41 N.Y.S. 566 | N.Y. App. Div. | 1896
This action was brought by the plaintiff, a stockholder of the defendant, the Brooklyn City Railroad Company, to set aside a lease of its railroad, executed by that company to the defendant, the Brooklyn Heights Railroad Company. At the opening of the trial of the action the plaintiff admitted that the lease sought to be avoided had been approved by the votes of the holders of more than two-thirds of the stock of the Brooklyn City Railroad Company, and that he (the plaintiff) was the only complaining stockholder. Upon these admissions the defendants moved to dismiss the complaint on the ground that the complaint, as modified by the admissions, failed to state a good cause of action. The motion was granted, and from the judgment entered upon such decision of the trial court this appeal is taken.
The two grounds upon which the learned trial court based its determination were, first, that the complaint was defective in failing to allege that the action was brought not only in the right of the plaintiff, but also on behalf of all other stockholders of the corporation, and, second, that the complaint failed to set forth any sufficient demand upon the corporation to bring an action to set aside the lease. As to the first objection to the complaint, we are by no means ’ clear that it, was well taken. The complaint showed that the action was brought, not for a wrong personal to the plaintiff, but for a wrong against the defendant corporation of which he was a shareholder, and his right of action was not primary, but derivative from the corporation, and existing only by the failure of the corporation to assert its own right. In surih a case the action doubtless should be and is on behalf not only of the particular plaintiff, but all the stockholders of the samó corporation. But we are riot
The second ground on which the decision of .the trial court proceeded we think clearly correct. It is settled law that In this class of cases, as the primary right of action is in the corporation, the stockholders .can intervene only upon the refusal of the corporation: to seek to enforce its own rights. “ An action for injuries caused by such misconduct must be brought in the name of the corporation, unless such corporation or its officers, upon being applied to
The averments of the complaint before ns, in these respects, are insufficient. The allegations of the twenty-ninth paragraph of the complaint are that the plaintiff demanded of his corporation, as a stockholder of the road, his share of the proceeds of the operation of the railroad over and above the rent stipulated to be paid in the lease. This demand called for no action by the lessor company against the lessee company. Á payment of some sum of money to the plaintiff would have been a complete compliance with the demand. Further, the plaintiff had no right to the payment of any part of the earnings of the railroad except as the corporation should declare dividends. Assuming the lease complained of to have been illegal or even wholly void, the whole earnings of the railroad in such case would belong to the lessor, not to the plaintiff, nor was he entitled to any aliquot share of them.
The thirtieth paragraph states that the plaintiff has notified the directors and officers of his company that the lease was unlawful and to the injury of the stockholders of the company, and has demanded that there shall be distributed among the stockholders all the profits and receipts from the operation of the railroad without regard to the lease; that such distribution necessarily involved such action on the part of said officers and directors as would effect the annulling of said lease, but that said directors and officers have failed and neglected to take any proceedings toward the annulling of said lease or agreement. There is the same criticism to be made on the statements of this paragraph as upon those of the preceding paragraph. There is alleged no demand that the corporation institute any action to annul the lease. As the right of the plaintiff to bring the action
Both at the trial and on this appeal the defendants further contend that the complaint states- no case sufficient to-set aside the lease. The scheme of the lease of the road of the' Brooklyn City Company, as. detailed in the complaint and the circular from the board of directors to; the stockholders, annexed ' to the complaint and made part thereof, is substantially as follows : A Syndicate proposed, to the directors and stockholders of the railroad company, that the rail-, road should be leased to another company for a net sum above all taxes, expenses, etc., equal to ten per cent of the stock of the company, which; at that time was, $9,000,000. A traction company was . to 'be formed with a nominal capital'of .$30,000,000, which was ,to own and control the company which might lease the railroad. .The, syndicate wás to secure and deposit the- sum of $4,000,000 as a, fund ' to guarantee the payment of the rent stipulated. : Each shareholder of the railroad company, for every $100 par "value -of stock, was entitled to subscribe for and receive three shares of traction company stock upon the payment of $15 per share, or to- sell- his right to such subscription. ;
This would dispose of $27,000,000 of traction -company- stock. The remaining $3,000,000 of "that stock was to go-.to the syndicate, which was to pay for the stock.at the same rate as that exacted from the Stockholders of the Brooklyn City Railroad Company — $15 per share; . It is .stated in the complaint -that, at the time this scheme was formulated, the Brooklyn City Railroad Company possessed a very valuable franchise and property; that it had been operating; a horse railroad; that it had - paid continuously dividends at the rate of eight per cent per annum; that it had at this time obtained the fram-. chise or privilege of substituting electricity as the motive power in the operation of its railroads; that the change of- motive power would render the operation of the railroad far more profitable, than it had previously been, by both diminishing the expense of operation and increasing its patronage, and that , the company was in-a condition to increase its earnings and pay dividends to the stockholders.in excess of ten per cent and at least fifteen per cent. . It is further -stated that the'defendant, the Brooklyn Heights; Railroad- Company possessed a short railroad of little value; that its capital stock of $200,000 was
We see no ground on which it can be successfully maintained that the lease was illegal.. The power of railroad companies to demise their own roads or lease those of others has existed in this State from the earliest period .of railroads within it. For a long time this" power was held to depend on the statute of 1839, which authorized' railroads to contract with each other for the use of their roads (Woodruff v. Erie Railway Co., 93 N. Y. 616); and this power could be exercised by the board of directors without the assent of the stockholders. (Beveridge v. N. Y. El. R. R. Co., 112 N. Y. l.) Now, by section 78 of chapter 565 of the Laws of 1890, as amended by chapter 676 of the Laws of 1892, express authority to leááe'railroads is given; but it is provided that leases exceeding in term' one year shall not be valid or binding unless' approved by the holders of two-thirds of the stock of the corporations. The con- ' cession of the plaintiff, made on the trial, is that the lease was ratified by more than two-thirds, in amount, of the stockholders. ’ The lessee is a railroad company, and, therefore, legally competent to accept the lease. The fact that the scheme contemplates a traction company which shall own the stock of the Brooklyn Heights Railroad Company, brings into the case no element of illegality. There' is no limitation on the right of. any person, individual or corporation, domestic or foreign, to own or hold the stock of railroad corporations of this State. There is, doubtless, an element of stock-jobbing or stock-watering in the scheme, the issue of $30,000,000 of traction stock at fifteen cents on the dollar, but this is not condemned by the laws of this State as to railroad companies. (Van Cott v. Van Brunt, 82 N. Y. 535.) It is forbidden as to certain corporations, but there is no such general legislation on the sub
Nor is the scheme as detailed fraudulent per se. The stockholders ,of the- Brooklyn City Railroad. Company were to' receive dividends at the rate of ten per cent per annum-. It, doubtless, was the expectation of the syndicate that the profits from the'operation of the railroad would exceed the stipulated rent, otherwise there would be no profit in the undertaking, but that does not condemn, the scheme as fraudulent. In most bargains there is a contemplation of profit by one side or the other. If the sole reliance for .the payment of the rent was to be the earnings of the Brooklyn City-Railroad Company it might well be said that it was a most foolish bar-' gain, because in that case the railroad company would have much to lose and nothing to gain by the transaction. But this was not the .plan „ Four million dollars was to be deposited in a trust company on the delivery of the lease as the security for its performance. .There is no -complaint that this süm was not so deposited. It certainly cannot be said that where the stock had been paying only eight per cent dividends fpr years, a lease at .the rate of ten, per cent, - guaranteed by the deposit of $4,000,000, or an amount equal to nearly one-half the capital stock of the railroad company, was necessarily a. foolish,, much less a fraudulent bargain. Besides this guarantee of dividends,, the stockholder of the Brooklyn City Railroad Company had the-right to subscribe to the stock of the traction company. If he thought that the future operation of the railroad was to be profitable he could, of course,- acquire the stock of the new company by paying his proper subscription, but he-was not compelled to venture any further-sum unless he saw fit, because under the plan each stockholder was entitled to dispose of his fight to subscribe. Nor does the fact that the' whole of the stock of the traction company was-not apportioned among the stockholders of the Brooklyn City Railroad Company necessarily show unfairness, . The .right to subscribe-to $3,000,000, or one-tenth of the whole capital, was to- go to the syndicate, but this provision for the syndicate was not a gift of without consideration. The syndicate had already advanced $500,000 as security for Carrying out the plan of lease in case the stockholders should adopt it; it was, further, to secure the deposit-of $4,000,000 on
It may be said by the plaintiff that it is his desire that the! Brooklyn City Railroad Company shall carry on its business as formerly, manage its own. road, receiving all the profits therefrom, and, of course, running the risk of its own losses. It may be, as he asserts, that the profit so accruing to the stockholders of the Brooklyn City Railroad Company will be far in excess of ten per cent, and that it Would be wiser had' the: company never leased its road, . But the plaintiff is one of. very many stockholders in the. company, one of many interested in a common enterprise. In the management of that enterprise, so far as its conduct is authorized by law, not his will or judgment, but the will and judgment of the majority, must control, even though he should be right and the majority wrong in their judgment. “ Generally, the rule must be that in such cases the will of the majority shall govern. The court, would not be. justified in interfering even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of. the court, in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority,, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation ’ itself . as to lead . to the clear inference that no one thus acting could. have been influenced by any honest desire to secure such interests, but
But though the lease, was within the power of the defendant corporations,. and though, upon its face the plan for lease is neither frau dulent nor oppressive, still fraud may be proved as a. matter of fact, if the allegations of the complaint are sufficient for that purpose. As the facts were not entered upon at the trial, but the complaint dismissed on the opening, it is necessary to see whether the pleadings sufficiently! charge fraud. - It is charged that the Brooklyn City Railroad Company would be able to pay fifteen per cent dividends if it retained its road instead of ten per cent, and that the effect of the lease is to deprive the company of its full earnings. As already Said, this does not necessarily render the lease illegal or fraudulent; •Generally, a lease, if made at a low price* deprives the lessor of its earnings; if at a high price, the lessee of its .earnings. In the fifteenth paragraph it is alleged that certain persons, some of whom were directors of the company, designed and-entered into a scheme to divert a portion of the earnings from- the stockholders, and in pursuance Of that scheme to .lease the railroad for a consideration less than its rental value. Except so far-as the persons were directors of the railroad company there -was no wrong in their attempting to lease the railroad -cheaply. But as to the directors of the company such conduct would be fraudulent, because their, loyalty was due to .the company and.its stockholders, and of course it would be equally wrong in other parties to combine with the directors. To this it. .may be urged that the allegation would be true possibly if one and certainly if two of the directors only were parties to such a scheme* while a clear majority of all the directors may have .acted from a desire to benefit the stockholders. The.allegation is justly subject
Except as to this view of the sufficiency of the allegation of fraud we all are in accord. But as to this two of my associates, the presiding justice and Mr. Justice Hatch, differ from me. They are of opinion that the allegation is defective in failing to charge what the fraudulent conduct and motives of the stockholders were, and also think that the allegation of fraud is to be construed in connection with the other statements of the complaint, as to the scheme of leasing the railroad, and, so construed, to charge nothing more than an intent to carry out that scheme. They are, therefore, of opinion that no case is stated justifying an avoidance of the lease.
The judgment appealed from should be affirmed, with costs.
All concurred.
Judgment affirmed, with costs.