Case Name: Charles E. Metzger, on Behalf of Himself and Other Stockholders of the Knox Hat Manufacturing Company, Similarly Situated, Plaintiff, v. Edward M. Knox, The Knox Hat Manufacturing Company, The E. M. Knox Retail Hat Company, Edward Knox Cook and The Cooke Hat Company, Defendants
Court: New York Supreme Court
Jurisdiction: New York
Decision Date: 1912-06
Citations: 77 Misc. 271
Docket Number: 
Parties: Charles E. Metzger, on Behalf of Himself and Other Stockholders of the Knox Hat Manufacturing Company, Similarly Situated, Plaintiff, v. Edward M. Knox, The Knox Hat Manufacturing Company, The E. M. Knox Retail Hat Company, Edward Knox Cook and The Cooke Hat Company, Defendants.
Judges: 
Reporter: New York Miscellaneous Reports
Volume: 77
Pages: 271–277

Head Matter:
Charles E. Metzger, on Behalf of Himself and Other Stockholders of the Knox Hat Manufacturing Company, Similarly Situated, Plaintiff, v. Edward M. Knox, The Knox Hat Manufacturing Company, The E. M. Knox Retail Hat Company, Edward Knox Cook and The Cooke Hat Company, Defendants.
(Supreme Court, Kings Special Term,
June, 1912.)
Corporations—- rights of stockholders and actions by them — right to injunction and receiver as remedy for unauthorized acts — receivers— proceedings against in equity.
Where a subsidiary company, formed by a board of directors to dispose of a certain class of goods manufactured by the corporation, is a benefit thereto and was not organized as a means to enrich some officer or director or majority stockholder at- the expense of the minority stockholders, or to be used as an attempt to injure them, the latter may not complain.
Statements in the prospectus of the promoter that the officers of a proposed corporation are to receive no salary do not preclude the board of directors of the corporation subsequently created from paying salaries to its officers.
That a corporation has rented a loft from its president is insufficient ground for a temporary injunction, or the appointment of a receiver.
Where the owner of a hat manufactory, upon a sale of his business to a corporation, agreed to purchase from it all hats and caps for his retail store with the exception of such as he had been accustomed to purchase in Europe as samples, the contract is not a unilateral one, where the corporation paid a large sum not only for the property but for the good-will, and a purchase of domestic hats by the other party to said contract constitutes a breach thereof.
Though equity would not restrain a breach of the contract to purchase the hat manufactory but leave the parties to their remedy at law, it would enjoin defendant from using his former label contrary to his agreement.
Where it appears that a corporation is paying dividends both upon its preferred and common stock, a receiver will not be appointed on the application of a minority stockholder who claims that the president of the corporation is violating a contract made by it.
Where it appears that the minority stockholder for several years had known of the violation of said contract and did not commence his suit until the president had refused to purchase his stock or give him employment with the corporation, the court will refuse a temporary injunction on the ground of laches.
Motion by the plaintiff for the appointment of a receiver and a temporary injunction.
Warren Bigelow, for plaintiff.
J. Aspinwall Hodge, for defendants, opposed.

Opinion:
Cbáne, J.
This application is made by the plaintiff for the appointment of a temporary receiver of the Knox Hat Manufacturing Company and for an injunction restraining the E. M. Knox Retail Hat Company from using the Knox trade mark on certain goods sold by it. The principal •grounds upon which the plaintiff moves for this immediate relief are:
First, the continuing breach of contract contained in the bill of sale of the manufacturing business from E. M. Knox to the Knox Hat Manufacturing Company. Second, the waste of funds due to the improper payment to the president of the Knox Manufacturing Company of a salary of $25,000, and the leasing by the said company from the said president of lofts in a building owned and controlled by him. Third, the injury done to the Knox Manufacturing Company's business by permitting the Cooke Hat Company to use part of the factory building and compete in the trade for the sale of hats.
All of these grounds can be disposed of without much comment excepting the first. The stock of the Cooke company is owned and controlled by the Knox Manufacturing Company and is a scheme whereby it disposes of a certain class of its goods. Whether this be good or bad business is for the board of directors to determine and not the courts, unless it be that it is used as a means to enrich some officer or director or majority stockholder at the expense of the minority holders, or an attempt to injure the minority holders. Ho such result has happened in the creation of the Cooke company so far as the papers reveal. As to the salary of the president, while it is true that the prospectus put out by him prior to 1903 stated that the officers of the company were to receive no salary, yet it cannot be claimed that the directors of the corporation subsequently created could never pay a salary if circumstances warranted. Business conditions might arise where it would be for the best interest of all concerned that the officers should receive a salary. Likewise, the renting of the loft in the Fifth avenue building from E. M. Knox, the president, by the Knox Hat Manufacturing Company is not a prohibited transaction., It is neither void nor voidable for the directors of a corporation to rent property from an officer of the company, although the transaction, of course, is subject to inquiry, and, like all other similar transactions, may be set aside or prevented if it be used for the purpose of defrauding minority stockholders in giving enlarged, profits to an officer or director. This matter of salary and of the loft rental can, of course, be inquired into on the trial, but the papers upon this application fail to show any reason for the immediate relief asked.
As to the breach of contract by the Knox Hat Manufacturing Company, the successor of Edward M. Knox, the following statement seems necessary: Prior to 1903 Edward M. Knox was the owner of a hat factory on St. Mark's avenue in the borough of Brooklyn and also the proprietor of retail hat stores in Brooklyn and Manhattan. In that year he formed the Knox Hat Manufacturing Company and by bill-of sale executed on the 19th day of March, 1903, transferred to it the manufacturing plant, property, good-will and business, receiving therefor $1,143,517.71. The good-will also included the exclusive right to the use of the Knox hat trade-mark, a very valuable asset. The bill of sale contained but one exception, which gave to Edward M. Knox the right to maintain and carry on his retail stores in Manhattan and Brooklyn, he agreeing at the time to purchase so long as he should personally continue to carry on said stores, all hats, caps, goods and merchandise which he might require of said company at the same prices which he had theretofore been accustomed to pay for like goods manufactured at said factory. The language used in this bill of sale indicates that Knox was to purchase all the goods for his retail stores which, up to that time, had been made and were being made by the hat factory; as to all other goods, he was free to buy them where he pleased. As to the Knox label or trade-mark, which was a most valuable part of the transfer to the company, Knox agreed that neither he nor his successors would use this trade-marlc on any other hats than those manufactured by and purchased of the company, with the exception " of such (hats') as he had teen accustomed to purchase in Europe as samples, for men's wear." This agreement was by no means a unilateral contract, as the company had paid a very large sum of money, not only for the property but for the good-will, and the agreement was one of the terms of the transfer. Edward M. Knox was, therefore, bound to live up to the letter and spirit of it.
The plaintiff claims that this agreement has been violated, as Edward M. Knox has for many years been purchasing hats and caps from other manufacturers and dealers and selling them in his retail stores under the Knox label, and that this action on his part has not only lessened the sales and business of the manufacturing company, but has had a direct tendency to lessen the value of the Knox label or trade-mark to the company. It is acknowledged on the part of the defendant. Knox that he has imported certain cloth caps and also silk hats and sold them as alleged, but it is claimed by him that this is not a violation of the contract, as these goods he had previously been accustomed to purchase in Europe, and, therefore, came within the exception of his agreement. While he agreed to purchase all hats and caps for -his retail stores manufactured by the Knox Company from that company, yet a court of equity would not enforce this agreement by injunction and restrain him from buying hats elsewhere, but it doubtlessly would and should restrain him from using the Knox label in such hats contrary to his agreement. It is not a question- of label or trade-mark, but one of contract and agreement. Whether, therefore, the defendant Knox violated his contract by using the label in imported hats and caps depends upon the reading of this exception to the contract which is above quoted. The plaintiff claims that this exception is confined to such samples as Knox purchased in Europe, while the defendants claim that he was free to purchase without limit and use the Knox label on hats which were lihe the samples theretofore bought in Europe. The language is subject to either interpretation without straining or unnatural construction, and the meaning of the parties and of the clause must be determined by the circumstances and nature of the business. This can be determined upon the trial, but until then the court would hardly be justified in granting a preliminary injunction when the meaning was not perfectly clear and certain. It is conceded by Mr. MaeEarland in his affidavit that cloth caps were not manufactured by the Knox Manufacturing Company, so that these do not come within that portion of the agreement requiring their purchase from the factory, but Knox could not use the Knox label in them unless the clause quoted gave him that right. It would be unreasonable to restrain the defendant from using the label in such hats and caps as he imports from Europe until it is definitely settled upon the trial of the case to what goods and class of hats the above exception refers.
But whatever indefiniteness there may be about the importation of hats from Europe, there is none regarding the purchase of domestic hats and caps, for as to these Edward M. Knox and the retail company which he has formed have no right whatever under the agreement to use the Knox label, unless the goods are purchased from the Knox Hat Manufacturing Company.
While it is a breach of his contract to purchase domestic hats from other dealers or manufacturers than the Knox Hat Manufacturing Company, yet equity would not interfere, but leave the parties to their remedy at law. Equity will not, however, permit the defendant to use in hats so purchased a label which is the exclusive property of the Knox Hat Manufacturing Company. It is claimed on behalf of the plaintiff that the defendant retail company has been purchasing and is now purchasing domestic hats from other places than the Knox company and using the label in them. If this he so I certainly would, grant an injunction if the plaintiff is in the position of one entitled to that relief.
Conceding that everything the plaintiff claims is true, yet this would not be a case for the appointment of a receiver. The Knox Hat Manufacturing Company is a very prosperous corporation, paying dividends upon its preferred and common stock. The Knox Retail Hat Company is also a prosperous concern. To appoint a receiver in order to obtain restitution of any money that might have been diverted from the stockholders would be the height of injustice and cause that damage which courts are provided to prevent. A receivership is to preserve property, not to destroy it, and if I should grant the relief asked for and appoint a receiver, which always carries with it an imputation of financial stress followed by damaged reputation, greater harm would come to the plaintiff, if he be honestly interested in the success of the enterprise, than all the acts which he charges against the defendant Edward M. Knox.
As I have above stated, however, I would grant the injunction preventing the use of the Knox label in domestic hats and caps not purchased of the Knox Hat Manufacturing Company if the plaintiff could insist upon this relief. But I believe him guilty of such laches that whatever relief he may obtain upon the trial, he surely cannot be harmed by the few months' delay until then. There are 20,000 shares of the .Knox Hat Manufacturing Company, of which the plaintiff owns 100, so that he has one-half of one per cent, interest. Edward M. Knox, the president, owns the controlling interest. Erom 1883 to 1909 the plaintiff was in the employ of Edward M. Knox and later the Knox Hat Manufacturing Company and knew how the business was transacted and carried on and has lately been seeking to get back into the employ of the company. In 1907 he wrote from Philadelphia to Mr. Knox that he would advertise his holdings of stock for sale unless Mr. Knox paid him $10,000 for them. In February of 1909 he wrote a letter to the board of directors of the Knox Hat Manufacturing Company, a copy of which he has annexed to the complaint, calling their attention to the violation of the above agreement by Edward M. Knox. Three years or more have elapsed since this without any change in conditions so far as this breach of the case is concerned and now the plaintiff claims that he will be irreparably damaged by a delay of four or five months until the merits of his case can be heard in court. I do not say that mere lapse of time will always prevent preliminary relief in an equitable action, but by the lapse of time coupled with the plaintiff's very small interest and his intimate knowledge of the business methods and its details, together with his recent attitude in seeking further employment with the company, such a position and condition are created that equity should refuse preliminary relief on the ground of laches. The motion, therefore, is denied.
Motion denied.