Case ID: ny-sup-ct_10/html/0383-01.html
Source: Caselaw Access Project
Author: {"author": "WE6TBBOOK, J. :", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

B. C. GRAY and others, Respondents, v. THE NEW YORK AND VIRGINIA STEAMSHIP COMPANY and others, Appellants.
    
      Stockholders — right of, to maintain action for frauds of director's — suit by some, for' benefit of aU— Code, § 119 — Fraudulent purchaser of corporate property—proper' pcurty to action— cannot avoid suit by setting up that purchase-price is not offered to be returned.
    
    A stockholder in a corporation, on behalf of himself and other stockholders similarly situated, may maintain an action against such corporation and its directors to set aside and enjoin transactions done by such directors in the name of the corporation for their own personal gain and benefit, and in fraud of the rights of the plaintiffs and other bona fide stockholders, when the directors have been requested to bring such action and have refused.
    In such action it is proper to make the purchaser of the corporate property a party (alleging him to be a co-conspirator with the directors), without offering to return to such purchaser the money paid for such property.
    A principal who adopts a fraud of an agent, by taking its fruits, has no standing to maintain an action to set aside the fraudulent act; but when the party implicated has aided an agent in committing the fraud upon a principal, and was, in fact, a party to it, he cannot make this point when the fruits of the transaction have not come into the hands of the principal.
    Appeal from orders of the Special Term, overruling demurrers to the complaint.
    
      S. •.P. Wash, for the appellant,
    The Old Dominion Steamship Company. Assuming that a cause of action is shown by the complaint against the' other defendants, it is apparent that none is shown, in this action, against The Old Dominion Steamship Company. -As to The Old Dominion Steamship Company the charge is, that the transfer was received, with full knowledge that the directors of the selling company had no authority to to make the sale, and that the transaction was in pursuance of a fraudulent arrangement between the directors of the two companies. On these allegations it would undoubtedly have been competent for the selling company to rescind the sale, and return the shares of stock received as the consideration of it. But they do not offer to buy up and restore the stock which was given for the sale, and which is still outstanding, nor to refund any money received as the avails of it. The complaint proposes to keep what has been received, and at the same time to rescind the sale. This cannot be done. (Cobb v. Hatfield, 46 N. Y., 533; Curtiss v. Howell, 39 id., 211; Ely v. Mumford, 47 Barb., 629.) The plaintiffs, as stockholders simply of the selling company, have no cause of action against The Old Dominion Steamship Company. A rescission, for violation of authority in an agent or subordinate, stands upon the same footing as a rescission on the ground of fraud. The principal may overlook the excess of authority, may receive the fruits of the transaction and ratify it, or he may rescind. He cannot do both. The Hew York and Virginia Steamship Company, under the management of a reformed board, could not have rescinded the sale of the ships without returning the stock. The plaintiffs, as simple shareholders, cannot, do more.
    
      Smith de Woodward, for the appellants,
    The Hew York and Virginia Steamship Company, F. Skiddy, G. Heineken, and H. 0. Von Post. The plaintiffs, as stockholders of the corporation (The New York and Virginia Steamship Company), cannot maintain this action. They were not authorized under the statute to institute or maintain proceedings for the dissolution of the corporation. Nor has a stockholder of such a corporation legal capacity to sue the corporation and its directors, trustees or other officers, for an account in respect to the management and disposition of the property of the corporation, and to set aside a transfer of any of its property.' Yet, no authority whatever is given to a stockholder to institute any such proceeding, or to obtain at his or their suit any judgment of dissolution. The suspension of business (referred to in § 46, 2 R. S., 464) does not ipso facto work a forfeiture, but is merely a ground upon which a forfeiture may be adjudged. (Bank of Niagara v Johnson, 8 Wend., 645; Mickles v. Rochester City Bank, 11 Paige, 118; Matter of Reformed Presbyterian Church of New York, 7 How. Pr., 476; Caryl v. McElrath, 3 Sandf., 176; People v. Manhattan Co., 9 Wend., 351; Slee v. Bloom, 19 John., 456; Attorney-General v. Bank of Niagara, Hopkins, 354.) In the absence of a statute which expressly authorizes some particular individual or class of persons to institute proceedings to obtain a judgment of forfeiture, such proceedings can be instituted only by the people. The decisions are that the fact of forfeiture cannot be investigated collaterally, or set up as a cause of action or defense in collateral proceedings; and until the government sees fit to interfere, no one can take advantage of the forfeiture. (Trustees of Vernon v. Mills, 6 Cow., 23; Mechanics' Building Association v. Stevens, 5 Duer, 676; Jones v. Dana, 24 Barb., 395; 9 Cranch, 51; 4 Wheaton, 698.) Proceedings to enforce the forfeiture claimed to have been incurred in this ease, should have been brought in the name of the people, and under sections 430 and 431 of the Code. This court has no jurisdiction over corporate bodies, either under the principles of the common law or through its general equity powers, for the purpose of restraining their operations, with a view to a dissolution, or to take away corporate rights and franchises. (Howe v. Deuel, 43 Barb., 504; Latimer v. Eddy, 46 id., 61.) If the proceedings are to be instituted on the equity side of the court, still they cannot be taken by a stockholder, but should be taken by the Attorney-General, in the name of the people. (Howe v. Deuel, 43 Barb., 504; Latimer v. 
      Eddy, 46 id., 61; Belmont v. Erie Railway Co., 52 id., 637; The People v. Same, 36 How. Pr., 129; Ramsey v. Erie R. W. Co., 38 id., 193; Smith v. Metropolitan Gas-Light Co., 12 id., 187; Galwey v. U. S. Steam Sugar Refining Co., 36 Barb., 256; Gilman v. Greenpoint Sugar Co., 4 Lansing, 482; Code, § 430; see Laws 1870, ch. 151, p. 421, §§ 2, 3, 4, 5.) And the fact that fraudulent acts or conspiracies are charged in the complaint against the directors, does not in this respect alter the result, or give the stockholders any better right to maintain the action. (Howe v. Deuel, and Latimer v. Eddy, supra; Belmonte v. Erie Railway Co., 52 Barb., 637; Treadwell v. Salisbury Manufacturing Co., 7 Gray, 393; Browne v. Monmouthshire R. W. & Canal Co., 13 Beav., 32; 15 Jur., 475; Abbott v. Merriam, 8 Cush., 589.) It is said in this case the plaintiff asks for such dissolution. That is so, in the complaint, but such an application can only be made by the Attorney-General (Code, § 430; Smith v. Metropolitan Gas-Light Co., 12 How. Pr., 187), or by the parties specified in section. 35 of the Revised Statutes, above referred to. (Abbott v. Merriam, 8 Cush., 588.) The directors and other officers and agents are amenable only to the corporation, and to give every individual stockholder a right of action would lead to a multiplicity of suits.
    
      John F. Balcer, for the respondents.
    The officers of a corporation are trustees, and a court of equity will hold them responsible for every breach of trust. (Code, §§ 159, 167; Story’s Eq. PL, § 213; Willard’s Eq., 751; Cunningham v. Pell, 5 Paige, 607; Robinson v. Smith, 3 Paige Ch., 222, 233; Hussey v. Veazie, 24 Maine, 12; Abbot v. The American Hard Rubber Co., 33 Barb., 578, 584; 21 How. Pr., 193; Heath v. The Erie R. Co., opinion of Blatchfood, J., April 27, 1871, and authorities there cited, 8 Blatehford, 347; Bach v. The Pacific Mail S. S. Co., 12 Abb. Pr. [N. S.], 373; Cumberland Coal Co. v. Sherman, 30 Barb., 553; Angell & Ames on Corp., §§ 305, 312, 391; Crook v. Jewett, 12 How. Pr., 19; Butts v. Wood, 38 Barb., 181; affirmed, 37 N. Y., 317; R. S., title 4, chap. 8, part 3, §41; Phoenix Bank v. Donnell, 40 N. Y., 410, Grover, J., p. 414; Peabody v. Flint, 6 Allen, 52; Gray v. Lewis, Eng. L. R. [8 Eq. Cases], 526, 541; Atwool v. Merryweather, Eng. L. & Eq. [5 Eq. Cases], 464, note; Hoole v. 
      Great Western R. Co., 1867, Eng. L. R., 3 Chan. App., 262.) It is a well established principle in equity pleading, that, if other parties participated with the directors in the fraud on the corporation, they may be joined as parties defendant. Henderson v. Jackson, 9 Abb. [U. S.], 294, 297; Heath v. Erie R. Co., U. S. Court Southern District, April 27, 1871, 8 Blatchford, 347; Richtmyer v. R., 50 Barb., 59; Quigley v. Walter, 2 Sweeney, 175; Peabody v. Flint, 6 Allen, 52; March v. Eastern R. R. Co., 4 N. H., 548; N. Y. & N. H. R. R. Co. v. Schuyler, 17 N. Y., 592; Vide N. Y. & N. H. R. R. Co. v. Schuyler, 17 id., 606; Adriance v. Roome, 52 Barb., 411.) The complaint states facts sufficient to constitute a cause of action. It shows fraudulent acts of the directors, and of the Old Dominion Company, acting collusively against the stockholders. (The People v. The Mayor, etc., 17 How., 62.) The demurrers cover the whole bill of complaint. If the complaint is good in part, the demurrers must be overruled. The complaint sets up facts sufficient to require an answer. (Story’s Eq. P1., § 443; Stuyvesant v. Mayor, etc., 11 Paige, 414; Livingstone. Story, 9 Peters, 632; 14 Abb., 379; Emery v. Pease, 20 N. Y., 62; Gook v. Chase, 3 Duer, 643; 42 Barb., 288.) If the prayer of the complaint goes beyond what the facts alleged authorize, the remedy is by motion to strike out. (Lord v. Vreeland, 13 Abb., 195.
   WE6TBBOOK, J. :

The complaint in this cause may be thus briefly stated: The plaintiffs are severally large stockholders in the defendant corporation, The New York and Virginia Steamship Company. That company was incorporated by a • special act of the legislature of this State, to establish a line of steamships between New York and Richmond, and for other purposes set out in the complaint. In July, 1867, whilst the company was doing a prosperous business, the individual defendants, who are appellants, being the directors thereof) for their own gain and advantage, and for the purpose of defrauding the plaintiffs and other stockholders, unlawfully and fraudulently sold to The Old Dominion Steamship Company, the other corporation defendant, the steamships belonging to The New York and Virginia Steamship Company, at a sum far.less than their value. That they received in pay for such steamships 4,000 shares of the stock of The Old Dominion Steamship Company, which latter company are now in possession of the vessels. And the whole transaction is charged to have been done for the purpose of breaking up and ruining The New York and Virginia Steamship Company, for the personal benefit of such individual defendants and their confederates.

The complaint further avers that the sale aforesaid, was made to, and received and accepted by, the said The Old Dominion Steamship Company, with full knowledge that said directors had no right, power or authority to make the said sale and transfer, and that the same was made and consummated under some secret and fraudulent agreement between said directors and'said defendant. The Old Dominion Steamship Company, its officers and agents were to be mutually benefited, and were to derive large pecuniary profits and advantages at the expense of, and in fraud of, the rights of these plaintiffs and the other stockholders of the said The New York and Virginia Steamship Company.” The complaint also avers that the directors of The New York and Virginia Steamship Company, “ though requested so to do, have refused to take action or proceedings to recover back the said steamships from said defendant, The Old Dominion Steamship Company.”

The plaintiffs, in behalf of- themselves and of all others interested with them, who shall come in and seek relief by this action, ask several different kinds of relief; amohg which is a prayer that the alleged fraudulent sale of the steamships to The Old Dominion Steamship Company may be set aside, and the property restored.

The defendants separately demur, but their grounds are the same, though presenting somewhat different questions, and are: first, that the complaint does not state facts sufficieñt to constitute a cause of action against each defendant demurring; second, that the plaintiffs, as stockholders in The New York and Virginia Steamship Company, have no right to maintain the action ; and third, the several causes of action have been improperly united in the complaint; that is to say, several causes of action stated in the complaint, are not common to all the defendants, but could only be maintained against some separately.

In the discussion of these demurrers, it must of course be assumed that the allegations of the complaint are true; and the questions presented are:

First, can a stockholder in a corporation, in behalf of himself and other stockholders similiarly situated, maintain an action against such corporation and its directors, to set aside and enjoin transactions done by such directors, in the name of the corporation, for their own personal gain and benefit, and in fraud of the rights of the plaintiffs and other bona fide stockholders, when the directors have been requested to bring such action and refused ?

"It would seem that a bare statement of the proposition ought, of itself, to be sufficient. It would be monstrous to hold that a stockholder had no standing in court to protect his property in a corporation, which, fraudulent managers, for their own gain, were misapplying. Such a rule would place every stockholder in a corporate body completely at the mercy, and in the power, of fraudulent trustees and directors. If the cases were not numerous where stockholders have been allowed to maintain bills in equity for frauds committed by directors, as Judge Fancher truly said they were, . we would now at least make a precedent for the maintenance of such an action, believing that sound public policy and the honest and discreet management of corporations require it.

The right of the present plaintiffs to bring an action in behalf of themselves and others, is recognized by section 119 of the Code, where it is, among other things,, provided: When the parties are very numerous and it may be impracticable to bring them before the court, one or more may sue or defend for the benefit of the whole.”

Angelí & Ames, in their work on Corporations, thus state the rule: The general rule is, that a suit, brought for the purpose of compelling the ministerial officers of a private corporation to account for breach of official duty, or misapplication of corporate funds, should be brought in the name of the corporation, and cannot be brought in the name of the stockholders, or some of them. * * * But as a court of equity never permits a wrong to go unredressed merely for the sake of form, if it appear that the directors of a corporation refuse in such case to prosecute, by collusion with those who had made themselves answerable by their negligence or fraud, or if the corporation is still under the control of those who must be the defendants in the suit, the stockholders, who are the real parties in interest, will be permitted to file a bill in their own names, making the corporation a party defendant. And if the stockholders are so numerous as to render it impossible, or very inconvenient, to bring them all before the court, a part may file a bill in behalf óf themselves and all others standing in the same situation. The jurisdiction of chancery in such cases, proceeds'in cases of joint-stock corporations, upon the same principles as are applied to charitable corporations in England. The directors are the trustees or managing partners, and the stockholders are the eestuis que trust and have a joint interest in all the property and effects of the corporation; and no injury that the stockholders may sustain by a fraudulent breach of trust can, upon the general principles of equity, be suffered to pass without a remedy.”

In Grant on Corporations, it is declared: A corporator may not only sue singly in equity the directors, etc., dr the company, on behalf of himself and other shareholders, etc., but he may also join other parties as defendants, who may be receiving benefits from, the transactions which he impeaches.”

This doctrine contained in the elementary works, has been repeatedly recognized in the courts. Koehler v. The Black River Falls Iron Company was an action brought to foreclose a mortgage giveu by the defendant. William M. Hally, a stockholder, on petition showing that the directors did not intend to make defense, was allowed to appear and defend. The bill was dismissed, and the complainants appealed. The Supreme Court of the United States affirmed the decree, Mr. Justice Davis writing the opinion, who cites the before quoted paragraph from Angel! & Ames on Corporations, approvingly, for the purpose of showing that a stockholder has a standing in court, to maintain or defend a suit which involves illegal or fraudulent .acts of the directors of a joint-stock corporation.

In Zabriskie v. The Cleveland, Columbus and Cincinnati Railroad Company and others, the Supreme Court of the United States affirmed the same doctrine. Mr. Justice Campbell says:

The frame of the bill implies that this contract exceeds the powers of the corporation, and cannot be confirmed against a dissenting stockholder. His authority to file such a bill is supported upon this ground alone. The usual and more approved form of such a suit being that of one or more stockholders to sue in behalf of the others.”

There are also many other cases which hold the same principle. Among these are Robinson v. Smith, Cunningham v. Pell, Peabody v. Flint, Blatchford v. The New York and New Haven Railroad Company, Cross v. Sackett, Butterworth v. Fox.

The cases referred to, abundantly establish that if the allegations of this complaint are true, there is a cause of action stated against The New York and Virginia Steamship Company and its directors. Upon their part, the appeal was argued as if it was necessary that the complaint should justify all the relief prayed for, whereas it is sufficient if it states a cause of action, the demurrer assuming that none is averred. No opinion is expressed upon the extent of the relief which can be granted in this action. It seems very clear,. however, if the truth of the allegations contained in the complaint be established, that the plaintiff will be entitled to the relief, at least, of setting aside the alleged fraudulent, transfer of the corporate property. This would be justified, if the proofs supported the averments.

Second. Can the action be sustained against The Old Dominion Steamship Company, upon the allegations of the complaint ?

It is claimed in behalf of this defendant, that the present suit cannot be maintained, because the pleading states that that corporation has'parted with its property for the vessels purchased of The New York and Virginia Steamship Company, and without restoring to it its property, the sale and purchase cannot be set aside.

It is undoubtedly .a general rule, that he who seeks to repudiate a contract with another upon the ground of fraud, must restore (& that which he has received. How this doctrine, however, can be made applicable in favor of this defendant, is not perceived. The complaint charges that The Old Dominion Steamship Company is co-conspirator with the other defendants to defraud the plaintiffs and those whom they represent, for its own benefit and that of its officers, as well as for the gain of the other defendants. Why should the plaintiffs be compelled to restore to it property which they do not control, and which such defendant, for the purpose of defrauding them, placed in other hands % The victims of a conspiracy (and such the plaintiffs are, according to the complaint, which the demurrer admits) surely ought not to be called upon to make good to one of the conspirators that which has been parted with for the express and only purpose of working a wrong to such victims.

He who has been engaged in an attempt to defraud another, should be left to relieve himself as best he can; and as this corporation must, on this appeal, be regarded as occupying just that position, it will be left to establish its case by proof. When the cause is tried, and its exact status as to the transactions ascertained, a decree protecting its rights, if it has any worthy of being protected, can be made. Its demurrer is.of no force, if the history of the dealings between the defendants, and the objects thereof, as stated in-the pleading demurred to, be true.

The authorities referred to above, establish that The Old Dominion Steamship Company, as one receiving benefits of the transactions which are impeached, is a proper party to the action. Occupying the position- it does, that of an active participant in a fraud upon the plaintiffs and their associates, the argument based upon the doctrine of principal and agent, does not apply.

' It is true that a principal who adopts a fraud of an agent, by taking its fruits, has no standing to maintain an action to set aside the fraudulent act; but surely, when the party implicated has aided the agent in committing a fraud upon a principal, and was, in fact, a party to it, he cannot make this point when the fruits of the transaction have not come into the principal’s hands. The complaint shows that the stock of The Old Dominion Steamship Company, received in payment of the vessels, have not come into the treasury of the other corporation, and consequently the plaintiffs, as stockholders of the latter, have not been benefited. The plaintiffs and their associates have none of the property of this defendant, or the proceeds thereof, in their hands'; and if the complaint is true, and The Old Dominion Steamship Company is a loser by reason of its fraudulent attempt to entail a loss lipón others for its own advantage, it will endure only that which it deserves to suffer.

Third. The demurrer of Heineken & Palmore having been sustained at Special Term, upon the ground that the facts stated in the complaint against them, do not constitute a cause of action with which the other defendants are concerned in this action,” causes of action, common to all the defendants, are alone left in the complaint.

The various orders overruling the demurrers, should be affirmed, with costs.

Daniels and Beady, JJ., concurred.

Orders affirmed, with costs. 
      
       Section 312.
     
      
      
         Page 290, Law Library (4th series), vol. 55 page 301.
     
      
       2 Black., 715.
     
      
      
         Page 721.
     
      
       23 How., 381.
     
      
       Page 395.
     
      
       Dodge v. Walsey, 18 How., 331; Mott v. Penn. R. R. Co., 30 Penn., 1; Manderson v. Commercial Bank, 28 id., 379.
     
      
       Bemon v. Rufford, 1 Simon [N. S.], 350; Winch v. Birkenhead H. Railway Co,, 5 De G. & S., 562; Moseley v. Alston, 1 Phil., 790; Wood v. Draper, 24 Barb.
     
      
      
         3 Paige, 222.
     
      
       5 Paige, 607.
     
      
       6 Allen, 52.
     
      
       5 Abbott, 276.
     
      
       2 Bosworth, 617.
     
      
       15 How. Pr., 545.
     
      
       Grant on Corporations, page 290; Peabody v. Flint, 6 Allen, 52.