Case Name: Hyman Bloom, Resp't, v. National United Benefit Savings and Loan Company et al., App'lts
Court: New York Supreme Court, General Term
Jurisdiction: New York
Decision Date: 1894-10-17
Citations: 62 N.Y. St. Rep. 657
Docket Number: 
Parties: Hyman Bloom, Resp’t, v. National United Benefit Savings and Loan Company et al., App’lts.
Judges: 
Reporter: New York State Reporter
Volume: 62
Pages: 657–662

Head Matter:
Hyman Bloom, Resp’t, v. National United Benefit Savings and Loan Company et al., App’lts.
(Supreme Court, General Term, Fifth Department,
Filed October 17, 1894.)
1. Appear—¿-What not brought up.
An o .rder reopening the cause and directing, as a condition, that it be sent tof a referee to hear and determine, is not reviewable on appeal from the judfgment.
2. Same—CObjections—Waiver.
An objection, taken before the referee, that the court had no power to order tike reference is not available on appeal from- final judgment, where the parry took part in the trial on the merits.
3. Corporations—Stockholders—Action by.
A stockholder may sue for the benefit of the corporation, where it refuses or is -controlled by the directors charged with liability.
4. Same—Directors.
The directors-! of a corporation are liable only for the losses of its funds, attributable to th oir negligence.
Appeal from a judgment in favor of plaintiff.
John H. Hopkins, -for app’lts; J. B. M. Stevens, for resp’t.

Opinion:
Bradley, J.
The defendants other than the company were directors of the National! United Benefit Savings & Loan Company. The action is brought ipgainst them to recover ifamagiss resulting from their alleged negligent mismanagemenf-óf the affaihs*.of the company. The trial proceeded at special term, and the evidemne was there deemed clo&wA. ,\But upon motion made by the plaintiff, and opposed by the defendía r\L, an order was made by the court that the plaintiff be permitted to introduce further evidence for certain purposes, and that, as a condition of reopening the proofs, the cause be sent to a referee to hear the additional evidence, and upon it and the stenographer's minutes of the evidence takeii on the trial at the special term he determined all the issues in the action, and it was referred to a referee named to hear and determine them. When it came on to hearing before the referee the defendants' counsel objected that he had no right to proceed with the trial under the order, because the court had no power to make it. The objection was overruled, exception taken, and the trial proceeded.
It was not within the power of the court to make the order of reference, and submit to the referee the evidence before taken, without the consent of the parties, and the error was reviewable by appeal from the order. No appeal from it was taken by the defendants within the time prescribed by the statute for that pur pose, but they took part in the trial before the \referee. The defendants seek to review the order on appeal froHji the final judgment pursuant to the statute, which provides that ^n appeal from a final judgment brings up for review "an intermediate order which is specified in the notice of appeal, and nec-éssarily affects the final judgment." Code Civ. Proc., § 1316. The -prder did not necessarily affect the final judgment, and therefore dejes not come within the provisions of that section. And since the] parties participated in the trial upon the merits to the result glfiven by the judgment, the objection taken by the defendants at th& outset before the referee is not available to them on this review.! The failure to appeal from the order and proceeding to the tifial may be treated as a relinquishment of the right to now assert objection to the reference. The defendant company was a corpora ti¿\n created pursuant to " An aet for the incorporation of building, mutual loan and accumulating fund associations." Laws 1851, tchap. 122. It was organized August 14, 1890. The articles of association Were subscribed by the defendants and by E. I. Nagefstein, W. R. Horne, and Charles Pscherhofer. Thereupon TTracy was elected president, Nagelstein vice president, Pscherhofrér treasurer, and Horne secretary. The business existence of the rcompany was short. On October 15, 1890, the directors, other tluan the three last above named and Makk, joined in a petition n,o the court for its voluntary dissolution, in which petition it wa¡u represented that in the meantime 1,320 shares had been subscribed to the capital stock, upon which $2,327.25 had been paid, an d that there was no money in the treasury to make the loans contemplated by the payment of the money upon such shares. TAe losses suffered by the corporation was occasioned by the malfeasance in office of the vice president, secretary, and treasurer.
There is *o support in the evidence for ¡jiny charge of bad faith or affjrsnative bread1;, of trust on the part of \the defendants. The uhiurge made against teem is that of neghge'hce. The funds were those of the corporation certain legitimate purposes. The legal privity of the directors is with the corporation only. They are its managing officers, and are primarily liable to it for losses occasioned by their negligence, for which it has a remedy by action at law. Hun v. Cary, 82 N. Y. 65. But when a corporation refuses to sue for such cause, or when it is controlled by directors who are charged with liability, and therefore may be supposed not to permit a faithful prosecution of themselves, a shareholder may bring an action in equity for the requisite relief. Robinson v. Smith, 3 Paige, 222; Greaves v. Gouge, 69 N. Y. 154. This right arises out of the interest the stockholders have in the preservation of the corporate property and the trust relation of the directors to them. The corporation must necessarily be made a party defendant, and the practical purpose of the action is the restoration for the benefit of all concerned of the corporate funds or property wasted or lost by the culpable fault of the directors. Davenport v. Dows, 18 Wall. 626; Craig v. Gregg, 83 Pa. St. 19; Brinckerhoff v. Bostivick, 99 N. Y. 185, 194. The substantial interests are in the stockholders, and in the present case it seems that the corporation has for all pra.-etical purposes ceased to have any potential existence. The directors undertook to exercise ordinary care in the management of the affairs of the company, and, as was said in Hun v. Cary, " the same degree of care and prudence that men prompted by self-interest gehc rally exercise in their own affairs." .The burden is with the plaintiff, to prove that the appropriation of the moneys of the corporation 'oy the guilty officers was permitted by the negligence of the defendants. It now appears that they were not worthy of any trust, a. id the charge is made of want of diligence on the part of the defendants in not learning that they were unfit for the offices before their election to them. The defendants then evidently had confidence in their ability and integrity. One of the defendants '• had known Pseherhofer for four years, and spoke highly of him to one or more of the other defendants, who had known him much less time. He assumed to be familiar with the contemplated corporate business, and Nagelstein and Horne cooperated with him in organizing the company. They assumed a knowledge of the business not possessed by the other directors. They were therefore placed in those official positions. The secretary and treasurer were respectively required to give bonds, with surety to 'be approved by the president. It was done. This apparently was reasonably sufficient to render their relation to the offices satisfactory. They alone were authorized to receive the money. I.t .was not within the duties of the vice-president to handle any-, of the money of the corporation. The defendants cannot well be charged with negligence in the outset.
The Unió# Bank of Rochester was designated as the place for deposit of tlr.e corporate funds. The by-laws provided that checks drawn upon%the loan fund should be signed by the president, secretary and treasurer, and those drawn on the expense fond be signed by the* secretary and treasurer; and it appears that' some of the officers qf the bank were so advised. A few days prior to August 27, 1890, one Grroh made application for forty shares of stock of the par; value of $100 each, and he assigned to Nagelstein and Horne a mortgage against one'Kraft, which exceeded in value that of the stock Üqy something over $300, which was paid to him. On that day the mortgage was transferred to the bank to secure the payment of a noiemade to obtain a lo.Tnof the sum of $3,0.00, of which $2,500 wass there credited to the loan fund and $500 to the expense fund of the corporation. T] is loan wa£4n excess of that which the company was authoriz d to make. £^aws 1851, chap. 122, § 5. Afterwards Grroh asserted that the assignment of the mortgage was obtained from him >y fraud, and sough6 60 reclaim it, and his attorney upon such ,harge obtained restc^8460n of it to his client, and Me amajagymk to him at the time of thA assignment was refunde®, xnu'Ttoeapbn Pseherhofer and four other ^ directors, who are the defendants other than Makk, gave their individual notes to the bank in place of that before mentioned, and those four defendants paid the amount of it,-aided in doing so by the proceeds, amounting to about $1,600, of a mortgage taken on the loan of a portion of that $3,000. It is not seen that the imputation of negligence of the defendants resulting in the loss of any of the money of the corporation arises out of the transaction of the loan from the bank. The amount of it was all paid without the use of any of the funds of the company other than the portion before mentioned of the amount of such loan. It is, however, urged that the amount of the KrCft mortgage should not have been surrendered to Grroh. No jertificate of stock had been issued to him. He made the charge hi fraud, and it seems that it was deemed advisable to avoid a c intest in the matter by giving it back to him. The circumstances 'of the fraud charged do not appear in the record. It must be assumed that the' directors acted in good faith in returning it to him, and, if there was any mistake made in doing so, it was mere error of judgment, for which they are not chargeable with liability.
The unfaithfulness and dishonesty of Nagelstein, P^cherhofer and Horne in their relation to the company appear, and the defendants are charged with culpable negligence by permitting them to remain in the positions to which they had been elected as officers and assigned as members of the executive committee. If the defendants were advised of the misconduct of those pensons, and unduly permitted them to remain in those places without- any action for their removal, they subjected themselves to the imputation of negligence, and became liable for the consequences of their subsequent peculations to the prejudice of the company.
About the 1st of September the attention of the directors was called to the fact that Nagelstein had received $600, a,nd the matter was called up, and, as appears by the minutes of a meeting of the directors, he then said such amount had gone into his pocket as commissions for obtaining shares for another company which were transferred to this company, and the matter was ij,hen dropped for the time being, to be thereafter examined. Theu'e seems to be no further account of that money, nor does it appear how or from whom he received it. Afterwards he was require^! to, and finally did, resign his position as an officer of the company. It does not appear that he subsequently received any other money. On September 18th, at a meeting of the directors, ome of them called attention to the facf-fhat the secretary, Horne" was inattentive to his official duties, and it also appeared that inis habits were bad. He was soon aft^r disifiissed from his office. * It seems that Pscherhofer, the' treasurer, retained longer the cortifidence of the directors, and h^.joined withAhem in demanding '.the resignation of the vice-president and in reii. oval of the secretary-. He, as treasurer, was called upon to subnet his book for er-xamination, and after some qelay it was produc/d. It was found/ to be incorrect. He sai¿i$ e would look it ov-t and submit ilt at the next meeting. A£hen k' wag found that sohe l?¿fjp¿ad b/feen torn out, and a new account entered. This was'T^ANiV/incorrect, and charge was made against him to that effect. He became excited, and tore the book to pieces. This was near the time that the company ceased to do business. There is evidence tending to prove that the secretary and treasurer were requested from time to time to render their accounts. They stated that it was necessary to have a certain kind of books adapted to the purpose, and that they had been ordered from the city of New York. This seemed to be a method of pretext employed for delay. It is quite evident that the defendants were the victims of misplaced confidence. They possibly may have been less vigilant than they would have been if the bonds of the secretary and treasurer had not been given, and they may have deemed the loan fund in the bank comparatively safe from the fact that the by-laws did not permit it to be drawn without the check of thráS officers, of whom the president (Tracy) was one. This requirement was not observed in drawing upwards of $600 of that fund. The condition of insolvency of the company was reaches in less than two months after its organization. Some money was required and used for expenses and in the payment of officers' salaries. The amount paid upon subscriptions to shares in excess of those expenses and salaries -was illegally appropriated by the three officers before mentioned, or some of them. It appears that the moneys deposited in the bank before then were drawn prior to September 13, 1890. A considerable portion of the moneys paid in by subscribers to shares did not go into the bank. Although the by-laws required that certificates of stock should be signed by the president, he signed none. It seems that the subscriptions were not reported to him, and that he was not advised that the certificates had been issued until shortly before the company ceased to do business. After the defendant Sheridan took the position of secretary, and before the condition of the company was fully ascertained, he and two other directors each contributed $100 to his credit in the bank to place the company in a situation to take care of its matters. But as it turned out on further investigátion, the sum so contributed was only little aid towards relief.
The only support found in the evidence for the charge of culpable negligence on the part of the defendants is in their omission to get rid of those officers respectively without delay after their unfitness was or should have been ascertained or suspected by them. The question as to the amount of money of the corporation lost for such cause after that time is not answered by the findings of the referee, nor does it appear by the evidence that the defendants were, upon such charge, liable to the original plaintiff, and those who came in as such, for the amount awarded to them upon the direction given by the interlocutory judgment. The defendants are neither insurers nor sureties for the fidelity of the officers of the company. They are liable only for the losses of its funds attributable to their negligence. Briggs v. Spaulding, 141 U. S. 132; Arthur v. Griswold, 55 N. Y. 400. There was a period in the short time within which the mischief was done that the defendants were not required to suspect those persons of peculating purposes, and the treasurer retained their confidence longer than the other two.
The learned referee fouiid many facts, and then added substantially that by reason of those facts the shares of the company were rendered worthless, and by reason thereof and of the debts and liabilities negligently incurred by the directors the plaintiff has sustained damages to the amount paid in by him, with interest, and the propoi'tion for which he may be personally liable of the debts and liabilities so incurred, and that the other shareholders of the company similarly situated have respectively sustained like damages, and j udgment was directed accordingly. Six others came in and took the benefit of the direction, and with the plaintiff, also recovered. The specific facts found did not necessarily require the direction of the judgment recovered against the defendants, nor was the recovery had warranted by the evidence. The reason urged by the plaintiff's feunsel for the suggestion that the determination is not reviewable is deemed not well founded. Code Civ. Proc. § 1301, 1316. The final and interlocutory judgments should be reversed, and a new trial granted, costs to abide the final award of costs. All concur.