87 N.Y.S. 369 | N.Y. App. Div. | 1904
Lead Opinion
This action was brought by certain stockholders of the defendant company in the interest of the company to recover from the firm of Moore & Schley what is termed in the complaint “ a secret, profit ” made “at the expense of the defendant company, its stockholders and creditors.”
It seems to me that the fundamental error which underlies the whole of this complaint is the assumption that the defendant com: pany had any interest in, or acquired any rights by, the contract, Exhibit A, annexed to the complaint, and which is erroneously styled & “ stock subscription.” .
This paper was simply a' contract between the signers thereof and Moore & Schley, whereby the signers agreed to buy from Moore & Schley the number of shares set opposite their respective names, at a' price specified, of a company to be organized upon the basis therein' provided; and Moore & Schley agreed to sell • certain of said shiarés to the signer's at the price named, deliverable when and if issued.'
It seems to me reasonably clear that if the signers had failed' to receive the stock subscribed for when issued, tliey would' havó filad' no cause of action against the defendant company, their only
There is no claim but that the company was organized us required by the contract, nor that the expectations referred to therein were not carried out to the letter. All the malt properties referred to therein were acquired by the defendant company and ample working capital was provided. Moore & Schley made no secret of their interest in the properties which were to be acquired by the company. The contract expressly declared that Moore & Schley and their associates controlled the properties which were to be acquired by the company ; and the'only inference to- be drawn from its language is that all the stock of the company, except the amount reserved in the treasury for further corporate uses, was to be issued to Moore & Schley and their associates in payment for the properties acquired and to provide working capital. AH the stock, referred to in the contract as to be issued for acquiring property and working capital, was issued to Moore & Schley as contemplated for the properties therein referred to and for working capital. I say issued to Moore & Schley, because I treat Moore & Schley and Eicks as one for the purposes Of this opinion. There is no claim but that Moore & Schley caused .every piece of property contemplated to be conveyed to the company and provided an ample working capital.
It is said that Moore & Schley did not themselves convey the properties to the company, but that they were conveyed by the respective owners. The contract states that Moore & Schley and . tlieir associates held options upon, this property. They, therefore, controlled it; and the fact that they caused the owners of the property to convey directly to the company in fulfillment of their contract with the company to convey or procure to be conveyed this property to the company in no manner affected, their relations to the transaction. The language of .the contract of Eicks with the company clearly contemplated that Moore & ScMey and Eicks were riot themselves to give the title.. Eicks contracted to , convey ,or procure to be conveyed. If one man holds a contract for the sale of real estate by another^ which he assigns to.a third party
The demurrer should be sustained.
Ingraham, J., concurred ; Hatch and Lattghlin, J.J., dissented.
Concurrence Opinion
(concurring): '
The cause of action sought to be enforced is one in favor of the corporation, the American Malting Company, to compel the individual defendants to account to that corporation for 5,000 shares of the preferred stock, and 77,400 shares of the common stock received by them and any other stock or money retained by them as a profit. There is no wrong done to the plaintiffs either individually or as stockholders by any of the defendants for which redress is asked, and the action must be treated as if the corporation were the plaintiff, and to sustain it the complaint must allege facts which give the corporation a right to call the defendants to account.
The complaint contains, many allegations as to the intent of the defendants and the purposes and objects that they had in view; but I suppose that the liability of the defendants must depend upon. what they did, not upon what they proposed or intended to do; and if what it is alleged they did, gives to the corporation no right of action, this judgment cannot be sustained. The fact that the defendants or some of them endeavored" to make it appear to the public, to the stockholders of the defendant company, and to the defendant company, that the defendant company was dealing, with an independent party is not at all material, unless the "endeavor was successful, and neither the. public nor the stockholders are before the court asking for relief.
■ The complaint alleges that the American Malting Company was
The defendant corporation having been incorporated on the 2.7th ■of September, 1897, the incorporators met on September twenty-■eighth and elected five directors, who were employees of the attorneys for Moore & Schley,, or representatives of Moore & Schley, and. said directors elected officers, one of whom was one of the attorneys of Moore & Schley and the others employees of such attorneys. On the said twenty-eighth of September,, at the instigation and' request of Moore & Schley, the officers- and directors caused the defendant corporation to enter into a. contract with the defendant Eicks, by which Eicks agreed to convey or cause to be conveyed to the defendant corporation the said malting plants and to furnish a
These are the substantial allegations of the. complaint as to the organization of the defendant’ corporation and the issue of the stock. The allegations of the motives and intent of the defendants (which are not alleged to have been carried out) and of other transactions of the corporation do not appear to me to be material in determining the legal relation that existed between Moore & Scliley and the corporation. It is not alleged but that Eicks complied with his contract and conveyed or caused to be conveyed to the defendant corporation the malt producing plants therein specified, nor is there any allegation that the plants acquired by the defendant company were not worth what the company paid for them. The corporation was organized to acquire and work these plants. It acquired such plants, issuing therefor a part of its capital stock at a price which, so far as appears, was not excessive. It does not ask to set aside the transaction, but holds on to what it acquired in con-. sideration of the issue of its stock. It is not alleged that there was any secret about the relation in which Moore & Schley stood to the company or to the property purchased by the company. The incorporators, the directors, the officers and Eicks, who made the contracts, and the purchasers of the stock from Moore & Schley had, so far as appears, knowledge of all the facts that are alleged in the complaint. The contract between the corporation and Eicks -was
After deducting the stock to be retained by the company, it was .-stated that the amount that was to be issued in acquiring the properties and for working capital was of the par value of $26,250,000. The stock to be issued to Eicks for the properties to be acquired for the corporation was of the par value of $26,240,000 ■—-less than ■stated in the letter. What was there then in this subscription letter to Moore & Schley which could give the corporation a right of action against Moore & Schley ? Moore & Schley did not purport to be acting for the corporation to be organized, nor for those who were to become the purchasers of the stock ; nor was it anywhere ■alleged that the agreement to purchase the stock was with the ■corporation. The promise to purchase was based upon the statement that the stock was to be issued in acquiring the malt properties upon which Moore & Schley controlled options, and the sub
If the purchasers of the stock of the defendant company had suf
It is, however, thought that if what is known as the English rule is to be adopted in this State, there is imposed some liability on the defendant. But ah examination of the cases in which that rule has been applied discloses that they are but an application of familiar principles, always a part of the common law. Thus the case of Erlanger v. New Sombrero Phosphate Co. (3 App. Cas. 1218) was brought to rescind a contract of sale made by the promoters to the corporation. The facts undoubtedly justified the rescission, and it was held in •affirming a judgment rescinding the sale to the -corporation that the application to make the promoters account for the profits that they had made by the sale to the company could not be granted; that all the relief that a court of equity could- grant was a rescission of the -sale. The corporation in that ease was organized by the owner of the property which was to be. sold to the. corporation. The public subscribed to the corporation for its stock and the proceeds of such subscription were paid to the company, its stock was issued, and such proeeeds wei;e paid by the company to the promoters for the property transferred to it. The relations between the corporation and the promoters were entirely different in that case from what they are in
In Cavendish Bentinck v. Fenn (12 App. Cas. 652) the defendant, a director of the Cape Breton Company, was sought to be held liable for a breach of trust as a director of the company. Upon appeal to the House of Lords from a judgment for the defendant it was held that, as the defendant was interested in the property sold to the corporation, he, being a director, was bound to disclose that interest to the other directors of the company who were entering into a contract for the purchase of property, and his failure to make that disclosure would entitle the company, upon discovering his interest, to rescind the sale, but at the time the action was brought such a rescission had become impossible, and thereupon it was claimed that the defendant had to make good to the company the loss that they had sustained Owing to his misfeasance in failing to make that disclosure. In affirming that judgment Lord Herschbll, in the House of Lords, said : “ Now I am by no means prepared to say that the argument of the appellant is well founded that such a case as this is a .parallel case to the class of cases to which I have alluded, where an agent employed to' go into the market and buy at the market price sells his own goods to the company at something above the market price. But I do not think it necessary to come. to any absolute determination upon that point, because it is of the very essence of such. a case as this to show that the price at which the property was sold to the company was in excess of what has been called the real price or the true value.” And it was held that# in the absence of evidence to show that the price at which the property was sold to the company was in excess of its true value, there was no such cause of action. And the opinion continues: “ I think it is impossible to arrive at any such conclusion, and to say that, therefore, there has been misfeasance on the part of Mr. Fenn, the present respondent, which would warrant your lordships coming to the conclusion that he should be compelled to return a part of the money received in respect of this purchase on the ground that he was making improperly a considerable profit. * * * There is no misfeasance in a person who has an interest in the property, by being a shareholder in the company which is selling it, never
Gluckstein v. Barnes (App. Cas. [1900] 240) was a case of fraudulent misrepresentation by Gluekstein and three other persons as to the price that they had paid for the property which they had sold to the company of which they were directors, and the lord chancellor in stating the question says: “ The simple question is whether four persons, of whom the appellant is one, can be permitted to retain the sums which they have obtained from the company - of which they were directors by the fraudulent pretence that they had paid 20,0002. more than in truth they had paid for property which they, as a syndicate, had bought by subscription among themselves, and then sold to themselves as directors of the company.” It was determined that fraud was proved and that said persons were liable to the company for the' damage sustained by the company by reason of the fraud. In that case it was said : “ Indeed, the case is so clear that I do not think it is a case of inadequate disclosure, but of direct misrepresentation.”
’ In Burland v. Earle (App. Cas. [1902] 83), a case before the Privy Council, in speaking of an action brought by one stockholder to enforce a demand in favor of the corporation in which he owned stock, it is said : “ The cases in which the minority can maintain such an action are, therefore, confined to those in which the acts complained- of are of a fraudulent character or beyond the powers of the company.” In that case it'appeared that at a public sale Burland, one of the directors of the company, had purchased property for $21,564; that he shortly afterwards sold the property to the company for $60,000; that under these circumstances he had been ordered to pay to the company the difference between the purchase price and the price at which he sold it to the company; and in discussing that question, Lord Da vet said : “ Both courts have held that the resale was by Burland’s advice and influence, and was made without disclosing to the company the price at which he had pur
The principle laid down in these cases does not, it seems to me, support this action. There were no representations in the Moore &
It follows, therefore, that the judgment must be reversed, with-costs, and the demurrer sustained, with costs, with leave to the plaintiffs to amend on payment of costs' in this court and in the court below.
Concurrence Opinion
(concurring):
I am unable to concur :in the opinion of Mr. Justice Hatch, and my judgment in this case inclines me to concur in the result reached "by Mr. Justice Ingraham.
It seems to me that the radical defect in the plaintiffs’ case is that they do not show themselves to be ¿ntitíed either originally or derivatively to the relief tliey demand. Taking the allegations of the complaint reciting facts, and separating them from mere characterizations and conclusions, it seems to me to be apparent that there can be no cause of action inhering in the plaintiffs, unless one inhered in the corporation. I do not see how a right to maintain' this action resided in the corporation. Suggestions, charges, epithets and imputations in the complaint must all yield, as I view the case, to the contents of Exhibit A (annexed to the complaint), which only constitutes between the signatories to that paper and Moore & Schley a private contract that the former would take the number of shares set opposite to their several signatures of preferred stock and of common stock in a corporation to be organized to mannfacture and deal in malt with a capital of $30,000,000, out of which capital all but $2,500,000 of preferred and $1,250,000 of common stock, to be reserved for future corporate uses, would be applied to . acquiring malt properties of which Moore & Schley controlled options (or their value as Moore & Schley might determine in lieu of any thereof that might not be acquired), and that the stock so to be issued, namely, $9,000,000 of preferred and $4,250,000 of common stock, would be sold upon the terms above stated, deliverable when issued. What wouldzbe understood by this private contract entered into between Moore & Schley and those who signed it ? As soon as it was put out by Moore & Schley, and they invited responses, those who signed the paper knew precisely what they undertook in the way of an obligation. When they signed, they did not agree with a corporation, but they agreed to take from Moore. & Schley, When a corporation should be formed, the number of shares set opposite their names respectively, and they agreed as to what and how much stock should be issued for the options. It seems to me that this is a simple contract by which Moore & Schley agreed to furnish shares of stock in respect of which those agreeing to take knew fully what the capitalization was to be and what would be
I fully concur with Mr. Justice Hatch in the abstract rules of law which he has stated, and in the very admirable and learned classification and array he has made of the cases bearing upon the subject of the liability of a promoter of a corporation. I see no reason to dissent from anything he has said on that general matter, and I regard his opinion in that respect as a very useful and valuable contribution to the literature of that subject. But I cannot bring this case within any one of his classifications. My view is that the corporation which was organized had no right of action against Moore & Schley, and that hence these plaintiffs, as stockholders, derive no right of action from that company. If a wrong has been done, it is one to be remedied in favdr of those who signed Exhibit A, or those claiming directly under them, and there is no complaint emanating from them.. For these reasons, I think the demurrer should have been sustained, and, as a consequence, I concur in the conclusion reached by Mr. Justice Ingraham.
Dissenting Opinion
(dissenting):
The complaint states a single and indivisible cause of action. The disposition which this court made of the motion to strike out certain parts of the complaint and to make other averments more definite and certain has settled as to form and materiality the averment of matter contained therein. While no opinion was written in making disposition of that appeal (77 App. Div. 642), yet such is.the necessary effect of that determination. The cause of action averred in this complaint, stripped of all verbiage, is plain and simple. It charges that Moore & Schley for the purpose of obtaining for themselves a secret profit, did certain things and thereby obtained profits to which they were not entitled. The acts which Moore & Schley are charged with doing to effect this result consisted in procuring in the name of the defendant Eicks, who was their agent for the purpose, options for the purchase of about twenty-five
It is evident that Moore & Schley from the inception of the enterprise and in all of the steps taken to the distribution of the stock stood in relation thereto as promoters. While it is true that they were owners of the options it is equally true that they procured those options for the purpose of transferring them to a corporation, to be thereafter formed, and in the entire transaction they intended to. and did make use, not of their own money, bnt of money paid in by the subscribers, which in amount was sufficient to pay the purchase price of the property and furnish the working capital. The excess of stock was provided for the purpose of being appropriated by Moore & Schley, and the complaint avers that in accomplishing it the scheme took this form. It is evident, therefore, that Moore & Schley in relation thereto were promoters. Cook on the Law of Stock and Stockholders defines a promoter to be: “A person who brings about the incorporation and organization of a corporation. He brings together the persons who are interested in the enterprise^ aids in procuring subscriptions, and, generally, is the representative of parties who wish to sell property to the corporation or to construct
It is averred in the complaint that the stock appropriated by Moore & Schley was the property of the corporation and was required to be placed in its treasury, and that, therefore, it being its property, a wrong has been done to it, and that it has been damaged to the extent of the value of the stock so appropriated. It seems clear that after the corporation was formed, the stock, which was issued, was and continued to remain its stock until transferred for some purpose of corporate use, and that no one could appropriate it to himself without giving value therefor. Certainly the board of directors were not authorized to make a gift of it to any person. Moore & Schley had no more authority to appropriate the stock to their use without giving value therefor than would the board of directors be authorized to make a gift of it. . Taking the stock- from the corporation was an appropriation of its property, and if no value was given therefor it operated to deplete the property of the corporation or to create an obligation against it, and in law it constitutes a fraud upon the corporation and its stockholders. Under similar circumstances it has been held that an action would lie either by the corporation or its representatives to compel the persons who have misappropriated the stock to account for the same, or its value, within well-settled equitable principles. (Brewster v. Hatch, supra; Colton Improvement Co. v. Richter, supra, and cases cited; Hayward v. Leeson, supra; Spaulding v. North Milwaukee Town Site Co., 106 Wis. 481; Pittsburg Mining Co. v. Spooner, 74 id. 307.) The rule is the same in England. (Erlanger v. New Sombrero Phosphate Co., supra; Gluckstein v. Barnes, supra; Matter of Lady Forrest [Murchison] Gold Mine, Ltd., 1 Ch. Div. [1901] 582.)
In Burland v. Earle (App. Cas. [1902] 83) it was held that where a director purchased property upon his own motion without any mandate from the company directing him so to do, and under such circumstances that he did not become a trustee, and subsequently sold the same property to the company at an advance in price, he could not be compelled to account for such difference by a share
- It is claimed that such result does not necessarily folloAV fertile reason that in every action brought by a stockholder to-enforce a corporate right, two elements are presented Avhich are-essential to the cause, of action. One, a cause of action in favor of' the company against the. party liable to it, and secondly, a cause of" action in the stockholder’s favor to compel the company to enforce* such liability. The argument is that there is a variety of things,., ■out of Avhich arise a right in favor of the corporation which may be-enforced in an action, which right, however, it is neither desirable-nor beneficial to enforce, and that such determination must of" necessity'be left to the control of the directors, charged with the-duty of management, and that before a stockholder can enforce the*» right of the company, it becomes incumbent upon him to establish,, as a part of his cause of action, that it is such a right as it would of:
There can be. no doubt of this rule, unless' we have wholly misapplied the rules of law and made construction of the acts of Moore <& 'Schley not justified by the actual transaction. It is earnestly insisted by .the learned counsellor the appellants that our conclusion
It is said, however, that the subscription agreement did not constitute a contract between the subscribers thereto and the corporation ; that as it acquired no interest thereunder it has no right upon which an action can be founded, and it is, therefore, entitled to no relief. By the terms of this instrument each subscriber agrees/ to take shares of preferred and common stock of the corporation when and if issued. There is no agreement to take any shares from Moore & Schley at any time, nor does the agreement contemplate that any shares issued to Moore & Schley will be delivered by them to the subscribers as such. The language is that each subscriber will pay to the Guaranty Trust Company of New York the amount of his subscription to the shares of stock of a corporation to be organized when called for by the trust company. It is with the corporation that the contract is made to take the shares when it comes into existence and issues its stock. There are no words which impose
We do not find it necessary to examine in detail all of the cases cited by the learned counsel for the appellants in support of his proposition. The cases to which attention has been called are those which are mainly relied. upon by him and are as strong in support of his contention as any to be found. All of the cases which he cites and relies upon, save Colton Improvement Co. v. Richter (supra), which he criticises as being erroneously decided, fall into one of two classes: First, those cases where one or more persons own an entire property or business,, incorporate a company for purposes of convenience or to prevent complication in dealing with the property, and the organization so formed does not intend or expect any other persons to join them as stock
Bather does it fall within a third class, where the promoter
It is evident, therefore, that by the averments of this complaint Moore & Schley fall into the category of promoters, owing a fiduciary relation to the company which they created, and charged with the obligation of protecting its interests and they could not make a profit out of the company in the transaction without fully disclosing the same and dealing in respect thereto fairly and openly. Such open and fair dealing is not had and proper protection is not given to the corporation which they control, when, without giving anything of valué, they take the stock issued by the company and appropriate it to their own use. Under such circumstances, and well within the authorities which we have cited, a wrong is done to the company and a case is created where equity will lay hold of the transaction and compel an accounting. Nor is the rescission of the contract of sale the remedy in such a case.' There are no averments in this complaint showing or tending to show that there was any wrong done to the corporation in transferring to it the malting properties. From all that appears the corporation received full value for the stock which it gave in exchange for the properties, and such transaction is not tainted in any respect with wrongdoing. There is, therefore, no ground upon which a rescission of the transfers of the malting properties could be based. There is a class of- cases holding that
It is further claimed that the plaintiffs have been guilty of such laches as defeats the right to maintain this action. „ Laches is ordinarily to be presented by answer and not by demurrer. (Sage v. Culver, 147 N. Y. 241; Zebley v. F. L. & T. Co., 139 id. 461.) The complaint avers the time when the misappropriation was discovered and, if there has been any laches in prosecuting the claims, it can be made to appear upon the trial; the court will not dispose of such question upon demurrer. The complaint is sufficient to show that of the secret profit no one had notice save Moore <fc Schley, and the directors of the company, whom they controlled, and the averments in this respect are sufficiently broad to permit showing that there was no ratification or knowledge by the plaintiffs or by their predecessors in title. Under such circumstances "there is no basis Upon which to predicate an estoppel. Estoppel, like laches, usually constitutes matter of defense. Estoppel in this case cannot be enforced, based upon the acquiescence of the directors of the company and Eiclis, the holder of the stock, and this for the reason that Eicks’ holding was fiduciary for the company and those legally entitled to the stock and no transfer of it could be justified tinder the facts averred, except to those who subscribed for it and who were entitled to the respective allotments, either for property or cash. The acts leading up to the appropriation by Moore &
We conclude, therefore, that upon the main questions this complaint states a good cause of action and the demurrer thereto was properly overruled. As to "the demurrer of the defendant Picks the allegations are that he acted as the agent of Moore & Schley, audit is not shown that he is liable to respond in anywise for any of his acts. While he may not be a necessary party to the action, yet, inasmuch as the transactions were largely through him he is a proper party, and the action being in equity he is properly made a party within section 447 of the Code of Civil Procedure as he may have some interest in the controversy.
In support of the demurrer of the executors of John Gr. Moore, •deceased, it is claimed that it must be sustained for the reason that no facts are alleged showing that complete satisfaction cannot be procured from the surviving members, of the firm of Moore ,& Schley, and that such averment is essential to the statement of a cause of action against them. Assuming that the complaint is to be treated as averring a cause of. action against Moore & Schley as copartners we think the contention of the executors cannot be sustained. It may be. admitted that at common law an action could not be maintained, even in equity, which joined surviving partners with the personal representatives of a deceased copartner in the absence of allegations showing insolvency of the'surviving copartners. Such seems to be the rule announced in Lawrence v. Trustees, etc. (2 Den. 577). The rule was otherwise in England, where it was finally settled that in an" action in equity the personal representatives of the deceased copartner could be joined, even though a legal remedy existed only against the survivors of the copartnership. (Wms. Exrs. [6th Am. ed.] 1848.) Whatever doubts may have existed in this State respecting the right to make personal representatives of a deceased copartner parties with the survivors in an .action
It follows from these views that the interlocutory judgment should be affirmed, with costs, with leave to the defendants to withdraw the demurrer and serve an answer within twenty days upon the payment of costs in this court and in the court below.
Laughxin, J., concurred.
Judgment reversed, with costs, and demurrer sustained, with costs, with leave .to plaintiff to amend on payment of costs in this court and in the court below.