Knickerbocker v. Groton Bridge & Manufacturing Co.

Majority

p. 145

Edwin Watson Knickerbocker, Appellant, v. Groton Bridge and Manufacturing Company, Respondent.

First Department,

February 9, 1906.

Headnote

Corporation — action by stockholder to dissolve corporation and set aside prior voluntary dissolution — complaint—failure to state cause of action — when directors not necessary parties defendant.

The complaint in an action by a stockholder under section 1785 of the Code of ■Civil Procedure to procure the dissolution of a corporation alleged that the ordinary and lawful business of the corporation had been suspended for at least a year'and the submission of a written statement of facts to the Attorney-General and his failure to institute an action within sixty days, and further alleged in substance that in a prior proceeding by the corporation in voluntary dissolution, pursuant to section 57 of the Stock Corporation Law, a certificate had been issued by the Secretary of State to the effect that the corporation had complied with said section in order to be dissolved in pursuance thereof, but that said proceeding was taken without notice to the plaintiff or to minority stockholders and for the purpose of defrauding the plaintiff and minority stockholders, etc., in pursuance of a conspiracy set forth in the complaint. The relief demanded was that the voluntary dissolution be set aside.

Held, that as said complaint did not allege that the notice to stockholders required - by the statute (Stock Corporation Law, § 57) had not been published or that no notice had been served upon or mailed to the stockholders, the complaint failed to state a cause of action;

That the allegations as to the fraudulent purpose of the voluntary dissolution were not allegations of fact which justified a judgment declaring the proceedings void, but were mere allegations of motive which were immaterial.

It seems, that the directors are not necessary parties defendant in such action when no personal judgment is asked against them.

Appeal by .the plaintiff, Edwin Watson Knickerbocker, from an interlocutory judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Mew York on the 27th day of October, 1905, upon the decision -of the court, rendered after a trial at the Mew .York Special Termr sustaining the defendant’s demurrer to the complaint.

W. Gerald Phlippeau, for the appellant.

Paul Eugene Jones, for the respondent.

The demurrer to this complaint was upon-the ground that there was a defect of parties defendant, and that the complaint did not state facts sufficient to constitute a cause of action.

• The action was brought by a stockholder to dissolve a domestic corporation. The plaintiff alleges that he is the owner of fifty shares of the capital stock of the corporation, which consisted of twelve hundred shares of the par value of $100 each; that the defendant has suspended its ordinary and lawful business for more than one year; that in January, 1900, the plaintiff received a report from ■the defendant of the condition of its business on December 31,1899, showing a surplus, inclusive of its capital stock, amounting to over , $600,000; that thereafter and in May, 1900, the defendant had transferred and set over the greater part of its assets to a corporation known as the American' Bridge Company, in consideration of the issuance and transfer to one Conger, as president of the. defend-x ant, by the said American Bridge Company, pf a number of shares of the preferred and common stock of the xsaid American Bridge Company of the par valué,of $100 each, and at. the same time sold and transferred to the American Bridge Company certain of its uncompleted contracts for a sum exceeding $165,000; that there*after and in or about June, 1901, the directors of the said defendant corporation sold all its remaining assets to Conger at auction for the sum of $36,000 ; that in or about July, 1901, the directors of the defendant caused proceedings to be instituted pursuant to the provisions of section 57 of the Stock Corporation Law for the voluntary dissolution of the defendant, which- proceedings resulted in the issuance of a certificate by the Secretary df State of the State of New' York, to the effect that it appeared from his records that the defendant liad, in all respects, complied with section 57 of the vStock Corporation Law in order to be dissolved in pursuance of the provisions thereof; that these proceedings were instituted without notice t-o the plaintiff, pr to the minority stockholders of the defendant corporation, and were so instituted for the purpose of defrauding the plaintiff and the minority stockholders, and in furtherance of a combination and conspiracy on the part of the then directors of the defendant to 'deprive the plaintiff and the minority stockholders of their rights and interests in and to the assets of the defendant, and

p. 147

for the sole purpose, and as a convenient method, to convert the property of the defendant corporation to their own use and benefit; that although these so-called dissolution proceedings were had and completed, in so far as the same could be completed in the absence of notice to all of the stockholders of the defendant, in July, 1901, neither the directors of the defendant nor any or either of them had ever accounted for the property of the defendant committed to their charge, as trustees of the stockholders; that the plaintiff duly demanded such an accounting of the defendant and of its directors but that this demand had not been complied with; that prior to the commencement of this action, the plaintiff submitted to the Attorney-General a verified statement of facts showing the grounds for an action 'under the provisions of subdivision 3 of section 1785 of the Code of Civil Procedure; that more than sixty days had elapsed since the said submission to the Attorney-General and that he had omitted to commence the action specified in said section of the Code ;• that thereupon the plaintiff, prior to the commencement of this action, obtained leave of the court to bring this action. The judgment demanded is that the corporation be dissolved; that these voluntary proceedings be vacated and set aside as irregular and void, and in fraud of the minority stockholders of the defendant; that the defendant and its directors and officers be enjoined and restrained from exercising any of its corporate rights, privileges and franchises, and from collecting or receiving any debts or demands or other assets of the defendant, and from paying out, or in any way transferring or delivering to any person any of the moneys, property or effects of the defendant until the further order of the court, and that a receiver of the defendant be appointed pursuant' to the ^pro visions of section 1788 of the Code of Civil Procedure.

The plaintiff bases this action upon section 1785 of the Code of Civil Procedure, which provides that an action to procure a judgment dissolving a corporation created by or under the laws of this State may be maintained: “ 3. Where it has suspended its ordinary and lawful business for at least one year.” Section 1786 provides that an action specified in section 1785 of the Code may be maintained by the Attorney-General in the name and in behalf of the People, and that whenever a creditor or stockholder of any corporation submits to the Attorney-General 'a written statement of

p. 148

facts, verified by Oath, showing grounds for an action under- the provisions of section 1785 of the Code, and the Attorney-General . o.mits, for sixty days after • this submission, to commence such an .action, then and not otherwise such creditor! or stockholder may apply to the proper court for leave to commence such an action, and on obtaining leave may maintain the same accordingly. The . complaint having alleged the fact that the ordinary and lawful business of the corporation had been suspended for at least a year and the submission of a written verified statement of the facts fo the . Attorney-General, and his failure to institute an action within sixty •days, and leave of court to commence the action prior to the commencement ..thereof, the plaintiff was^entitled to maintain this action unless other facts alleged were a bar to the actión, and it was because of the allegation of these facts that the learned court at Special Term held that the plaintiff could not maintain the, action.

The plaintiff takes the point that as by these allegations he has merely-anticipated a defense, the proper remedy of the defendant was a motion to strike out these allegations. If, however, on the facts pleáded the plaintiff could not maintain the action, the complaint is demurrable. The facts alleged which the court below considered a bar were that in Jnly, 1901, the directors of the defendant' caused proceedings to be. instituted pursuant to the provisions of section 57 of the Stock Corporation Law for the. voluntary dissolution of' the defendant, resulting in the issuance of a certificate by the Secretary of State of the State of Hew York to the effect that it appeared from his records that the defendant had in all respects complied with said section in order to be dissolved in pursuance of the provisions thereof. If the legal result of a proceeding under section 57 of the- Stock Corporation Law was to dissolve the corporation, then this action could not be maintained, as by operation . of law the corporation had become dissolved.

Section 57 of the Stock Corporation Law (Laws of 1892, chap. 688, added by Laws-of 1896, chap. 932,-and amd. by Laws of 1900, chap. 760) provides : ‘1 Any stock corporation, except a moneyed or a railroad corporation, m&y be dissolved before the expiration of the time limited in its certificate of incorporation or in its charter as follows: The board of directors of any such corporation may at a' meeting called for that-purpose upon, at least,' three days’ notice to

p. 149

each director, by a vote of a majority of the whole board, adopt'a resolution that it is in their opinion advisable to dissolve such corporation forthwith, and thereupon shall call a meeting of the stockholders for the purpose, of voting upon a proposition that such corporation be forthwith dissolved. Such meeting of the stockholders shall be held not less than thirty nor more than sixty days after the adoption of'such resolution, and.the notice of the time and place of such meeting so called by the directors shall be published in one or more newspapers published and circulating in the 'county wherein Such corporation has its principal office, at least once a week for three weeks successively" next preceding the time appointed for holding such meeting, and on or before the day of the first publication of such notice a copy thereof shall be served personally on each stockholder, or mailed to him at his last known post-office address. * * * If at any such meeting the holders of two-thirds in amount of the stock of the corporation then outstanding shall, in person dr by attorney, consent that such dissolution shall take place, and signify such consent in writing, then such corporation shall file such consent, attested by its secretary or treasurer, and its president or vice-president, “ * * in the office of the Secretary of State. The Secretary of State shall thereupon issue to such corporation, in duplicate, a certificate of the filing of such papers, and that it appears therefrom that such' corporation has complied with this section in order to be dissolved, and one of such duplicate certificates shall be filed by such corporation in the office of the clerk of the county in which such corporation has its principal office, and thereupon such corporation shall be dissolved and shall cease to carry on business, except for the purpose of adjusting and winding up its business.” The statute then authorizes the board of directors to proceed to liquidate the affairs of the company and to wind up its business.

If by a compliance with the provisions of this statute and the issuance of the ^certificate of the Secretary of State, as therein provided, the corporation becomes dissolved, thereafter no action under sections 1785 and 1786 of the Code could be maintained for that purpose. The complaint alleges that a proceeding was instituted under this section, and that such proceeding resulted “ in the issuance of a certificate by the Secretary of State of the State of New York, to the effect that it appeared from his records that the defendant had in all respects

p. 150

complied with section 57 of the Stock .Corporation Law, in order to be dissolved in ^pursuance of the provisions thereof.” That . allegation, thus standing alone, was an allegation of a compliance by this corporation with the provisions of this section, and that the corporation was dissolved. The plaintiff, however, asks, as a part of the relief to which he claims to be entitled, that this proceeding which resulted in a dissolution of .the corporation1 be vacated and set aside as irregular and ‘void and in fraud of the minority .stockholders of this defendant. To sustain this demand for relief,. • which, must be granted before the. plaintiff could maintain .an, . action to' dissolve the corporation, lie alleged that these voluntary dissolution proceedings were instituted without any notice to the plaintiff or to, the minority stockholders of the defendant; that these dissolution proceedings, were instituted for the purpose of defrauding the plaintiff and the minority stockholdersand in furtherance of a combination and conspiracy on the part.of the then directors of the defendant to deprive the plaintiff and the minority stockholders; of their rights and interests in and to the assets of the defendant, and for the sole purpose and as a convenient method, to convert the property of the. defendant corporation to their own usp and benefit; and, further, that the- directors of the corporation have never accounted for the assets of the corporation received by them, although siich an accounting has been demanded. But a failure of the directors to account has no relation to this cause of action, ás the plaintiff has his, remedy in a proper action to compel siich an 'accounting." .The right of, the plaintiff to ask that this dissolution proceeding be declared void depends Upon the allegations of the 13th paragraph of the complaint. The facts there alleged are that the so-called voluntary dissolution proceeding was instituted without any notice to the plaintiff, ■ It is not alleged that, the notice required to be published by the' statute was not published, or that no notice was served upon or mailed to'the stockholders, as therein provided, but simply that the proceeding Was instituted without notice to the plaintiff or to the minority stockholders. This allegation is necessarily a conclusion, not based upon any fact alleged to show that the provision of the statute has not been complied with. The clear intent was to make the certificate of the Secretary of State evidence of the' due performance of the provisions of the statute, and I do not think

p. 151

that this allegation is sufficient to hase a claim for a revocation of this proceeding based upon a failure of the directors to .publish and serve or mail the notice required, by section 57 of the Stock Corporation Law. The further allegation as to the purpose for which these proceedings were instituted is not the allegation of a fact which justifies a judgment declaring them void. The mere motive of the directors in instituting proceedings is entirely immaterial. If the proceeding was conducted according to the statuteif the steps required, by the statute to dissolve the’ corporation were taken, and the corporation thereby became dissolved, certainly the proceedings cannot be vacated because the plaintiff alleges that the motives of the directors were fraudulent.

I think, therefore, that the complaint does not state facts sufficient to constitute a cause of action.

■ The learned trial court also held that there was a defect of parties defendant, in that the officez-s and diz-ectors whose conduct was complained of wez-e not made defendants. If the action was solely to . dissolve the corporation, I do not think the officers and directors are proper ¡larties. If a judgment was asked against-thezn, of course they would be. Upon the ground, however, that the complaint fails to state facts sufficient to constitute a caiise of action,_ the demurrer was properly sustained.

It follows that the judgment appealed from must be affirmed, with costs to the respondents, with leave to the plaintiff to serve an amended complaint within twenty days upon payment of the costs in this court and in the court below.

O’Brien, P. J., Laughlin, Clarke and Houghton, JJ., concurred:

Judgznent affirzned, with costs to respondents, with leave to plaintiff to amend on payment of costs in this court and in the court below.