Court Opinion

ID: 5670168
Source: CourtListenerOpinion
Date Created: 2022-01-12 14:10:43.02288+00
Date Added: 2024-06-11T08:39:34.524352
License: Public Domain

Frank, J. (dissenting).
The question posed is whether the secretary-treasurer of a closely held corporation, without the consent of its board of directors and over the opposition of its president, can commence an action in the name of the corporation.
At the outset, it should be stated that if this plaintiff has been wronged and is entitled to recover, it is not without relief. The law provides a remedy in an appropriate action.
I believe that the appellants correctly rely on Sterling Inds. v. Ball Bearing Pen Corp. (298 N. Y. 483) as the controlling authority on the question. It is stated by the majority, however, that the Sterling case is distinguishable in two important respects. First, there was no ‘ ‘ presumptive or prima facie authority ’ ’ for the president to act in the Sterling case whereas here there is. Second, it is stated that the Sterling case left open an exception in that the rule does not apply to emergency situations vital and critical to the corporation and this case falls within that exception. The two propositions will be discussed seriatim.
*158I find no. implicit, presumptive or prima facie authority in Schneider to commence this action. Parenthetically, the exception in the Sterling case, at best, refers to the corporate president. Schneider who initiated the action here does not hold that office.
The record discloses that Schneider, on behalf of the corporation, undertook to defend two actions brought against the corporation. Whether Schneider unilaterally or by consent undertook to defend two isolated lawsuits does not signify his authority to commence an action. Nor can comfort be found in the fact that no formal directors’ meetings were held since 1947. Schneider and Rothman, with equal stockholdings and representation on the board, engaged daily in the business of the corporation. Their informal agreement on corporate policy and activity created no necessity for formal board resolution. That course of conduct, however, does not denote authority in one to act, as here, without the consent of the other.
The complaint charges, upon information and belief, that sample rings and models were converted by the defendants, designs copied, and then the models secretly returned.
On January 18, 1954, the final date before which the conversion is charged, Schneider and Rothman executed an agreement to dissolve the corporate plaintiff. The agreement evidences a merchandise and equipment inventory as of its date, which includes only sample models and merchandise then located in the premises and merchandise out on consignment only.
Although the agreement containing numerous paragraphs anticipates many contingencies, including the consequences of a patent infringement suit in which the corporation was a defendant, it does not expressly authorize Schneider to commence lawsuits on behalf of the corporation, nor does it give him sole authority to liquidate the corporation. On the contrary, with respect to the patent infringement action it provides that the parties “ Will defend the said suit ” and that each will “ equally pay * * * all attorneys’ fees.” Another paragraph provides that: “ Neither of the parties to this agreement will settle or compromise any claim or controversy in favor of or against the corporation unless by mutual consent of the party stockholders.” (Emphasis supplied.)
It is significant that the contract makes no change in the corporate officers or directors. Rothman and his wife are still two of the four directors and he is still the president. To me the conclusion is inevitable that the agreement between the equal *159stockholders negates any authority in Schneider to commence this action.
The General Corporation Law (§ 27) states, in substance, that the business of a corporation shall be managed by its board of directors and unless otherwise provided, a majority thereof shall constitute a quorum.
The papers before this court disclose a virtual concession that the corporate by-laws require that the control and general management of the corporation be conducted by a majority of the four directors. They do not authorize in haec verba, the commencement of any lawsuit by any officer on behalf of the corporation.
Section 29 of the General Corporation Law provides that even upon dissolution, in the absence of other designations by a court or by law, the directors acting by majority shall have full power to settle its affairs.
In the Sterling case (supra, p. 492), the Court of Appeals in reversing this court, stated: “We have consistently held that section 27 of the General Corporation Law, which provides that the business of a corporation shall be managed by its board of directors, cannot be circumvented. [Cases cited.] The decision below in effect amends section 27 to read that the corporation shall be managed by its board of directors, except in the case of deadlock when it shall be managed by any director who happens to be president.”
I cannot concur with the attempt to distinguish the determination in the Sterling case {supra) because in that case, the president of the corporation expressly sought board authority to commence the action and the vote thereon by the directors culminated in a tie. In this case, the president opposes the institution of the action, and it is obvious that had the question been submitted to a vote at a board meeting the result would have been a tie. Nor does the action possess the virtue of commencement by order of plaintiff’s president.
I find no merit in the suggestion that this case falls within the exception hereinbefore noted because an ‘‘ emergent or critical situation ” exists. As in the Sterling case (supra, p. 492) “ No evidentiary facts are alleged to indicate that a crisis is at hand or that immediate or vital injury threatens plaintiff.” On the contrary, this corporation is in the process of dissolution. Its business can no longer be injured by unfair competition. Its good will is nonexistent and no value was placed thereon in the dissolution agreement.
*160The other cases cited in the majority opinion are distinguishable on the facts. The case at bar is factually analogous to Voron & Chait v. Benguiat (162 N. Y. S. 974, 975). In dismissing the complaint the Appellate Term stated: “if such authority is held to exist in the officers of a corporation, certainly the officer in whom it would be found would be the president as the chief executive officer, and not the secretary or the treasurer.”
It is evident from the record that Schneider is competing with the defendants in his individual capacity.
The majority opinion states that the dissolution of the corporation and the special future interest of its secretary-treasurer are considerations which lead to affirmance. These very facts impel me to a contrary view. Is this action brought for the benefit of the corporation or for the personal interest of Schneider who is continuing the business as an individual! If the latter is the fact, he should not be privileged to sue in the corporate guise. It may well be that he is seeking to embarrass or stifle competition in this manner. Certainly, an ‘ ‘ emergency or critical situation vital to the corporation ’ ’ is not thus created.
The order of the court below should be reversed, the summons vacated, and the complaint dismissed.
Breitel, J. P., Botein and Cox, JJ., concur with Bergan, J.; Frank, J., dissents and votes to reverse in opinion.
Order affirmed, with $20 costs and disbursements to the respondent.