Court Opinion

ID: 5181936
Source: CourtListenerOpinion
Date Created: 2022-01-06 04:43:21.07121+00
Date Added: 2024-06-11T08:26:36.091122
License: Public Domain

Barrett, J. (concurring):
I concur in the reversal of this order for the following reasons, in addition to those given by Mr. Justice Williams :
*388(1) ' The contract did not, as Mr. Justice Patterson assumes, effect the sale of all the property of the company,.much less of its franchises. The only property covered by the agreement—■ apart from the reinsurance arrangement — is (a) the lease of the premises occupied by the company, together with its furniture and safes; (5) its insurance maps; (c) its New York city and agency records and supplies.
This property was an essential incident to the contract of reinsurance, and if that contract was within the ¡lower of the directors so certainly was the sale of these necessary appendages to its due execution by the purchaser. The sale of this personal property as an independent act had no taint of invalidity. Still less was it ultra. rnres when appurtenant to a valid contiiáctof reinsurance. Nor did this contract, as is also assumed, leave the seller company with nothing but its corporate name and its liabilities. On the contrary, it guaranteed the company against its liability upon contracts of insurance to the amount of about $30,000,000, and, as between the two companies, practically transferred that liability to the purchaser company. It also saved it from heavy expenses pending the dissolution. proceedings, and secured for the stockholders some $50,000 more than would have been available for distribution had the company not been relieved from its liability upon such contracts. And, further, it not only left to the company all its capital and.assets not specifically .included in the contract, but also left it perfectly free and with ample means at any future time to resume business should such resumption be deemed proper or expedient, or should unforeseen circumstances favor such resumption.
(2) "Upon the facts here presented the contract was a valid exercise of power upon the part of the directors. This being a private corporation, exercising no public or quasi public function, its business having been'conducted for years at a steady loss, and there being no reasonable prospect of future success or of profit to the shareholders, it was the duty of the directors to stop the outgo and to wind up its affairs. As Mr. Mbrawetz well says in his work on-Corporations (§ 412): “ The ultimate object of every ordinary trading corporation is evidently the pecuniary gain of its shareholders. * * * It seems to follow,' therefore} that after a corporation of this character has become hopelessly insolvent, or unable to eawry *389on its business except at a loss, it is the duty of the managers of the company to stop carrying on its business any further, and to wind up its affairs. To continue the business of the company under these circumstances • would involve both an unauthorized exercise of corporate franchises, and a breach of the contract between the shareholders.”
The exercise of a sound judgment upon this subject was within the province of these directors. “ The right of a manufacturing corporation,” said Follett, J., in Skimmer v. Smith (134 N. Y. 250), “ to discontinue its operations when they have become unprofitable, for the purpose of protecting shareholders from further loss, does not admit of doubt.” (Citing Treadwell v. Salisbury Manufacturing Go., 7 Gray, 395, and many other cases.) The principle thus enunciated is not at all in- conflict with -that stated in Abbot v. The American Hard Hubber Co. (33 Barb. 578). There the action of the directors entirely incapacitated the company from ever transacting the business for which it was incorporated. The sale covered the very patent rights under which alone the company could do business; and that sale was made by the directors to some of their own num_ ber, who formed a new organization to conduct the business of manufacturing under these patents. Upon this latter fact, the court held the action of the directors to be fraudulent. It is true that it also held, their action to be ultra vires. But why ? Because the company was apparently successful and prosperous, and because the action of the trustees was simply an attempt to inflict upon it, to quote the language of Justice Allen, “ political death,” for their own benefit and in fraud of the rights of their cestuis gue trust, the stockholders. The company there was not, as here, operating at a steady loss. The wiping out of its surplus was not imminent. Insolvency was not impending, either presently or remotely. Here, upon the other hand, all these features exist; and there is no suggestion of fraud or bad faith upon the part of the directors. On the contrary, the contract which these directors have made is the ordinary and sensible accompaniment of dissolution proceedings rendered appropriate, indeed essential, by the special facts disclosed ; and which apparently must result in a final order of dissolution. That contract, too, is highly beneficial to the stockholders and to all concerned. It is, therefore, neither fraudulent nor ultra vires.
*390The affidavits which were used, in opposition to the motion are conclusive : Fi/rst,- as to the facts upon which the power of the directors -— apart from that specially conferred by section 2 of the charier — was predicated; and, second, as to the fairness and propriety of the exercise of that power. In voluntary dissolution proceedings, the court up to the moment of actual insolvency is powerless to appoint even a temporary receiver, and the final order cannot be obtained for- upwards of three months. (Code Civ. Proc. § 2423.) Can it be that the saving authority of the directors during all this period is limited to stopping business and' taking ■ no fresh risks’? That in the interim they cannot protect the company from the losses which it may suffer from existing risks ? We are told that they may see ruin staring them in the face-—■ from sudden catastrophes, accumulating losses and other causes —- but that they are powerless; that they must sit with folded arms until actual insolvency is reached or a final order permits the court to step in. This ■ dangerous view is not. borne out by authority. On the contrary, the authorities are, as we have seen, directly the other way. And it certainly is not good sense. The mistake'lies in the misapplication of the doctrine that the statutory method of effecting dissolution is exclusive. ' That doctrine relates solely to the power of the courts. It has no relation1 to the general power of the directors either independently or as an incident to these proceedings. Here the resolution with regard to dissolution proceedings very properly accompanied the action of the directors. That resolution, like the contract, was fully justified' by the company’s steady decline and probable insolvency. The directors judiciously timed its passage at the moment when . they were able to secure a guaranty against loss pending the proceedings to be instituted thereunder. Thus the resolution and the contract afford mutual evidences of good faith and sound judgment. And the contract justly and providently anticipated both the normal delay in the conduct of the proceedings and their almost certain outcome.
(3) A mandatory injunction summafily evicting the purchaser and commanding it, upon the very ■ commencement of .the action, to restore to the seller the subject of the sale, and to relinquish pendente . lite all the rights which it had secured under its contract, should certainly not have been granted. That was an extraordinary, and, *391under the circumstances disclosed by the record, unwarranted, exercise of judicial power. It amounted to the practical annulment of an executed contract without a trial. It was a summary determination, in advance of the regular hearing, of all the important questions involved — questions which, even upon the case presented by .the complaint, were by no means free from doubt. This order thus had substantially the effect of final judgment granted upon a preliminary motion against an undoubtedly ‘solvent defendant, who was actually in possession under a contract executed in perfect good faith, and after due consideration. While the court possessed jurisdiction to grant a mandatory injunction on an interlocutory application, yet it is always reluctant to do so, and only exercises that power in an extreme case, where the right is clearly established, and the invasion of the right results in serious injury. (1 High on Inj. [3d ed.] § 2.) Such injunctions are seldom allowed before a final hearing. It was even said in Ward v. Kelsey (14 Abb. Pr. 109) that a temporary injunction should only be issued to prevent an act, not to compel the performance of one. Here, certainly, the seller company could not be- compelled, by a species of interlocutory mandamus, to continue its business, and to accept risks -pending the dissolution proceedings, despite the resolution of its directors to the contrary. The mandatory part of the injunction here was, therefore, entirely valueless to the seller company, and was simply oppressive to the purchaser, company. It could serve no useful purpose, and it tended to produce irreparable injury to the company in whose interest it purports to have been granted.
In every aspect of the case the order appealed from should be reversed.
Van Brunt, P. J., and Williams, J., concurred.