Sage v. Culver — 24 N.Y.S. 514

Majority

p. 514

SAGE et al. v. CULVER et al.

(Supreme Court, General Term, Second Department.

July 28, 1893.)

Headnote

1. Corporations—Action by Stockholders—Pleading.

In an action by stockholders of a railroad company for an accounting, the complaint alleged that defendants were president and treasurer of the company, and had always controlled it; that the stock amounted to $500,000, and the railroad was mortgaged for $500,000; that afterwards part of the line was sold for $420,000; that defendants appropriated $250,000 of the company’s money to pay themselves for alleged advances for improvements which were not made until several years later; that the company has apparently done a prosperous business, but has never paid any dividends, though it has been in operation ¿bout 18 years; and that plaintiffs were refused any information about the affairs of the company, and were not allowed to see the books. Held, that the complaint charged defendants with misapplication of the funds of the company, and therefore stated a cause of action.

p. 515

2. Same—Action by Company.

Where corporate funds have been wasted by persons who obtained control of the corporation, and they still remain in control, a stockholder may sue without first demanding that an action be brought by the company.

Appeal from special term, Kings county.

Action by Henry W. Sage, Dean Sage, and William H. Sage against Andrew E. Culver, Allan C. Washington, and the Prospect Park & Coney Island Railroad Company, for a discovery of the affairs of the company, an accounting, and to enjoin defendants Culver and Washington from diverting the property of the company to their individual benefit. From an order sustaining a demurrer to the complaint, with leave to plaintiffs to amend, and from an interlocutory judgment entered thereon, plaintiffs appeal.

Reversed.

For former report, see 19 N. Y. Supp. 936 .

Argued before BARNARD, P. J., and DYKMAN and PRATT, JJ.

William C. De Witt, for appellants.

Wingate & Cullen, for respondents.

The Prospect Park & Coney Island Railroad Company was organized in 1874, and operates a railroad from the city of Brooklyn to Coney island. The defendant Culver is the president and the defendant Washington the treasurer thereof. The complaint states that in 1879 the capital stock was $500,000 in amount, of which the plaintiffs owned $50,000; that there then existed a first and only mortgage of $500,000; that in 1880 the capital stock was reduced by an' issue of income bonds to the extent of one-half the stock. In 1886 the company sold a part of its line for $420,000, secured by a mortgage due January 1, 1895. The defendants Culver and Washington then proposed to create a new mortgage on the part of the line wanted for $500,-000, and with the proceeds to pay a debt to defendants Culver and Washington, to pay the $80,000 needed with the $420,000 mortgage to pay in full the $500,000 first mortgage, and to leave the balance of $170,000 in the treasury of the company for improvements. $390,000 of bonds were issued under this project. The defendants Culver and Washington owned a large majority of the stock of the company, and have always controlled its management. The plaintiffs were opposed to the second mortgage of $500,000. The company has apparently done a prosperous business, which the plaintiffs believe to have been sufficient to pay dividends upon its stock, especially after the sale of the portion of its line for $420,000, but it has never paid a dividend on its stock, or any interest on its income bonds. The company leased a small road, built by the New York & Coney Island Railroad Company, of which the defendant Culver was president, and the defendant Washington the treasurer, for $10,000 a year, which did not cost more than $50,000. The defendant company has refused to give the plaintiffs information as to its management The company

p. 516

has refused to show its books to the plaintiffs. A new mortgage of $200,000 was authorized by the stockholders in 1891 for the purpose of paying off the floating debt. The company refuses to give any information about this floating debt. Culver and Washington state that the $250,000 debt which they paid themselves out of the treasury of the company was for a loan by them to the company for certain improvements which were not in fact made until several years after that date. Culver, Washington, and the plaintiffs own the entire stock and income bonds with the exception of a slight fraction, and Culver and Washington have the exclusive control of the road and its management. The complaint states a cause of action. While a minority stockholder, in the absense of waste, mismanagement, or fraud, has no individuil standing, the complaint does charge a general misapplication of the funds by two persons who have obtained control of the corporate management. That the company has done business sufficient to pay dividends, and it has not done so, this, of itself, would not be sufficient to make a cause of action; but the managers admit that they have taken $250,000 from the treasury for themselves for money loaned for improvements which were not then made, nor were they made for several years thereafter, and which were, in fact, paid out of the ordinary revenue of the company, so that the admission and averment assert a direct charge of misappropriating the proceeds of a loan which the company made under the management of the president and treasurer, and that there was no legal justification of the act. Assuming all the facts in the case in connection with this charge, there is a case made for an accounting. The minority stockholder should have the right to require a statement from the company. Robinson v. Smith, 3 Paige, 222. It is not necessary to demand that the company bring the action, as the company is still under the control of the alleged wrongdoers. Brinckerhoff v. Bostwick, 88 N. Y. 52 . The order sustaining the demurrer to the complaint and the interlocutory judgment therein should be reversed, and the demurrer overruled, with costs; the defendant to have the right to answer in 20 days on payment of costs of demurrer and of appeal. AE concur.

Cases cited

Brinckerhoff v. Bostwick 88 N. Y. 52 N.Y. 1882-02-07 p. 516