Case Name: Franz Merz, Plaintiff, v. The Interior Conduit & Insulation Co. et al., Defendants
Court: New York Supreme Court
Jurisdiction: New York
Decision Date: 1897-05
Citations: 20 Misc. 378
Docket Number: 
Parties: Franz Merz, Plaintiff, v. The Interior Conduit & Insulation Co. et al., Defendants.
Judges: 
Reporter: New York Miscellaneous Reports
Volume: 20
Pages: 378–382

Head Matter:
Franz Merz, Plaintiff, v. The Interior Conduit & Insulation Co. et al., Defendants.
(Supreme Court, New York Special Term,
May, 1897.)
1. Corporations — Debenture bonds.
The issue of debenture bonds to be subscribed for by stockholders and paid for in part by the surrender of stock is invalid as not complying with sections 23 and 42 of the Stock Corporation Law, which require the issue of bonds for money, labor or property.
2. Same — Seduction of stock.
Where the stockholders have taken valid action for the reduction of the capital stock, and the directors subsequently make provision for the issue of debenture bonds payable in part by stock, the court will interfere with such reduction of stock only so far as is an incident to or Connected with the proposed issue of the bonds.
3. Same — Damages.
In an action to procure an injunction against a proposed issue of bonds, damages cannot be awarded on the presumption that some of the bonds have been issued.
4. Pleading — Supplemental pleadings.
In order to review and have relief for or against action taken during the pendency of the suit, application must be made and leave had to serve supplemental pleadings presenting the question.
Action to restrain the issue of debenture bonds and reduction of capital stock.
Dittenhoefer, Gerber & James, for plaintiff.
Eaton & Lewis, for defendants.

Opinion:
Russell, J.
The plaintiff, as a minority stockholder, brings action to restrain the defendant company and its directors from issuing debenture bonds to the amount.of $500,000 upon the plan of having them taken by the stockholders to the amount of 401 per cent, of their holdings of capital stock, and pay for such subscriptions one-half in capital stock at par, 12^ per cent, in dividend scrip, at par or cash, and 37-J per cent, in cash, the subscription to be made on or before the 1st day of April, 1895, and the balance of such debenture bonds presumably to provide for liabilities of the company not discharged by the resources from the stockholders' subscriptions to the bonds. This resolution of the directors was adopted March 22, 1895, and contained also a request to the stockholders to return to the transfer agent their certificate of stock for the puipose of surrender, in order to receive new certificates for 80 per cent, of their then holdings, and an additional certificate of interest in the surplus capital of the company.
It is claimed by the company and the directors that the capital stock of the company, three days before this meeting of the directors, had been, lawfully reduced from $1,575,000 to $1,000,000 by the stockholders, at a lawful meeting called for that purpose.
It is apparent that the reduction of the stock and the issue of the debenture bonds were designed for the purpose of defraying!' pressing liabilities, then, perhaps, more onerous on account of the financial depression, and to raise also a fund in cash for the operations of the company in the carrying on of its legitimate business. These efforts were the result of a previous attempt to accomplish the same purpose by an increase of capital stock alone, and the issue of preferred stock, but which, not meeting the assent of the stockholders of a sufficient amount,- became abortive and hence the adoption of the other plan.
A preliminary injunction was granted by Justice Beekman restraining the issue of the bonds and the cancelling the certificates of the stock holdings of the plaintiff, or reducing the same to 80 per cent., or interfering with the stock holdings, such injunction order containing a provision requiring the defendants to show cause why it should not be continued during the pendency of the litigation.
The hearing of the continuance motion was had before Justice Beach, who denied the motion for an injunction and vacated the order to show cause, with the qualification that the plaintiff should not be called upon to surrender any part of his stock or subscribe for debenture bonds. An appeal was taken to the General Term by both parties, the defendants appealing from the. modification and the plaintiff from the denial of the injunction as to the other, matters asked for.' By the opinion of the General Term, written by Justice Follett and concurred in by Presiding Justice Van Brunt, it was decided that the issue of the bonds for the payment of scrip dividend, the reduction of stock of the corporation arid to raise the balance only in cash was riot a compliance with sections 23 and.42 of the Stock Corporation Law which require the issue of bonds for inoriey, labor or property, and. the injunction was,. therefore, restored and continued -during' the pendency of the ac-. tion. Justice O'Brien, also sitting upon the appeal, dissented in a carefully reasoned opinion sustaining the issue of the bond's, except that the plaintiff should/ not be required to surrender any ' portion of his stock for retirement. An appeal was taken to the Court of Appeals by the defendants, but the merits of the in june- tion were not there corisidered and the appeal was dismissed.
On the present trial of the issues of the action the same facts appear substantially as were displayed to the courts upon the arguments for and against the preliminary injunction. It is, therefore, plain that the law of the case as announced by the General - . Term, in the prevailing opinion, requires a continuance in the final judgment of the injunction to the extent determined by the • legal principles settled by the appellate court.
. There are many matters set forth in the pleadings in regard to the conduct and management of this company, its connection, with the Standardizing company, and the president, Johnson,n which are not directly, involved in the determination of this action,, and^the merits of which were-not tried upon the facts, so that care must be taken to confine the decision here h> the legal wrong displayed by the .evidence, without embarrassing the directors in the legitimate conduct of the affairs of the company,' Upon them rests the burden of managing its affairs; chosen as they are by the nrajoritv of the stockholders, and the court will refrain from attempting to substitute its discretion for their wisdom and responsibility, so far as it is possible to do so. The judgment will, therefore, restrain the defendants from the issue of the debenture bonds to the amount of $500,000, or any part thereof, as being illegal in the plan of their inception.
I am asked also to enjoin the defendants from attempting to reduce the stock holdings of the plaintiff. I regard the resolutions of March 22, 1895, in regard to the reduction of the stock holdings to 80 per cent, and the proposition to take a part of the stock in payment of subscriptions to the bonds as' inviting in effect what is, legally speaking, a voluntary action not compellable or obligatory upon the stockholders, and not even in terrorem with the adjudication of the legal character of the bonds so to be issued. There are proper methods for the reduction of the stock, and from the view, so far as it is displayed in this action, of the measures taken for the reduction of the stock, I am not prepared to say that the capital stock was not lawfully reduced from $1,515,000 to $1,000,000. It must be remembered that that reduction was the result of a stockholders' meeting of entirely different and independent legal authority from any directors' .meeting, and that the resolution for the issue of the debenture bonds was by action of the directors at a meeting subsequently held.
The injunction as to the reduction of stock, therefore, must be limited to an inhibition against any interference with the stock of the plaintiff as an incident to or in connection with the proposed issue of the debenture bonds.
The additional relief asked for by the plaintiff, in the proposed judgment submitted and in his brief, is for damages against the defendants for the issue of the bonds. The request is that the court shall presume that the bonds are outstanding, and that they have been issued for value without corresponding benefit, and that the plaintiff, suing in form on behalf of all the stockholders, is entitled to judgment for the presumptive damages sustained. It is strongly maintained by the defendants that there are no bonds issued or outstanding, and it would be hazardous justice to* award a money judgment of such magnitude upon the incidental presumptions afforded by the pleadings and the documents in a case tried to determine other issues. i
But that issue is not properly solvable here. The whole scope' and foundation of the complaint, even in its amended form, is to prevent a threatened wrong in the proposed issue of the bonds and the proposed reduction of the plaintiff's stock. The effort of the plaintiff has been all through to obtain an injunction against such anticipated injury. It would be an anomaly to award such an injunction as the main relief and also ftdl damages resulting from the consummated act which the injunction was asked for to prevent.
Again, the sole ground upon which the court might determine the fact as to the issue of the-bonds is derived from an allegation in the amended complaint and a qualified admission by the answer to it. After the hearing of the motion for the injunction an amended complaint was served, in which it was incidentally stated, upon information and belief, that the defendants, after the denial of the injunction by- Justice Beach, in order to take advantage of the occasion before the injunction could be restored by appeal,' had issued the bonds- to some extent, but to what extent was unknown to the plaintiff, That allegation was not directly admitted by the answer, but the affirmative averment was made that the bonds had been issued for the legitimate purposes of the company. It will be thus seen that, to determine the responsibility and liability upon the pleadings, it will, be necessary to determine how many of the bonds had been issued and were outstanding, and also to what purpose they had been devoted, upon which investigation it might appear that they had been received for proper purposes for money, labor or liabilities previously lawfully accruing.
It must also be remembered that this action is in no sense placed by the pleadings in a position to' try the lawfulness of events occurring during the two years of the pendency of the litigation. An amended complaint, like añ original complaint, speaks of the period at and prior to the service of the summons. In order to review and have relief for or against action taken during the pendency of the. suit, application must be made, and leave had from the court, to serve supplemental pleadings, which perform a very different office from that of simply amended pleadings. Code Civil Procedure, § 544; Holyoke v. Adams, 59 N. Y. 233.
It would be a very wide stretch of .judicial power to award heavy damages against the defendants for events occurring during the litigation suggested simply by an amended complaint, where the scope of the action is purely to prevent a threatened injury.
Judgment is directed for the plaintiff as herein indicated, with . costs.
Ordered accordingly.