Kavanaugh v. Commonwealth Trust Co. — 45 Misc. 295

Majority

p. 295

Charles H. Kavanaugh, Who Sues on Behalf of Himself and All Other Stockholders of the Commonwealth Trust Co. of New York (formerly the Trust Co. of the Republic), Who Are Situated Similarly with Himself, Plaintiff, v. The Commonwealth Trust Co. of New York, Charles W. Wetmore and Charles F. Brooker, Impleaded with Others, Defendants.

(Supreme Court, Saratoga Trial Term,

November, 1904.)

Headnote

Corporation — Action brought by a.stockholder on its behalf — What facts as to the refusal of the corporation to sue must be alleged.

A stockholder of a corporation who brings an action on behalf of the corporation to redress a wrong done to the corporation must allege and prove that the corporation, after demand, has refused to bring the action. Such refusal may be express or implied. An express refusal may be established by statements or declarations

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of the corporation’s officers or by resolutions adopted by its board of directors. An implied refusal may be established by the course and conduct of the corporation in omitting or neglecting to do what it should have done.

A complaint in such an action, which, after setting forth a demand upon the corporation to bring the action, alleges “ But said Trust Company has wholly omitted and failed to bring said action and the plaintiff therefore brings the same,” is demurrable, in that, while it alleges omission and neglect to bring the action, it does not allege a refusal to do so.

Trial of demurrer to' the complaint by defendants Wet-more and Brooker. .

Edgar T. Brackett, for plaintiff.

Sullivan & Cromwell (Wm. J. Curtis, of counsel), for defendants Wetmore and Brooker.

This action is brought by the plaintiff as a stockholder in behalf of the defendant corporation to recover losses sustained by it because of the negligence of the individual defendants while acting as its directors. The defendants Wetmore and Brooker demur to the complaint oh the ground that it does not state facts sufficient to constitute a cause of action. The demurrer goes to the entire complaint, but the only question discussed by defendants in their brief, and argued at the bar of this court, was whether the allegation of refusal on the part of the corporation to bring the action is sufficient, and I shall limit my decision to that particular.

The complaint, after setting forth a demand upon the corporation to bring the action, alleges: “ But said Trust Company has wholly omitted and failed to bring said action and the plaintiff therefore brings the same.” The demurring defendants contend that this is not a sufficient allegation of refusal on the part of the company.

There are numerous expressions in published decisions of this court and of the Court of Appéals from which it may be inferred that a plaintiff in a case like this may «allege a refusal or an unreasonable neglect by the corporation as

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the basis of his right to bring the action; and a striking example of these is found in Flynn v. Brooklyn City R. R. Co., 158 N. Y. 493 , 508, where Judge Vann, speaking for the court, makes use of the following language: “ The right of action, however, belongs to the corporation, and should be brought by it as plaintiff, but when it will not bring the suit itself, an aggrieved stockholder, after due demand and a refusal, or unreasonable neglect to proceed, may bring it in his own name upon making the corporation a party defendant.” But I am of the opinion that it was never intended, by the use of this language, that a plaintiff may allege and prove less than a refusal. He must allege and prove that the corporation, after demand, has refused to bring the action. Such refusal may be -express or implied. Express refusal may be established by statements or declarations of the company’s officers or by resolutions adopted by its board of directors; and implied refusal by the course and conduct of the corporation, omitting or neglecting to do what it ought to have done.

Tested by this rule, the complaint herein is deficient. It alleges omission and neglect, but not refusal. The essential difference is one of intention. A refusal involves an intentional denial of the stockholder’s request; an omission or neglect does not necessarily contain any such element, but may be of such a character that an intention may be inferred therefrom. To plead neglect is not equivalent to pleading refusal.

I should regard the point raised by this demurrer as hypercritical were it not for the serious consideration given to it in the case of Leslie v. Lorillard, 31 Hun, 305 , where the question was quite similar to the one now under consideration. The allegation in that case was, I think, even stronger than the one here. The complaint there alleged: “ That said defendant has neglected to bring such action and threatens to continue to make the monthly payments provided for in such contract.”. This involved a neglect as to the past with a threat of continued negligence in the future, and might reasonably be construed as involving an intentional refusal on the part of the corporation to bring the action;

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nevertheless, the General Term of the First Department unanimously reversed the judgment, on the ground that the complaint did not allege a refusal on the part of the corporation to bring the action, the court quoting with approval the words of Mr. Justice Nelson in Memphis City v. Dean, 8 Wall. 73 , as follows: “ There must be a clear default, therefore, on their part, involving a breach of duty.”

I think the demurrer must be sustained, the plaintiff to plead over upon the usual terms if he so elects.

Demurrer sustained, plaintiff to plead over upon usual terms, if he so elects.

Cases cited

Flynn v. Brooklyn City Railroad 158 N. Y. 493 N.Y. 1899-04-18 at 508 p. 297