11 Daly 373 | New York Court of Common Pleas | 1884
[After stating the facts as —This action is brought by the Metropolitan Railway Company, to set aside the agreements of October 22d, 1881, upon the following grounds:
1st. Because the Metropolitan directors had no power to modify the original leases and tripartite agreement of May 30th, 1879, without the consent of the shareholders.
2d. Because three of the Metropolitan directors were, at the time of the making of the October agreements, also directors of the Manhattan company—one of the contracting parties, whose interests were antagonistic to those of the Metropolitan company.
3d. Because the personal interests of several of the Metropolitan directors were opposed to those of that company.
4th. Because of the actual fraud upon the part of certain Metropolitan directors, who entered into a scheme to benefit themselves at the expense of their corporation.
The' defendants admit that the October agreements were not assented to by the stockholders of the Metropolitan company, and claim that such assent was not at all necessary to the validity of the contract. They further admit that three of the Metropolitan directors were also, at the time of the making of the October agreements, directors of the Manhattan company, but they deny that this circumstance in any way invalidated the action taken. They deny that the personal interests of any of the Metropolitan directors were opposed to those of that company; and they also deny that there was any actual fraud; and aver that the agreements of October, 1881, were for the best interests of all the parties concerned, and that they presented tire only solution of the difficulties and embarrassments which surrounded the elevated railway system,-in the summer and fall of 1881.
The preliminary objections are as follows :
1st. No case is presented in this action for the interference of a court of equity.
2d. If the October agreements are fraudulent, as the plaintiff contends, then the plaintiff itself was a party to the fraud.
3d. The plaintiff, in its complaint, alleges that the agreements and leases of May 20th, 1879, which it seeks to reinstate, were a nullity, being made without authority of law.
4th. That the October agreements have never been dis-affirmed by the stockholders of the Metropolitan company in any way, nor even by the directors, by any direct vote.
The fifth and last preliminary objection is the lapse of time and the acquiescence of the plaintiff.
The following affirmative defenses are also urged:
1st. That the Manhattan company had at the time of the commencement of this action already brought its action in 'the Supreme Court against the New York company, the Metropolitan company, and all the persons who had brought actions to set aside the October agreements, in the nature of the old bill of quia timet, asking, in its complaint, that all matters relating to the October agreements should be determined in that action, and that the defendants and all others should be restrained from bringing any actions on account of these agreements.
2d. The judgment of the Supreme Court in the action of The People against The Manhattan Railway Company, entered on the 17th day of November, 1881.
3d. The judgment of the Superior Court of the City of New York, entered on the 8th of December, 1881, in the action wherein the New York Elevated Railroad Company was plaintiff, and the Manhattan Railway Company and the Metropolitan Railway Company were defendants.
4th. That restitution cannot be had.
I will first consider the preliminary objections, and then
The first preliminary objection urged is, that the facts • elicited upon this trial do not present a case for the interference of a court of equity.
It is claimed by the defendants that the plaintiff has a complete remedy at law, and, therefore,'cannot seek the intervention of a court of equity. That the plaintiff could have sued for the rent, which is claimed to be due, under the leases and agreements of May 20th, 1879, and if the October agreements were set up as a defense, they could have been attacked upon precisely the same grounds as they have been in this action. -
In Grand Chute v. Winegar (15 Wall. 373), it was held that a municipal corporation, obligor in a bond, cannot ask in equity that the obligee be enjoined from proceeding at law, and that the bond be surrendered, when the bill alleges that the bond was issued, without authority, in violation of law, and in fraud of the plaintiff; that the obligee knew this when he took it; that the obligee’s possession is ' merely colorable, and that he gave no value for it, and never had any right or-title to it. Such allegations show a complete defense to the bond at law; and a judgment against the obligee at law would give as full protection in every way to the obligor as a decree in equity.
Mr. Justice Hunt in this case uses language as follows :
“And the result of the argument-is, that wherever a court of law is competent to take cognizance of a right, and has power to proceed to a judgment which affords a plain, adequate, and complete remedy, without the aid of a court of equity, the plaintiff must proceed at law, because the defendant has a constitutional right to a trial by jury. The right to a trial by jury is a great constitutional right, and it is only in exceptional cases and for specified causes that a party may be deprived of it.”
In Allerton v. Belden (49 N. Y. 373)At was held that the right to apply to a court of equity to have a contract
The opinion of Judge Rapallo (page 377) has this:
“ The allegations in his complaint disclose a perfect defense at law to any action which might be brought against him on his indorsement, and no fact is stated showing any necessity for the interposition of a court of equity, or entitling the plaintiff to become an actor in the matter. . . . . . The most usual ground for going into equity in such cases formerly was the necessity for a discovery to prove the usury.
“ Bills of discovery being now abolished, some ground which formerly would have justified the filing of a bill for relief must appear in the complaint, or it shows no right of action......No authority has been cited sustaining an equitable action on such grounds; but on the contrary, it has been uniformly held, that where a perfect remedy, both as to the discovery and relief, can be had at law, an action in equitjr cannot be maintained, and that this objection is. available on demurrer.”
In The Town of Venice v. Woodruff (62 N. Y. 462), the-court said (at page 467) :
“ Whether, therefore, the question be regarded as one of jurisdiction or practice, it is established by the later decisions that some special ground for equitable relief must be-shown, and that the mere fact that the instrument ought-not to be enforced is insufficient, standing alone, to justify a resort to an equitable action.”
In Fowler v. Palmer (Id. 533), which was the case of' an action to compel the surrender of a note past due, on the-ground that it had been paid, but not taken up,' the court held that the action could not be maintained in equity, that the defense of payment was perfectly available to the plaintiff in an action upon the note, and no transfer could prejudice it.
In the case of Troy and Boston R. Co. v. Boston, Hoosac Tunnel, &c. R. Co. (86 N. Y. 107, 127), it is said by the court, Mr. Justice Dakforth speaking:
“ Although the form of actions and suits, and the distinction between actions at law and suits in equity has been abolished, a party, to entitle himself to the equitable remedy by injunction, must still make such a case as would, while the distinction existed, have made an equitable cause of action. This is well settled.”
In Hamilton v. Cummings (1 Johns. Ch. 517), the Chancellor states, as his conclusion from the authorities, that a resort to equity to compel the cancellation of written obligations, to be sustained, must be expedient either because the instrument is liable to abuse from its negotiable nature, or because the defense, not arising upon its face, may be difficult or uncertain at law, or from some other circumstances peculiar to the case, and rendering a resort to a court of equity highly proper and clear of all suspicion of any design to promote expense and litigation.
These authorities seem to establish, with great distinctness, the rule which has obtained in our courts since the practice of allowing equitable defenses in actions at law has been established, and none of the cases cited by the plaintiff at all conflict with it.
In the case of Gould v. Cayuga County Nat. Bank (86 N. Y. 75, 82), it is true that the court say that the party might have brought his action in equity to rescind the contract, and in that action might have had full relief; but in the next paragraph of the opinion the necessity of bringing in other parties is adverted to, which was to be the basis of
The Aberdeen Railway Case (1 Macq. H. L. Cas.), has no application to the question now under discussion, as equitable defenses were not available in actions at law in the English courts.
Equity jurisdiction of the court was applied in the case of McHenry v. Hazard (45 N. Y. 580), because the rights of all the parties could not be determined in any one action at law, and also because the defendants could not be allowed at their election to postpone the litigation of the question, and subject the plaintiff to the vexation of a litigation at a distant period when the means of defense might be lost or impaired, and when he might be disabled from contesting the validity of the claim with the same ability as at the present time. The latter ground for the entertaining of jurisdiction does not at all apply to the ease at bar, because the plaintiff here can sue at once to recover rent, under the May agreements. The defendants have no rights to be enforced against the plaintiff, but the plaintiff, the aggrieved party, can at any time enforce the rights which they think they have. In order to test the question as to the validity of the October agreements, the plaintiff has only to bring its action for the rent due under the May agreements, and the matter is at once brought up. Equitable jurisdiction cannot be entertained in this case upon the ground that otherwise there will be a multiplicity of suits. No such result would ensue. If an action had been brought upon the May agreements for rent due since the making of the October agreements, and a final .recovery had been- had for the amount of rent due, according to the terms of the May agreements, that final judgment would have ended, as far as the Manhattan company is concerned, the October agreements as effectually as any final judgment which can be rendered in this action can do¿ The fact that the agreements extend over a long period of years, does not alter the question. A final recovery is just as effectual, whether it be in a.court of law or a court of equity.
But there is another ground upon which the bill in equity can be sustained, and that is, that there could be no determination as to the validity of the October agreements without the presence of the New York company, a party to them. The New York company had a right to be heard upon the question. One party cannot be released by legal proceedings from a tripartite agreement, in an action against one other party. All the parties must be brought before the court, as all have a right to be heard upon the question as to whether the agreement which is mutual shall be broken up. Therefore, the New York company is a necessary party to any action seeking to avoid the October.agreements, that company being one of the parties to them. If an action was brought upon the lease of May 20th, 1879, the New York company could not have been brought in as has been done in this case, and which was the reason given in Gould v. Cayuga County Nat. Bank, for the entertaining a bill for rescission. It seems, therefore, that .the first preliminary objection is not well taken.
The second preliminary objection is, that if the October agreement is fraudulent, as the plaintiff contends, then the plaintiff itself was a party to the fraud.
The defendants claim, that as this is not a suit by a stockholder to set aside an agreement which is chargeable with fraud, but a suit by the corporation itself—one of the parties to the fraud—a court of equity will not interfere; and we are referred to the opinion of Mr. Justice McCrary, in the case of Lewis v. Meyer (14 Fed. Rep. 311, 312, 313), as an authority to sustain the proposition. The case cited, however, is not analogous to the one at bar.
That action was to avoid railroad bonds in the hands of innocent holders, upon the ground that the directors had issued them fraudulently. The bondholders were innocent parties, and not in any manner privy to the fraud perpetra
The next preliminary objection is, that the plaintiff claims that the agreement and leases of May 20th, 1879, which it seeks to reinstate, were a nullity, being made without authority of law.
I understand that the claim that the agreements and leases of May 20th, 1879, were void, was abandoned upon the argument, it being conceded that under the statute of 1839 a corporation may lease its road.
But this is not at all necessary to answer the objection made. The plaintiff by its complaint does not seek to reinstate anything; it simply, asks that the agreement of October 22d, 1881, may be declared null and void; whether such judgment will reinstate anything or not is not a question involved in this action.
The next preliminary objection is, that the October agreements have never been disaffirmed by the stockholders of the Metropolitan company in any way, nor even by the directors, by any direct vote.
In the case of Boardman v. Lake Shore & Michigan Southern R. Co. (84 N. Y. 157, 183), it is-said:
“It was not required that each particular stockholder should sue for his share of the dividends, to preclude the defendant from claiming an acquiescence and estoppel; and it is quite sufficient that it was advised of the character of the claim of the respective stockholders. The plaintiffs and other stockholders were entirely justified in awaiting the results of the suits pending without incurring the- hazard of losing their rights on account of the lateness of their demand.” „
The stockholders had no power to meet and act as a body, except as the statute and the by-laws prescribe, and must be called together in the manner provided by law, otherwise they have no power to act.
In the case at bar, the only way in which the stockholders were required to act was, upon the first opportunity to appoint other agents who would assert their rights, if they had any. Moreover, the Manhattan company, on the 9th day of December, 1881, commenced its bill of peace suit, and all stockholders were enjoined from suing, which injunction continued in force until February, 1883. Can the Man
It is urged, that because a new board of directors has been elected, no right is given to impeach the acts of a previous board, as the corporation is the same. I am unable to appreciate the force of this objection. If my agent has entered in my name into a fraudulent agreement, I know of no reason why I may not appoint a new agent and through him repudiate the fraudulent contract. In the case supposed, I am the party acting in both instances. I have never heard that a man was bound by the fraudulent contract made by his agent in his name, because he, the same person in whose name the fraudulent contract was made, sought to set aside the contract. The directors of the corporation are its agents and executive officers. They, as such agents, manage the business and affairs of the corporation, and when the business and affairs of the corporation are to be managed by directors, I do not think that the stockholders can do any act or make any contract, except by the use of the means provided by law, viz.: its directors. Therefore, if one set of agents act beyond their authority, or are recreant to their trust, the principal—that is, the corporation— may appoint a new set of agents and through them seek redress for the wrongs which it has suffered. The corporation being able to act only through its directors, at the very first opportunity after the October agreements were made, the shareholders of the Metropolitan company elected a new board of directors, such change in the board being evidently made because of the fact that the old directors had made these agreements; and within one month thereafter, this action was brought, and within one week after these agreements were executed, shareholders had commenced their actions to set them aside. I do not know how, if the most extreme diligence had been required, any more prompt action could have been taken; and thus is answered the last preliminary objection—that of laches.
1st.—That the Manhattan company had at the time of the commencement of this action already brought its action in the Supreme Court against the New York company, the Metropolitan company, and all the persons who had brought actions to set aside the October agreements, in the nature of the old bill of quia timet, asking in its complaint that all matters relating to the October agreements should be determined in that action, and that the defendants and all others should be restrained from bringing any actions on account of the October agreements.
The commencement of this action could not in any way interfere with the rights of the Metropolitan company to file its bill for a rescission. The mere filing of the bill by the Manhattan company restrained nobody, and the plaintiffs in that action knew this, because they, asked for, and obtained, an injunction preventing the bringing of any more suits, which was set aside by the General Term. Merely because the Manhattan company had filed a bill of peace against all the world in general, and the Metropolitan company and its stockholders in particular, the latter company did not lose any rights which it might acquire to the protection of the court. The Metropolitan company had the right to file its bill for rescission, and the Manhattan company could not deprive it of this right by filing a bill asking the court to adjudicate upon the question involved. Before such an action can restrain anybody’s proceedings, the right to an injunction must be established, either preliminarily or by final judgment.
The second affirmative defense is:
The judgment of the Supreme Court in the action of the People against the Manhattan Railway Company, entered on the 17th day of November, 1881.
I have searched in vain in the judgment-roll, in the case of the People against the Manhattan Railway Company, for anything which could in any way operate upon any rights which the Metropolitan company had. This company was
But it is said that the three companies united in a petition to have the property delivered back to the Manhattan company. The ■ order of restoration made upon that petition in no way adjudicated upon the question of the validity of the October agreements. No such question was pre- * sented to the court. The union of the New York company and the Metropolitan company in that petition operated only as a consent upon their part that restoration might be made. And no order that the court did make, in that proceeding, could have had the force of an adjudication, because the doctrine of res adjudieata does not apply to interlocutory judgments or orders which the court that rendered them has power to vacate or modify at any time. The order of restoration in the People’s case expressly reserved to the court the power of alteration and modification. These companies did not become parties to the record, and as has already been shown, they were not treated by the court, in its findings and judgment, as parties whose rights were being determined. Therefore, the judgment in that action barred no rights which this plaintiff might have.
In considering this question, it is necessary that we should have plainty before our minds the facts relating to that action and the proceedings therein.
The action was commenced upon the 2d of July, by the New York company against the Manhattan company and the Metropolitan company; and the plaintiff claimed the right to recover possession of its property from the Manhattan company, because of its . breach of the terms of the lease between the New York and Manhattan companies, and no relief whatever is asked for against the Metropolitan company. The Metropolitan company, in its answer, denied the right of the New York company to get back its road, and the Manhattan company put in a similar plea.
On the 22d day of November, 1881, the October agreements having then been made, the Manhattan company put in a supplemental answer, setting up the proceedings in the * People's suit, and also the October agreements above mentioned, alleging them to be an adjustment of all the controversies between the parties to the action. The parties then went before the court, and without the plaintiff offer: ing any proof whatever, the parties admitting the facts alleged in the supplemental answer of the Manhattan company to be true, obtained certain findings of fact and conclusions of law, all of which are expressly stated to be founded on the admissions of the parties, adjudging these October agreements valid, and a judgment to the same effect is entered thereon.
I fail to see how .this judgment can operate as a bar to the rights of the Metropolitan company to contest the validity of the October agreements. If those agreements are fraudulent, and this judgment should be held to preclude the Metropolitan company from rescinding them, then
If this judgment of the Superior Court is a bar to the right of this plaintiff to maintain this action, we have this state of things, as a necessary result: directors of a company may make an agreement which is absolutely void, and in the making of which there has been a plain violation' of duty, and if their corporation is sued upon it, the same board of directors being in office—their term not having expired—may confess judgment, and then there is no power in any court to redress the wrong. The mere statement of the proposition, it seems to me, shows that such cannot be the law, and it is not the law.
In order that a judgment may be a bar, there must be a real controversy. There was no controversy in the Superior Court. The Manhattan company alleged the making of the October agreements, and that they adjusted all matters in difference. The New York company and the Metropolitan company say, “ we agree that that is true,” and the judgment is entered. This was nothing more than a judgment by consent. All the parties to the action consented that these agreements had been made and had adjusted the differences, and the court so ordered. If these agreements were voidable for want of power in the directors to make them, or fraudulent, then the obtaining a judgment affirming these agreements by the same directors who made them, was a fraud upon the court, not necessarily an intentional fraud, but a fraud in law; and such a judgment binds no court, and its nullity upon that ground, though it has not been set aside or reversed, may be established in another action (Webster v. Reid, 11 How. U. S. 437).
In Earl of Bandon v. Becher (3 Clark & Fin. 479, 510), Lord Brougham adopts the language of Wedderburh, in the Duchess of Kingston’s case, as follows :
*444 “A sentence is" a judicial determination of a cause agitated between real parties, upon which a real interest has been settled. In order to make a sentence there must be a real interest, a real argument, a real prosecution, a real defense, a real decision. Of all these requisites, not one takes place in the case of a fraudulent and collusive suit; there is no judge, but a person invested with the ensigns of a judicial office is misemployed in listening to a fictitious cause proposed to him; there is no party litigating, there is no party defendant; no real interest brought into question.” In the case of Gaines v. Relf (12 How. U. S. 472), the principle was distinctly enunciated that in order that a judgment should be a bar there must be a real controversy, and that a judgment entered by consent to be used in the future cannot affect the parties to it, because there was no controversy carried on in earnest. In that case the defendant admitted the decree, but contended—
“ That said decree was designed as no honest exposition of the merits of the ease, but was brought about, allowed, and consented to for the purpose of pleading the same as res adjudieata upon points in litigation not honestly contended.”
The court say:
“ That this proceeding on the part of Patterson and General and Mrs. Gaines was amicable, and that no earnest litigation was had, is too manifest for controversy. They agreed to go to trial at once, on the depositions found in the Probate Court; and as Patterson was to lose nothing by the event, he was, of course, indifferent as to what evidence might be introduced on the hearing.
“ It also appears by his evidence that when a decree was obtained in the Circuit Court against him, his name was used to carry up an appeal to this court; but it was in fact brought up by General and Mrs. Gaines. Patterson employed counsel here, who, of course, had to take the record as they found it, and make the best of it they could; and it is conceded on all hands they did so, and made the best exertions for Patterson they could do, on the record brought*445 up by him, as they supposed. Nevertheless, an affirmance of the decree was had in this court. It could hardly be otherwise, in a case managed as this was; the object of the complainants below being to obtain a favorable opinion and decree on the law and facts of a case made up at their own discretion.”
In the case of Moses v. McDivitt (88 N. Y. 62, 68), the same principle is enunciated. The court say:
“The judgment does not stand upon the same footing as a judgment obtained in the usual course, in a hostile suit in which the defense of usury was either overruled or omitted to be interposed. It was a mere arrangement between the parties, put by their mutual consent in the form of a judgment, for the purpose of evading the statute.”
It seems, from the evidence in this case, that the judgment in the Superior court was obtained for future use. Claims had then been advanced by shareholders, that these October agreements were fraudulent and void, and this judgment would appear to have been obtained by and with the consent of the very directors whose acts were attacked in the suits by the shareholders, in order that it might be interposed as a bar to any relief to which the shareholder might show his corporation was entitled.
The denial of the motion to vacate the judgment, before Mr. Justice Feeedmaít, gave such judgment no greater force or effect than it had before. It left the judgment in precisely the same position that it was before, with the same force it before had and no more (Schrauth v. The Dry Dock Savings Bank, 86 N. Y. 390, 395).
The judgment, therefore, of the Superior Court does not operate in any way as a bar to the assertion of its rights by the Metropolitan company in this action.
The fourth and last affirmative defense is that restitution cannot be had.
It is claimed, that because, by any judgment in this case, the receivers cannot be put again in possession of the property of the Manhattan company ;
That because the People’s suit in the Supreme Court cannot be restored to the condition in which it then stood;
That because the Superior Court suit cannot be restored to the condition it would have occupied had not so much time been lost; that, therefore, no rescission can be had.
It is urged that we would have to undo the “ increase of Manhattan stock. That it has been proved that this stock has been increased with the sanction of the State engineer and surveyor, pursuant to law, from thirteen millions to twenty-six millions of dollars. What can we do with that? Shall we reduce it? What will we do with the stockholders who hold it ? Shall they be paid, or will we take their stock away without payment? Then we would have to re-exchange the first preferred stock for New York stock, and the second preferred stock for Metropolitan stock. How is that to be done ? Then we would have to dismiss the Burnham suit, and the quia timet suit, and the merger suit; enter an order denying the New York application in the People’s suit, take an appeal from the order, put it on the calendar of the General Term for argument; pay back the interest which the Manhattan company had paid on the mortgage bond of the other two companies; make a question of the insolvency of the Manhattan company; restore to the other two companies their earnings since October, 1881; in short, undo everything that has been done since" October 22d, 1881, pursuant to the settlement. But that is impossible. The New York company cannot be restored to the condition it then held. It parted with its whole earnings, and if they could be ascertained and received back, there is no corporation or person to pay them; a portion of them have been paid over to the Metropolitan company and distributed to its bondholders and stockholders ; they are not parties to any pending suit, and, if they were, they are under no obligation to pay back. Each company has been released from the six and a half million claim; that release, must be cancelled, but it cannot be cancelled without imperilling the interests of the stockholders of the constituent companies.”
But I do not understand the rule to be, that a plaintiff is deprived of all relief, because he cannot restore the other parties to the same position which they occupied before they entered into the void or voidable agreements, when the other parties to the agreement have put themselves in the position in which they find themselves, with full knowledge that the other party claims the agreement to be void and fraudulent, and every means had been taken at once, by those who have the right to question the legality of the proceedings, to restrain the wrong.
Long before any of these things were done, in respect to which restoration may now be impossible, suits had been brought by more than one stockholder seeking to avoid the October agreements, and indeed the first suit was begun within one week after the agreements had been made, by a stockholder to annul them and to have them declared void. These suits multiplied so rapidly that as early as December 9th, 1881, the Manhattan company filed its bill of peace, for the purpose of restraining the increase of this cloud of suits, with which it was threatened by stockholders of the Metropolitan company. The Metropolitan company could commence no action itself, because it was in the hands of the very directors who, it was claimed, had either exceeded their powers or acted fraudulently in fact or in law in the making of these agreements; and the stockholders, therefore, necessarily were required to assert their own rights. If, in the face of all these facts, the other parties to the agreement went on and acted in such a way that they cannot get back to the position which they occupied at the time of the making of the alleged fraudulent agreements, it certainly is not the fault of the plaintiff or of the court. They have only themselves to blame. Their heedlessuess cannot deprive the plaintiff of any rights to which it otherwise would be entitled. If this is not the rule, then all
As to the People’s suit, I do not know that the Manhattan company is in any respect harmed by the discontinuance of a suit brought against it on account of insolvency, nor is it injured in any degree by not being in the possession of receivers.
As to the bondholders’ suit, it was not discontinued because of the October agreements; the discontinuance having taken place October 6th, more than two weeks before the agreements were made.
As to the Superior Court suit, the judgment and findings can be vacated, the injunction restored, and then the action will be in the same condition in which it was at the time of the October agreements.
With the increase of the capital stock of the Manhattan company and the result flowing therefrom, this plaintiff has nothing to do; all those things were done by the defendants with full knowledge of the claim presented in this action, and they acted at their peril.
As to the payment back of the moneys which have been received: before disposing of that part of the question, it will be necessary to examine a few of the authorities upon this question of rescission.
■ The court makes a distinction in this case, which should be borne in mind, between a suit in equity to rescind, and a suit at law upon a rescission, holding, that if you sue at law you must offer to restore before you bring suit; if you sue in equity you may make the offer in your complaint. The defrauded party has ample remedies. One situated as the plaintiff was in that case, can rescind by tendering or restoring what he has received, and then commencing his action; he may keep what he has received, and sue to recover damages for the fraud; or he may commence an action to rescind or for equitable relief, and offer to restore, in case he is not entitled to retain what he has received. If,, however, the plaintiff cannot restore absolutely, he cannot come into a court of equity for relief. This rule is illustrated by the learned court, in its opinion, by the following:
• '“ Suppose A. goes abroad, leaving in the hands of his agents debts to be collected, against various debtors, among-whom is B., a debtqr for $1000, and before his return his-agent dies. Upon his return he finds among his papers no evidence that B. paid his agent, and then he calls upon B. and he claims that he paid the agent the whole debt. A. disputes this, and they finally agree to compromise the dispute, B. paying $500. Afterward A. concludes that B. did not, in fact, pay his agent, and claims that he was induced by fraud to enter into the compromise. So long as the compromise-remains in force, no action, based upon the original indebtedness, can be maintained. The bar can be removed only by rescinding the compromise agreement, and that can be-rescinded only by a restoration of the $500, so that they*450 can resume their dispute upon a footing of equality, just where they left it before they entered into the compromise. When A. sues upon the original indebtedness, B. must be permitted to renew his dispute, and set up payment of the entire debt to A.’s agent. If he can establish that, the $500 will be again in his hands, where it belongs. If he fails, A. will recover his whole debt. If A. can maintain his suit without first returning the $500, he will have all the game in his own hands. If he wins the suit he will retain the $500 and get $500 more. If he loses the suit, in consequence of proof that the whole debt has been paid to his agent, he will still have the $500. He will thus, in effect, hold B. to the compromise, but himself be released. Such inequality and injustice cannot be tolerated by correct principles of law.”
It is plainly stated in the above case that the reason why restoration is made a condition of rescission is that the retaining of that which has been received is inconsistent with the abrogation of the contract.
But the rule that if any party to the agreement has done anything which cannot be undone, or has omitted to do anything which he might have done, no rescission can be had, does not apply to things done or left undone by such party to the agreement, who has knowledge before anything is done or omitted to be done, that the agreement is repudiated either by the other party or by those who have a right to contest its validity on his behalf.
It is claimed that as a condition of rescission, all the moneys paid out since October 22d, 1881, by the Manhattan company, both to the bondholders and shareholders of the New York company, must be restored; that the New York company cannot be restored to the condition it then held; that it has parted with its whole earnings, and they cannot be got together again and paid back; they have been paid out and distributed to bondholders and shareholders who are not parties to this action, and if they were they are under no obligation to pay back.
As far as the distribution of the earnings of the New.
I say that the distribution of its earnings was connived at by the New York company, because, with the full knowledge above stated, they consentéd to the dismissal of the action in the Superior Court, and to the entry of a judgment in that court affirming the validity of the October agreements. They did all those things, not in ignorance, but with full knowledge of every claim which has ever been advanced affecting the validity of these agreements. Therefore, if they have empowered the Manhattan company to distribute their earnings, and they cannot now get them back, it has not been done in reliance upon anything which the plaintiff has done—in ignorance that there was any claim, of wrong affecting the validity of those agreements. They knowingly took the risk of the success of the attacks upon these agreements, and they cannot now complain if they have lost the battle.
Upon the question of the restoration of the money received by the Metropolitan company, it will be necessary to advert again to the rule governing restoration upon rescission.
The rule is very distinctly laid down, that to retain any part of what has been received upon a contract is incompatible with its rescission (Cobb v. Hatfield, 46 N. Y. 533, 537).
To retain the whole, or a part only, of what has been received upon the contract, is incompatible with its rescission, and hence the necessity of restoring what has been received upon it (Masson v. Bovet, 1 Denio 69, 74).
The same rule was held in the case of Grould v. Cayuga, County Bank (supra).
In all these cases, however, there was but one contract,
If the plaintiff is entitled to recover the money of the defendant, contract rescinded or not, no tender or offer to return'is necessary. It is only where the plaintiff has no claim to the money received, except by force of the rescinded contract, and, therefore, its retention is incompatible with the rescission, that a return or offer to return is deemed to be necessary.
I am of the opinion, therefore, that there are no obstacles which prevent the plaintiff from making all the restitution which the law requires in case it has been shown that the plaintiff is entitled to relief in this action.
It is now necessary to consider the grounds upon which the plaintiff claims relief.
The questions of law involved are of the greatest importance to the community at large, to the innumerable trading corporations with which our country is filled, and to such of our citizens as hold the shares of stock of such corporations. The respective rights, duties and obligations of both directors and shareholders in these corporations must be determined, unaided by any authoritative adjudications in our own state upon the subject.
Before, however, considering the legal questions presented, I shall endeavor to dispose of the only question of fact presented by the evidence, which bears; in any degree, upon the right of the plaintiff to relief; and that is:
Was there any actual fraud upon the part of the Metropolitan directors; and did they enter into a scheme to benefit themselves at the expense of their corporation?
Upon an examination of the evidence in this case, and the arguments of counsel thereon, I have had forced upon my mind the conclusion, that their belief in the verity of their position was brought about by asking themselves the question: “Can any good thing come out of Nazareth?” by imputing bad motives when the moving cause may have been good; by considering past transactions by the light and knowledge which subsequent events have developed ; by taking that view of the future of these properties, whether supported most strongly by the evidence or not, which best accords with their desires, rather than by according to the defendants the right of a different judgment which they might in good faith entertain, than by placing themselves in the position of the defendants with no knowledge of the future, than by imputing good motives and meeting the question with the idea that the directors of the Metropolitan company intended to do their duty by that corporation.
Let us review, for a moment, the situation of affairs during the spring, summer and fall of 1881, and see what difficulties had to be overcome and what obstacles removed in order that the elevated railroad system, that these properties should be relieved from the incubus and dangers of this receivership (an invention of the courts in modern times, by which the enforcement of vested rights, rights secured by contract and by law, are arbitrarily and indefinitely stayed). It was soon ascertained, after the execution of the leases and tripartite agreements, that great miscalculations had been made as to the cost of completing the various lines, and that the net income derived from the
In April, 1881, the president of the Manhattan company confessed the hopeless condition of the Manhattan company, unless relieved from the load of taxation. The Attorney-General thereupon commenced his first action the latter part of May for the dissolution of the corporation and the appointment of a receiver. This was long before there was any idea advanced of Mr. Gould becoming a director of the Metropolitan company. In July the Manhattan company was unable to pay the interest on the bonds of the New York and Metropolitan companies falling due on the first, as well as the rental then due. Some friends of the companies advanced the moneys requisite to pay the interest on the bonds. Shortly prior to 'this time, Mr. Kneeland, a holder of a considerable amount of Metropolitan stock, and also of a number of the proxies of Metropolitan shareholders, went to Mr. Sage to ask him about making up a board of directors, and it was suggested that it would be desirable to get Mr. Gould into the board; and Mr. Kneeland asked Mr. Gould to become a member of the board, and he finally consented to do so, if certain of his friends would also consent to go into the direction. There is not a scintilla of evidence that Mr. Gould desired to get into the board of directors of the Metropolitan company, that he made the slightest effort to get into that board, but on the contrary the evidence shows that he placed conditions upon his going into that board, which Mr. KneeEand, who was to elect him, refused to accept,- and which he did not accept until almost the very day of election; and yet I am asked to find, that as early as May, Mr. Gould had formed the plan of ruining the Metropolitan to build up the Manhattan, and that in furtherance of that plan he caused the Attorney-General’s action to be brought, and the bondholders’ action against the Metropolitan company, Mr. Lawrence, the attorney for
It is further urged, as an evidence of the fraudulent intent of Mr. Gould, that he insisted upon having certain of his friends go into the direction with him. May I ask, is there any crime in this ? Mr. Gould’s presence in the board was desired, either because of his financial and executive ability, or because his appearance in the board of directors would add strength to the management of the corporation. It is true that Mr. Gould says he did not expect, when he went in, to give much attention to its business, bub if his presence was considered so desirable, he had the right to say who his associates should be. If his presence was not wanted with this condition, then why did Mr. Kneeland consent to his terms? Can there be any impropriety, under such circumstances, in a man protecting himself from factious opposition, or from being overwhelmed by expedients worse than useless ?
I am unable to see any unfavorable deduction to be derived from this feature of the case. Indeed, one of the badges of fraud urged by one of the learned counsel for the plaintiff is that, although Mr. Gould is notorious for sustaining properties in which he is interested with his means and exertions, he did not advance a dollar, or take any action, to preserve the leases, and to maintain the Metropolitan company in its then condition. That is, because Mr. Gould did not advance his own money to support the Metropolitan company, although he may honestly have believed that the charges reserved in the leases could not be earned for years to come, he is to be charged with fraud! There is no rule of law which requires a director to use his own money to support a corporation in which he is a director. In fact a use of his money by a director for such a purpose puts him in a very different position from an ordinary creditor. In case of disaster he is liable to much greater hindrances in the collection of his debt, and means of protection of which the ordinary creditor can avail himself are closed to the director who has advanced his money to sup
On the 30th day of June, Mr. Kneeland made his liberal proposition to the directors of the Manhattan company, that if the board of directors of the Manhattan company would surrender the control of that corporation to him and his associates, they would take one million of the income bonds of the Manhattan company at sixty cents on the dollar. If it was such an evidence of guilt in Mr. Gould requiring the presence of his friends in the Metropolitan board as a condition of his acting as a director, what are we to think of Mr. Kneeland’s proposition to take possession of the Manhattan company and lend it $600,000 upon a promise to pay back $1,000,000 with interest out of its income? That Mr. Gould had anything to do with the rejection of this proposition, or even knew of it, there is not the slightest evidence. He was not then a director in either of the companies, nor did he ow;n any stock in either.
But, suppose he had been a director in the Metropolitan and Manhattan companies, and had held stock in the Manhattan, and he had come forward and said: I will take these bonds at sixty: would there be any doubt but that such a ruinous transaction would have been at once impeached, and the first to cry fraud would have been these very Metropolitan stockholders who now claim that Mr. Gould was guilty of fraud because he did not advance his money to support the Metropolitan company? The acceptance of such a proposition by the directors of the Manhattan company, the borrowing of money at such ruinous rates and upon such conditions, would be justifiable only if it could be made to appear that by no other means could the peril be warded off, and that it was thereby successfully averted. But, in fact, the sum of $600,000 would have put
On the 2d of July, the Attorney-General had commenced the second action, and on the 13th of July, the receivers were appointed of the Manhattan companjq and the New York company had commenced its action in the Superior Court to get possession of its road, upon the ground of the insolvency of the Manhattan company. The New York company, also, on the 22d of July, presented its petition to the court in the second People’s suit, setting forth the hopeless insolvency of the Manhattan company and asking that the court give it back its property. In August, the $13,000,000 claim Avas started. Judge Emott, an eminent lawyer of this bar, had given it as his opinion, that the Manhattan company had a valid claim against the New York and Metropolitan companies. In this vieAV, Messrs. Allison & Shaw concurred; and Mr. Justice Westbbook intimated subsequently, that it was not to be brushed away without thought.
On September 1st Mr. John C. Watson, of Boston, a stockholder of the Manhattan company, commenced his action in the United States Circuit Court against the New York and Metropolitan companies, for the ptirpose of testing this claim. The adviser of Mr. Watson, in this city, was Mr. Ashley, secretary and transfer agent of the Wabash, St. Louis & Pacific Railway Company, of which Mr. Gould was a director. When Mr. Ashley Avas in the banking business here, Mr. Watson had been his Boston correspondent. Mr. Watson wrote to him asking him what to do. Mr. Ashley consulted his son and a Mr. Wheeler, lawyers, and then he advised Mr. Watson to bring suit. Mr. Ashley states he never spoke to Mr. Gould on this subject until after this suit was brought, when he simply showed him the complaint in the cars; that Mr. Gould had no connection with the action in any manner, way or shape; and
Mr. Gould, Mr. Sage and Mr. Conner made affidavits opposing the application, upon the ground that it would be only a temporary expedient, and serve simply to prolong for a little while a hopeless struggle. In this opposition they were clearly right, as shown by subsequent events. The difficulties under which the Manhattan company labored were not of a temporary nature; they were radical and could not be overcome by any temporary expedients. The revenues of the elevated railways have never, up to this time, yielded enough to pay the enormous burdens which the Manhattan company had assumed by the leases and tripartite agreement of May 20th, 1879; and when they
To this point I shall again revert.
If the roads had been kept in the hands of the receivers and forfeiture prevented by the issuing of these bottomry bonds, one upon the other, the end would inevitably have been, that although the bondholders would have received their interest and the stockholders their dividends, and thus a forfeiture averted, eventually the holders of the bottomry bonds would have owned the whole property, and the bondholders and stockholders would have had no interest therein. I can see no fraud in preventing such financiering. The court wisely refused to give its sanction to such a violation of vested rights, and simply authorized the receivers to borrow money upon certificates at legal rates, and none of the certificates were negotiated.
In the meantime the motion of the New York company to get back its road, made in the People’s suit, was argued, and on the 30th of September, the ninety days’ grace having elapsed, the New York company presented a supplemental petition, setting up the forfeiture, to reinforce its demand for its property. Negotiations for a settlement had been begun some time before, and Mr. Gould now began to purchase Manhattan stock, and also bought his Metropolitan and New York stock. About October 1st the necessity of a settlement upon some basis seems to have been generally conceded. It was apparent that some solution would be arrived at by which the Manhattan company could remain in possession of the property. Negotiations were carried on; conference committees appointed; that some concessions must necessarily be made was obvious; to what extent, and in what order, were the only subjects of discussion. The old controversy as to the relative values of the New York and Metropolitan properties was renewed; the $13,000,000 suit was held up in terrorem. (It may be doubtful whether anybody was very much frightened by it.)
If the New York company was presenting itself before the court, I might understand how such a settlement might be considered disadvantageous to it; and the fact that not only the board of directors but the stockholders of that company approved this settlement, seems to be conclusive evidence that at that time the settlement was deemed wise and proper by all unprejudiced minds.
But it may be said that this result was brought about by the fact that the New York company was to have a preference in the payment of dividends. That the New York company should have such a preference was inevitable. There is not the slightest doubt that if at any time there was a deficiency in dividends, it would arise from the fact that the Metropolitan roads did not earn them; and further, that the New York company would earn much more than sufficient to pay the rental dividends upon its lease, long before the Metropolitan company could possibly hope to earn rental dividends upon its lease.
I am aware of the fact that these conclusions are disputed by the plaintiff; but it seems to me very plain that the plaintiff’s deductions are based upon a greatly exaggerated view of the immediate future of the Metropolitan roads.
It is undoubtedly true that the Metropolitan roads might be run so as to show greater gross earnings; but that such a change in the running of the trains would result in an increase in the net earnings of the roads, is, in my judgment, far from being established. The idea of running heavy surface engines and trains over the Second Avenue line to Twenty-third Street, even if the structure would permit, is too conjectural to need much comment. This structure,.in consequence of its great height, is inaccessible, and the
Again, the Sixth Avenue -road cannot be as profitable as the Third. From Fifty-ninth Street up to the terminus at the Harlem River, it runs through a sparsely settled portion of the city, and it is compelled to run each train a much greater distance than the Third Avenue is required, and this has increased the cost of transportation of its passengers. Below Fifty-third Street this road has also nearly reached its limit of accommodation, and the result of an increase of travel above Fifty-ninth Street would be to deprive it of local travel below Fifty-third Street, and consequently the cost of transportation of its passengers would be increased in proportion to the greater distance each passenger travels.
For these reasons, it does not seem to me that the future of the Metropolitian properties is nearly so brilliant as its stockholders imagine, and that its net earnings will not for years, if ever, equal those of the New York company. Therefore, as far as the preference given to the New York road is concerned, no unjust discrimination was observed.
It may be said that Mr. Field, who was also interested in the Manhattan company, carried this settlement through the New York board. He undoubtedly urged it; but that the other directors were under his influence, or that they sub-served any other purpose than the interest of their company, is not by any means shown, but upon the contrary, the evidence shows that the proposition was vigorously canvassed and finally approved as the best solution of existing controversies, by men unbiased by any adverse interest.
Much has been said about that bugbear of the $13,000,-000 claim. This claim may have no foundation; it may be frivolous. As to this, I do not express any opinion, but respectable counsel had given it their sanction and it was a good thing to get it out of the way. It might have given trouble when least expected, and that it had no
I have had brought under my notice a case which illustrates how dangerous it is to leave outstanding a' claim which is declared without foundation by the most eminent counsel.
Not very many years ago, a suit was to be begun to have actual partition of certain real estate in this city, amongst the numerous tenants in common. It being a very important action, and as it would involve the title to a very large and valuable property, the most eminent counsel then at the New York bar was retained to supervise the proceeding. During the preparation of the complaint, a question arose as to whether it would not be desirable to make a person, who had been appointed an assignee in bankruptcy in 1841 of a party through whom an interest in the property descended, a party, to save all question. The attorneys favored it, although they were of the opinion that such assignee had no interest, upon the ground that it was best to make any or everybody a party in a partition suit, who not only could have or by the slightest possibility could claim to have, any interest; the eminent counsel examined the question a,nd was firmly convinced that any claim by the assignee would be of the most frivolous character, and the attorneys pressing the view that it was best anyhow to make this assignee a party, to save all question, the eminent counsel declared that he would retire from the case if any such unnecessary parties were made defendants. The assignee in bankruptcy was not made a party. The action went on, the property was partitioned, a large amount of-it sold, title taken, upon the eminent counsel’s opinion as to the regularity of the proceedings. Sometime afterwards the Court of Appeals decided that bj*- the assignment in bankruptcy in 1841, the whole title to that share in the real estate, claimed through the bankrupt, had passed to the assignee, and, as a result, the title to the whole of the property partitioned was defective. I therefore say, that no matter what any lawyer’s;
That this claim, of itself, was the moving cause of the reduction in the rentals to be paid to the companies by the Manhattan, cannot, I think, with verity be asserted; or that it was a very potent factor in determining the terms of the new arrangement; but that it was thought advisable to get rid of this claim, and that it was taken into consideration with the many other things necessary to a determination as to the advisability of any particular action, is undoubtedly true.
The necessity of keeping the properties under the control of one management was recognized, and that the Manhattan afforded the best means of attaining that end was acknowledged, and how this result could be achieved without the dangers of the disastrous failure which had followed the making the leases of May 20th, 1879, was the problem to be solved. ■ It was solved by the October agreements, to the satisfaction of the directors and stockholders of the New York company, none of whom, except one, had any interest whatever in the Manhattan company—the New York company being called upon, in my judgment, to make much greater sacrifices than were called for from the Metropolitan company.
At the time the October settlement was made, by the terms of the lease of May 20th, 1879, the New York company was absolutely entitled to the possession of its road. There is not a pretense that there was any defense to its claim; and yet it is urged that it was the duty of the directors of the Manhattan and Metropolitan companies to resist this claim, and, because they admitted its validity and negotiated upon that basis, they are guilty of fraud.
The counsel say:
“ The New York company would have been powerless,formally months, to break up the lease, because of their nonpayment.
*466 “At the expiration of the ninety clays’ grace provided by the original lease, the New York company would have to bring an action of ejectment to obtain possession of the road.
“ That suit, with the two trials given as a matter of right to the Manhattan company by the statute, would have lasted months, if not years, and would have given the lessee ample opportunity to provide for its liabilities by its rapidly increasing earnings, to say nothing of raising the necessary funds in other ways.”
That is, by putting in defenses under oath having no foundation in fact, taking new trials and paying the costs of a previous trial, with the absolute assurance of a no better result, the New York company might have been delayed in the assertion of its rights for months, if not for years, so as to have given^the Manhattan company time out of increased earnings to pay its past indebtedness; and because the directors of the Manhattan and Metropolitan companies did not resort to these (I had almost said questionable, but there is no question as to their impropriety) devices, that, therefore, they are to be charged with the betrayal of their trusts. It is the first time, I imagine, that a court of equity has ever been asked to give its sanction to such a claim as this.
. Indeed, if the directors of the Manhattan and Metropolitan companies had taken this course and incurred expenses in such litigation and paid costs upon the obtaining of such new trials, and these expenses and costs had been paid out of the funds of the respective companies, the) could have been charged personally against such directors as disbursements incurred in proceedings which they had carried on in bad faith, in violation of their duty. It is no duty of a director to resist lawful claims against his corporation, and if legal forms are susceptible of abuse by the unscrupulous, a director is not censurable for not availing .himself of such improper methods to sustain his corporation.
The conduct of the Metropolitan directors, after the making of the October agreements, is claimed to be strong evi
In order that a fraudulent intent in the original act may be deduced from subsequent acts they must be inconsistent with anything but a fraudulent intent originally, and not relate to any subsequent fraudulent intent; because a fraudulent intent formed after an agreement has been executed and delivered, although formed for the purpose of aiding the carrying into effect the terms of the agreement, cannot relate back to the original agreement.
Great opposition to the October and November agreements had been manifested by some of the stockholders, and the endeavor was made to crush out this opposition, but these efforts by no means implied that any improper purpose was indulged in at the time of the making of the agreements themselves.
The absence of Mr. Connor, and the non-production of the books, are to my mind a very suspicious circumstance; and were it not for the rule laid down in Bleecker v. Johnston (69 N. Y. 309), I should necessarily conclude that their absence justified the strongest inference to be indulged in against the defendants. But as this rule is held by the court, in that case, only to apply to cases where it is shown that a party has resorted to improper means to get or keep witnesses away from the trial, my own opinion must conform. Although we may imagine a great many things in connection with this matter, yet unless our deductions are supported by some evidence, they cannot form the foundation of a legal judgment.
There are other minor points which have been urged by
The next question to be considered is—
Had the Metropolitan directors the power to modify the original leases and tripartite agreement of May 20th, 1879, without the consent of the shareholders ?
In the disposition of this important question, I am but little aided by any authorities in the courts of this state or of the United States.
It is true that Mr. Justice Blatchfobd, in the United States Circuit Court, in the case of Flagg, held that these October agreements were valid, upon the authority of Hoyt v. Thompson (19 N. Y. 207), and McCullough v. Moss (5 Denio 566) ; and that the General Term of this Department sustained the same in the case of Content (26 Hun 82), upon the ground that the October agreements were nothing more than a compromise and adjustment of claims which the Metropolitan and New York companies held against the Manhattan, and that the boards of directors having charge of the management of the affairs of a corporation, can always exercise this power of adjustment in the administration of the affairs of their corporation. The weight to be given to the decision by Mr. Justice Blatohford has been much shaken by opinions given in our own courts; and the ground upon Avhich the decision of the Content case was based does not seem to be relied upon by the counsel for the defendants in the case at bar, although the case is presented as an authority in their favor. If the October agreements are to be held to be simply as a compromise and adjustment of an existing claim, then I am clearly of the opinion that the board of directors of the Metropolitan company, without the assent of its stockholders, had the power to make them, within the principle involved in the case of Hoyt v. Thompson (19 N. Y. 207). But, in my opinion, these agreements are not susceptible of any such limitation. They are rather new agreements radically modifying and changing previous
If these agreements had merely been a settlement of existing claims due, or about speedUy to become due, they might be considered as mere compromise agreements, but when they change in many substantial particulars the leases of May 20th, 1879, and that, too, for a period of over nine hundred years, I cannot see how they can be called mere compromise agreements.
But it is urged, “ that, conceding the fact that shareholders have a voice as to the transaction of extraordinary
“ This action settled the question of parting with the possession of the property for nine hundred and ninety-nine years. This having been done, what business, ordinary or extraordinary, was then left for the directors of the lessor road to do ? They had no railroad to run or manage. The usual ordinary business of the directors of a railroad as such had ended. Those in office and those afterward elected were empowered, and, in fact, employed in looking after the affairs and interests of the lessor under the lease, and nothing else. ■ Although called directors of a railroad company, they had no railroad to direct; all the property of the railroad company having passed into other hands for a long period of time, with the assent of its shareholders. The ordinary business which remained for the directors to attend to was the collection and distribution of the rents falling due under the lease. Would it be extraordinary business, and in excess of their powers, to accept and receive a less' amount than that reserved in the lease, if unexpected difficulties and complications arose ? In other words, to waive part of a demand if it appeared clear that the interests of their principals called for it. Although leasing may be extraordinary business, the element of leasing did not enter into the October agreements, and, therefore, were not the subsequent modifications as to rent, etc., a mere matter relating to money affairs and ordinary “ business,” as that term is generally understood ? It clearly appearing that the carrying out of the terms of the lease as to the amount of rent to be paid had become an impossibility, what was to be done ? A modification was necessary, and the October agreements -were simply modifications.
“If it be said that if the lessee could not perform, it was the duty of the directors of the lessor to have insisted upon the taking possession of the property, and to do anything else was extraordinary and not within the power, it must be remembered that all parties had agreed that the running of
“ To insist upon breaking up the lease because the lessor could not pay the full rent; to resume the old status which all concerned had agreed could not be maintained, except at the risk above mentioned, would have been directly opposed to the expressed views of the shareholders. Therefore, if the lessee was unable to pay all, it was the part of wisdom to agree to take less, when to maintain the former agreements was an impossibility; and was fairly within the meaning of ordinary business.”
That there is great force in the above argument must be conceded, but I think that its fallacy arises from overlooking the fact that, if the shareholders had the right .to determine the terms and conditions upon which their property was to be parted with, such terms and conditions form the consideration for the assent, and the consideration cannot be taken away without destroying the assent. The assent depended upon and was supported by the terms and conditions, it sprang from such terms and conditions, and when they were removed the foundation of the whole structure upon which the assent rested was removed and the assent necessarily fell. Although it might have been within the powers of the directors to have made temporary arrangements for relief from the difficulties, and such arrangements would be called ordinary business, yet they could not make radical changes in the terms and conditions of the lease as to which the stockholders had never been consulted.
The result of the October agreements certainly was a permanent and radical change in the terms and conditions of the lease.
If the board of directors could not make a new lease upon definite terms and conditions, then, clearly, they could not radically modify the old lease.
If they could not make a new lease directly, then they could not in effect make a new lease by striking out of the old
It is undoubtedly true that directors may compromise a debt due to their corporation; but the October agreement went much further than this. They changed the lease in many radical and substantial particulars, and took away rights which may have been the very things that induced the shareholders to assent to a leasing of their property, and without the presence of which such assent would never have been given.
It is true that all conceded the necessity of united management, and this concession might have justified the directors in.the making of temporary arrangements to continue such management if the lease could not be complied with, until they had an opportunity to consult with their principals ; but such concession could not possibly have given the directors power to radically change the old lease for all time, which was in effect done by the October agreements, simply because the corporation, through its shareholders, had consented to the leasing of its road upon certain other specified terms.
Directors, as I shall hereafter attempt to establish, are the agents of the corporation, having, as such, exclusive authority to act within their sphere. But they are also, in some respects, merely the executive agents of the shareholders, and as such may perform certain other acts, if specially authorized thereto by their principals, and in respect to such action they are simply the agents of the shareholders, as well as of the corporation. The shareholders, the principals, having fixed the terms and conditions, which they had a right to do, upon which the directors, their agents, were authorized to part with the possession of the property in their charge, and to commit the possession and management thereof into other hands; what right have the agents to radically change or alter these terms and conditions without consulting their principals ?
Suppose an agent parts with his principal’s property upon
In other words, in case of a failure to comply with the terms upon which the property had been parted with,, who is to elect whether the property shall be taken back or not? Is it not the principal? How can the agent claim any power to make this election, simply because he has a general authority to compromise debts ?
This would be exercising a widely different authority in the name of the principal from that which would be called into action by the mere taking of a smaller sum in settlement of a larger sum due.
The principal might much prefer to have his property back again rather than to take a smaller sum for it, and he would have the right to determine that question himself.
So in the case at bar; the Metropolitan shareholders fixed the terms upon which they would consent to part with their property, and they stipulated that in case those terms were not complied with they should be entitled to recover back their property. Can there be any doubt but that, in case of a failure to comply with the terms which they have fixed, it is a question for them to determine whether they would prefer to take their property again into their own possession and manage it for themselves, rather than to accept different terms from those which had originally induced them to part with their property ?
But it is not necessary to pursue further the discussion of this question, because I do not understand that the defendants base their claim of the validity of these agreements upon any such ground; but that they insist that the diree
That the directors of a corporation are agents, seems to be clearly recognized in all the cases in which the relations of directors and shareholders to their corporation have been discussed.
It is said in Twin Lick Oil Co. v. Marbury (91 U. S. 587, 589), that the directors arfe the officers or agents of the corporation, and represent the interests of that abstract legal entity, and of those who own the shares of its stock.
In Cumberland Coal &c. Co. v. Sherman (30 Barb. 553, 571), the court say: “There can be no question at the present time that a director of a corporation is the agent or trustee of the stockholders.”
In Angelí and Ames on Corporations, § 771, it is stated that, “The stockholders compose the company, and the managers, directors or officers are their agents, necessary for the management of the affairs of the company, but they are not essential to its existence as such, not forming one of the integral parts.”
In Abbott v. American Hard Rubber Co. (33 Barb. 578), the court say, at foot of page 591: “ Boards of directors are agents of the corporation to manage its affairs, and carry out the purpose and object of its formation.”
The directors thus being the agents of the corporation, what are their powers and from whence are they derived, and how must corporate powers residing in the corporation, the right to exercise which is not vested in the directors, be brought into operation ? These questions are so intimately connected that they must be disposed of together.
The powers of directors are such as are conferred by the charter of their corporation and the laws pertaining thereto, and such corporate powers as are not conferred by law upon the directors, remain in the corporation to be exercised, or
In the case at bar, the charter provided that the directors were to manage the business and affairs of the company; and the question involved in this branch of the case is, whether this language conferred the right to exercise every corporate power possessed by the corporation, or merely to manage the ordinary business and affairs of the company for the carrying on of which it was organized, leaving the right remaining in the shareholders composing the company to set in motion or confirm corporate action within the limits of its powers, but extraordinary and unusual in its nature*.
Within the sphere of their duties, the right of the directors to act is undoubtedly exclusive, and further, all corporate acts must be done through them, as they are the exclusive executive and administrative authority, but, nevertheless, all corporate powers do not reside in the board of directors.
It is true that the court say, in McCullough v. Moss (5 Denio 567,575), that: “When a charter invests a board with the power to manage the concerns of a corporation, the power is exclusive in its character. The corporators have no right to interfere with it, and courts will'not, even on a petition of a majority, compel the board to do an act contrary to its judgment.”
That case was an action to recover upon a promissory note, which the corporation in the exercise of its legitimate business could have made, and the question presented was whether execution was proved. The note was signed by the president and secretary of the company, but no authority from the board of directors, who, by the charter, were to conduct the affairs of the company, to the president and secretary, was shown. Some resolution of the shareholders was shown, but it had no relation to this question, and then the court uses the language above quoted. This case nowhere decides that the directors'are clothed with all the corporate powers. It may be cited as an authority for the
For example, if the power to lease was vested in the corporation, but the directors could not, because of the limitation in the charter, exercise this power, the shareholders could not cause the lease to be executed and delivered, nor could they compel the directors to execute and deliver the same against their own judgment; all that the shareholders could do would be to authorize the directors to act or confirm an act of the directors which would be incomplete without such ratification.
The case of Hoyt v. Thompson (19 N. Y. 207), is also claimed to be an authority against the suggestion made above ; but upon an examination it will be seen that much is said in respect to the relation of directors to their corporation, and their rights and powers, and the sources from which they are derived, which was not at all necessary to the decision of the question involved, and is directly contrary to the principles announced in the United States Supreme Court, in a case where the direct question was presented.
The adjudication in the case of Hoyt v. Thompson had necessarily to be put upon the ground that the act under investigation was “ ordinary business,” and in that case a distinction was plainly recognized between “ordinary business,” and such as was within the corporate powers, but unusual and not coming within the general business of the corporation. The court held, that although the charter of the corporation declared that its powers should be exercised by a board of directors, consisting of a specified number, yet the board might delegate its authority to agents or to a quorum of less than a majority of the number.
The court further held, that when a by-law of the corporation declared that five directors should be a quorum for the transaction of “ ordinary business,” the general business of the corporation was embraced in the authority thus
It is true that the learned judge who wrote the opinion in the case of Hoyt v. Thompson, uses the following language :
“ The board of directors of a corporation do not stand in the same relation to the corporate body which a private agent holds toward his principal. In the strict relation of principal and agent, all the authority of the latter is derived by delegation from the former, and if the power of substitution is not conferred in the appointment, it cannot exist at all. But in corporate bodies the powers of the board of directors are, in a very important sense, original and undelegated. The stockholders do not confer nor can they revoke these powers. They are derivative only in the sense of being received from the state in the act of incorporation. The directors convened as a, board are the primary possessors of all the powers which the charter confers.”
The whole of this argument was devoted to establishing the power of the board of directors to delegate the authority to manage the ordinary business of the corporation to five of their number, and had no other purpose.
That the directors convened as a board, are not the primary possessors of all the powers which the charter confers, is expressly held by the United States Supreme Court, in the case of the Railway Company v. Allerton (85 U. S. [18 Wall.] 233). In that case the charter provided as follows :
“ Section 3. The capital stock of said corporation shall be one hundred thousand, dollars, and may be increased from time to time at the pleasure of said corporation.
“ Section 4. All the corporate powers of said corporation shall be vested in and exercised by a board of" directors, and such officers and agents as said board shall appoint.”
In considering this question, it is not at all improper to look for a moment at the result arising from a rule, that the directors are the primary possessors of all the powers which the charter confers. If the board of directors have the power, without the assent of the shareholders, to lease the properties of the corporation for all time, then the shareholders may be deprived of, not only the administration of their property through its agents, the directors, but its very possession, without a moment’s warning. A board of directors are elected for one year, to manage the business and affairs of the porporation, such business being the operating
“But if this conclusion is the result of too strict a construction of the charter, we are of the opinion that the power in question is not exercisable independently of the judgments of the stockholders. The directors and officers of a corporation are its exclusive executive agents, and, as it can only act by and through them, the powers vested in the corporation are deemed to be conferred upon its representatives, but they are, nevertheless, trustees for the stockholders. The law recognizes the stockholders as the ultimately controlling power in the corporation, because they ma3, at each authorized election, entirely change the organization, and may at any time keep the trustees within the line of faithful administration, by an appeal to a court of equity. Hence, it has been held that the directors of a corporation cannot alone increase its capital stock, where such increase was authorized by its charter at the pleasure of
“The change proposed is not organic, but it is thorough and fundamental, as it affects the administration of the company’s affairs. It involves a withdrawal from the control and management of the stockholders of the entire property of the corporation for at least five years; it will preclude, for a like period, the exercise by the stockholders of their judgment'as to the particular character and method of conducting the business affairs of the corporation; and it denies to the stockholders any right of suggestion or disapproval of the conditions, when such a relinquishment of important corporate faculties may be conceded. Surely a power which will be attended with such consequences does not relate ‘to the ordinary business transactions,’nor ‘to the orderly and proper administration of the affairs ’ of the company; and hence cannot be exercised by the directors without express authority to them.”
In opposition to this view is cited by the learned counsel for the defendants, the case of The Excelsior Fire Ins. Co. (16 Abb. Pr. 8, 14), in which it was said:
“ The statute says ‘ the company is authorized to reduce the number of its directors,’ etc. It makes no provision for a meeting of the stockholders for that purpose. In the absence of any provision of that -character, the power is vested in the board of directors. Stockholders, as such, possess no powers in the management of a corporation, except specially authorized so to do by their charter. Their power ends with the election of the directors.”
Also in Elwell v. Dodge (33 Barb. 336, 339), the court says:
“A general resolution of the directors delegating the power to transfer property or choses in action to meet the exigencies of the company, or a ratification of this particu*481 lar transfer by act or resolution of the board, or acceptance and appropriation of the fruits of the transaction, if a special resolution authorizing the transfer and use of this note was wanting, would be sufficient to sustain the indorsement as the act of the company, even as against the company, and might have been proved had the precise point now made been then taken.”
The language of Judge Selden, in the case of Robertson v. Bullions (11 N. Y. 243, 250), is also referred to. He says :
“ What, then, are the powers, rights and obligations of this class of corporate officers, and to what extent has this court jurisdiction over them ?..... These officers are trustees in the same sense with the president and directors of a bank or of a railroad company. They are the officers of the corporation to whom is delegated the power of managing its concerns, for the common benefit of themselves and all other corporators, and over whom the body corporate retains control, through its power to superséde them at every recurring election.”
In the Matter of St. Ann’s Church (23 How. Pr. 285), Judge Emott says:
“ The officers thus chosen are not trustees in the sense in which an individual becomes or is made a private trustee ; they are simply officers of the corporation. As such officers, they represent the corporation; they are its managing agents, and they may act for the corporation as fully as the directors or agents of an ordinary corporation may act in its behalf. A corporation ordinarily acts through its officers, and through them only. The power of managing its concerns is delegated to its officers, and they are to manage them for-the common benefit of themselves and all the other corporators. These officers are liable, it may be, to judicial proceedings to control their action, where it is fraudulent or destructive of the rights and interests of the corporation, They are responsible, however, more directly and practically to the corporate body itself, through the power of the corporators to supersede them at their elections.”
“This, I take (that is to say, the election), is the utmost that the stockholders can do according to the tenor and design of the act under which they must all act until an election of the directors shall come around, when the former, if dissatisfied with the conduct of the latter in managing the affairs of the bank, may turn any one, or more, or the whole of them, out of the direction, and place it .in other hands.”
The claim made by virtue of these decisions is that the stockholders have no power to do anything in relation to any matter whatever pertaining to their corporation, except that if dissatisfied with the conduct of their directors in managing the affairs of the corporation they may turn them out at the next election; and this is certainly the language of- all the above decisions. But how inapplicable is such remedy to an act of the directors which has terminated the business of the corporation, and placed all its property in other hands for a thousand years; will that give back the property to the corporation; will that set right any maladministration if the directors had the power to thus act? Clearly not, and the language was intended to apply to cases where the action taken was neither radical nor fundamental in its character. For mismanagement of the ordinary business of the company, the turning out of the directors is a reasonably adequate redress; but when the directors have divested the company of all its propert}, it is difficult to see how any remedy is afforded by turning them out. Further, the courts of this state, as has already been seen, expressly recognize the fact, notwithstanding the decision above mentioned, that the shareholders have certain other rights and privileges beside that of electing directors,- viz: the right to be consulted in respect to change of business, increase of capital stock, dissolving and winding up the affairs of the corporation, sale of any portion of its property necessary for the transaction of its business, etc.
It need hardly, therefore, be necessary, in view of the principles which have controlled the decisions already quoted,
It is claimed by the counsel for the defendants that as far as this state is concerned, at least, the power of a board of directors to lease without the assent of shareholders, has been expressly recognized by the legislature of this state, and various acts of the legislature are cited, in which leases of railroads and consolidations of railroads are authorized to be made as the directors shall determine. It seems to me, that instead of these acts being an evidence of a legislative construction that, under the act of 1839, directors had the power to lease without the assent of the shareholders, it was only because such acts could not be performed by the directors alone that it was thought necessary to confer express powers upon the directors. If the power was conferred upon the corporation, the directors alone could not exercise it, and, therefore, the legislature conferred the power expressly upon the directors.
Attention has also been called to various cases where the assent of stockholders is provided for as a condition of corporate action.
It will be seen that in every case it is a limitation upon corporate action by requiring more than a majority of stockholders to assent, or the conferring of a new power upon corporations and affixing the conditions' upon which such power is to be exercised.
I fail to see that legislation of this character in any way aids us in the determination of this question. If, however,
The cases of Fisher v. New York Central &c. R. R. Co. (46 N. Y. 644), and The Central Cross Town R. R. Co. v. The Twenty-third Street R. R. Co. (54 How. Pr. 183), are cited as deciding that a lease may be made without the assent of the shareholders. I have failed to find any such adjudication in either of those cases. All that can be claimed for those cases is that they decide that a lease of its road, made by a railroad corporation, is not ultra vires, and they decide nothing more upon the question of power.
No question is raised or discussed as to the manner of the exercise of its power by the corporation. There was no person before the court seeking to impeach the lease, who could be heard upon the question of stockholders’ assent. The only question was whether the lease was not actually void, not voidable.
There is no question, but that admitting that a board of directors alone have no power to lease the property of their corporation, and if such lease is executed by the directors without the assent of the stockholders, such stockholders may accept thé lease or repudiate it; and that if they allow the parties to the lease to go on under the lease without any action being taken in respect thereto, within a reasonable time, they will be held to have acquiesced in the lease and ratified it. Therefore, conceding that the corporation has the power to lease, when the action is taken and the stockholders have acquiesced, no third party can raise the objection that the stockholders have not formally assented.
. In the cases cited the leases had long been in operation, and the time for dissent had long passed, and, therefore, the only question that could be raised was the power of the corporation to act at all. After an examination of the rea
This brings me to the consideration of the remaining question :
Were the agreements voidable at the option of the Metropolitan company, because three of its directors were also directors of the Manhattan company; or because Metropolitan directors held also stock in the Manhattan company?
In considering this question, it must be conceded at the outset that the interests of the Manhattan company were directly antagonistic to those of the Metropolitan company.
In the negotiations which resulted in the October agreements, it was for the interest of the Manhattan company to get as large a reduction of rental as possible; and it was the interest of the Metropolitan company to secure as advantageous terms as the Manhattan company could comply with, and a similar interest pertained to the New York company; but it was to the interest of neither to secure
Three propositions are urged in answer to the claim of the plaintiff, that the conflicting interests rendered the October agreements voidable. The first is, that although conflicting interests may disqualify an agent, -strictly so called, from acting, that this rule does not apply to trading corporations, so many of whom have common directors. Secondly, if such conflicting interest induces any incapacity, it is not fatal to the agreement, if such agreement can be proven just and fair; and thirdly, that if any of the directors were disqualified because of an adverse interest, enough voted for the adoption of the agreement who were not disqualified, to have carried the measure, even if all the disqualified directors had voted no.
It will not be denied, I imagine, that as between natural persons, where an agent or trustee has a personal intez-est opposed to that of the principal, or where a man acts as agent of both parties to the contract, although he may have no personal interest on either side, the principal or cestui que trust may avoid the contract at will, even if there be no actual fraud or damage.
The cases in this state and izi England seem to be very explicit upon this point, and it might perhaps be zrecessary only to refer to the language of the chancellor, used in the case of Davoue v. Fanning (2 Johns. Ch. 252, 260), which sets forth in the clearest language the principle upon which that rule is founded. He says:
“However izzzrocent the purchaser may be izi the given case, it is poisonous in its cozisequeziees. The cestui que trust is zrot bound to prove, zror is the court bound to judge, that the trustee has made a bargain advazrtageous to himself. The fact may be so, and yet the party not have it in his power distinctly and clearly to show it. There may be fraud, as Lord Haedwicke observed, and the party not able to prove it. It is to guard against this uncertainty and hazard of abuse, and to remove the trustee frozn temptation, that the rule does and will permit the cestui que trust
In Taussig v. Hart (58 N. Y. 425, 428), the court say:
“ It is no answer that the intention was honest, and that the brokers did better for their principal by selling him their own stock than they could have done by going into the open market. The rule is inflexible, and although its violation in this particular case caused no damage to the principal, he cannot be compelled to adopt the purchase.”
In New York Central Ins. Co. v. National Protection Ins. Co. (14 N. Y. 85, 91), it was said:
“ It is not necessary for a party seeking to avoid a contract on this ground to show that an improper advantage has been gained over him. It is at his option to repudiate or to affirm the contract irrespective of any proof of actual fraud.”
In Conkey v. Bond (36 N. Y. 427, 429), it was said :
“It is not material to inquire whether the defendant had any actual fraudulent purpose. The making of a purchase from himself without authority from the plaintiff was a constructive fraud, in view of the fiduciary relation which existed between the parties. In such a case the law delivers the agent from temptation by a presumptio juris et de jure, which good intentions are unavailing to repel.”
In the case of Greenlaw v. King (3 Beav. 49, 61), Lord Eldon says:
“ If a trustee can buy in an honest case, he may in a case having that appearance, but which, from the infirmity of human testimony, may be grossly otherwise. The impossibility of detecting the conduct of parties placed in such situations, is the reason which imposes upon the court a necessity, which I believe has always been acted on, of saying that such transactions shall not stand at all. You have not the means of finding out all the modes in which advantage can be taken, and therefore it is safer, and the interests*488 of society require that you should forbid such transactions altogether.”
Also, in Ex parte James (8 Vesey 337, 344) :
“ This doctrine as to purchases by trustees, assignees, and persons having a confidential character, stands much more upon general principle than upon the circumstances of any individual case. It rests upon this, that the purchase is not permitted in any case, however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance, as no court is equal to the examination and ascertainment of the truth in much the greater nrrmber of cases.”
In Grillet v. Peppercorne (3 Beav. 78, 84), it is said:
“It is not necessary to show that fraud was intended, or that loss afterwards took place in consequence of these transactions, because the defendant, though he might have entertained no intention whatever of fraud, rvas placed in such a situation of trust with regard to the plaintiff, that the transaction cannot, in the contemplation of this court, be considered valid.”
We might multiply authorities upon this point, but these are sufficient to show how stringently the rule has always been applied, and that under no circumstances should it be departed from.
It was intimated, that although this rule was so stringent as to purchases and sales, yet that it was not applied with the same rigor to other contracts. I have failed to find any foundation for this distinction either upon principle or authority. It may be true that most of the adjudicated cases have arisen in reference to purchases and sales, but no distinction has been made by any court between contracts of this nature and any others which were tainted with the same infirmity. There is no reason for any such limitation, and I do not find that it has ever been attempted to be enforced.
In the case of The Aberdeen Railway Company v. Blaikie Brothers (1 Macq. H. L. Cas. 461), the same point was suggested, and the court say upon this point:
*489 “ It is true that the questions have generally arisen on agreements for purchase or lease of land, and not as here on a contract of a mercantile character. But that can make no difference in principle. The inability to contract depends, not on the subject matter of the agreement, but on the fiduciary character of the contracting party, and I cannot entertain a doubt of its being applicable to the ease of a party who is acting as manager of a mercantile or trading business for the benefit of others, no less than to that of an agent or trustee employed in selling or letting land.”
But it is urged that this incapacity does not apply to the directors of a corporation; that the director of a corporation may contract with his corporation, and such contract will be held valid if such contract is shown to be just and fair, because a director of a corporation is not an agent or trustee in the ordinary sense. He is not a trustee of the shareholders, but a trustee of the corporation; and in support of this proposition attention is called to the language used in the case of Duncomb v. The New York, Housatonic & Northern R. R. Co. (84 N. Y. 190, 198). The court says:
“ Whether a director of a corporation is to be called a trustee or not, in a strict sense, there can be no doubt that his character is fiduciary.....and that he falls, therefore, within the doctrine by which equity requires that confidence shall not be abused by the party in whom it is reposed. ..... But the rule was adopted to secure justice, not to work injustice; to prevent a wrong, not to substitute one wrong for another; and hence have arisen limitations upon its operation, calculated to guard it against evil results as inequitable as those it was designed to prevent.”
This language must be interpreted having in view the facts of the ease under consideration, and what wrong it was proposed to commit under the alleged forms of law. The court was speaking in reference to a claim made by the defendant of its right to keep the money loaned by the director to the corporation, and to avoid the security given for its repayment. The court adds, “ Thus, the beneficiary
Reference is further made to the.language used in Angelí & Ames on Corporations § 233, which is as follows :
“ By the common law, and by the Civil Code, too, as a corporation aggregate may contract with persons who are not members, so it may contract with persons who are members of it; and the contract is not on this account invalid; a member of a corporation contracting with it being regarded, as to that contract, a stranger. Hence, a vote of the corporation affecting a contract between it and a member cannot bind the member without his assent to it. And though the member of the corporation be also one of the trustees of the corporation, it would seem that this would not incapacitate him from contracting with it; but he may recover against the corporation for his services rendered under a contract with the other trustees, in a case where there is no evidence of such gross partiality in the contract as amounts to fraud. And where the members of three distinct corporations were the same, yet, in The Proprietors of the Canal Bridge v. Gordon, it was held by the Supreme Court of Massachusetts, that contracts between the several corporations were valid, and might even be implied from corporate acts. The banking associations of New York, under the general bank law of 1838, are to be regarded for this purpose as bodies corporate; and hence, in a suit at law by such an association against one of its members for debt, the fact of membership presents no objection to recovery.” And also the case of Jackson v. The New York Central R. R. Co. (2 Thomp. & C. 653), and affirmed in the Court of Appeals upon the opinion of the court below (58 N. Y. 623), in which a director was allowed to recover from the corporation for the value of certain professional services outside of and beyond those pertaining to his office, rendered to the corporation of which he was a director. This latter case may be sustained upon the ground that as the' corpora
“ As to the first class of cases, the purchase or contract is voidable at the option of the cestui que trust, without reference to the fairness or unfairness of the purchase or contract. For the reasons before given, the disqualification of the party purchasing or contracting is a conclusion of law, and is absolute.”
Some confusion seems to have arisen in the enunciation of the principle under discussion, because of a failure to distinguish between the two classes of cases, the disability as to dealings between trustee and cestui que trust being absolute, while that in respect to dealings between attorney and client is less strict. Story, in his Equity Jurispru
The ground upon which the decision of the case of Jackson v. The New York Central R. R. Co. (supra), may well have proceeded, is well stated in the opinion in the case of Gardner v. Butler (30 N. J. Eq. 702), where it is said:
“ The rule is, that the trustee cannot fortify himself by a contract which he makes with himself or for his own interest, and set it up, either at law or in equity, as a valid obligation. It is of no binding force as a contract, and the cestui que trust may repudiate it at will. The agreements, therefore, which the directors made with themselves, must be pronounced to be illegal, and can furnish no support to their defense as contracts. But while the express undertaking is without legal force, the directors of a company have a right to serve it in the capacity of officers, agents or employés, and for such services the law will enable them to recover a just and reasonable compensation. The law restrains them from making a contract where their own gain intervenes between their exercise of judgment and their duty as trustees, but it does not operate to deprive the company of the service of those who, in many cases, may alone possess the skill requisite to the successful management and conduct of the corporate business, and who may have the chiefesjb interest in its prosperity. Stockholders, because they are directors, are not compelled to commit the success of their company to strangers, or else render their own services gratuitously. No claim which they may make against their company can acquire any support or validity from the fact that they have expressly sanctioned it; it must rest exclusively upon its fairness and*493 justice, and be enforced upon the quantum meruit. That such is the full scope and effect of the rule, and the extent to which the transaction is annulled, will be found by an examination of the cases. .....
“The same principle must apply, whether it is property conveyed or services rendered to the company. The eupiddity and avarice of the trustee is guarded against by giving the cestui que trust the right to repudiate the contract at all times, where it is executor)', and to allow simply a just remuneration, without reference to the contract price where it is executed. The trustee thus derives no advantage from his breach of duty, and the company can "suffer no detriment from his service in their behalf.”
In the case of Thomas v. The Brownville, Fort Kearney & Pacific R. R. Co., decided in the Supreme Court of the United States in October last, the right to recover upon a quantum meruit for services rendered and materials furnished under a voidable contract, is distinctly enunciated. The court says:
“But we are asked to reverse the decree so far as to permit the trustee in this case to recover such a sum as the construction company actually earned in building the road. The matter was referred to-a master, who, on this hypothesis, reported that the contractors had done work for the railroad company, which it had accepted to the value of $205,947.66, beyond what they had received payment for, except as it was paid by these bonds. He also reported that this work was of that much advantage to the company, and its value or cost is estimated on a quantum meruit, without regard to the prices fixed by the contract.
“We are of the opinion that the appellant’s view of this part of the transaction is sound.
“The bonds and mortgage in the hands of the trustee were issued in payment of this work. To the extent of $205,947.6(3, the consideration is good, and no sound principle is seen on which they cannot to that extent be enforced. To this extent they do not rest on the original contract, but on work, labor and material actually fur*494 nished to the company and received by it. These services and materials are not estimated by the prices named in the contract, but by their real value to the company.”
In the case of Wardell v. The Union Pacific R. R. Co. (103 U. S. 651, 659), the incapacity of a director to contract with the company is recognized, and also his right to recover for services and materials upon a quantum meruit.
The language used in the above section quoted from Angel! & Ames on Corporations is certainly broad enough to cover the proposition in question; but I have examined, with care, the authorities cited to sustain the broad language of" the text, and none go so far as to hold that a corporation may contract with 'one of its directors, or that two corporations, having common directors, may contract with each other.
In the case of The Proprietors of the Canal Bridge v. Gordon (1 Pick. 297), which is the authority cited, the question decided was that a contract might be implied from corporate acts and nothing more. But in any event the contrary rule seems to be clearly established by the decisions of this state, founded upon the rule as laid down in the English courts and the United States Supreme Court.
In the case of Hoyle v. Plattsburgh & Montreal R. R. Co. (54 N. Y. 314,328), it was held that the office of director of a railroad company is fiduciary in its character, and, as a consequence, he is incapacitated from dealing in his own behalf in respect to the corporate property or-in respect to any matter involving his powers and duties as such direct- or: that this incapacity is not limited to the particular times when he is acting as director, but continues during the period of his directorship, and that therefore, a director (considering that relationship only) cannot become purchaser of the property of the corporation upon a sale under an execution against it, except subject to the right to dis-affirm and demand a re-sale. Actual fraud or' actual advantage in such case need not be shown.
The foregoing rule is approved in the case of Duncomb v. The New York, Housatonic & Northern R. R. Co. (84 N. Y.
“It is not intended to deny or question the rule that whether a director of a corporation is to be called a trustee, or not, in a strict sense, there can be no doubt that his character is fiduciary, being intrusted by others with powers which are to be exercised for the common and general interests of the corporation, and not for his own private interests, and that he falls, therefore, within the doctrine by which equity requires that confidence shall not be abused by the party in whom it is reposed, and which it enforces by imposing a disability, either partial or complete, upon the party intrusted to deal, on his own behalf (Hoyle v. Plattsburgh Montreal R. R. Co., 54 N. Y. 328 ; Gardner v. Ogden, 22 N. Y. 327 ; Twin Lock Oil Co. v. Marbury, 91 U. S. 587 ; Smith v. Lansing, 22 N. Y. 531 ; Aberdeen R. R. Co. v. Blaikie, 1 Macq. H. L. Cas. 461). Nor is it at all questioned that, in such cases, the right of the beneficiary, or those claiming through him, to avoidance, does not depend upon the question whether the trustee in fact has acted fraudulently or in good faith and honestly, but is founded upon the known weakness of human nature, and the peril of permitting any sort of collision between the personal interests of the individual and his duties in his fiduciary character.”
In the case of Barnes v. Brown (80 N. Y. 527, 535), the question as to the inability of a director to contract with his corporation was distinctly presented, and it was claimed in that case that the disability went so far that an assignment of an interest in a contract made to an independent party was absolutely void, and that such director could not transfer any title by a subsequent assignment.. The court say, referring to this point:
“We must assume, therefore, here, that it was, when made, a legal contract, such as the corporation could make. It is claimed, however, that the assignment of the interest in that contract to the plaintiff while he was a director was void as being contrary to public policy. It is true that the
“ The assignment of a portion of the Byrne contract to the plaintiff did not render that contract void. There was nothing done under the contract. If the plaintiff had attempted to do anything under it, so that his interest under it might come in conflict with his duty as trustee, then the principle of the above cases could'have been invoked against him. The corporation could have permitted him and Byrne to perform the contract, and then could make him account to it for all the profits he made by such performance. If he had attempted to perform the contract while he was direct- or, the shareholders could probably have intervened, by some suit in equity adapted to the nature of the case, to nullify the contract as to him, or to restrain him from the performance thereof, or to compel him to elect to resign his office of director or to give up the contract. In any view of the case, the assignment to him was not absolutely void; it was at most simply voidable at the election of the corporation or its stockholders. Besides, the assignment to him did not destroy the Byrne contract, and before he attempted with Byrne to perform it, and before any ob
In Aberdeen Railway Company v. Blaikie Bros. (1 Macq. H. L. Gas. 461), which is the leading case in England upon this point, the question was as to the validity of a contract made by the plaintiff with the defendants, a firm, one of whose members was a director in the railway company; and the court say:
“ The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal, and it is a rule of universal application, that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting, or which possibly may conflict with the interests of those whom he is bound to protect.
“ So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far, in any particular case, the terms of such a contract have been the best for the interest of the cestui que trust which it was possible to obtain.
“ It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could be obtained from any other person; they may even at the time have been better.
“ But still so inflexible is the rule that no inquiry on that subject is permitted. The English authorities on this subject are numerous and uniform.”
The decision in this case seems to me to have been based' upon principle, and not upon the 85th, 86th and 87th sec
In the case of The Aberdeen Railway Company v. Blaikie Bros, (supra) this case is referred to, and the decision is sustained upon the ground that at law the contract was valid, while in equity it was voidable. The lord chancellor says:
“ The statute, i. e., the Companies Clauses Act, it was argued, has impliedly, if not expressly, recognized the validity of the contract by enacting that its effect shall be to remove, the director from his office, indicating thereby that a binding obligation would have been created which would render the longer tenure of the office of director inexpedient, and reference was made to the case of Roster v. The Oxford, Western Wolverhampton Railway Company. This was an action for breach of a contract under seal, whereby*499 the defendants covenanted with the plaintiffs to purchase from them a quantity of iron. The defendants pleaded that at the time of the contract one of the plaintiffs was a director of their company, and to this plea there was a general demurrer. That such a contract would in this country he good at common law, is certain. The rule which we have been discussing is a mere equitable rule, and therefore all that the Court of Common Pleas had to consider was how far the contract was affected by the statute. The decision was that the statute left the contract untouched, and that its operation was only to remove the director from his office. The 85th and 86th sections of the English statute, 8 & 9 Vic. ch. 16, on which the court proceeded, are in the same words as the 88th and 89th sections of the Scotch statute, and the counsel relied on this decision as being strictly applicable to the acts now under appeal; but there is a clear distinction between them. In Scotland there is no technical division of law and equity; the whole question, equitable as well as legal, was before the Court of Session. All that the Court of Common Pleas decided was that a contract clearly good at law was not made void by an enactment that its effect should be to deprive one of the contracting parties of an office. This decision will not help the respondents unless they can go further and show that the statute has had the effect of making valid a contract which is bad on general principles, that is to say, principles enforceable here only in equity, and not recognized in our courts of common law.”
Lord Beotjgham, in his opinion, states:
“I also concur with my noble and learned friend that the decision in the case of Foster v. The Wolverhampton Company, in the Court of Common Pleas, upon which great reliance was placed, and which appears, to a certain degree at least, to have been the ruling decision in the court below, does not apply to this case, because there the transaction was past all doubt valid at common law, though not in equity. But had the Court of Common Pleas had an equitable jurisdiction as well as a common law jurisdiction, the*500 anomaly could never have happened of a transaction being found legal and valid in that court which could not stand an examination on the other side of Westminster Hall.” The language used by the court in its opinion in Twin Lock Oil Oo. v. Marbury (91 U. S. 587), seems, certainly, to sustain the views of the learned counsel for the defendants upon this point. The court says:
“ That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts,.....is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and in others (Koehler v. Black River Falls Iron Co., 2 Black. 715 ; Drury v. Cross, 7 Wall. 299 ; Luxemberg R. R. Co. v. Maquay, 25 Beav. 586 ; The Cumberland Coal &c. Co. v. Sherman, 30 Barb. 553 ; 16 Md. 456). The general doctrine, however, in regard to contracts of this class is, not that they are absolutely void, but that they are voidable at the election of the party whose interest has been so represented by the party claiming under it. We say, this 'is the general rule; for there may be cases where such contracts would be void ab initio ; as when an agent to sell buys of himself, and by his power of attorney convejs to himself that which he was authorized to sell. But, even here, acts which amount to a ratification by the principal may validate the sale.
“ The present case is not one of that class. While it is true that the defendant, as a director of the corporation, was bound by all those rules of conscientious fairness which courts of equity have imposed as the guides for dealing in such cases, it cannot be maintained that any rule forbids one director among several from loaning money to the corporation when the money is needed, and the transaction is open and otherwise free from blame. No adjudged case has gone so far as this. Such a doctrine, while it would afford little protection to the corporation against actual fraud or oppression, would deprive it of the aid of those most inter*501 ested in giving aid judiciously, and best qualified to judge of the necessity of that aid, and of the extent to which it may safely be given.
“ There are in such a transaction three distinct parties whose interest is affected by it; namely, the lender, the corporation, and the stockholders of the corporation.
“ The directors are the officers or agents of the corporation, and represent the interests of that abstract legal entity, and of those who own the shares of its stocks. One of the objects of creating a corporation by law, is to enable it to make contracts; and these contracts may be made with its stockholders as well as with others. In some classes of corporations, as in mutual insurance companies, the main object of the act of incorporation is to enable the company to make contracts with its stockholders, or with persons who become stockholders by the very act of making the contract of insurance. It is very true, that as a stockholder, in making a contract of any kind with the corporation of which he is a member, is in some sense dealing with a creature of which he is a part, and holds a common interest with the other stockholders, who, with him, constitute the whole of that artificial entity, he is properly held to a larger measure of candor and good faith than if he were not a stockholder. So, when the lender is a director, charged, with others, with the control and management of the affairs of the corporation, representing in this regard the aggregated interest of all the stockholders, his obligation, if he becomes a party to a contract with the company, to candor and fair dealing, is increased in the precise degree that his representative character has given him power and control derived from the confidence reposed in him by the stockholders who appointed him their agent. If he should be a sole director, or one of a smaller number vested with certain powers, this obligation would be still stronger, and his acts subject to more severe scrutiny, and their validity determined by more rigid principles of morality and freedom from motives of selfishness. All this falls far short, however, of holding that no such contract can be made which will be valid; and we*502 entertain no doubt that the defendant in this case could make a loan of money to the company; and, as we have already said that the evidence shows it to have been an honest transaction, for the benefit of the corporation and its shareholders, both in the rate of interest and in the security taken, we think it was valid originally, whether liable to be avoided afterwards by the company or not.”
But I think that a careful examination of this case will show that the learned court’s language was intended to show that-such a contract was not absolutely void, so as not under any circumstances to afford the basis for future action or subsequent rights. The last clause of the language above quoted seems clearly to indicate this, which is: “We think it was valid originally, whether liable to be avoided after-wards by the company or not.” In other words, it was valid at law, but subject to avoidance in equity by the company, if such right was exercised within a reasonable time; and the sale in that case was upheld expressly upon the ground of laches. One of the grounds upon which it was sought to set aside the sale was because of certain declarations made by the defendant that he only designed to purchase the property for the benefit of all or a part of the shareholders ; and the court says: “ But we need not decide whether any of these declarations raised a legal obligation to do so or not, nor whether, without such declarations, the sale and deed were voidable at the election of the complainant—a proposition which is entitled to more consideration, resting solely on the fiduciary -relations of the defendant to the plaintiff, than on the evidence in this ease of the declarations alluded to. We need not decide either of these propositions, because plaintiff comes too late with the offer to avoid the sale.”
This language is entirely consistent with the view that the court did consider such contracts, although valid at law, voidable in equity at the option of the corporation, and the decision, as above stated, is put distinctly upon the ground of laches. This case, therefore, decides nothing whatever which is in any respect in hostility to the rule as laid down-
I think, therefore, that the undoubted rule of law in this state is, that every contract entered into by a director with his corporation may be avoided by the corporation within a reasonable time, irrespective of the merits of the contract itself.
But we are asked, does this disability extend to the case of a contract between two corporations, some of whose directors hold that office in each corporation ?
I can see no difference in principle between the case of a \ director contracting with his corporation and that of direc- j tors of one corporation contracting with themselves as directors of another corporation. The evils to be avoided are the same; the temptations to a breach of trust are the same; the want of independent action exists, and the divided allegiance is just as apparent. The fact that there is no such distinction is expressly stated in the case of Wallace v. Long Island R. R. Co. (12 Hun 460, 464). The court says :
“The rule that persons acting in a fiduciary capacity shall' not, directly or indirectly, make any profit by means of such acts, or be interested in contracts made by their principals, undoubtedly applies to directors of corporations. It is a valuable principle, and ought not to be impaired by any subtle or refined distinctions. Still, the mere fact that the same persons were directors of the corporation which made the lease, and of that which took it, is not of itself*504 sufficient to avoid the contract at the instance of one or more stockholders, against the will of the corporation. That fact alone might entitle either corporation to avoid the lease, but I apprehend it does not give that right to a stockholder.”
The principle is here recognized that the majority of the shareholders may ratify a lease made by the directors, and that a majority cannot disaffirm. That, therefore, it must be the majority of the shareholders acting through the corporation who repudiate, and no shareholder has the power to exercise that right against the will of the majority.
The case of The United States Rolling Stock Co. v. The Atlantic & Great Western Railroad Co. (34 Ohio St. 450), is relied upon by the defendants’ counsel as conclusive upon this point. It seems to be necessary that this case should be referred to at length, ás it is claimed to decide, and upon a cursory examination appears to decide, much more than was intended by the court:
“ The action below was brought by the plaintiff against the defendant, to recover the sum of $985,934.02, most of which sum was a balance alleged to be due the plaintiff from the defendant for the use of the rolling stock furnished by the former to the latter from February, 1872, to December 10th, 1874, under an express contract. It appears from the record that the plaintiff was incorporated under the laws of New York, on the 31st day of October, 1871, with a board of five directors, empowered to manage its affairs; and that on December 11th, 1871, the defendant was organized as a consolidated railroad company under the laws of New York, Pen nsjd vania, and Ohio, with a board of thirteen directors; that at the date of the organization of the railroad company the five directors of the Rolling Stock Company, George B. McClellan, Samuel L. M. Barlow, James B. Hodgkins, William Butler Duncan, and Lawrence Wells, were elected and became five of the thirteen directors of the railroad company; and that said five persons continued to be the sole members of the plaintiff’s board of directors and five of the thirteen members of the defendant’s board until*505 the 11th day of December, 1873, and that one or more of said directors of the plaintiff continued to be directors of defendant until the termination of the contract on which suit was brought. It further appears that on November 6th, 1871, a provisional contract was entered into by James McHenry, purporting to act for plaintiff, and Leonard J. Woodman, purporting to act for and on behalf of the executive committee of the Atlantic and Great Western Railroad Company, by the terms of which the plaintiff agreed to supply to the defendant, and the defendant to receive, at an agreed monthly rental for the period of seven years from January 1st, 1872, the rolling stock mentioned in a schedule thereto annexed.
“On the 19th day of July, 1872, this contract, with a certain modification, was ratified and adopted by the plaintiff's board of directors, and on August 2d, 1872, was, as modified, adopted and confirmed by the defendant’s board of directors. It further appears that at the meeting of the defendant’s board at which said contract was ratified and confirmed, only eight of the thirteen members were juesent, two of whom, McClellan and Hodgkins, were the directors of the plaintiff.
“•The question presented by the record arises upon the exception to the charge of the court upon the point of the defendant’s right to avoid the contract upon which the action was founded. The rule that an agent or trustee, in matters touching his agency or pertaining to his trust, cannot bind the principal or cestui que trust, without his consent, by a contract in which the former is adversely interested, rests upon a very satisfactory foundation, and is supported by a great weight of authority (Wade v. Pettibone, 11 Ohio 57 ; Morison v. Thompson, L. R. 9 Q. B. 480 ; 1 Lead. Cas. in Eq. 210).
“ In Story on Agency § 210, the rule is said to be founded ‘upon the plain and obvious consideration that the principal bargains, in the employment, for the exercise of the disinterested skill, diligence and zeal of the agent for his own exclusive benefit. It is a confidence necessarily re*506 posed in the agent, that he will act with a sole regard to the interest of his principal as far as he lawfully may.’ And in 2 Kent’s Com. 618, the same principle is asserted and in the following language: ‘ An agent acting as such cannot take upon himself at the same time an incompatible duty. He cannot have an adverse interest or employment. He cannot be both a buyer and seller, for this would expose his fiduciary trust to abuse and fraud.’ In Bennett, ex parte (10 Yes. 393), Lord Eldon, commenting on a sale of the trust property to the trustee, stated the reason of the rule denying the right of the trustee to buy the trust property, .to be, That it would not be safe, with reference to the administration of justice in the general affairs of the trust,’ that a trustee should be permitted to purchase; for human infirmity will, in a very few instances, permit a man to exert against himself that prudence which a vendor ought to exert in order to sell to the best advantage, and which a purchaser is at liberty to exert for himself, in order to purchase at the lowest price. The rule which prevents the. agent or trustee from acting for himself, in a matter where his interest would conflict with his duty, also prevents him from acting for another whose interest is adverse to that of the principal; and in all cases’where, without the ass.ent of the principal, the agent has assumed to act in such double capacity, the principal may void the transaction at his election. No question of its fairness or unfairness can be raised. The law holds it constructively fraudulent and voidable at the election of the principal ’ (Aberdeen R. Co. v. Blaikie, 1 Macq. H. L. Cas. 461 ; The York B'ld’s. Co. v. Mackenzie, 3 Paton H. L. 378 ; Bispham’s Princ. Eq. 106 ; 18 Ohio St. 182).
“But does the present case fall within the operation of this principle ? The right to avoid the contract because the agent has a personal interest in its subject matter adverse to that of the principal, or has assumed an incompatible duty, is one arising in equity for the principal’s protection. He may avail himself of the right to avoid the contract, or he may waive it, at his option. That the agent may repre-.*507 sent two persons, with their assent, in a transaction relating to or embracing a subject matter respecting which their interests may be adverse or conflicting, admits of no doubt. In The Adams Mining Co. v. Senter (26 Mich. 73), upon the question how far the double agency of one affected his relation to his employer or third persons, it was held that where the same person is made the agent of two mining corporations in the same vicinity, and it becomes necessary for one to deal with the other, he must be presumed to have the same power to act for' both that he would be possessed of if there were two agents acting separately, and may dispose of the property in the same way; and such double authority would dispense with such formalities as could not be complied with, where one man acts for both companies. The court, in announcing its opinion, says: ‘The authority of agents, where no law is violated, is as large as their employers choose to make it. There are multitudes of cases where the same person acts under power from different principals in their mutual transactions. Every survey of boundaries by a surveyor jointly agreed upon would come within similar difficulties. There can be no presumption that the agent of two parties will deal unfairly with either.’
“ So, where the subsequent assent is given to the acts of the agent, the same result follows; that is, if the principal, with full knowledge of all the facts affecting his rights, ratifies the acts of his agent, the right to avoid the contract or transaction is gone.”
The learned court then points out that dissent must be made within a reasonable time, and that a principal who has an option to avoid or stand by the contract of his agent, is not permitted to wait the issue of events and then adopt or reject the contract as he may think most for his interest, and that an acceptance of the benefits of a transaction imposes the obligation to assume its burdens, and operates to confirm it as a whole; but that if the contract in question was absolutely void because agents in common of the two corporations participated in making it, there could be no ratification by acquiescence. The learned court then calls
“ We have not, upon the most diligent research, been able to find a case holding a contract made between two corporations by their respective boards of directors invalid or voidable at the election of one of the parties thereto, from the mere circumstance that a minority of its board of directors are also directors of the other company. Nor do we think such a rule ought to be adopted. There is no just reason where a quorum of directors, sustaining no relation of trust or duty to the other corporation, are present, participating in the action of the board, why such action should not be
“ That it did not do this, nor take any steps towards disaffirmance, but continued to act under it for nearly two years and a half, receiving the rolling stock for the use of which it stipulated and with which it operated its road for the whole of said period, making payments for such in accordance with the rate fixed by the contract, very clearly appears from the admitted facts.”
It will be observed that no question as to a minority of common directors was involved in that case, and the discussion was based entirely upon failure to repudiate within a reasonable time, and in the discussion of the minority question the learned court overlooked the principle, which seems to me to be well established by authority, as I shall attempt to show hereafter, that the corporation is entitled to all the knowledge and skill which each and every director can bring to bear upon the subject before the directors of such corporation.
The court further says, that “the instruction given by
Attention is also called to Ashurst’s Appeal, (60 Pa. St. 290), in which it is said:
“I come, then, to consider the facts that the purchasers were the same persons as those who as directors sold, and as stockholders authorized the sale. It is often said, and truly, that the same persons cannot be both buyers and sellers in one transaction. They were not strictly in this. All the purchasers were not directors who made the sale. But I make no account of that. Still, why may not directors of a corporation sell to themselves ? Each director has an interest distinct and antagonistic to his interest as a mere man. There is identity of person, but not of interest. There must be many things which directors can do for their individual benefit which are binding upon a corporation of which they are directors. If they have advanced money, I cannot doubt they may pay themselves with corporate funds. If they have become liable as sureties for the corporation, they may provide for their indemnity. And though ordinarily the law frowns upon contracts made by them in their representative character with themselves as private persons,*511 such contracts are not necessarily void. They are carefully watched, and their fairness must be shown. But I repeat the question, why may not directors sell to themselves in airy case ? It is because of the danger that the stockholders may suffer if such sales be permitted, for want of antagonism between the parties to the contract. But such sales are supported in equity where the fiduciary relations of the purchaser have ceased before the purchase, when the purchase Was made with full consent of the stockholders, or where stockholders have by their acquiescence debarred themselves from questioning the transaction.”
The doctrine here is again enunciated that such contracts are valid in law, and although voidable in equity may be affirmed by actual ratification or acquiescence.
In the case of Billy v. The Western Union Tel. Co., the same distinction is taken, and it is nowhere held that such a contract is not voidable in equity, even if valid at law.
The case of Booth v. Robinson (55 Md. 419), it is claimed also decides that a contract is not voidable between corporations because of common directors. That case was an action brought by the stockholders of a corporation against some of its directors who were common directors in another corporation, upon an allegation that they, with an intent to cripple the corporation in which the plaintiffs were stockholders, made certain arrangements with another corporation in which they were directors, and in which the plaintiffs were not stockholders. The corporations were made parties defendant upon an allegation that these directors had control of the corporations, and by means of that control they could frustrate and defeat any attempt to induce the corporation to take action for the redress of the wrongs alleged. The court in that case says:
“In these cases the proper and primary party to complain and call the directors to an account in a court of equity for fraud or breaches of trust in the management of the affairs of the corporation, is the corporation itself, because the duty is owing and the wrong is done directly to the corporation and only indirectly to the shareholders; and, there*512 fore, to enable a shareholder, either for himself alone, or for himself and others, to maintain a bill against directors for such fraud or breaches of trust, he must allege and show not only the violations of duty or breaches of trust on the part of the directors, but that he as a stockholder had been damnified thereby, and that the corporation has failed or refused to take the proper legal steps for the redress of the wrong.”
The nature of the action, it will thus be seen was entirely different from that which is now before the court. It was an attempt upon the part of stockholders to assert their individual rights independent of the corporation, upon the ground of absolute fraud and mismanagement of the affairs of the corporation by certain of its directors. The fact that these directors held also the same offices in the other company, had nothing whatever to do with the cause of action involved, because independent of that fact a cause of action existed, if such fraud and gross mismanagement were shown. It is clearly stated in that case that the fraud must be proven, and that mere indiscretion, want of skill or deceit or mistake of judgment in the conduct of the affairs of the corporation affords no ground of personal liability on .the part of directors. The court, therefore, says that two directors representing both corporations, this fact alone, while it should subject their conduct to rigid scrutiny by the court, does not afford ground of'presumption against the legality and fairness of the dealings and transactions between the two companies. In other words, that upon the issue of fraud—actual fraud and gross mismanagement, the fact that these two directors had conflicting interests would be considered in determining that issue, and nothing else was meant by the court in the use of this language. The court then goes on and says:
“ The two companies were certainly competent to contract the one with the other, and the two. directors whose conduct is in question were interested in both companies, and by their relation to and official position in them, they owed duties and were bound to be faithful alike to both; there*513 fore, while acting within the scope of the affairs delegated to them by the stockholders of the corporation, there is no presumption of illegality or unfairness in their dealings and transactions as between the two companies. They were the chosen agents of both, and to be successful in any attempt to impeach the validity of their acts, with a view of making them personally responsible either to the corporation or to the stockholders, there must be distinct charges of misconduct fully supported by proof” (Adams Mining Co. v. Senter, 26 Mich. 73 ; United States Rolling Stock Co. v. Atlantic and Great Western R. Co., 34 Ohio St. 450). Thus it will be seen that the court, in the use of this language, had in mind only the fact, that in order to make trustees personably responsible, it was necessary to prove actual misconduct, and that the mere fact that some of the directors of the two contracting corporations, were common directors, did not necessarily establish-that proposition.' It must be fully supported by proof. And in support of this proposition, are cited the cases to which reference has previously been had—the one of which referred to the fact that an agent might act for both parties where his agency was known and his action approved, and the other that the mere fact that two contracting corporations had common directors did not make their contract void in law but simply voidable in equity, which right might be lost by lapse of time.' The-court goes on and says:
“ This case is altogether unlike that of a trusted agent or director bargaining in a matter of personal advantage to himself, individually, with the party reposing the confidence in him, and where it is incumbent on him to show that a fair and reasonable use has been made of that' confidence, as in the case of The Hoffman Steam Coal Co. v. Cumberland Coal and Iron Co. (16 Md. 456) ; Cumberland Coal and Iron Co. v. Parrish (42 Md. 598) ; Jackson v. Ludeling (21 Wall. 616) ; and other cases of that class to which reference might be made. In that class of cases the law proceeds upon the principle of constructive fraud irrespective of fraud in fact; and hence the onus of proof is'upon the*514 party seeking to maintain the transaction. But in a case like the present, where the effort is to make the defendants •-personally liable for alleged, injuries occasioned by conduct wilfully fraudulent, in intent and purpose amounting to breaches of trust, the proof in support of the allegations must be other than mere constructive fraud or breaches of trust; there must be affirmative proof of the misconduct charged, going to establish the fraud in fact.”
Therefore, all that seems to be established by the case above cited is that in order to hold directors personally responsible, affirmative proof of fraud, absolute fraud, is requisite. The power of corporations having common directors to loan and borrow money one from the other, and to give and to receive security therefor, is recognized and upheld, the court, however, not referring to the fact that such contracts, although voidable in equity, cannot be repudiated without the return of the money borrowed, and, therefore, the contract is allowed to stand, as there can be no object in entertaining an action for rescission, the borrower having a right upon tender of the money received to get its securities back without the intervention of a court of equity, which is all the relief a court of equity can give.
These cases, therefore, cannot be held to overcome the adjudications of our own state, nor should they be held to have, in the slightest degree, shaken a principle so deeply imbedded in the rules governing the action of trustees with their cestuis que trust. In none of the cases has there been any attempt, as far as I have been able to discover, to distinguish between the disqualification of interest, as applicable to contracts between a director and his corporation, and such disqualification as applicable to contracts made between two corporations having common directors, they being treated as resting upon the same basis. It seems to me that it has been conclusively shown by the authorities, both in England and this state, that any contract which may be entered into between a corporation with one of its directors is voidable at the option of the corporation, although it may be entirely valid at law. The question as
It may be urged that the position of a director in a corporation does not give him the same degree of personal interest in its success as would be the fact were he simply entering into the contract to be personally benefited thereby ; that he is one of many, his interests are divided with those of the other shareholders, and his influence may be counteracted b) his co-directors. But the fact that he has an adverse interest to the one or the other of the corporations is apparent, and that he is attempting to serve two masters •is also equally plain. It must necessarily happen, according to the rules which have been laid down by the courts of equity in reference to the action of agents, that he will in 'nine cases out of ten serve the interests of the one principal and betray those of the other ; and in order to remove persons so situated from all temptation, in order that there may 'be no uncertainty in the law in reference to such contracts, ■courts of equity have held that where there is such a conflict of interests between an individual and a corporation, or between corporations having common directors, that the "contract shall be voidable as matter of equity without any •evidence whatever of misconduct upon the part of the agent or director. If the rule is to be so far relaxed that common directors may participate in the contracts between corporations, or if common directors may allow contracts to be 'made between the two corporations that they represent, it •would present the same field o.f speculation- and the same
It is urged against this rule that if common directors are disqualified from acting, so are common shareholders incompetent to ratify agreements between their companies, and that the holder of one share of stock in each of the companies could prevent any action at a shareholders’ meeting relating to the two companies, no matter how advantageous such action might seem to the holders of every other share of stock. I do not say that the disqualification extends to a shareholder. I can see no reason why it should. The disability rests entirely upon the fiduciary relationship. - A shareholder is trustee for nobody; he has only his own interests to look after as such shareholder, closely connected as they undoubtedly are in practice with the interests of the other shareholders, but he holds no such fiduciary relation to the corporation as pertains to the office of director,
This brings us to the consideration of the question, whether this infirmity does exist in the October agreements, a number of uncommon directors sufficient to constitute a majority having voted for them, even if all of the' common directors had voted no? No such question as this was presented in the Content case, as it is called, nor was the question of common directors at all discussed.
The general tenor of all the authorities is, that this fact does not cure the infirmity in the contract. It is true that some cases, like those above cited, may be found where such a proposition has been stated; but I can find no adjudication to that effect in any case where the question was directly involved, and where its discussion was necessary to the decision of the case. The foundation of the rule lies in the.fact that the corporation, as has been before stated, is entitled to all the knowledge and skill which each and every director can bring to bear upon the subject before the directors of such corporation. This rule is clearly recognized in respect to various statutory boards. In order that valid action may be taken by such a board Cunless different provision is made by statute), all the members of the board must meet, although a majority may control the action of the board. The argument being, that the arguments and reasoning of one man of a number may convince, and frequently have convinced, the minds of many associates as to the propriety or impropriety of contemplated action, and whose votes would have undoubtedly been just the opposite of what they were had such member been absent. This was the point upon which’ turned the decision of the case In re East Norfolk Tramway Co. (L. R. 5 Ch. Div. 963). There the articles of association provided that no man should be eligible as a director, unless he was recommended to the shareholders by the board of directors. Six
“ First of all, he was not recommended by the board of directors. Six' directors out of seven met in a friendly capacity, and for a different purpose, and such a meeting does not make them a board of directors......It by no means follows that if a board meeting had been summoned, and the seventh had attended, the seven would have come to the same conclusion as the six without him. People are very apt to change their minds when they hear arguments......Then it might well be that the absent director' might have known something against the person proposed, and that if he had stated it to the board of directors they would have entirely changed their minds.”
Again, in The Aberdeen Railway Company Case, upon this point, the Lord Chancellor says :
“I observe that Lord Fullerton seemed to doubt whether the rule would apply where the party whose act or contract is called in question is only one of a body of directors, not a sole trustee or manager.
“But, with all deference, this appears to me to make no difference. It was Mr. Blaikie’s duty to give to his co-directors, and through them to the company, the full benefit of all the knowledge and skill which he could bring to bear on the subject. He was bound to assist them in getting the articles contracted for at .the cheapest possible rate. As far as related to the advice he should give them, he put his interest in conflict with his duty, and whether he was the sole director, or only one of many, can make no difference in principle.”
In the case of The Imperial Mercantile Credit Association v. Coleman (6 Ch. App. Cas. 588),. this point is also discussed, and the Lord Chancellor says:
“ The ordinary operation of the rules of this court lay down firmly that no director of a company can, in the absence of any stipulation to the contrary, be allowed to be a*519 partaker in any benefit whatever from any contract which requires the sanction of a board of which he is a member. The reasons are given fully by Vice-Chancellor Knight Bruce, in Benson v. Heathron (1 Younge & C. 326), cited by the Vice-Chancellor in his judgment, and amount to this: that the company have a right to the services of their directors whom they remunerate by considerable payments ; they have a right to their entire services; they have a right to the voice of every director, and to the advice of every director in giving his opinion upon matters which are, brought before the board for consideration; and the general rule that no trustee can derive any benefit from dealing with those funds of which he is a trustee, applies with still greater force to the state of things in which the interest of the trustee deprives the company of the benefit of his advice and assistance.”
In the case of Paine v. Irwin (16 Hun 390), which came up on a demurrer before me, and which was affirmed at the General Term, this question was distinctly presented, and in respect to the trustee not having voted at the meeting authorizing the contract, it was said:
“I have not thought it necessary to discuss the question as to the defendant’s presence at the meeting at which it was resolved to purchase this property; because bis presence or absence at such a meeting would in no manner affect his disability to deal with the corporation. This confidential relation existed, whether he was at the meeting which directed the purchase or not.”
In the case of Cumberland Coal and Iron Co. v. Sherman (30 Barb. 553), the court sets forth with great clearness the reasons upon which the rule is founded. It says:
“Neither are the duties or obligations of a director or trustee altered from the circumstance that he is one of a number of directors or trustees, and that this circumstance diminishes his responsibility, or relieves him from any incapacity to deal with the property of his cestui que trust. The same principles apply to him as one of a number as if he was acting as a sole trustee. It is not doubted that it*520 has been shown that the relation of the director to the stockholders is the same as that of the agent to his principal, the trustee to his cestui que trust; and out of the identity of these relations necessarily springs . . . . . the same policy of the law.
“ In the language of the plaintiff’s counsel, it is justly said: ‘Whether it be a director dealing with the board of which he is a member, or a trustee dealing with his co-trustees and himself, the real party in interest, the principal, is absent, the watchful and effective self-interest of the director or trustee seeking a bargain is not counteracted by the equally watchful and effective self-interest of the other party, who is' there only by his representatives; and the wise policy of the law treats all such cases as that of a trustee dealing with himself.’
“ The number of directors or trustees does not lessen the danger, or insure security that the interests of the cestui que trust will be protected. The moment the directors permit one or more of their number to deal with the property of the stockholders, they surrender their own independence and self control. If five directors permit the. sixth to purchase the property intrusted to their care, the same thing must be done with the others if they desire it. Increase of the number of the agents in no degree diminishes the danger of unfaithfulness.
“ Whichcote v. Lawrence (3 Vesey 740), was a case of several trustees. . In this case Lord Loughboeoxtgh says:
‘ There was more opportunity for that species of management which does not betray itself much in the conduct and language of the party, when several trustees are acting together. I am sorry to say there is greater negligence where there is a number of trustees.’ ”
The fact of the importance of individual influence was recognized in the judiciary amendment to the constitution, wherein it was provided that a judge could not sit in an appellate court in review of his own decision, although he might be only one of seven composing the court.
In Luryea v. Traphagen (84 N. Y. 652), a judgment of
In Regina v. Justices (6 Adol. & Ell. N. S. 758), it was held that the fact that an interested magistrate sat in court, vitiated the decision, even when there was a majority in favor of the decision without counting his vote.
Lord Dbemae says:
“ It is contended that, as the majority, without reckoning his vote, was in favor of the confirmation, the order is not vitiated. • But after making every possible deduction from the strength of my opinion, in deference to that of my brother Pattesoe, still, in my judgment, a decision is vitiated by any one interested person taking part in it. We cannot enter into an analysis of the different motives which may have produced the decision; it is enough to say that a single interested person has formed part of the court.” •
—“ I suppose that, in Regina v. The Cheltenham Commissioners (1 Q. B. 467), I was not satisfied that the interference of a single interested party was sufficient to invalidate the decision; in fact, the interference of the interested parties did there turn the majority; and I suppose that I was satisfied with limiting my decision to that ground. But, on consideration, I think this is unsound; I think that it is very dangerous to allow an interested person to join, whether the majority turn on his vote or not. The magistrates discuss the question among themselves; an<J it is impossible to say what effect that discussion may have on the decision. The real question is, has an interested person taken any part at all ? ”
—“I will merely add, as I-was not present at the decision of Regina v. The Cheltenham Commissioners (1 Q. B. 467), that I agree in the view now taken by my Lord and my brother Pattesoe. Whether there is a properly constituted court, is a question which must be
I agree, and I meant, in Regina v. The Cheltenham Commissioners, to rest upon the principle on Avhich Ave are doav deciding; that we cannot enter into a discussion as to the extent of the influence exercised by the interested party.”
In our oavii courts, the disqualification of interest is as strictly upheld. A judge, the holder of one share of stock out of one million shares in a corporation, is just as certainly disqualified to sit in a cause in which that corporation is interested as though he held one thousand shares. It is not the amount of the interest which works the disqualification; it is the existence of any interest, hoAvever slight.
The rule, therefore, seems to be clearly established that' the question of minority cannot be considered in determining the right in equity to avoid a contract. The presence of one disqualified director is just as fatal to action which cannot be repudiated as the existence of a dozen. It being impossible to ascertain the amount of influence Avhich each director exerts, or which he fails to exert in opposition to action in Avhich he is interested, the only rule which can be adopted or which can be applied Avith any certainty is, that if there is even one director who is disqualified, the whole action of the board is subject to repudiation.
But it is urged that the Metropolitan shareholders knew that at the time Messrs. Garrison, Navarro and Porter Avere elected directors of the Metropolitan company they were also directors of the Manhattan company.
I have been unable to find proof of any such knowledge, but if they had, I do not see how it can affect the question under consideration.
There is no proof that the shareholders of the Metropol
The Metropolitan company certainly did repudiate these agreements within a reasonable time, having commenced this action within one month after the shareholders of that company had an opportunity to elect a new board of directors, who could take action in the matter.
The plaintiff, therefore, is entitled to a judgment relieving all the parties in this action from the October agreements, upon making such restitution as is suggested in a former portion of this opinion.
It has been said that this conclusion, if reached, would cause great confusion and conflict of interest among a vast number of railroads in this country, so many of whom have common directors and also traffic arrangements with each other. This evil is not so great by any means as has been depicted. Agreements of this character are not void, but simply voidable, and if the corporation wishes to avoid them, as has been shown, it must act within a reasonable time. If the shareholders are dissatisfied with the acts of their directors, they must repudiate them within a reasonable time, which in most cases would be held to mean at the next meeting for the election of directors, when they can elect a new board, who can take the necessary action to annul the-voidable contract; and it must, therefore, be the dissatisfaction of the majority of the shareholders, and not that of a minority, which can call the power into operation. If the shareholders renew the terms of office of the directors who have made the voidable contract, or if they take no action showing plainly their dissent, the contract will become binding
Although it is not necessary for me to decide the question of fact, in reference to Mr. Stout’s vote, in view of the conclusion to which I have come above, yet, in order that, if I should have been mistaken in my view, the whole case may be disposed of by the appellate court, I' will briefly state why I shall And that Mr. Stout voted in the affirmative on the 22d of October, at the meeting of the board of directors of the Metropolitan company; and, for the purposes of this question, I am willing to. concede that every director present supposed that he voted no.
• I am satisfied from the evidence that not one of the members of the board present at that .meeting remembers the physical fact of hearing Mr. Stout’s voice.when he voted. I do not think Mr. Stout himself recollects the precise act' of voting. It is not a circumstance which he would.be likely to recollect. It was at the "time,-probably,' not .thought of much consequence how he voted. .He was, if he voted with Mr. Kneeland, in. a-.hopeless .minority, and.he undoubtedly thought it was not of much consequence how he voted, as is shown by his action at the next-meeting on .the 24th of October. The minutes record his vote as in the affirmative, and at the next meeting of .the board, held two'days after, when these agreements are being canvassed and all sorts of motives impugned to'their supporters,.these .minutes, in which his vote is recorded in 'the affirmative, are read in his presence, and that of Mr. Kneeland, the latter of whom had voted.“no,” and they are approved unanimously.; It is not claimed that he or anybody else then voted no. . It seems to me that after .Mr. Stout has allowed those minutes to be approved, it is too.late .for him now to. say that they are incorrect. He has voted that they are correct. There is no claim
I am referred by the counsel for the plaintiff to the case of Hun v. Cary (59 How. Pr. 426, 430), as to the effect of a record of a vote in the minutes of a board. The learned justice who wrote the opinion in that case fell into an error as to the effect of the testimony of a party. In that case one of the questions submitted to the jury was, whether the defendant Smith was present at a meeting of directors. The court says:
“ There was no evidence, other than the minutes, of his attendance at the meeting which authorized the purchase. He, himself, denied such attendance in the most positive terms,'and asserted his entire ignorance of the transaction until after it was closed. We think this entitled Mr. Smith to a dismissal of the complaint. There was no conflict of evidence and nothing to go to the jury. If the secretary or any one else had testified to Mr. Smith’s attendance, that, of course, would have involved a conflict. But the prima facie case made by the secretary’s unsworn declaration contained in the minutes was absolutely overthrown by Mr. Smith’s testimony; that is, unless such testimony is to be disregarded. But it cannot be disregarded by either court or jury, for it was not impaired on cross-examination, nor was Mr. Smith’s credibility in anywise impeached or affected.”
■ There is no such rule governing the "evidence of a party. The evidence of a party may be disregarded by a jury or a court trying questions of fact, although it may in no wise be impeached or affected; a different rule obtaining, however, in respect to the evidence of disinterested witnesses (Lesser v. Wunder, 9 Daly 70 ; Nicholson v. Connor, 8 Daly 212 ; Elwood v. Western Union Tel. Co., 45 N. Y. 549 ;
But in the ease at bar, we have the positive evidence that Mr. Stout was present at the meeting of October 24th,, and that the minutes of the previous meeting were read in his presence and his hearing, and that such minutes were approved without any dissent whatever.
If the records of the proceedings of corporations are to be thus lightly regarded, then no man can be safe in dealing with a corporation. It is impossible for a stranger to prove anything about the minutes; and to say that they can be impeached after they have been regularly approved, by the testimony of the very men who sat by and allowed their approval, would be opening the door wide for the gravest perjury and fraud.
In the case of Ashurst v. Mason (L. R. 20, Eq. Cas. 225), Vice Chancellor Bacost says :
“ It would be in the highest degree dangerous to permit directors or other'persons having the management of companies to say, when any particular incident arises or there comes to be a pinch upon it, ‘ At that moment my thoughts were elsewhere! I did not hear it! 'in fact I was thinking of something else ! ’”
Stout heard and approved, and now he cannot be allowed to say that he did not.
Therefore, notwithstanding the fact that the learned counsel for the plaintiff believes it to be impossible for the court, on the evidence, to find that. Mr. Stout voted aye, I must find, according to every rule of evidence, and according to my own conviction, founded upon the evidence, that he did vote “ Aye.” Mr. Stout’s excuse that he was not permitted to see the minute books, is too flimsy to need much comment. He did not try to see them, and, as far as I know, there was no reason why he should have done so. Even if his vote was wrongly recorded, if his evidence is to be believed, he had no reason to suspect it. His lame attempt to find what he believed to be a necessary excuse for not examining the books, showed a disposition to rely,
The enormous length of this opinion certainly needs some apology; but I have in vain endeavored to condense it. . It has frequently been'necessary to make long quotations from cases cited,’because it seemed impossible 'otherwise to present the precise attitude of the court toward' the subject under discussion.
I have deemed it proper, in view of.the large' interests involved, and the magnitude of the'questions to be disposed of, and the divergent -views entertained’ by the eminent counsel engaged in the cause, to consider all the questions involved at much greater length than was, pérhaps, necessary, because I did. not desire that there should be any misunderstanding as to the grounds upon which my decision was based.
After a most laborious and critical examination of all the principles and authorities to which my attention has been called, or. which I could find, I have satisfied my own mind, that the conclusions . at which I "have arrived, are those which must be reached by every, impartial mind, upon a careful examination of the questions involved in this action, and that they best accord with those great principles .'of equity, by’ which-.the -injustice.'and hardships of the strict letter of the law are remedied.
No fappeal was taken from.this decision. . All the parties.in interest accepted it as a correct exposition of the law; their various rights were adjusted in" accordance with it, and the suit was settled.
