Court Opinion

ID: 3632509
Source: CourtListenerOpinion
Date Created: 2016-07-06 00:11:37.427385+00
Date Added: 2024-06-11T13:45:09.795606
License: Public Domain

In 1880, the Spring Valley Hydraulic Gold Company was organized as a corporation under the General Manufacturing Act of this state, and shortly thereafter it invested substantially all its capital in certain mines in the state of California, and until the year 1886 operated the same as its sole business. The object for which it was formed, as stated in the certificate of incorporation, was to carry on the business of mining various precious ores and to smelt, refine and sell the product.
In July, 1886, the defendant trustees transferred all its property, both real and personal, including said mines, to a corporation organized at the time under the laws of the state of California, for the purpose of carrying on the business theretofore conducted by the defendant company and of taking title to its assets. This was done with the approval of stockholders holding a majority of the stock, in good faith, to save the property from sacrifice, but without the consent of the holders of a large number of shares and against the protest of some of the stockholders. The sole consideration for such transfer was an agreement by the California company to pay the debts of the New York company and to issue to it certain shares of its capital stock. A majority of the directors of the former company were, and still are, residents of California, and the only object of the transaction was, without a dissolution, to reorganize the defendant company under the laws of another state in order to obtain some real or supposed advantage afforded thereby. The attorney-general commenced this action to remove the trustees and to compel them to account for the property thus transferred, but the Special Term dismissed the complaint because no one was joined as a relator and the General Term affirmed the judgment, one of its learned justices dissenting.
This appeal presents two questions of grave importance:
1. Whether an action for the judicial supervision of a business corporation, its officers and members, can be maintained by the attorney-general in the name of the people without a *Page 272 
relator? (People v. Lowe, 47 Hun, 577; People v. Bruff, 9 Abb. [N.C.] 153.)
2. Whether a corporation created by the laws of this state can be reorganized under the laws of another state without the process of lawful dissolution.
The first question has been twice considered, but never decided by this court. In the People v. Lowe (117 N.Y. 175, 190), the present learned chief judge of the court, after a thorough and able discussion of the subject, reached the conclusion that the people have no right to maintain such an action, but, as a majority of the court were unable to agree with him in that conclusion, the judgment was reversed upon another ground. The question was again considered by the court in the very case now before us and an opinion, unfortunately not published, because it is exhaustive in research and persuasive in reasoning, was prepared, sustaining the right of the people to sue without a relator, but, as one of the members of the court was the attorney-general who commenced the action, only six judges could act, and they were equally divided upon the question, so that no judgment was rendered. *Page 273 
The case was subsequently certified to this division of the court for decision, and after hearing a reargument and giving the subject the most careful attention, we also are divided in opinion and are unable to pronounce judgment except by the vote of a majority. The duty of giving expression to the views of those who think that the action can be maintained as brought, necessarily involves, to a great extent, the adoption of positions already taken and arguments already made in previous discussions of the question. *Page 274 
As early as 1817 it was held by Chancellor KENT (Atty.-Genl. v. Utica Insurance Co., 2 Johns. Ch. 371), that the Court of Chancery, upon motion of the attorney-general, had no power to restrain an insurance company from carrying on a banking business, even if it was in violation of a public statute. After reviewing all the authorities, which at that early date were exclusively English, the conclusion was reached that, as there was an adequate remedy at law by quo warranto, the Court of Chancery had no jurisdiction to supervise the conduct *Page 275 
of corporations, unless it was in the case of charitable corporations, which were regarded as of sufficient public concern to warrant interference by a court of equity. The only question discussed was the jurisdiction of the court to entertain such an action at all, and no attention was given to the form of procedure. It was not even claimed by the eminent counsel who took part in the argument of that case but what, if the court had jurisdiction of the subject of the action, it could proceed at the instance of the attorney-general, without a *Page 276 
relator. (Page 374.) In none of the cases cited by the chancellor did the court refuse to proceed because the attorney-general came into court alone and represented the interests of the public only. While there was doubt in the minds of some of the judges whether Chancery or the King's Bench was the proper tribunal to supervise the conduct of charitable corporations, there seems to have been no doubt that such jurisdiction, wherever it resided, could be exercised upon motion of the attorney-general, either with or without a relator. (Attorney-General *Page 277 
v. Bucknall, 2 Atk. 328; King v. Masters of St. Catherine'sHall, 4 Durn.  East. 233, and note A on page 240;Attorney-General v. Brown, 1 Swan. 265; Attorney-General v.Oglender, 1 Ves. Jr. 246.) The only object of joining a relator at all seems to have been to provide security for the costs of the defendant. (Attorney-General v. Green, 2 Brown, 496; Redesdale's Ch. Pl. 79.)
The revisers had in mind the decision in the Utica Insurance
case (supra), when they reported that part of the Revised *Page 278 
Statutes relating to "proceedings by and against corporations and public bodies having certain corporate powers, and by and against officers representing them," the thirty-first section of which is as follows: "Upon a bill being filed by the attorney-general in the Court of Chancery, the chancellor shall have power to restrain by injunction any corporation from assuming or exercising any franchise, liberty or privilege, or transacting any business not allowed by the charter of such corporation; and in the same manner, to restrain any individuals from exercising *Page 279 
any corporate rights, privileges or franchises not granted to them by any law of this state." (2 R.S. 462, § 31.) To this section the revisers appended the following note: "The proceedings at law by quo warranto or scire facias are so dilatory that much mischief will generally be done before judgment can be obtained, and are so expensive that a summary remedy seems absolutely necessary. Chancellor KENT held in 2 Johnson's Chancery Reports, 391, that the court did not possess the power proposed to be given in the preceding section." *Page 280 
It is clear that the object of the legislature in enacting this section with this official explanation before them was to enlarge the power of the Court of Chancery in relation to proceedings against corporations. This is made even more apparent by the specific provisions of section 33, which is as follows: "The chancellor shall have jurisdiction over directors, managers and other trustees and officers of corporations. 1. To compel them to account for their official conduct in the management and disposition of the funds and property committed to their *Page 281 
charge. 2. To decree and compel payment by them to the corporation whom they represent, and to its creditors, of all sums of money, and of the value of all property which they may have acquired to themselves or transferred to others, or may have lost or wasted by any violation of their duties as such trustees. 3. To suspend any such trustee or officer from exercising his office whenever it shall appear that he has abused his trust. 4. To remove any such trustee or officer from his office upon proof or conviction of gross misconduct. 5. To *Page 282 
direct new elections to be held by the body or board duly authorized for that purpose to supply vacancies created by such removal. 6. In case there be no such body or board, or all the members of such board be removed, then to report the same to the governor, who shall be authorized, with the consent of the senate, to fill such vacancies. 7. To set aside all alienations of property made by the trustees or other officers of any corporation contrary to the provisions of law, or for purposesforeign to the lawful business and objects of such *Page 283 
corporation in cases where the person receiving such alienation knew the purpose for which the same was made; and S. To restrain and prevent any such alienation in cases where it may be threatened, or there may be good reason to apprehend it will be made."
The revisers, in their note to this section, say that it was "drawn to supply what are conceived to be important defects in some cases, and to remove doubts entertained respecting the power of the court in others. The first subdivision is intended, *Page 284 
in connection with section 35, to give to the Court of Chancery in this state the same power that is exercised by that court in England in cases of charitable corporations, and in other cases, the possession of which power is doubted by Chancellor KENT in 2 Johnson's Chancery Reports, 384, although alleged to be a part of the general jurisdiction of the court in 2 Term Reporter, 199."
This legislation was doubtless induced by said decision of the chancellor, and as he gave prominence to the supposed defect *Page 285 
in the power of the court, so the legislature gave prominence to that subject in enacting the statute, but the method of exercising the power is made clear by section 35 in the following language: "The jurisdiction conferred by the preceding thirty-third section shall be exercised as in ordinary cases on bill or petition, as the case may require, or the chancellor may direct at the instance of the attorney-general prosecuting in behalf of the people of this state, or at the instance of any creditor of such corporation, or at the instance of any director, *Page 286 
trustee or other officer of such corporation having a general superintendence of its concerns."
Thus, as it seems to us, the legislature intended to greatly increase the power of the Court of Chancery in regard to the supervision of corporations, and to authorize the attorney-general, on his own motion, to call upon the court to act. The revisers intended, as we gather their meaning from the language used, that the Court of Chancery, in this state, should have the same power in regard to corporations generally that *Page 287 
is exercised by that court in England in the case of charitable corporations. We cannot unite with the learned justice who decided the case at Special Term, in the opinion that it was intended to limit the jurisdiction conferred to those cases in which it was exercised by the English court. The statute contains no words of limitation, but in plain terms confers upon the chancellor the powers enumerated, and provides that they shall be exercised at the instance of the attorney-general. If the revisers had intended to limit those powers to a single class of corporations, would not so important a limitation have appeared in the statute itself rather than in a note? But, it is asked, if this power really existed, why was it not exercised by some attorney-general during the long period that these provisions of the Revised Statutes were in force? The contemporary construction of a statute is always valuable, because it involves the judgment and understanding of those conversant with the law at the time the statute was passed. This, however, means such construction by contemporaries as indicates actual user of the statute. Mere negative construction, inferred from non-user for many years, is of little value, especially when the only person capable of calling the statute into action is a high officer of the state, with multifarious duties and cares. As the statute conferred the same power of acting under it upon creditors and others that it did upon the attorney-general, it may be that that officer left parties to their own resources or *Page 288 
that parties preferred to act for themselves so that they could control the proceedings.
The next legislation upon the subject, after the Revised Statutes, appeared in the Code of Procedure, which provided that an action might be brought by the attorney-general in the name of the people in various cases. Such actions were in the place of writs of scire facias and quo warranto and of proceedings by information in the nature of quo warranto. (Code of Procedure, §§ 428-447.)
These provisions have but little bearing upon the question under consideration, except as they reflect the general policy of the state in allowing the attorney-general to interfere with the affairs of corporate bodies without a relator "in every case of public interest" and with a relator "in every other case in which satisfactory security shall be given." (Code of Pro. § 430.)
Attention is also called to an act passed in 1870 "to regulate proceedings against corporations by injunction and otherwise," which provided that "all actions and proceedings against a corporation, when the relief sought or which can be granted therein, shall be the dissolution of such corporation or theremoval or suspension of any officer or director thereof, shall be brought by the attorney-general in the name of the people of the state." (Laws 1870, chap. 151, § 2.)
In 1874 two cases were decided by this court holding that, under the peculiar circumstances therein appearing, the state could not sue in its name of sovereignty without some specific interest in the subject of the action. (People v. A.  S.R.R.Co., 57 N.Y. 161; People v. Ingersoll, 58 id. 1.)
These cases are said to have led to the passage of chapter 49 of the Laws of 1875, which conferred upon the people the right to sue without a specific interest and authorized the attorney-general to prosecute such actions in their name.
We have thus reviewed the law as it stood prior to the enactment of the Code of Civil Procedure, in order to learn the history of legislation and judicial decision, together with the general policy of the state upon the subject, so that the *Page 289 
statute under which this action was commenced might be the more easily understood. That history, if we read it aright, shows a progressive tendency on the part of the state towards the supervision, through its courts and attorney-general, of the corporations which it brought into existence by keeping them within the lines of the law.
Title 2 of chapter 15 of the Code of Civil Procedure treats of "actions relating to a corporation" and the second article is entitled the "judicial supervision of a corporation and of the officers and members thereof." This action was brought under sections 1781 and 1782, which appear in the article headed by that significant title. Section 1781 is a re-enactment, in substantially the same language, of section 33, already quoted from the Revised Statutes. (2 R.S. [1st ed.] p. 462.) In plain terms it confers jurisdiction upon the court over the subject-matter of such an action as this, leaving it to the next section, to prescribe by whom the action is to be brought in the following language: "An action may be brought, as prescribed in the last section, by the attorney-general in behalf of the people of the state, or, except where the action is brought for the purpose specified in subdivision third or fourth of that section, by a creditor of the corporation, or by a trustee, director, manager or other officer of the corporation having a general superintendence of its concerns." (Code Civ. Pro. § 1782.) The excepted subdivisions relate to the suspension or removal of a defendant from office. To this section the commissioners attached the following note: "2 R.S. 462, § 35, amended as required by the changes of the judicial system and forms of proceeding and by Laws 1870, chap. 151, § 2." Thus section 35, already quoted from the Revised Statutes, is pointed out as the basis of the section reported, amended, however, as required by the act of 1870, so as to provide that all actions in which a part of the relief sought is the suspension or removal from office of any officer or director of a corporation, "shall be brought by the attorney-general in the name of the people of the state." (Laws 1870, chap. 151, § 2.) This is an action of that character. Section 1786 applies only to actions to dissolve a corporation, *Page 290 
and sections 1797 and 1798 to actions to vacate or annul the charter of a corporation. No such relief is sought in the action before us. Section 1804 excepts religious, educational, municipal and some other corporations from the operation of the act. Section 1808 provides that "where the attorney-general has good reason to believe that an action," such as the one under consideration," can be maintained in behalf of the people of the state * * * he must bring an action accordingly, * * * if, in his opinion, the public interests require that an action should be brought. In a case where the action can be brought only by the attorney-general in behalf of the people, if a creditor, stockholder, director or trustee * * * applies to the attorney-general for that purpose and furnishes the security required by law, the attorney-general must bring the action, or apply for leave to bring it, if he has good reason to believe that it can be maintained."
This section provides for two classes of actions, each of which requires two facts to exist before the action can be brought, but only one of which is common to both. Each class requires that the attorney-general should have good reason to believe that the action can be maintained. In addition to that the first class requires that he should be of the opinion that the public interests demand that an action should be brought, and the second class, that one of the persons named should apply to him to bring the action and furnish the security required by law. It is not enough to warrant the commencement of either action for the attorney-general to be satisfied that it can be maintained, for, in the one case he must also be satisfied that the public interests require him to act, and in the other, one of the designated persons must ask him to act and give security. In the first class no security is required, and in the second the public interests need not be consulted, but simply private interests. If a relator were required in the first class, the attorney-general might not be able to procure one, and hence could not obey the command of the statute. If a relator were not required in the second class, costs might be thrown upon the people in litigation in which the *Page 291 
public had no concern. This construction is confirmed by the commissioners' note to said section, in which they say: "New, as respects an action brought under article 2 or article 3, but corresponding to Code of Procedure, section 430, last sentence,
as respects an action substituted for the proceedings by quo warranto. It will often happen, and, indeed, has happened, that the attorney-general, who, alone, under sections 2 and 5 of the act of 1870, can bring some of the actions provided for in articles 2 and 3, declines to interfere on the ground that no public interests are jeopardized by the transactions complained of. In such a case the aggrieved parties were remediless, until the enactment of this section. No sufficient reason is apparent why the rule established by Code of Procedure, section 430, should not apply to such cases."
We have now examined all the sections of the Code to which our attention has been called, except 1811, which provides that a director or other officer of a corporation cannot be removed otherwise than by final judgment in an action brought by the attorney-general. This section, also, had its origin in chapter 151 of the Laws of 1870, as the commissioners state in their note thereto. Section 1986 has no bearing, because it is limited to title 1 of chapter 16, which relates to a different subject, except where a creditor applies to the attorney-general to sue under section 1808, when a relator is to be joined if the application is granted and the action commenced.
Considering the history of the law upon the subject, the origin, object and language of the statute, we think that the legislature intended to authorize the attorney-general to bring such an action as this whenever he was convinced not only that it could be maintained, but also that the interests of the public would be promoted thereby. We appreciate the force of the argument that it is contrary to the prevailing rule to permit an action to be brought in the name of one who has no direct interest in the result. This, however, bears upon the question of construction only, for what the legislature has authorized may lawfully be done, in the absence of some *Page 292 
restriction in the Constitution. But, while the people have no pecuniary interest in the result, have they no interests that need protection? Corporations for various purposes are created by the state. They exist only by virtue of its will. Their interests are vast, their assets enormous, their powers extensive, and their action affects the welfare of every citizen. When they act within the law, they serve a useful purpose and promote the common good. When they act in violation of law, their great power affords a practical protection which the average citizen cannot command. Has the state no interest in supervising the conduct of its creatures to whom it has confided such great power? In a broad and political sense, has it no interest in requiring the managers of corporations to observe their charters and not abuse their powers? Has it no interest to prevent, by the deterrent effect of example in a flagrant case of wrong, similar violations of law by those managing other corporations? May not the legislature have thought that sound public policy required not only remedies for the redress of private wrongs to be enforced at the instance of those injured, but also the direct interference by the state whenever, according to the sound judgment of a discreet and conservative public officer, it was necessary in order to arrest a growing evil? These questions, we think, suggest an answer to the argument founded on the supposed improbability that the legislature would depart from the usual rule of requiring a direct interest to support an action. No such interest was regarded as necessary in order to annul a charter, dissolve a corporation, remove a receiver or oust a usurper. With great deference to the learned judges who have reached a different conclusion and whose opinions have caused us to hesitate long and anxiously before pronouncing judgment, we think that this action, if otherwise well founded, can be maintained by the attorney-general in the name of the people alone.
The suggestion is made that while an action may be brought by the attorney-general in the name of the people without a relator, still it is for the court to decide whether the public interests, in fact, required the action to be so brought, and if it *Page 293 
decides that they did not so require, that the complaint should be dismissed on that ground. The interest of the public, according to this construction, would be an issuable fact. A comparison of section 1781, which provides for the substance, with section 1808, which provides for the form, shows, as we think, that such was not the intention of the legislature. The attorney-general is to bring the action if he has good reason to believe that it can be maintained, and "if in his opinion," not in the opinion of the court, the public interests require that it should be brought. While the former section is to govern the action of the court in granting relief, the latter is to govern the action of the attorney-general in deciding to ask for relief, and is addressed to his conscience only. The sole responsibility of suing in the name of the people rests upon him. That subject is wholly in his keeping as the representative of the public interests. If it were held otherwise, upon what evidence could the court proceed? If, for instance, the attorney-general, upon learning that serious abuse of power by the trustees of corporations was so common as, in his judgment, to amount to a public evil, should decide to interpose the power of the state for the sake of a wholesome example, could the court take evidence as to the mass of wrongful acts upon which he relied in deciding to bring the action? If so, would not the defendants have the right to show that each act was innocent and not wrongful? Would not this lead to an intolerable multiplication of issues? Could those issues be defined by pleadings? Unless so defined, could the defendants be prepared for trial?
We think that the question as to what the public interests require is committed to the absolute discretion of the attorney-general, and that it cannot be made the subject of inquiry by the courts. If he abuses the great power intrusted to him, a remedy may be found in his removal from office, or in the election of a successor worthy of the high position.
The statute authorizes an action to remove the trustees of a corporation for misconduct; to compel them to account for their official acts in managing and disposing of the property committed to their charge, and to require them to pay to the *Page 294 
corporation, or its creditors, the value of any property transferred in violation of their duties. (Code of Civ. Pro. § 1781.)
A corporation is purely artificial, having no natural or inherent power, but only such as its charter confers. The charter of the corporation in question was the statute under which it was organized. Upon filing the certificate of incorporation it came into existence with power to do only that which is expressly or impliedly authorized by the statute. It had no power to act except through its trustees, who were authorized to manage its "stock, property and concerns," and a majority of whom were required to be citizens of this state. (Laws of 1848, chap. 40, as amended by Laws of 1869, chap. 269.) While they were authorized to conduct its affairs, they were not authorized to terminate its existence, although, under special circumstances, the courts could dissolve it upon their application. (Code of Civ. Pro. § 2419.) A corporation cannot cease to exist of its own will. Its life continues until either the charter period has expired or the court has decreed a dissolution. The law made it and the law only can put an end to it. As it cannot take its own life directly, it cannot do so indirectly, for that would be a fraud upon the law and against public policy. By the transaction complained of the defendant company was stripped of all its property, and thus prevented from going on in business and deprived of all means of carrying into effect the object of its existence. While a corporation may sell its property to pay debts, or to carry on its business, it cannot sell its property in order to deprive itself of existence. It cannot sell all its property to a foreign corporation organized through its procurement, with a majority of non-resident trustees, for the express purpose of stepping into its shoes, taking all its assets and carrying on its business. That would be the practical destruction of the corporation by its own act, which the law will not tolerate. Whether the process by which it was sought to convert the New York corporation into a California corporation is called reorganization, consolidation or amalgamation, it was the exercise of a power not delegated and was void. It was corporate *Page 295 
burial in New York for resurrection in California. While the stockholders who consented may be estopped by their acts, those who did not consent can take advantage of this violation of their rights, and the state of New York can demand that those who did the wrong shall make restitution.
The case of Abbott v. American Hard Rubber Company (33 Barb. 578), is the leading authority upon the subject in this state, and it is also recognized as the leading authority in most of the states. In that case a majority of the trustees of a business corporation, without the consent of some of the stockholders, transferred all its personal property, which was especially adapted to its business, to two persons, who forthwith caused another corporation to be formed, and transferred such property to it. It was held that, as such transfer practically terminated the corporation by taking from it the power to fulfill the object of its organization, it was a violation of that object, was not within the power of the trustees, and was hence void as ultra vires. The case was elaborately considered both at General and Special Term and we regard it as a sound and valuable authority.
A somewhat similar question was under consideration inFrothingham v. Barney (6 Hun, 366), where the court said: "This, as a business arrangement, was wise, discreet and sagacious. As such it should be sustained if it legally is possible. The interests of one or two small stockholders should not enable them to work the destruction of the interests of co-owners, or compel the purchase of their stock at fictitious or unreal prices, if it can be avoided. * * * Upon the dissolution of the association, it became the duty of the trustees to convert the assets into money and distribute the proceeds among the stockholders. To a certain extent this has been done. A portion of such assets have not been distributed, and another portion, including the good will of the old association, has been exchanged by the trustees for the corporate stock of a new Wells, Fargo  Co. This, as I understand, the trustees had no right to do. They had no right to exchange the assets of the old association for the corporate stock of any corporation *Page 296 
without the consent of all the stockholders. (Mann v. Butler,
2 Barb. Ch. 362.) Equally were they without authority in making this partial exchange without such consent. Stockholders of the old association could not thus, against their will, be forced into relations with the new company. (Blatchford v. Ross, 54 Barb. 42 H.  N.H.R.R. Co. v. Croswell, 5 Hill, 383, 386.)"
In Taylor v. Earle (8 Hun, 1), a New York corporation, by the vote of a large majority of its stockholders, sold all its property, except cash on hand, mills and franchises, to a Vermont corporation and took in payment shares of stock in the latter company. The court said: "The whole scheme of the transfer and its execution was illegal. There is no power given by the acts under which the Burlington Cotton Mills (the New York corporation) were incorporated to transfer all its property and thus terminate its existence, and take in payment stock in a company carrying on the same business with a different name, charter and stockholders, and being a foreign corporation. The corporation, by the New York law, could increase or diminish its stock, or extend its business to other objects, but that falls far short, I think, of the sweeping power exercised on this occasion. The sale was not real. It was a mere form to turn a New York corporation into a Vermont one, and thus escape the scrutiny into the affairs of the company permitted by the New York law to the stockholders."
All the authorities in this state are uniform in holding that the trustees of a corporation cannot so dispose of its property as to virtually end its existence and prevent it from carrying on the business for which it was incorporated. (Blatchford v.Ross, 54 Barb. 42; Copeland v. Citizens' Gas Light Co.,
61 id. 60; Smith v. N.Y. Consolidated Stage Co., 18 Abb. Pr. 419; Metropolitan El. Ry. Co. v. Manhattan Ry. Co., 14 Abb. [N.C.] 303; Hartford, etc., R.R. Co. v. Croswell, 5 Hill, 383.)
Other courts of the highest standing have laid down the same rule. (Railway Co. v. Allerton, 85 U.S. 233; Stevens v.Rutland, etc., R.R. Co., 29 Vt. 545; New Orleans, etc., *Page 297 R.R. Co. v. Harris, 27 Miss. 517; see, also, Morawetz on Corporations, § 413; Spelling on Corporations, § 1012; Cook on Stock and Corporation Law, § 667; Beach on Corporations, §§ 358, 430.)
The fact that the trustees acted in good faith did not empower them to do an illegal act; and the fact that there may be some difficulty in the final adjustment of rights, because some of the stockholders consented, while others did not, constitutes no defense to the action. We see no greater difficulty, however, than would exist if the action were brought by a trustee who had not consented to the act complained of, and no reason why "the liability of the trustees to account" should not be "limited to those stockholders who have not assented to the transfer."
We think that the transfer was unauthorized and void as to the non-assenting stockholders, and as to the state, and that the people can maintain the action in their name of sovereignty.
The judgment should, therefore, be reversed and a new trial granted, with costs to abide event.