Court Opinion

ID: 5482519
Source: CourtListenerOpinion
Date Created: 2022-01-10 01:59:14.917046+00
Date Added: 2024-06-11T08:33:38.181928
License: Public Domain

Desmond, J.
(dissenting). We dissent, since we know of no theory of law under which directors, on facts like these, can be held liable or accountable to their corporation’s creditors. There is in the ease no showing of fraud or bad faith, no self-dealing or diversion of assets, no violation of any statute, and, therefore, no applicability of any of the decisions cited in the majority opinion of this court, in the opinion of the Appellate Division, or in the briefs filed here by respondent.
Faced with operating losses, poor market conditions, pressure from creditors, and inability to borrow, the corporation, in early 1949, found that it could not continue its merchandising business. Defendants, its sole stockholders and directors, consulted an attorney, who described to them various methods of liquidation, including a sale at auction of the corporation’s merchandise. That method defendants chose. They hired a licensed auctioneer, who advertised the event by newspaper advertisements and by postcards mailed to about a thousand persons or firms in the same or similar lines of business (not including the corporation’s creditors), and who conducted the sale, which produced gross proceeds of about $23,000 and a net return of just under $20,000, for merchandise which had been carried on the corporation’s books at its gross cost price of about $60,000. Three days later, the corporation’s creditors, to whom it owed about $52,000, petitioned it into bankruptcy, and plaintiff-respondent, after its election and qualification as trustee in bankruptcy, and after the net proceeds of the auction had been turned over to it by defendants, brought this suit.
Those are the facts, undisputed and found by both courts below. Defendants committed no actionable wrong of any *12sort, and were entitled to judgment of dismissal, on the merits. At very worst, they were guilty of an error of judgment, hut for that the law provides no punishment or remedy. “If a director exercises his business judgment in good faith on the information before him, he may not be called to account through the judicial process, even though he may have erred in his judgment ” (Rous v. Carlisle, 261 App. Div. 432, 434, affd. 290 N. Y. 869). “ That is true even though the errors may be so gross that they may demonstrate the unfitness of the directors to manage the corporate affairs ” (Everett v. Phillips, 288 N. Y. 227, 232). “ The law will not permit a course of conduct by directors, which would be applauded if it succeeded, to be condemned with a riot of adjectives simply because it failed. Directors of a commercial corporation may take chances, the same kind of chances that a man would take in his own business. Because they are given this wide latitude, the law will not hold directors liable for honest errors, for mistakes of judgment ” (Shientag, J., in Bayer v. Beran, 49 N. Y. S. 2d 2, 6; see, also, Leslie v. Lorillard, 110 N. Y. 519, 532; Winter v. Anderson, 242 App. Div. 430, 432; Kalmanash v. Smith, 291 N. Y. 142,155; Rosbrook, New York Corporation Manual, § 314).
The theory of the recovery here seems to be: that these directors “ wasted ” the corporate assets, and so became subject to suit under subdivision 2 of section 60 .of the General Corporation Law. But ‘ ‘ waste ’ ’, as that verb is used in this and similar statutes, has a fixed meaning, limited to acts which are illegal, fraudulent or done in such bad faith as to amount to fraud (see Bosworth v. Allen, 168 N. Y. 157, 165, 166; Mason v. Henry, 152 N. Y. 529; Gilbert v. Finch, 173 N. Y. 455; Lonas v. Layman Pressed Rod Co., 242 App. Div. 444, affd. 269 N. Y. 529; Bassellin v. Pate, 30 Misc. 368, 373, Hiscook, J.; Cottrell v. Albany Card & Paper Mfg. Co., 142 App. Div. 148, 151 et seq.; Hazard v. Wight, 201 N. Y. 399, 403; Talcott v. City of Buffalo, 125 N. Y. 280, 288; Ayers v. Lawrence, 59 N. Y. 192,197). We find no case, and none is cited to us, where directors have been held liable to creditors for waste, merely because of their use, in good faith but doubtful wisdom, of their own business judgment. Hindsight may be better than foresight for some purposes, but not as a basis for imposition of liability in a court of law (Purdy v. *13Lynch, 145 N. Y. 462, 475, 476; Costello v. Costello, 209 N. Y. 252, 262).
Aside from accusations of mere unwisdom, the only specifications of “ illegality ” put forward here are these: that defendants gave the creditors no notice of the sale, that defendants themselves did not conduct the sale, and that they failed to carry out the permissive statutory procedures for corporate dissolution, or bankruptcy, or assignment for benefit of creditors. As to each of these, we can say only that there is no requirement of law for such action by directors.
A word as to the ‘ ‘ trust fund doctrine ’ ’. Whatever be 11 the uncertain limits of that much debated theory as understood and applied in New York ” (Barr & Creelman Mill & Plumbing Supply Co. v. Zoller, 109 F. 2d, 924, 927, 928), it never includes more than this: that the property of a corporation is a trust fund for the payment of all its debts, and its creditors, therefore, have an equitable lien thereon and the right to priority of payment over all stockholders (Wood v. Dunmer, Fed. Cas. No. 17,944; Bartlett v. Drew, 57 N. Y. 587, 589; Ward v. City Trust Co., 192 N. Y. 61, 74; Reif v. Equitable Life Assur. Soc., 268 N. Y. 269, 276). The doctrine or theory has, therefore, nothing whatever to do with this case.
The judgment of the Appellate Division should be reversed, and the complaint dismissed, with costs in all courts.
Loughran, Oh. J., Lewis, Dye and Froessel, JJ., concur with Conway, J.; Desmond, J., dissents in opinion in which Fuld, J., concurs.
Order affirmed, etc.