Case ID: ad_104/html/0242-01.html
Source: Caselaw Access Project
Author: {"author": "\n      Ingraham, J.: McLaughlin, J. (dissenting):", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Solomon R. Jacobs and Arthur Jacobs, Respondents, v. Mexican Sugar Refining Company, Limited, Appellant, Impleaded with Mexican Sugar Company, Defendant.
    
      An action by minority stockholders to prevent the cancellation-of a lease to tl,eir corporation by the fraudulent act of its directors who also represent the lessor corporation — it may be maintained although both corporations are foi'eign corporations '—the corporation itself could not maintain the action — the action does not affect the tille to real property. .
    Where-a corporation organized under the laws of the State of Louisiana leases a plantation owned, by it in the Republic of-Mexico to a corporation organized under the laws of - the State of New Jersey and thereafter persons controlling a majority of the stock and the hoard of directors of both the lessor and lessee corporations, for the purpose tif wrecking the-lessee corporation, fraudulently and in violation of their duty as the directors and majority stockholders of the lessee corporation, procure the cancellation of the -lease and take possession of . the leased plantation in'the name of the lessor corporation, a minority stockholder of the lessee corporation, residing in the State of New York, may maintain mrt-he Supreme Court of the State of New York an action against the lessor and lessee corporations-to procure an adjudication setting aside the cancellation of the lease.
    Such action cannot he maintained under section 1781 of the Code .of Civil Procedure, as neither the officers nor the directors of the interested corporations are parties, thereto, but it may be maintained under that provision of section 1780 of the Code of Civil Procedure which provides that an action against a foreign corporation may be maintained by a resident of the State for any cause of action. . . /
    The object of the action is .not to affect the title to real, estate situated without the State as the title to the leased real estate is not involved therein. .
    Semble, that under section 1780 of thé Code of Civil Procedure the lessee corporation could not maintain an action in the courts of the State of New York to set aside the cancellation of the lease. ■
    Van Brunt, P. J., and McLaughlin, J., dissented.
    ., Appeal by the defendant, the Mexican Sugar Refining Company, Limited, from an interlocutory judgment of the Supreme. Court in -favor of - the plaintiffs, entered in the office of the clerk of th e-county of New York on the -23d day of November, 1904, upon the decision of the court,'rendered after a trial at the New.York Special Term, overruling the said defendant’s demurrer to the plaintiffs’ complaint..
    
      William P. S. Melvin, for the appellant.
    
      George H. Engelhard, for the respondents.
   Ingraham, J.:

This appellant interposed a demurrer to the complaint upon the ground that it appears upon the face thereof that the court had not jurisdiction of the subject-matter of the action. That demurrer was, overruled, and the defendant appeals.

The action is brought by the plaintiffs as stockholders of the Mexican Sugar Company, and the plaintiffs demand judgment on behalf of themselves and all other stockholders of the Mexican Sugar Company that an agreement, by which a lease made by the refining company to the Mexican Sugar Company is canceled, be declared null and void and of no effect. It is thus sought to enforce a causé of action in favor of the Mexican Sugar Company to cancel an agreement between that company and the refining company by which the rights of the Mexican Sugar Company and plaintiffs as stockholders therein would be impaired or injured. The complaint alleges that the Mexican Sugar Refining Company, Limited, is a. corporation organized under the laws of the State of Louisiana, and that said company was and now is the owner of a large sugar plantation in the State of Vera Cruz, in the Republic of Mexico, known as the Santa Fe plantation, and of the buildings thereon erected, and that said plantation and its appurtenances constitute the only asset of said refining company; that at the end of 1901 it was found- by the directors and stockholders of the refining company that a large .amount of money would be required for working capital, which the said refining company was unable to raise, and it was, therefore, deemed advisable that it should lease its plantation to persons able to operate it; that thereafter Braker, Craven and Dowler and the plaintiffs formed a syndicate for the purpose of taking such a lease from the refining company and operating said plantation; that on or about February 21, 1902, the refining company executed a lease to Max J. Mayer ancj Samuel S. Lees, who represented said syndicate, for a term of two years from. May 1, 1902, with an option of renewal for three additional years, at ■ a rental of fifty cents per ton, gold, for each and every ton of cane gro.und in the mill or refinery to be erected upon the premises, it being provided that, in no event, the revenues for such tonnage were to fall below the sum required to pay the interest on the bonds issued by the refining company and the taxes, insurance and all other public charges upon said premises, and a copy of said lease is made a part of this complaint; that subsequently the said syndicate caused the sugar company to be organized under the laws of the State of New Jersey with an authorized capital stock of 6,000 shares of the par value of $100 each for the purpose of acquiring the lessees’ interest in said lease and of operating said plantation thereunder; that thereafter and on the 29th day of October, 1902, an agreement was entered into between the members of the said syndicate for the issue of the entire capital stock of the sugar company as follows: That the lease of the said sugar plantation should be assigned by said Mayer and Lees to the said sugar company in exchange for 5,200 shares of the capital stock of the said sugar company, the said stock to be divided between the plaintiffs Craven and Dowler; that there should be issued to Arthur Jacobs (one of the plaintiffs) 233-J- shares of the stock, to Craven 491-f shares, to Dowler 1,474 shares and that the remaining 3,001 shares of said 5,200 shares should be issued to Braker and the plaintiff Solomon R. Jacobs jointly as voting trustees, to be held by them in trust during the continuance of the term of the lease, as provided by a certain trust agreement entered into between Braker, Craven, Dowler and the plaintiffs, and that the remaining 800- shares of the capital stock of the sugar company should be issued and paid for in cash at par, 266| shares to Arthur Jacobs (one of the plaintiffs), 133$ shares to Craven, 400 shares to Dowler; that the entire capital stock of the sugar company was thereafter issued, in pursuance of said agreement, the said sugar company receiving in payment for the same an assignment of the lessees’ interest in the lease of the plantation owned by the refining company, and the sum of $55,000 in cash, which was paid into the treasury of the company in several installments, as called for by the board of directors of the company; that after the issue of. the capital stock of the sugar company and after various transactions among some of its holders, the stock of the said company, represented by both stock certificates and voting trust certificates, was owned by Braker, Craven, Dowler and the plaintiffs ; that the said agreement of October 29,1902, provided that the first board of directors of the said sugar company should consist of Braker, Craven, Dowler and the plaintiffs, and that Braker should be president, Solomon R. Jacobs treasurer and Craven secretary of said company, and that these directors and officers still continue to be the directors and officers of the company, and that under the voting trust agreement no change can be made except upon the joint vote of Braker and Solomon R. Jacobs, the voting trustees; that thereupon the said sugar company took possession of the plantation, and commenced to operate the same, and for the purpose of carrying on the work acquired a large number of mules, large quantities of tools and implements and employed a manager and other employees and many laborers, all at a large expense; that it had also advanced to the refining company upwards of $30,000 to enable the refining company to pay the interest upon its bonds, for which the refining company is still indebted to the sugar company; that in this manner the sugar company has borrowed about $67,000 which, with the $55,000 of working capital, had been expended upon the leased property, and in addition thereto the amount of $25,000 had been expended by Dowler on behalf of the sugar company towards; the erection of a still as provided for in the agreement as a part of his subscription to the capital stock; that during the first grinding season, from December, 1902, to May, 1903, no cane was harvested or ground and no sugar refined or alcohol distilled by*! the sugar company, and that it made no earnings during said period; that in the month of April, 1903, Braker and Craven purchased 2,000 shares of stock of the refining company which before had been held by other people, find that in the summer of 1903 Dowler sold his entire interest in both companies to Craven and Braker, so that Braker and Craven owned 5,330 shares and the plaintiffs owned 670 shares of the stock of the refining company, and Braker and Craven owned 4,000 shares, and the plaintiffs owned 2,000 shares of the sugar company; that Braker and Craven controlled and still control the board of-directors of the sugar company; that Dowler, after the sale of his interest in the company, continued to act as director at the request of Braker and Craven, and represents them upon said board of directors and acts entirely according to their wishes and directions and under their control; that thereafter Braker and Craven conspired among themselves and with the refining company to manage the affairs of the sugar company for the benefit of the refining company ill which they had a much larger interest, and to the detriment of the sugar company; that in or ■about the month of April, 1904, said Braker and Craven, with the assistance and connivance of Dowler, conspired among themselves with the refining company to wreck said sugar company by depriving it of ad its assets and to obtain the same for themselves, either •as individuals or 'through their larger interest in thé refining company, and- particularly to bring about a cancellation, by the refining company, óf the lease of said plantation which would utterly destroy all the property and assets of: the sugar company, and cause them "to revert to" and become the property of the refining company, in which Braker and Craven had a much larger and the plaintiffs a much smaller interest; that Braker and-Craven had the control of • the board of-directors of the refining company, apd that pn or about April 25, 1904, Braker,„• Craven and Dowlér, as directors of the sugar .company and in violation of their duty as- such directors and in furtherance of their plan to wreck said company and against the adverse vote of the plaintiffs, passed a "resolution authorizing the president to pledge all the assets of the sugar company, except its lease of said plantation, representing as hereinbefore set forth an investment of about $150,000' to one J. W. Cunningham, without any consideration whatsoever, to. secure an alleged, claim of said Cunningham against the sugar company for about $30,000' alleged to have been loaned by said Cunningham to the said sugar company and to execute to said Cunningham a demand note for the' ainount thus alleged to be due him; that after the passage of said resolution, said Braker, as president of the sugar company, executed said demand note to Cunningham and he 'executed an instrument, of pledge of all said assets and delivered the same to him; that said Cunningham never was,'nor now is, th e $ona fi$e holder-of said'alleged claim against the sugar'company, but’-is merely the agent aiid.-representative of. Braker, who "had advanced said moneys -to the sugar company without security, and that said resolution was passed by said directors for the unlawful purpose of transferring all the assets of the sugar company to said Braker in fraud and violation Of its rights, and interests, and for the further purpose of making, inevitable the cancellation of said-lease by the refining "company; that thereafter, on May 9*. 1904, Braker, Craven and one- Field's, who was then a- director, passed a resolution whereby the ' refining company pretended to cancel its lease of the plantation to said sugar company, and immediately thereafter Braker, Craven and Dowler abandoned and disregarded the rights of the sugar company, pretended to assume possession of the said plantation for the refining company,, all in violation of their duty as directors of the sugar company, and that they now claim to hold such possession for the refining company, and the judgment demanded is that the attempted cancellation of the said lease by the refining company be declared null and void and of no effect, and for further relief.

The demurrer being upon the ground that the court had no jurisdiction of the subject-matter of the action, whether or not a cause of action is alleged is not presented, this analysis of the complaint being merely for the purpose of ascertaining just what cause of action is sought to be enforced. Nor is the question as to a defect of parties, in that the directors whose acts are complained of are not parties to the action, presented, the only question being whether or not the Supreme Court of the State of New York has jurisdiction of the cause of action here sought to be énforced.

This action cannot be maintained under • section 1781 of the Code of Civil Procedure, as that section provides for an action against the officers or directors of a corporation, and as neither the officers nor directors of either corporation áre parties defendant, the action is not against them, and, therefore, is not such an action as is authorized by that' section of the Code of Civil Procedure. T think, however, that at common law an action can be maintained by the stockholders of a corporation to have declared void a contract with another corporation when the two corporations are controlled by common directors where the acts of the two corporations are based upon a fraudulent combination by which , a majority of the directors of the two companies seeks to defraud one corporation for the benefit of the other. Here it is alleged, ■and the demurrer admits, that Braker and Craven controlled a majority of the stock of both corporations and also controlled the board of directors of both corporations; that they have a much larger interest in the stock of the refining company than in the sugar company, and thus would be benefited by acquiring for the refining company all the property of the sugar company, and to advance that interest, in violation of their duty as the directors and the. majority stockholders of the sugar company, they have canceled the lease of the sugar company and taken possession of all the property of the sugar company in the name and for the benefit of the refining company. That such a transaction is a gross fraud upon the minority stockholders of the sugar cotapany cannot be disputed; and a court of equity could,, by appropriate relief, prevent the execution of such a scheme ; and. where both corporations are controlled by those who are carrying this fraudulent scheme into effect, the stockholders Of the defrauded company can maintain, an action to restrain the fraudulent acts of the directors and majority stockholders ; and undoubtedly the Supreme Court of the State of New York, as a court of general equity jurisdiction, has jurisdiction of such cause .of action. .As the defendants are both foreign - corporations, it is said that this court has no jurisdiction to enforce a cause of action in favor of one foreign corporation against another f oreign corporation, and that would he undoubtedly true, if the action was brought by one foreign corporation against another corporation. The action, however, is not brought by either of these foreign corporations. It is/ brought, by the plaintiffs as stockholders of one, of the corporations, seeking, it is true, to enforce a cause of action in favor of one corporation against the other; but still the cause of action is one given to the plaintiffs to protect tlieir rights as stockholders, by .applying to. a court of equity to prevent the consummation of a fraudulent act which would tend to the injury of the corporation of -which they are stockholders. There is no allegation in .the ■ complaint as to the residence of the plaintiffs.; but as-..the demurrer can only be sustained because of an objection that appears-upon, the face of the complaint, if it does not appear in the complaint that the plaintiffs are non-residents,' the objection-must be taken by answer, . ,

Section 1779 of the Code of Civil Procedure provides that an action may be maintained by a foreign corporation in like manner and subject to the same regulations as where the action is brought by a domestic corporation, except as otherwise specially prescribed by law; and section 1780 provides that an action against a foreign corporation may be maintained by a resident of the State, or by a domestic corporation, for any cause-of-action; that an action against a foreign corporation may be maintained by anotliér foreign corporation, or by a non-resident, “ where the cause of action arose within the State, except where the object of the action is to affect the title to real property situated without the State.” Undoubtedly under this section a cause of action could not be maintained by the sugar company against the refining company in the courts of this State ; but I think that resident stockholders who have an interest in a foreign ■ corporation can maintain an action to protect their interest as stockholders by enforcing a contract in favor of one foreign corporation against another foreign corporation where such a cause of action could be maintained if the corporation of which they are stockholders was a domestic corporation. (Brinckerhoff v. Bostwick, 88 N. Y. 52; Sage v. Culver, 147 id. 241.) Section 1780 of the Code of Civil Procedure provides that an action against a foreign corporation may be maintained by a resident of the State for any cause of action. Now, the plaintiffs, as stockholders, have a cause of action against the defendant, the refining company, to compel that company to recognize the rights of the sugar company of which -they are stockholders. It is the plaintiffs’ right to commence that action in equity that is the cause of action sought to be enforced, and while the relief that will be awarded will be in favor of the sugar company, the cause of action- that is sought to be enforced is a cause of action which vests in a minority stockholder to prevent the majority stockholders and the officers of the corporation from carrying out a fraudulent scheme to injure the corporation of which the plaintiffs are stockholders. In Bouvier’s Law Dictionary (Vol. 1 [Rawle’s Rev.], p. 295) a Cause of action ” is defined as Matter for which an action may be brought. A cause of action is said to accrue to any person when that person first comes to a right to bring an action.” Thus, if the plaintiffs have a right to bring the action, they have a cause of action to enforce that right which, under section 1780 of the Code of Civil Procedure, they may commence against one or more foreign corporations. The demurring defendant having appeared in the action, the court has jurisdiction over the person of the defendant, and having jurisdiction of the person, thq court can enforce the rights of citizens of this State as stockholders of the sugar company by such a decree as is necessary for their protection as stockholders of the sugar company. Certainly citizens of this State should not be refused relief where their interests require a judgment against a foreign corporation, and. where-the courts have, acquired, jurisdiction ovei’ the foreign coin poration. Nor does the cause of action affect the title to real property situated without the átate. .. The ownership of this property in Mexico is in the refining company, and that fact is conceded in the complaint. The object of the action is to set aside or have declared void the action of the two companies controlled by the. same directors in canceling a lease which is a valuable property right belonging to the sugay company. The title .to the real estate is not at all involved. The- plaintiffs' do not ask, nor could they obtain, a -judgment which would give them possession of the property. They-can, however, if the facts alleged justify it, obtain a judgment declaring that certain acts of'these two corporations are fraudulent and void. ,

I think' the judgment appealed from should be affirmed, with costs, with leave to defendant tó withdraw demurrer and to answer on payment of costs in this court and in: the court below.

O’Bríén and Hatch, JJ., concurred;' Yah Brunt, P. J., and McLaughlin, J., dissented. '■ . ■ .

McLaughlin, J. (dissenting):

It seems'to be conceded'in the prevailing opinion that: this court would not have, jurisdiction of the subject-matter of the action had it been brought by one corporation against the' other, but it is suggested that inasmuch as the action is brought by a stockholder of the corporation, /it can be maintained.

I do not understand that a stockholder of a-corporation cando . for the corporation what it could not do for itself, and if I am right in. this, then the court hás no jurisdiction to enforce the cause of action alleged in the complaint, and for that reason the judgment appealed from should be reversed and the demurrer sustained.

Yan Brunt, P. J./ concurred.

Judgment affirmed, with costs, with leave to -defendant to withdraw demurrer: and to answer on payment of costs in this court and in the court below. ' , ' '