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Gilbert v. Finch

72 A.D. 38 Court N.Y. App. Div. English

Delivered by McLaughlin, J.:

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p. 38
William T. Gilbert, as Receiver of Commercial Alliance Life Insurance Company, Appellant, v. Edward L. Finch and Others, Respondents.

Headnote

Insurance company—payment of its money to the incorporators of a mutual insurance company, to secure their resignation as such and the substitution of persons representing the pwchasing company—it is ultra vires on the part of, both companies, — it transfers no property interest — it is a waste of the funds of the purchasing company — liability of directors consenting to, it — not released by a compromise with the incorporators of the mutual company sued by a receiver of the purchasing company for money had and: received—effect of a release by the purchasing company to one of its directors — a verdict cannot be directed in the absence of the jury.
The directors of the Commercial Alliance Insurance Company, a corporation organized under the laws of the State of New York, entered into negotiations with the surviving incorporators of the Maine and New Brunswick Insurance Company, a mutual insurance corporation; organized under the laws of the State of Maine, for the purchase and control of the latter company by the former. In pursuance of this purpose the directors of the Commercial AIli=-^ anee Company paid from the funds of that company $3,500 to each of the ten'incorporators of the Maine and New' Brunswick Company and - received from ', them an assignment of “ all their right, title and interest as corporators, asso- • ciates or otherwise, in said Maine and New Brunswick Insurance Company.”
Simultaneously therewith the officers and directors of the Maine and New Brunswick Company resigned and their places were filled by persons acting on behalf of the Commercial Alliance Company. Some two months later the Maine and New Brunswick Company was declared insolvent and a receiver was appointed to wind up its affairs.
Thereafter the Commercial Alliance Company also passed into the hands of a receiver, who brought an action against the incorporators of the Maine and New Brunswick Company to recover the $35,000 paid to them, which action was compromised upon payment of $35,000 by the incorporators of the Maine and New Brunswick Company.
In an action brought by the receiver of the Commercial Alliance Company against the directors of that company to .recover the- balance of the $35,000,-with interest, it was
Held, that the plaintiff was entitled to recover;
That, assuming that the good will of the Maine and New Brunswick Company was valuable, that company had no power to sell such good will and the Com- , mercial Alliance Company had no power to purchase it;
That the incorporators of the Maine and New Brunswick‘Company had no interest therein which could be the subject of á sale;
That the payment of the $35,000 to the incorporators of the Maine and New Brunswick Company was not only an ultra vires act, but that it constituted a
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waste of the funds of the Commercial Alliance Company which rendered those who consented to such waste liable to respond to the stockholders and creditors of the Commercial Alliance Company for the money thus wasted; That the fact that the directors of the Commercial Alliance Company acted in good faith, upon the supposition that the payment of the §35,0.00 would operate for the best interests of the Commercial Alliance Company, did not relieve them from liability;
That the release of the incorporators of the Maine and New Brunswick Company upon the payment of $35,000 to the plaintiff did not relieve the defendants from liability, as the defendants and the incorporators of the Maine and New Brunswick Company were not joint tort feasors;
That the fact that upon the settlement of an action brought by one of the defend- ' ants against the Commercial Alliance Company prior to the appointment of the plaintiff as receiver, releases were exchanged, did not operate to relieve any of the defendants from liability, especially as it did not appear that the execution of such release was authorized by the board of directors or the executive committee of the Commercial Alliance Company as required by one of its by laws;
That if the release had been so authorized it would be ineffective, as the directors of a corporation cannot waste the funds of a corporation and then relieve themselves from liability by a release granted by themselves or their co-directors.
A verdict contemplates the presence of both the court and a jury, and consequently the court has no power to directa verdict after the jury have been discharged.
Appeal by the plaintiff, William T. Gilbert, as receiver of Commercial-Alliance Life Insurance Company, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on the 13th day of July, 1901, upon the verdict of a jury rendered by direction of the court dismissing the plaintiff’s complaint.
Henry D. Hotchkiss, for the appellant, s? . "
. Michael H. Gardozo, for the respondent Ackerman.
Albert Stickney, for the respondents Finch and others.

This appeal is from a judgment dismissing the complaint entered on a verdict directed by the court. There is little or no dispute as to the material facts involved. The complaint alleges, and the evidence adduced upon the trial establishes, that the Commercial Alliance Insurance Company was incorporated in 1888 under the statutes of the State of New York, and that immediately following its incor

p. 40
poration it commenced, and thereafter continued, to do business until October, 1894, when the plaintiff was appointed receiver in an •action brought for that purpose by the Attorney-General of the State.; that on and prior to the 3d of May, 1893, the, defendants and other persons beyond the jurisdiction of the court were the directors of such company, and as such entered into negotiations with the surviving incorporators (ten in number) of the Maine and New Brunswick Insurance Company, a corporation organized under the laws of the State of Maine, for the jmrchase and control of the latter company by the former;' that such negotiations were finally consummated on the day last mentioned, when one Dunham, the president of the Commercial Alliance Company, acting in pursuance ■of the direction of the defendants and their associate directors, took from the funds of such company $35,000 and paid the same to the ten surviving incorporators of the Maine and New Brunswick Company, for “ a valuable consideration,” as expressed therein, and in connection with such bill of sale, Dunham and three other's - (all of whom were directors of the Commercial Alliance Company), received a transfer or assignment from such surviving incorporators, at the expressed consideration of $3,500 each, of “ all their right -title and interest-as corporator's, associates or otherwise, in said .Maine and New. Brunswick Insurance Company ; ” that simultaneously with the execution and delivery of such papers, under an agreement previously made, all of the officers and directors of the Maine -and New Brunswick Company resigned, and their places were filled by some of the defendants or persons acting for or on behalf of the Commercial Alliance Company; that on the 22d of July, 1893, the Maine and New Brunswick Company was judicially declared by the Supreme Judicial Court of Maine to be insolvent, and a receiver was appointed to wind up its affairs and distribute its-assets among its creditors; that shortly thereafter, in an action brought by this plaintiff in the United States Circuit Court for the district of Maine, -against the ten surviving incorporators of the Maine and New ' Brunswick Company, to recover the money paid to' them, aggregating $35,000, the plaintiff received as a compromise of such action the sum of $25,000, and this action was brought to recover the •difference between said sum and the $35;000 paid to them, together with interest thereon.' It also appeared that the defendant Miller,
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some time prior to February 10, 1894, brought an action against the Commercial Alliance Insurance Company, which was settled by the payment to him of $8,000, and thereupon mutual releases were exchanged, the consideration expressed therein being $1.

At the close of the trial each party moved for the direction of a verdict. The motions were denied and thereupon the counsel for the plaintiff asked that the issues of fact be submitted to the jury, which request was granted, the court, however, refusing (notwithstanding it was requested so to do by defendant’s counsel) to state to the jury the issues submitted. The jury were unable to agree upon a verdict and were by consent of all the parties discharged, after which the court directed a verdict for the defendants, to which an exception was taken by the plaintiff;

Before considering the merits involved in the appeal it may not be out of place to call attention to the fact that the practice pursued, so far as the same relates to or is involved in the direction of the verdict, was not only irregular, but was entirely unauthorized. A verdict contemplates, and necessarily involves, the presence of both court and a jury, and whenever it is directed it is absolutely necessary that both be present. There can, from the very nature of things, be no such thing as a verdict directed unless both the court and jury are present, because in such verdict there is involved an order by the court and an execution of the same by the jury. Once a jury has been discharged, the court has no power to direct a verdict, because there is not only no one to direct, but no one to execute the direction. Therefore, the exception taken to the direction in this case would, in and of itself, necessitate a reversal of the judgment appealed from, were it not for the fact that it was conceded upon the argument before us that the objection made and exception taken were not directed to the practice adopted; and in connection with this concession, a request was made on the part of counsel for both of the parties that the error be overlooked and the case decided upon the merits.

Passing, then, from this question to the merits, we are of the opinion that the judgment must be reversed. As already indicated, there is little or no conflict as to the facts. Upon the facts as hereinbefore stated, the real question is, whether the directors of an insurance company can take its property and assets and give them

p. 42
•away, in the belief and with the expectation that such gift will •ultimately benefit the company by bringing to it new business. That directors have no such power cannot be seriously questioned. The transaction by which $35,000 -in money was taken from the Commercial Company and paid to the surviving incorporators of the Maine and New Brunswick Company was not only an ultra vires act, but it constituted a waste of the funds- of the Commercial Company, and to such an extent that those who acquiesced in it or consented to it were liable to respond not only to the stockholders but to the creditors of the Commercial Company to the extent of the funds used. (Mason v. Henry, 152 N. Y. 529 .) What was done was not a purchase of property at all or even of the good will of a competing company.. The Maine Company had nothing which it could sell; it had no assets, and its good will, so far as value was concerned, was purely mythical, as evidenced by the fact that, within a few days after the consummation of the transaction with the Commercial, it passed into the hands of a receiver on the ground that it was insolvent; and, had it been otherwise, it had no 'more power to sell its good will than had the Commercial Company the power to buy it. But what was done was not even an attempted purchase of either the assets or good will of that company. The most charitable view that can be taken of the whole transaction is that the $3,500 paid to each of the surviving incorporators of that company was a gift, because there is no claim made that. they had anything to transfer, in return for which they permitted the control of the corporation. which they represented to-pass into the •hands of the persons representing the Commercial Alliance Company. The Maine and New Brunswick Company parted with no property, nor did the Commercial Company receive anything for the money paid. The new officers and directors-of the Maine and New Brunswick Company, substituted for those who had resigned, even had there been any property or assets of that company, could not have turned it over to or used it for the benefit of the Commercial Company. The Maine Company,. it will be remembered, was a mutual company. Its assets were not represented by* stock. Its officers and directors as such had no interest whatever in the company or its assets, except to manage the same for all the members. (Huntington v. Savings Bank, 96 U. S. 388 .) The defendants,
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therefore, were not authorized, and they had no right whatever, to use the funds of the Commercial Alliance Company in the manner in which they did, and, upon every principle applicable to the management of the business and affairs of a corporation, they must be held liable to make good the loss which was sustained.

Nor is the fact that they acted in good faith of the slightest importance or any excuse for what they did. It may be conceded, and it is undoubtedly true, that what the defendants did was done in good faith upon the supposition that their acts would ultimately turn out for the best interests of the Commercial Company. It is not difficult to see the object sought to be accomplished by the transaction. It was the destruction of the Maine and New Brunswick company, upon the supposition that, when destruction had finally taken place, out of its ruins would come disappointed policyholders, the majority of whom would be glad to surrender policies in that company and take new ones in the Commercial Company, for which the Commercial Company would receive the premiums, which would largely increase both its business and assets. But the directors, as indicated, had no power to use the funds of the Commercial Company for this purpose, and the courts, so far as we have been able to discover, never yet have sanctioned, but, on the contrary, have always condemned, this method of acquiring business. Once judicial sanction is given to it, it is not difficult to see how the funds of an insurance company might be used in a stock speculation, a mining scheme, or lost in many other ways which might be suggested. Good business methods forbid it, and the statutes of the State prohibit it.

But it is urged that the defendants cannot be held liable, since the release of the surviving incorporators of the Maine Company by the payment of $25,000 released them. This suggestion is based upon the assumption that the defendants and the incorporators of the Maine Company were joint tort feasors and, therefore, the release of one constituted the release of all. But they were not joint .tort feasors. The incorporators of the Maine Company had a right to resign their offices, if they so desired. The property of that corporation was not by that act either destroyed or injured to any extent. The presumption was that the persons who took their places would discharge their duties according to law and manage

p. 44
the business and affairs of the corporation in the interest of all the ■ parties interested therein. Nor was there any objection, so far as the Maine Company was concerned, to their receiving as a gift the money paid to them by the defendants in this action. But, inasmuch as the money paid belonged to the Commercial Company, it could reclaim the same, and for that purpose could maintain an action for money had and received, upon the theory that there was an implied obligation on their part to restore it to the true owner. (Mills v. Mills, 115 N. Y. 80 ; National Trust Co. v. Gleason, 77 id. 400.) And this seems to have been the theory upon which the action was brought against them, which they compromised by the t payment of $25,000.

Nor did the release given by the Commercial Company to the defendant Miller release the other defendants. No authority whatever was shown on the part of the officers of the Commercial Company, who executed the release, to do so. It is true Miller testified that he had a litigation with the Commercial Company, which was settled by-the payment to him of the sum of $8,000, and upon such settlement mutual releases were exchanged. But it must be borne in mind that he was at that time a director of the Commercial Company, and his resignation was contemporaneous with his release. The release is general in form, was executed by Dunham, the president, and Whitehead, the assistant secretary. One of the by-laws of the Commercial Company provided that “ no deed, instrument or contract of any description, excepting as provided in Article X, Section 2, purporting to have been made on behalf of the company,, and excepting in relation to the ordinary routine of the business of the company shall be valid unless authorized by the board of directors or the executive committee.” There is no evidence, whatever, nor is there a suggestion in the record, that the board of directors or the executive committee ever authorized the execution of this release. Nor do we think the board of directors or executive committee would have had the power, had they attempted to exercise it, to release Miller. By his act, in connection with others, the property pi the corporation had been wasted, and no act could have been done which would have released him or the others, except the restoration of the property to the corporation or it had been made good for the loss which it had sustained. If he could be relieved from, liability in

p. 45
the manner claimed, then it is not difficult to see how each one of the defendants could also have been released in a similar way. Directors cannot waste the funds of a corporation which they represent, and then relieve themselves from liability by a release granted by themselves or their co-directors.

At the close of the trial, therefore, the fact was uncontradicted that the defendants, as the directors of the Oommercial Alliance Life Insurance Company, had unlawfully used, to the damage of the stockholders and creditors of that company, $35,000; that only $25,000 had been recovered, and they were, therefore, in law, liable for the difference, together with interest thereon, and a verdict should have been directed against them for that sum.

The judgment appealed from, therefore, must be reversed, and a new trial ordered, with costs to the appellant to abide the event of the action.

Yan Brunt, P. J., O’Brien, Ingraham and Hatch, JJ., concurred.

Judgment reversed, new trial ordered, costs to appellant to abide event.

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