Clubb v. Cook

[1] From the form of relief demanded, as well as from the lack of any allegations in the complaint of any fraud, wrongdoing, or misappropriation by the individual defendant, it would appear that the pleader originally intended to sue under the provisions of section 90 of the General Corporation Law (Consol. Laws, c. 23 [formerly section 1781, Code of Civil Procedure]), which- permits an action to be maintained against one or more trustees, directors, managers, or other officers of a corporation to procure a judgment compelling the defendants to account for their official conduct, and compelling them to pay to the corporation any money found to be due. The plaintiff, however, now disclaims any intention of relying upon the statute referred to, as indeed she must do, because by section,91 of the General Corporation Law the only parties authorized to bring such an action are the Attorney General in behalf of the people of' the state, or a creditor of the corporation, a trustee, director, manager, or other officer of the corporation having a general superintendence of its concerns. The plaintiff is neither of these. She is obliged to fall back, therefore, in order to uphold her judgment, upon the right of a stockholder to resort to a court of equity, in the right of the corporation, to obtain relief for which the corporation itself ought to sue, but for some reason will not.

[2,3] Such actions are common, and the rules governing them are well understood. It is necessary, in order to maintain such an action at all, that the plaintiff allege: First, a good cause of action on behalf of the corporation; and, second, facts which authorize his intervention and the institution of his suit in behalf of his corporation. O’Connor v. Virginia Passenger & Power Co., 184 N. Y. 46 , 76 N. E. 1082 ; Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121 , 73 N. E. 562 . To justify such an action, there must be an allegation in the complaint, and to justify a judgment, there must be proof of some actual or threatened wrongdoing on 'the part of the defendants. What is required to be alleged and proven in such an action against directors or trustees is broadly, but definitely, stated in Hawes v. Oakland, 104 U. S. 450 , 26 L. Ed. 827 , as follows:

“We understand that doctrine to be that, to enable a stockholder in a corporation to sustain in a court of equity in his own name a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff, there must exist, as the foundation of the suit, some action or threatened action of the managing board of directors or trustees of the corporation, which is beyond the authority conferred on them by their charter or other source of organization; or such a fraudulent trans

action, completed or contemplated by the acting managers, in connection with some other party, or among themselves, or with other shareholders, as will result in the serious injury to the corporation, or to the interests oí the other shareholders; or where the board of directors, or a majority of them, are acting for their own interest in a manner destructive of the corporation itself, or of the rights of the other shareholders; or where the majority of shareholders themselves are oppressively and illegally pursuing a course, in the name of the corporation, which is in violation of the rights of the other shareholders, and which can only be restrained by the aid of a court of equity; possibly other cases may arise in which, to prevent irremedial injury, or a total failure of justice, the court would be justified in exercising its powers, but the foregoing may be regarded as an outline of the principles which govern this class of cases.”

The case from which the above quotation is taken has been frequently cited and followed, and may fairly be said to be a leading case upon the subject. Leslie v. Lorillard, 110 N. Y. 532 , 18 N. E. 363 , 1 L. R. A. 456 ; Flynn v. Brooklyn City R. R. Co., 158 N. Y. 493 , 53 N. E. 520 ; Hallenborg v. Greene, 66 App. Div. 592 , 73 N. Y. Supp. 403 ; Continental Securities Co. v. Belmont, 206 N. Y. 19 , 99 N. E. 138 .

[4] Turning now to the complaint in this action, it is notable that there is an entire absence of any allegation of fraud, misappropriation, or wrongdoing on the part of either of the individual defendants. It is not alleged that they, or either of them, owe any money to the defendant corporation, or have wasted or squandered its assets, or in any other way have done or threatened to do any act injurious to it or. its stockholders. Indeed the plaintiff, in her brief on this appeal, expressly disclaims any charge that wrongful profit has been made either by the defendant Cook individually or by the defendants Cook and Turner as copartners. The gravamen of the complaint, and the sole dereliction of duty charged against the individual defendants is that they failed to cause the corporation to keep what the plaintiff considers would be proper books of account, and that the defendants Cook and Turner as copartners failed to render what plaintiff thinks would have been proper accounts of their transactions in behalf of defendant corporation. The plaintiff also complains that Cook and Turner as copartners have refused to permit her to examine these copartnership books. The business of the defendant corporation was raising and dealing in coffee. As has been said, George D. Cook was the president, and the firm of George D. Cook & Co. managed the finances of the company, keeping the accounts in their own books under appropriate headings. From time to time the firm rendered to' the corporation accounts of its transactions in its behalf, in the shape of transcripts from the firm’s books. From these transcripts a set of books was made up by expert accountants employed by the company. It is not suggested that the books of Cook & Co. were not properly kept, and did not accurately state the transactions recorded therein, nor was it questioned that the transcripts furnished to the defendant corporation were accurate, although for some reason the trial court refused to permit proof of these facts to be made.

In our opinion the plaintiff wholly failed to allege or prove, and the court failed to find, any facts which would justify the affirmance of this judgment. The defendants as a firm did furnish reports of its

[5] Even if it might be assumed that the mere failure of the individual defendants to cause the corporation to keep proper books of account furnished a sufficient ground for a stockholder’s action (which we do not hold), the question whether such books were in fact kept should have been determined upon the trial, because if it appeared that such books of account had been kept this would be no basis for an interlocutory decree. Proof to establish this fact was offered on the trial, but, on plaintiff’s objection, was excluded. This was error even upon plaintiff’s theory of the case, but we do not rest one decision simply upon this error, but upon the broader ground that the complaint fails to state, and the proofs fail to establish, facts sufficient to constitute a cause of action.

The judgment appealed from must therefore be reversed, and the complaint dismissed, with costs to the appellants in this court and the court below. All concur.