Case Name: CUMMINGS v. YATES & PORTERFIELD TRADING CO.
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1907-12-06
Citations: 107 N.Y.S. 498
Docket Number: 
Parties: CUMMINGS v. YATES & PORTERFIELD TRADING CO.
Judges: 
Reporter: West's New York Supplement
Volume: 107
Pages: 498–503

Head Matter:
(122 App. Div. 505.)
CUMMINGS v. YATES & PORTERFIELD TRADING CO.
(Supreme Court, Appellate Division, First Department.
December 6, 1907.)
Corporations—Stockholders—Compelling Action by Corporation—Sufficiency of Complaint.
A complaint in an action by a stockholder, on behalf of the corporation, for breach of contract by a promoter, alleged that the promoter entered into an agreement with a partnership which was to be incorporated, whereby a certain number of shares of stock in the proposed corporation were to be turned over by the partners to the corporation and a certain, number to the promoter, in consideration of which the promoter was to sell 500 shares of stock of the corporation. It was also alleged that the stock was transferred per agreement, and that the promoter sold 109 shares of the stock but no more, by reason of which' the corporation became insolvent. Held, that the complaint did not fail to state a cause of action in not alleging that the contract was made for the benefit of the-proposed corporation, or that the corporation after its formation ratified or assumed it, since those facts could be inferred from the complaint as-framed.
McLaughlin and Ingraham, JJ., dissenting.
Appeal from Special Term.
Action by William H. Cummings, suing, etc., against the Yates & Porterfield Trading Company and another. Prom an interlocutory judgment overruling a demurrer to the complaint, defendant company appeals. Affirmed.
Argued before PATTERSON, P. J., and McEAUGHEIN, IN-GRAHAM, HOUGHTON, and SCOTT, JJ.
Horace Comfort, for appellant.
Robert B. Austin, for respondent.

Opinion:
PATTERSON, P. J.
The defendant, impleaded with one James N. Brown, demurred to the complaint in this action, on the ground that it does not state facts sufficient to constitute a cause of action. The demurrer was overruled, and from the interlocutory judgment entered upon the decision of the Court at Special Term this appeal: is taken.
It is alleged in the complaint that the plaintiff, who is a stockholder of the defendant corporation, sues on behalf of himself and others similarly situated, and that such defendant is a foreign corporation, organized under the laws of the state of New Jersey; that the plain-tiff was the owner and holder in his own right of 10 shares of the preferred stock of that corporation, which was organized in February,. 1900, for the purpose of acquiring the business and good will of an copartnership carried on under the firm name and style of Yates & Porterfield. It is further alleged that the corporation took over and acquired the going business of the copartnership, and issued to the members thereof its entire authorized capital stock consisting of '2,000 shares of preferred, and 2,000 shares of common, stock. It is also alleged that the defendant James N. Brown was the promoter of the defendant corporation, and as such promoter entered into an agreement with the persons constituting the copartnership of Yates & Porter-field, whereby he (Brown) agreed with the members of that firm that, in consideration of the said copartnership transferring and assigning to the defendant corporation 1,130 shares of the preferred stock, and of transferring and assigning to the defendant James N. Brown 1,020 shares of the common stock and 50 shares of the preferred stock of the corporation, and of the payment of $1,000 in cash to the defendant Brown, he would sell and dispose of at par at least 500 shares of the 1,130 shares of the preferred stock of the defendant corporation which was to be transferred to the defendant corporation as aforesaid. The complaint then proceeds to allege that Yates & Porter-field, on the organization of the corporation, assigned and transferred to the defendant corporation 1,130 shares of the preferred) stock, and in compliance with the terms and conditions of its agreement with Brown it transferred to him 1,020 shares of the common stock and 50 shares of the preferred stock, and paid to him the sum of $1,000 in cash; that Brown sold, pursuant to the agreement, 100 shares of the 1,130 shares, and has not sold the remaining 400 shares to be sold pursuant to said agreement. The names of the directors of the corporation are then set forth in the complaint, and it is alleged that the plaintiff has made a demand upon each of the aforesaid directors that they cause the defendant corporation to bring an. action against Brown to recover damages for his failure to carry out his contract to sell the preferred stock, and that a majority of the directors have refused to comply with such demand; that the corporation is now in the course of liquidation, and in an insolvent condition, and that such insolvent condition has been brought about by the-failure of the defendant Brown to carry out the aforesaid contract,. Judgment is demanded that the corporation recover the damages, which it and the stockholders have sustained by reason of the matters set forth in the complaint, and that Brown be adjudged and decreed to pay to the defendant corporation such damages when they.may be ascertained.
The gist of the objection of the demurring defendant to the complaint is that the Yates & Porterfield Company has no cause of action against the defendant Brown, because the complaint does not contain an allegation that the contract was made for the benefit oil the proposed corporation, or that the corporation after its formation-ratified or assumed it. The requisites of a complaint in an. action. against directors for corporate mismanagement are stated in the case of Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121, 73 N. E. 562, and they are (1) the cause of action in favor of the corporation, which should be stated in exactly the same manner and with the same detail of facts as would be proper in case the corporation had brought the action; (2) the facts which entitle the plaintiff to maintain the action in place of the corporation. The second requirement is abundantly satisfied by the allegations of the complaint in this action, and the particular question now presented for consideration is whether a cause of action in favor of the corporation has been stated in the manner and with such detail of facts as would be proper in case the corporation itself brought the action. I think the allegations above recited, and the legitimate inferences which flow therefrom, show that the corporation might maintain an action against the defendant Brown. He was, according to the complaint, the promoter of the corporation. He caused it to be organized, and the duty and obligation assumed by him, as to the 500 shares, inured directly to the benefit of the corporation to.be formed. For a consideration moving to himself, and which he received, he agreed to sell for the benefit of the corporation 500 shares of its preferred stock, viz., shares transferred to and held by it. It is evident that that agreement was not for the benefit of the copartnership of Yates & Porterfield, whose business was to be and was transferred to the corporation. It was the stock belonging to the corporation that was to be sold. The purpose of the sale was to furnish money to the corporation, and Brown's agreement was partially performed when 100 shares were sold. The inference clearly is that that sale was. for the corporation. There was an adoption by the corporation of the contract made by the promoter, and a partial performance of the obligation which the promoter assumed. I think there can be no doubt that the corporation in such circumstances—the contract having been made for its benefit and evidently to supply it with money—could have maintained its action against Brown for failure to fulfill his agreement, which was made as a part of the scheme attending the organization of the corporation. Such being the case, and it being sufficiently shown that the corporation refused to enforce a contract which was prima facie en-forcible, and from which benefits would accrue to the stockholders of that corporation, I am of the opinion that the action was well brought. I have not overlooked the possible suggestion that the demurring defendant is not in a position to assail this complaint, and that the objection would be available only to the defendant Brown, but as that suggestion has not been made by the respondent, it is not regarded as requiring especial consideration, the complaint being good as against both defendants.
The interlocutory judgment overruling the demurrer should be affirmed with costs, with leave to the defendant to withdraw the demurrer on payment of costs, and to answer over within 20 days after service of a copy of the order to be entered on this decision.
HOUGHTON and SCOTT, JJ., concur.