Brinckerhoff v. Bostwick

The complaint charges, among other things, that the defendants Bostwick and others, who were directors of the National Bank of JFishkill, neglected to perform their official duties as such directors, and negligently permitted the money, property and effects of the bank to be stolen, wasted and squandered. That they negligently permitted various-persons and corporations who were insolvent and irresponsible to overdraw their accounts to a large amount without security, and negligently permitted the money of the bank to be loaned to irresponsible persons, and corporations, without adequate security, whereby said money was lost; that they employed a cashier who was dishonest, unfaithful - and incompetent, all of which was known to them; that they neglected to take and keep good and sufficient security for the performance of the duties of said cashier, and of the president and other officers of the-bank, and that they so negligently and carelessly conducted its affairs that its entire capital, surplus, property and effects were lost and the stock rendered worthless, and the stockholders were rendered liable for a' large sum of money on account of the unpaid debts of the bank.

The plaintiff avers.that he was the holder of sixteen shares of the capital stock, and that, by reason of the negligence and misconduct- of said directors, he has, sustained damage to the amount of $3,200, and each of the stockholders has sustained damages to the amount of double the par value of the stock held by him.

The complaint' then sets out the default of the bank in not redeeming its circulating notes, and the appointment by the comptroller of the currency, in January, 1877, of the defendant Bostwick as receiver of the bank pursuant to the provisions of the National Banking Act. That such receiver duly qualified and has ever since acted and still continues to act as such' receiver, and that before the commencement of this action the

The action is brought by the plaintiff in his own behalf, and on behalf of all the other stockholders of the bank, and the judgment demanded is that the - damages which the bank and its stockholders have sustained may be ascertained, and that the defendants who were directors of the bank may be adjudged to pay such damages, and that the receiver may collect them for the benefit of the creditors and stockholders, .or that the plaintiff may recover his damages and costs, and that the other stockholders who may come in may have such judgment as they are entitled to, etc.

The receiver, the bank and the directors are joined as defendants.

The respondents demurred to the complaint on the ground of want of jurisdiction, improper joinder of parties, want of legal capacity to sue, and failure to show a cause of action.

The Supreme Court at General Term held in favor of the-plaintiff on the question of jurisdiction,- and the sufficiency of the statement of the cause of action but sustained the demurrer on the ground that the demand upon the receiver, and his refusal to bring an action against the delinquent directors, was insufficient to authorize the plaintiff to sue as a stockholder; that the receiver had no authority to prosecute except under the direction of the comptroller of the currency, and that in refusing to bring an action he acted in accordance with his duty, the court at the same time expressing the opinion that an improper refusal of the comptroller of the currency to prosecute and to direct the receiver to prosecute, would entitle the stockholders to sue in their own behalf, making the corporation á party defendant.

The defendants contend that the comptroller of the currency, and not the receiver, was the proper party to bring the action.

The causes of action set forth in the complaint are losses and misapplication of the funds of the bank through the negligence and misconduct of its directors. For these losses the bank, if still exercising its corporate functions, would have a claim upon the guilty directors which it could enforce, by action; but if it refused to prosecute, or if it still remained under the control of the very directors against whom the action should be brought, the stockholders would ■ have a standing in a court of equity to sue in their own names, making the corporation a party defendant. (Robinson v. Smith, 3 Paige, 222, 233; Greaves v. Gouge, 69 N. Y. 154 ; Ang. & A. on Corp., § 310; see review of cases in Heath v. Erie Railway Co., 8 Blatchf. 347 , 393.)

Section 5234 of • the United States Revised Statutes provides that upon the appointment of a receiver by the comptroller, such receiver shall, under the direction of the comptroller, take possession of the books, etc., of the association, and collect all debts, dues, and claims belonging to it, .and pay the money collected by him to the treasurer of the United States. The receiver is the only person authorized by the act to collect dues and claims belonging to the bank. Whether special instructions from the comptroller to the receiver are necessary to enable the receiver to collect or sue for each particular claim, it is not very material, in our view of the case, to inquire. It is sufficient for all present purposes to show that no person but the receiver is empowered by the act, or can be directed by the comptroller to collect claims belonging to the bank. That the claims set out in the complaint belonged to the bank and could have been enforced by it but for the receivership is too plain to require argument.

“ And in cases of such violation, every director who participated in, or assented to the same, shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person shall have sustained in consequence of such violation.”

These provisions are evidently intended to apply to violations by these corporations of the law under which they are organized, and to subject them to the forfeiture of their corporate franchises upon such violations being established by the judgment of a court of the United States. Being organized under an act of Congress, the jurisdiction to declare á forfeiture of their franchises is very appropriately vested exclusively in the courts of the United States, and the comptroller of the currency is designated as the officer who shall prosecute for the purpose of having such forfeiture adjudged. It would of course be very inappropriate that such a proceeding should be instituted by a receiver who has only to deal with the assets of the bank, and the requirement that the violation should be adjudged by a court of the United States, at the suit of the comptroller, is, by the terms of the section, made essential “ before the association shall be declared dissolved,” but there is nothing in the act which renders it essential for any other purpose; and it is further to be observed that this is the only provision of the act which authorizes the comptroller to institute any action in relation to the affairs of a National bank.

The liability of the directors of corporations for violations of their duty or breaches of the trust committed to them, and the jurisdiction of courts of equity to afford redress to the corporation, and in proper cases to its shareholders, for such wrongs exist independently of any statute. By the Bevised Statutes of New York (2 B. S. 462), it is declared that the chancellor has jurisdiction over directors, managers, and other trustees, and officers of corporations, to compel them to account for their official conduct in the.management and disposition of the funds and property committed to their charge, and to compel pay

The action to recover such losses, as before observed, should in general be brought in the name of the corporation, but if it refuses to prosecute, the stockholders, who are the real parties in interest, will be permitted to sue in their own names, making the corporation a defendant ( 69 N. Y. 154 ). And that course of proceeding is also allowed if it appears that the cor- , poration is still under the control of those who must be made the defendants in the suit. (See Butts v. Wood, 37 N. Y. 317 ; Robinson v. Smith, 3 Paige, 222.) In such cases a demand upon the corporation to bring the suit would be manifestly futile and unnecessary. A suit prosecuted under the direction and control of , the very parties against whom the misconduct is alleged, and a recovery is sought, would scarcely afford to the shareholders the remedy to which they are entitled, and the

In the present case the corporation cannot sue, because all its rights of action have been transferred by operation of law to the receiver. He certainly is not a proper person to whom to intrust the conduct of the action, even did he consent to institute it, or should the comptroller of the currency direct him so to do, for he is one of the parties charged with misconduct and against whom a remedy is sought. It necessarily follows that the shareholders must be permitted to sue in their own names,- or the wrongs complained of must go without redress, and substantial rights be sacrificed to a mere matter of form. The shareholders are the parties whose interests are involved in the proceeding. If conducted in the name of the corporation or the receiver, it would be as their representative and for their benefit; and when, as in this case, sufficient reasons are shown why it cannot be effectually prosecuted in that form, the right of the shareholders to sue in their own names is sanctioned both by principle and precedent.

Where the shareholders are numerous, the suit may be brought by one or more in behalf of all. (Butts v. Wood, 37 N. Y. 317 ; Robinson v. Smith, 3 Paige, 222; Hichens v. Congreve, 4 Russ. 562 ; 8 Blatchf. 347 .)

' The jurisdiction of the State court to entertain the action is also challenged by the demurrer. The right of action is not in our opinion derived from the act of Congress, but depends upon general principles of equity; but in any aspect of the case the State courts have concurrent jurisdiction, unless exclusive jurisdiction has been conferred upon the United States courts. (Claflin v. Houseman, 3 Otto, 130; Robinson v. Nat. Bk. of Newberne, 81 N. Y. 385 ; National Bank of Gloversville v. Wells, 79 id. 498 , affirmed in the Supreme Court

The bank was a proper and even a necessary party defendant. (R obinson v. Smith, 3 Paige, 222.) It continued to be a corporation, notwithstanding the appointment of a receiver, and the receiver may bring actions in its name. (Pahquioque Bk. v. Bethel Bk., 36 Conn. 325 ; 8 Wall. 506 , supra Green v. Walkill Nat. Bh., 7 Hun, 63 ; City of Lexington v. Butler, 14 Wall. 283 ; Bank v. Kennedy, 17 id. 19.) The receiver was also a necessary party, as it was through him that the amount which might be adjudged against the directors was to be collected and paid over. The presence of both of these parties was necessary to a final determination of the controversy.

We entertain no doubt of the sufficiency of the allegations of the complaint to constitute a cause of action against the defendants who are sued as directors. The rule of liability in such cases is well stated by Chancellor Walworth in Robinson

The judgment appealed from should by reversed and judgment rendered for the plaintiff on the demurrer, with costs, with leave to the defendants to withdraw the demurrer within thirty days on payment of costs in this court, and in the Supreme Court, and to answer the complaint.

All concur.

Judgment accordingly.