Court Opinion

ID: 5229193
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:52:13.118049+00
Date Added: 2024-06-11T08:27:38.425424
License: Public Domain

Ingraham, P. J. (dissenting):
The plaintiff sues as a stockholder of the R. E. Dietz Company, a domestic corporation, and the relief asked is that the defendants who are directors of the said company be required to account for the corporation property and effects of said corporation which have been lost by reason of the default and neglect of the defendants and for the money paid out as dividends or principal and interest on certain debentures or certificates of indebtedness described in the complaint, and that the said certificates of indebtedness be adjudged to have been illegally issued, and to account for all money received by the defendants as interest on said certificates. The respondents demurred to the complaint as not stating facts sufficient to constitute a cause of action, which demurrer was sustained.
The action being brought on ■ behalf of the corporation, the *599question presented is whether on the fact alleged the corporation is entitled to any relief as against its directors. Bobert E. Dietz died in September, 1897, the owner of 600 shares of the capital stock of the corporation, which consisted of 1,000 shares of the par value of $100 each. He left a last will appointing the defendants Frederick Dietz and Samuel McMillan and the plaintiff’s testator trustees, to whom he bequeathed the 600 shares of stock in trust, to hold the same during the life of his wife, on whose death it was to be divided among his children, one of whom was the wife of the plaintiff’s testator, and this right to the stock was acquired by the plaintiff’s testator before his death.
It is alleged that after the death of the plaintiff’s testator, the defendant Frederick Dietz controlled the corporation and elected the directors thereof and has caused himself to be elected president thereof; and the question is whether the corporation can call its directors to account for their management of its affairs.
The complaint alleges that the defendants, respondents, “formed a scheme,plan and conspiracy for the purpose of impairing, reducing and destroying the value of the interest in the stock so owned by the plaintiff as trastee,” and in order to carry out said scheme defendants caused to be issued a large amount of debentures or certificates of indebtedness by the defendant corporation; that on September 16, 1904, by a resolution of the board of directors of the corporation, a dividend of 340 per cent on the capital stock of the corporation was declared; that the corporation had no money to pay such dividends and it was not intended to be paid in money but by the issue of certificates of indebtedness; that before such resolutions the respondent Frederick Dietz procured the widow of said Bobert E. Dietz, who was entitled to the income during her life, to sign an instrument by which she gave one-quarter of the dividend to which she would be entitled to each of her children named; that having obtained such instrument, the directors declared the dividend, and then in payment thereof issued to themselves certificates of indebtedness for $340,000; $204,000 of these certificates were allotted to Arma Dietz as the dividend on the 600 shares of stock held in trust for her, *600and then transferred to her children, the defendants and respondents. By these certificates the corporation acknowledged itself indebted to the holders in the sum named, payable at a fixed time, with interest thereon, out of the future profits of the company annually.
For a second cause of action it is alleged that on February 1, 1905, the directors passed another resolution declaring a dividend of 200 per cent on the capital stock of the company, and also procured an assignment from the widow, who was entitled to a fife interest in the stock, to her children, and then issued certificates of indebtedness to themselves in payment of that dividend.
For a third cause of action it is alleged that on February 1, 1908, another dividend was declared of 180 per cent on the capital stock of the company. The defendants obtained another assignment from the life tenant, and issued in payment of that dividend certificates of indebtedness of $180,000 to themselves
The situation of this company, after the issue of these certificates of indebtedness, is that it has a capital stock of 1,000 shares, of which the plaintiff will be entitled to 120 shares. The defendants have by issuing these certificates of indebtedness imposed on the corporation a liability of $720,000, interest on which must be paid before any dividends can be paid on the stock, and the principal must be paid before the capital of the corporation can be divided among the stockholders; and this has been done in pursuance of a conspiracy to destroy the value of the stock of the company. I do not think that there is presented on the facts alleged in the complaint, and admitted by the demurrer, a question as to the right of a corporation to declare a dividend as representing investment of profits in property used by the corporation in its business, which the directors m good faith desire to capitalize. It is alleged and admitted that this was not done in good faith, but to destroy the capital stock held by the minority stockholders. In other words, the directors have involved the corporation in an indebtedness which would absorb its earnings and prevent the payment of dividends upon its stock. These directors, having control of the company by holding a majority of the stock in trust, to injure the minority stockholders, have issued obligations of *601the company to themselves, under the pretense that they are declaring dividends, of more than seven times the amount of the capital stock of the company. The directors are trustees for the corporation and all its stockholders. In the execution of such trust they are bound to exercise the utmost good faith for the benefit of the corporation, and this obligation certainly extends to declaring dividends. Assuming that the defendants had the power to declare such dividends as were declared in this case, the question is: Did they exercise that power in good faith ? If they did not the corporation has the right to call them to account and require them to justify their acts. The question of the right of a corporation to call its directors to account has been so fully discussed in late cases that it is not necessary to restate it. (Carr v. Kimball, 153 App. Div. 825; Godley v. Crandall & Godley Co., Id. 708; Pollitz v. Wabash Railroad Co., 207 N. Y. 113.)
I think, therefore, that the judgment should be reversed, with costs, and demurrers overruled, with costs, defendants to be allowed to answer over on payment of such costs.
Judgment affirmed, with costs, with leave to plaintiff to amend on payment of costs.