Case Name: Robert L. Niles, Appellant, v. The New York Central and Hudson River Railroad Company and Others, Respondents
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1902
Citations: 69 A.D. 144
Docket Number: 
Parties: Robert L. Niles, Appellant, v. The New York Central and Hudson River Railroad Company and Others, Respondents.
Judges: 
Reporter: Appellate Division Reports
Volume: 69
Pages: 144–148

Head Matter:
Robert L. Niles, Appellant, v. The New York Central and Hudson River Railroad Company and Others, Respondents.
Corporation—control of one corporation obtained by another, which improperly ■instigates a foreclosure of a mortgage on the property of the former—the right of action for the wrong rests in the injured corporation itself and not in its stockholders— remedy when in equity.
Where one corporation obtains the possession, control and management of another corporation, and in violation of the trust, obligation thereby created causes a default to be made in the payment of the interest due upon the mortgage indebtedness of the latter corporation, and instigates a foreclosure of the mortgage and a sale of the mortgaged property to a third corporation acting in its interest, with the result that all the stock of the mortgagor corporation is depreciated in value, the right of action resulting from the breach of the trust obligation vests in the mortgagor corporation.
ITn case of the refusal or neglect of the mortgagor corporation to bring the action it may be brought by a stockholder thereof, in his own name, suing in the right of the corporation, which must be made a party, but in no event can it . be brought in the individual right of a stockholder who has suffered no wrong, contradistinguished from the wrong suffered by the corporation.
'The action may be brought at law where the damages are susceptible of proof in such an action; ordinarily the remedy is in equity.
Appeal by the plaintiff, Robert L. Niles, from a final judgment -of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on.the 22d day of May, 1901, upon the decision of the court, rendered after a trial at the New York Special Term, sustaining the demurrers of the defendants and dismissing the complaint.
Louis Marshall, for the appellant.
Thomas Thaoher, for the respondents.

Opinion:
Laughlin, J.:
The demurrers are upon the ground that the complaint does not state facts sufficient to constitute a cause of action. The complaint alleges, in substance, that the plaintiff is a large stockholder in the New York and Northern Railroad Company, a domestic railroad corporation owning and operating about sixty miles of railroad in competition with a line controlled by the New York Central and Hudson River railroad, and having valuable terminal facilities and other property in the city of New York and elsewhere; that his stock was of great value; that the defendants wrongfully, unlawfully, fraudulently and maliciously entered into a combination and conspiracy to procure for the New York Central and Hudson River Railroad Company the possession, control and virtual ownership of all the property and franchises of the New York and Northern Company and to render the capital stock of that company valueless, and to destroy plaintiff's interest therein without making compensation therefor; that in furtherance of such conspiracy they procured a controlling interest in said company by the purchase of stock and elected officers friendly to their purposes; that they acquired bonds of said company upon which coupons were due and unpaid, for the purpose of foreclosing the mortgage given to secure the same; that they obstructed a plan which at this time a large number of the stockholders and bondholders of the New York and Northern Company had under way, with fair prospects of. success, for the reorganization of the New York and Northern Company, for its financial relief; that after the New York Central and Hudson River Railroad Company, with the aid of the defendant Drexel, Morgan & Co., obtained the possession, management and control of the New York and Northern Company it further obstructed and hampered its business and refused traffic which was offered to'it by-other transportation companies and shippers, thus depriving it of earnings which' would have been applicable to the payment of interest due on its mortgage indebtedness and sufficient therefor, and diverted its earnings to other purposes, causing it to remain in default and precipitating, a foreclosure; that they instigated a foreclosure and sale, and caused the property to- be purchased in the interests of defendant corporation and conveyed to the New York- and Putnam Railroad Company, which immediately executed a lease thereof to the New York Central and Hudson River Railroad Company for 999 years, at a nominal rental; that subsequent, to the execution of said lease, the lessee mortgaged all its- property, including the property thus leased, to secure the payment of bonds to the amount of $100,-000,000, most of which have passed , into the.hands of hona fide purchasers; that the decree of- foreclosure has been reversed on an appeal taken by some of the minority stockholders who. intervened and interposed a defense, but that defendants claim that the reversal in no manner affects the title acquired under said lease, and remain in full possession thereunder; that the malicious and fraudulent purpose of the defendants has been consummated and the market value of plaintiff's stock has been destroyed.
It is conceded that this is an action at -law, not in the right of the corporation of which plaintiff is a stockholder and which has not been made a defendant, but to recover the value of the plaintiff's stock.
The defendants had the control of the.affairs of.the railroad, of which the plaintiff was-a stockholder, and it was their duty to manage it in good faith, in the interest of all stockholders. They.have violated that obligation and managed thé corporation in furtherance of their own interest. For this breach of a trust obligation the defendants are liable to the corporation itself. (Farmers' Loan & Trust Co. v. New York & N. Ry. Co., 150 N. Y. 410; De Neufville v. N. Y. & N. Ry. Co., 81 Fed. Rep. 10; Pondir v. N. Y., L. E. & W. R. R. Co., 72 Hun, 384; Ervin v. Oregon Ry. & Nav. Co., 27 Fed. Rep. 625; Sears v. Hotchkiss, 25 Conn. 171; Goodin v. C. & W. Canal. Co., 18 Ohio St. 169.)
Where the corporation refuses or neglects on demand to bring the action, or is under control of the parties to be sued, so as to render a demand of no avail, or other facts appear to make it improper that the action should he controlled by the officers of the corporation, or even by a receiver already appointed, a stockholder may bring the action in his own name, but in the right of the corporation, which must be made a defendant. (Flynn v. Brooklyn City R. R. Co., 158 N. Y. 493, 508; Alexander v. Donohoe, 143 id. 203, 211; Brinckerhoff v. Bostwick, 88 id. 52; Fitchett v. Murphy, 46 App. Div. 181; Sayles v. White, 18 id. 590.)
The action by or in the right of the corporation may be at law where the damages are susceptible of proof in such an action. (Sayles v. White, supra; Hanley v. Balch, 94 Mich. 315.) Ordinarily, however, the remedy is in equity. (Hanley v. Balch, supra; Farmers' Loan & Trust Co. v. New York & N. Ry. Co., supra.)
Equity regards the stockholder as the equitable owner of an undivided fractional part of the entire assets of the corporation. (Flynn v. Brooklyn City R. R. Co., supra, 504.)
The direct wrong was to the corporation. 'The defendants having assumed its management, were bound to prevent default in the payment of interest and consequent sacrifice .of the corporate property, if in their power to do so. A breach of this obligation was - an actionable tort. (Rich v. N. Y. C. & H. R. R. R. Co., 87 N. Y. 398.)
The depreciation in value of the stock, however, was the result of the wrongs committed against the corporation. The complaint contains no allegation of any wrong done to the plaintiff, as. distinguished from the wrong committed against the corporation. The plaintiff's stock has neither been acquired, sold nor directly interfered with. The value of all stock has been affected alike, and its depreciation in value has been caused by the wrongful interference with the rights of the corporation and the fraudulent diversion of its property from the purpose for which the same was acquired. The plaintiff has been damnified, but the damages sustained by him flow from the wrong committed against the corporation, and are, in contemplation of law, remote, indirect and consequential. ' Where, as here, the common law prevails, such damages are not recoverable except in the right of the corporation. (Morgan v. R. R. Co., Fed. Cas. No. 9,806; Greaves v. Gouge, 69 N. Y. 154; Gardiner v. Pollard, 10 Bosw. 674; Alexander v. Donohoe, supra; Hodsdon v. Copeland, 16 Maine, 314; Hirsh v. Jones, 56 Fed. Rep. 137; Craig v. Gregg, 83 Penn. St. 19.)
If a wrong were committed against the plaintiff as a stockholder, as contradistinguished from a wrong against the corporation, that would give him a right of action against the wrongdoer. (Roth-miller v. Stein, 143 ,N. Y. 581; Cazeaux v. üfflüi, 25 Barb. 578; Ritchie v. MeMullen, 79 Fed.. Rep. 522 ; Walsham v. Stainton,1 Be Gr., J. & S. 678.) The corporation, however, is a distinct and' separate entity from the holders of. its stock, and in the management of the" property and affairs of the corporation it represents them all. (People ex rel. Winchester y. Coleman, 133 N. Y. 279, 284 ; Morgan v. R. R. Co., supra; Kennebec dk Portland R. R. Co., v. P. <& K. R. R. Co., 54 Maine, 173; Tomlinson v. Bricldayers Union No. 1, of Indiana, 87 Ind. 308.) Even though the depreciation in the value of the .stock be capable of ascertainment as a basis of damages at law, the wrongs complained of are wrongs against the corporation, and it has a cause of action for the restoration of the property or for the damages sustained. It is presumed that a diligent enforcement of. these remedies- will result in the restoration of the corporate property or its equivalent, and will afford adeqiiate indemnity to the stockholders. A recovery in such case by the stockholders in their own right would not be a bar to a recovery of the same damages by the corporation. A double recovery has not been permitted in these actions up to the present time, either at law or in equity. (Greaves v. Gouge, 52 How. Pr, 58; 69 N. Y. 154; Gardiner v. Pollard, supra; Hirsh v. Jones, supra.)
These views lead to the conclusion that the action is not maintainable, and, therefore, the final judgment dismissing the complaint must be affirmed, with costs.
Ingraham and Hatch, JJ., concurred; Van Brunt, P. J., concurred in result.
J udgment affirmed, with costs.