Case Name: SEAGRIST et al. v. REID et al.
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1916-03-10
Citations: 157 N.Y.S. 979
Docket Number: 
Parties: SEAGRIST et al. v. REID et al.
Judges: 
Reporter: West's New York Supplement
Volume: 157
Pages: 979–991

Head Matter:
SEAGRIST et al. v. REID et al.
(Supreme Court, Appellate Division, First Department.
March 10, 1916.)
1. Corporations <8=210—Receivers—-Actions Against Receiver—Joinder as Defendant in Pending Suit.
Where a receiver was appointed to take possession of the property of a railroad corporation, against whose directors an action brought by the stockholders was pending to recover on behalf of the corporation assets alleged to have been lost through the misfeasance or malfeasance of the directors, an ancillary receiver appointed to collect the ehoses in action is a proper and necessary party defendant to the stockholders’ suit, and a motion by the plaintiff, made with consent of the court appointing such ancillary receiver, to have him joined as defendant, should be granted.
[Ed. Note.—For other cases, see Corporations, Cent. Dig. §§ 808-813; Dec. Dig. <@=210.]
2. Abatement and Revival <8=6—Other Action Pending—Abatement of Prior Action.
Where a stockholder’s action against the directors of a corporation is pending at the time a receiver for the corporation was appointed, the institution of a suit by the receiver for the same relief as was demanded in the stockholder’s action does not abate the further prosecution of the prior action.
[Ed. Note.—For other cases, see Abatement and Revival, Cent. Dig. §§ 32-34; Dec. Dig, <8=6.]
3. Discovery <8=58—Order for Examination of Parties—Requisites.
In a stockholder’s action against the directors to recover misappropriated funds, an order for examination of the defendants before trial, which specifies no object for such examination, is too broad, and should be limited to matters of fact which plaintiffs must establish to maintain their cause of action, or from which the facts sought to be proven may be inferred.
[Ed. Note.—For other cases, see Discovery, Cent. Dig. § 72; Dec. Dig. <S=58.]
Scott, J., dissenting.
<S=»For other eases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes
Appeal from Special Term, New York County.
Action by Theresa Seagrist and others against Daniel G. Reid and others, impleaded with William H. Moore. From orders denying plaintiffs’ motion to bring in Jacob M. Dickinson, as ancillary receiver of the Chicago, Rock Island & Pacific Railway Company, as a party defendant, directing the plaintiffs to reply to new matter contained in the supplemental answers of the defendants,, and granting defendants’ motion to vacate an order for the examination of the defendants before trial, the plaintiffs appeal. Orders reversed.
Argued before CLARKE, P. J., and SCOTT, DOWLING, SMITH, and PAGE, JJ.
Samuel Untermyer, of New York City, for appellants.
George L. Ingraham, of New York City, for respondents Reid, Hine, Mills, Graham, Boggs, Mudge, and McMurty.
William N. Dykman, of Brooklyn, for respondent Moore.

Opinion:
PAGE, J.
I regret that I am unable to accept the opinion of either my Brother SMITH or SCOTT. There is no question submitted to this court on the appeal which involves the consideration of a stay. No application has been made either in this or the United States court, so far as we are advised, for such relief. We are concerned with tire questions which are presented by these appeals from the three orders of the Special Term, and not in advising the parties as to what motions they could make in the future, nor in suggesting to the Special Term .or the United States District Court what disposition they should make of such motions, if they should be made. If this had been a permanent receiver, appointed in proceedings for the dissolution of the corporation, with full power to marshal and distribute the assets, I would be inclined to accept Mr. Justice SCOTT'S conclusions. The receiver was appointed by the United States District Court for the Northern District of Illinois, in an action brought by the American Steel Foimdries against the Chicago, Rock Island & Pacific Railway Company. The complainant in that action alleges that tire Railway Company is indebted to it in the sum of $15,818.46, which, although due and payment demanded, is unpaid, and that the Railway Company claims to be unable to make such payment by reason of its financial condition. The bill of complaint also sets forth that certain short term notes, interest on bonds, the principal of certain bonds, and guaranteed interest, amounting in the aggregate to more than $4,997,707, would become, due and payable within the next two months. It is further alleged that the creditors of the Railway Company 'are located in many jurisdictions, and that complainant fears that such creditors will commence actions, attach property, or attempt to enforce liens against the property owned, operated, or controlled by it, and will levy upon its rolling stock, equipment, supplies, earnings, and bank accounts, thereby preventing it from continuing, the operation of its system of railways, and that there is a consequent danger that the system of the defendant's railways will become disorganized, and that the Railway Company will be unable to continue the operation thereof; that it is of vital importance, not only to the holders of bonds and other cred itors, but also to the public, that the operation of said system of railways should not be interrupted or disorganized until the rights of various creditors can be ascertained and an oppportunity given for a reorganization and readjustment of the properties and securities and the obligations of the Railway Company. It is further alleged that an attempt by the complainant to enforce at law its claims as a general creditor would precipitate similar actions by other creditors, that by reason of the foregoing facts the interference of a court of equity is immediately required, and that there is necessity for the immediate appointment of a receiver or receivers "to take charge of and preserve the property of the Railway Company, to continue the operation of its lines of railroad for the accommodation of the public, and to collect and receive and properly appropriate the income of and from said property under orders of this court to be made from time to time until its final decree in the premises. Then follows a prayer for the appointment of a receiver or receivers, with the usual powers in such cases.
The bill was filed in the clerk's office, April 20, 1915. The same day the final decree was entered reciting that the defendant had filed its answer admitting the allegations of the bill. This decree provides for no relief to the complainant or other creditors. Two receivers were appointed, to take possession of the assets, rights, franchises, and property of the Railway Company, and to operate its railroad system in the interest of the public and under the direction of the court. The receivers appointed by the decree are merely chancery receivers, given possession of, but not title to, the property of the Railway Company. The Railway Company is not dissolved or divested of its title to its property. It is restrained from interference with the receivers, and required to surrender possession temporarily until the purposes of the suit may be accomplished, namely, until the finances of the Railway Company can be reorganized and readjusted, under the supervision and direction of the United States District Court.
On April 24, 1915, upon petition of the receivers, Jacob M. Dickinson was appointed sole receiver of claims, choses in action, if any, existing in favor of the defendant against its present or former directors, or any of them, with power and authority to investigate the facts and law respecting said claims and choses in action, or cause the same to be investigated by such counsel and others as he may select, with power to select and employ counsel and others for such purpose, and as such receiver of said claims and choses in action to pay such counsel and others out of funds in the custody of the receivers herein. Said Receiver Dickinson "shall have authority, and is hereby directed, to institute such proceedings as such receiver of said claims, and choses in action, against said directors, or any of them, as after such investigation he may be advised, and to intervene in any pending suits, when it shall be necessary and proper." On September 18, 1915, an order was made in the United States District Court for the Southern District of New York, appointing said Dickinson ancillary receiver, with the same powers and authority as contained in the order of April 24, 1915, and he "is also authorized in his discretion, and without further application to tliis court, to intervene, either as ancillary receiver or in the name of the said -Railway Company, in any action at law or suit in equity now pending, which may in any wise affect the claims, choses in action, and causes of action, of which he is appointed as ancillary receiver as aforesaid."
This action was commenced in this court, and was at issue as to all the defendants, prior to the commencement of the suit in the United States District Court for, the Northern District of Illinois by the American Steel Company. The right to bring this action by these plaintiffs, as stockholders of the Railway Company, rested upon the fact that the directors in control of the corporation were the parties sought to be charged with misfeasance and malfeasance, and hence demand upon and refusal of the corporation to bring the action was not necessary. By virtue of their stockholdings these plaintiffs pro tanta were the owners of the property and assets of the corporation. The action is not to recover the money for their own benefit, except as they would share with other stockholders in the benefit arising through an increase in tire common property held by the corporation. Therefore, although the action is prosecuted by tire stockholders, the recovery inures to the corporation. At the time tire action was commenced, the corporation was vested with the title to-, and rig'ht to possession of, the cause of action and tire avails thereof. The order appointing the receiver does not divest the corporation of the title, but it transfers the right of possession to the receiver. As an incident to his right of possession he could prosecute an action to reduce the claim to possession.
Where an action had already been brought, and was pending, by the stockholders in their representative capacity, no action on his part was necessary or proper. The recovery, however, should be paid to him, and not to the corporation, for the reason that he is entitled to the possession. This consideration makes him a proper, and in my opinion a necessary, party defendant, in place and stead of the Railway Company, which is a party defendant to the action.
It is clear, from the' language of the order appointing the receiver and the order appointing the ancillary receiver, that it was the expectation of the judges of the District Court that in any'jurisdiction where actions had been commenced by stockholders that the receiver would intervene, and not that two actions should be brought on the same cause of action. This view is strengthened by the fact that, as soon as it was called to the attention of the United States court in this district that an action had been brought and was pending in which the receiver had not intervened, leave was immediately granted to apply to the state court to make him a party defendant.
For these reasons, and the further reason that when the receiver is made a party, the prosecution of this action will in no wise interfere with the rights of the receiver under his order of appointment, but be in aid thereof, by reducing to his possession the avails of the action, in my opinion the order denying the motion to bring the receiver in .as a party defendant should be reversed, and the motion granted. '
This disposition of the motion to bring in the receiver dispenses with the necessity of a reply to the allegations of the supplemental answers of the defendant as to the appointment of the receiver and his having brought an action for the same cause against these defendants, as those facts will necessarily be alleged in the supplemental complaint, except as to the bringing of the action.
The plea of another action pending is a novel proposition, as a bar to the first action, however appropriate it might be in the second action. Such plea is available to the defendants in the action brought by the receiver, but as to this action the maxim applies, "Qui prior cst tempore potior est jure." The order directing the plaintiffs to reply to the supplemental answer should be reversed, and the motion denied.
1 concur with Mr. Justice SMITH that the order for the examination should be modified in accordance with his opinion, but not that the examination should be stayed.
The order denying the motion to bring in the receiver of the Railway Company as a party defendant is reversed, with $10 costs and disbursements, and the motion granted.
The order requiring plaintiffs to reply to the supplemental answer is reversed, with $10 costs and disbursements, and the motion denied, with $10 costs.
The order vacating the order for the examination of the defendants before trial is reversed, with $10 costs and disbursements, and the order for examination reinstated and modified. Settle order on notice.
CLARKE, P. J., and DOWLING, J., concur.