30 N.Y.S. 860 | N.Y. Sup. Ct. | 1894
The Third National Bank of Syracuse', one of the defendants, is a national banking association organized many years ago under the Federal Banking Act, and the
For years prior to 1887 Lucius Gleason and Frank Hiscock, both large stockholders, acting in unison, had controlled the management of the bank, apparently to the satisfaction of all concerned. Mr. Gleason was president, and in the discharge of his duties was accustomed to advise with Mr. Hiscock, who was vice-president. They were in entire accord as to the general policy to be pursued in managing the affairs of the bank. It was understood between them that all stock of the bank purchased by either should be for the joint benefit of both, and this understanding was faithfully adhered to. There had been no contest over the election of directors or otherwise, and regular dividends were declared and paid semi-annually at the rate of eight or ten per cent each year. The bank prospered and all were satisfied.
In 1887 differences arose between these two gentlemen over a large loan made by the bank through Mr. Gleason to the El Oro Mining Company, which had become insolvent. Mr. Hiscock was so severe in his criticism of this loan that finally Mr. Gleason indorsed the paper, amounting to between $60,000 and $70,000, in his own name, but afterwards refused to pay more than $30,000 thereof, and the bank lost the remainder. Bitter feelings resulted, and, owing to their estrangement, a contest arose between these men over the election of directors held in January, 1888, in which each tried to secure control of the board, and Mr. Hiscock succeeded. Thereupon Mr. Gleason was retired from the position of president, which he had held since the organization of the bank,
Mr. Gleason was greatly elated over his success in thus getting permanent control of the hank, and said that he never enjoyed anything more than voting out those people who had voted against him; that it had come out exactly as he planned it on the night after his defeat; that it would be some time before Mr. Hiscock and his friends would get any dividend on their stock, and that he now proposed to dictate the policy of the bank to suit himself. As a part of that policy he announced that he did not propose to pay any more dividends for some time to come, and refused to say when dividends would be resumed. Ho dividend has since been declared, although the condition of the bank would at all times.have warranted it, and as long as • he lived, although frequently urged by the largest stockholders, other than himself and Lacy, to at least allow a dividend large enough to pay the
Mr. Lacy co-operated with his uncle in obtaining control of the bank and in his policy of excluding the minority from any representation in the board of directors, as well as in the nonpayment of dividends. He stated in 1888 to a near relative that he and his uncle would buy up a controlling interest in the stock and then they would have the Hiscocks’ money to use. He told Mr. Hiscock, on one occasion, that it was not for his interest to make a dividend, because he was paying no interest on the notes he had given to Mr. Gleason for his stock, and if dividends were paid, Gleason would take them, but if they were allowed to accumulate he would, himself, have the benefit of them.
Mr. Gleason was a bachelor, well advanced in years, with impaired health, and Mr. Lacy, although not his nearest, was apparently his favorite relative. The title to much of the stock boxight by Mr. Gleason tp get control of the bank was taken in Mr. Lacy’s name until at last he held nearly 2,000 shares, for which he had given his notes to Mr. Gleason, pay
Loans were also made to Mr. Lacy ranging from $3,600 on the 1st of January, 1891, to $22,061.30 in January, 1892, but falling a year later to $8,566. The average was from $10,000 to $11,000, a part being the naked paper of Mr. Lacy, which, although it may not have been good prior to Mr. Gleason’s death, has undoubtedly been good ever since that event. Mr. Lacy was also paid a salary as cashier largely in excess of the amount paid to his predecessor, who, although of long experience in that capacity, had received but $2,500 a year, except in 1888, when he had $3,000. On the other hand, Mr. Lacy, who had for some years been employed by the bank in a subordinate capacity, at a salary that never exceeded $1,500, was paid by the direction of Mr. Gleason, and with only a pretense of authority from the board of directors, $5,500 for .his services as cashier in 1889; in 1890, $6,500; in 1891, $10,500; in 1892, $13,500. In 1893 he became president and his salary in that capacity was fixed by the board at $5,000. His successor as cashier, who was thoroughly qualified for the position, received $2,500 per year. A son and daughter of Mr. Lacy, both under age at the time, but competent to perform the duties required of them, were paid for their services in the bank as receiving teller and discount clerk, respectively, at the rate of $50 a month, each, in 1890; $100 a month each, after June, 1891, and $200 a month each, after April, 1892. The payments were reduced in 1893 to $225 per month for both together. Their respective predecessors had received $87.50 and $66.66 per month. Thus, in four years, Mr. Lacy received $36,000, and his children, during a similar period, $10,650 more, from the bank. Mr. Gleason’s salary as president had never exceeded $2,500, while Mr. Hier’s was but $2,000. When Mr. Lacy was cashier Mr. Gleason drew no salary and none
For some purpose, at variance with the previous history of the bank, Gleason and Lacy soon began to reduce the apparent
If retained by the bank and circulation was taken out upon them, as was in fact done, they would produce enough income to pay six per cent on their face value, and also enable enough of the premium to be charged off each year to completely wipe it out before the bonds matured. Yet all of the premium was charged off in 1890, except $5,000, which followed in 1891.
About 1887 the bank erected a convenient and beautiful banking house at a cost somewhat exceeding $80,000, and which is now worth from $60,000 to $70,000. Of this item over $55,000 was charged off on the 18th of February, 1889, and the 17th of May, 1891. March 17, 1893, certain real estate known as the Park block, belonging to the bank, and worth $10,000, Avas Avholly charged off. Omitting other assets of less value Avhich took the same course, but perhaps Avith a different purpose, the three mentioned amount to $111,598.44, the whole of Avhich Avas perfectly good, except as reduced by deficiency in the price of the banking house. After making a reasonable alloAvance for this item, there still remains from $90,000 to $100,000 of good assets charged off the books of the bank, or about one-fourth of its capital. Notwithstanding this heavy reduction in the apparent value of its assets, the bank has had a surplus, even upon that basis of value, ranging from $70,000 and upwards to about $115,000. Thus, its actual surplus is about $200,000, or the equivalent of' one-half its capital, and more, proportionately, than when the bank Avas paying dividends eATery year. It is not without significance that the charging off was so timed as to reduce the1 apparent surplus Avhenever it would otherwise have shown a marked increase. Thus, in 1889 there was an apparent loss on the business of the year, according to tire books, of
In 1890 the apparent net profits were $1,420.91, but including good assets charged off they amounted to $42,148.18.
In 1891 the apparent net profits were $17,438.76, but with good assets charged off they were more than twice that sum. In 1892, when the salaries to Mr. Lacy and his family ran the highest, there was an apparent net loss of $3,962.84, and no assets were then charged off worth mentioning. In 1893 the apparent net profits were $5,309.30, but the actual net profits, including the good assets charged off, were $15,309.30. During the five years under consideration the average net profits exceeded five per cent upon the capital, without taking into account the good assets charged off other than those above mentioned. The effect of the course pursued, as thus outlined, was to so depress the value of the stock as to make it difficult to sell at par, when it is really worth from $140 to' $150 per share. Mr. Lacy stated when on the stand as a witness that its present value is $150, and that it would realize upon liquidation $140.
Towards the close of 1892 the physical infirmities of Mr. Gleason became so great that it was apprehended he was rapidly nearing his last days. On December 20, 1892, he made his will, by which, without disposing of any of his property, he simply appointed Mr. Lacy as his executor with power to sell. At this time he held Lacy’s notes payable on demand, with interest, given for stock taken in the latter’s name, to the amount of nearly $200,000. Four days after the will was made, or on December 24, 1892, a new note was given by Lacy in the place of the old notes, and Mr. Gleason gave him back an instrument which allowed him ten years in which to pay his note and relieved him from the payment of any interest in the meantime. This gave Mr. Lacy the option of not paying his note until the charter of the bank had expired. Ten days later, or on January 3, 1893, Mr. Gleason died, at the age of seventy-three, and soon after his will was admitted to probate with Mr. Lacy as sole executor. Some
The defendant directors were elected in January, 1893, soon ■after the death of Mr. Gleason, and with two exceptions they, are the same persons who acted as directors during his life after he got control of the bank. Seven out of the nine ■directors so elected together own but ninety-four out of the 4,000 shares of stock, and hence have but a small pecuniary interest in the management. The other two directors are said Lacy and Orson Gleason, his uncle, who own, respectively, 1,782 and 113 shares. Mr. Lacy, as executor, also controls 474 shares in addition to those owned by him, as already stated.
During 1890, 1891 and 1892 Orson Gleason paid no taxes on his stock, and he is a somewhat heavy, but perfectly responsible,» borrower at the bank.
As would naturally be expected from the existing state of ■affairs, Mr. Lacy is the controlling sjflrit of the present management, as Mr. Gleason was before him. Few meetings of directors, an average of less than two each year, have been held since they came into supreme control, and at none of them has any business of importance been transacted, except the election of officers and matters of that character. Even the committee, appointed for two years in succession to make a thorough examination into the affairs of the bank, has made neither examination nor report.
These facts, with others not mentioned, leave no doubt in my mind that Lucius Gleason and Henry Lacy, in adopting and persisting in the policy of paying no dividends, acted without reasonable cause and in bad faith for the purpose of punishing the minority interest and at the same time securing advantages for themselves and their friends which the other stockholders did not enjoy; that their professed object of strengthening the bank was only a pretext to conceal their abuse of power; that it was the object of the will, note and agreement to enable Lacy to perpetuate such policy after the death of Mr. Gleason; that said policy was continued by him after that event in the same way and for the same purpose ; and that a majority of the other directors have, some through carelessness and others through a sense of obligation or through fear, acquiesced in such a policy, and aided in carrying it into effect by so voting as to express the wishes of Mr. Gleason and Mr. Lacy, rather than their own judgment. Thus, although not guilty of intentional fraud, their conduct had the same effect as fraud and calls for the same redress. Such being the facts, the question arises whether there is any remedy for these wrongs ? While courts have required business corporations to divide surplus profits, no case is cited where they have ordered a bank to declare a dividend, but no case seems to have arisen before where such facts were presented to a court for its jxidgment. I approach the subject with caution, realizing its delicacy and importance.
In authorizing the formation of business corporations the law has two objects in view: (1) To make the corporation strong, so that the public can safely deal with it; (2) to permit a reasonable division of its surplus earnings among the stockholders, so as to attract the' investment of capital. When the first is accomplished the second is authorized. The first is effected by certain mandatory provisions which must be complied with, not only in forming the corporation, but also
The directors in the discharge of their duties to the public are protected only by absolute obedience to the law, even good faith being no excuse for violating the governing statute, but in the discharge of their duties to the stockholders good faith is the standard of action. Directors are not required to be wise, but they are required to be honest. Errors of judgment are excused, even if they result in disaster to the stockholders, but bad faith, whether exercised to gratify malice or to promote personal interests, is condemned by the courts, which are zealous to find a remedy for the breach of trust.
Jurisdiction is assumed by courts of equity from their right to supervise trusts and to call trustees to an accounting. The property of private corporations is in the nature of a trust fund, under the control of directors, as trustees, for the benefit first of creditors and next of stockholders. Strictly speaking, the corporation holds the property in trust for the creditors and stockholders, and the directors are its agents to discharge
Primarily the corporation has the right, as a beneficiary of an implied trust, to call the directors to account, but as this is not practicable while the same persons continue directors, the stockholders may commence the action in their own names on making the corporation a party defendant.
While all the decisions hold that the general powers of a corporation reside in its directors, and that the ordinary power of the stockholders is confined to the choice of directors, they all proceed upon the theory that the directors, as trustees, must act in good faith, and unless they do so the courts will restrain or compel action in the interest of the aggrieved stockholders as justice may require. Thus, directors have been restrained upon the application of stockholders from misapplying funds (Carpenter v. N. Y. & N. H. R. R. Co., 5 Abb. Pr. 211); from so Auolating the charter as to hazard its forfeiture (Rendall v. Crystal Palace Co., 4 K. & J. 326); from transferring property witli intent to injure a stockholder (Kelly v. Mariposa Land & Mining Co., 4 Hun, 632); from unfairly discriminating between stockholders so as to give one an advantage over the other (Luling v. Atlantic Mut. Ins. Co., 45 Barb. 510); from so contracting with themselves, in the name of the corporation, as to secure an undue advantage at its expense ( Wardell v. R. R. Co., 103 U. S. 651, 658; from obtaining a valuable and exclusive privilege through their control over the corporation. Koehler v. Black River Falls Iron Co., 2 Black, 715, 120.
The courts have not only restrained directors from performing unauthorized acts, hut they have also awarded affirmative
The sanction of the courts to precisely such an action as the one under consideration has thus far been by intimation rather than decision. Thus, in Scott v. Eagle Fire Ins. Co., 7 Paige, 198, 203, it was said that if the directors of an insurance company should, “ without reasonable cause, refuse to divide what is actually surplus profits, the stockholders are not without remedy if they apply to the proper tribunal” While this was not necessary in order to decide the case then in hand, it has been referred to with approval by many courts of last resort, and has been criticised by none to which my attention has been called.
In Seeley v. N. Y. Nat. Ex. Bank, 78 N. Y. 608 ; 8 Daly, 400, it was held that where a national bank reduces its capital under the statute, the whole of the capital set free by the reduction must be returned to the stockholders, and that no portion of it can be retained as a surplus fund or for other purposes. In Williams v. W. Union Tel. Co., 93 N. Y. 162, 192, the court said: “ When a corporation has a surplus, whether a dividend shall be made, and, if made, how much it
In McNab v. McNab & Harlin Mfg. Co., 62 Hun, 18, it was held “ that the rate of dividend to be paid and the amount of surplus to be retained by a corporation must rest in the fair and honest discretion of its trustees.” In that case there was no reason for doubting or impeaching the good faith of the trustees, and there was no occasion for interference, but the principle that good faith is required was recognized.
In Brown v. Buffalo, New York & Erie R. R. Co., 27 Hun, 342, the plaintiff, a stockholder, suing in behalf of himself and all other stockholders willing to unite, alleged that the corporation and its president had converted and misapplied corporate moneys and refused to account for the same ; that they had withheld dividends and kept false books of account, and demanded that they account for and pay over to him his share of said moneys which ought to have been divided in the form of dividends among the stockholders. The demurrer interposed by the corporation, that the complaint did not state a cause of action, was overruled. This case, especially when the original complaint is examined, bears a strong analogy to the case under consideration. Supreme Court Cases, 1880, 4th department, vol. 1.
An instructive case was recently decided by the court of last resort in Michigan. It appeared that for seven years a stockholder, who owned a majority of the stock, elected himself and two of his dummies as directors, and caused the board to vote a large salary to him as president. By reason of this and other acts of like character, the corporation failed to pay dividends," and, upon the suit of a minority stockholder, the court took the management away from the directors altogether, appointed a receiver and dissolved the corporation. Miner v. Belle Isle Ice Co., 93 Mich. 97.
In Fougeray v. Cord, 24 Atl. Rep. 499, a corporation with
The action of the federal courts in dealing with a tyrannous majority of stockholders in disregard of' the rights of the minority may be seen in the following cases: Sellers v. Phœnix Iron Co., 15 Fed. Rep. 20 ; Davis v. Memphis City R. R. Co., 22 id. 883.
The elementary writers all agree that stockholders have a remedy if the directors do not act in good faith in refusing to declare a dividend. Thus, in Waterman on Corporations, it is said : “ The managers of a corporation are clothed with a. large discretion with reference to the declaration of dividends: They may be compelled to exercise their discretion if they improperly fail or refuse to do so. But when they have exercised it without any violation of the charter, their action cannot be disregarded or controlled by a court at the instance of a stockholder, unless it is shown to have been an'abuse of their discretion, or the result of bad faith, or a willful neglect or breach of duty. * * * Should they, without reasonable, cause, refuse to divide what is actually surplus profits, the stockholders are not without a remedy.” 2 Waterman Corp. 148-150.
“ The doctrine that where a corporation is about to exceed its powers by applying its property to objects beyond the authority of its charter a court of equity will grant relief to. a minority of its stockholders who dissent from such use of its funds necessarily results from the principle that the corporation and its directors are trustees, and as such may be called into a court of equity, either for an account or to restrain, them from mismanagement of the corporate property, especially for a fraudulent mismanagement of k, or for the purpose of compelling the corporation to declare dividends from its surplus earnings, when such dividends are needlessly and improperly withheld.” Id. 154.
“ If a majority of the stockholders or directors of a corporation wrongfully refuse to declare a dividend and distribute profits earned by the company, any shareholder feeling aggrieved may obtain relief in a court of equity.” 1 Morawetz Corp. § 448 et seq.
“ While a right to a dividend is no debt until the dividend is declared, the stockholders are not remediless in case the directors, without reasonable cause, refuse to divide the surplus profits. They may be compelled in such cases to make the distribution.” 2 Beach Corp. § 602.
“ Should the directors act illegally, wantonly or oppressively, and willfully abuse their discretion in refusing to declare a dividend, where the right to one is clear, and there are funds from which it can properly be made, a court of equity will compel the directors or trustees to declare and pay such a dividend as the funds accumulated will warrant.” Kerr Business Corp. 189. See, also, Angel & Ames Corp. §§ 391-393 ; Potter Corp. 100 ; Spelling Priv. Corp. 441, 442; Pierce Railroads, 122; Smith v. Prattville Manufacturing Co., 29 Ala. 503, 508 ; Park v. Grant Locomotive Works, 40 N. J. Eq. 114,118; March v. Eastern Railroad Company, 43 N. J. 515 ; Taylor v. Miami Exporting Co., 5 Ohio, 165 ; Pratt v. Pratt, 33 Conn. 446, 456 ; Beers v. Bridgeport, etc., Co., 42 Conn. 17-27; Belfast, etc., Railroad Co. v. Belfast, 77 Maine, 445, 454; Hazeltine v. R. R. Co., 79 id. 411; Hunter v. Roberts, etc., Co., 83 Mich. 71; Ely v. Sprague, Clark’s Ch. 351; Richardson v. Vermont & Mass. R. R. Co., 44 Vt. 613; State of Louisiana v. Bank of Louisiana, 6 La. 745, 763; Barnard v. Vermont & Mass. R. R. Co., 7 Allen, 512, 521.
From the authorities cited the rule may fairly be drawn
Such is the case now before the court, and it follows that the plaintiffs are entitled to a decree requiring the defendants to declare a reasonable dividend, provided the practice pursued is regular.
The learned counsel for the defendants, in his able argument, insisted that the complaint should be dismissed, because the plaintiffs sue in their own behalf only and not also in behalf of all other stockholders who might come in and unite in the action. As this objection, however, was raised neither by answer nor demurrer it has been waived. Code Civ. Proc. §§ 488, 498, 499; Tremper v. Conklin, 44 Barb. 456 ; 44 N. Y. 58 ; Merritt v. Walsh, 32 id. 685.
It is also suggested that, as a national bank is the creature of the federal government, it is not within the jurisdiction of a state court to interfere with the internal affairs of such a corporation. This would, perhaps, be the rule had not Congress provided otherwise. Osborn v. Bank of United States, 9 Wheat. 738. Any doubt as to jurisdiction, however, is dispelled by a reference to the statutes of the United States, one of which provides “ that the jurisdiction for suits hereafter brought by or against any association established under any law providing for national banking associations, except suits between them and the United States, or its officei-s and agents, shall be the same as and not other than the jurisdiction for suits by or against banks not organized under any law of the United States which do or might do banking business where such national banking associations may be doing business when such suits may be begun; and all laws, and parts of laws, of the United States inconsistent with this proviso be, and the same are hereby repealed.” U. S. Stat. 1882, chap. 290, § 4.
The only questions remaining relate to the amount of the dividend to be declared and the costs of the action. After careful reflection I have reached the conclusion that the bank should pay a dividend of not .less than twelve per cent, leaving it to the discretion of the directors to increase the amount, if they think best. The bank can readily pay a larger dividend, but I wish to be on the safe side and to make a conservative decision. This is but little, if any, more than enough to pay the taxes assessed upon the stock during the period that dividends have been suspended. The decree to be entered may provide for payment of one-half of the amount within sixty and the other half within ninety days after entry of judgment, with leave to the directors to pay the whole at an earlier date if they prefer.
The plaintiffs should recover costs, but, owing to the facts already stated, they should all be paid by Henry Lacy.
Findings and a decree may be prepared accordingly, and served, with a copy of this opinion, on the attorneys for the defendants, and, if not agreed upon as to form, they may be settled before me on a notice of two days.
Ordered accordingly.