Court Opinion

ID: 5702246
Source: CourtListenerOpinion
Date Created: 2022-01-12 15:42:16.033622+00
Date Added: 2024-06-11T08:40:21.472829
License: Public Domain

Per Curiam.

The complaint pleads two causes of action. The first is an individual action at law for damages caused to plaintiff’s investment in Clermont Cravat Company, Inc. by means of an allegedly fraudulent liquidation of that corporation. The second cause of action is an action in equity on behalf of the corporation to recover for damages resulting front the liquidation of its business and misappropriation of its assets and good will by defendants. , *
Plaintiff appeals from so much of the order of Special Term as dismissed the first cause of action as insufficient and' which denied, as academic, that part of the plaintiff’s motion to dismiss the defense pleaded to the first cause of action.
In the first cause of action it is alleged that plaintiff owned 30% of the stock of Clermont, and defendants Benner and Nitchun owned the remaining 70%. A stockholders’ agreement contained provisions restricting the alienation of the capital stock, setting forth that any salary or compensation paid by Clermont to the parties for services should be in proportion to their stockholdings, and giving plaintiff other rights not ordinarily available to a stockholder as such. Defendants Benner and Nitchun demanded that plaintiff withdraw from the,corporation and sell his capital stock to them, threatening that if plaintiff refused to do so they would cause the’ business of' the corporation to be liquidated and the corporation dissolved. With no proper business reason for liquidation, and while business was flourishing, the afore-mentioned defendants combined to bring about the dissolution of Clermont, the elimination *265of plaintiff’s stock interest and the consequent destruction of the stockholders’ agreement — all over the protests of plaintiff. Operation of the corporation’s factory was discontinued, its lease surrendered, and its machinery and inventory sold at auction. These acts, it is alleged, were not done in good faith but with the intent of eliminating plaintiff’s interest in Clermont, as well as his participation in its profits pursuant to the stockholders ’ agreement, and diverting its business for defendants’ individual benefit.
Subsequently, plaintiff alleges, defendants Denner and Nichun, in combination with the other individual defendants, caused the incorporation of defendant Mason Neckwear Co., Inc., which took over the plant, equipment, personnel, designs, samples and unfilled orders of Clermont.
The second cause of action is brought on behalf of Clermont and alleges that the purported dissolution and liquidation was fraudulent as to that corporation.
In Kavanaugh v. Kavanaugh Knitting Co. (226 N. Y. 185, 197-198) the Court of Appeals said: “We need not state a* detailed analysis of the contents of the complaint. Obviously, facts are alleged which permit, if they do not compel, the inference that the directors conceived and progressed the scheme of dissolving the corporation, irrespective of the welfare or advantage of the corporation and of any cause or reason related to its condition or future, through the desire and determination to take from the corporation and to secure to themselves the corporate business freed from interference or participation on the part of the plaintiff. Moreover, allegations of the complaint are, in effect, that the judgment or opinion of the directors was not honest, their action was not the result of good faith, the exercise of an honest judgment and an honest and unbiased consideration of any fact or circumstances affecting the general interests of the corporation and of all of its stockholders, and was in bad faith and for the sole purpose of permitting the individual defendants Kavanaugh to dissolve the corporation for the purpose of depreciating the value of the corporate property and the plaintiff’s proportionate interest therein.”
The first cause of action, under review here, parallels the complaint in the Kavanaugh case. The allegations as to wrongful acts and motives on the part of defendants are practically identical; and the Court of Appeals held unequivocally that they were sufficient to support an action for injunctive relief.
True, in the Kavanaugh case, an injunction only was sought against apprehended injuries, whereas here plaintiff in the *266first cause of action seeks damages for the accomplished injuries. If it appeared that plaintiff could secure equivalent relief for the damages he has suffered by means of a derivative action, we would be inclined to dismiss the first cause of action. However, accepting the allegations of the first cause of action at face value, it appears that plaintiff asserts damages which could not be recovered in any derivative action — possibly damages flowing from the destruction of the stockholders’ agreement.
We cannot accept the view urged, namely, that the directors had the unqualified right to dissolve the corporation if so advised. They could do that only if acting in good faith and in the best interests of the corporation. That, we think, is the clear holding of the Kavanaugh case: ‘‘ The directors, in reaching their belief, cannot consider or give weight to their personal wishes, comfort or advantage. Whether or not the dissolution is wise or expedient for themselves as apart from the corporation or any or all of the other stockholders they can neither question nor determine. Their action must be based upon the belief that the interests and welfare of the corporation and the stockholders generally will be promoted by the dissolution. * * * The directors are bound by all those rules of conscientious fairness, morality and honesty in purpose, which the law imposes as the guides for those who are under the fiduciary obligations and responsibilities. They are held, in official action, to the extreme measure of candor, unselfishness and good faith.” (226 N. Y. 185, 192-193.) The first cause of action is replete with factual allegations of bad faith and selfish motives on the part of the directors.
Moreover, the distinctive characteristics of the “ close ” corporation, as distinguished from the publicly held corporation, require a realistic approach to the problems presented by that method of conducting business. (See “ A Plea for Separate Statutory Treatment of the Close Corporation”, 33 N. Y. U. L. Rev., 700-745 [May, 1958]; “Statutory Assistance for Closely Held Corporations ”, 71 Harv. L. Rev. 1498-1516 [June, 1958].) Plaintiff, a 30% stockholder in a three-man corporation, does not in the first cause of action sue for vindication of a corporate right against his allegedly wrongdoing partners, but seeks to enforce a personal claim. The charges made include a violation of a pre-incorporation agreement as well as activities by the defendants which have diminished the value of his stock. Evidence may be introduced under the first cause of action of damages suffered by plaintiff in his individual right that are not recoverable through the channels of *267the derivative stockholder’s action. While the corporation may have an interest in requiring the individual defendants to account for some of their alleged acts — and the second cause of action brought in a derivative capacity asserts that right — the corporation has not an enforcible claim as to other aspects of plaintiff’s suit. We should recognize plaintiff’s separate cause of action for wrongs allegedly done to him as distinct from those for which the corporation may seek redress.
We reach the conclusion that the first cause of action is sufficient as a pleading and should not have been dismissed. In so holding we are then required to pass upon the defense of estoppel pleaded to the first cause of action, based largely on plaintiff’s failure to take legal action to prevent the liquidation. Having dismissed that cause of action, Special Term did not pass on that defense.
The sole basis of this defense is that plaintiff took no action to restrain defendants judicially from proceeding with their wrongful course of proposed action, although he had been made aware of their intentions for several months before consummation of the plan. However, defendants do admit that they acted against the repeated protests of plaintiff; and assert that they went ahead with their announced plans ‘ ‘ in reliance on such inaction ” (to institute restraining litigation).
The defense of estoppel is never considered unless and until plaintiff has proven that defendants acted in bad faith to freeze him out of the business. For the purposes of the defense under consideration, since it is asserted in the nature of an avoidance, the acts of defendants must be assumed to have been fraudulent, as alleged in the complaint. This fraud or bad faith must mean something more than a distaste for plaintiff and a desire to terminate the relationship; there must be some illegality, gross impropriety, or breach of trust. Their bad faith having been proven, defendants can scarcely raise a defense grounded on good conscience and fair dealing (People v. Wirtschafter, 305 N. Y. 515, 524). “ There can be no estoppel against dishonest conduct” (Angerosa v. White Co., 248 App. Div. 425, 433-434, affd. 275 N. Y. 524; Crowell-Collier Pub. Co. v. Josefowitz, 9 Misc 2d 613, 615, affd. 5 A D 2d 987; 31 C. J. S., Estoppel, § 75).
Moreover, to sustain an equitable defense to a law cause of action there must be available all of the elements of an estoppel in pais. Delay and irreparable change of position by the parties invoking estoppel, while necessary, are not enough, as they might be if the defense were that of laches in equity, or more accurately here, the quasi estoppel of acquiescence. (Weiss v. Mayflower Doughnut Corp., 1 N Y 2d 310, 318;
*268Galway v. Metropolitan El. Ry. Co., 128 N. Y. 132, 152-156; 3 Pomeroy on Equity Jurisprudence [5th ed.], § 816 et seq., but especially § 819.) Before the legal defense can be made out, there must be some act or omission on the part of the party legally estopped, which he was bound to do or abstain from doing, working to the irreparable change of position of the parties invoking the estoppel (31 C. J. S., Estoppel, § 59).
Clearly, in this case, if plaintiff was the target of a legal wrong, he had no obligation to sue to prevent defendants from doing him damage. The day has not yet been reached when the victim must enjoin the thief or lose his right to recover his stolen property or its money worth. If plaintiff proves his legal cause of action he will have proven a clear legal right to relief. Short of a Statute of Limitations defense or a complete estoppel in pais, that right may not be denied (Galway v. Metropolitan El. Ry. Co., supra). It is not sufficient to suggest that an estoppel may result from a “failure to take legal action ” when it is possible (if not utterly certain) that plaintiff had no legal duty to take legal action.
In equity the answer is more simple as to when the defense of laches may lie. Equity will deny its discretionary relief— but only its discretionary relief—when plaintiff has rested on his rights, done nothing, while to his knowledge, defendants changed their position to their irreversible detriment (Groesbeck v. Morgan, 206 N. Y. 385, 389; Calhoun v. Millard, 121 N. Y. 69, 82-83). But however relevant laches or acquiescence-may be to those parts of the second cause of action which seek discretionary relief, quite clearly they are irrelevant to the first cause of action.
In other words, defendants nowhere allege that had plaintiff sought judicial relief they would have abandoned their illegal plan. Bather, they seem to tax plaintiff with not having gone to litigation in order to save them from the consequences of' then-own wrongful conduct. However, if defendants are in a position to plead properly other facts that can sustain an estoppel against this action at law, they may amend their pleadings, if so advised.
Accordingly, the order appealed from should be reversed on the law so as to deny defendants’ motion to dismiss the first cause of action and to grant plaintiff’s motion to dismiss the affirmative defense thereto, with leave to replead, if so advised, with costs to abide the event.