by a majority of the stockholders of a corporation to restrain the proposed action of its directors and majority of the stockholders can be maintained is considered in the opinion of Peckham, J., in Gamble v. Water Co., supra. The learned judge remarks:

“ I think that, where the action of the majority is plainly a fraud upon, or, in other words, is really oppressive to, the minority shareholders, and the directors or trustees have acted with and formed part of the majority, an action may be sustained by one of the minority shareholders, suing in his own behalf and in that of all others coming in, etc., to enjoin the action contemplated, "and in which action the corporation should he made a party defendant. It is not, however, every question of mere administration or of policy, in which there is a difference of opinion among the shareholders, that enables the minority to claim that the action of the majority is oppressive, and which"justifies the minority incoming to a court of equity to obtain relief. Generally, the rule must be that in such cases the will of the majority shall govern. The court would not be justified in interfering, even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interest of the corporation itself as to lead to the clear inference that-no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company, and in a manner inconsistent with its interests. Otherwise, the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or, at least, to enjoin the carrying out of the opposite policy.”

Under the doctrine thus laid dpwn, sufficient facts are not stated in the complaints to show that the proposed agreement is so much opposed to the interests of the Ogdensburg & Lake Champlain Eailroad Company as to sustain an action. The allegation that the agreement is in every way disadvantageous to' the last named corporation, and advantageous to the Central Vermont Eailroad Company, is a statement of a conclusion of law. The allegations that the receipts of the Ogdensburg & Lake Champlain Eailroad Company have increased and are increasing, that the road is of great value, that the Central Vermont Eailroad Company has never paid a dividend, and that its stock has no market value, do not enable us to determine the respective values of the stock of the two roads. The plaintiffs do not- allege the value of the stock of either road, or the comparative value thereof. If the pleadings had stated that the stock of 'the Ogdensburg & Lake Champlain Eailroad Company was equal in value to that of the Central Vermont Eailroad Company, or that two shares of the former were worth as much as one share of the latter, or alleged the respective values of the stock of each company, it would have stated facts on which the court could have formed a conclusion. As it is, the pleader leaves us to guess, from the allegation, that the Ogdensburg & Lake Champlain Eailroad Company, is a valuable road, and its business is increasing, and that the Central Vermont Eailroad Company has never paid. a dividend on its stock, and that such- stock has no market value, the respective values of the stock of said roads, and that the proposed agreement is disadvantageous to the former road. Although the plaintiffs allegó an increase- in the earnings ■of the Ogdensburg & Lake Champlain Eailroad Company during the existence of the lease, there is no averment stating the amount of such earnings, or the‘amount of such increase. I think, therefore, that the plaintiffs, as far as they have attempted to show that the proposed agreement of consolidatian is disadvantageous to the interests >of the stockholders and bondholders of the Ogdensburg & Lake Champlain Railroad Company, fail to set forth such á state of facts as authorizes the maintenance of these actions, within the doctrine laid down in Gamble v. Water Co., supra.

Other questions are raised in the points of counsel which I do not deem it necessary to consider.

An appeal is also taken by plaintiffs from an order of the court below awarding an extra allowance of $1,000 to defendants. The complaints allege, as one of the causes qf action, a wrongful act on the part of the Central Vermont Railroad Company in causing the directors of the Ogdensburg & .Lake Champlain Railroacl Company to omit making a payment due on the conditional contract theretofore made by the last-named company for the purchase of three boats, and that, in consequence of said wrongful act, the title of said company to said boats was divested; that the Central Vermont Railroad Company organized a corporation called the “Ogdensburg Transit Company,” of which it owned the stock, and procured a transfer of said boats to such company, and on such, transfer the amount previously paid by the Ogdensburg & Lake Champlain Railroad Company on said conditional contract was allowed as part, of the purchase price; that the said boats have earned, since 1887, $100,000 per year over all expenses. The complaints asked for judgment against the Central Vermont Railroad Company in favor of the Ogdensburg &■ Lake Champlain Railroad Company for the value of the interest of the latter in said boats, and also for such an amount as would represent the earnings of said boats since June 1, 1886. The earnings of the boats, as stated in the complaints and the affidavit of Mr. Hasbrouck, since 1887, were about $500,000, which sum plaintiffs in these actions sought to recover for the Ogdensburg & Lake Champlain Railroad Company. I think, therefore, there was, in the complaints, a claim to recover of defendants a sum of money on which an extra allowance of $1,000 could be properly made by the court below, under the provisions of section 3253, Code of Civil Procedure.

The judgments and order should be affirmed, with costs.

All concur.