Case ID: misc_64/html/0343-01.html
Source: Caselaw Access Project
Author: {"author": "Wheeler, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

John E. Roth, for Himself and all Other Stockholders, Etc. Plaintiff, v. Samuel Robertson et al., Defendants.
    (Supreme Court, Erie Trial Term,
    August, 1909.)
    Corporations: Officers and agents — Liability of officers to corporation or stockholders — Liability for waste and misapplication of corporate funds: Rights of stockholders and actions by them — In general — Right to sue on behalf of corporation — Necessity of first requesting the corporation to sue.
    Money paid by an officer of an amusement company to persons who had threatened otherwise to take steps to prevent the corporation from conducting its business on Sunday; for the purpose of buying tlieir silence, is improperly expended and must be refunded to the corporation by the officer who paid it at the suit of a stockholder of the corporation.
    And where, as in the present case, the money was paid for a corrupt and unlawful purpose, it is not a sufficient answer to the suit that the stockholder who sues on behalf of himself and the other stockholders acquiesced in such payment.
    And where the officer who made the payment controls a majority of the corporate stock and himself elected the board of directors which is composed of his relatives, a situation exists that justifies the interposition of a court of equity in favor of a minority stockholder.
    In such case it is unnecessary to show a demand upon the corporation, for such a demand, under the circumstances, would appear to be futile.
    Action for an accounting.
    Wallace Thayer, for plaintiff.
    Eugene Cary, for defendant Robertson.
   Wheeler, J.

This action is brought by the plaintiff in his own behalf and of other stockholders of the S. L. Robertson Amusement Company, to compel the defendant Samuel L. Robertson to account to the plaintiff and the amusement company for certain moneys alleged to have been received by him as manager of the company, and unaccounted for, or improperly or illegally expended by him.

The plaintiff’s evidence upon the trial was directed to some six different items, aggregating some $2,159.50, for which it is claimed the defendant should account.

I am of the opinion that the evidence touching all of these items, except one for $800, has been sufficiently met by the defense, and there was nothing established by the plaintiff on the trial to justify a judgment requiring the defendant Robertson to account for them.

As to the item of $800, the facts are substantially these: The amusement company had been operating a patent coaster known as “The Figure 8,” at Niagara Ralls, and had rented booths to outsiders for the sale of ice cream, refreshments, and other things, and a large part of the patronage was obtained on Sundays when excursionists visited the place. Threats appear to have been made by some persons that, unless money was paid, steps would be taken to prevent the amusement company from conducting its business on the Sabbath. Rearing that some such action might be taken, to the financial detriment of the amusement company, the defendant Robertson testifies he paid certain parties $800 to buy their silence, and that he did this believing it to be for the best interests of the corporation, and that, before making the payment, he consulted with Mr. Hofheins, who was the treasurer of the company and one of Ms associate directors.

We shall assume that the payment was made under the circumstances stated by the defendant. We are, however, unable to justify any such payment, or to see how the court can sustain it. It was, in short, paid as “ hush money f’ and the defendant corporation was blackmailed in just that amount. It cannot for a moment be contended that the money was expended for any legitimate purpose of the corporation.

We think to operate, on the Sabbath, a place of amusement like that of which the defendant Robertson was manager, was in violation of the Sunday laws of the State. See Penal Code, §§ 259, 263, 265; United Vaudeville Co. v. Zeller, 58 Misc. Rep. 17; People v. Poole, 44 id. 118.

If it was against the law to keep open on the Sabbath, it was an illegal expenditure to pay money to silence opposition to the violation of the law. If it was not against the law to keep open Sundays, there was no necessity of purchasing immunity from complaint for a violation in that respect: In whatever view we look at it, the payment was not only foreign to the objects of the corporation, but made for a purpose which the courts must condemn. It was, and must be treated as, an illegal payment. It was something more than an ultra vires transaction, it was one bad in morals, and so evidently so that the plea that the payment was made for the supposed interest of the corporation cannot be deemed any excuse in law.

Where the directors and officers of a corporation engage in ultra vires transactions and they cause loss to the corporation, they must be held jointly and severally liable for such damages. Holmes, Booth & Hayden v. Willard, 125 N. Y. 79; Austin v. Daniels, 4 Den. 299; Hun v. Cary, 82 N. Y. 65; Wormser v. Metropolitan St. R. Co., 184 id. 83.

The Court of Appeals, however, in the case of Wormser v. Metropolitan St. R. Co., 184 N. Y. 83, held that, where the acts objected to are simply ultra vires without being either mala prohibita or mala in se, a stockholder who has acquiesced and accepted pecuniary benefits thereunder cannot maintain an action for himself, to set aside the transaction, or to compel a restitution to the corporation. It is claimed in this action that Roth, the plaintiff, not only had knowledge of the payment of the $800 in question, but acquiesced in it. Roth himself admits that he was told of the payment after it was made, and apparently made no objections to it at the time, although he denies that he was consulted prior to the payment of the money.

It does not appear, however, that plaintiff ever received or accepted any direct pecuniary benefit from such payment; and, at most, all that can be claimed is that he acquiesced in and assented to the payment.

As we understand the facts and the law, the payment was not simply a transaction ultra vires in nature, but rather a transaction mala prohibita or mala in se; and, where it partakes of such a nature, the law seems to make an exception in favor of the right to sustain an action to compel a refunding of the money of the corporation misapplied, although the party bringing the action to compel restitution may have acquiesced in the payment.

For reasons of public policy, we are clearly of the opinion that payments of corporate funds for such purposes as those disclosed in this case must be condemned, and officers of a corporation making them held to a strict accountability and be compelled to refund the amounts so wasted, for the benefit of stockholders, irrespective of the question as to who assented to or counseled their payment. To hold any other rule would be establishing a dangerous precedent, and tacitly countenancing the wasting of corporate funds for purposes of corrupting public morals. The questions here involved are too broad and far reaching to permit an appeal to the doctrine of estoppel to defeat a salutary enforcement of official responsibility.

It is contended by the defendant Robertson that the plaintiff cannot maintain this action, because there has been no sufficient demand on the corporation and refusal by it to bring this action.

The plaintiff contends that a demand was made, not only on the defendant Robertson, but upon Hr. Byers, one of his associate directors, two of the three members of the board of directors. Hr. Byers denies any such demand on him. This action is prosecuted for the corporation, and can only be brought by a stockholder when the corporation itself has declined to act, or the circumstances are such that a demand on the corporation to act would be useless.

Where a corporation is exclusively under the control of trustees and officers whose acts and management are questioned, and a demand that the corporation bring an action ■would be idle and fruitless, in such cases equity permits the stockholder to bring the action in his own name for the benefit of the corporation. Sage v. Culver, 147 N. Y. 246; Brinckerhoff v. Bostwick, 88 id. 52; Leslie v. Lorillard, 110 id. 519.

I think the evidence discloses sufficient to sustain the plaintiff’s light to maintain this action. The defendant controls a majority of the stock of the corporation. The directors were elected by his votes. He is one of the board. One of the other members of the board is his brother, and the third his uncle. The payment of the $800 in question was reported to a meeting of stockholders where these directors were present and participated, and seems to have been acquiesced in by the directors, and even now justified by them under the circumstances of the case. We are of the opinion the evidence presents a situation where the right of the plaintiff to maintain this action should be sustained.

For these reasons we find the plaintiff entitled to a judgment directing the defendant Robertson to pay into the treasury of the defendant corporation the sum of $800. This relief is granted without costs to the plaintiff, however, because, in our opinion, the defendant has prevailed as to the majoi portion of the claims asserted against him.

Judgment accordingly.