Court Opinion

ID: 5253159
Source: CourtListenerOpinion
Date Created: 2022-01-06 18:19:38.570141+00
Date Added: 2024-06-11T08:27:58.714236
License: Public Domain

Shearn, J. (dissenting):
A general demurrer to a bill in equity “ ■ must be founded upon the absolute, certain and clear proposition that, taking the charges in the bill to be true, the bill would be dismissed at the hearing.’ ” (Standard Fashion Co. v. Siegel-Cooper Co., 157 N. Y. 60.) The essential facts admitted by this demurrer are these:
On March 8, 1911, the plaintiff and the defendant Ward . entered into a. written agreement at the city of New York for the purpose of the acquisition by them of the entire capital stock of the defendant Ideal Cocoa and Chocolate Company, a foreign corporation, engaged in the cocoa and chocolate business, having a factory in the State of Pennsylvania, and now engaged in business in the State of New York, with an office for the regular , transaction of business in the city of New York. The agreement provided, among other things, that Ward should advance $325,000 and plaintiff $25,000 for the purchase of said stock in accordance with the terms of an option agreement held by the plaintiff, said sums to be deposited with a trust company which was authorized to pay to the *634stockholders of the Ideal Company, holding stock to an amount not less than fifty-one per centum of the authorized capital, consisting of 3,000 shares, of which 2,843 shares had been issued and were outstanding, the sum of $115 per share. Upon such purchase, fifty-one per centum of the total authorized capital stock of the Ideal Company was to be transferred to Ward, or his nominees, and the balance of the stock purchased was to be issued in the name of the plaintiff, indorsed by him in blank and delivered to Ward, to be held as security until Ward’s contribution of $325,000 should be returned to him, with interest at five per cent. The earnings of the company were to be distributed annually in the form of cash dividends, twenty per cent of which was to be paid to Ward and the plaintiff in proportion to their holdings of stock, the remaining eighty per cent to be paid to Ward until his investment and interest were fully repaid, thereafter to the plaintiff until his investment of $25,000 and interest at six per cent should be repaid. Thereupon Ward agreed to transfer out of his own holdings to the plaintiff two per centum of the “ authorized ” capital stock of the Ideal Company and thenceforth annual dividends were to be divided between the parties in proportion to their respective holdings. The agreement further provided that upon the acquisition of the said shares of the Ideal Company by Ward and the plaintiff, the Ideal Company should acquire the assets and good will of the Puritan Pure Food Company, a corporation organized under the laws of the State of New York, the entire capital stock of which was owned or controlled by the plaintiff, by the exchange of bonds of the Ideal Company for the stock of the Puritan Company. The agreement further provided:
“ Seventh. It is hereby agreed that the party of the second part [plaintiff] shall devote himself exclusively to the business of the Ideal Company, and that in consideration thereof he shall receive from said Company a salary of Ten thousand dollars ($10,000.00) per annum, to continue until the transfer of the two per centum of the authorized capital stock of the Ideal Company by the party of the first part to the party of the second part is fully completed, as provided in Article Fifth hereof.
“ Eighth. It is agreed that the party of the second part *635shall have the management of the factory, and shall fix the limit of the appropriation for advertising purposes annually, but that the party of the first part shall be given the exclusive control of all advertising of the products of the Ideal Company and shall superintend the expenditure of all moneys appropriated for that purpose.”
Pursuant to the agreement, Ward advanced $300,000 (instead of $325,000) and plaintiff advanced $42,800 (instead of $25,000), and, with the money so advanced, they acquired 2,843 shares of the Ideal Company’s stock. Of the stock so acquired, 1,530 shares, or 51 per cent of the total authorized stock, were issued to Ward and the balance of the shares purchased, 1,313 shares, were issued to the plaintiff. Thereupon the plaintiff undertook the management of the Ideal Company “ as provided in said agreement, and has continued for over seven years to manage the same, but with the advice, consent and full knowledge of the said Ward.” During the period while the plaintiff was managing the company, its business increased about 300 per cent. The company has a surplus exceeding $350,000, over $300,000 of which was accumulated during the period of plaintiff’s management. No dividends have been declared, the earnings having been used to increase the working capital and acquire additional assets. The company is thoroughly solvent and is now in a position to begin the payment of dividends, if it should be decided that it would be more advisable to do so than to employ the profits in extending the business. In April, 1918, plaintiff still being the manager of the business, and president of the company, Ward undertook to exclude the plaintiff from the management of the company and to deprive the plaintiff of his agreed salary in order “ to have the advantage for himself of the control of the administration of the business,” and on May 28, 1918, Ward “ caused a meeting of the stockholders of the said Ideal Company to be held, and the defendants Charles E. Atkinson, William B. Nesbit and George M. Clarke elected directors, together with William H. Muth and the plaintiff.” On June 5, 1918, Ward “ caused the board of directors to meet and caused them to elect the defendant Charles E. Atkinson as president in place of the plaintiff, the defendant Cornelius M. Ford as treasurer, and the defendant William II. Muth *636as general manager of said company in place of the plaintiff/’ Ward “ then caused the officers and directors of the company to appoint the plaintiff factory manager, but limited him to such duties as might be assigned to the plaintiff by the president of the company.” Thereafter the officers and directors of the company “ neglected and refused to assign any duties to the plaintiff and refused to allow him to take any part in the management of the company or of said factory and instructed other employees of the company to disregard the directions given by the plaintiff.” Ward also “ caused the directors of the company to adopt on or about June 25, 1918, resolutions designed to and for the purpose of limiting the authority of the plaintiff as factory manager, and preventing him from performing any of the duties connected with such a position.” Ward also “ caused said board of directors to vote- salaries to the officers of the company as follows: President, $5,000 per annum; vice-president, $4,000 per annum; treasurer, $4,000 per annum; secretary, $4,000 per annum, making a total of $17,000 per annum for salaries to officers, whereas prior to said date all of the duties directed to be performed by said officers had been in fact performed by the plaintiff and clerks in the regular employ of the company and an officer at a salary of $200 per annum, and without any cost to the company other than the plaintiff’s own salary of $10,000 a year and the salaries paid to the said clerks and officer.” Thereafter Ward “ caused the board of directors of the company to adopt preambles and resolutions and to spread the same upon the minutes of the company, making various charges against the plaintiff of dishonesty and inefficiency, all of which are wholly false and untrue, and appointing a committee to investigate said alleged charges.” On July 2, 1918, Ward l< caused a further meeting of said board of directors to be held, and at said meeting caused said committee to present a report charging the plaintiff with various acts of dishonesty and unfaithfulness, all of which are wholly false and untrue.” At said meeting Ward' “ caused said board of directors to adopt a resolution discharging the plaintiff from the employ of said Ideal Cocoa & Chocolate Company as factory manager; ” and “ Ward has since said time caused and still causes said board of directors and said officers of said company to refuse *637to allow the plaintiff to perform the duties of said factory manager, and to refuse to pay the plaintiff his said salary of $10,000 per annum.”
The directors and officers “ are wholly inexperienced and unskilled in the business of manufacturing chocolate, which said business requires technical knowledge which can only be acquired through long experience.” These officers and directors “ have already made numerous and costly errors in their management of said business ” and have “ added to the expense of operating said company, through unnecessary salaries to officers and increase of salaries to other employees, a sum equal to six per cent per annum upon the total authorized capital stock of the company.” On the other hand, if the plaintiff should continue to manage the business as heretofore, he would be enabled in a very short time to bring about the repayment of the whole of the said investment of the said Ward, thus making it possible to repay the plaintiff’s own investment, to receive the full dividends upon his own stock when earned and to have transferred to him two per centum of Ward’s holdings, as provided in the contract.
Alleging that he has no adequate remedy at law, plaintiff prays, among other things, for the following relief:
“ I. That an injunction issue out of this Court restraining the said Ward and all other defendants from doing any act in violation of said contract of March 8, 1911, between said Ward and the plaintiff, and particularly from excluding or doing any act tending to exclude the plaintiff from the management of the business and factory of the Ideal Cocoa & Chocolate Company, and directing the said Ward to exercise his stock control of the said company so as to restore the plaintiff to the position and salary of manager of the factory of said company and to keep said position and cause said salary to be paid to the plaintiff until the expiration of the time fixed in said contract.”
Upon this state of facts, which must be assumed to be true, this court is about to decide that it is an “ absolute, certain and clear proposition ” that the bill would be dismissed at the hearing. From this conclusion I must dissent.
. The main ground advanced for refusing even to take plaintiff’s proof is that the law affords the plaintiff adequate *638relief for Ward’s admitted violation of his contract, in an action for damages. It seems very clear to me that such is not the case. Of course the plaintiff could recover damages for Ward’s breach of contract in causing the plaintiff to be deprived of his salary; but that is but a small part of the wrong inflicted upon the plaintiff. This enterprise is a manufacturing business, requiring technical knowledge based upon long practical experience. It has been turned over to men who are wholly inexperienced and unskilled, whose blunders have already resulted in losses. Plaintiff can never get possession of the 1,313 shares issued to him until the profits have repaid Ward’s $300,000 investment. Until that time plaintiff must forego eighty per cent of all dividends that may be declared upon his stock. Until that time plaintiff must wait for the transfer to him by Ward of two per cent of Ward’s holdings. Until that time, even if the company issued and plaintiff secured the 157 shares remaining unissued, plaintiff could not by any possibility become a majority stockholder, but must leave the control with Ward. It stands admitted that if the plaintiff should continue to manage the business as heretofore, he would be enabled in a very short time to bring about the repayment of the whole of Ward’s investment. This would entitle plaintiff to the possession of his 1,313 shares, to all of the dividends thereon instead of only twenty per cent thereof, and to-the transfer to him of two per cent of Ward’s holdings. It is utterly impossible to prove how long the plaintiff will be deprived of these advantages, ' or subjected to these disadvantages, in the event that plaintiff continues to be excluded from the practical management of the factory and the same is continued in the hands of wholly inexperienced and unskilled managers. It is impossible to prove with any definiteness how soon the plaintiff would come into the enjoyment of the advantages secured to him by his contract if the terms thereof were lived up to. The stock is that of a private manufacturing company and is not such as would ordinarily have a market value. But if it had a market value, depreciation thereof would afford no true measure of plaintiff’s damage, for the plaintiff made his investment of $42,800 in the enterprise and devoted his time and technical knowledge for years thereto presumably with the *639expectation of future profits that would accrue to him from the business as it developed under his skilled guidance. None of these elements would be compensated for if plaintiff merely recovered back his investment and damages for the deprivation of his salary. But while these various and clearly apparent elements of damage exist, they are so speculative and uncertain in their nature as to be incapable of ascertainment at law. If they were merely difficult of ascertainment, it would be a different matter, but, being impossible of ascertainment, and the wrong being a continuing one, the right to resort to the equity side of the court seems to me to be clear, so far as this particular ground of objection is concerned.
But it is said, and herein to my mind lies the chief difficulty, that in effect the court is asked to interfere with the internal management of a corporation and, by indirection,, compel its board of directors against their will to continue the plaintiff in the management of the corporation’s factory. Ordinarily, of course, no such action would lie. (Barcus v. Cooper, 184 App. Div. 111.) There are two material considerations, however, which take the case out of the general rule. One is that, although we are dealing with a corporate entity, its entire capital stock is owned by two individuals, in nearly equal proportions, who acquired and who hold the stock by virtue of a mutual agreement making provision for the management of its business and the disposition of the profits, in such manner as to constitute what has frequently been called in this court an “ incorporated partnership.” No rights of f other stockholders are involved, for there are no other stockholders. No obligations of directors to stockholders other than the immediate parties are involved; nor are any rights of creditors concerned. The other material consideration is that the contract between the plaintiff and Ward was in the nature of a joint venture, importing good faith and fiduciary obligar tions peculiarly cognizable in equity.
It is now well settled that where a court of equity is adjusting the rights of two stockholders owning all the capital stock, it looks at the merits rather than the form, and will disregard the legal fiction that a corporation is a separate entity where justice requires; and, further, that two stockholders owning all the stock of a corporation occupy to each *640other substantially the relation of partners. (Goss & Co. v. Goss, No. 2, 147 App. Div. 698; affd., 207 N. Y. 742.) To the same effect is Carney v. Penn Realty Co. (174 App. Div. 86), where it was held that two brothers, who were the sole owners of stock of a corporation, occupied substantially the relation of partners, and that such corporate owners are not limited in control by a board of directors, who must necessarily be dummies. (Citing First National Bank v. G. V. B. Mining Co., 89 Fed. Rep. 439.) In Anthony v. American Glucose Co. (146 N. Y. 407) the Court of Appeals said: “ We have of late refused to be always and utterly trammelled by the logic derived from corporate existence where it only serves to distort or hide the truth.” In Garrigues Co. v. International Agricultural Corporation (159 App. Div. 877, 880) this court said: “That the doctrine of corporate entity will not be allowed to stand in the way of circumventing fraud or administering justice, has been held in Goss & Co. v. Goss, No. 2 (147 App. Div. 698).” In Buffalo Loan Co. v. Medina Gas Co. (12 App. Div. 199) the court said: “ In view of the fact that Stranahan was practically the owner of the entire capital stock, and the corporation was virtually his private property, and in the light of all the circumstances disclosed in respect to his transactions, the court must not carry too far the legal conception that a corporation is to be regarded as a legal entity, existing separate and apart from the natural persons composing it.” In the recent case of Quaid v. Ratkowsky (183 App. Div. 428, 432; affd., 224 N. Y. 624) this court said: “ While the courts of law strictly observe the fiction of corporate entity, there has been for years a growing indisposition to permit corporate entity to be employed either as an instrumentality or as a cloak for fraud or for successful evasion of the law.”
We have here a corporate entity, but it is merely the instrumentality through which the plaintiff and Ward, the sole stockholders, agreed with one another to carry on the business of manufacturing cocoa and chocolate; and the directors, other than Ward and the plaintiff, as the complaint shows, are mere dummies of Ward. So that there is no insuperable difficulty in the fiction of corporate entity that will prevent a court of equity from proceeding to the merits and doing justice if the facts warrant it. "
*641That the agreement between Ward and the plaintiff is of the nature of a joint venture or quasi-partnership seems very evident. Each made an agreed contribution to a common fund, deposited with a trust company, for the purpose of acquiring and pooling the entire capital stock of a manufacturing corporation. The purpose of the agreement was to enable the parties to carry on the business of manufacturing cocoa and chocolate. Ward was to have control of the corporation until his investment was repaid with interest and the plaintiff was to control the practical management of the factory, an agreement entirely legal although involving the management of a corporation. (Lorillard v. Clyde, 86 N. Y. 384, 388.) Profits were not to be divided according to stock ! holdings, as is ordinarily the case with corporations, but were\\ to be divided pursuant to the particular provisions of the contract/1 Every element of a joint venture existed: joint contribution of capital, joint control with specified qualifications, a common subject-matter, a particular purpose, and an agreed division of profits. Such an agreement is to be enforced upon principles applying to partnership transactions. (King v. Barnes, 109 N. Y. 267; Pooley v. Driver, L. R. 5 Ch. Div. 458; Goss & Co. v. Goss, No. 2, supra; Carney v. Penn Realty Co., supra.) In Marble Co. v. Ripley (10 Wall. 339, 351) the court said: “ Any unauthorized attempt by one to oust the other from the position and rights assigned to him by the contract was, therefore, not only a breach of their agreement, but a fraud upon the relation they had assumed to each other. Such a wrong it is the province of a court of equity to prevent. A chancellor will interfere by injunction to restrain one partner ■ from violating the rights of his copartner, even when a dissolution of the partnership is not necessarily contemplated.” (See, also, McCabe v. Sinclair, 66 N. J. Eq. 24.) Lindley on Partnership (8th Eng. ed. p. 362) says: “ Indeed, speaking generally, it may be said that nothing is considered as so loudly calling for the interference of the court between partners, as the improper exclusion of one of them by the others from taking part in the management of the partnership business.” (See, also, 5 Elliott Contracts, 1045, n. 55.) Particularly should this be true in a case where the exclusion not only violates the *642fiduciary obligations incident to a joint venture or quasi-partnership, but where it is a direct violation of an explicit provision of the agreement between' the parties.
The learned counsel for respondents cites Drucklieb v. Harris (209 N. Y. 211), where on the organization of a corporation it was agreed that in case of any breach of the agreement by the directors of the company, the defendant would purchase from the plaintiff at the latter’s election the shares of stock held by him at the existing book value of the same as shown at the time of such election. It was alleged that the defendant induced the directors to- reduce the good will improperly from $20,000 to the nominal value of $1,000 and made other improper reductions in the accounts of the corporation so as to greatly decrease the book value of the shares of stock. The relief demanded was that the individual defendants and the corporation be compelled to restore the books of account to their original condition. A demurrer to the complaint was sustained, but the court specifically based its decision upon the fact that “ No breach of the agreement by Harris or the corporation is alleged.” (p. 214.) While the court said that it did not think the agreement to continue the plaintiff as a director and officer of the corporation, although entirely legal in a case where the corporation had only two stockholders, was binding on the corporation, that question was not decided, for the court said it was not presented by the case. The court said: “ The contract between Harris and the plaintiff makes no provision as to the method in which the books shall be kept. Therefore, if this action be maintained, it must rest on the proposition that when one stockholder contracts with another stockholder of a corporation for the purchase and sale of shares of stock at the book value as shown on the accounts of the corporation, such a contract requires or justifies the intervention of a court of equity in the management and control of the books of account of the corporation.” The court held that it did not require or justify intervention, but it does not follow at all that the court would have so held if the case had involved, as here, the violation of a provision of the contract between the parties. < 1
Following the intimation in the Drucklieb case that the *643contract to continue the plaintiff as director and officer was not binding on the corporation, the learned counsel for the respondents insists that the contract between the plaintiff and Ward was not binding on the Ideal Company. It is contended that there is no allegation that the corporation adopted the contract. But the complaint alleges: “ That after said stock had been purchased as aforesaid the plaintiff duly undertook the management of the said Ideal Cocoa & Chocolate Company as provided in said agreement, and has continued for over seven years to manage the same.” Construing this allegation in support of the pleading, and interpreting it liberally as we are required to do, this shows that the corporation adopted the provision in the contract that plaintiff should be its factory manager. It is said that there could be no adoption without knowledge and there is no specific allegation of knowledge. But the knowledge of the corporation clearly appears. Its only stockholders were the plaintiff and Ward, parties to the agreement. The corporation knew of the agreement when all of its stockholders were parties to the agreement. The plaintiff was its president when he undertook the management “ as provided in said agreement.” Each of the other directors was a dummy and alter ego of Ward, and Ward, who was in full control' of the corporation, had full knowledge of the agreement when the plaintiff -undertook the management “ as provided in said agreement.” Under such circumstances it is pretty far fetched to infer, in order to overthrow this pleading, that the corporation had no knowledge of the agreement when the plaintiff was made manager and continued as such for a period of years at a salary of $10,000 per annum, just as provided in the agreement.
But even if it be held that the complaint does not sufficiently show adoption of the agreement by the corporation, the agreement is enforcible against Ward and, through his dummies, against the corporation, for this is one of those cases where the court should go behind the corporate entity and refuse to permit it to be employed as a cloak for fraud and the successful evasion of the fiduciary obligations .of a contract essentially of the nature of a partnership. The agreement is not one that can be said to be void as against public policy, as in Manson v. Curtis (223 N. Y. 313), but is entirely legal and *644the kind held to be legal in Lorillard v. Clyde (supra) and in Drucklieb v. Harris (supra). The purpose of ousting plaintiff from the practical management of the factory and installing in his place wholly inexperienced and incompetent persons being to postpone indefinitely the time when plaintiff will get possession of his stock and enjoy the dividends therefrom, and to cbntinue Ward indefinitely in the control of the business, thus in effect appropriating the plaintiff’s investment of $42,800, which constitutes a fraud upon the plaintiff and a violation of fiduciary obligations, the case is plainly one calling for the intervention of a court of equity. At any rate, it is not an “ ‘ absolute, certain and clear proposition that, taking the charges in the bill to be true, the bill would be dismissed at the hearing.’ ”
It was suggested from the bench on the argument that the court had no jurisdiction because the defendant corporation is a foreign corporation. The point was not advanced by the learned counsel for the respondents, and I do not think that it was because he overlooked the point. This action is not directed against a foreign corporation. The corporation and its directors are proper parties defendant (King v. Barnes, supra), but the action is based upon a New York contract between the plaintiff and Ward, and is directed primarily against Ward to enjoin him from violating his contract and, by way of mandatory injunction, to compel him, through his absolute control of the corporation, to reinstate the plaintiff as factory manager. If the corporate entity may be disregarded when it is a mere instrumentality for the conduct of a practical partnership, upon the principles above discussed, it can make no difference that the parties have chosen to locate the fiction of corporate entity in another State. Moreover, as the corporation is engaged in business in this State, the court would possess jurisdiction, even though on the trial it should decide as a matter of policy to decline jurisdiction.
The plaintiff seeks other and further relief to which it does not appear that he is entitled. Without going into the matter in any detail, it may be said that the plaintiff alleges that under the contract he was to have forty-nine per cent and Ward fifty-one per cent of the total authorized capital until *645Ward’s investment was returned with interest, whereupon Ward was to transfer two per cent of his holdings to the plaintiff, thereby vesting control in the plaintiff. Accordingly, plaintiff demands that Ward cause the corporation to issue a sufficient number of additional shares out of the 157 remaining unissued and transfer the same to the plaintiff, so that the plaintiff will have forty-nine per cent of the stock and thus be in a position, when Ward’s investment is returned, to have the control of the corporation. If such was the intent ■ of the contract, it was not so provided, and before the plaintiff would be entitled to any such relief the contract would need reformation.
For these reasons.I am of the opinion that the judgment and orders sustaining the demurrers should be reversed, with costs, and the motion to sustain the demurrers denied, with ten dollars costs, with the usual leave to withdraw the demurrers and answer upon payment of said costs.
Merrell, J., concurred.
Judgment and orders affirmed, with costs.