Case Name: General Rubber Company, Respondent, v. Elias C. Benedict, Appellant
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1915-05-11
Citations: 215 N.Y. 18
Docket Number: 
Parties: General Rubber Company, Respondent, v. Elias C. Benedict, Appellant.
Judges: 
Reporter: New York Reports
Volume: 215
Pages: 18–33

Head Matter:
General Rubber Company, Respondent, v. Elias C. Benedict, Appellant.
(Argued February 23, 1915;
decided May 11, 1915.)
Corporations — duty of directors to preserve property of corporation— misuse of corporate funds causing loss to corporation —liability of director who had knowledge of such illegal application of funds but intentionally concealed such fact.
1. A director of a corporation owes to it good faith and vigilance and is bound to take the same care of its property that men of average prudence take of their own property.
2. The plaintiff corporation is the principal stockholder in a subsidiary corporation, the general manager of which was a defaulter. Plaintiff in this action alleges that the defendant, who was one of its directors, knew of this misuse of moneys and acquiesced in it and approved of it, and for his own profit intentionally withheld and concealed the truth. It is also alleged that had defendant given this information, plaintiff could have prevented the misapplication and the loss. Held, that his duty to preserve the estate, the breach of that duty, and the resulting damage, call for the application of the principle that there is no wrong without a remedy and that the complaint is sufficient on demurrer.
3. The claim that defendant is not liable to plaintiff by reason of the fact that he is liable to the subsidiary company is untenable. A wrong to an individual or corporation does not cease to be remediable because it may also be a wrong to some one else.
General Rubber Co. v. Benedict, 164 App. Div. 332, affirmed.
Appeal, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered November 14, 1914, which affirmed an interlocutory judgment of Special Term overruling a demurrer to the complaint.
The following question was certified: “Does the complaint state facts sufficient to constitute a cause of action ? ”
William M. Ivins and Harold J. Boig for appellant.
The distinction sought to be .made by the court below that this action will lie “ because it is not a derivative action in which the stockholder is seeking.to recover his share of the damages sustained by a corporation in which he is interested, but an action accruing solely to a corporation which has been damaged by a director’s neglect or disregard of his duties to it ” is untenable. (Niles v. N. Y. C. & H. R. R. R. Co., 69 App. Div. 144; 176 N. Y. 119; Smith v. Hurd, 12 Metc. 375.) A stockholder may not recover, qua stockholder, upon a state of facts showing an injury to the corporation. (Niles v. N. Y. C. & H. R. R. R. Co., 176 N. Y. 119; Flynn v. B. C. R. R. Co., 158 N. Y. 493; Howe v. N. Y., N. H. & H. R. R. Co., 142 App. Div. 451; Kavanaugh v. Comm. Trust Co., 181 N. Y. 123; Loewenstein v. D. S. W. M. Co., 94 App. Div. 387; Delavan v. N. Y., N. H. & H. R. R. Co., 154 App. Div. 34; Michel v. Betz, 108 App. Div. 241; Dudley v. Armenia Ins. Co., 115 App. Div. 380; Neufille v. N. Y. & N. Ry. Co., 81 Fed. Rep. 12; Hirsh v. Jones, 56 Fed. Rep. 137.) The plaintiff’s theory will subject the defendant to a double or treble recovery. (G. A. Coffee Co. v. Diehl, 86 Misc. Rep. 548; Rogers v. Atlantic Co., 21N. Y. 246; Ottenger v. Bennett, 203 N. Y. 555.)
Francis Lynde Stetson, Nathaniel Myers and George H. Gardiner for respondent.
The defendant is answerable to the plaintiff to compensate it for its loss. (Hun v. Cary, 82 N. Y. 65; Hobart v. Dovell, 38 N. J. Eq. 553; Williams v. McKay, 46 N. J. Eq. 25; Campbell v. Watson, 62 N. J. Eq. 396; Bloom v. Nat. Benefit Assn., 81 Hun, 120; Anthony v. Am. Glucose Co., 146 N. Y. 407; Matter of Watertown Paper Company, 169 Fed. Rep. 252, 256; Matter of Rieger, Kapner & Altmark, 157 Fed. Rep. 609, 613; U. S. v. Milwaukee Refrigerator Co., 142 Fed. Rep. 247; Colebrook v. Perkins, 147 Fed. Rep. 166; Kendall v. Klapperthal Co., 202 Penn. St. 596; Exploration Co. v. Pacific Co., 177 Fed. Rep. 825; People v. North River S. R. Co., 121. N. Y. 582; State v. Standard Oil Co., 49 Ohio St. 137; Cawthra v. Stewart, 59 Misc. Rep. 38; Bentz v. Crotona Park. Co., 81 Misc. Rep. 364; Booth v. Bunce, 33 N. Y. 139; Union P. R. R. Co. v. Chicago, etc., R. R. Co., 163 U. S. 564.)

Opinion:
Cardozo, J.
This case comes here on a demurrer to a complaint. The plaintiff is a corporation. It is organized under the laws of New J ersey.' The defendant is one of its directors. There is another corporation, organized in the same state, known as General Rubber Company of Brazil. The capital stock of the latter company is made up of three thousand shares; and all the shares, with the exception of eighteen, are held and owned by the plaintiff. For convenience, we shall refer to the plaintiff as the holding, and the General Rubber Company of Brazil as the subsidiary company. The general manager of the subsidiary company at Para, Brazil, was one Arnold J. Hutter. While acting as manager for that company, he became the manager of a rival business. This business was conducted at first under the name of E. Levy, and later, after a corporation had been organized, under the name of the Moju Company. The, defendant was, the owner of more than..one-fourth-, of. _the_stpck. Hejyas ialso its vice-president. The Moju Company met with reverses, and finally became insolvent. To relieve its embarrassments, Hutter, according to the allegations of the complaint, took the moneys of the General Rubber Company of Brazil and gave them from time to time to the Moju Company. The defalcations extended over a period of more than a year, and caused a loss of $185,000. The. charge is made that the defendant knew of this misuse of jnoneys, and that he acquiesced in it and approved of it. He neglected, it is said, to inform the plaintiff of Hutter's wrongdoing; he withheld and concealed the truth, so it is charged, intentionally and for his own profit; and the averment is that if such information had been given, the plaintiff could and would have prevented the misapplication and the loss. Because of this violation of 'his duty, the value of the plaintiff's shares in the subsidiary company.is said to have been lessened, and the' plaintiff to have been otherwise damaged, in a sum exceeding $185,000. For the amount of this loss with interest, judgment is demanded.
The foregoing summary states in briefest outline the averments of a voluminous complaint. .It suffices, however, to indicate the problem of law which is involved. We are to determine whether the defendant is liable to the holding company for the diminished value of-its shares resulting from the waste of the assets of the subsidiary company.
The defendant was not a director of the subsidiary company. He was a director of the plaintiff. Because of that relation he owed to the plaintiff the duty of good faith and vigilance in the preservation of its property. The duty and the breach, coupled, it is here. alleged, with damage, make out a cause of action. (Ashby v. White, 3 Ld. Raym. 320.) Such cases as Smith v. Hurd (12 Metc. 315) and Niles v. N. Y. C. & H. R. R. R. Co. (176 N. Y. 119) are pressed upon us by the defendant. They are inapplicable here. The distinction was well put by Taft, J., writing for the Circuit Court of Appeals in Ritchie v. McMullen (79 Fed. Rep. 522, 533): " It is undoubtedly true, as the Circuit Court held, that a stockholder, merely as such, cannot have an action in his own behalf against one who has injured the corporation, however much the wrongful acts have depreciated the value of his shares (citing Smith v. Hurd, supra, and other cases). But we are of opinion that this principle has no application where the wrongful acts are not only wrongs against the corporation, but are also violations by the wrongdoer of a duty arising from contract or otherwise, and owing directly by him to the stockholders." The stockholder in those cases did not sue his own agent. He sued another's agents, i. e., the directors of a company, and sued them for the waste of the company's property. In his own right, and not in a derivative action, he attempted to recover his own damages, which he measured by the diminution in the value of his shares. The decision was that the delinquent directors were the agents of the company; that they owed a duty to the company and not to the individual stockholders; and that if there had been any breach of that duty the company must redress the wrong. But here the situation is a different one. Here the stockholder is not suing the agent of another company; it is suing its own agent. The stockholder happens to be itself a corporation; the defendant happens to be a director; but the legal problem would be the same if the plaintiff were a natural person, and the defendant an executor or trustee. It would also be the same if the plaintiff, instead of being substantially the sole stockholder, were one stockholder among many. If the trustee of an estate, holding shares in a bank, should learn that the cashier was looting it, and with that knowledge should keep silent, the defendant would have us say that the beneficiaries under the will would have no remedy for the ensuing loss. A trustee in the case supposed would owe no duty of active vigilance to the bank whose property was stolen. If not liable to those interested in the estate, he would not be liable to any one. Yet his duty to preserve the estate, the breach of that duty, and the resulting damage, would seem to call for the application of the principle that there is no wrong without a remedy. The case supposed does not differ in its essence from the case presented. The defendant, as a director of a corporation should have taken the same care of its property that men of average prudence take of their own property. (Hun v. Cary, 82 N. Y. 65; Latimer v. Veader, 20 App. Div. 418, 428; Bosworth v. Allen, 168 N. Y. 157.) A jury might not unreasonably find that the care exacted by that rule would involve at least a warning that the subsidiary company was in the management of a thief, and that the value of the shares was vanishing. It is argued that even if the warning had been given, the plaintiff was only a stockholder in the subsidiary, company, and hence was not in a position to stop the waste. The allegation is, however, that it could and would have done so; and we must hold this sufficient on demurrer. There are many things it could have done. It could at least have sounded an alarm that might have led to flutter's removal. The trial will show whether its intervention would or would not have been efficient. In any event, we cannot say, and least of all as a matter of law, that the opportunity to intervene was valueless. (Leather Mfrs. Bank v. Morgan, 117 U. S. 96, 115; Continental Nat. Bank v. Nat. Bank of Commomvealth, 50 N. Y. 575; Voorhis v. Olmstead, 66 N. Y. 113, 118; Rothschild v. Title Guarantee & Trust Co., 204 N. Y. 458; Cassidy v. Uhlmann, 170 N. Y. 505, 518, 521.).
It is strongly argued, hpwever, that the defendant is answerable for the same wrong to the subsidiary company, and is thus exposed to the risk of a double liability. We think the wrong to the plaintiff does not! cease to be remediable because it may also be a wrong to t some one else. If the defendant has violated any duty to ] the subsidiary company, it is not the same duty that he owes to the plaintiff. He is not liable to the subsidiary company qua director. He is not liable to that, company for mere neglect. He is liable to it, if at all, only as a stranger' might be liable. If he has joined in a con. spiracy to plunder it, he must, like any other tort feasor, make compensation for the plunder. There are allegations in the complaint which are broad enough .to be construed as charging that he was a party to such a conspiracy. We cannot know whether they will be proved. If they are proved in all their fullness, they will show that the subsidiary company as well as the plaintiff has been wronged. Less, however, may be proved; the defendant may not have counseled or ratified Hutter's acts, or otherwise made himself a party to them; and still if he knew of them, and was silent, he may have failed in the stricter duty that he owes to the plaintiff. It is not for us at this time to say to what extent the duties are coterminous. It is enough that they have a different origin, a different standard, and a different measure.
The argument is made, however, that since the duties overlap, a double liability is threatened. To-day the defendant is called upon to make good the diminished value of the plaintiff's shares. To-morrow he may be called upon at the suit of the subsidiary company to replenish its wasted treasury. We think the argument confuses the cause of action with the damages. If the defendant is solvent, and has so made himself a party to the conspiracy that he is liable as a tort feasor to the subsidiary corporation, the existence of such a cause of action will be reflected, like the ownership of any other asset, in the value of the shares. The diminution in value will be one thing if the subsidiary corporation is without a remedy against any one. It will be another thing if there is a remedy against a solvent wrongdoer. It will be one thing if the cause-of action in favor of the company is conceded or certain. It will be another thing if the cause of action is contested or doubful. A contested claim is rarely appraised at its face value. The expenses of litigation, its delays, its uncertainties, these and like elements may make the shares less valuable, even though a remedy at the suit of the company exists, than they would be if the wasted moneys were back in the treasury. The extent of the reduction in value is to be measured by the jury. We must keen in mind steadfastlv the essential nature of the cause of action. It is not an action to restom_to the subsidiary company the money that has been abstracted. It is an action to restore to the holding company the diminished value of its shares.
If the subsidiary company were suing the defendant for a conversion of its assets, it would, of course, be no answer for him to say that there was a remedy also against Hutter. He would be bound to restore what he had taken, or permitted others to take. It is possible that if his offense was merely one of negligence, he might through subrogation have a remedy over against the principal offender. (Steele v. Leopold, 135 App. Div. 247, 256, 257; affd., 201 N. Y. 518; Chillingworth v. Chambers, L. R. [1896] 1 Ch. 685; Moxham v. Grant, L. R. [1900] 1 Q. B. 88.) But in this action he is under a very different duty. Nothing has been taken directly from the plaintiff. What has been taken belongs to the subsidiary company. The defendant is not sued for a wrongful taking. He is sued for the wrongful failure to preserve the value of the plaintiff's shares. Only to the extent that the taking has made the individual shares less valuable, has a liability arisen. In such circumstances there is no right of action in favor of the plaintiff against the primary wrongdoer to which the defendant can be subrogated. The ultimate devolution of the burden must, therefore, be determined, not in some other action, but here and now. In'these conditions, it becomes our duty, through a sound definition of the measure of damages, to work out a result which will be just alike to plaintiff and to defendant.
The existence of a cause of action does not depend, however, upon the extent of the recovery. If the subsidiary company has no remedy that will enable it to make good the loss, the reduction in the value of the shares may be equal to the fund converted. If it has a plain and certain remedy either against the defendant or against some other solvent party to the wrong, the reduction in the value of the shares may be less than the converted fund, or, it may be, almost nominal. We can imagine a case where a director has borrowed money illegally, and may, therefore, be required to repay it. The corporation in such circumstances has a cause of action to compel the money to be restored, yet the value of the shares in the hands of the stockholders may not be reduced at all. Whatever difficulty there is in determining the measure of the loss is. inherent in the very nature of these problems of appraisal. To determine the value of the shares, every asset of the subsidiary company must be reckoned, and the defendant's liability to that company, if it exists, must be included like any other.
We think, for these reasons, that the menace of a double liability is illusory. The defendant owes a duty to the plaintiff; if the complaint speaks truly, he has violated that duty; and to the extent of the resulting damage he must answer for the wrong.
The order should be affirmed, with costs, and the question certified answered in the affirmative.