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Stromeyer v. Combes

15 Daly (N.Y.) 29 Court N.Y.C.P. Decision date 1888-09-13 English

Delivered by Larremore, Ch. J.

Contents

Majority

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Indiana V. Stromeyer, Plaintiff, against R. Carman Combes, Defendant.
[Special Term.]
(Decided September 13th, 1888.)

Headnote

The rule that an action against an officer of a corporation, for misappropriation of corporate funds, or for damages for waste or destruction of corporate property, through misfeasance in office or violation of duty, cannot be brought by a stockholder, unless the corporation refuses to sue, and in case of such refusal the corporation must be made a defendant, is not affected by the provision of section 1782 of the Code of Civil
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Procedure, which authorizes actions for such purposes “ by a creditor of the corporation, or by a trustee, director, manager, or other officer of the corporation, having a general superintendence of its concerns.” Nor does the provision of section 452 of the Code that “ the court may determine the controversy, as between the parties before it, where it can do so without prejudice to the rights of others, or by saving their rights,” apply to such an action, brought by a stockholder, in which the corporation is not made a party.
Neither can such an action by a stockholder against an officer of the corporation, for damages for ah alleged fraudulent disposition of property by an instrument in writing signed by the defendant individually, be maintained as an action in tort against an individual acting solely on his own responsibility; since, if the defendant was not acting in an official capacity, his act was nugatory.
Hearing on demurrer to a complaint.
The facts are stated in .the opinion.
E. T. Bullard, for the demurrer.
George Percy Howe, opposed.

The complaintalleges as follows: That in May, 1882, the plaintiff was, and now is, the sole owner of 400 shares of capital stock of the Pennsylvania and Western Railroad Company, of which R. Carman Combes was president; that an agreement was made May 18th, 1882, by Combes, in his own right and as attorney in fact for certain of the stockholders, with one S. R. Peale, which recited a previous contract of January 7th, 1882, with John C. Campbell, to construct and equip seventy miles of said road, and that Campbell had assigned his interest in the contract to the Franklin Improvement Company; that the parties of the first part to the agreement of May 18th, 1882, owned a majority of the stock of both companies, which they agreed to convey to Peale free from all debts or incumbrances, and also agreed to deposit with the Central Trust Company of New York certificates of shares of the capital stock of both corporations, accompanied by an assignment of the same to Peale, with all muniments of ownership, to be held by said trust

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company in escrow, and to be delivered to Peale when he had complied with the terms of his contract; that the com tract with Campbell was to be rescinded at the option of Peale. The obligation of Peale under this contract was mainly the payment, upon the completion of the road, in money and in first mortgage bonds of the Pennsylvania Western Railroad Company, to the parties entitled thereto, the amounts to which they were respectively entitled under such contract.

The complaint further alleges: That plaintiff’s interest in the Pennsylvania and Western Railroad Company under said contract is of the value of $28,040.50; that on August 7th, 1882, the defendant, without the knowledge, consent, or authority of the plaintiff and the stockholders of the company, falsely and fraudulently entered into an agreement with Peale, whereby said contract of May 18th, 1882, was rendered null and void, and the plaintiff thereby was deprived of and prevented from realizing and receiving her interest in the contract of May 18th, 1882.

■ The contract of August 7th, 1882, the alleged ground of fraud, after reciting that the counsel of Peale has doubts about the authority of the Pennsylvania and Western Railroad Company to locate and construct its railroad through certain counties of Pennsylvania, and it being desired to judicially determine that question, agreed that the time for the filing of the bond of $350,000 named in the first contract should be extended until the question in dispute should be judicially decided in favor of the Pennsylvania and Western Railroad Company; that as a means for raising that question, Peale and those acting with him might proceed under the general railroad law of Pennsylvania to lay out a road upon a previously prescribed line, and there begin to locate and construct such road, and that the Pennsylvania and Western Railroad Company would proceed to construct its road at a different point upon such prescribed line, when the said new organization might file its bill and challenge the right of the Pennsylvania and Western Railroad Company to occupy such prescribed location or to build such railroad. It is also pro

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vided, in such later agreement, that if the question of the right of location shall be adverse to the Pennsylvania and Western Railroad Company, Peale shall still have the option of its franchise for ninety days, and may comply with the terms of the foregoing contract. If he did not so elect, “ the route so occupied, and the papers and surveys, and right of way thereof, shall be the property of said Peale, and he and the said new organization shall not be disturbed in the occupancy of said route by the Pennsylvania and Western Railroad Company, and the sum of $8,500, now in possession of R. Carman Combes, shall be retained by him in full compensation for the same.”

This agreement was signed by Combes individually, and not as president of the company, or as trustee or attorney for the stockholders.

The defendant demurs to the complaint upon the following grounds: First. That the complaint does not state facts sufficient to constitute a cause of action. Second. That there is a defect of parties, because the Pennsylvania and Western Railroad Company, mentioned in the complaint, is not made either plaintiff or defendant.

It is quite evident that the preparation of the original contract in controversy was not the result of professional skill or legal ingenuity. For what purpose the sum of $8,500 was paid and credited is quite mysterious and • unsatisfactory. The pleader, however, was obliged to accept the statement of the contracting parties, and resort must be had to the last clause of the supplemental agreement, set forth in the complaint, for the information that the sum last mentioned was a payment on account of the contract of May 18th, 1882.

The only claim asserted by plaintiff in the complaint is in her capacity of stockholder of the Pennsylvania and Western Railroad Company. As such, and in her own name, she insists that the defendant is individually liable for the fraudulent and illegal conversion and disposition of her property by reason of the existence of the contract of August 7th, 1882. If that contract is illegal, its invalidity can be shown when an attempt is made to enforce it, or the plaintiff and those

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having a like interest may, by proper judicial proceedings, procure its rescission. Even if the plaintiff had the legal right to sue defendant, the mere allegation that the stock had become valueless would not be a sufficient averment of damage. It has been held that in a stockholder’s action of this character, the plaintiff must show damages sustained beyond the intrinsic value of the stock, which may have been deteriorated or destroyed by the removal or destruction of the company’s assets.

But there is a more fundamental objection to this complaint. It has been established by a long line of authorities that an action against an officer of a corporation, for misappropriation of corporation funds, or for damages for waste or destruction of corporation property, through misfeasance in office or violation of duty, must be brought in the name of the corporation, unless it refuses, and that in case of such refusal, a stockholder may sue, but the corporation must be made defendant. ( Allen v. N. J. Southern R. Co., 49 How. Pr. 14 ; Gardner v. Pollard, 10 Bosw. 674 ; Smith v. Rathbun, 66 Barb. 402 ; Dinsmore v. Atlantic, &c., R. Co., 46 How. Pr. 193 ; Greaves v. Gouge, 54 How. Pr. 272 ).

If it be true that some of such .decisions were made before the enactment of section 1782 of the Code of Civil Procedure, I still cannot see how the language of that section extends the former rights of stockholders. They are not mentioned in it by name, and as far as it confers any power for their benefit, it grants it to an officer of the corporation or one having a general superintendence of its concerns, who is to sue for the general good of all parties in interest. The case at bar is a stockholder’s action, and it does not appear that the corporation has refused to bring it, nor has such corporation been made a party defendant. These are fatal defects.

Section 452 of the Code of Civil Procedure is not applicable to an action of this nature, and the authorities relied upon will not sustain it. In Hale v. Omaha Nat. Bank ( 49 N. Y. 626 ), it was held that, under a covenant in a lease that the lessors should have a lien for rent on hotel furniture, the plaintiff might enforce an equitable lien upon the proceeds of such

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property which had been lost by the wrongful acts of the defendant. Penman v. Slocum ( 41 N. Y. 53 ), decides that an action may be maintained upon an individual contract to pay the plaintiff and another a certain proportion of the proceeds of a sale, and that in such a case the defendant must be regarded as a quasi trustee and bound to respond in a claim to establish such trust' and declare the plaintiff’s right. Wills v. Simmonds ( 8 Hun 189 ), holds that one partner may sue another partner for a violation of an express covenant in the copartnership agreement. In Hitchcock v. Linsly ( 17 Hun 556 ), it was held that, the defendant’s account as an executor having been passed, and it having been adjudged by the surrogate that he had $14,538.33 for the benefit of the plaintiff and her two infant sisters, the plaintiff could sustain an action for the recovery of her one-third interest without joining her sisters. It would thus appear that, where an individual liability has been fixed by contract or by operation of law, the party in whose favor such individual right exists may enforce it, irrespective of the lights of other parties, and this is the evident intention of section 452 of the Code. In the case now under consideration, the plaintiff has an interest in common with every other stockholder of the Pennsylvania and Western Railroad Company, against which the alleged fraud has been perpetrated, and the damages for such alleged fraudulent act (if any), can only be recovered, according to the authorities above cited, in an action, either by the corporation or by an officer thereof, or in an action to which the corporation is a defendant, if it has refused to become the plaintiff.

■ It is not necessary for me to decide whether section 1782 of the Code, providing for an action by an officer of the corporation, supersedes the former rule, established by adjudications, and providing for such suit in the name of the corporation itself, or by a stockholder, if the corporation refuses. I may say, however, that I cannot perceive wherein the statutory rehiedy is inconsistent with the earlier common law one, and why they may not both be considered as still existing and concurrent. But under neither rule, according to the facts alleged in the complaint, would the plaintiff as a stockholder be authorized to maintain this action.

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But plaintiff’s counsel further argues that this is an action in tort against an individual acting solely on his own responsibility, because “ the supplemental contract causing plaintiff’s loss was signed by Combes individually, not even as trustee.” The answer to this contention is very obvious and simple. Whatever damage of any kind the plaintiff sustained was occasioned by reason of defendant’s acting in an official capacity. The mere fact that he signed as an individual would not affect the question, if in reality he was a trustee, and had the power and intended to act as such. This could be shown aliunde. If he was not acting in an official capacity, his act would have been nugatory—no more valid for any purpose than the unauthorized act of a mere stockholder, or an utter stranger to the corporation. ' If his act was nugatory, it certainly could not have been a source of damage to any person. Unless, therefore, defendant was acting in an official capacity, no cause of action exists against him, and for reasons above given plaintiff cannot reach him in his official capacity under the present complaint.

The demurrer is sustained, and the defendant is entitled to judgment thereon, with costs, with leave, however, to the plaintiff to amend on payment of costs.

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