Case ID: abbn-cas_19/html/0427-01.html
Source: Caselaw Access Project
Author: {"author": "Smith, P. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

KELSEY v. PFAUDLER PROCESS, &c. CO.
    
      N. Y. Supreme Court, Fifth Department, General Term ;
    
    June, 1887.
    1. Corporation; combination to avoid rivalry ; dissolution for suspension op business.] Where a corporation, organized under the Act of 1848 (c. 40) for manufacturing, using, licensing, etc., machines and the process in which the same are used under letters patent, in order to avoid ruinous competition and litigation with a rival company and to prosecute the business with more beneficial results to its stockholders under its own control, pursuant to an arrangement with the rival company, assigns its business and its patents to a new corporation organized for the same objects, and takes a majority of the stock therein, the residue being subscribed for by the rival company, its trustees having no intention to abandon business but. thereafter carrying it on by means of the new corporation, it cannot be deemed to have abandoned or suspended its ordinary and lawful business so as to afford ground for its dissolution under the statute.
    2. The same; illegality of company's subscription to stoclcin new corporation.] Assuming that the corporation exceeded its powers or acted illegally in taking the stock of the new corporation in exchange for its patents, etc., this is not available as a cause for dissolution in an action brought therefor by a stockholder upon the ground that the corporation has abandoned the powers given by its charter.
    
    
      3. The same; remedy.] The remedy under the statute is by action brought by the attorney-general against the officers chargeable with the wrong, to set aside the unlawful alienation of its property.
    4. Estoppel; verified complaint.] Whether a plaintiff wbo, in an action for a penalty for refusing to exhibit to him the stock-book of a corporation, verified, a complaint alleging the existence of the cor. poration, and that it then had an office and place of business, is not estopped from alleging in a subsequent action to dissnlve the corporation, that it had then suspended its lawful business, query ?
    
    5. Appeal by corporation from judgment dissolving it.] A corporation aggrieved by a judgment declaring it to be dissolved has the. same right as any other litigant to appeal from the judgment, and from the orders based on the judgment or growing out of the proceedings taken to enforce it. It cannot be deemed by reason of the judgment to have no existence, and therefore no power to appeal.
    Trial by the coart.
    Appeal from a judgment entered upon a decision of the Monroe Special Term declaring the defendant corporation dissolved.
    Edward J. Iielsey brought this action against the Pfaudler Process Fermentation Company for its dissolution, upon the ground that the corporation had suspended its ordinary and lawful business for at least one year prior to the commencement of the action.
    The resolutions referred to in the opinion as adopted by the trustees of the defendant, recited that “ it has been agreed by the representatives of the two companies, as stated in the report of the committee just adopted,” that “ the new company contemplated by such agreement has been organized under the name of the Consolidated Bunging Apparatus Company,” and that “ it is deemed for the best interests of this compan)7, that it should conduct its future business mainly as a majority owner of said company and all its patents; ” and directed the president and secretary to transfer to the new company the patents upon which the defendant was organized, “ also all licenses, contracts, and business secured by this company since October 20, 1883,” in exchange for 750 shares of the new company’s stock, to be issued to James Sargent, president of the defendant.
    Other facts material to the appeal from the judgment, appear in the opinion.
    With this appeal were also argued three several appeals from Special Term orders, growing out .of the proceedings to enforce the judgment; and also an original motion on the part of the respondent to dismiss the appeals.
    
      E. A. Nash (J. & Q. Van Voorhis, attorneys) for the defendant, appellant.
    
      Theodore Bacon (Bacon, Briggs & Beckley, attorneys) for the plaintiff, respondent.
    I. The cessation actually to do" any business for which it was incorporated is ground for dissolution, notwithstanding the company continues to receive corporate funds, etc. (Ward v. Sea Ins. Co., 7 Paige, 294 ; Re Jackson Marine Ins. Co., 4 Sandf. Ch. 559 [affirmed in Court of Appeals, Bliss’s Code, § 1785, Note c.] ; Briggs v. Penniman, 8 Cow. 387; People v. Northern R. R. Co., 53 Barb. 98 ; 42 N. Y. 217).
    II. After judgment of dissolution, no right of appeal remains to the corporation, for it -is no longer in existence (Greeley v. Smith, 3 Story, 657, 658 ; Mumma v. The Potomac Co., 8 Pet. 281; National Bank v. Colby, 22 Wall. 609, 615 ; Hubbell v. Merchants’ Nat. Bank, 42 Hun, 200, 201); and costs could not be imposed on it (North Baptist Church v. Parker, 36 Barb. 171, 176; Maries v. Maries, 23 Eng. L. & E. 221; Gynn v. Kirby), 1 Strange, 402 ; Hubbart v. Phillips, 13 Mees. &. W. 703).
    
      
       See note as to power of a corporation to hold stock in another corporation, p. 421 of this vol. and note on trusts of stock for the control of corporations, on p. 448.
    
   Smith, P. J.

The judgment of dissolution was put upon the ground that the corporation had suspended its ordinary and lawful business for at least one year prior to the commencement of the action. The corporation was formed in April, 1882, under the general manufacturing act of 1848. The objects of its formation, declared in the certificate of its incorporation, were “ the manufacturing, using, licensing and selling machines and apparatus, and the process in which the same are used in the manufacture of beer and other fermentable liquors, under and by virtue of” certain letters patent of the United States, specified in the certificate. The certificate stated that the capital stock of the corporation was to be $100,000, in one thousand shares of $100 each ; that the term of existence of the corporation should be fifteen years from April 15, 1882 ; that its trustees should be seven in number, and its principal place of business should be in the city of Rochester. The plaintiff was one of its stockholders.

After the corporation entered upon the business for which it was formed, it encountered a competing company called “ The New Process Fermentation Company,” of Chicago, claiming as its own, the same invention upon which the defendant relied. To'test the question growing Out of the rival claims, the “Hew Process” company brought suit against a licensee of the “ Pfandler Process ” company for an infringement, arid the latter company assumed the defense. "While that suit was pending undecided, the two companies entered into an arrangement for the purpose of composing their differences, the principal features of which were that the party which should succeed in the suit should have three-fourths, and the other party, one-fourth, of the invention ; that all the patents of both companies should be transferred to a third party, or new corporation to be formed for that purpose, each party reserving its rights as to licenses theretofore granted, or contracts in process of execution ; that the two companies should pool all future business and divide its proceeds, the successful warty to have seventy-five per cent., and the defeated party the remainder; that all suits then pending should be prosecuted for the benefit of the party commencing the same, and all future suits for the benefit of the pool; and there should be five directors of the new corporation, two of whom might be selected by the minority interest; and that the new corporation should furnish to each of the contracting parties, each month, a statement of the business done during the month, and remit to each its proportion of the net profits received during the month.

The suit between the companies was decided in favor of the defendant herein, and thereupon, for the purpose of carrying out the said agreement, a new company was organized under the said act of 1848, called the “ Consolidated Bunging Apparatus Company,” to which the contracting parties assigned their respective patents. The certificate of incorporation of the new company bears date July 18, 1884, and was signed by three persons, each of whom was a stockholder and trustee of the defendant. The objects of the new corporation stated in the certificate, were the purchasing and leasing of letters patent and of inventions for improvements in the process and apparatus for manufacturing and preparing beer, wine and other fermented liquors for the market; the manufacturing, selling, licensing and operating of such process and apparatus under said fetters patent and of inventions used for like purposes; and the transaction of all business incidental to or connected therewith.

The amount of the capital stock of the new company was $100,000, consisting of one thousand shares; the number of trustees was fixed at five; the term of existence of the company was to be twenty-five' years, and its principal office and place of business was to be in the city of Rochester. Seven hundred and fifty shares of the stock were assigned to the defendant, and the remainder to the Chicago company ; the president of the defendant was authorized and directed by its board of trustees to vote the stock of the new company-owned by the defendant, in all meetings of that company, as he should deem best for the interests of the defendant and its business, and a board of five trustees of the new company was designated, three of whom were trustees of the defendant; and the ether two represented the Chicago company.

Evidence of the action of the defendant’s officers, in effecting this arrangement, of the motives which induced it, and of the purposes sought to he accomplished by it, is furnished by the resolutions of the hoard of trustees, and the reports of committees and other information upon which they acted, set out -in the printed case.

So far as we can gather from the testimony, it seems obvious that the trustees at no time intended an abandonment or suspensión of the business for which the defendant was organized ; on the contrary, the arrangement made, including the transfer of the patents to the new company, was entered into by them for the purpose of removing the formidable competition of the Chicago Company which threatened them with disaster, and in the expectation of being able, by their control of the new company, to prosecute the business for which they were organized, with greater vigor and success.

These views as to the favorable effect of the arrangement upon the business of the defendant and the value of its stock, find support in the averments contained in the complaint verified by the plaintiff herein, in an action brought by him and others against the defendant herein and others, in February, 1884, and in the findings of the referee in that action, all of which appear in the appeal book before us. The arrangement seems to have been the same, in practical effect (so far as future business was concerned.) as it would have been if the defendant had taken an assignment of the patents held by the Chicago company, giving that company in exchange for them, one-fourth of the capital stock of the defendant, and the right to choose the minority of its board of trustees. If the arrangement had taken that form, it will hardly be contended that it would have amounted to an abandonment or suspension of the business of the defendant. The present arrangement provides for a continuance of the business for which the defendant was organized, and for its control by the defendant through its ownership of three-fourths of the stock of the new corporation. So that if the arrangement is one which the defendant had power to make and is not illegal, it is difficult to see how it works an abandonment or suspension of the business for which the defendant was formed.

It may he, however, that the defendant, in parting with its patents, and taking stock in t,he new company, exceeded its powers, or acted illegally. Assuming for the further consideration of the matter, without deciding, that such was the case, how is the plaintiff aided thereby in this action?

For an unlawful alienation of the property of a corporation by its officers, where the alienee knew its purpose (as must have been the case here), the statute provides a remedy by action against the officers chargeable with the wrong, to. set aside the alienation ; the action mnst he brought by the attorney-general, and the alienee, doubtless, must be made a party (Code Civ. Pro., §§ 1781 [subd. 5], 1782),

And if the taking of stock in the new corporation,.by the defendant, was an excess of power, it can hardly belaid that the circumstance is available to the plaintiff in this.actioiii; for the sole ground on which he seeks relief is, not that tho defendant has exceeded, but that it lias abandoned the powers given by its charter.

In line, so long as the State does not interfere,, and the parties to the contract treat it as valid, it is. hard to.see that the plaintiff has any cause of complaint, on. acoonnt of the method which the defendant has adopted;fon carrying-on the business contemplated by its charter, especially as that; method was intended to promote the interests .of all the stockholders, and for aught that appears has had that effect.

So far as we are advised, the case is. without precedent. The authorities cited by the respondent’s counsel differ widely from the present action. In Ward v. Sea Ins. Co. (7 Paige, 294), the business of the corporation, which was that of marine insurance, was suspended for more than a year under a formal resolution to that effect by the board of directors, and the management o.f its. estate and effects was committed, as the report of the case states, to the president and secretary, aided by three of the directors. From this it is to be inferred that the board of directors had relinquished the control.

In the case of the Jackson Marine Insurance Co. (4 Sandf. Ch. 559), the corporation resolved to cease its business, to cancel its outstanding policies and to liquidate all liabilities, and for more than a year had done no now business ■except to fulfill stipulations in then existing policies.

In Briggs v. Penniman (8 Cow. 387), it was held that a ■manufacturing corporation which had ceased to act, was without funds and was in debt, was dissolved, within the intent of the statute, so far as to give a remedy to creditors .against the individual stockholders, and that that result was ■not prevented by an election of trustees made apparently 4'or no purpose hut to keep the company in existence.

In People v. Northern Central R. R. Co. (53 Barb). 98), the defendant was insolvent thirteen years before suit, and ■then surrendered its property to its creditors, and ever there, ¡after had remained insolvent, neglected to pay, its notes aud -other evidences of debt, and entirely suspended its ordinary business, -and another corporation with the same general ■object, had, under the authority of the State, organized, and was in actual operation it its stead.

In most, if not all of the cases upon the subject reported an the books, there was evidence of an actual abandonment ■of the business of the corporation, or of a suspension for ¡more than a year, with no effort whatever to carry it on, ¡and no intention to resume—accompanied, generally, by ■insolvency or pecuniary embarrassment.

In this case there is no finding of insolvency. In the ■action already mentioned, brought by this plaintiff and others against the defendant and others, it was found by the referee that the assets of the defendant were valuable, and that they largely exceeded its indebtedness. As has been said, the decision of the sjsecial term rests upon the single fact that the defendant parted with the title to its patents in the circumstances above stated. As we think it manifest from the evidence that it did so, not vtdth the intention of abandoning or suspending tho business for which it was formed, but for the purpose of relieving itself from ruinous competition and' litigation, and of having the business prosecuted with more beneficial results to its stockholders under its own control, and such business has continued to be prosecuted in the mode contemplated, we arc not prepared to concur in the conclusion that the corporation was thereby dissolved.

The defendant corporation has kept up its organization. It has continued its board of trustees, president and other officers. Its omission to elect trustees in some years, is not a reason for dissolving it. The acts of its trustees arc valid till their successors are elected (L. 1848, c. 40, § 4). In accordance with its agreement with the Chicago company, it has received royalties upon licenses issued by it prior to the agreement, has issued licenses to the licensees of that company, and has prosecuted or defended actions at law in which it is a party, much of which has been done within the year next preceding the commencement of this action. If these things were done merely for the purpose of closing its prior engagement, and winding up its affairs, they would not prevent its dissolution in case it had in fact abandoned its business, but, in the circumstances, they tend to show that it is continuing its business under its agreement with the rival company.

One pf the actions which the company is defending was brought against it by the plaintiff herein, to recover a penalty for refusing to exhibit the stock-book of the company to the plaintiff. That action was brought within the year next preceding the commencement of this suit. The company-alleged that the refusal to exhibit the book occurred at adate which is within the same period. It also alleged the existence of the defendant as a corporation, at that time, the fact that it then had an office and place of business and trustees whose duty it was to cause the stock-book to be kept open for inspection by the defendant’s stockholders. The complaint was verified by the plaintiff. There must be a question whether the plaintiff is not estopped thereby from alleging that the defendant had then suspended its business (Bradt v. Benedict, 17 N. Y. 93, per Pratt, J., p. 100). It would seem that if this action can be maintained, the obligation of the defendant to exhibit the book, had ceased by reason of its suspension (Bruce v. Platt, 80 N. Y. 379).

It appears by the appeal book that at a time when the written assignment to the new company was executed the letters patent were held by a receiver, to whom they had been transferred by the defendant, by an order of the court, • but as they were afterwards re-transferred by the receiver to the defendant, under a like order, we do not think that this case is affected by the circumstance that the patents were in the receiver’s hands when the assignment was executed.

We are of the opinion that the judgment should he reversed and a new trial ordered, costs to abide event.

The reversal of the judgment removes the foundation on which the three'orders appealed from rested. They grew out of proceedings on the part of the receiver appointed by that judgment to get possession of the property of the defendant, and of the action of the officers or agents of the corporation in opposing such efforts. The orders must fall with the judgments, but as the proceedings, on the part of the plaintiff and of the receiver, were apparently justified by the judgment, the reversal of the several orders should be without costs to either party.

The motion to dismiss the appeals has not been overlooked. It appears to be based upon the idea that the defendant corporation, having been adjudged to be dissolved, has no existence and cannot appeal. Every party litigant has the ' right to appeal from a judgment by which he is aggrieved (Code Civ. Pro. § 1294). A corporation aggrieved by a judgment declaring it to be dissolved, is no exception to the rule. Having the right to appeal from the judgment, it ipay also appeal from an order based upon the judgment or growing out of proceedings taken to enforce or execute it.

The motion is denied without costs.

t‘ Haight and Bbadlbt, J J., concurred. ,