Sedgwick v. Seward Development Co. — 144 A.D. 455

Majority

p. 455

Alexander Sedgwick, Respondent, v. Seward Development Company, Appellant, Impleaded with Alfred F. White and Others, Respondents.

First Department

May 5, 1911.

Headnote

Corporation — representative action by stockholder — estoppel — receiving illegal stock and • dividends — receiver — facts not justifying appointment.

It seems, that a person who' has received and retained stock unlawfully issued as a bonus and has received dividends illegally declared cannot maintain a representative action on behalf of the corporation against the directors for fraud. .

In a representative action brought by a stockholder on behalf of - the corporation against directors a charge that the defendants induced him to ■ purchase stock by fraud is irrelevant.

The court will not appoint a receiver of a corporation in a representative action brought by a stockholder against - directors alleged to have "induced the plaintiff- to purchase stock by fraud and for unlawfully issuing Stock and'deelaring dividends, 'where it appears that no further waste is threatened in that the stockholders have appointed a committee, not including the defendants, to preserve the assets of .the corporation and that the codirectors of the one charged with unlawful acts have removed him from office, compelled him tó make partial restoration and undertook criminal proceedings against him.

p. 456

Especially is this so where the complaint contains averments tending to cast doubt upon the good faith of the plaintiff in that the suit may have been instigated by the director whose acts are complained of.

Appeal by the defendant, the Seward Development Company, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of ¡New York on the 15th day of February, 1911, appointing a receiver of the defendant corporation.

Hardie B. Walmsley, for the appellant.-

William F. Goldbeck, for the respondent.

This is a representative action by a stockholder of a foreign corporation. The motion for the appointment of a receiver was' granted by default, on a verified complaint and on affidavits of the plaintiff, containing broad general statements made on knowledge, though it plainly appears that many of the facts stated could not have been within the knowledge of the affiant. Upon the opening of the default the court ordered the original motion heard forthwith and thereupon made the order appealed from. It is charged that the defendants made false representations to induce the plaintiff and others to purchase stock; that they unlawfully caused common and preferred stock to be issued, the latter as a bonus to- purchasers of the former; that they paid dividends out of capital, and that they negligently intrusted the entire capital of the corporation to the defendant Cutler,, who misappropriated a large part of it. The charge of fraud in inducing the purchase of stock may be eliminated as irrele-. vant to a representative action on behalf of the corporation, and it may well be doubted whether a party who received and retains stock issued ás a bonus arid his share of dividends illegally declared, can maintain an action in behalf of the corporation in respect thereto. It is not denied that -there are no. creditors of the corporation. With respect to the charge of negligently-intrusting the capital to the defendant Cutler, it appears that his codirectors repudiated his unlawful acts when discovered, succeeded in compelling a partial restoration, under

p. 457

took to institute criminal proceedings against him and removéd him from his position as treasurer and general manager.

The only purpose of appointing a receiver in a case like this is to preserve assets., The plaintiff failed to show that further waste was threatened, hut on the contrary it appeared that the stockholders have held a meeting and appointed a committee, not including any of the defendants, for the very purpose of preserving the assets'of the corporation. They should he allowed, if they can, to. do that, without having the expense of a receivership unnecessarily imposed upon them. The assets of the corporation belong to the stockholders, and the court should not take possession through its receiver unless a plain case of necessity be shown.

. The appointment' of a receiver will not help the plaintiff to prosecute his suit. Moreover, the complaint contains averments which tend at least to cast doubt upon the good faith of the plaintiff, who complains of the removal of the said Cutler and of the attempt to have him indicted. „ Cutler was concededly the active wrongdoer in'wasting the funds of the corporation, and it is quite possible that this suit has been instigated by him in order to embarrass those who have removed him" from the management of the corporation and compelled him, in part at least, to make restitution. The plaintiff complains of some .plan of reorganization, proposed by the stockholders committee, but fails to show what that has to do with the prosecution of this action against, directors for waste.

The order should be reversed, with ten dollars costs and disbursements, and the motion denied, with ten dollars costs.

Ingraham, P. J., McLaughlin, Scott and Dowling, JJ., concurred.

Order 'reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs.