Case ID: ny-sup-ct_97/html/0354-01.html
Source: Caselaw Access Project
Author: {"author": "Follett, J.: O’Brien, J. Lawrence, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Abbie S. Nash and Others, Appellants, v. The Hall Signal Company, Respondent, Impleaded with Others.
    
      Corporation — right of a stockholder to sue for the torts of directors — non-residence, not presumed — bona fide holding of stock, presumed — when a complaint is i multifarious — who may object.
    
    Where a corporation refuses to prosecute individual directors who are alleged to have been guilty of an abuse of their trust, or of a misapplication of the funds of the corporation, and such directors are still in control, stockholders are . entitled to sue for redress in their own name.
    An objection taken by demurrer to the jurisdiction of the court based upon the non-residence of the plaintiffs, is not tenable unless the fact of non-residence appears upon the face of the complaint.
    Where a demurrer is interposed to a complaint in an action brought by stockholders, who allege that the directors of a corporation have abused their trust and misapplied the corporate funds, the court will presume that all the plaintiffs are bona fide holders of their stock; and where it does not appear affirmatively upon the face of the complaint that any one of the plaintiffs acquired his stock subsequent to the transactions complained of, the court cannot regard an allegation to that effect contained in one of the grounds of demurrer.
    Where two causes of action are joined in the same complaint, a demurrer to the complaint upon the ground that all of the defendants are not affected by . both causes of action will lie, even at the instance of a defendant who is so affected.
    If “A & B, directors in a corporation, waste its funds during one year, and B and C, directors, by some act not connected with the first devastavit, waste the corporate funds in another year, the three cannot be joined as defendants in an equitable action brought by or in behalf of the corporation to compel them to account for and pay the damages sustained by reason of these independent wrongful acts.”
    A complaint so drawn is multifarious, within the meaning of subdivision 7 of section 488 of the Code of Civil Procedure.
    O’Brien, J., dissenting.
    Appeal by tlie plaintiffs, Abbie S. Nasli and others, from an interlocutory judgment of tlie Supreme Court in favor of the defendant, The Hall Signal Company, entered in the office of the clerk of the county of New York on the 3d day of July, 1895, upon the decision of the court rendered after a trial at the New York Special Term sustaining the said defendant’s demurrer to the complaint, with notice of an intention to bring up for review upon such appeal an order entered in said clerk’s office on the 24th day . of June, 1895, sustaining the demurrer, and directing the entry of judgment.
    
      Austin Abbott, for the appellants.
    
      Gharles M. Ka/rle, J. 8. JO Amor earn and Witter & Kenyon, for the respondent.
   Follett, J.:

In case A and «B, directors in a corporation, waste its funds during one year, and B and 0, directors, by some act not connected with the first devastavit, waste its funds in another year, the three cannot be joined in an equitable action brought by or in behalf of the corporation to compel them to account for and pay the damages sustained by these independent, wrongful acts. Wasting the property of a corporation by its directors is a tort. A is not liable for the acts of B and 0, and C is not liable for the acts of A and B, and these independent, tortious acts constitute distinct causes of action which cannot be united in one complaint. .

The interlocutory judgment should be affirmed, with costs, on the opinion of Lawrence, J., at Special Term.

Yan Brunt, P. J., concurred.

Judgment affirmed, with costs.

O’Brien, J.

(dissenting):

Upon the authority of Brinckerhoff v. Bostwick (88 N. Y. 52) I think the action is maintainable. The suit is one brought by stockholders who, on behalf of the corporation, demand an accounting for property which has been taken, or allowed to be taken, from the corporation. The acts complained of, although happening at different periods of time, are but cumulative and constitute a single cause of action. It is true that certain of these defendants were not directors, but were transferees of the assets of the corporation; but their being made parties does not change the nature of the action, nor make what was one cause of action multifarious. The purpose sought is to enable a court of equity to reach out and recover diverted assets. Although different relief may be accorded as against the different defendants, this does not effect a severance or multiplication of the cause of action. I do not think the demurrer upon this ground is good, and, as it was sustained in the court below, the judgment sustaining it should be reversed.

The following was the opinion of the Special Term:

Lawrence, J.:

This is an action brought by resident stockholders of the Hall Signal Company, a corporation created under the laws of the State of Maine, having its business office in New York, against its directors and their transferees of its assets. The plaintiffs sue on behalf of themselves and all other stockholders who shall come in and contribute to the expenses of the action, and the corporation is joined as one of the defendants. It is alleged in the complaint that the directors, or some of them, have voted money and treasury stock from the treasury to some of their own number, and to their superintendent in some cases, without legal consideration; in some cases for grossly inadequate consideration ; in some cases when no quorum was present; in some cases when, the presence of the donee was necessary to a quorum; in some when the vote of the donee was necessary to a majority, and in all cases contrary to the standing rule of the board established under the direction of a,stockholders’ meeting. It is also alleged that they have voted treasury stock to some of their own number at fifty dollars when they knew that said stock was selling at over ninety dollars per share; that they have taken stock from the treasury at fifty dollars per share and with it filled orders at ninety dollars and over, obtained from the purchasers by the company’s agent; that the directors have failed properly to apply and account for moneys received by them for the company; that they have neglected its interests and imperiled its assets. It is also alleged that during all this time the corporation had its principal office for doing business in the city of New York, and that those transactions were had in the city of New York, and that the defendants issued their circulars from the office of the defendant company, 50 Broadway, New York. It is further alleged that the principal individual defendants voted 500 shares of the stock to one of their own number, the president, at one-half the par and little more than one-half the market value, under the pretext of remunerating him for “ extraordinary services” previously rendered; that they also voted to him an increase of salai’y to $1,000, and paid him at that rate from January 1,1894, and that he received from them, out of the treasury of the company such back pay. Furthermore, that after their superintendent had been employed about a year and a half at a fixed salary, and had assigned to the comj)any the inventions and improvements made by him, and the company had become the patentee and owner thereof, they voted 3,000 shares of the stock to him, on the pretext that it was a reasonable and necessary compensation for assignments made a year and a half previously, and that the transfer of these 3,000 shares to him was only a cover for allowing the president and treasurer, who are defendants, to take and dispose of the 3,000 shares at their pleasure. Many otliér statements and_ allegations are also contained in the complaint, designed to show that a discovery and accounting is necessary. One of those statements is to the effect that the directors have bought with the funds of the corporation, and without the stockholders’ assent, shares of stock in the corporation theretofore issued to other persons or corporations; that those acts were done with intent to gain control of the corporation and to dictate its corporate acts and the acts of the board- There are many other acts of improper conduct alleged on the part of the directors, or some of them, but enough has been stated to show the general character of the complaint. It is further alleged in the complaint that the reason why this suit is brought by the plaintiffs is that the defendants Hall, Gilmore, Parker, Houston, Webb, Miller and James, or some of them, now compose the board of directors of said corporation, and that it would be useless to ask said board to bring this action, as said directors, or a majority of them, are chargeable jointly and severally with the management of the corporation, and have pecuniary interests opposed to the interest of the corporation and of the stockholders. It is stated in the plaintiffs’ brief, and not denied, that all the individual defendants have answered. The corporation alone demurs to the complaint, assigning as grounds, of demurrer: First. That the court has no jurisdiction of the subject of this action. Second. That the complaint does not state facts sufficient to constitute a cause of action. Third. That the court has no jurisdiction of the defendant. Foxirth. That causes of action have been improperly united, in that a cause of action in equity against the corporation has been joined with causes of action at law against the other defendants, or some of them, specifying the different paragraphs of the complaint in which said alleged improper joinder of causes of action appears, and also that the causes of action stated in the complaint do not affect all the parties to the action. Fifth. That there is a misjoinder of parties plaintiff, in that Charles F. Ulrich appears by the complaint to have received his stock long after each and every of the acts and transactions set forth in the complaint had occurred, while the plaintiffs Abbie S. Nash and Emma S. Nash are alleged to have received their stock in 1892, when some of the transactions and acts set forth in the complaint had not taken place.

By the complaint-it appears that no relief in favor of the plaintiffs individually is asked. The relief prayed for is that the defendants who have not demurred may be required to repay into the treasury of the defendant corporation the amounts alleged to have been illegally taken or obtained by them therefrom. There is enough stated in the complaint, I think, to bring this case within the principle established by Brinckerhoff v. Bostwick (88 N. Y. 52) and Briggs v. Spaulding (141 U. S. 132). It is quite apparent from the allegations of the complaint, and from the demurrer which is interposed in this action, that the corporation refuses to prosecute the individual directors who are claimed to have been guilty of an abuse of their trust or a misapplication of the funds of the company, and it is also quite apparent that the individual defendants, against whom relief is mainly sought, are still in control of the corporation. As was said by Rapallo, J., in the case of Brinckerhoff v. Bostwick (supra):In such cases a demand upon the corporation. to bring the suit would be manifestly futile and unnecessary. A suit prosecuted under the direction and control of the very parties against whom the misconduct is alleged and a recovery is sought would scarcely afford to the shareholders the remedy to which they are entitled; and the fact that the delinquent parties are still in control of the corporation is of itself sufficient to entitle the shareholders to sue in their own names.” (Hodges v. New England Screw Co., 1 R. I. 312; Heath v. Erie Ry. Co., 8 Blatchf. 347.) In addition to the cases above cited, the cases of Holmes v. Abbott (53 Hun, 617), Garner v. Harmony Mills (6 Abb. N. C. 212), Gaines v. Chew (2 How. [U. S.] 619) and Brinckerhoff v. Brown (6 Johns. Ch.-139) are authorities which support the right of the plaintiffs to maintain this action. I am of the opinion also that this court has jurisdiction of the action. (Fisk v. Chicago, Rock Island, etc., R. R. Co., 53 Barb. 513; Code Civ. Proc. § 1780.) The presumption is that the plaintiffs are residents of this State, and objection cannot be taken to the jurisdiction of the court on the ground of their non-residence unless the fact of such non-residence appears upon the face of the complaint. In Gurney v. Grand Trunk Railroad Co. of Canada (37 N. Y. St. Repr. 560, 561) Van Brunt, P. J., said : “ Objection to jurisdiction may be raised by demurrer where it appears upon the face of the complaint that the court has no jurisdiction of the person or subject-matter; but unless want of jurisdiction appears upon the face of the complaint the objection must be raised by a motion to set aside the summons where an appearance would confer jurisdiction, or in cases where an appeai-ance would not confer jurisdiction it may be raised by answer, or at the trial, or upon appeal, or by the court itself.” The demurrer in this case is general, and, as some of the alleged illegal resolutions are stated in the complaint to have been passed at a meeting or meetings of the directors held in the city of New York, it would appear that a general demurrer on the ground of want of jurisdiction cannot be sustained. Without pursuing this branch of the case further, it is sufficient for me to refer to the opinion of Mr. Justice Patterson in denying the motion to continue the injunction granted, pendente lite. (See N. Y. L. J., Feb. 11, 1895 ; S. C., 11 Misc. Rep. 468.) I do not think that the objection that there is an improper joinder of the plaintiffs in this action can be sustained. All of the plaintiffs are stockholders, and, for the purposes of this demurrer, must be presumed to be tona fide holders of their stock, and it does not affirmatively appear upon the face of the complaint that the plaintiff Ulrich acquired or became possessed of his stock after all the transactions, the validity of which forms the subject of this action, had taken place. The remaining question in the case is whether the complaint is not multifarious within the meaning of subdivision 7 of section 488 of the Code of Civil Procedure. Where two causes of action are improperly joined in the same complaint a demurrer to the complaint upon the ground that all of the defendants are not affected by both causes will lie, even at the instance of a defendant who is so affected. (See Nichols v. Drew, 94 N. Y. 22 ; Stanton v. Missouri & Pac. Ry. Co., 15 N. Y. Civ. Proc. Rep. 296.) It is quite apparent that all the causes of action stated in the complaint do not relate to all of the defendants. W ithout specifying all the instances in which causes of action are stated which do not relate to or affect all the defendants, it is sufficient to say that in paragraph 10 of the complaint a cause of action against Hall, Cochran, Gilmore and Ingraham is stated for the sale of stock to the defendant Cochran at an- improper price, and that damages are prayed for against those four defendants for the sale by them as directors to the defendant Cochran. The defendant Miller is not concerned in this cause of action, and had no part in the transaction. So far as can be ascertained from the complaint, Miller did not become a director, nor have anything to do with the defendant company at all until May 4, 1894, when it is alleged that he with other directors voted illegally to increase Hall’s salary. This appears to be the only cause of action against Miller set out in the complaint, except the general charge in paragraph 41, that he failed to keep proper accounts and records of the transactions of the company. The alleged illegal sale of stock to Cochran in 1891 has nothing to do with the alleged illegal increase of the president’s salary in 1894, nor were all of the same directors concerned in both transactions. Again, the allegation contained in the 39th paragraph of the complaint in respect to the alleged illegal transfer to and acceptance by the defendant Webb of stock illegally issued in December, 1893, has nothing to do with the transaction in which Miller is alleged to have been concerned in paragraph 3.0 of the complaint. There are other instances in the complaint of the joinder of causes of action in which some of the defendants were concerned with others in which only a portion of those defendants took part. The case, therefore, seems to fall within the doctrine laid down in Nichols v. Drew (supra) and Stanton v. Missouri & Pacific Railway Co. (15 N. Y. Civ. Proc. Rep. 296). Por these reasons I am of the opinion that the demurrer on the ground that causes of action have been improperly united should be sustained, and that the defendants have judgment thereon, with leave to the plaintiffs to amend upon payment of costs.