Potter v. Walker

11 N.E.2d 335 | NY | 1937

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] Plaintiff, as stockholder of Pan American Petroleum and Transport Company, brought this representative action in June, 1933, against defendants, who are directors of that corporation, for acts committed by them as such during the years 1924 and 1925. The third amended complaint demands judgment that the court, in the exercise of its equitable jurisdiction, decree that defendants be required to account for the profits which they obtained and the losses which the corporation sustained by the acts of these defendants as directors.

The questions of law certified are whether the six-year statute (Civ. Prac. Act, § 48, subd. 3) or the ten-year Statute of Limitations (Civ. Prac. Act, § 53) applies to the first, fourth and seventh causes of action pleaded in the third amended complaint.

Defendants Walker, Armsby, Hayes and Marston moved to dismiss the first, fourth and seventh causes of action as to them. Special Term granted this motion, but the Appellate Division reversed as to the first and seventh and affirmed as to the fourth. Defendant Harwood moved to dismiss the first, fourth and seventh as to him. Special Term granted the motion and the Appellate Division affirmed. Defendant Tinker moved to dismiss the first and seventh as to him. Special Term granted his motion, but the Appellate Division affirmed only as to the first and reversed as to the seventh.

The first cause of action set forth in the third amended complaint alleges that defendants Walker, Armsby, Hayes and Marston, who were then directors of Pan American and who were also officers, directors and stockholders in Blair Co., Inc., entered into a conspiracy during the year 1924, which conspiracy was consummated in August, 1925, to acquire for themselves and for Blair Co. a majority of the voting stock of Pan American with money supplied by Pan American; that pursuant to this conspiracy Walker proposed to his codirectors in Pan American that Pan American acquire the stock of British Mexican from British Union; that it did purchase that stock for $11,000,000; that this sum, instead of being paid directly to British Union, was deposited with Blair Co. to the credit of British Union; that, with the consent of British Union, but without disclosure to the other directors of Pan American, it was used by defendants Walker, Armsby, Hayes and Marston for purchase by them of the majority voting stock in Pan American from E.L. Doheny; that from the transaction Blair Co., Inc., obtained a profit of $2,505,000 and Pan American suffered a loss of $7,802,743.67. The allegations in support of this cause of action are also to the effect that defendant Tinker, as a director of Pan American, authorized and confirmed the purchase of the stock of British Mexican, but that defendant Harwood dissented. The Appellate Division held, in respect to the first cause of action, that defendants Walker, Armsby, Hayes and Marston are not entitled to plead the six-year Statute of Limitations for the reason that this cause of action is one for an accounting to recover not only losses resulting from their wrongful acts as directors but also profits received by them, and, citing Falk v.Hoffman (233 N.Y. 199) and Hanover Fire Ins. Co. v. MorseDry Dock Repair Co. (270 N.Y. 86), that an action at law would not be as complete or effective as the remedy in equity. As to defendant Tinker, he is charged, in the first cause of action, merely with negligence, and the court decided that the six-year statute applies to him in respect to the allegations set forth in the first cause of action. In respect to Harwood, he also was charged merely with negligence, and the Appellate Division held that the six-year statute applies also to him.

The fourth cause of action alleges negligence against the defendant directors for their acts in approving and acquiescing in the payment by Pan American to defendant Stewart of the sum of $150,000, which is averred to be a gift. A remedy at law against Stewart for money had and received would lie and no accounting is necessary. The courts below have held that the six-year statute applies in this action for negligence against the directors, none of whom is alleged to have profited by this gift to Stewart.

The seventh cause of action charges defendants Walker, Hayes, Armsby, Marston and Tinker, as members of a "directors' syndicate," with profiting, through a conspiracy at the expense of Pan American, to the extent of $13,200,000 through the purchase of Lago Oil stock by Pan American, and demands an accounting of such profits and losses. The Appellate Division decided that the six-year statute is no defense to this cause of action. The principle is the same as that applied to the first cause of action. This seventh cause of action also charges negligence against the directors and, as in the first cause of action, the courts below have applied the six-year statute as to defendant Harwood. His approval of the resolution occurred in August, 1925, and this action was not commenced until June, 1933.

In respect to those causes of action by which is sought to recover profits received by directors by reason of wrongful acts, an action at law would not afford adequate relief. To the extent that an accounting is necessary, the right and the remedy must necessarily be of an equitable nature. The Appellate Division is, therefore, clearly right in applying the ten-year Statute of Limitations as to such causes of action. (Civ. Prac. Act, § 53; Hanover Fire Ins. Co. v. Morse Dry Dock RepairCo., 270 N.Y. 86.)

Those causes of action, however, which are based merely upon negligence of two of the directors who are not alleged to have participated in the receipt of any wrongful profits at the expense of the corporation require the application of a different rule. The formal demand for relief in the complaint does not determine the legal or equitable character of the action. These causes of action are essentially and exclusively to recover for an injury to the property of the corporation within the meaning of subdivision 3 of section 48 of the Civil Practice Act as it read prior to its amendment by chapter 558 of the Laws of 1936. If the remedy were invoked directly by the corporation or a receiver, a common-law action for damages would lie. It would be adequate and, consequently, equitable relief would be unnecessary. (O'Brien v. Fitzgerald, 143 N.Y. 377, 380;Dykman v. Keeney, 154 N.Y. 483, 491, 492; Curtis v.Connly, 257 U.S. 260.) Some dicta occur in the earlier reports of this court's decisions indicating doubt in the minds of the authors of the opinions whether the same rule by which a corporation or its receiver is governed in actions against directors for negligence would apply to a stockholder (O'Brien v. Fitzgerald, supra, pp. 381, 382; Mason v. Henry,152 N.Y. 529, 535), but no direct adjudication to that effect.

In Wallace v. Lincoln Sav. Bank (89 Tenn. 630, 648, 649) the opinion was written by a distinguished jurist, Mr. Justice LURTON. That action, as is the one now before us, was instituted by a shareholder in behalf of all other shareholders against directors of the corporation for their breach of trust due to inattention, negligence and mismanagement in that they failed to supervise the management and turned over the entire control of the bank to the unlimited discretion and unaided judgment of the cashier. In the course of his opinion the learned justice wrote: "This kind of suit is, at last, but the suit of the corporation for its benefit and upon its right of action. If for any reason the corporation isestopped from suing, or its action is barred, the suit by thestockholder or creditor is likewise affected," and quoted the following excerpt from Morawetz on Private Corporations (§ 271): "A suit of this character is brought to enforce the corporate or collective rights, and not the individual rights of the shareholders. It may therefore properly be regarded as a suit brought on behalf of the corporation, and the shareholder can enforce only such claims as the corporation itself could enforce. Moreover, the essential character of a cause of action belonging to a corporation remains the same, whether the suit to enforce it be brought by the corporation or by a shareholder. Thus a legal right of action would not be treated as an equitable one, or become governed by the rules applicable to equitable causes of action, as to limitations, etc., because a shareholder has brought suit in equity to enforce it on behalf of the company." The same principle has been accepted in this State in Holmes v.Camp (180 App. Div. 409, 412). In an action for damage to property the six-year statute applies even in those instances where the alleged remedy may be equitable in form. (Keys v.Leopold, 241 N.Y. 189, 192.)

Plaintiff was granted leave to appeal from the judgment in favor of defendant Tinker on the first cause of action, in favor of defendant Harwood on the first, fourth and seventh causes of action, and the following questions were certified: "(1) Did the cause of action alleged against defendant Edward R. Tinker in thefirst cause of action of the third amended complaint herein accrue within the time limited by law for the commencement of an action thereon? (2) Was the motion of defendant Edward R. Tinker for judgment dismissing the first cause of action in the third amended complaint on the ground that the cause of action therein alleged against him had not accrued within the period permitted by law for the commencement of an action thereon, properly granted at Special Term? (3) Did the causes of action alleged against the defendant Paul H. Harwood in the first, fourth and seventh causes of action of the third amended complaint herein accrue within the time limited by law for the commencement of an action or actions thereon? (4) Was the motion of defendant Paul H. Harwood for judgment dismissing thefirst, fourth and seventh causes of action in the third amended complaint on the ground that the causes of action therein alleged against him had not accrued within the period permitted by law for the commencement of an action or actions thereon, properly granted at Special Term?" The first question should be answered "No," the second and fourth questions "Yes." The third question should be answered "No."

Defendants Walker, Armsby, Hayes and Marston were also granted leave to appeal, and the following questions were certified: "(1) Did the cause of action alleged against the defendants Elisha Walker, George Armsby, Edward F. Hayes and Hunter S. Marston, in the first cause of action in the third amended complaint herein accrue within the time limited by law for the commencement of an action thereon? (2) On the record herein, was the motion of the defendants Elisha Walker, George Armsby, Edward F. Hayes and Hunter S. Marston, for judgment dismissing the first cause of action in the third amended complaint on the ground that the cause of action therein alleged against them had not accrued within the period permitted by law for the commencement of an action thereon, properly granted at Special Term? (3) Did the cause of action alleged against the defendants Elisha Walker, George Armsby, Edward F. Hayes and Hunter S. Marston, in the seventh cause of action of the third amended complaint herein accrue within the time limited by law for the commencement of an action thereon? (4) On the record herein, was the motion of the defendants Elisha Walker, George Armsby, Edward F. Hayes and Hunter S. Marston, for judgment dismissing the seventh cause of action in the third amended complaint on the ground that the cause of action therein alleged against them had not accrued within the period permitted by law for the commencement of an action thereon, properly granted at Special Term?" The first question should be answered "Yes," the second "No," the third question "Yes" and the fourth question "No."

Defendant Tinker was also granted leave to appeal and the following questions certified: "(1) Did the cause of action alleged against the defendant, Edward R. Tinker, in the Seventh cause of action of the third amended complaint herein accrue within the time limited by law for the commencement of an action thereon? (2) On the record herein, was the motion of the defendant, Edward R. Tinker, for judgment dismissing the Seventh cause of action of the third amended complaint on the ground that the cause of action therein alleged against him had not accrued within the period permitted by law for the commencement of an action thereon, properly granted at Special Term?" The first question should be answered "Yes" and the second question "No."

The judgments and orders of the Appellate Division should be affirmed, with costs, and the questions certified answered as above stated.

CRANE, Ch. J., LEHMAN, HUBBS, LOUGHRAN, FINCH and RIPPEY, JJ., concur.

Ordered accordingly.