Court Opinion

ID: 5239789
Source: CourtListenerOpinion
Date Created: 2022-01-06 17:22:56.229293+00
Date Added: 2024-06-11T08:27:47.294629
License: Public Domain

Scott, J. (dissenting):
Although the three orders appealed from, the appeals from which have been argued together, are not necessarily interdependent, they may without inconvenience be considered together.
The action is a representative one by certain stockholders of the Chicago, Rock Island and Pacific Railway Company, suing in the right of the corporation, to recover from the individual defendants, who are or were directors of said corporation, a large sum of money said to have been lost to the corporation in consequence of the fraud, maladministration or misfeasance of said directors. The complaint, as a necessary allegation, without which no cause of action would have been stated, alleges that the plaintiffs have not made a demand on the board of directors of the company to bring an action for the relief desired, for the reason that the individual defendants constitute a majority of the board of directors of the defendant company and are in control thereof, and that the acts complained of were committed by them or by a majority of them, and it would, therefore, be futile to make a demand upon them to bring suit against themselves.
Since the commencement of the action one Jacob M. Dickinson has been appointed by the United States District Court for the Northern District of Illinois receiver of all the assets, choses in action and claims of whatsoever kind or nature belonging to the corporation defendant, and specifically vested with the claims and choses in action existing in favor of the corporation against its present or future directors or any of them, with authority and discretion to prosecute such claims as he might be advised, and to intervene in any pending suits when it should be necessary or proper. On September 18, 1915, the said Dickinson was appointed by the United States District Court for the Southern District of New York ancillary receiver of the assets and choses in action of said corporation, with similar powers conferred on him as receiver by the decree of the Federal court in Illinois.
*768After having duly qualified as such ancillary receiver the said Dickinson, as such receiver, brought suit against these same individual defendants in the Supreme Court of this State, upon the same state of facts alleged by these plaintiffs in their complaint, and asking the same relief against said individual defendants. The defendants by supplementary answers have set up the appointment of said Dickinson as receiver and ancillary receiver as aforesaid, and the fact that he has brought the action above described and is now prosecuting it.
In this condition of affairs the plaintiffs move that the said Dickinson, as ancillary receiver as aforesaid, be brought into this action as an additional party defendant, and the individual defendants move that plaintiffs be required to reply to the new matter set up in the supplementary answers. The plaintiffs’ motion was denied, and the defendants’ motion granted at Special Term and both orders are brought up on appeal.
As to the order requiring plaintiffs to reply to the new matter set up by the supplemental answers it seems to me to be entirely clear that the order was right and should be affirmed. The avowed and obvious purpose of defendants in seeking a reply is that they may test, by an appropriate motion upon the pleadings, the effect of the appointment of the receiver and the commencement of an action by him upon the plaintiffs’ right to further prosecute the present action. They realize, or profess to do so, that the receiver’s right to sue is superior to the derivative right of plaintiffs, and that the pendency of plaintiffs’ action could not be interposed as a bar to the receiver’s action, and they seek an opportunity to insist upon pleadings properly framed to exhibit the facts, that they should not be subjected to double prosecution upon the same cause of action.
It was conceded on all hands on the argument, and there is no question about it, that the receiver has been appointed and has brought suit, so that, if a reply is ordered, it must admit the allegations of the supplemental answers, and thus so shape the pleadings as to state the real facts. As the pleadings stand now, without a reply, the new matters alleged in the supplemental answers, although unquestionably true, are “deemed controverted by the adverse party, by traverse or avoidance, as the case requires.” (Code Civ. Proc. § 522.) As matters stand *769now, therefore, the defendants cannot test, by a motion upon the pleadings, the sufficiency of a defense of the new matters pleaded by the supplemental answers. The tendency of the courts and of the Legislature at present is to facilitate the determination of questions which lie at the basis of fictions at law' or in equity. To this end the Legislature has provided for motions for judgment on the pleadings at any stage of a case after issue joined (Code Civ. Proc. § 547), and the courts have shown constantly increasing liberality in permitting parties to actions to frame the pleadings so as to present the real issues involved and to avoid unnecessary delay or surprise at the trial. In pursuance of this general modem policy it has been customary to grant very freely orders requiring the service of a reply to new matter set up in the answer by way of defense or avoidance, and it is settled, at least in this court, that the granting of an order for a reply does not imply a holding that the new matter does, as matter of law, if not avoided constitute a good defense or avoidance (Humboldt Exploration Co. v. Fritsch, 150 App. Div. 90); nor, by the same reasoning, does the denial of such a motion necessarily imply that the court held the new matters to be insufficient. The reason for ordering a reply is not to pass upon the sufficiency of the matter to which a reply is desired but to put the pleadings in such a shape that the real issues shall be clearly and sharply defined. Of course if the new matter is frivolous or so clearly insufficient as a defense or avoidance that there is no room for question, it would be idle to order a reply, although even in that case it is seldom that harm can result from such an order.
I do not consider that the new matter set up by the supplemental answers is so obviously frivolous or insufficient as to justify a refusal to order it to be replied to. It is a sufficient defense to an action that there is another action pending between the same parties for the same cause (Code Civ. Proc. § 488, subd. 4), and when the fact does not appear on the face of the complaint the objection may be taken by answer. (Code Civ. Proc. § 498.) That the two causes of action, to wit, that by plaintiffs and that by the receiver, are identical is clear, and I think that in legal contemplation they are between the same
*770parties. Neither as individuals nor as stockholders have the plaintiffs any personal right of action upon the facts stated in the complaint. The cause of action belongs to the corporation and the plaintiffs are allowed to prosecute it solely in the right of the corporation, and, although the suit is entitled in the plaintiffs’ names, the cause of action still remains not theirs but the corporation’s, and in contemplation of law is prosecuted by the corporation for its benefit alone. So, also, the action by the receiver is not based upon any personal right in him, but is brought in the right of the corporation and for its benefit. So we have presented the very thing which the law condemns, that is, the simultaneous prosecution in the same court of two actions prosecuted in the same right and for the benefit of the same corporation against the same defendants upon the same cause of action. It is intolerable that a defendant should be required to defend two such actions at the same time. It still remains, however, to consider which action should be halted by the other. The general rule undoubtedly is that where two actions are brought to enforce the same right the defense that another action is pending is available only in the second action. That rule, however, is, as I take it, merely a rule of convenience which must yield where a question of superior and inferior right is presented. The very basis of the present action is the anticipated and presumed refusal of the directors of the defendant corporation to sue in its name and behalf. The moment that the presumption of such a refusal is disproved, the plaintiffs’ right to prosecute the action fails. The presumption which, as the complaint alleges, existed when the action was commenced has now disappeared, because the receiver has sued, directly and not derivatively, in the right of the corporation. The reason for entertaining a suit by stockholders in the right of the corporation has ceased to exist, for the corporation itself, in the name of its receiver, has undertaken to do that which, as plaintiff alleges, the corporation itself should = have done before the receiver was appointed. The Federal court has taken possession of all the assets of the defendant corporation and has assumed the reduction into possession of its choses in action, including the claims sought to he enforced in this action. (Porter v. Sabin, 149 U. S. 473.) As is justly *771remarked by my brother Smith: “ The commencement of the action against these defendants by the receiver was, therefore, the assumption by the United States court of this prosecution. That action under the direction of that court became the superior action, because it was instituted by a court with full power to determine that defendants’ liability should be adjudicated therein.” If the receiver’s action, although commenced after the present one, became the superior action, and if the two actions should not both be prosecuted simultaneously, it can scarcely be said that a defense to the present action setting up the pendency of the receiver’s action is frivolous or tenders no issue which plaintiffs should be called upon to meet. If it be not frivolous, but tenders an issue which may be reasonably termed debatable, it would be a departure from the established practice to refuse to order a reply to the end that an issue may be framed which can be passed upon on the pleadings. For somewhat similar reasons I think that the motion to make the receiver a party defendant was rightly denied. If the application was to make him a party plaintiff or to substitute him in place of the present plaintiffs a different question would be presented. But that is not what the plaintiffs ask or desire. No relief could be awarded to the receiver in this action which he cannot equally well obtain in the action which he has himself commenced. The order granted by the United States District Court permitting an application to be made to bring in the receiver as a party defendant in this action appears to have been made without notice to those defendants, and was, as to them, ex parte. I do not understand that it can be taken as an expression of the desire of the Federal court that the receiver should be made a party. If there be such a desire, that court, by its receiver, would make the motion. The order referred to, as I understand it, amounted to nothing more than an extension of immunity from a charge of contempt if plaintiffs should make the present motion, which if granted and acted upon would be equivalent to bringing suit against the receiver. I cannot share the apprehension, suggested if not clearly expressed, that the rights of the corporation are not likely to be so vigorously prosecuted by the receiver as by these plaintiffs. To entertain that suggestion is to reflect not only *772upon the receiver himself but upon the court which appointed him, and without the consent of which he certainly could not discontinue or compromise the action he has brought. I think, therefore, that the motion to make the receiver a party defendant was rightly denied.
As to the order for the examination of the defendants, if granted at all, it should be made much less broad than plaintiffs ask. Most of the allegations of the complaint are admitted or not denied. As to those no proof will be required at the trial and, therefore, no examination before trial is necessary. As to the matters not so admitted the examination should, in my opinion, await the determination of the issues to be raised by the reply if it is ordered to be served.
In my opinion, therefore, each of the motions appealed from should be affirmed, with leave to renew the motion for examination after service of the reply.
Order denying motion to bring in receiver as a party defendant reversed, with ten dollars costs and disbursements, and motion granted. Order requiring plaintiffs to reply reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs. Order vacating order for examination of defendants before trial reversed, with ten dollars costs and disbursements, and order for examination reinstated and modified as directed in opinion. Order to be settled on notice.