Case Name: General Rubber Company, Respondent, v. Elias C. Benedict, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1914-11-13
Citations: 164 A.D. 332
Docket Number: 
Parties: General Rubber Company, Respondent, v. Elias C. Benedict, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 164
Pages: 332–344

Head Matter:
General Rubber Company, Respondent, v. Elias C. Benedict, Appellant.
First Department,
November 13, 1914.
Corporation — liability of director for neglect of duty in failing to advise Ms corporation of a misapplication of funds by a general manager of a subsidiary corporation — sufficiency of complaint — damages.
Complaint in an action by a corporation against a director to recover damages caused by the defendant’s neglect or disregard of his duties in that he failed to advise the plaintiff that the general manager of another corporation, wMeh plaintiff had organized as an aid to its business and practically owned, was misapplying the funds of his principal and using them for the benefit of defendant and his associates in a rival business, examined, and held, to state a cause of action.
The measure of plaintiff’s damage is the diminution in the value of its stock caused by defendant’s failure to perform his duty to it.
Ingraham, P. J., and Laughmn, J., dissented, with opinion.
Appeal by the defendant, Elias C. Benedict, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 2d day of September, 1914, overruling his demurrer to the complaint.
William M. Ivins, for the appellant.
Nathaniel Myers, for the respondent.

Opinion:
Dowling, J.:
The complaint in substance alleges that plaintiff is a corporation organized pursuant to the laws of the State of New Jersey, whose affairs under the statutes are managed by its directors, and that defendant was a director therein and, as such, charged by law with the continuous duty " of protecting and promoting its welfare by the exercise of diligence and faithfulness and of preserving its property and assets from waste, and of refraining from authorizing, making or knowingly permitting to be made any unlawful, improper or improvident use of its funds or assets, and of abstaining from doing himself and from acquiescing in the doing by any one else of any wrongful act which he knew to be detrimental to its pecuniary interests, and especially with the duty of refraining from doing and of preventing others from doing any act which to his knowledge would be detrimental to its pecuniary interests and at its cost would be promotive of his own interests; " that plaintiff has been continuously engaged for several years prior to May 1, 1911, and thereafter until September 20, 1911, in purchasing crude rubber in Brazil for its business through Gordon & Co., a concern located at Para, Brazil, in which plaintiff and one W. Stuart Gordon were interested; that on the latter date a corporation was organized under the laws of the State of New Jersey, known as " General Eubber Company of Brazil," to which the business of Gordon & Co. was transferred, and of all of whose shares the plaintiff became owner, and has since retained ownership thereof, with the exception of some 18 shares out of the total issue of 3,000; that said 3,000 shares were worth their par value of $300,000 -until damaged by the acts complained of; that the Brazil Company is the sole crude rubber buying instrumentality of the plaintiff in Para, Brazil, and its principal office outside of New Jersey has been in New York city, where its directors' meetings have been held; that defendant is the only director of plaintiff who has ever been at Para; that Arnold J. Hutter was general manager of W. S. Gordon & Co. down to September 20, 1911, after which date" and until June, 1913, he was general manager of the General Eubber Company at Para and, as such, in charge of its moneys, property and business there; that in May, 1911, defendant, Hutter and Colgate Hoyt purchased a rubber-growing and crude rubber-buying and selling business in Brazil, and established an agency thereof in Para under the name of "E. Levy," and placed Hutter in charge thereof as general manager at a salary of $6,000 per annum; that without plaintiff's knowledge, defendant also agreed that Hutter should be one of the owners of said business and interested to the extent of 200 shares in the corporation to be formed to acquire the same; that defendant informed plaintiff and its board of directors in June, 1911, that he had engaged in the business of "E. Levy" and desired Hutter's services therein for not more than six months, which would not take more than one hour a week and would not interfere with the performance of his duties as plaintiffs general manager at Para, and thereupon requested plaintiff and its board of directors to consent to Hutter's performing the services in the business of "E. Levy" to the extent indicated; that defendant withheld from the plaintiff and the board the real agreement between Hutter and himself and his other associate in. " E. Levy " by which Hutter's salary was to he an annual one, bis services were to continue for much longer than six months, and he was to he one of the owners of the business, devoting twenty hours per week to the same, and thus lessening the value of his services to plaintiff, interfering with the performance of his duties to it, and putting him in a position in which his interests would conflict materially with those of the plaintiff; that neither plaintiff nor its directors, save defendant, knew of these facts, though defendant did have knowledge of all of them and concealed them; that defendant with Hoyt and others caused the incorporation in West Virginia of the " Moju Rubber Plantations and Development Company, " whereof defendant owns more than one-fourth of the stock, being its vice-president, a director and a member of its executive committee; that the Moju Company became the owner of the business conducted under the name "E. Levy;" that on July 10, 1911, Hutter became the general manager of the Moju Company at the annual salary of $6,000 and subscribed for and acquired twenty per cent of its capital stock, still without plaintiff's knowledge; that the Moju Company was in pressing need of money from February, 1912, its condition becoming gradually worse until, in June, 1913, it was, and has since remained, insolvent, and claims against it are of little or no value; that during the period named, defendant knew that Hutter, as general manager of the Brazil Company, was in possession of large sums of money belonging to it and was removed from personal supervision by its officers and could dispose of funds without consultation with them; that in February, 1912, Hutter, to the knowledge of defendant, misapplied funds and moneys of the General Rubber Company of Brazil to the amount of $4,000 to the use of himself, defendant and their associates, and paid out and misapplied the moneys of said company in payment of the debts and obligations of the Moju Company, and continued until June, 1913, misapplying additional funds of the Rubber Company of Brazil to the use of the Moju Company and for the benefit of defendant, Hutter and their associates to the aggregate amount of $185,000; that neither plaintiff nor any of its officers or directors, save defendant, ever knew of such misapplication of its funds. The complaint then proceeds to set forth: '
" Twenty-third. On information and belief, that at or about the time of such misapplication of each of the said sums of money or funds of the said General Rubber Company of Brazil, to the uses of the said Moju Company by the said Hutter, the defendant herein was cognizant thereof and acquiesced in and approved of such use thereof, and that at all such times he knew that thereby such funds were being placed in jeopardy and were liable to be wholly lost to said General Rubber Company of Brazil and to the damage of the plaintiff, and that such misuse of said funds was a fraud upon the plaintiff and upon said General Rubber Company of Brazil and in the financial interest of the defendant and his associates and of said Hutter, and that at all the said times the defendant well knew that the plaintiff and its officers and directors (other than himself) and the said General Rubber Company of Brazil and its officers and directors, were and each of them was wholly ignorant of such misuse of said funds.
" Twenty-fourth. On information and belief, that when and as the defendant acquired knowledge of the relations of the said Hutter to the said Moju Company and of the use by the said Hutter of the funds of the General Rubber Company of Brazil for the benefit and account of the said Moju Company as aforesaid, it was the duty of the defendant to inform the plaintiff and its officers and directors of each of the said facts, and of all of the facts within his knowledge relating thereto, and forthwith to cause effective steps to be taken to prevent the said Hutter from misapplying any funds of the General Rubber Company of Brazil to the said purposes, and to recover for the said General Rubber Company of Brazil any of its funds that had been so misapplied; and, if the said defendant had performed his said duties as such director of the plain tiff, the plaintiff could and would have taken such action as would have caused the funds and moneys of said General Rubber Company of Brazil theretofore so misapplied to have been recovered and as would have prevented the said further misapplication of said funds and moneys to such wrongful uses.
" Upon information and belief, that by reason of said violation by the defendant of his duty as a director of the plaintiff, the said Hutter was enabled to misapply, and as aforesaid did misapply, the moneys of the General Rubber Company of Brazil without the knowledge of its directors or officers, or the knowledge of the directors (other than the defendant) or officers of the plaintiff, to the damage of said General Rubber Company of Brazil, and to the damage of the plaintiff as hereinafter alleged; and that by reason of said violation by the defendant of his duty to the plaintiff, the directors of the plaintiff were effectually prevented from protecting its property from misapplication as aforesaid until after the said Hutter, with knowledge as aforesaid of the defendant, had misapplied its funds and money to the amount of one hundred and eighty-five thousand dollars ($185,000).
" Twenty-fifth. Upon information and belief, that at all the times prior to the month of June, 1913, the defendant, in violation of his duty as a director of the plaintiff, and for his own benefit intentionally withheld and consciously concealed from the plaintiff and from its officers and directors and from the said General Rubber Company of Brazil and from its officers and directors, all knowledge and information of the matters stated in the preceding Article Twenty-fourth.
" Twenty-sixth. Upon information and belief, that the said wrongful misappropriations by said Hutter have lessened the value of the assets of the plaintiff, to wit, said shares of stock of said General Rubber Company of Brazil owned by the plaintiff as aforesaid, and have also otherwise damaged the plaintiff in a sum exceeding one hundred and eighty-five thousand dollars ($185,000), and that the said damage to the plaintiff resulted directly from the violation by defendant of his duty to the plaintiff as one of its directors as hereinbefore set forth and to his benefit.
"Twenty-seventh. Upon information and belief, that in the manner aforesaid and by the said acts, neglects and concealments of the said defendant and by his said breach of his duty to the plaintiff the said defendant has damaged the plaintiff in the sum of one hundred and eighty-five thousand dollars ($185,000) and interest."
We think that the objections which are urged against the sufficiency of this complaint with such ability and vigor by the appellant's counsel are not valid, because this is not a derivative action, in which a stockholder is seeking to recover his share of the damage sustained by the corporation in which he is interested, but an action accruing solely to a corporation which has been damaged by reason»of a director's neglect or disregard of his duties to it. Plaintiff could not seek either the whole or its proportionate share of any damage which the Brazil Company had sustained by reason of defendant's acts. In Niles v. N. Y. C. & H. R. R. R. Co. (69 App. Div. 144; affd., 176 N. Y. 119) plaintiff, as a stockholder of the New York and Northern Railroad Company sued to recover in his own right the value of his stock whose market value he claimed had been destroyed by reason of the defendant's control of the road whose stock he held. Concededly, the obligation rested on that defendant to manage the controlled road in good faith and in the interest of all the stockholders, but for a violation of that obligation and the management of the controlled company in furtherance of its own interest, it was liable to the corporation itself. This court referred to the fact that the complaint contained no allegation of any wrong done to the plaintiff, as distinguished from the wrong committed against the corporation, and said: "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." (69 App. Div. 148.) The plaintiff herein cannot recover back the amount of the misappropriation of funds of the General Rubber Company of Brazil, to be paid to it instead of the latter company, even if it does own practically all of its stock, for that company is still in existence and has its independent right of recovery for such moneys, which it must bring in its own name, plaintiff's ownership of stock therein conferring upon it no right of action for a debt due to such corporation. (People v. American Bell Telephone Co., 117 N. Y. 255; United States Radiator Corp. v. State of New York, 208 id. 144; Fitzgerald v. Missouri Pacific Ry. Co., 45 Fed. Rep. 812.) But that is not the present action. Stripped of explanatory matter, it is an action against a director in a corporation, who owed it the duty of diligence, honesty and good faith, for his failure to exercise those obligations on its behalf. It is based on the claim that, as a director in the plaintiff corporation, the defendant in the exercise of ordinary care and common prudence was bound to advise it that the general manager at Para of another corporation which plaintiff had organized as an aid to its business and owned practically in its entirety, to defendant's knowledge, was misapplying the funds of his principal and using them for the benefit of defendant and his associates in an outside venture, which course of action was continued until the latter venture became hopelessly insolvent. Defendant well knew that the direct result of such course of action on the manager's part was to damage plaintiff's investment in the Brazil Company and at the same time to help along his individual venture at plaintiff's expense. Still he remained silent. It seems plain that this is quite different from an action against defendant by the Brazil Company for a conspiracy with Hutter to divert its funds to an unwarranted use. Defendant was not a director in the Brazil Company. He is not shown to have owed it any special duty. An action against him by the Brazil Company must proceed upon a very different theory from that upon which the present action can be upheld, which is that defendant is liable for the failure to disclose a series of transactions involving serious loss to his company, with attendant personal profit to himself. Upon the allegations of the complaint, the case would seem to come well within the rule laid down in Hun v. Cary (82 N. Y. 65) and Latimer v. Veader (20 App. Div. 418). Not only did defendant fail to advise his associates in the board of directors of the first of the misapplications of funds of which he had knowledge, but he kept silent and allowed the process of diversion to continue for a period of more than a year. It is also charged that the situation thus created was made possible by the dual position which Hutter was allowed to occupy towards both the plaintiff's enterprise and the defendant's, by reason of defendant's suppression of the real situation as to Butter's interest in, and attention to, the affairs of the latter. Had this action been brought for a loss sustained by plaintiff in the value of stock held by it due to a neglect by defendant of his duties as a director, we think there would be no question raised as to the right to recover. That in addition to this cause of action there may also exist one in favor of the other corporation is no defense to this suit. A man may do an act for which he is not only responsible to different persons affected by it, but his responsibility may vary in extent and degree according to the relation which he holds to the various sufferers from his action. Here, defendant owed a' positive duty to plaintiff. He is charged with having failed to discharge it. The measure of plaintiff's damage is the diminution in the value of its stock caused by his failure to perform his duty to it. We are not now concerned with other claims that may be made against defendant by the Brazil Company, or how, if successfully urged, the amount recoverable thereon might be affected by a recovery herein. It is enough to decide that the complaint herein sets forth a cause of action against defendant, and that the judgment appealed from should be affirmed, with costs, with leave to defendant to withdraw the demurrer and interpose an. answer herein within twenty days upon payment of costs in this court and in the court below.
Scott and Hotchkiss, JJ., concurred; Ingraham, P. J., and Laughljn, J., dissented.