Case ID: ad_76/html/0105-01.html
Source: Caselaw Access Project
Author: {"author": "Laughlin, J. :", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Frank J. Dupignac, Respondent, v. John Bernstrom, Individually and as Managing Director of Aktiebolaget Separator, and Others, Appellants.
    
      Contract between two owners of all the stock of a corporation for the payment of a percentage of all future earnings of the corporation to one of them—when it is not an exclusion of its directors from its management—proof of its acceptance by the company — not an agreement to answer for the debt of one of such owners of its stock—right of ail the stockholders to make such a contract—performance of a contract originally within the Statute of Vrauds—effect of its ratification by the directors —proper parties to an equity action to enforce the contract.
    
    The complaint, in an action brought against one Bernstrom, individually and as managing director of Aktiebolaget Separator, a Swedish corporation, the said Aktiebolaget Separator, the De Laval Separator Company, a New Jersey corporation, and certain persons who were nominal owners of sufficient stock of the De Laval Company to qualify them as directors thereof, alleged that in May, 1893, the plaintiff and the defendant, the Aktiebolaget Separator, owned all but a small percentage of the stock of the De Laval Separator Company, and held an option to purchase the balance; that, previous to this time, the plaintiff had rendered valuable services for the De Laval Company and for the Aktiebolaget Company, and that, being desirous of retaining his services, the Aktiebolaget Company agreed with him in May, 1893, that, if he would continue in charge of the affairs of the said De Laval Separator Company and of the Aktiebolaget Separator in its capacity asa stockholder thereof, until the De Laval Separator Company should be enabled to pay its obligations, amounting to about §300,000, and be placed upon a paying basis, the plaintiff should receive “from said De Laval Separator Company,” in addition to any fixed compensation, “a substantial interest in all the future earnings of said De Laval Separator Company after the payment of the said obligations and without regard to any services rendered or required thereafter; and mat said De Laval Separator Company should enter into, carry out and.perform such agreement.”
    The plaintiff further alleged that he performed said agreement, with the result that on December 31, 1894, the obligations of the De Laval Company had been paid and it had been placed upon a paying basis; that in April, 1895, the plaintiff and the Aktiebolaget Company, who were then the owners of all the stock of the De Laval Company, fixed the interest which the. plaintiff was to receive under said agreement at five per cent of all net earnings of the De Laval Company, “such interest to continue permanently;” and that they agreed that the De Laval Company “should take corporate action in confirmation of the said agreement ” at a stockholders’ meeting to be thereafter held; that on September 30, 1896, at a meeting of the stockholders of the De Laval Company, a resolution was passed by a vote “of the holders and owners of all of the stock,” requiring the board of directors to declare cash dividends yearly out of the net earnings, and to pay to the plaintiff five per cent of such net earnings in addition to dividends upon his own stock; that, up to the time the action was brought, the plaintiff had received such additional five per cent, but that the stockholders and directors of the De Laval Company threaten and intend to rescind the said resolution and to repudiate the contract; that a remedy by action at law would be inadequate for the reasons that the De Laval Company was a foreign corporation; that an annual accounting would be necessary; that a multiplicity of expensive and vexatious suits would result and that the stock might be transferred to innocent purchasers for value.
    The relief demanded was a judgment establishing the plaintiff's contract as valid and binding upon the De Laval Company and all its stockholders, and adjudging that it was terminable only upon his death, and directing the payment to the plaintiff by the De Laval Company of five per cent of the net earnings of such company, and enjoining the defendant stockholders of the De Laval Company from selling, assigning or transferring any of their stock, “except with notice of and subject to the rights of the plaintiff," and restraining the De Laval Company from transferring any stock upon its books, or issuing new stock, “ except with notice of and subject to'such rights of the plaintiff.”
    
      Held, that the complaint was not demurrable;
    That, the agreement between the plaintiff and the Aktiebolaget Company did not vest the management and control of the affairs of the De Laval Company in the plaintiff, one of its members, to the exclusion of the board of directors of that company, but contemplated that the services which the plaintiff • was to render the De Laval Company were to be rendered with the consent of and in co-operation with the board of directors;
    That, as it was alleged that the services had been in fact rendered and that great financial benefit had accrued therefrom to the De Laval Company, it followed that such services must have been accepted by the De Laval Company; that, consequently, it could not be said that the De Laval Company was a strangér to the contract between the plaintiff and the Aktiebolaget Company, or that, in accepting such contract, it undertook to answer forthedebt or default of the Aktiebolaget Company;
    That, even if the contract between the plaintiff and the Aktiebolaget. Company had been within the Statute of Frauds originally, being executory, such statute ceased to apply upon the performance of the contract by the plaintiff and the adoption.of the resolution by the stockholders;
    That, even if it were conceded that it was not competent for the stockholders of the De .Laval Company by unanimous vote to bind the corporation to the ■ payment of five per cent of the net profits to the plaintiff; the directors, by paying such dividends to the plaintiff annually for several years, in accordance with such resolution, ratified and adopted the action of the stockholders;
    That, as the sole relief sought against the Aktiebolaget Company and the individual defendants was a decree binding them as stockholders of the De Laval Company and limiting and restricting their rights with reference to the sale and transfer of their stock, in order to prevent such stock from passing into . the hands of an innocent purchaser who might not be bound by the agreement, such defendants-were not only proper, but necessary, parties to the action.
    
      Appeal by the defendants, John Bernstrom, individually and as managing director of Aktiebolaget Separator, and others, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 17th day of April, 1902, upon the decision of the court, rendered after a trial at the New York Special Term, overruling the defendants’ demurrers to the second amended complaint.
    The second amended complaint alleges, among other things, that in May, 1893, the plaintiff and the defendant, the Aktiebolaget Separator, a Swedish corporation, together owned all the stock of the defendant, the De Laval Separator Company, a New Jersey corporation, except five per cent (200 shares) thereof which by an agreement they had the right to purchase and which the Aktiebolaget Separator did in fact acquire prior to performance by the plaintiff of the agreement set forth in the complaint; that at said time, in view of the valuable services previously rendered by the plaintiff, both as a lawyer and in a general business capacity for the De Laval Company and for the Aktiebolaget Company as a stockholder thereof, and being desirous of retaining his services in said corporation, the Aktiebolaget Company agreed with him that, “ if he would take and continue in charge of the affairs in the United States of said De Laval Separator Company and the Aktiebolaget Separator in its capacity as such stockholder thereof” until the De Laval Separator Company “should be placed on a paying basis, and should be enabled, through its earnings, to pay its obligations amounting to about $200,000,” that the plaintiff should receive “ from said De Laval Separator Company ” in addition to any fixed, compensation “ a substantial interest in all the future earnings of said De Laval Separator Company after the payment of the said obligations and without regard to any services rendered or required thereafter ; and that said De Laval Separator Company should enter into, carry out and perform such agreement; ” that the said Aktiebolaget Company well knew at that time that the performance of the said agreement would interfere materially with the plaintiff’s law practice ; that, relying on said agreement, the plaintiff entered upon and performed said agreement with the result that on the 31st day of December 1894, the obligations of the De Laval Company had been paid off and it had been placed on a paying basis; that in April,
    
      1895, the plaintiff and the Aktiebolaget Company, then owners of all the stock of the De Laval Company, fixed the interest that the plaintiff was to receive under said agreement at five per cent of all net earnings of the De Laval Company, “ such interest to continue permanently,” and agreed that the De Laval Company “ should'take corporate action in confirmation of the said agreement” at a stockholders’ meeting to be thereafter held; that on or about the 30th day of September, 1896, a meeting of the stockholders of the De Laval Company was duly held and a resolution in writing was duly passed and spread on the minutes by the vote “of the.holders and owners of all of the stock” requiring the board of directors to estimate the amount of “ surplus cash on hand or the net earnings- over and above current and reasonable future requirements ” each year and declare cash dividends, but that five per cent of such surplus or net earnings should be paid to the plaintiff in addition to dividends on his own stock; that up to the commencement of this action “ said agreement has been in all respects duly lived up to and performed,” and that for several years past the De Laval Company has earned large amounts of money and distributed large sums in dividends and has paid to the plaintiff “ his five per cent thereof to which he has been entitled as aforesaid; ” that the Aktiebolaget Company' is the owner of all the stock of the De Laval Company not owned by the plaintiff, but that the other appellants are the nominal and record owners of sufficient stock to qualify them as directors of the De Laval Company, and that they are or claim to be such directors; that the stockholders and directors of the De Laval Coriipany threaten and intend “ to rescind the said resolution and to deprive the plaintiff of all future rights and interests in and under said contract,” and to distribute the entire net earnings of the company among the stockholders of record according to their respective shares; that the business of the company is prosperous and the returns should be large, but that its tangible assets have a money value, if sold on execution, not exceeding $50,000, and that á remedy by action at law would be inadequate because the company is a foreign corporation, an annual accounting would be necessary, a multiplicity of expensive and .vexatious suits would result and the stock might be transferred to innocent purchasers for value.
    The plaintiff’s prayer for relief is for a judgment establishing hid contract as valid and binding upon the De Laval Company and all its stockholders, terminable only upon his death, and directing payment to him by the De Laval Company, its directors and officers of five per cent of the net earnings or surplus cash that may be from time to time set apart or applicable to the payment of dividends in addition to his dividends as a stockholder, and enjoining the defendants, who are stockholders of the De Laval Company, from selling, assigning or transferring any of their stock “ except with notice of and subject to the rights of the plaintiff,” and restraining the De Laval Company from transferring upon the books of the company any certificates of stock or issuing new stock “ except with notice of and subject to such rights of the plaintiff,” and enjoining the defendants from taking any action, jointly or severally, which will in any manner interfere with or - alter the rights of the plaintiff under said agreement and for such- further relief as the facts warrant.
    The De Laval Company and John Bernstrom, individually and as managing director of the Aktiebolaget Company, separately demur to the second amended complaint, upon the ground that it does not state facts sufficient to constitute a cause of action against them, and the other defendants join in a separate demurrer upon the same ground.
    
      L. Laflin Kellogg, for the appellants.
    
      Charles E. Rushmore, for the respondent.
   Laughlin, J. :

. The appellants all contend that their demurrers should be sustained upon the grounds (1) that there was no consideration between the plaintiff and the De Laval Company; (2) that the stockholders of the De Laval Company could not bind it by the contract, and (3) that the contract is void under the Statute of Frauds. The appellants other than the De Laval Company also urge that, at all events, they are not proper or necessary parties and that no cause of action is alleged against any of them. While it is alleged that, the contract originally was with the Aktiebolaget Company, it is manifest that it was not intended to allege it as a contract with that, company as a business corporation but in its capacity as a stockholder of the De Laval Company. It should be borne in mind that, with the exception of the small percentage of the stock of the De Laval Company which the plaintiff owned, and. that which he had án .option to purchase with a similar option over to the Aktiebolaget Company which was exercised, the latter company' owned all the stock of the De Laval Company. It thus appears that the contract was made between two parties who owned or controlled all the stock of this corporation. • The agreement was for the benefit of the Aktiebolaget Company in its capacity as such stockholder. Doubtless it was not competent for the stockholders of the De Laval Company to agree that the management and control of its affairs should be vested in one of their dumber to the exclusion of the board of directors, nor is such the fair purport of the agreement as alleged in the complaint. The services which the plaintiff was to fender the De Laval Company as attorney or otherwise were pre-' sumably to be rendered with the consent of, and in co-operation with, the board of directors. It is alleged that the services were in fact rendered and that from them great financial benefit accrued to the company. Therefore the services must have been accepted by the company. The plaintiff may have advised and assisted the ' board of directors, and the latter may have had such confidence in his judgment that they acted on his recommendations; or they may have legally devolved on him the business management of the corporation such as might be delegated. The contract was also for the benefit of the De Laval Company, and through the efforts of the plaintiff that company was extricated from its apparently hopeless condition of insolvency. It was not, therefore, a stranger to the contract, and in accepting the contract it did not undertake to answer for the debt or default of. the other company. All that the plaintiff agreed, with the Aktiebolaget Company as a stockholder of the De Laval Company,. to do, he has fully performed, presumably with the acquiescence and approval of the directors of the De Laval Company, for without their consent and approval his services could have been of no benefit to the company. Although it is not so specifically alleged, this is the natural and reasonable inference from the allegations contained in the complaint, and the fact might, we think, be proved thereunder.

After the rendition of the services, by unanimous vote of all the stockholders of the De Laval Company, the agreement under which the plaintiff performed the services, which was somewhat indefinite in so far as it related to substantial interest in all the future earnings ” of the company, was made clear and definite by the reso. lution in effect declaring that the “ substantial interest ” should be “ five per cent of such surplus cash or net earnings ” available for the payment of dividends.

The appellants also claim that it was not competent for the stockholders, even by a unanimous vote, to bind the corporation to the payment of these dividends. Even if that be so, the board of directors, by acting on the resolution and paying five per cent of the net profits to the plaintiff annually for several years in accordance therewith, ratified and adopted the action of the stockholders. It is, therefore, unnecessary to decide whether either the stockholders or the board of directors, without the consent or approval of the other, could make the contract or authorize such payment. It is not apparent, however, that the corporation, as. such, has any interest in these surplus earnings, nor would it seem that its creditors or the public are interested therein. The contract only purports to deal with legitimate dividends. Upon dividends being declared, instead of their being distributed to the stockholders in proportion to their holdings, the stockholders, who alone are entitled thereto, have agreed that the board of directors shall first deduct five percent for the plaintiff on account of these services which they recognize as having placed the corporation on a dividend-paying basis.

The Statute of Frauds has no application. The contract has been fully performed by the plaintiff, and while it was not performed within one year it does not necessarily follow that it could not have been performed within that time. ¡Nothing remains to be done under the contract now but to make the payments of the five percent of the net income going to the stockholders which they have authorized the directors to turn over to the plaintiff. The resolution of the stockholders was merely authority to the directors to fulfill a contract made by the stockholders with reference to the payment of dividends that might be thereafter declared in their favor. In effect it was an assignment jpro tanio of their right to dividends. The contract was no longer executory at the time the stockholders passed the resolution, and, even if it had been within the statute originally, the statute ceased to apply upon performance hy the plaintiff and the .adoption] of the resolution by the stockholders which, in thus authorizing payments to the plaintiff for all future time' covered by the contraict, constituted a performance.on their part. ■

Ho personal claim is made against, the Aktiebolaget Company or the individual defendants, but a decree is sought'which will affect them as stockholders of the De Lajval Company and may limit and restrict their rights with reference;] to the sale and transfer of 'their stock to prevent its passing into the hands of an innocent purchaser who might not be bound by the agreement. They aré, therefore, not only proper, but necessary parties.'. '

It follows that tile interlocutory judgment should be affirmed, with costs, with leave to defendants to withdraw demurrers and answer upon payment of costs in tiffs court and in the court below. -

' Van Brunt, P. J., Patterson], Ingraham and Hatch, JJ., concurred.

Judgment affirmed, with costs, with leave to defendants to withdraw demurrers and answer on payment of costs in this court and in the court below. ¡