Court Opinion

ID: 5234294
Source: CourtListenerOpinion
Date Created: 2022-01-06 17:05:13.494173+00
Date Added: 2024-06-11T08:27:42.515184
License: Public Domain

Ingraham, P. J. (dissenting):
I am unable to concur in the opinion of my brother Dowling. The defendant was a director in plaintiff corporation, organized under the laws of the State of New Jersey, with its principal office for the transaction of business in the city of New York. The complaint alleges that on the 20th of September, 1911, a corporation was organized pursuant to the laws of the State of New Jersey, under the name of the General Rubber Company of Brazil, with a capital stock of 3,000 shares of *340the par value of $100, all of which was the property of the plaintiff, except eighteen shares, which seem to have been held by the directors to qualify them to serve as such. The defendant was not a director of the General Rubber Company of Brazil. Various acts of the defendant as a director are then alleged as in violation of his duty to the plaintiff corporation, of which he was a director, which resulted in depreciation of the value of the stock of the General Rubber Company of Brazil held by the plaintiff corporation. It is not alleged that any other damage was sustained by the plaintiff, except that the action of the defendant and certain of the officers or employees of the General Rubber Company of Brazil tended to dissipate the assets of said corporation and injure its business. The complaint then alleged:
“ Twenty-fifth. Upon information and belief, that at all the times prior to the month of June, 1918, the defendant in violation of his duty as a director of the plaintiff, and for his own benefit intentionally withheld and consciously concealed from the plaintiff and from its officers and directors and from the said General Rubber Company of Brazil, and from its officers and directors, all knowledge and information of the matters stated in the preceding Article Twenty-fourth.
11 Twenty-sixth. Upon information and belief, that the said wrongful misappropriations by said Hutter have lessened the value of the assets of the plaintiff, to wit, said shares of stock of said General Rubber Company of Brazil-owned by the plaintiff as aforesaid, and have also otherwise damaged the plaintiff in a sum exceeding one hundred and eighty-five thousand dollars ($185,000), and that the said damage to the plaintiff resulted directly from the violation by defendant of his duty to the plaintiff as one of its directors as hereinbefore set forth and to his benefit.
“ Twenty-seventh. Upon information and belief, that in the manner aforesaid and by the said acts, neglects and concealments of the said defendant and by his said breach of his duty to the plaintiff the said defendant has damaged the plaintiff in the sum of one hundred eighty-five thousand dollars ($185,000) and interest.”
The action is brought by the plaintiff, not as a stockholder *341of the General Rubber Company of Brazil, but in its own right as a stockholder, to recover from the defendant as its director the loss occasioned to the plaintiff by the depreciation in the value of the stock of the General Rubber Company of Brazil which it held. There is no allegation in the complaint which tends to show that the plaintiff has been damaged in any particular by any act of the defendant, except in depreciation of the value of the stock of the General Rubber Company of Brazil. A recovery by the Brazil Company from those engaged in the defalcations of the property of said corporation will restore the value of the plaintiff’s stock therein, and thus the plaintiff will be compensated for any injury it sustained in consequence of the depreciation of its said stock. It would- be no defense to an action brought by the General Rubber Company of Brazil against the defendant, and those who united with him in despoiling that company, that plaintiff had recovered from the defendant the damages that were sustained by the General Rubber Company of Brazil in consequence of the acts alleged in the complaint. Such a recovery would inure to the benefit of the creditors and stockholders of the corporation; but if a recovery were permitted in this action it would go to the stockholders in disregard of the rights of the creditors of the corporation.
The wrongs of which complaint is made, as alleged in the complaint, seem to be: First, the defendant conspired with one Hutter to defraud the General Rubber Company of Brazil; and, second, the knowledge that Hutter had despoiled the General Rubber Company of Brazil, and defendant had refrained from informing the officers and directors of that company of that fact. It seems to be assumed that, if that information had been given, the officers and directors of the General Rubber Company of Brazil, of which defendant was not one, would have taken such means as would stop further despoliation. The two corporations were distinct, the only connection between them being that plaintiff owned practically all of the stock of the General Rubber Company of Brazil. The only wrong, as against this plaintiff, as far as I can see, consisted in the failure to give the directors of the plaintiff notice of the way in which Hutter was treating the assets of said cor*342poration. But the plaintiff, as a corporation, had no power to interfere in the management of the General Rubber Company of Brazil except so far as it could control the election of directors by virtue of the ownership of its stock. The wrong that was done was against the General Rubber Company of Brazil, and it only affected the plaintiff because the plaintiff was the owner of the stock in that company, the value of which was depreciated by the acts of Hutter.
The question as to the liability of the directors of a corporation for loss caused to its stockholders was exhaustively discussed by this court in Niles v. N. Y. C. & H. R. R. R. Co. (69 App. Div. 144; affd., 176 N. Y. 119). In that case this court, Mr. Justice Laughlin writing for the court, said: “If a wrong were committed against the plaintiff as a stockholder, as contradistinguished from a wrong against the corporation, that would give him a right of action against the wrongdoer. * * * The corporation, however, is a distinct and separate entity from the holders of its stock, and in the management of the property and affairs of the corporation it represents them all. * * * Even though the depreciation in the value of the stock be capable of ascertainment as a basis of damages at law, the wrongs complained of are wrongs against the corporation, and it has a cause of action for the restoration of the property or for the damages sustained.” In the Court of Appeals, Judge Haight, delivering the unanimous opinion of that court, said: “It was an injury for which an action could have been maintained by the corporation, its receiver, if one had been appointed, or by any stockholder, after proper demand, in behalf of the company and for its benefit. In such an action the creditors are vitally interested. They have the right to have the action prosecuted on behalf of the company, so that their interests may be protected and their claims paid out of any recovery which may be obtained. True, the plaintiff has suffered a depreciation in the value of his stock as a result of the wrong, and in this respect the injury was personal to the holders of the stock. But every stockholder has suffered from the same wrong, and if the plaintiff can maintain an action for the recovery of the damages sustained by him, every stockholder must be accorded the same *343right. The injury, however, resulting from the wrong was, as we have seen, to the corporation. The depreciation in the value of the plaintiff’s stock, and that of the other stockholders, was in consequence of the waste and destruction of the property and franchise of the Corporation. There are wrongs which if committed against a stockholder entitle him to a right of action against the person committing the wrong for the damages sustained, as, for instance, where a person had been induced to purchase stock in a corporation and pay a higher price than the stock was fairly and reasonably worth, or where the owner of stock had been induced to part with it for a less sum than its true value, by reason of false and fraudulent representations of others with reference to its value. * * * But these wrongs are distinguishable from those against the corporation. They result in injury to the stockholder upon whom the wrong is practiced, but do not injure the other stockholders or the corporation itself. The injuries, however, in this case are not of that character.”
So it seems to me clear the plaintiff cannot recover for any injury caused to the value of the stock of the General Rubber Company of Brazil, for although it would result in injury to the value of the stock of the said company, it would not result in injury to the plaintiff except as such a stockholder.
Nor do I think the allegation of neglect of duty to inform the plaintiff or his fellow directors of the plaintiff, of his knowledge of the acts of Hutter in relation to the property of the General Rubber Company of Brazil is actionable-against the defendant. It is quite clear, it seems to me, that injury to the plaintiff, as distinct from the individuals comprising its officers and directors, could neither have produced nor prevented the wrong to the General Rubber Company of Brazil. As the directors of the plaintiff corporation, with the exception of the defendant, were directors of the General Rubber Company of Brazil, it may be that, if they had been informed of the actions of the said Hutter, they would have taken measures, not as directors of the General Rubber Company of Brazil, to stop his despoliation. But the wrong done was to the General Rubber Company of Brazil and not to the plaintiff corporation, and, it seems to me, the plaintiff cannot be said to have sustained *344damages because defendant did not inform the directors of the General Rubber Company of Brazil of the wrongs alleged in the complaint. It is quite clear the only damage alleged is the depreciation in the value of the stock of the General Rubber Company of Brazil because of the acts of the defendant, and that, it seems to me, was a wrong against the General Rubber Company of Brazil and not against the plaintiff corporation and for which the General Rubber Company of Brazil has a right of action and the plaintiff has not.
I, therefore, think that this judgment should be reversed.
Laugi-ilin, J., concurred.
Judgment affirmed, with costs, with leave to defendant to withdraw demurrer and to answer on payment of costs.