#### In the Matter of the Application for a Voluntary Dissolution of Great Northern Trading Company, a Corporation. Albert Halsey and Others, Petitioners, Appellants; Fannie Bloxham and Others, Respondents.

First Department,

May 7, 1915.

Corporation — voluntary dissolution denied — maladministration of corporate affairs.

Application for the voluntary dissolution of a domestic corporation instituted on the petition of its board of directors and opposed by certain creditors who are holders of its bonds. It appeared that the company was incorporated to deal in real estate, and also to conduct a general brokerage business and buy and sell securities, etc., while as a matter of fact the only business actually carried on by it was speculation on a margin. After the formation of the company and on the motion of a director and officer he was authorized to receive all the moneys of the company and to invest the same in his own discretion for its benefit, but in his own name, and to buy and sell securities at his own option, and at such times and in such manner as to him seemed best. It further appeared that said officer, who was subsequently elected treasurer as well as president, had possession of all the moneys of the corporation, which he deposited to his individual account and mingled with his own money; that he had speculated with said moneys, had kept no books of account, and that his transactions had resulted in a loss, although he *537had paid dividends to stockholders at certain periods. On all the evidence;

*Held,*that as the corporation and its creditors have an apparent cause of action against the officers and directors of the corporation for the maladministration of its affairs, the petition for the voluntary dissolution should be denied, with costs to be paid by the petitioners personally.

Appeal by the petitioners, Albert Halsey and others, from two judgments of the Supreme Court in favor of the respondents, entered in the office of the clerk of the county of New York on the 1st and 2d days of September, 1914, respectively, upon the report of a referee appointed to hear and determine the issues, and also from two orders entered in said clerk’s office on the 1st and 2d days of September, 1914, respectively, confirming said referee’s report, and directing judgment in favor of the respondents.

Judgments and orders affirmed, with costs, on the opinion of Percival H. Gregory, referee.

*Charles T. Kunkel,*for the appellants.

*Alfred M. Schaffer*and *Henry A. Uterhart,*for the respondent Fannie Bloxham.

*Edwin J. Dryer,*in person and for the respondents Moody and another.

Present—Ingraham, P. J., Clarke, Scott, Dowling and Hotchkiss, JJ.

The following is the opinion of the referee:

Percival H. Gregory, Referee:

This is a proceeding instituted by a majority of the directors of the Great Northern Trading Company, a domestic business corporation, for its dissolution. The order requiring all interested persons to show cause why the corporation should not be dissolved was made returnable before me, as referee, and I have taken testimony and have made my report thereon as directed by the statute. (Gen. Corp. Law, §§ 186, 187.)*

The dissolution of the corporation is opposed by certain of its creditors who are holders of its bonds.

*538The corporation was created, by the filing of its certificate of incorporation in the month of January, 1908. Its authorized capital stock was $100,000, of which $75,000 was to be common and $25,000 preferred, and it was stated that the amount of capital with which the corporation would begin business was $15,000.

The purposes for which the corporation was formed, as stated in its certificate, were, among others, to transact a general real estate and agency business, including the management of estates; to act as agent for any persons or corporations dealing, in real estate or personal property, making or obtaining loans, effecting insurance as agents; to conduct a general brokerage business, buy and sell stocks, bonds, etc.; to develop and extend the business interests of firms, corporations and individuals; to deal in securities or investments of any kind and generally with full power to perform any and all acts connected therewith or arising therefrom for the purposes of the business.

The only business actually done by the company has been to speculate on margin in stocks, cotton and provisions. That the enterprise should end in a petition for voluntary dissolution on the ground of insolvency is, perhaps, not remarkable; but the conduct of the company’s affairs has been, in many respects, so extraordinary that I am of the opinion that the petition of its directors for dissolution should not be granted in face of the opposition of its creditors.

On April 1, 1908, at the first meeting of the stockholders after the organization of the company, the petitioner Halsey was elected a director of the company, and the following resolution was passed:

“Moved, seconded and carried by vote of all stockholders that Albert Halsey, of 166 Schermerhorn Street, Brooklyn, N. Y., be and he is hereby authorized and directed to take all the money belonging to the company now and at any time hereafter belonging to the company and to invest the same at his own discretion for the benefit of the company, and at his own option and discretion and in his own name, but for the benefit of the company, and without giving any notice to the directors or officers or stockholders of said company, to buy or sell or to both buy and sell wholly at his own option and at such times *539and in such manner as to him shall seem best, any stocks or bonds or grain or cotton or provisions or other things and to begin and close such transactions at such time or times as to him shall seem best, employing for that purpose any broker or brokers he may see fit and placing with such broker or brokers all such orders as he shall deem for the best interest of the company and to compensate such broker or brokers at the usual and reasonable rate, such purchases or sales to be either made outright or on margin and such margin as said Halsey shall deem best, this authorization to include also the power to sell short and to place stop loss orders and to do all usual and proper things in connection with the purchase and sale or short sale of stock in his own name, but for the benefit of the company, and the treasurer of the company is hereby authorized, empowered and directed to deliver to said Halsey now and at any time hereafter all money of the company that said Halsey may call for to be disposed of as said Halsey may see fit.”

A similar resolution was passed at a meeting of the directors held on the same day at which Mr. Halsey was also elected president of the company. Later in the same year he was also elected treasurer and he has since been acting as both president and treasurer.

Subsequently the stockholders and the directors passed resolutions authorizing the issuance of bonds of the corporation to the amount of $25,000 and further authorized the issuance as a *“*premium ” to each purchaser of such bonds of such an amount of preferred or of common stock, or of both, as in the discretion of the president might be found desirable in each case. The resolution also provided that “ the bonds may be floated on such conditions as to price and all other matters as shall be deemed best by the president and the different respective bonds may be floated on different conditions and are not required to be floated on uniform conditions, as to prices, premiums or circumstances, or maturity dates.”

Bonds were accordingly prepared and were offered for sale upon representations of the most grossly false and fraudulent character. The offer of these bonds met with the customary response in such cases although, oddly enough, the subscriptions aggregated only $10,900. ■ This sum was paid in by the *540purchasers and bonds to that amount were issued to them. With each dollar in bonds so issued the company, with one or two exceptions, issued and gave away one dollar of its preferred and two dollars of its common stock. ■

The stock thus issued was not invariably given to the purchasers of the bonds. It was sometimes given in part to the intermediary who had procured the purchaser for the bonds, or, in the graphic phrase of one of the witnesses, to the person who had got the other person in. In this manner one of the witnésses who appeared before me and whose total investment in the concern was $100 became the • owner of bonds to that amount and of stock to the amount of over $10,000.

It was from the sale of these bonds that the only money or property of value appears ever to have been received by or on behalf of the corporation, except that $500 was previously paid in by Mr. Halsey for preferred stock. This sum, however, was later credited to him as part of the purchase price of $1,000 in bonds.

The moneys thus received were all taken into the possession of the treasurer, pursuant to the resolution of April 1, 1908, and were by him deposited in his own name in various banks. In most cases they were mingled in the same accounts with' his own moneys and the only record of how much belonged to him and how much to the company, was contained in memorandums made and retained by him. The same thing is true of moneys received as profits upon the speculative transactions conducted by him for the benefit of the company. The company itself kept no books of account.

With the moneys thus coming into his hands the treasurer entered upon the series of speculations in stocks, cotton and provisions which has been its sole business since its organization. The transactions were made upon margin and consisted both of purchases for a rise and of so-called- *“*short sales.” These transactions were all conducted in ' the name of the treasurer who was, at the same time, speculating for his own account through the same brokers. No separate accounts were kept of transactions intended for his own account and of those said to have been intended for the benefit of the company. No indication was given to the brokers, at the time the various *541orders to buy or sell were given, as to which orders were intended for his personal account and which for the account of the company. The only indication ever made of any differentiation between the two interests consisted of loose pencil memorandums made and retained by himself.

The speculations thus conducted for the company were not, according to the treasurer’s account, profitable to the company. On the contrary each year’s operations resulted in a loss and the net result of the six years’business is that the assets of the company are now reduced to $1,050 in cash together with its equity in 100 shares of New York Air Brake Company stock bought on margin and now pledged with the brokers to secure their advances. The value of this equity is estimated by the treasurer to be about $1,100, but it is impossible to say from the evidence before me what it actually amounts to owing to the complications arising from the mingling of other speculation in the same account in which this stock was carried.

Notwithstanding the steady losses of the company from year to year, dividends were continuously paid to the stockholders at least once every three months from April 1, 1909, to July 1, 1913, and, during part of the time, once every month.

According to the treasurer’s account not only has the company lost all its own moneys, excépt the remaining assets above mentioned, but it has further lost $6,152.61 which he claims to have advanced to it and for which he waives any claim.

While I have not attempted to go into this account in detail or to pass upon its correctness in this proceeding, enough has appeared in the testimony to show that charges have been made in the account against the company for disbursements made in matters with which it had no concern.

From the facts recited it seems plain that the corporation has at least an apparent cause of action against its officers and directors, or some of them, for maladministration of its affairs. It seems equally clear that the court cannot, in this proceeding, make any binding adjudication as to the existence or extent of that liability. I am of the opinion, however, that the petition of the directors for a voluntary dissolution of the corporation ought not to be granted, in the face of the objection of the *542creditors who have appeared in the proceeding and opposed the application. If they desire that the corporate existence be continued until they can have an opportunity to assert the claims of the corporation, in a representative action or otherwise, against its officers and directors, I think the opportunity should be given them. (See *Matter of Rateau Sales Co.,*201 N. Y. 420; Gen. Corp. Law, §§ 90, 91; *Sage*v. *Culver, 147*N. Y. 241; *Davis*v. *Wilson,*150 App. Div. 704.)

I am of the opinion, therefore, that the application should be denied, with one bill of costs to the respondent Blóxham and one bill of costs to the respondents Dryer, Moody and McLoud to be paid by the petitioners personally, without prejudice, however, to a renewal of the application after the lapse of six months provided there shall be no litigation then pending by, on behalf of or against the corporation.

I think I ought to call the attention of the court to the fact that, as appears from the testimony, several of the persons most actively connected with the affairs of this corporation were members of the bar of this court.

*

 Consol. Laws, chap. 23 (Laws of 1909, chap. 08), §§ 186, 187.—[Rep.