Case ID: ad_164/html/0146-01.html
Source: Caselaw Access Project
Author: {"author": "Clarke, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

John L. Steele, Respondent, v. Felix Isman and Others, Appellants.
    First Department,
    October 23, 1914.
    Corporation — action by creditor against directors for accounting — pleading — complaint. '
    A complaint in a suit in equity brought under section 91 of the General Corporation Law, by a creditor of the corporation to compel directors of the corporation to account for their official misconduct and waste of corporate assets, which fails to show that the plaintiff is a judgment creditor, or that it would be impossible or useless to obtain a judgment against the corporation itself, does not state a cause of action.
    Appeal by the defendants, Felix Isman and others, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 12th day of May, 1914, denying defendants’ motion for judgment on the pleadings.
    
      Edward M. Grout of counsel [F. Sidney Williams with him on the brief], Edward M. Grout and Paul Grout, attorneys, for the appellant.
    
      Ralph Polk Buell of counsel [Graham & L'Amoreaux, attorneys], for the respondent.
   Clarke, J.:

The complaint alleges that the defendant Jamaica Estates is a domestic stock corporation; that the defendants Isman, Degnon and Barnes were and still are directors thereof; that the plaintiff is the owner and holder of bonds issued by the corporation under and pursuant to the terms of a certain mortgage; that several installments of interest have accrued and become due and payable thereon which still remain wholly due and unpaid, and thereby the plaintiff is a creditor of the said corporation; that the individual defendants have neglected and failed to perform their duties in the management and disposition of the funds and property committed to their charge, and have acquired to themselves, transferred to others, lost and wasted money and the value of property of the corporation, by and through their neglect of and failure to perform and other violation of their duties, in various ways, of which the complaint sets up certain particulars. Wherefore the plaintiff prays judgment against the defendants as follows:

1. Compelling them to account for their official conduct, including any neglect of or failure to perform their duties in the management and disposition of the funds and property committed to their charge.
2. Compelling them to pay to the defendant corporation or to its creditors the money and the value of the property which they have acquired to themselves or transferred to others or lost or wasted by or through their neglect of and failure to perform and other violations of their duties.
3. Appointing a receiver of the property of the defendant corporation.
4. For such other and further relief, etc.

It will be noted, first, that the plaintiff is not a judgment creditor; second, that there is no allegation that the corporation is insolvent; third, that it is an action in equity and necessarily a representative action to compel directors and officers of a corporation to account for them transactions to the corporation, and is not an action to recover a money judgment in favor of the plaintiff.

The answers of the corporation and the individual defendants deny that certain installments of interest still remain due and unpaid,' and deny that the plaintiff is a creditor of the corporation, as well as the particulars of neglect, failure to perform, and waste.

The defendants moved for judgment upon the pleadings, and appeal from the denial of this motion.

Section 91 of the General Corporation Law (Consol. Laws, chap. 23; Laws of 1909, chap. 28, formerly Code Civ. Proc.

§ 1782, derived from 2 R. S. 463, § 35) provides that an action may be brought as prescribed in the last section, that is, to compel directors to account, by the Attorney-General, in behalf of the People of the State, or, except where the action is brought for the purpose specified in subdivision 3 or 4 of that section,* by a creditor of the corporation or by a trustee, director manager or other officer of the corporation having a general superintendence of its concerns. The phrase “creditor of the corporation ” has been interpreted to mean a judgment creditor. (Belknap v. North America Life Ins. Co., 11 Hun, 282; Cole v. Knickerbocker Life Ins. Co., 23 id. 255; Paulsen v. Van Steenbergh, 65 How. Pr. 342; Bewley v. Equitable Life Assurance Society, 61 id. 344.) In Swan v. Mutual Reserve Fund Life Assn. (20 App. Div. 255), in sustaining a demurrer to the complaint, the court said: “Were the plaintiff a judgment creditor of the defendant, it is quite possible that a cause of action might be spelled out of the complaint in his favor. * * * The action is one which is necessarily founded upon the misconduct of the defendant’s trustees, directors or managers, and consequently it is one within the contemplation of section 1Y81 of the Code of Civil Procedure, which must be brought against the officers of the defendant and not against the corporation only. Furthermore, such an action must be brought either by a creditor of the corporation — which means a judgment creditor — * * * or else by the Attorney-General in behalf of the People of the State.” In affirming (155 N. Y. 9, at p. 18) Judge Gray said: “If an action had for its object the compelling of the trustees, directors, managers, or other officers of "a corporation, to account for their official conduct, in the management and disposition of the property committed to their charge, then it would have to be brought by the Attorney-General in behalf of the People; or it might be brought by a judgment creditor of the corporation, under sections 1781 and 1782 of the Code of Civil Procedure.”

In Miller v. Barlow (78 App. Div. 331), an action brought by a director, the court in distinguishing such an action said, in speaking of the creditor’s suit: “Being a general creditor, such firm could not maintain an action for this purpose, under the provisions of the Eevised Statutes, as only judgment creditors would be authorized to maintain such an action.” In Buckley v. Stansfield (155 App. Div. 735) it was said: “Moreover, it is only creditors whose claims have been reduced to judgments who are in a position to maintain this form of action.”

There is one exception, as pointed out in Lilienthal v. Betz (108 App. Div. 222), where'this court said: ‘ The complaint alleging facts which make it impracticable to obtain a judgment against the corporation, any question as to the necessity of alleging that such judgment had been obtained and execution thereon returned unsatisfied is not presented; the dissolution of the corporation and the appointment of a receiver of its property excuse the plaintiffs from enforcing their remedy against the corporation prior to the commencement of this action.” While the judgment in that case was reversed by the Court of Appeals (185 N. Y. 153) it was not upon that point. There is no case cited by the respondents affecting in the slightest degree the unbroken line of authorities which hold that “ creditor ” in this statute means judgment creditor. There is the soundest public policy in not permitting a mere general creditor to compel an accounting of the officers of a solvent corporation. The management of a corporation is intrusted to its directors and officers, and they are accountable to it. It might result in intolerable abuse if any or every holder of a claim against a corporation should be held to he entitled to such an equitable action. As the plaintiff is not a judgment creditor, as no facts are set up showing that it would be impossible or useless to obtain a judgment against the corporation, the complaint is fatally defective. The defendants were entitled to judgment upon the pleadings, as the complaint did not state facts sufficient to constitute a cause of action.

The order appealed from should, therefore, be reversed, with ten dollars costs and disbursements, and the motion granted, with ten dollars costs.

Ingraham, P. J., McLaughlin, Laughlin and Scott, JJ., concurred.

Order reversed, with ten dollars costs and disbursements, and motion granted, with ten dollars costs. 
      
       See Gen. Corp. Law, § 90.— [Rep.
     
      
       Amd. by Laws of 1907, chap. 157.— [Rep.