Case Name: JAMESON et al. v. HARTFORD FIRE INS. CO. et al.
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1897-02-19
Citations: 44 N.Y.S. 15
Docket Number: 
Parties: JAMESON et al. v. HARTFORD FIRE INS. CO. et al.
Judges: 
Reporter: West's New York Supplement
Volume: 44
Pages: 15–25

Head Matter:
(14 App. Div. 380.)
JAMESON et al. v. HARTFORD FIRE INS. CO. et al.
(Supreme Court, Appellate Division, First Department.
February 19, 1897.)
1. Insurance Company—Reinsurance—Voluntakt Dissolution—Injunction.
A solvent fire insurance company had been doing business at a loss for 10 years. The dividends during that time had been paid from the surplus, the earnings for each year having been less than the current expenses. Its charter expressly authorized it to make reinsurance on all of the risks taken. Its directors concluded that the interests of the stockholders would be best served by voluntary dissolution. They contracted for reinsurance of all risks with another company, and transferred to it the lease of their offices with fixtures, agency records, and supplies. They then sued for dissolution. The terms on which reinsurance was made were more advantageous than could have been obtained after the action was begun. Certain of the stockholders got a temporary order restraining the companies from acting under the contract, and on the hearing of their application the injunction was continued pending the action for dissolution. Held, that the injunction was improperly continued, since it was mandatory, and, in effect, annulled an executed contract. Patterson, J., dissenting.
2. Same—Contract by Directors—Valid ty.
The contract for reinsurance was in the sound judgment of the directors, since it did not incapacitate the company from continuing business.
3. Same—Transfer of Personal Property.
The contract for reinsurance being valid, it carried with it the power to transfer the personal property, without which the reinsurance was impracticable.
Appeal from special term, New York county.
Action by Edwin 0. Jameson and others against the Hartford Fire Insurance Company, the Broadway Insurance Company, and others, to restrain defendants from acting under a contract for reinsurance, pending an action by the Broadway Company for dissolution. From an order continuing an injunction during the pend-ency of the action, defendants appeal. Reversed.
Argued before VAN BRUNT, P. J., and BARRETT, RUMtiEY, WILLIAMS, and PATTERSON, JJ.
Benno Loewy and Austen G-. Fox, for appellants.
Paul Fuller, for respondents.

Opinion:
WILLIAMS, J.
The action was brought to restrain the defendants from carrying out a contract entered into between them relating to the reinsurance by the Hartford Company of the risks of the Broadway Company, and for other relief, upon the ground that such contract was illegal, ultra vires, and void, and that carrying it out would cause irreparable injury to the plaintiffs and others. The plaintiffs were stockholders of the Broadway Company, and the defendants were the two companies parties to the contract and the directors of the Broadway Company. The contract was made November 11, 1890. The action was commenced November 12, 1896. Upon that day the plaintiffs served the papers upon which an application was subsequently made for an injunction pending the action. An order was made enjoining and restraining the defendants until the hearing and determination of the application. The application was subsequently heard, and on December 30, 1896, the order was made from which this appeal is taken.
The complaint in this action alleged, among other things, that the Broadway Company was a domestic corporation, and the Hartford Company was a foreign, Connecticut, corporation; that November 11, 1896, the board of directors of the Broadway Company, held a meeting in the city of New York, at which they agreed and determined to wind up the affairs of the corporation,, and to suspend the business for which it was incorporated, and to execute the contract in question; that on the same day the president made the contract with the Hartford Company, and mailed to the company's agents a notice of such determination, and of the making of the contract, etc.; that the contract was made, and the notice mailed, with the knowledge, consent, and authority of the board of directors, and in pursuance of resolutions adopted at the meeting; that the object of the resolution, contract, and notice was to wind up and terminate the company; that the company was at all the times referred to in the complaint a solvent corporation, and had for years paid a large dividend; that the acts of the board of directors in passing the resolutions and carrying them out were beyond the powers of the board, and the company itself, and therefore void, and the contract with the Hartford Company was ultra vires, and void; that the plaintiffs had never consented to or ratified the resolutions, contract, or notice to agents; that, if the resolutions were carried into effect, or the contract executed, the result would be that the Broadway Company would suspend a lawful and paying business, would discontinue the objects for which it was incorporated, and the corporation and the plaintiffs would suffer irreparable injury; that the Broadway Company, pursuant to the contract, had assigned and transferred to the Hartford Company securities described in the contract, the lease of its offices in New York City, all of its insurance maps and furniture, and safes, agency records and supplies, and that the board of directors had determined to and would fully complete the contract, unless restrained by order of the court; and relief was sought restraining such acts by the company and directors, and restraining the Hartford Company from acting under the contract. It will thus be seen that the plaintiffs based their right of action and their prayer for relief by way of injunction against the defendants upon the claim that the acts' sought to be restrained were beyond their power, illegal, ultra vires, and void, and would cause irreparable injury to the plaintiffs and the company. It appears from an examination of the papers used upon the application for an injunction that, after a consultation between the directors of the Broadway Company with reference to the propriety and necessity of dissolving the company, they held the meeting of November 11, 1896, and passed resolutions to the effect that it was beneficial to the interest of the stockholders that the company should be dissolved, and its outstanding risks should forthwith be reinsured; that the officers of the company forthwith enter into the contract with the Hartford Company for such reinsurance, and that proceedings for the voluntary dissolution of the company according to law be at once commenced, and that the company should take no new business; that the contract was thereupon at once executed, and the carrying out of the same was commenced; that a petition for the voluntary dissolution of the corporation was at once prepared and executed by the directors, and on the morning of November 12, 1896, and prior to the commencement of this action, and the making of the order temporarily restraining the defendants, was presented to the court, and an order made thereon directing all persons interested to show cause before Franklin Bien, referee, at his office in New York City, February 13, 1897 (that being the earliest day on which an order to show cause could be made returnable), why the corporation should not be dissolved.
It cannot be doubted that the directors had the legal power to commence these proceedings for a voluntary dissolution of the corporation, and that it was their duty to do so, if for any reason, they deemed it beneficial to the interests of the stockholders that the corporation should be dissolved. It was not necessary that the corporation should be insolvent, in order to justify the proceedings for dissolution, and the final dissolution of the corporation. The papers disclose such a condition of this corporation as made the proceedings for such dissolution entirely proper. The company was not insolvent, but it had concededly been losing money every year for the last 10 years, and the dividends had during that whole time been paid, not from the net earnings of the company, the earnings having each year been less than the current expenses, but from the surplus on hand, which had thereby been steadily reduced from year to year. This appears not only from the defendants' showing, but from the letter sent out by the plaintiffs' agent in June, 1896, wherein the losses during 10 years were clearly set forth, showing the loss in surplus for the last 10 years was $300,000 and in assets $133,000, and expenditures in excess of income $250,000; and loss for the last five years in surplus was $107,000, in assets $30,000, and expenditures in excess of income $67,000; and the loss for the last year in surplus was $17,000, in assets $7,000, and expenditures in excess of income $1,500. This letter further stated that the company claimed to have a surplus at the beginning of the last year of $43,000, but that the actual surplus was at least $10,000 less than that sum. The plaintiffs were then trying to buy up the stock of the company, very likely for the purpose of getting a controlling interest in the company, so as to control the election of directors at the coming election. Other items of evidence in the papers might be referred to, showing beyond question that the company, though still solvent, and able to pay its debts and liabilities, was nevertheless doing business at a loss, and paying dividends out of its surplus, and had been doing so for at least 10 years last past. The directors may well have believed it to be for the interest of the small stockholders, at least, that the dissolution of the company should be secured, while they still had the power to act in the premises, and before the plaintiffs succeeded in buying up the majority of the stock, and thus obtaining control of the company, when the smaller stockholders would be at their mercy. We are unable to say, from an examination of the papers, that the directors were not justified in their conclusion that it was beneficial to the in terests of the stockholders, that the corporation should be dissolved, Indeed, there seemed to be no other conclusion possible. This being so, they were not only acting within their legal right, but in accordance with their duty, in determining to commence the proceedings for dissolution of the corporation, and in acting promptly in instituting the proceedings. It will be noticed that the plaintiffs did not, in their complaint, attack either the legality or propriety of this action by the board of directors, although it was a part of the scheme outlined in the resolutions, and was the basis for the action of the directors in reinsuring the risks of the company, and the reason alleged for the propriety and necessity of making the contract of reinsurance.
It cannot be said as an abstract proposition that the board of directors had no legal power to reinsure the risks of the company, because the amended charter of the company, by section 2f provided expressly that "this company shall have power to make reinsurance upon any or all of the risks to be taken by them as aforesaid." If it be claimed that this section did not give the directors the power to close up the business of the company, the reply is that this contract of reinsurance did not, in and of itself, close, or assume to close, the business of the company. It in no way deprived the company of the power to go on and take new business. The contract was evidently made with a view to the dissolution of the corporation, but the dissolution was to be effected, if at all, in the proceedings begun at the time; and, if the court refuses to order such dissolution, the corporation will have to go on with its business, which it can do, notwithstanding the contract of reinsurance has been made and fully carried out. There can be no doubt as to the legal power of the directors to make this contract of reinsurance. The only question is whether it was a proper thing to do under the circumstances. The defendants claim that, if the proceedings for dissolution were to be commenced, and especially if they were to result in the dissolution of the corporation, it was absolutely necessary, in order to protect the company against serious loss in the existing business, that the reinsurance should be effected prior to or at the time of the commencement of the proceedings for dissolution, and this claim is supported by the affidavits of several insurance men of large experience. It also appears from the papers that this course has usually been resorted to, and this is uncontradicted. It was the duty of the directors to act as their judgment dictated, for the best interests of all the stockholders, and it was evidently for their interest that the reinsurance should be effected as early as it was. It appears the contract was a favorable one for the Broadway Company, and the transfer of the personal property referred to in the contract was a necessary incident to the reinsurance of the risks, and, if the reinsurance was properly and discreetly effected, no reasonable objection can be made to the transfer-of the personal property referred to. There seems to be no allegation in the complaint of bad faith or fraud on the part of the defendants, in making the reinsurance, except the charge that it was ultra vires. There is nothing in the papers to show bad faith on the part of the defendants, and we do not think there was any warrant for saying the contract was ultra vires.
The views we have expressed lead us to conclude that this injunction order was improperly granted upon the papers before the court, and that the order should be reversed, with $10 costs and disbursements of this appeal, and the application should be denied, with $10 costs.
VAN BRUNT, P. J., and BARRETT, J., concur.