People v. Troy Chemical Co. — 118 A.D. 437

Majority

p. 437

The People of the State of New York, Appellant, v. Troy Chemical Company, Respondent.

Third Department,

March 13, 1907.

Headnote

Corporation — action to dissolve corporation under section 1785 of the Code of Civil Procedure — when Attorney-General acts in good faith — dissolution decreed when statutory facts admitted.

When an action to dissolve a corporation is brought by the Attorney-General under section 1785 of the Code of Civil Procedure upon the ground that the defendant has remained insolvent and has failed to discharge its notes for one year, after a hearing upon notice to the defendant in which the insolvency and the failure to pay the notes were admitted, the action is justified, and it cannot he said that it was not brought in the discharge of a public duty and in good faith.

Where the answer admits that the defendant suspended its ordinary and lawful business for more than a.year owing to bankruptcy proceedings brought against it, a dissolution of'the corporation under the statute is proper.

So, too, a dissolution is proper when the corporate notes have not been paid for more than one year although the corporation has been discharged in bankruptcy, the discharge not operating as payment or protecting the corporation from an action to dissolve it.

Whether or no the court may exercise its discretion in auaction for the dissolution of a corporation, when the plaintiff has shown the statutory requisites for a dissolution, a decree thereof should be granted;

Appeal by the. plaintiff, The People of the State of New York, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of-Rensselaer on the 15th day of October, 1906, upon the decision of the court, rendered after a trial at the Rensselaer Trial Term, a jury having been waived, dismissing the complaint upon the merits.

The action was begun by the Attorney-General in behalf of the People to secure the dissolution of the defendant corporation under subdivisions 1, 2, and 3 of section 1785 of the Code of Civil Procedure. The grounds stated in the complaint upon which the dissolution was sought were that the defendant has remained insolvent for at least one year; that it has neglected and refused for at least one year to pay and discharge its notes, and that it has suspended its ordinary and lawful business for at least one year. In the answer the allegations of defendant’s insolvency and of its failure

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to pay its notes were denied. It was also alleged as an excuse for its suspension of business that proceedings for the voluntary dissolution of the defendant in the Supreme Court of the State were instituted and also that proceedings in involuntary bankruptcy against it in the United States District Court had been taken and its assets seized. It was also alleged that its estate had been administered in these proceedings and that a discharge in bankruptcy of the debts of the defendant had been had and that the action was not instituted for public purposes.

The defendant was a domestic corporation organized in 1898, having its principal place.of business at Troy. Among its assets were two formulas for medicinal preparations, one called “ Pixine,”. and one called “ Save the Horse.” ' The trustee in bankruptcy of the defendant sold the “ Pixine” formula and the exclusive right to the use of "the trade mark therefor to one M. Arthur Wheeler, who was a stockholder and vice-president of the defendant. All the other assets of the defendant, including the formula Save the Horse,” were sold by the trustee in" bankruptcy to one Edgar C. McKallor. The latter with his associates formed a new corporation with its pi’incipal office at Binghamton under the same name as that of the defendant, viz., The Troy Chemical Company.

The action was tried by the court which found among others the' facts hereinafter stated. On March 14, 1904, a majority of the directors of the defendant instituted a proceeding for the voluntary dissolution of the defendant because of its insolvency, pursuant to the provisions of the Code of Civil Procedure. (See Code Civ. Proe. § 2419 et seg.) By the schedule attached to the petition in said proceeding the total demands of the creditors of the defendant .were stated to he $11,930.14, and the total value of all its property to be. .$1,892.83. A temporary receiver of the defendant was appointed in said proceeding,'who qualified on .March 14, 1904, and took possession of all the property of. the defendant and continued the business until May, 1904. On May 10, 1904, three ■ of the creditors of the defendant filed in the office of the clerk of the. District Court of the United States for the ¡Northern District of New York, a petition in involuntary bankruptcy against the "defendant. Such procedings were had therein that on June 18, 1904, an adjudication was made- adjudging the defendant to be bankrupt,

p. 439

and a trustee in bankruptcy of the estate of the defendant was appointed who qualified by filing his bond on the 28th day of July, 1904, and all the property and assets of the defendant were turned over to him and he continued the business for about four weeks from that time and in doing so bought and sold property. On September 2, 1904, such trustee sold all the-assets of the defendant except the cash and. deposits .in bank. Such assets when reduced to money amounted to $19,945.45; the debts and liabilities of the defendant as ascertained in said bankruptcy proceedings were $16,729.21. The expenses of said bankruptcy proceedings were such that after the payment thereof by -the trustee the remaining assets were insufficient to meet the liabilities, the deficiency being $1,600. An order was duly granted by the United States District Court on April 3, 1906, discharging the defendant from its debts. In the month of December, 1903, -the defendant executed two promissory notes aggregating $2,500 in amount, which became due .and payable in the month of January, 1904. Said notes were transferred before maturity to the Union National Bank of Troy, which bank remained the owner and holder thereof at maturity and until June 15, 1905, neither of which have been paid by the defendant.

The court rendered judgment dismissing the complaint on the merits, and from that judgment this appeal is taken.

Julius M. Mayer and Himnan, Howard & Kattell, for the appellant.

William W. Morrill and Andrew P. McKean, for the respondent.

It is claimed by the defendant that McKallor caused this suit to be instituted to take the life of the defendant for the purpose of leaving his company, of the same name, the only one in existence, and that the action is not for a public but fora private purpose. A sufficient answer to this contention is that the action was instituted by the Attorney General in the name of the People under a pro vision of the Code of Civil Procedure authorizing him so to do. (Code Civ, Proc. § 1786.) It appears that the action was so Begun

p. 440

by the Attorney-General upon the verified application of McKallor, who was a creditor of the defendant, after a hearing thereon before a Deputy Attorney-General, upon notice to the defendant, upon which hearing defendant appeared by its attorney, who conceded that the facts stated in the complaint'were true. The Attorney-General, therefore, was fully justified in commencing the action, and nothing appears to indicate that it was not brought in the discharge of a public duty and in entire good faith on his part.

It was admitted in the answer that since the time of filing the said petition in bankruptcy (Hay 10, 1904), the business of the . defendant had not been conducted. The action was commenced February 13,1906, and.the.answer was dated April 20, 1906. This admission alone shows that the defendant had suspended its ordinary .and lawful business for more than a year, which is one of the reasons assigned in the statute for which a judgment, dissolving a corporation may be liad.

Another ground for a judgment of dissolution is where a corporation has neglected or refused for at least one year to pay .and discharge its notes or other evidences of debt. It is true- that the notes held by the Unión ¡National Bank of Trov so far as they have not been paid by dividends from the bankrupt estate, have been discharged in bankruptcy, hut such a discharge is not a payment of the notes. (Dusenbury v. Hoyt, 53 N. Y. 521 .) The Legislature has seen fit to provide that a corporation must “ pay and discharge ” its obligations to save itself from being subjected t.o án action of this character. That it has 'not done and it has allowed these notes to remain outstanding and unpaid for more than one year. The fact that it has received a discharge in bankruptcy cannot avail to save its corporate life, for the statute has decreed otherwise. (Code Civ. Proc. § 1785, sulxl. 2.)

We need not go into the question as to whether or not the "learned trial court was correct in its-conclusion that the defendant was not insolvent under the facts found, for the other two reasons are sufficient to require a reversal. The defendant, however, claims that the statute is simply permissive and that the court may or may not, as it deems wise, in the exercise of' its discretion, award judgment dissolving a corporation, even though facts justifying its dissolution may be found.

p. 441

Even ii it should be assumed that the court liad some discretion in actions of- this kind, it would evidently not be a proper exercise of it, when a cause of action is clearly established, for the court to prevent the law from taking its course and from being made effective. The plaintiff, having shown facts which under the law are clearly sufficient to sustain an action dissolving a corporation, should have been awarded a judgment for that purpose.

The judgment should be reversed on the law. and on the facts and a new trial granted, with costs to the appellant to abide the event.

All concurred, Smith, P. J., and Kellogg, J., in result.

Judgment, reversed on law and facts and new trial granted, with costs to appellant to abide event.'

Cases cited

Dusenbury v. Hoyt 53 N. Y. 521 N.Y. 1873-10-07 p. 440