Court Opinion

ID: 5704602
Source: CourtListenerOpinion
Date Created: 2022-01-12 15:45:19.932977+00
Date Added: 2024-06-11T08:40:23.792466
License: Public Domain

Valente, J. (dissenting).
We dissent. We cannot agree that the Supreme Court is impotent to act under section 25 of the General Corporation Law to set aside an election of directors upon the basis of the allegations of the petition herein. Since a motion was made to dismiss the petition, pursuant to section 1293 of the Civil Practice Act, we must assume that petitioner can establish the truth of his allegations.
*47Those allegations challenge the election of directors at the stockholders’ meeting held on April 29, 1958 on the ground there was no quorum present for the transaction of business. The absence of a quorum is in turn predicated on allegations that 1,000,000 shares of the common stock of the corporation, which were voted by one S. J. Smiley, the company’s chairman of the board of directors, had been issued for no consideration and in violation of section 69 of the Stock Corporation Law. Other allegations depict a fraudulent scheme whereby the said shares came into the hands of Smiley and now stand in his name in the corporate stock book and records.
The majority of this court now holds that the stock book records are conclusive (relying on Matter of Faehndrich, 2 N Y 2d 468, and Matter of Bruder & Son, Inc., 302 N. Y. 52) and that the court may not, in a proceeding under section 25, try out the question of the validity of the issuance of shares of stock voted at an election.
But Faehndrich and Bruder are not controlling in the instant proceeding. In those cases the court was asked to determine disputes between rival claimants to stock. They did not involve a question of the valid issue of the stock. Where potential owners of stock each claim the right to vote, the parties will be relegated to a plenary suit and their conflicting claims will not be determined in a section 25 proceeding. However, where, as in the instant case, there is an alleged invalid issue of stock, there is no impediment to the court’s jurisdiction under section 25 to order a new election if the invalid stock was voted and affected the election.
This court so held in Matter of Blinkley Prods. (15 Misc 2d 507, affd. 285 App. Div. 947) where the same contentions, now urged by appellants, were unsuccessfully advanced. The majority attempts to distinguish Blinhley on the basis of lack of necessity for any hearing to determine stock ownership. But here too the issue is not stock ownership but the validity of the issuance of the stock. That a determination of the invalidity of the stock issued may affect the holders of the stock is no reason for refusing to rule initially as to the use of the stock in a corporate election.
We do not think that Matter of Blinkley Prods, (supra), Matter of Ringler (204 N. Y. 30), Matter of Strong v. Smith (15 Hun 222, affd. 80 N. Y. 637) and Matter of Prophet (236 App. Div. 524) have, by implication been overruled by the Court of Appeals in the Faehndrich and Bruder cases.
The court in a section 25 proceeding need only decide whether ‘ ‘ the election sought to be reviewed is so clouded with doubt *48or tainted with questionable circumstances that the standards of fair dealing require the court to order a new, clear and adequate expression of the security holders’ will” (Matter of Wyatt v. Armstrong, 186 Misc. 216, 220).
Where, as here, the admitted allegations of the petition sufficiently allege the invalid issue of stock—which was voted at an election; and where there are no rival claimants to the stock, the court is not conclusively bound by the corporate stock book and records. As section 25 provides 11 the supreme court at a •special term thereof shall forthwith hear the proofs and allegations of the parties, and confirm the election or order a new election, as justice may require ”. To restrict the power of the court, as the majority does, tends to emasculate section 25 and is an unnecessary abdication of power in the face of allegations in a petition—which must be deemed true — disclosing a consummate fraud in the issuance of stock in violation of section 69 of the Stock Corporation Law. We cannot admit a disability to act in a summary fashion under such circumstances.
We, therefore, vote to affirm the order denying the application to dismiss the petition.
Breitel, J. P., and Bastow, J., concur with Rabin, J.; Várente, J., dissents in opinion, in which M. M. Frank, J., concurs.
Order so far as appealed from reversed on the law, with $20 costs and disbursements to the respondents-appellants, and the motions to dismiss the petition granted, with $10 costs.