158 Misc. 627 | N.Y. Sup. Ct. | 1935
Plaintiff. sues in a representative capacity as minority stockholder in the Marine Transit Corporation in his own behalf and for the benefit of other stockholders of the said corporation, charging the individual defendants, who are the officers and directors either of the said corporation or of related corporations, with alleged acts of official misconduct. He seeks, besides an accounting and injunctive relief, an assessment of damages. He is joined by the defendant Gerald A. Fagan who, both in his official capacity as stockholder in the National Motorship Corporation and as pledgor of stock with the defendant John D. Schoonmaker, pleads in his cross-complaint certain wrongful acts alleged to have been committed by the individual defendants in their official corporate and individual capacities.
Before discussing the nature of the issues, it will be necessary to outline the interrelation of the various corporations and the capacities in which the various individual defendants are claimed to have acted.
Marine Transit Corporation was incorporated on December 1, 1927, under the laws of the State of New York, as successor to Marine Transit Company. Both of these corporations were organized by the defendant John D. Schoonmaker, deceased, the defendant and cross-complainant, Gerald A. Fagan, and Arthur Connors, each of whom owned one-third of the stock. As time went on more stock was issued, and eventually Connors and Fagan each held 1,113 shares and Schoonmaker 1,114 shares. Connors disposed of his stock to Harry Shanks, who in turn sold them to the plaintiff in May, 1932. On July 30, 1932, and September 7, 1932, there were incorporated seven New Jersey corporations — Sidco Corporation, Fagco Corporation, Craco Corporation, Chico Corporation, Stecco Corporation, Emco Corporation and the Barge Corporation — and the stock of all was issued, ninety-eight per cent to the defendant Courtland Palmer, one per cent to his secretary, the defendant Damberger, and one per cent to his law office associate, the defendant Lovelace, all of whom became the officers and directors of these corporations. Marine Transit Corporation conveyed its twenty-four barges, some directly and others indirectly, to the Barge Corporation, and its six tugs, one to each of the other New Jersey corporations. In December of 1932, General Marine
In addition to the corporations and individuals named, there are joined as defendants: John D. Schoonmaker, Jr., as his father’s agent or representative under a power of attorney; Romer B. Markle and Edgar P. Deane, as employees and later officers and directors of Marine Transit Corporation; and John I. Kinney, as an employee of John D. Schoonmaker and certain of the corporations which he controlled, including Kingston Dry Dock & Construction Company, Inc., and Kingston Shipyards, Inc. During the course of the trial the complaint against the defendants Charles Walton and Kingston Trust Company was dismissed, without costs, on consent of both plaintiff and the cross-complainant.
The Plaintiff’s Cause of Action.
The rules relating to actions of this nature are familiar.
“As a general rule courts have nothing to do with the internal management of business corporations. Whatever may lawfully be done by the directors or stockholders, acting through majorities prescribed by law, must of necessity be submitted to by the minority, for corporations can be conducted upon no other basis. AH
“ To these general rules, however, there are some exceptions, and the most important is that founded on fraud. While courts cannot compel directors or stockholders, proceeding by the vote of a majority, to act wisely, they can compel them to act honestly, or undo their work if they act otherwise. Where a majority of the directors, or stockholders, or both, acting in bad faith, carry into effect a scheme which, even if lawful upon its face, is intended to circumvent the minority stockholders and defraud them out of their legal rights, the courts interfere and remedy the wrong. Action on the part of directors or stockholders, pursuant to a fraudulent scheme designed to injure the other stockholders, will sustain an action by the corporation, or, if it refuses to act, by a stockholder in its stead for the benefit of all the injured stockholders. (Leslie v. Lorillard, 110 N. Y. 519, 535; Gamble v. Queens County Water Co., 123 N. Y. 91; Sage v. Culver, 147 N. Y. 245; Farmers’ Loan & Trust Co. v. N. Y. & N. Ry. Co., 150 N. Y. 410; Hawes v. Oakland, 104 U. S. 450.) ” (Flynn v. Brooklyn City R. R. Co., 158 N. Y. 493, 507.)
Judge Gray, speaking for the court in Leslie v. Lorillard (110 N. Y. 519, 532), said: “ In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere unless the powers have been illegally or unconscientiously executed, or unless it be made to appear that the acts were fraudulent or collusive and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as grounds for equity interference; for the powers of those entrusted with corporate management are largely discretionary.” (See, also, City Bank Farmers Trust Co. v. Hewitt Realty Co., 257 N. Y. 62, 68.)
More recently the rule was stated as follows: “ The rule is well settled that the officers and directors of a corporation occupy positions of trust in relation to their company and to its stockholders, and in all their dealings are bound to act with fidelity and in the utmost good faith; they are required to guard and care for the property of the corporation, and to manage its affairs with the same
The right of action belongs to the corporation, and in addition to showing that wrongful acts were committed, it is incumbent upon the plaintiff to prove that such acts damaged the corporation (Waters v. Waters & Co., 201 N. Y. 184) unless the interposition of equity is sought to restrain a threatened act (Schwab v. Potter Co., 194 N. Y. 409, 418, 419) or to undo what has been done. (Murray v. Smith, 166 App. Div. 528.)
The facts will be examined in the light of these rules.
1. The plaintiff charges that the transfer of the fleet to the New Jersey corporations was accomplished primarily for the purpose of preferring corporate obligations running to Schoonmaker, and secondarily for the purpose of defrauding creditors and ultimately forcing the sale of the vessels by burdening them with liens, mortgages and commitments in Schoonmaker’s favor.
The facts with respect to the fleet transfer are as follows: As early as 1931, before the plaintiff became a stockholder in Marine Transit Corporation, Fagan was contemplating a plan whereby Marine Transit Corporation would divest itself of all physical assets. On March 4, 1932, Fagan, in a letter to Schoonmaker, suggested that the fleet be transferred to avoid difficulties arising out of the indemnity insurance situation. In his letter of July 9, 1932, Fagan outlined to Palmer the reason for the transfer of the fleet. To quote his own words: “ The purpose of these new corporations is to incorporate each of the tugs and several of the barges in separate companies. The Marine Transit Corporation will sell these tugs and barges to the respective companies for stock of the respective companies. The assets of the Marine Transit Corporation will' not be impaired or otherwise changed, except, instead of having the equipment on our records as the visible property of tugs and barges, the property and equipment account will be substituted on our records in the same net amount covering the value of the stock acquired from the purchasing companies of the equipment.” He wrote further: “ As you know as per our conversation, there are several claims
Palmer, acting as attorney for Marine Transit Corporation, approved of the plan and proceeded to put it into effect. The plaintiff testified that on August 11, 1932, he attended a conference at which Fagan and Schoonmaker were present, and that he was told by Fagan that in order to obviate the harmful delays occasioned by the repeated seizure of vessels, their transfer into the new corporations was contemplated; that seven new corporations would be formed for that purpose; that the stock of these corporations would be issued to Marine Transit Corporation; and that as additional consideration these new corporations would assume certain of the liabilities of Marine Transit Corporation. At the close of the conference and at Fagan’s request, the plaintiff signed a proxy “ for the purpose of ratifying the act or acts of directors of the corporation in connection with the sale and transfer of some of the assets of the corporation.” The retrospective language was used in view of the fact that some of the transfers had theretofore been effected. That the plaintiff was advised of this appears from his own testimony at the trial. He was asked by his counsel: “ Did Mr. Fagan request you to sign a proxy to validate or authorize the transfers which he had described?” To which the plaintiff replied: “ Yes, they asked me to sign a proxy.” That the plaintiff was advised not only of the transfers but likewise of the motives which led to them prior to the execution of the proxy is not disputed. The plaintiff’s complaint seems to be that while he approved of the plan in its general form, he was not told that the transfers would be made to New Jersey corporations or that the stock in these corporations would be issued in the name of Palmer and his employees. His complaint further seems to be that the only circumstance necessitating transfer of the fleet was the pressure being exerted by the Schoonmaker companies (Kingston Dry Dock & Construction Company, Inc., and Kingston Shipyards, Inc.) for payment of
The plaintiff’s claim that there was failure to disclose to him the use of New Jersey rather than domestic corporations and the issuance of the stock to Palmer and his employees, as trustees for Marine Transit Corporation, cannot be given very serious consideration. In view of the reasons disclosed to him for the transfers, he should have realized that little could have been accomplished if the relationship between the parent and the subsidiary corporations was apparent on the surface.
Since the plaintiff had expressly assented to the main features of the fleet transfer plan, he is estopped from asserting any claim with respect thereto, even though it be assumed that what was done was somehow malum in se or malum prohibitum. (Little v. Garabrant, 90 Hun, 404; affd., 153 N. Y. 661; Continental Securities Co. v. Belmont, 206 id. 7.) It appears further that as early as June 23, 1933, the plaintiff was told that the stock in the New Jersey corporations was held by Palmer. On August 2, 1933, Palmer offered to transfer to the plaintiff one-third of the stock if there was any complaint. Both the plaintiff and his attorney assured Palmer that he was right in taking the stock in his own name, since it served to protect the assets, stockholders and creditors of the corporation. That Palmer was not secretly holding the stock in the New Jersey ¿orporations is best evidenced by his own notation in the stock certificate book under date of July 30, 1932, which reads as follows: “ Affix stamps, July 30, 1932. Trust certificates. When transferred. No tax as no transfer of interest —■ C. P. 7 /30/32.” This notation was made simultaneously with issuance of the stock. Without clothing the transactions with judicial sanction or approval, it seems clear, nevertheless, that the entire plan was projected to help rather than to injure Marine Transit Corporation; that it was projected to provide a breathing spell for this ailing corporation so that it might liquidate its obligations while operating its fleet unhampered. If that actually was the motive, it serves to explain away many of the facts which standing alone may lend some credence to the plaintiff’s claims. It must be noted that despite the transfer of the fleet, Marine Transit Corporation retained the beneficial ownership and that every penny derived from the fleet’s
It appears further that during the period in question a large sum of money was paid on account of Marine Transit Corporation in liquidation of obligations to its general creditors. It can hardly be said that these facts are consistent with a plan to confer some special benefit on Schoonmaker at the expense of the other stockholders and the creditors of Marine Transit Corporation. On the contrary, the record discloses that it was only through Schoonmaker’s generosity that Marine Transit Corporation was enabled to continue in business. The plaintiff points to the “ Capital Adjustments ” of October 25, 1932, which recites that Marine Transit Corporation “ does not owe the Kingston Shipyards, Inc., or Kingston Dry Dock & Construction Company any amounts for repairs ” and that “ Marine Transit Corporation is to be ultimately wound up and dissolved.” Regardless of what this statement shows, the fact remains that Marine Transit Corporation retained beneficial ownership of the tugs and barges and was directly benefited by all revenue derived from operation of the fleet. There is nothing to indicate that the facts with regard to the contemplated dissolution of Marine Transit Corporation was designedly withheld from any one. Late in 1932 Fagan informed Palmer that because of outstanding judgments Marine Transit Corporation was experiencing considerable difficulties, and suggested that a new operating company called “ General Marine,” or some similar name, be formed. Palmer accordingly caused the General Marine Transit Company, Inc., to be organized. Anticipating objections by the Secretary of State to the use of the name “ General Marine,’ Marine Transit Corporation filed with the Secretary of State a certificate which recited in part as follows:
“ Resolved that it is the judgment of this Board of Directors that the name General Marine Transit Co., Inc., will in no way or manner conflict with the name of this corporation, Marine Transit Corporation, for the reason that the General Marine Transit Co., Inc., will be used as a holding and chartering corporation for the transaction of business within the State of New York, in which it ■will not conflict with the business of the Marine Transit Corporation, which corporation is now in the process of liquidating and winding*638 up its affairs by paying its debts and collecting its outstanding assets and is not operating otherwise, and it is our further judgment that the said corporate names are sufficiently different and would not be calculated to deceive because of the nature of the business they do, and because of the common ownership of the stock.”
The certificate of incorporation was dated October 26, 1932, and was filed in the office of the Secretary of State on December 30,1932. One hundred shares of stock were issued, but not delivered; ninety-eight per cent to Schoonmaker, one per cent to Fagan, and one per cent to Palmer. The certificate to Schoonmaker was indorsed over to Marine Transit Corporation on January 31, 1934. Palmer assumed that he indorsed his certificate over at the same time. Thereafter, a certificate for the one hundred shares of General Marine Transit Company, Inc., was issued in the name of Marine Transit Corporation and dated back to December, 1932. No one, it appears, was deceived into the belief that the General Marine Transit Company, Inc., was anything but the operating company for Marine Transit Corporation. Not one penny of revenue derived from the operation of the fleet was improperly diverted from Marine Transit Corporation by reason of the use of this operating company. This is unlike a case where a corporation strips itself of all assets and is left an empty shell for, despite the plaintiff’s characterizations, Marine Transit Corporation was at all times the beneficial owner of all of the General Marine Transit Company, Inc., stock and was deprived of nothing by the transaction. If the statement that Marine Transit Corporation “ does not owe the Kingston Shipyards, Inc., or Kingston Dry Dock & Construction Company any amounts for repairs ” is at variance with the facts, that alone cannot serve to support either a charge of fraud or a charge of misfeasance, nor does it show damage to Marine Transit Corporation.
That the minutes of Marine Transit Corporation do not disclose any formal authorization for the organization of subsidiary corporations is of little significance in a corporation the stock of which is so closely held, and while it may constitute an irregularity, it does not constitute a badge of fraud, particularly where it has been effected with the active sanction of the holders of two-thirds of the shares of Marine Transit Corporation stock. If in substance the seven New Jersey corporations and the General Marine Transit Company, Inc., were wholly owned by Marine Transit Corporation, then form must yield to it.
The plaintiff directs attention to the fact that the Marine Transit Corporation shares on the books of the National Motorship Corporation were written up and subsequently written down. This affords no evidence that Schoonmaker was attempting to defraud
The plaintiff also complains about the inadequacy of the bookkeeping system. While the system was not perhaps the best that could be devised, there is no evidence of falsification, no evidence of any entry, or the absence of any entry, that could have adversely affected stockholders of Marine Transit Corporation. An examination of the books discloses that all moneys paid to or on account of Marine Transit Corporation were fully accounted for.
Nor is there any proof to support the charge that Schoonmaker would become preferred over the debts of other creditors. By taking mortgages on six barges to secure repayment of money which was supposed to have been loaned to the Barge Corporation, Schoonmaker was not in the position of a preferred creditor. He simply became a secured creditor. There was nothing secretive about this transaction, and so far as the record discloses was not tainted by fraud. “ A minority stockholder has no standing to set aside corporate acts of the directors with one of their number where such acts are not tainted with fraud and are made openly and in good faith, even though the contracting director eventually makes a profit therefrom.” (City Bank Farmers Trust Co. v. Hewitt Realty Co., 257 N. Y. 62, 68.) As a matter of fact, with the exception of the barge Barbara, of which mention will later be made, the mortgages were satisfied of record, although not paid. Instead of reaping any private advantage to himself, Schoonmaker, who bargained for security for his various loans, found himself a general unsecured creditor.
The plaintiff claims further that the proceeds of the tug Chilton were never received by Marine Transit Corporation. This is not borne out by the record. The Chilton had been damaged in a collision with another vessel which resulted in a claim against it. The damage was repaired by Kingston Shipyards, Inc., the repair bill amounting to $1,388.77. Because of the claims outstanding against the Chilton, Fagan instructed Palmer to have it libeled for the repair bill instead of transferring it directly to the Chico Corporation, one of the New Jersey corporations organized to hold title to it. The libel was filed and resulted in a final decree directing the sale of the tug by the United States marshal. At the sale it was bid in for $3,600 by one Mills, the money or credit having been furnished to Mills by Schoonmaker. The marshal’s bill of sale was made in the name of the Chico Corporation. After the proceeds were deposited in court, two checks were issued, one in the sum of $1,583.13 and the other in the sum of $1,914.20, representing $3.600, less costs. Palmer sent to the Kingston Shipyards, Inc., his
The plaintiff says that the retransfer of the assets to Marine Transit Corporation in 1934 evidenced an attempted restitution by the defendants when caught “ red-handed ” in the act of having diverted the vessels and their earnings from Marine Transit Corporation to their own selfish ends. Inasmuch as the record is barren of any proof that Marine Transit Corporation was in a worse position after the transfers than it was before, or that moneys belonging to Marine Transit Corporation were wrongfully diverted to any of the individual defendants, or that either the stockholders or creditors suffered any pecuniary loss by what was done, it seems more plausible to conclude that the retransfers were accomplished because Palmer no longer wished in his own language “ to hold the bag ” and because it was desirable at that time to reflect the true situation, namely, Marine Transit Corporation’s continued and uninterrupted control over the fleet and the revenue which it yielded.
The best proof of the efficacy of the plan now attacked as fraudulent is that no vessel was seized during the time that the fleet was nominally owned by the New Jersey corporations, but that immediately upon retransfer of the fleet fourteen barges and five tugs were seized under an execution of the National Surety Company. This seizure leads directly to the second main point upon which the plaintiff relies.
2. The plaintiff asserts that the action of the directors of Marine Transit Corporation in filing a voluntary petition in bankruptcy while the corporation was still solvent resulted in an inestimable loss to the corporation and to its good will. The events which led up to the bankruptcy are as follows: In September or October of 1933 two judgments were obtained against Marine Transit Corporation totaling about $17,000. The National Surety Company as indemnitor paid off these judgments and, becoming subrogated to the rights thereunder, demanded payment of Marine Transit Cor
The claim that the filing of the voluntary petition was a fraud upon the courts is effectually disposed of by the determination of the United States Circuit Court of Appeals affirming the order which denied the motion to dismiss the petition August 16, 1935. (Matter of Marine Transit Corporation, 79 F. [2d] 232.)
3. The plaintiff contends that six barges belonging to Marine Transit Corporation were conveyed to the Barge Corporation so that they could be used to secure loans that Schoonmaker might make to any of his companies. The claim is made that although the mortgages were executed and delivered to Schoonmaker, Marine Transit Corporation derived no benefit therefrom. The mortgages were given to secure advances said to be close to $40,000. The plaintiff
4. The plaintiff charges that there has not been a proper accounting to Marine Transit Corporation by those corporations which operated the fleet during 1932 and 1933. Without setting forth a detailed analysis of the entries in the books of the various corporations involved during the period in question, the court finds after a study of the proof on this issue that the chart (Exhibit 7-J for identification) accurately reflects the condition of the books in evidence and discloses that there has been a complete accounting of all revenue derived from operation of the fleet and that all such revenue less the cost of operation was devoted exclusively to the use of Marine Transit Corporation.
5. Proceeding upon the assumption that Marine Transit Corporation never authorized payment of salaries to its officers, the plaintiff attacks as impropér salary payments to Schoonmaker and Fagan during 1932 and 1933 “ aggregating $18,000 per annum.” The court is unable to ascertain the source of the plaintiff’s figures. The evidence discloses that Schoonmaker withdrew the sum of
6. The plaintiff attacks the propriety of certain legal charges made by Palmer, an attorney for Marine Transit Corporation. It cannot be seriously contended that Palmer did anything improper in receiving compensation for legal services performed in connection with the libel and sale of the Chilton or with the incorporation of the General Marine Transit Company, Inc,, and the New Jersey corporations. The claims that the defense of the several directors in the present litigation was borne by Marine Transit Corporation is contrary to the facts. There was no proof offered that a single penny was expended by Marine Transit Corporation in defense of the directors. With regard to Palmer’s submission in the bankruptcy proceedings of retainer bills aggregating $17,039.99 and covering a period of four years, it need only be said that the issue is properly before the bankruptcy court for litigation. If Palmer fails to prove his alleged agreements of retainer, his claim will be disallowed.
7. The plaintiff asserts that there were improper and unjustifiable charges between Marine Transit Corporation and the Schoonmaker companies. The gist of the complaint under this heading is that Marine Transit Corporation bore the entire expense of the Buffalo office, and that although the office at No. 17 Battery place in Manhattan was shared by National Motorship Corporation, Kingston Shipyards, Inc., Rome Transit Corporation, General Marine Transit Company, Inc., and the New Jersey corporations, there was no allocation of time among the companies, no apportionment
8. The proof in the record does not support the claim either that the charter hire set up for the vessel Express was used as a means for building up fictitious charges against Marine Transit Corporation in favor of National Motorship Corporation, or that there was anything improper with respect to the accounting set up of the yacht Grayland.
Plaintiff makes many other complaints which are too trifling and picayune to merit comment.
The complete absence of any real basis for the many general charges of fraud, collusion, waste, gross negligence, etc., lends considerable support to the claim that the plaintiff’s suit was not motivated by a desire to benefit the Marine Transit Corporation, and in this connection the plaintiff’s association with Mr, Narelle, as president of the Seaboard Great Lakes Corporation, is highly significant.
The plaintiff’s complaint is dismissed on the merits, with costs to all of the defendants separately represented, except Fagan.
The Cross-Complaint.
The defendant and cross-complainant Fagan claims to be the holder of 362| shares of stock in the National Motorship Corporation. He says that in January of 1931 it was agreed that in return for services rendered, moneys advanced and credit furnished, there was to be issued to Schoonmaker and to himself in equal shares
That Fagan was fully advised of the issuance to Schoonmaker for his own use of the 2,400 shares of preferred stock and the 6,000 shares of common stock cannot be seriously disputed. The stock was issued in accordance with the minutes before they were altered at Fagan’s request. Fagan never laid claim to these shares during Schoonmaker’s lifetime. That he was content to treat them as
Furthermore, whether Fagan at one time was entitled to one-half of this stock is of no consequence. Kingston Shipyards, Inc., was organized by and‘became a wholly owned subsidiary of the National Motorship Corporation. Its function was to engage in shipbuilding and repair work. It was then that the Kingston Dry Dock & Construction Company, Inc., conveyed the dock and other equipment to the Kingston Shipyards, Inc., in return for 15,000 shares of common stock, and 6,000 shares of preferred stock of the National Motorship Corporation which was issued to Schoonmaker. For the purposes of the transfer, the value of the property was fixed at $92,000, it being understood that this sum Would be realized from the public sale of the National Motorship stock. In December of 1932 it appears that all parties concerned were reconciled to the fa'lure of the public sale of this stock. The corporate capitalization of the National Motorship Corporation was thereupon changed to 1,000 shares of no par value common stock. Inasmuch as the shipbuilding and repair venture of Kingston Shipyards, Inc., did not prove successful, and in fact resulted in a loss of $30,000 per year, Fagan insisted that the property be returned to the Kingston Dry Dock & Construction Company, Inc. This the parties agreed to do. Subsequently at a meeting attended by Schoonmaker, Fagan, Palmer and Schoonmaker, Jr., it was agreed that the new stock in the National Motorship Corporation be distributed one-third to Fagan and two-thirds to Schoonmaker. The stock was accordingly delivered, the certificates having been dated as of the original date of issue. Fagan indorsed his stock in blank and delivered it to Palmer, presumably in accordance with the trust agreement, the terms of which will be considered later. All of this was done without the slightest intimation on Fagan’s part that he was entitled to more than one-third of the stock of the National Motorship Corporation. These facts come squarely within the rule that a complainant is bound by a transaction where his conduct with respect thereto “ subsequent to the rise of it, justifies and supports the normal and reasonable conclusion that he, by his assent thereto or acquiescence therein, has accepted and adopted it.” (Pollitz v. Wabash R. R. Co., 207 N. Y. 113, 129.) No matter what Fagan's interest might have been in the corporation prior to that date, his rights were fixed by agreement at the meeting referred to. Fagan claims to be the owner of a majority of the stock in the National Motorship Corporation. The claim is made on the theory that with the transfer of the Lower Island dock to the Kingston Dry Dock & Construction
While the book value of the Lower Island dock was placed at $335,273.06, the entry itself affords no evidence of actual value. The fact that a public sale of the stock was contemplated at the time suggests perhaps the reason for the valuation. In the minutes of June 23, 1933, the value is fixed at $92,500, while the “ Property and Equipment ” account shows the value written down to $50,000. The court was not concerned with the true value of this property for the obvious reason that after its return to the Kingston Dry Dock & Construction Company, Inc., the parties by agreement redistributed the stock.
The charge that the Kingston Shipyards, Inc., stock is no longer owned by the National Motorship Corporation and the implied charge that it has been transferred to one of the defendants was not proved.
Fagan asserts that he is not indebted to the Schoonmaker estate. This assertion he bases upon the trust agreement of December 21, 1931, entered into between Fagan and Schoonmaker and later accepted by the Kingston Trust Company, and a letter alleged to have been written by Schoonmaker on the same date. The trust agreement recites Fagan’s indebtedness to Schoonmaker in the sum of $53,295, which included three notes of $10,000 each executed by Fagan and delivered to Schoonmaker, with interest from January 3, 1927, together with an unpaid balance, and two of Fagan’s notes, one for $8,000 and the other for $6,000, indorsed by Schoonmaker. The agreement also recites the deposit of Fagan’s Marine Transit Corporation stock with Schoonmaker as collateral security for the said loans and the subsequent acquisition by the General Motorship Corporation of all of the Marine Transit Corporation stock held by the respective parties in return for its capital stock. To provide Schoonmaker with continued security, Fagan agreed that all of the shares of stock in the General Motorship Corporation standing in his name would be indorsed in blank and deposited with the Kingston Trust Company as collateral security for the payment of said loans.
One of the paragraphs of the agreement reads as follows: “ (6) It
The letter of December 21, 1931, a purported duplicate original of which signed by Schoonmaker was found in the files of the National Motorship Corporation, reads in part as follows:
“ As explained to you the Kingston Trust Company would not accept the trust agreement which included two of your notes which I discounted with them. However, you will only be called upon to pay all your notes out of dividends on your stock. Any reduction in your notes through the sale of your stock or any payments on the notes will be shown on the trust agreement.
“ The Marine Transit Corporation and the General Motorship Corporation notes which you endorsed personally will be protected by my estimate in the event of my death and any balance due me on your personal notes cancelled.”
Fagan contends that with Schoonmaker’s death he was released of all liability. The facts surrounding the signing of this letter are not disclosed by the record. The letter was admitted over objection and was permitted to remain in evidence after a motion that it be stricken out. The court’s attention was consequently directed to the claim that the trust agreement was, as a matter of law, integrated in the writing. Under the circumstances, the admission of the letter into evidence does not preclude a finding at this time that it cannot be given probative force. (Higgs v. De Maziroff, 263 N. Y. 473.) The theory upon which the letter was offered in evidence is disclosed by the following quotation from the cross-complainant’s brief: “ The document, by its very nature, purports to record an oral agreement and does not purport, itself, to confer the rights, and the document need never have been delivered and need never have been in the possession of Fagan. If it were found in the possession of Schoonmaker and had never been seen by Fagan, it would still be admissible in evidence and would still prove that Fagan and Schoonmaker had an oral agreement, by the terms of which none of the notes were absolute obligations of Fagan but were payable solely and only out of dividends of the General Motorship stock.”
The letter specifically refers to the trust agreement, and there is no suggestion that this alleged oral agreement was supported by independent consideration. The only discernible purpose for the introduction of this letter was to add additional terms to the trust agreement and by doing so to vary and contradict the terms already expressed. It is well settled that where an instrument appears upon its face to embody all of the terms of a valid contract, there may not be shown by extrinsic proof additional terms of the contract which might have been but were not included in the writing (Edison Electric Illuminating Co. of Brooklyn v. Thacher, 229 N. Y. 172), and particularly where, as here, the extrinsic proof tends to vary the terms of the writing. Nor may parol evidence be introduced to show that a contract delivered unconditionally was to be canceled upon some future contingency. (Jamestown Business College Assn. v. Allen, 172 N. Y. 291.) Further, since the trust agreement was sealed, its terms cannot be modified by a subsequent unexecuted parol agreement. (Cammack v. Slattery & Bro., Inc., 241 N. Y. 39.) The recent amendment to section 342 of the Civil Practice Act by chapter 708 of the Laws of 1935 is not applicable to this situation. It follows that the letter can be given no probative force regardless of the theory upon which its introduction into evidence was predicated, and upon the state of the competent proof
Fagan seeks relief both as pledgor of stock deposited as collateral security for the payment of. his obligation to Schoonmaker and as a stockholder in the National Motorship Corporation. In his first capacity he charges Schoonmaker with having violated his duties with respect to the pledge, relying upon certain alleged acts which will be considered in the order in which they are set forth in the cross-complainant’s brief.
First. The charge that Schoonmaker failed to declare dividends out of profits realized by Marine Transit Corporation was not sustained, for nowhere in the record was the court able to find any proof to show that available surplus which should have been distributed to the stockholders was improperly diverted from the corporation by Schoonmaker. As was said in Liebman v. Auto Strop Co. (241 N. Y. 427, 433): “ It is a fundamental rule relating to the management of corporations that it is within the discretion of the directors to determine when and to what extent a dividend shall be made, subject of course to the qualification that the same shall not encroach on the capital. Courts will not interfere with such discretion unless it be first made to appear that the directors have acted or are about to act in bad faith and for a dishonest purpose.”
The court finds no evidence of bad faith or dishonest motives.
Furthermore, the policy of non-payment of dividends was acquiesced in by Fagan, for there is no proof that he or any other stockholder at any time asked for a distribution of dividends. The mere statement that the surplus was used for the purchase of vessels from corporations controlled by Schoonmaker lends no support to Fagan’s claim in the absence of some proof that these purchases were not proper corporate capital investments. No such proof was tendered.
Second. The charges relating to the transfer of the fleet to the New Jersey corporations, the failure to account to Marine Transit Corporation for the earnings of the New Jersey corporations, the filing of the voluntary petition in bankruptcy against the Marine Transit Corporation, and the delivery to Schoonmaker of preferred mortgages on six barges have been dealt with heretofore.
Third. Fagan takes the position that under the trust agreement of December 21, 1931, Schoonmaker was obliged to protect him against liability on the notes which he had either indorsed or signed as maker. From that premise he argues that Schoonmaker’s refusal to renew two of the notes and the withdrawal of National Motorship Corporation funds, which precipitated protest of another note, constituted a violation by Schoonmaker of his obligations under the
Fourth. It is claimed that the Schoonmaker interest not alone failed to resist attempted foreclosure by the United States of America of its preferred mortgages on the motorships Clevelander and Detroiter, but actually co-operated with the mortgagee. The application for leave to foreclose was made while the National Motorship Corporation was in receivership under the order of Mr. Justice Furman. At that time Fagan was employed by the receivers and it does not appear that any of the parties now charged with malfeasance had any standing to resist the application. It is unreasonable to suppose that Schoonmaker, who had invested an additional $30,000 on February 9, 1934 (two months before the receivership), to stave off foreclosure of these mortgages would have co-operated in the destruction of his own investment. Fagan says Kinney volunteered information to William E. Collins, district counsel of the Shipping Board, which information he says was used by the government in its attempts to foreclose. Collins, it appears, was referred to Kinney either by Palmer or by his associate Barber. Kinney did not volunteer information, but merely responded to questions put to him by Collins, who at that time was checking the accuracy of statements contained in an affidavit filed by Fagan in opposition to the motion for leave to foreclose. There was no evidence of collusion, no evidence of co-operation on the part of either Schoonmaker, Palmer, Kinney, or any of the other defendants with the United States government.
Fifth. There was not a scintilla of proof offered to support the charge that the Schoonmaker interests caused the involuntary petition in bankruptcy to be filed against the National Motorship Corporation. Nor is there any proof to support the claim that Schoonmaker interests sought to destroy the pledge by causing an intervening petition in bankruptcy to be filed, or by filing excessive claims against the bankrupt corporation. Without analyzing in detail the extent to which the National Motorship Corporation was obligated to the Schoonmakers, it is sufficient to point out that such obligations closely approximate, if they did not actually coincide with, the sum mentioned in the intervening petition. It is difficult to understand how the Schoonmakers, who represented by far the largest creditors of the National Motorship Corporation, could be criticized for seeking to protect their interests by way of intervention in the bankruptcy.
In his capacity as stockholder in the National Motorship Corporation, Fagan reverts to the transfer of the fleet to the New Jersey corporations, asserting that it was done (a) to force the plaintiff and Fagan out of Marine Transit Corporation and to leave the Schoonmakers in sole control, and (b) to prefer the Schoonmakers over bona fide creditors. His argument under (a) is that the plaintiff and he were left without stock in the New Jersey corporations and in the General Marine Transit Company, Inc., and the Marine Transit Corporation was left without any assets. This he claimed would inevitably lead to the bankruptcy of Marine Transit Corporation,
The allegations in the cross-complaint that the Kingston Dry Dock & Construction Company, Inc., repaired vessels of Marine Transit Corporation at excessive charges and without competitive bidding and forced the sale of vessels of Marine Transit Corporation have apparently been abandoned, and properly so, inasmuch as no competent proof in their support was offered.
Finally, Fagan contends that Schoonmaker and Palmer violated their duties as officers and directors of the National Motorship Corporation, as did other defendants controlled by Schoonmaker and Palmer. The alleged wrongful acts relied upon are those previously discussed and which consequently require no further consideration.
The cross-complaint of Fagan is dismissed, with costs to the other defendants separately represented.
At the opening of the trial, all of the defendants, with the exception of the executors of the estate of John D. Schoonmaker, deceased, and Gerald A. Fagan, moved to dismiss the complaint and cross-complaint on the ground that the causes of action therein stated belong solely to the Irving Trust Company, trustee in bankruptcy of Marine Transit Corporation. The motions were denied. They were renewed at the end of the plaintiff’s case and again denied. The voluntary petition in bankruptcy was filed on March 21, 1934, but the trustee was not elected until February 25, 1935. Under the Bankruptcy Law (§ 70, as amd.; U. S. Code, tit. 11, § 110) it has been held that a “ claim against directors of a bankrupt
Settle findings and judgment in accordance with the above on notice. While it has taken twenty-three days to try this case and while close to 600 exhibits are now in evidence, only the salient facts are covered in the opinion, and it is suggested that counsel in preparation of their findings and conclusions limit themselves accordingly.