Case Name: William H. Cummings, Suing for Himself as Stockholder and All Other Stockholders of Yates & Porterfield Trading Company in Like Situation Who Choose to Make Themselves Parties to This Action, Respondent, v. James N. Brown, Defendant, Impleaded with Yates & Porterfield Trading Company, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1907-12-06
Citations: 122 A.D. 505
Docket Number: 
Parties: William H. Cummings, Suing for Himself as Stockholder and All Other Stockholders of Yates & Porterfield Trading Company in Like Situation Who Choose to Make Themselves Parties to This Action, Respondent, v. James N. Brown, Defendant, Impleaded with Yates & Porterfield Trading Company, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 122
Pages: 505–512

Head Matter:
William H. Cummings, Suing for Himself as Stockholder and All Other Stockholders of Yates & Porterfield Trading Company in Like Situation Who Choose to Make Themselves Parties to This Action, Respondent, v. James N. Brown, Defendant, Impleaded with Yates & Porterfield Trading Company, Appellant.
First Department,
December 6, 1907.
Pleading—complaint in stockholder’s action for benefit of corporation.
A stockholder’s action brought for the benefit of the corporation states a cause of action when it alleges, in substance, that the corporation was organized to take over the business of a copartnership, and that a defendant promoting the enterprise had entered into an agreement with the members of the firm by which, in consideration of their transfer of certain shares of stock to the corporation and an additional transfer of stock to the defendant promoter and a cash payment to him, he promised to sell at par a certain portion of the stock transferred to the corporation, but that after the transfers and payment aforesaid he only partially performed his agreement to sell said stock, whereby the corporation became insolvent, and that the directors, upon demand, refused to bring action against him.
Although said complaint does not specifically allege that the promoter’s contract was made for the benefit of the corporation or that the corporation ratified the same, the inference legitimately flows from the facts alleged.
The complaint in an action by a stockholder to enforce a claim in favor of the corporation should state the facts in the same manner and with the same detail as would be proper in case the corporation had brought the action, and also the facts which entitle the plaintiff to sue in place of the corporation.
McLaughlin and Ingraham, JJ., dissented, with opinion.
Appeal by the defendant, the Yates & Porterfield Trading Company, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Héw York on the 15th day of May, 1907, upon the decision of the court, rendered after, a trial at the Hew York Special Term, overruling the said defendant’s demurrer to the complaint.'
Horace Comfort, for the appellant.
Robert B. Austin, for the respondent.
*See Laws of 1896, chap. 908, § 181, as amd. by Laws of 1901, chap. 558, and Laws of 1906, chap. 474.— Rep.

Opinion:
Patterson, P. J.:
The defendant, impleaded with one James H. Brown, demurred to the complaint in this action on the ground that it does not state facts sufficient to constitute a cause of action. The demurrer was ' overruled, and from the interlocutory judgment entered upon the decision of the. court at Special Term this appeal is taken.
It is alleged in the complaint that the plaintiff, who is a stockholder of the defendant corporation,-sues on behalf of himself and others similarly situated, and that such defendant is a foreign corporation organized under the laws of the State of Mew Jersey ; that the plaintiff was the owner and holder in his own right of 10 shares of the preferred stock of that corporation, which Was organized in February, 1900, for the purpose of acquiring the business and good ' will of a copartnership carried on under the firm name and style of Tates & Porterfield. It is further alleged that the corporation took over and acquired the going business of the copartnership and issued to the members thereof its-entire authorized capital stock consisting of 2,000 shares of preferred and 2,000 shares of common stock. It is also alleged that the defendant James N. Brown Was the promoter of the defendant corporation and as such, promoter entered into an agreement with the persons constituting the copartnership of Tates & Porterfield, whereby he, Brown, agreed with the members of that firm that in consideration of the said copartnership transferring arid assigning to the defendant corporation 1,130 shares of the jireferred stock and of transferring and assigning to the defendant James E"."Brown 1,020 shares bf the common stock and 50 shares of the preferred stock of. the corporation and of the payment of $1,000 in cash to the defendant .Brown, he would sell and dispose of at par at least 500 shares of the 1,130 shares of the preferred stock of the defendant corporation which was to be transferred to the defendant corporation as aforesaid. The complaint then proceeds to allege that Tates & Porterfield on the organization of the corporation assigned and transferred to the defendant corporation 1,1.30 shares of the preferred stock, and in compliance with the terms and conditions of its agreement with BroWn, it transferred to him 1,020 shares of the common stock and 50 shares of the preferred stock,, and paid to him the -sum of $1,000 in cash; that Brown sold, pursuant to the agreement, 100 shares of, the 1,130 shares, and has ' not sold the remaining 400 shares to be sold pursuant to said agreement. The names of the directors of the corporation are- then set' forth in the complaint, and it is alleged that the plaintiff has made' a demand upon each of the aforesaid directors that they cause the defendant corporation to bring an action against Brown to recover damages for his failure to carry out his contract to sell the preferred stock, and that a majority of the directors have refused to comply with such demand; that the corporation is now in the course of liquidation and in an insolvent condition, and that such insolvent condition has been brought about by the failure of the defendant Brown to carry out the aforesaid contract. Judgment is demanded that the corporation recover the damages which it and the stockholders have sustained by reason of the matter set forth in the complaint, and that Brown be adjudged and decreed to pay to the defendant corporation such damages when' they may be ascertained.
The gist of the objection of the demurring defendant to the complaint is that the Yates & Porterfield Company has no cause of action against the defendant Brown, because the complaint does not contain an allegation that the contract was made for the benefit of the proposed corporation or that the corporation after its formation ratified or assumed it. The requisites of á complaint in an action against directors for corporate mismanagement are stated in the case of Kavanaugh v. Commonwealth Trust Co. (181 N. Y. 121), and they are: 1. The cause of action in favor of the corporation, which should be stated in exactly the same' manner and with the same detail of facts as would be proper in case the corporation had brought the action. 2. The facts which entitle the plaintiff to maintain the action in place of the corporation. The second requirement is abundantly satisfied by the allegations of the complaint in this action, and the particular question now presented for consideration is whether a cause of action in favor of the corporation has been stated in the manner and with such dptail of facts as would be proper in case the corporation itself brought the action. I think the allegations above recited and the legitimate inferences which'flow therefrom show that the corporation might maintain an action against the defendant Brown. He was, according to the complaint, the promoter of the corporation. He caused it to be organized, and the duty and obligation assumed by him as to the 500 shares inured directly to •the benefit of the corporation to be formed. For a consideration moving to himself and which he received, he agreed to sell for the benefit of the corporation 500 shares of its preferred stock, viz., shares transferred to and held by it. It is evident that that agreement was not for the benefit of the copartnership of Tates & Porterfield, whose business was to be and was transferred to the corporation. It was the stock belonging to the corporation that was to be sold. The purpose of the sale was to furnish money to the corporation and Brown's agreement was partially performed when 100 shares were sold. The inference clearly is that that sale .was for the corporation. There was an adoption by the corporation of the contract made by the promoter and a partial performance of the obligation which the promoter assumed. I think there can be no doubt that the corporation in such circumstances — the contract having been, made for its benefit and evidently to supply it with money — could have maintained its action against Brown for failure to fulfill his agreement which was made as a part of the scheme attending the organization of the corporation.- Such being the case and it being sufficiently shown that the corporation refused to enforce a contract which was prima facie enforcible and from which benefits would accrue to the stockholders of that corporation, I am of the opinion that the action was well brought. I have not overlooked the. possible suggestion that the demurring defendant is not in a position to assail this complaint and that the objection would be available only to the defendant Brown, but as that suggestion has not been made by the respondent it is not regarded as requiring special consideration, the complaint, being good as against both defendants.
• The interlocutory judgment overruling the demurrer should be affirmed, with costs, with leave to the demurrant to withdraw the demurrer on payment of costs and to answer over within twenty days after service of a copy of the order to be entered on this decision.
Houghton and Scott, JJ., concurred; Ingraham and McLaughlin JJ., dissented.