Court Opinion

ID: 3616755
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:59:39.317535+00
Date Added: 2024-06-11T12:03:51.704368
License: Public Domain

Joseph Auditore and his brother Frank Auditore each owned fifty per cent of the corporate stock of Auditore Contracting Co., Inc., and together managed its corporate affairs. Joseph Auditore died May 9th, 1920. Letters of administration with the will annexed were issued to his wife, Guisippina, and to Frank Auditore, on August 18th, 1920. The National Surety Company executed its bond as surety for the administrators. From the death of Joseph Auditore, Frank Auditore continued to control the corporate affairs of the Auditore Contracting Company, Inc., with one Joseph Stockham who was elected secretary and a director thereof on June 10th, 1920. Together they appropriated to their own use corporate property. Thereafter Guisippina Parascandola, the former wife of Joseph Auditore, as administratrix of his estate brought a representative action in behalf of the corporation against Frank Auditore and Joseph Stockham to recover the corporate property appropriated by them. The action resulted in an adjudication that Frank Auditore and Stockham had looted the corporate treasury, and a final judgment was made and entered in favor of the corporation for the amount stolen. That judgment has never been paid and probably is uncollectible.
Frank Auditore has, of course, been removed as administrator *Page 349 
of the estate of Joseph Auditore. He has proven himself a faithless guardian of that estate. Upon the settlement of the accounts of Guisippina Parascandola a decree has been entered charging Frank Auditore, as former administrator, with the sum of $208,143.75, which is one-half of the amount of corporate property which Frank Auditore diverted and which, the courts below held, would have come to the estate if the corporate funds had not been diverted from the corporate treasury into the pockets of Frank Auditore and Stockham. There is no more probability that the amount found due to the estate can be collected from Frank Auditore than the amount found due to the corporation, but the decree which charges Frank Auditore with half the amount of his peculations from the corporation which he controlled also grants judgment for the same amount against the surety company as surety of the administrators.
Unquestionably the evidence establishes that Frank Auditore stole corporate funds through his control of the corporation. Unquestionably his theft reduced the value of the corporate stock belonging to the estate of which he was an administrator, though the assets he stole belonged to the corporation and not to the stockholders. The decision of the courts below that, as administrator, he or his surety must make good the damage to the assets of the estate through his theft of the property of the corporation, in which the estate is a stockholder, has been based upon the view that there are circumstances in this case which may properly lead the court to disregard the concept of a corporate entity apart from the stockholders. This court is about to affirm the judgment of the courts below on the theory that though we may not disregard the corporate entity which, at the suit of the administrator of the estate, has recovered a judgment against its faithless officer, the estate of Joseph Auditore is also entitled to a judgment against its faithless administrator *Page 350 
for damages caused to the estate by the breach of some duty owed to it. This court finds authority for its decision in GeneralRubber Company v. Benedict (215 N.Y. 18).
In that case the defendant was a director of the plaintiff corporation. He knew that the president of a subsidiary company whose capital stock was owned by the plaintiff was stealing the assets of the corporation. The defendant, knowing these facts, perhaps even acting in collusion with the dishonest president of the subsidiary corporation, neglected to inform the plaintiff. "He withheld and concealed the truth, so it is charged, intentionally and for his own profit." The defendant was not a director of the subsidiary corporation. "He is liable to it, if at all, only as a stranger might be liable. If he has joined in a conspiracy to plunder it, he must, like any other tort feasor, make compensation for the plunder." As a director of the plaintiff corporation the defendant owed to it a duty of fidelity and care. That duty the defendant breached, and for the consequent depreciation in the value of the stock owned by the plaintiff this court held that the defendant was liable directly to the plaintiff, regardless of whether or not the defendant was also liable to the subsidiary corporation for the conversion of its assets.
The opinion in General Rubber Co. v. Benedict (supra) distinguishes such cases as Smith v. Hurd (12 Metcalf, 371);Niles v. N.Y.C.  H.R.R.R. Co. (176 N.Y. 119), in which it was held that an individual stockholder has no right of action in his own behalf against one who has injured the corporation, however much the wrongful acts have depreciated the value of his shares, and this court adopted the language of TAFT, J., inRitchie v. McMullen (79 Fed. Rep. 522) that "we are of opinion that this principle has no application where the wrongful acts are not only wrongs against the corporation, but are also violations by the wrongdoer of a duty arising from *Page 351 
contract or otherwise, and owing directly by him to the stockholders."
The language of that statement, torn from its context and read without regard for the reason of the rule and its application to the particular circumstances to which it was intended to apply, is, perhaps, broad enough to constitute authority for the decision which this court is now about to make. Language in an opinion may not be so read. Though there is no privity between a director of a corporation and a stockholder, it can hardly be said that a director does not occupy a fiduciary relationship to the stockholders. The corporate entity stands between the stockholders and the directors, but the doctrine of a corporate entity may not blind us to the fact that a director of a corporation owes some duty, even if indirect, of good faith and honesty to all those who are interested in the assets of the corporation, be they stockholders or even creditors. The limits of that duty need not now be decided. Certainly the duty not to steal is sufficiently broad that it applies towards all who may be injured by the theft, and the sound reason why a stockholder ordinarily has no individual right of action for waste of the corporate property is that ordinarily a stockholder suffers no damage, of which the law takes cognizance, by waste of corporate assets. Those assets in law belong only to the corporate entity. The individual stockholders have no direct interest in those assets and hence suffer no injury, for which they may seek redress in the courts. Other holding would be in disregard of the doctrine of a corporate entity under circumstances and for purposes in which it was peculiarly intended to apply. Damage to the stockholders arises only indirectly through damage done to the corporation, and may be redressed only by action which seeks reimbursement for the corporation. (See opinion in Smith v.Hurd, supra.) Breach of a duty which is directly owed to a stockholder may, however, *Page 352 
also result in direct damage to the stockholder, which cannot be repaired by a representative action in behalf of the corporation. "The duty and the breach, coupled * * * with damage, make out a cause of action." That is the reasoned basis of the decision inGeneral Rubber Co. v. Benedict (supra).
It is to be noted that in all the cases cited in that opinion, including the case of Ritchie v. McMullen (supra), the "duty owed directly" by the wrongdoer to the stockholders was broader than any duty to the corporation not to waste the corporate assets, and gave rise to direct damage which ordinarily could not be made good by reimbursement to the corporation. Waste of assets in those cases constituted merely the means by which injury was directly inflicted upon the aggrieved stockholder. Where directors waste the assets of a corporation as part of a successful scheme to acquire the stock of the corporation at a depressed price, it would be idle to say that the only remedy left open to the wronged stockholder who has parted with his stock is by a representative action which would result only in an increase in the value of the stock in the hands of the wrongdoer. In the case of General Rubber Co. v. Benedict, it is true, all damage to the stockholder would be repaired if the corporation were made whole for the waste of its assets. In that case, however, the court pointed out that "the defendant was not a director of the subsidiary company. He was a director of the plaintiff" which in turn owned the stock of the subsidiary company whose assets were wasted. That circumstance I think was decisive. As a director the defendant owed a duty of care to the plaintiff corporation. He owed no such duty to the corporation whose assets were wasted. True, "if he has joined in a conspiracy to plunder it, he must, like any other tort feasor, make compensation for the plunder," but he was not sued for conversion but for failure to do his duty as a director. Only the plaintiff might sue for failure *Page 353 
to perform that duty and the court pointed out that under the circumstances "the breach of that duty, and the resulting damage, would seem to call for the application of a principle that there is no wrong without a remedy." Wrong and damage to the shareholder was not merely an indirect result of wrong to the corporation, for as to the corporation there may have been no wrong. In that action the question of whether the defendant had also committed some further wrong to the corporation by plundering it was irrelevant, except that, as the court expressly pointed out, proof that the corporation could itself collect damages for the waste of its assets, either from the defendant of any other wrongdoer, would reduce or perhaps even eliminate any damages which the stockholder might recover against the defendant for breach of a duty directly and peculiarly owed to the public.
Therein lies, I think, a decisive distinction between the case of General Rubber Co. v. Benedict and the present case. In both cases the wrongdoer occupied a fiduciary relation to a shareholder of a corporation. In both cases he was false to his trust. There, I think, analogy ceases. In the former case there was a breach of duty to the shareholder alone, and that breach was completely independent of any wrong to the corporation, indeed as to it there may have been no wrong. Here the shareholder shows and can show no breach of duty to the shareholder except by proof that the defendant wasted the assets of the corporation. The shareholder has not been wronged except indirectly through wrong to the corporation by the waste of its assets. True, the wrongdoer owed not only a direct duty to the corporation and an indirect duty to its shareholders as such but also a direct duty to the estate of Joseph Auditore because of his special fiduciary relationship to it, but his breach of all these duties was the same. He has been a faithless *Page 354 
administrator only because he has stolen the assets of the corporation. He stole no assets of the estate, and the estate has not been injured by the waste of corporate assets, except indirectly. For loss indirectly suffered by the shareholder through wrong to the corporation, the shareholder has never been accorded an individual right of action. In Ritchie v.McMullen (supra) and the cases there cited, there was a direct wrong to a shareholder beyond the waste of assets which caused the shareholders direct damage which would not be repaired even by complete restitution to the corporation. In GeneralRubber Co. v. Benedict the shareholders' cause of action was for a breach of a direct duty which was entirely independent of a waste by the wrongdoer of the corporate assets and might be proven even if the defendant was guilty of no wrong to the corporation. Here the defendant is being held liable as administrator for damages indirectly caused to the estate by his wrongful diversion of corporate funds perpetrated as a corporate officer. Distinctions which seem to me without substance between the acts of an administrator and a corporate officer are drawn to fasten upon the administrator's surety liability for damages resulting indirectly to the estate from a wrong to the corporation committed by an officer of the corporation, and which falls entirely without the purview of the bond when reasonably construed.
What I have said is intended to apply to the entire decree against the administrator and his surety. It applies, I think, with special force to that part of the decision of this court which holds Frank Auditore as administrator and his surety liable to the estate for damages caused by the theft of corporate assets even prior to his appointment as administrator. Concededly at that time no privity of any kind existed between Auditore and that estate. Theft or waste of corporate assets were at that time concededly a wrong only to the corporation, and the estate as shareholder had no cause *Page 355 
of action against the wrongdoer. The theft gave rise only to a debt to the corporation, and not a debt to the stockholder. Only through his control of the corporation or by an action brought in its behalf could Frank Auditore have compelled restitution. His failure to bring such an action and to collect the damages may again have constituted a wrong to the corporation; it constituted no independent wrong to any stockholder as such, and I fail to see how a direct wrong to the corporation which constitutes no injury to its stockholders can become an injury to a particular stockholder merely because the man who wronged the corporation occupied a special fiduciary relation to the stockholder. To permit a recovery by the stockholder for wrong to it, there must be proof that independently of the wrong done to the corporation there was a wrong done to the stockholder. A wrong to the corporation may become morally greater when the wrongdoer stood in a fiduciary relationship to a stockholder, but when the only breach of a duty owed by the wrongdoer to the stockholder is a waste of corporate assets causing no direct damage to the shareholder, I fail to see any sound ground for transmuting the injury done to the corporation into an injury to the stockholder in order to create a new liability against the surety on the administrator's bond.
For these reasons I think the decree should be reversed.
CARDOZO, Ch. J., POUND, ANDREWS and O'BRIEN, JJ., concur with CRANE, J., LEHMAN, J., dissents in opinion in which KELLOGG, J., concurs.
Ordered accordingly. *Page 356