Case Name: Arthur Paulson, Appellant, v. John A. Margolis, Respondent
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1932-02-26
Citations: 234 A.D. 496
Docket Number: 
Parties: Arthur Paulson, Appellant, v. John A. Margolis, Respondent.
Judges: 
Reporter: Appellate Division Reports
Volume: 234
Pages: 496–508

Head Matter:
Arthur Paulson, Appellant, v. John A. Margolis, Respondent.
First Department,
February 26, 1932.
Frank Parker Ujjord, for the appellant.
David Paine, of counsel [Orison S. Mar den with him on the brief; White & Case, attorneys], for the respondent.

Opinion:
Sherman, J.
Plaintiff, while not questioning the validity of the cause of action successfully maintained by defendant by way of counterclaim, contends that the rule of damages applied by the learned trial justice was incorrect. The jury found for defendant damages under the counterclaim sufficient to extinguish defendant's conceded liability upon his note for $5,000 given to Long, plaintiff's assignor, and made the basis of the second cause of action.
This counterclaim alleges, in substance, that in January, 1929, defendant and Long entered into an agreement to turn over to a corporation, to be formed, the individual lumber business which each had theretofore conducted; that pursuant thereto, the LongMargolis Lumber Company, Inc., was incorporated in New York, each of them subscribing to one-half of the capital stock, and each becoming a director of the corporation; that Long became its president and Mrs. Long its treasurer. Defendant further pleaded that while he performed all the conditions of the contract, Long in violation of that agreement continued his individual lumber business, and, with his wife's connivance, misappropriated the corporation's business and assets, with resultant loss to defendant of the salary, profits and dividends which the corporation would otherwise have paid to him; that it was necessary to dissolve the corporation and bring suit against both Longs under section 60 of the General Corporation Law to compel the restoration of the misappropriated business and assets, which suit was a representative one brought by defendant as a director and officer of the corporation and is still pending in the United States District Court.
At the close of the entire case defendant's answer was amended to include, as damage, the loss in intrinsic value of defendant's shares of stock.
Plaintiff claimed at trial that Long's agreement was not to turn into that corporation the business which he had theretofore conducted at Somerville, N. J., but only such New York trade as he could obtain by solicitation, and that unsolicited trade, coming to his Somerville business belonged to him. The jury, resolving that issue in favor of defendant, came to assess damages.
No evidence was introduced to show the intrinsic or the market value of Margolis' shares, but the proof offered and received to uphold an award of damages was that Long's lumber sales (which should have been carried out by the corporation) amounted to a sum in excess of $100,000, upon which Long should have made at least a profit of fifteen per cent, amounting to $15,000, and, as defendant owned one-half of the capital stock, it was, therefore, to be concluded that his damages under the contract between the parties amounted to at least $7,500, which sufficed to offset completely defendant's conceded liability upon his personal note for $5,000.
In effect, defendant has been permitted to recover directly, as personal damage, one-half of the profits which it was estimated that Long made in his individual business at Somerville. This was allowed notwithstanding Margolis' allegation that such profits belonged to the Long-Margolis Lumber Company, Inc., and are explicitly sought to be recovered in the pending representative action in the Federal court.
In charging the jury the court mentioned as elements of damage loss of profits or dividends which defendant would have received but for Long's breach of contract. The charge did not bring clearly to the jury's attention any damage fixed by depreciation in the value of defendant's shares and ascribable to Long's breach. But the court told the jury that any sum awarded to Margolis herein by way of damages would be in diminution of any recovery against Long in the action pending in the Federal court, because defendant's counsel had during this trial announced that such allowance would be credited to Long. This was erroneous and may well have misled the jury. Defendant, as a shareholder, was without power to make a binding and enforcible agreement of that kind, for his interest in the corporate funds cannot be determined until after all creditors of the corporation shall have been paid and all taxes levied satisfied. Further, it is possible that defendant himself might be found personally indebted to the corporation due to his transactions with it, which would have to be paid before he could share in the corporate assets, even upon dissolution. These and like situations could be resolved in equity, but not upon the trial of the counterclaim which sets forth a cause of action at law.
It is well settled that for debts due to a corporation a stockholder has no individual right of action. " In no legal sense can the business of a corporation be said to be that of its individual stockholders." (People v. American Bell Telephone Co., 117 N. Y. 241, 255.) " The whole title to it is in the corporation and the shareholders are neither tenants in common nor in any legal sense the owners of it." (United States Radiator Corp. v. State of New York, 208 N. Y. 144, 152.)
' While it is true that an individual may be hable for his acts in breach of such a contract, as was shown here, not only to the corporation, but to the party with whom he contracted to form it, such liability in each instance springs from the violation of a duty owing to the one (individual or corporation) claimed to be damaged thereby. If a separate duty was owing and survived to each, he may find himself liable to both (Ritchie v. McMullen, 79 Fed. 522, 533; Higgins v. Applebaum, 186 App. Div. 682) and be cast in double damages.
It is important to note that Long's liability in damages here is not the outgrowth of his acts as a director and officer of the corporation, for it alone can maintain an action against a director for any waste due to his misfeasance in office, qua director. (General Rubber Co. v. Benedict, 215 N. Y. 18, 23; Matter of Auditore, 249 id. 335, 341.)
It is contended, however, that defendant was properly awarded damages because of loss of profits and dividends to which he might have become entitled as a shareholder, if the profits from Long's business had been earned and received by the corporation. This loss, it is said, is necessarily reflected by a diminution in the value of the stock.
Without a reckoning of the corporate assets and liabilities as well as knowledge of its financial condition and business prospects, the effect of the deprivation of these unrealized earnings upon the value of the shares held by defendant cannot be estimated. It is pure speculation.
Such damage is extremely remote and is also not a direct consequence of the breach so as to be recoverable in this action by Margolis. " Even though the depreciation in the value of the stock be capable of ascertainment as a basis of damages at law, the wrongs complained of are wrongs against the corporation, and it has a cause of action for the restoration of the property or for the damages sustained." (Niles v. N. Y. C. & H. R. R. R. Co., 69 App. Div. 144, 148; affd., 176 N. Y. 119.)
Further, if the jury were to be allowed to assess here such damages, in reaching the amount thereof they should have taken into account the value of the corporation's cause of action against Long. (General Rubber Co. v. Benedict, supra, 26.) No instruction to that effect was given and the jury was without adequate guidance in reaching their verdict. -
The judgment and order so far as appealed from should be reversed, the action severed and a new trial ordered as to the second cause of action and the counterclaim, with costs to the appellant to abide the event.
Finch, P. J., and Martin, J. concur; Merrell, J., dissents; McAvoy, J., taking no part.