Case Name: Archibald A. Hutchinson and Victor K. McElheny, Jr., on Behalf of Themselves and all Other Stockholders of the American Malting Company Similarly Situated, Respondents, v. John W. Simpson and Thomas Thacher, as Executors, etc., of John G. Moore, Deceased, and Others, Appellants, Impleaded with American Malting Company, Defendant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1904-03
Citations: 92 A.D. 382
Docket Number: 
Parties: Archibald A. Hutchinson and Victor K. McElheny, Jr., on Behalf of Themselves and all Other Stockholders of the American Malting Company Similarly Situated, Respondents, v. John W. Simpson and Thomas Thacher, as Executors, etc., of John G. Moore, Deceased, and Others, Appellants, Impleaded with American Malting Company, Defendant.
Judges: 
Reporter: Appellate Division Reports
Volume: 92
Pages: 382–427

Head Matter:
Archibald A. Hutchinson and Victor K. McElheny, Jr., on Behalf of Themselves and all Other Stockholders of the American Malting Company Similarly Situated, Respondents, v. John W. Simpson and Thomas Thacher, as Executors, etc., of John G. Moore, Deceased, and Others, Appellants, Impleaded with American Malting Company, Defendant.
Action by stockholders in behalf of the corporation to recover stock, alleged to havebeen improperly issued to parlies engaged in its organization—-what instrument of subscription for stock of the corporation constitutes a contract with the parties to whom the stock was issued, and not with the corporation — what does not create fiduciary relationsbetween such parties and the corporation—amy wrong done must be remedied in an action by the subscribers.
The complaint in an action brought by stockholders, of the American Malting Company against the corporation, the members of the brokerage firm of Moore & Schley and one Kicks, to comp el Moore c&rSchleyto account to the corporation for 5,000 shares of its preferred stock and 77,400 shares of the common .stock, alleged that prior to the incorporation of the American Malting Company, Moore & Schley secured options for the purchase of a number of malting plants and caused such options to be taken in the name of the def endant Kicks, who was in their employ, for their benefit; that immediately prior to the organization of the corporation, Moore '& Schley Invited subscriptions to .the stock thereof by the following letter:
“ Messrs. Moore & Schley:
“Gentlemen.—Each of the undersigned agrees to take the number of shares set opposite his signature hereto of the preferred stock and .one-half that number of shares of the common stock of a company tobe organized to manufacture and deal in malt with a capital of §30,000,000, one-half thereof to he 1% cumulative preferred stock and'the remainder common stock, and to pay there, for the amount likewise set opposite his signature to the Guaranty Trust Company, of New York, at its office in New York City, as and when called for by said trust Company.
“It is expected that .of the capital aforesaid all but two.and one-half millions of preferred' and one and one-quarter million dollars of common stock, to he reserved in the treasury for further corporate uses, will be issued In acquiring certain malt properties on which you and your associates.hold options (or other value as you may determine in lieu of any thereof that may not be acquired) and for working capital and that a part of the stock so to he issued, to wit: nine million dollars of preferred and four and one-half million dollars of common heretofore underwritten, will he sold upon the terms above stated, deliverable when and if issued.
“Dated New York, September %’Hh, 1897 '
Signatures. No. of Shares-of Preferred Stock. Prices.
The complaint further alleged that this letter was signed by a large number of persons who agreed to take the §9,000,000 in preferred stock and $4,500,000 in common stock therein mentioned and to pay therefor the sum of §9,000,000; that Moore -& Schley procured the American Malting Company to be incorporated with a capital of §30,000,000, §15,000,000 of which was preferred stock and §15,000,000 common stock; that they also procured the election of officers and directors who acted in their interest; that thereafter, through the instigation of Moore & Schley, the corporation entered into a contract with Eicks, by which the latter agreed to convey or cause to he conveyed to the defendant corporation the malting plants on which options hadheen secured and to furnish a working capital of §2,070,000, in consideration of which the corporation agreed to issue to Eicks or to his order preferred stock of the par value of §12,500,000and common stock of the par value of §13,740,000; that the Guaranty Trust Company paid for the malting plantspnrchased from Eicksand-also furnished the corporation with a working ■ capital of §2,070,000 out .of the §9,:000,000 paid by the persons signing the .subscription agreement above set forth; that there remained in the hands of the trust company'5,000 shares of preferred stock and 77,400 shares of the common stock which was delivered to Moore & Schley, who appropriated it to their own use. It was this stock for which the plaintiffs sought to compel the individual defendants to account to the corporation.
It was not alleged that Eicks failéd to -convey to the corporation the plants which he agreed to convey, nor'that such plants were not worth what the company paid for them. No attempt was made to rescind the sale of the plants to the corporation.
Held, that the complaint did not state -a -cause of action against the individual defendants, as, upon the facts alleged, the corporation, in whose right the plaintiffs sued, could not itself maintain the action;
Hatch and Laughlin, JJ., dissented.'
(Per Van Brunt, P. J. and Ingraham, J.) That the corporation had no interest in the subscription agreement which was the foundation of the cause of action which the plaintiffs had attempted to set up;
(Per Ingraham, J.) That no fiduciary relation existed between Moore & Schley and the corporation, which would -entitle the latter to maintain the action;
(Per Patterson, J.) That if a wrong had been done, it was one which would be remedied only at the suit of those who signed the subscription agreement or those claiming directly under them.
Appeal by the defendants, John W. Simpson and .another, as executors, etc., of John G. Moore, deceased, and others, front an interlocutory judgment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of New York ■on the 21st day of July, 1903, upon the decision of the court, rendered after a trial at the New York Special Term, overruling the -demurrers interposed hy the said defendants to the plaintiffs’ ■complaint.
This action was brought by the plaintiffs as stockholders of the American Malting Company, a New Jersey corporation, to require .the defendants, other than the American Malting Company, to ¡•account to that company for secret profits alleged to have been .realized by them as promoters of the company.
The complaint in substance avers that the plaintiffs are stockholders in the defendant company, which is a corporation organized and ■.existing under the laws of New Jersey, with its principal place of business in the city of New York; that at the time herein mentioned John Gr. Moore and the defendants Grant B. Schley, Elver-ton B. Chapman, Henry G. Timmerman and George F. Casilear were copartners engaged in business as bankers and stockbrokers in New York city under the firm name of Moore & Schley, and that ’the defendant Caspar H. Eicks was an employee of said firm, and ■that the said defendants committed the acts hereinafter set forth; that .the said John G. Moore died and John W. Simpson and 'Thomas Thacher were duly appointed his executors, and made parties defendant in their representative capacity; that all the acts herein set forth were done in the city of New York, and all of the ■ defendants and the plaintiff McElheny are residents , of said city ; that said malting company was incorporated on or about the 27th day of September, 1897, with an authorized capital of $30,000,000, one-half of which was and still is preferred stock and the other half common stock and which is still divided into 150,000 ¡shares of preferred stock of the par value of $100 per share and 150,000 shares of common stock of the par value of $100 ; that said defendant company was incorporated for the purpose of making for ¡said Moore & Schley a secret profit upon certain options which they held upon other malting properties; that the attorneys who prepared the articles of incorporation of said defendant company were Messrs. Simpson, Thacher & Barnum of New York city; that the :m corporators of said corporation were Hamilton H. Durand, John J. Treacy and Frederick Dwight, all of whom were at the times hereinafter referred to employees in the office of the firm of Simpson, Thacher & Barnum, which latter firm at all times acted as the attorneys for Moore & Schley.
That immediately prior to the incorporation of said company and in furtherance of their scheme to make a large secret profit to themselves, they procured options upon about twenty-five malting plants situate throughout the United States and caused said options to be taken in the name of one Eicks, their employee, for their benefit; that the taking of these options in the name of said Eicks was to make it appear tó the public that Moore & Schley in securing the options were acting with an independent third party ; that in furtherance of the scheme aforesaid, the said firm of Moore & Schley invited the public to subscribe to the capital stock of said company for the purpose of securing the cash requisite for the purchase of the said malting plants, and working capital; that as a result thereof a large number of persons signed subscriptions1 to take $9,000,000 par value of the preferred stock of said corporation and $4,500,000 par value of the common stock of said corporation, and agreed to pay therefor the sum of $9,000,000; that the aforesaid subscriptions provided all the money necessary to procure said options and fo purchase said plants and to provide said working capital, and that said Moore & Schley were not one of said subscribers; that in furtherance of said scheme the said Moore & Schley procured additional subscriptions to the capital stock of said defendant company, which at that time was about to be incorporated, from the owners of said malting plants, amounting to $3,000,000 par value of the preferred stock and $1,500,000 of the common stock of said corporation; that said last-mentioned subscriptions were paid for by said subscribers conveying to said defendant company the malting plants herein referred to ; that the subscriptions first above mentioned, amounting to $9,000,000 preferred and $4,500,000 of the common stock of the defendant company, were in the form of a letter addressed to Moore & Schley, and were made by the subscribers upon the condition and agreement that all of the stock of the defendant corporation issued would be used by said Moore & Schley and their associate Eicks, for acquiring said malting plants, upon which said firm of Moore & Schley had -options, .and for working capital, and for no other purposes; that the reason said .subscriptions were made in the form of a letter as aforesaid, was because at that time the defendant company had not been incorporated ; that as a result of all of said subscriptions, $±2,00.0,000 of the preferred stock and $6,;000,000 of the common, stock of the defendant company were subscribed for by- persons other than the defendants immediately preceding the incorporation -of the defendant company, and that the stock so called for was issued previous to November!, 1897> and the $9,000,000 proceeds of the sale of the same as aforesaid was all .that was necessary -to procure the said malting plants and provide a working capital, and was all that was used by Moore & Schley therefor. '/
That in furtherance of said scheme Moore & Schley then immediately caused said company to be incorporated, and employed the Guaranty 'Trust Company of..New Torktó take charge of the collection of said subscriptions ¡and distributing the money so received, ¡and distributing the stock to which said subscribers were entitled by virtue -of said subscriptions'; that -all -of said subscriptions, except those made by the owners of ¡said -malting plants, were made payable to said trust company, which company did collect and receive the money called for by said subscriptions, and did -disburse said moneys and did distribute said stock -as- af oresaid.
That in furtherance of said scheme, said" incorporators held their first meeting, and ¡elected five, directors, all o.f whom were either .'employees of Moore «fe -Schley Or Simpson, Thacher ¡& Barnum,- and that the entire organization . .of the corporation was in the absolute control of said Moore & Schley, -and Simpson, Thacher & Barnum.
That in furtherance of ¡said scheme, the said board -of directors entered into a contract with the defendant Eicks to have said malting plants conveyed to "the defendant corporation and furnish a working capital of $2,070,000, and on its part the said defendant company agreed to issue to said Eicks -or his order preferred ¡stock in -the amount of $12,500,-0.00 par value, and common -stock in -the amount of $1:3,740,¡000 par value ; that at the time such contract w-as entered into the said Eicks merely had -options upon -said malting plants and bad nothing to convey; that the -expenses of securing said options were small, and that they were paid'-out of the said $9,000,000 paid by the subscribers as aforesaid.; that the said! malting plants were conveyed directly to the defendant company,, and that the defendant company in fulfillment of the contract aforesaid had issued to said Eicks 125,000 shares of the preferred and! 137,400 shares of the common stock of said company.
That in furtherance of said scheme said Moore & Schley ordered" the said trust company to issue the stock as aforesaid described, and the defendant Eicks placed in its possession the said 125,000 shares of preferred stock and the 137,400 shares of common stock, which had been issued by the president and treasurer of said defendant, company to said Eicks as aforesaid; that said trust company carried out said instructions and disbursed said $9,000,000 to pay for-the said plants and to provide a working capital of $2,070,000 for* defendantcompany; and distributed to said .subscribers of said stock: 120,000 shares of preferred and 60,000 shares of the common stock: of said defendant company; that no further or other stock was. needed or used .by the defendants or any one else to acquire said, options, malting plants and the working .capital, .and there remained: in the possession of the said trust company 5,000 shares of the preferred stock and 77,400 shares of the common stock of said defendant company; and that,as said last-mentioned shares of stock were-not needed, they should have been .returned to the treasury, of the; defendant company. Instead, however, of returning.said stock to-the treasury of the defendant company, .the said trust company did,, under the directions of said Moore & Schley .and Eicks, deliver the; said 5,000 shares of preferred and 77,400 shares of common stock to the said John G-. Moore, and the defendants Schley, Chapman, Timmerman, Casilear and Eicks, who received the same and appropriated, the same to their own use and .have never paid anything therefor.
That the said defendant company has not nor have its stockholders ratified the issuance or appropriation of said last-mentioned, stock, and that it was done ivithout their'knowledge or consent.
That in furtherance of said scheme said Moore ■& Schley caused! directors to resign and they were elected in their places, and that.. the defendant Chapman at their instigation was elected treasurer* and continued in office at a salary of $8,000 per year.
That in furtherance of said scheme the said Moore & Schley caused the said defendant company to pay for two years quarterly dividends of one and three-quarters percentum each upon the pre- ■ ferred stock of said defendant company, regardless of the fact of whether the said' defendant company had made any surplus earnings ; that said dividends amounted to $1,855,000, and that the net earnings of said defendant company did not exceed during that time $700,000; that as a result of paying said illegal'dividends the preferred stock of said defendant corporation sold at public sale as high as $88 per share and the common stock at $38 per share; that as a result thereof, the public, believing that the defendant company was fully earning such dividends, bought large amounts .of stock, include ing.stock which said Moore & Schley had received as aforesaid, and there are now at least 1,400 stockholders in said. corporation.
That as a further result the working capital was dissipated and the company did not have sufficient funds with which to pay its floating, debt, a large portion of which floating debt was call loans/and as a further result the defendant company’s credit became so low that new-loans could not be obtained and legal proceedings threatening imme- . diate insolvency became imminent; that as a result and to procure the necessary working capital, the defendant company was compelled to issue and did issue $4,000,000 of first mortgage six per cent, fifteen year gold bonds at a discount of ten per cent, and a' large portion of said bonds, is still outstanding and is- a first lien on said defendant company’s property, and the- selling price of the stock at public. sale dropped to $19 per share for preferred .and to $2.75 per share for common stock..
That in .the year 1898 the defendant company purchased additional property for which it paid $1,940,000 of par value of the preferred and $750,000 of the common stock of said -company,, and that nearly all of said last-mentioned stock was immediately sold by its purchasers, through the said firm of Moore & Schley, to the public at-large prices. x
That these plaintiffs and the other stockholders did not learn .of the foregoing illegal acts, until late in the spring.of 1901, and that as soon as they could be advised by counsel, and in August, 1901, the plaintiffs duly demanded of the defendant company -and its board of directors that the defendant company institute the necessary legal proceedings against said firm of 'Moore & Schley to make them account to the defendant company for the said $500,000 of preferred stock and $7,740,000 of common stock of the defendant company which said Moore & Schley had retained as a secret profit as aforesaid; that the said directors and said defendant company have neglected and refused to bring said action; that the defendants Simpson and Thacher are members of the law firm of Heed, Simpson, Thacher & Barnum, who were and still are the attorneys for the defendant company.
That these plaintiffs upon behalf of themselves and all other stockholders of the defendant company similarly situated, commenced an action to compel said directors to pay back to said company the amount of illegal dividends paid' out as aforesaid, which action is still pending'; that the present president of the company, Charles A. Stadler, and the present secretary of the defendant company,George F. Neidlinger, and one of the present directors of the defendant company, Seymour Scott, are three of the defendants whom the plaintiffs herein have sued for illegal dividends as aforesaid ; that the attorneys for all of the said seven directors sued for the illegal dividends as aforesaid, excepting Charles M. Warner, are the aforesaid firm of Heed, Simpson, Thacher & Barnum ; that when the plaintiffs here made their demand upon the defendant company to begin the proceedings herein, said demands were forwarded to the said firm of Heed, Simpson, Thacher & Barnum for advice, and that when the summons herein was served upon the defendant company it was forwarded to the same law firm; that the said defendant company is controlled by persons who are hostile to this action, and it would be useless to expect the defendant corporation to bring this action.
That prior to the commencement of this action the plaintiffs duly demanded of the defendants that they account to the American Malting Company for said $500,000 of preferred stock and $7,740,000 of common stock, but that the defendants have refused and still' refuse to do so. The prayer of. the complaint then is on behalf of the plaintiffs and all other stockholders similarly situated:
First. That the defendants be ordered, directed and compelled to account to the defendant American Malting Company for each and all of said $500,000 of preferred stock and $7,740,000 of com mon stock retained; by them, as a secret profit, as aforesaid, and any other stock or money retained by them as a secret profit.
Second. That the defendants be ordered, directed and compelled to account to the defendant corporation for all of said stock issued at or about the time of its organization, namely, $12,500,000 of preferred stock, and $13,710,000 of common stock, and $9,000,000 ■of money paid by the subscribers to the stock of the defendant ■corporation.
Third. That a referee be- appointed with power to state an .-account of the: amount of said stock and money that the defendants have received and for what they have received them, the amount of said stock that they still have; the amount of said stock that they, have sold and: the prices received therefor, and the price at which the stock of said defendant company has; been sold, both by the ■company and at public sale, and the market value- of the stock of ¡said defendant - company at such a time after the incorporation of ¡said defendant company as1 the- market value can be determined.
Fowrth. That the defendants be ordered, directed and compelled to pay to the plaintiffs the costs and disbursements of this action.
Fifth. That the plaintiffs have such other and further relief as to the court may seem just in the premises.
To this complaint the defendants- separately demurred upon the ground that it appears upon the face thereof that the complaint ■does not state facts sufficient to constitute a cause of action, and from the order overruling said demurrer this appeal is taken.
The stock subscription referred to in the complaint, and made a part thereof is as follows:
“ Messrs. Moore & Schley :
“Gentlemen.— Each of the undersigned agrees to take the number of shares set opposite his signature hereto of the preferred stock and one-half that number of shares of the common stock of-a company to be organized to manufacture and deal in malt with a capital of $30,000,000, one-half thereof 1% cumulative preferred stock and the remainder common stock, and to pay therefor the amount likewise set opposite his signature to the Guaranty Trust Company of New York, at its office in New York City, as and when called for by said trust Company.
“ It is expected that of the capital aforesaid all but two and one- half millions of preferred* and one and one-quarter million dollars of common stock to be reserved* in the treasury for further corporate uses, will be issued in acquiring certain malt properties oii which you and your associates control options (or other value as you may determine in lieu of any thereof that may not be acquired) and for working capital and that a part of the stock so to be issued,, to wit: nine million dollars of preferred, and four and one-half million dollars of common heretofore underwritten^ will be sold upon the terms above stated, deliverable when and if issued.
“Dated New York, September TUh, 1891.”'
Signatures. No. of Shares of Preferred Stock. Prices.
Thom,as Thacher, for the appellants..
WilUmn M. Bennett, for the respondents. ■

Opinion:
Van Brunt, P. J.:
This action was brought by certain stockholders of the defendant company in the interest of the company to recover from the firm of Moore & Schley what is termed in the complaint " a secret, profit " made "at the expense of the defendant company, its stockholders and creditors."
It seems to me that the fundamental error which underlies the whole of this complaint is the assumption that the defendant com: pany had any interest in, or acquired any rights by, the contract, Exhibit A, annexed to the complaint, and which is erroneously styled & " stock subscription." .
This paper was simply a' contract between the signers thereof and Moore & Schley, whereby the signers agreed to buy from Moore & Schley the number of shares set opposite their respective names, at a' price specified, of a company to be organized upon the basis therein' provided; and Moore & Schley agreed to sell • certain of said shiarés to the signer's at the price named, deliverable when and if issued.'
It seems to me reasonably clear that if the signers had failed' to receive the stock subscribed for when issued, tliey would' havó filad' no cause of action against the defendant company, their only recourse being against Moore & Schley; and if any of the signers had failed to make payments as agreed in the contract, the defendant company would have had no cause of action, Moore & Schley • being the only parties aggrieved. In other words, there was no contract between the signers of that paper and the defendant company.
There is no claim but that the company was organized us required by the contract, nor that the expectations referred to therein were not carried out to the letter. All the malt properties referred to therein were acquired by the defendant company and ample working capital was provided. Moore & Schley made no secret of their interest in the properties which were to be acquired by the company. The contract expressly declared that Moore & Schley and their associates controlled the properties which were to be acquired by the company ; and the'only inference to- be drawn from its language is that all the stock of the company, except the amount reserved in the treasury for further corporate uses, was to be issued to Moore & Schley and their associates in payment for the properties acquired and to provide working capital. AH the stock, referred to in the contract as to be issued for acquiring property and working capital, was issued to Moore & Schley as contemplated for the properties therein referred to and for working capital. I say issued to Moore & Schley, because I treat Moore & Schley and Eicks as one for the purposes Of this opinion. There is no claim but that Moore & Schley caused .every piece of property contemplated to be conveyed to the company and provided an ample working capital.
It is said that Moore & Schley did not themselves convey the properties to the company, but that they were conveyed by the respective owners. The contract states that Moore & Schley and . tlieir associates held options upon, this property. They, therefore, controlled it; and the fact that they caused the owners of the property to convey directly to the company in fulfillment of their contract with the company to convey or procure to be conveyed this property to the company in no manner affected, their relations to the transaction. The language of .the contract of Eicks with the company clearly contemplated that Moore & ScMey and Eicks were riot themselves to give the title.. Eicks contracted to , convey ,or procure to be conveyed. If one man holds a contract for the sale of real estate by another^ which he assigns to.a third party it certainly is not an unusual transaction for the seller to convey directly to the assignee of the contract. There was, therefore, nothing unusual in 'the fact that the owners of this property conveyed directly to the company. Moore & Schley, as far as the company was concerned, were the sellers'of this property as it appeared upon the face of the contract that it was contemplated that they should be; and there is no hint or allegation throughout the complaint but that the company received full value for the stock it issued. The whole foundation of the complaint resting upon the contract (Exhibit A) in which the defendant company never had any interest, no cause of action is set out.
The demurrer should be sustained.
Ingraham, J., concurred ; Hatch and Lattghlin, J.J., dissented.