204 A.D. 268 | N.Y. App. Div. | 1922
Lead Opinion
There is no attempt here to combine the rights of the cestui que trust with those of the corporation, nor to enforce the trust contained in the O’Meara will in an action brought to enforce the rights of the corporation. The form of the action is quite plain; it is to recover from the defendant directors sums illegally voted and paid to themselves as salaries, and so still belonging to the corporation and recoverable by it; and the prayer of the complaint, among other things, asks for the distribution of these illegal salaries as dividends to the stockholders. (See Civ. Prac. Act, § 258, subd. 9.) The agreement between the defendants and the trustees to pay the trust estate $7,500 yearly instead of dividends, is alleged in the answer as a bar to the maintenance of the action. It became essential, therefore, that its validity be determined because, if valid, it created an estoppel; if not, it did not constitute a bar to any relief to which the plaintiff might show itself entitled. It seems clear that the voting of these salaries was simply, as the referee held, a method of distributing the earnings of the company. Each stockholder was, therefore, entitled to his or her proportionate share, unless the trust estate was estopped to question the agreement by which it received less. Ordinarily, where all the stockholders of a corporation consent and where the rights of creditors are not involved nor the limits of the corporate charter exceeded, any action of the corporation with reference to its property, surplus or assets, may be sustained, although not in accord with the general methods of corporate action. Here all the stockholders, including plaintiff’s predecessors, consented m form
The judgment, however, should be modified. According to its present provision, the salaries to be restored are $1,136,300, less amount paid trust estate, $82,500, leaving the net amount to be restored, $1,053,800; from this must be deducted the preferred dividends, $13,813, and the balance, $1,039,987, must be divided into fourths, and each of the stockholders, including the trust estate, will be entitled to one of these equal fourths, or $259,997.
But the trust estate has, pursuant to the agreement declared void, already received $82,500, which added to the above one-fourth of the balance directed to be distributed will make a total of $342,497 to be received by the trust estate. In other words, the trust estate receives an excess of $82,500, over and above the amount received by the stockholders. This, of course, is inequitable. The judgment should provide that the illegal salaries be restored to the company, $1,136,300, from which must first be paid the preferred dividends, $13,813, leaving $1,122,487 to be divided into fourths, amounting to $280,621.75; from one of these fourths to be paid to the trust estate should be deducted the amount received by the estate under the illegal agreement, $82,500, lfeaving the share to be paid such estate $198,121.75.
The $82,500 should then be distributed among the defendants O’Meara equally. In this way equality of distribution is secured.
The above computation points out the proper method of distribution. The final figures, however, will be different, because
The judgment should be modified so as to provide that the amounts of illegal salaries paid the individual defendants which are to be restored to the corporation shall be the amounts paid said defendants as salaries, with interest, less such amounts as may be found to be a fair and reasonable compensation to said defendants for their services to said corporation outside of their official duties, with interest, and the case should be remitted to the referee to make such findings. And the judgment should be further modified to provide that said defendants meet as directors and after deducting from said amount so restored the eight per cent dividend on the preferred stock as in said judgment provided, they pay and distribute to each of the holders of the common stock, viz., plaintiff and said individual defendants, one equal fourth part of the balance of said moneys, deducting from the plaintiff’s share thereof the amounts paid by said ind'vidual defendants under the illegal agreement to plaintiff’s predecessors as trustees, with interest, and that said last named amounts be equally divided among and paid to said individual defendants, and as so modified affirmed, without costs.
New findings and conclusions are directed to be made by the referee in accordance with the order to be entered upon this decision, and new final judgment upon the present record and the said new findings and conclusions shall be entered as a substitute for the present judgment, which new judgment shall also specify the amount to be paid by each defendant, and also the amounts to be received by the parties entitled thereto. The case is remitted to the referee to proceed accordingly.
Blackmar, P. J., Jaycox and Young, JJ., concur; Kelby, J., dissents and reads for reversal and dismissal of the complaint, with whom Kelly, J., concurs.
Dissenting Opinion
Additional facts not referred to in the prevailing opinion are as follows:
The parties own among them the entire capital stock of the corporate defendant, deriving their interest from Maurice E„
The referee was of opinion that the salaries should be restored, and that the resultant fund should be ordered disbursed as a dividend.
The plaintiff appeals from the denial of the further relief sought, including an accounting of the exact amount of the surplus, and award of further dividends therefrom, and from the refusal to grant to the plaintiff an allowance of the amount asked, to be secured by lien upon the recovery, in addition to the statutory extra allowance of $2,000. The individual defendants appeal generally. The corporation joins in neither appeal.
The complaint was framed in the right of the corporation to redress a wrong done it, in the nature of a waste of its assets, by the payment of the salaries. No fraud upon, or plan or intent to defraud, the corporation was alleged or found by the referee. His opinion shows that he regarded the salaries as excessive and not based upon the value of the services rendered; but his decision was not based on this consideration, but upon the fact that the salaries were a method of distributing the earnings.
Where creditors’ rights are not affected, any form of distribution, however characterized, violates no right of, or obligation to, the corporation. (Hartley v. Pioneer Iron Works, 181 N. Y. 73; Fitchett v. Murphy, 46 App. Div. 181; Kassel v. Empire Tinware Co., 178 id. 176; Shaw v. Ansaldi Co., Inc., Id. 589.) The point of condemnation, in the referee’s decision, ^was that the salaries
The gist of the reasoning of the referee, whereby he sustained the action, was that the salaries, being voted retroactively by the directors to themselves as officers, were voidable; and that they were not validated by the subsequent unanimous vote of the stockholders, because one-fourth of this vote was by Eginton of the trustee stock and could have no “ probative force and effect ” in ratification, since to accord it such would be an effectuation of the $7,500 agreement, which was “ illegal and void.” The referee, therefore, found, the salaries should be restored to the corporation to be at once disbursed in a decreed dividend, so that the “ injustice ” to Mrs. O’Meara, by the agreement, be righted.
There are several assumptions, in this reasoning, as to the law governing corporate action, which are erroneous. There is woven into one texture the distinct and diverse rights of the corporation, which are the gravamen of the complaint, and the rights of the cestui que trust, which are not. Failing any finding of error in the first, it assumes for the second the illegality of the $7,500 agreement, and shifts entirely to the single strand of the cestui’s rights in the direction for the compulsory dividend. This is a result which cannot be upheld, unless we are to regard as abrogated the clear and settled distinction between actions brought for the redress of wrongs to the corporation, and actions brought for redress of wrongs to a stockholder.
The referee was appreciative of the obstacle of this distinction, and at the close of plaintiff’s case felt compelled to grant a dismissal of the action; because the complaint sought the relief, appropriate only to a stockholder’s direct action, of enforcing a personal right of a stockholder and the distribution of a dividend. He referred, in his opinion, to some of the cases which have declared and enforced the distinction between a derivative action, so called, because the right to maintain it is derived from the corporation, and an action upon a personal right of action accruing to the stockholder as such. He was of opinion that none of the cases
As to this amendment, none of the several cases which have interpreted it have held that it effected an obliteration of the rule that a derivative action is distinct from a stockholder’s personal action. These cases have consistently declared that the intent and effect of the amendment was to do away with the distinction between strict actions in equity and act'ons at law, founded upon wrongful acts of officers and directors, which before the amendment could not be united. (German-American Coffee Co. v. Diehl, No. 2, 86 Misc. Rep. 547; affd., on opinion below, 168 App. Div. 913; German-American Coffee Co. v. O’ Neil, No. 2, Id. 913; affd., 216 N. Y. 726; Sherwood v. Holbrook, 98 Misc. Rep. 668; affd., 178 App. Div. 462; Wilson v. Brown, 107 Misc. Rep. 167; affd., 190 App. Div. 926.) And both in the caption of the amendment and in its text the reference is to suits “ by ” and “ of ” a corporation, which would seem in exclusion of personal actions by a stockholder.
The observation in the Von Au case (by Mr. Justice Miller), cited by the referee, was that “ where directors in bad faith and for purposes of their own refuse to make proper distribution of earnings, the injury is primarily to the stockholders collectively and must be redressed through the corporation by a suit in equity to compel proper action, and that where waste is committed the direct injury is to the corporation, and * * * the remedy is by a representative action on behalf of the corporation.” The italics are mine, added to bring out that the words “ through the corporation ” are used antithetically to cases where the remedy is by an action “ on behalf of the corporation ”— that is, a derivative action. It seems very clear to me that Mr. Justice Miller had no more in his mind than a statement of the settled rule, and this further appears from the citation, immediately following, of some of the leading cases which have declared and applied it, such as Flynn v. Brooklyn City R. R. Co. (158 N. Y. 493); Sage v. Culver (147 id. 241); Hawes v. Oakland (104 U. S. 450); Kavanaugh v. Commonwealth Trust Co. (181 N. Y. 121) and Niles v. N. Y. C. & H. R. R. R. Co. (176 id. 119). Again the same judge in the Court of Appeals, in Godley v. Crandall & Godley Co. (212 N. Y. 121), sustained a personal
If the intent of the decision in the Von Au case, or of, the amendment by section 91a of the General Corporation Law, was to abolish the distinction between derivative and personal actions, and to substitute therefor the idea that these causes of action may shift and interchange according to the exigencies of the situation, it has so far escaped notice in certain carefully considered cases, decided later. The courts have affirmed and applied the theory of the total distinction of the two causes of action in Godley v. Crandall & Godley Co. (supra); Brock v. Poor (216 N. Y. 387), which directly restated the distinction, and Harris v. Pearsall (116 Misc. Rep. 366).
In the case at bar there was no adequate or complete trial and disposition of the defenses pleaded, which might have validity against a personal action but which were immaterial on the theory of a derivative action. Had the plaintiff brought a personal action to recover the proportionate share of the sums withdrawn as salaries, the pleaded defense that there were adjudications adverse thereto, by the accounting decrees to which Mrs. O’Meara had consented, would be triable. (Blair v. Cargill, 111 App. Div. 853, 858; Matter of Denton v. Sanford, 103 N. Y. 607; Central Trust Co. v. Falck, 177 App. Div. 501; affd., sub nom. Central Trust Co. v. Rogers, 223 N. Y. 705.) Again the defense of estoppel by ratification of Eginton’s votes of the trust stock might stand in bar. (Steinway v. Steinway, 2 App. Div. 301; Bonta v. Gridley, 77 id. 33.) And finally there might have been tried the broad and inclusive question, whether the action of the trustees, either under the “re-investment clause” of Mr. O’Meara’s will or by virtue of Mrs. O’Meara’s knowledge and acquiescence at the time and for over ten years, could be upheld as so equitable that the courts would not set it aside. (Moss v. Cohen, 158 N. Y. 240; Barr v. N. Y., L. E. & W. R. R. Co., 125 id. 263.) This would involve also the consideration of the actuality of any feeling of injury or grievance on the part of Mrs. O’Meara, or whether her complaint
It is suggested that the validity of the agreement was made an issue by being set up in the answer “ as a bar to the maintenance of the action.” The answer does not do that. None of its four separate defenses set up the agreement, in itself, as a bar. These four defenses are, first, the widow’s knowledgé and acquiescence; second, the adjudications by the decrees in the accountings; third, ratification by her and by her former trustees, and fourth, equitable estoppel against her by her receipt, under the agreement, for over ten years, of payments equivalent to thirty per cent upon the par value of the trust stock. And when it is perceived, \ as we have noted, that these defenses were treated as irrelevant to the theory of a derivative action, the suggestion fails of force. By no, cause of action in the complaint, by no defense in the answer, was the validity of the agreement in issue; and the conclusion of its invalidity, as against the defenses pleaded and relevant to a personal action, is reached only by disregarding those defenses, that is to say, by assumption.
The judgment in nominal favor of the corporation, appears in truth to have been granted on the assumed strength of an unasserted cause of action in the cestui quei trust, and is then devitalized, so far as concerns benefit to the corporation, by the compulsory dividend, which benefits only her. If this result is to stand, there has been found a device of satisfying an assumed cause of action by means of asserting another which does not exist. I do not think it can be sustained. To urge that the courts are disinclined to apply the idea of a distinct corporate identity, where to do so would impede justice, overlooks the fact that it is the plaintiff who has invoked the corporate conception by the logic of the cause of action it has advisedly elected to affirm in order to escape the trial of issues it would have to meet in a direct personal stockholder’s action.
An action pursued derivatively must show a right derived from the refusal or unwillingness of the directors to sue, and must be founded upon a wrong to the corporation. (O’Connor v. Virginia Passenger & Power Co., 184 N. Y. 46; Continental Securities Co. v. Belmont, 206 id. 7; Brock v. Poor, supra.) It cannot derive from a source where it does not exist. (Waters v. Waters & Co., 201 N. Y. 184, 188.) The solution of the present case is not to be found in the assumption that the agreement was illegal or void, but in the inquiry whether any right of the corporation has been violated.
The salaries in their final form were neither void nor voidable. When based only upon the vote of the directors they were voidable (Murray v. Smith, 166 App. Div. 528; affd., on the point in question,
The canonical doctrine, that directors are fiduciaries, which plaintiff invokes, has in this case no application, because that fiduciary obligation is to the corporation and its stockholders as such. It is entirely distinct from the fiduciary obligation under the will, which may or may not have been departed from, dependent upon the result of an action wherein that question in all its equitable aspects may be properly tried. If there has been a violation of the fiduciary duty owing to Mrs. O’Meara, so that either she or her present trustee is entitled to complain of the $7,500 agreement, or to insist upon the enforcement of the trust in the strict terms of the will, or to follow funds subject to it in the hands of any one who may have improperly participated therein, qua trustees or qua directors, the limit of the right to complain is that it must be asserted in some direct or personal action and not in the guise of an action in the right of the corporation.
The complaint should be dismissed.
Kelly, J., concurs.
Judgment modified and case remitted to the referee for further findings, without costs, all in accordance with the opinion per curiam. Order signed.