Leslie v. Lorillard — 18 N.Y. St. Rep. 520

Majority

p. 520

John A. Leslie, Resp’t, v. Jacob Lorillard et al., Impleaded with others, App’lts.^[1]

(Court of Appeals,

Filed October 16, 1888.)

Headnote

1. Contract in restraint of trade—When court will not interfere WITH.

Where the provisions of agreements in restraint of competition tend beyond measures for self protection and threaten the public good in a. distinctly appreciable manner, they should not be sustained. The proof of danger to the public interests, however, should rest on evident grounds, and courts should refrain from the exercise of their equitable powers in interfering with and restraining the conduct of the affairs of individuals, or of corporations, unless their conduct in some tangible form, threatens, the welfare of the public.

3. Same—When not void.

Ho contracts are void as being in general restraint of trade, where they operate simply to prevent a party from engaging or competing in the same business. The agreement in question in this case, removed a business rival whose competition was deemed injurious to the success or maintainance of the business of the Old Dominion Company, and could not be considered objectionable on the ground that they restrained competition.

3. Ultra vires—What contracts are—When plea will not prevail.

The contracts of corporations are ultra vires when they involve some adventure or undertaking not within the scope of their charter which is their rule of corporate action. The plea of ultra vires will not prevail when it would not advance justice, but on the contrary would accomplish legal wrong.

4. Same—When plea will prevail—Rules.

In suits between a corporation and strangers dealing with it, the question is whether the act is one the corporation is not authorized to perform under any circumstances, or one that it may perform for some purpose, or under certain conditions. In the first case, it is ultra vires, and there

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can be no recovery. In the second case, the issue will turn upon whether the party dealing with it is aware of the intention to perform the act for unauthorized purposes, or whether the attendant circumstances justify its making and its performance.

5. Corporation—Actions by stockholders.

In actions by stockholdc rs, which assail the acts of the directors or trustees, courts will not interfere, unless the powers have been illegally or unconscientiously executed; or unless it be made to appear that the acts were fraudulent or collusive, and destructive to the rights of stockholders.

6. Same—Courts will not interfere where the directors err in judgment.

Mere errors of judgment are not sufficient as grounds for equity interference, for the powers of those entrusted with the corporate management are largely discretionary.

7. Same—When Stockholders have right of action.

A stockholder has the right to complain of any diversion of the capital and assets of a corporation to purposes not authorized by the charter, and to arrest by suit an unauthorized course of dealings which result in such diversion.

8. Same—Single stockholder can maintain action in equity.

The powers of a court of equity may be put in motion at the instance of a single stockholder, if he can show that the corporation is employing its statutory powers for the accomplishment of purposes not within the scope of its institution.

9. Same—When single stockholder can maintain an action founded ON the right of action existing in the corporation itself.

To enable a stockholder in a corporation to sustain, in a court of equity, in his own name, a suit founded on the right of action existing in a corporation itself, there must exist, as a foundation for 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 sources of organization, for such a fraudulent transaction, completed or contemplated by the acting managers in connection with some other party, or among themselves, or with other stockholders, as will result in serious injury to the corporation or the interests of the other shareholders; or where the board of directors, or a majority of them, are acting for their own interest in a manner destructive to the corporation itself, or of the rights of other stockholders. Following Hawes v. Oakland, 101 U S„ 450.

10. Same—Officers bound to carry out lawful contracts made by CORPORATION TO RESTRAIN COMPETITION.

The agreements in this case (made to restrain competition) were within the power of the corporation to make, and if they were free from the taint of fraud and were not procured to be made by some collusion or conspiracy, they were not ultra vires or assailable on the ground of public policy. They came within the discretionary powers of the board of managers' to make in the interests of the corporation, and they are binding upon the company, and constitute an obligation which the officers must discharge.

11. Same—Power of officers.

Within the limits of the chartered authority the officers of a corporation have the fullest power to regulate the concerns of the company according to their best judgment The powers conferred by the charter cannot be transcended by any considerations of expediency which they suppose may result to the stockholders from an act not within the scope of their authority.

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12. Fraud—Equity has power to restrain.

In cases of fraud, or where the charge is of conspiracy or fraudulent combination, equity has concurrent jurisdiction with the law, and will restrain, but in every case the exercise of jurisdiction in equity rests in the sound discretion of the court, and depends on the especial circumstance» disclosed.

Demurrer to complaint by defendants Lorillard and the Lorillard Steamship Company.

The plaintiff is a stockholder of the defendant, the Old-Dominion Steamship Company of Delaware. In the year 1873 the Old Dominion Steamship Company of New York was a corporation organized under the laws of New York, and was engaged in the business of running a line of steamships between the port of New York and certain ports in the state of Virginia. The defendant, the Lorillard Steamship Company, was also a New York corporation organized for the business of navigating the ocean by steamships. The defendant Lorillard was a director and the president-of the Lorillard company and had entire control of it; the other directors, except one who was a brother-in-law, being his clerks and employees.

The complaint charges that in and prior to the summer of 1873, said Lorillard “for the purpose of extorting large sums-of money from The Old Dominion Steamship Company of. New York, stated to the officers of said corporation that the said Lorillard Steamship Company intended to put on and run a line of Steamships between the ports above mentioned, in opposition to the steamships of said Old Dominion Steamship Company; and, to deceive the officers of said company and cause them to believe that a formidable opposition, would be established against said company, said Lorillard caused said Lorillard Steamship Company to lease docks at-Norfolk and other places, and to hire agents and servants at-. different points, and, in or about the month of October, 1873, said Lorillard caused said Lorillard Steamship Company to put on and run a line of steamships between said-ports in opposition to said Old Dominion Steamship Company of New York;” that said Lorillard continued to run. his steamships at great loss, and at his own expense, until his efforts were successful in deceiving the officers of the Old Dominion Company into the belief that a powerful opposition line had been established, and, in January, 1874, an agreement running between the Old Dominion Company . and Lorillard and his company, was signed by the president of each company, and by Lorillard for himself, by the terms-of which, in consideration of a monthly payment to him, Lorillard and his company, agreed to discontinue running their vessels, or any others, between the ports mentioned; and that they would not charter or sell the vessels to any other company or persons to be used on that route, and would not become in any way, interested in the running of

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steamships between those places; that in February, 1875, the defendant, The Old Dominion Steamship Company of Delaware, was formed under the laws of that state, and succeeded to the business of the Hew York Company, and “became vested with the property of said last named company, which was duly conveyed and assigned to it, and subjected to the liabilities and contracts of said company;” that this new company continued making payments to Lorillard, under the contract mentioned, until February 1878, when disputes arose between the various parties, and a new contract was entered into in October, 1878; that by this latter contract the previous contract was cancelled, and in consideration of the payment of a gross sum of money, and of certain monthly payments, to be continued through five years, from February, 1879, Lorillard and his company again agreed not to run or to be in any way interested in the running of steamships between the ports named; that the Delaware Company made all the payments called for under the second agreement up to August 1881, when further payment of the monthly subsidies was enjoined in an action brought by this plaintiff,

Plaintiff alleges that prior to the commencement of this action, and in February 1884, he requested the Delaware Steamship Company to pay no more moneys and to commence an action for the cancellation of the contract and for the recovery back of the moneys paid under the contracts. This demand was in a letter and the reply to it contains a resolution of the board of directors refusing to take the action requested.

Plaintiff also alleges the commencement of an action in February, 1884, by Lorillard against the Delaware Company to recover the monthly payments payable under the contract from and after August 1881, and that the Delaware Company did not intend to defend it. The relief demanded is an injunction against the Delaware Company’s making any payments under the contract; against Lorillard from prosecuting his action; the cancellation of the contract and the re-payment by Lorillard of all moneys received. The demurrer having been overruled at the Westchester county special term of the supreme court and its decision having been affirmed at general term of the supreme court second department, defendants Lorillard and the Lorillard Steamship Company appealed to this court.

Asa Bird Gardiner, for app’lts; Thos. S. Moore, for resp’t.

The defendants Lorillard and the Lorillard Steamship Company have demurred to the complaint on the ground that it did not state facts sufficient to constitute a cause of action.

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We are thus required to examine this pleading and to see-whether, allowing to its averments all the force and truth such a ground of demurrer concedes, it may be sustained as-the foundation of an action for equitable relief.

Our decision of the question will necessarily turn upon the validity of the contracts which are set forth. An extended discussion of the principles controlling the making and enforcement of corporate contracts is unnecessary. By frequent adjudications, certain principles are well settled and have become familiar.

The contracts of corporations are said to be ultra vires when they involve some adventure or undertaking, not within the scope of their charter, which is their rule of corporate action.

In the granting of charters, the legislature is presumed" to have had in view the public interest; and public policy is-(as the interest of stockholders ought to be) concerned in the restriction of corporations within chartered limits, and a departure therefrom is only deemed excusable when it cannot result in prejudice to the public or to the stockholders. As artificial creations, they have no powers or faculties, except those with which they were endowed when created; and when, as is frequently the case, they act in excess of their powers, the question will be, is the act prohibited as prejudicial to some public interest, or is it an act, not unlawful in that sense, but prejudicial to the stockholders! The rule, however, is well settled that the plea of ultravires should nqt prevail when it would not advance justice, but on the contrary would accomplish legal wrong. In suits between the corporation and strangers dealing with it, the question is whether the act is one the corporation is not-authorized to perform under any circumstances; or one that it may perform for some purposes, or under certain conditions. In the first case it is ultra vires, and there can be no recovery; because the party dealing with the corporation is bound to know from the law of its existence that it has no power to perform it. In the second case, the issue will turn upon whether the party dealing with it is aware of the intention to perform the act for some unauthorized purpose; or whether the attendant circumstances justify its-making and its performance. In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere -unless the powers have been illegally or unconscientiously executed; or unless it be made to appear that the acts were fraudulent or collusive and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as grounds for equity interference, for the powers of those intrusted with corporate management are largely discretionary. Testing by these rules the-

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case made by plaintiff in his complaint in approaching the consideration of that pleading, we find that the only respect in which the contracts in question could be viewed as prejudicial to public interests and therefore become the subject of judicial condemnation, as against public policy, would be that they were in restraint of competition and tended to create a monopoly.

The tendency of modem thought and of the decisions, however, has been no longer to uphold in its strictness the doctrine which formerly prevailed in respect of agreements in restraint of trade. The severity with which such agreements were at first treated became more and more relaxed by exceptions and qualifications. This change was gradual and may be considered, perhaps, as due mainly to the-growth and spread of the industrial activities of the world,, and to enlarged commercial facilities, which render such, agreements less dangerous as tending to create monopolies. The earlier doctrine, of course, obtained in respect of agreements between individuals. The limitation which became imposed was that the agreement should operate as to a locality and not as to the whole land. In later times the danger in such agreements seems only really to exist when corporations are parties to them ; for their means and strength would better enable them to buy off rivalry and to create monopolies.

The object of government, as interpreted by the judges, was not to interfere with the free right of man to dispose of his property or of his labor ; it was to guard society, of which he was a member, from the injurious consequences of his agreement; whether they would arise from his own improvidence in bargaining away his means of gaining a livelihood, or in the deprivation to society of the advantages of competition in skilled labor.

At the present day there is not that danger, or, at least, it does not seem to exist to an appreciable extent; except, possibly, as suggested in the case of corporations. In their supervision and in their restriction within the limits of their chartered powers, the government and the public are directly interested. Corporations are great engines for the promotion of the public convenience and for the development of public wealth, and so long as they are conducted for the purposes for which organized, they are a public benefit.; but if allowed to engage without supervision, in subjects of enterprise foreign to their charters, or if permitted unrestrainedly to control and monopolize the avenues to that industry in which they are engaged, they become a public menace, against which public policy and statutes design protection.

Where, therefore, the provisions of agreements in re

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straint of competition tend beyond measures for self protection and threaten the public good in a distinctly appreciable manner, they should, not be sustained. The apprehension of danger to the public interests, however, should rest on evident grounds, and courts should refrain from the exercise of their equitable powers in interfering with and restraining the conduct of the affairs of individuals or of corporations, unless their conduct, in some tangible form, threatens the welfare of the public. The doctrine relating to contract's in restraint of trade has been elaborately discussed in a careful opinion of Andrews, J:, in the recent case of The Diamond Match Company v. Roeber ( 106 N. Y., 473 ; 11 N. Y. State Rep., 47). Under the authority of that case, it may be said that no contracts are void as being in general restraint of trade, where they operate simply to prevent a party from engaging or competing in the same business. It is there said (p. 483): “ To the extent that the contract prevents the vendor from carrying on the particular trade, it deprives the community of any benefit it might derive from his entering into competition. But the business is open to all others, and there is little danger that the public will suffer harm from lack of per sons to engage in a profitable industry. Such contracts do not create monopolies. They confer no special or exclusive privileges.”

Under the doctrine of that case, it is difficult to see how these contracts which are complained of here are open to the objection suggested by counsel. Regarded only in the light of what they tended to effect, these agreements removed a business rival, whose competition may have been deemed dangerous to the success or maintenance of the business of the Old Dominion O.ompany. They could not, of course, exclude all competition in the business; but could in that particular case.

How, then, is the result different from the simpler case , of the sale by an individual of his business and his right to conduct it in a particular part of the land. The doctrine . held by this court in Diamond Match Co. v. Roeber (supra) should control in the case at bar, and these contracts, „ therefore, cannot be considered objectionable on the ground that they restrained competition.

Whether competition in this particular business would be a public benefaction, or its restraint a source of prejudice, we are unable, of course, to judge. I do not think that competition is invariably a public benefaction, for it may be carried on to such a degree as to become a general evil. The conclusion at which we have arrived as to these contracts would seem to dispose of this case and make further consideration useless; for the plaintiff makes them the

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basis of his action. The relief he has sought is the prevention of a misappropriation of corporate funds by the officers of the company and the annulment of these contracts as obtained by deception.

We do not question the undoubted right of stockholders to complain of any diversion of the capital and assets to purposes not authorized by the charter and to arrest by suit an unauthorized course of dealing which results in such diversion. The powers of a court of equity may be put in motion at the instance of a single stockholder, if he can show that the corporation are employing their statutory powers for the accomplishment of purposes not within the scope of their institution. Angelí & Ames on Corporations, § 393. But this is not such a case. The contracts were within the power of the corporation to make, and if they were free from the taint of fraud and were not procured to-be made by some collusion or conspiracy, then they are-binding upon the company and constitute an obligation,, which the officers must discharge.

If this is a controversy between a stockholder and directors, or other shareholders, who may be acting distinctively towards the property in which he has an interest, it is one with which these defendants are not concerned and into which they should not be brought. They dealt with the directors, in respect of matters which were within the discretionary powers of a board of management.

If it were charged that some fraud was practiced by Lorillard, to which the officers of the Hew York Company were parties and that they had colluded with him, the equitable jurisdiction of the court might be invoked by the plaintiff; for fraud vitiates all contracts and it is a general rule that in cases of fraud, or where the charge is of conspiracy or of a fraudulent combination, equity has concurrent jurisdiction with the law and will give redress. But in every case the exercise of jurisdiction in equity rests in the sound discretion of the court and depends upon the special circumstances disclosed. McHenry v. Hazard, 45 N. Y., 580 ; Dodge v. Woolsey, 18 How. U. S., 331.

In Hawes v. Oakland ( 104 U. S., 450 ), Miller, J., asserted the doctrine established in the case of Dodge v. Woolsey 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, there must exist as a foundation for 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 transaction, completed or contemplated by the acting managers in connection with some other party, or among themselves, or with other shareholders, as will result in serious injury to the

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corporation, or to the interests of 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. * * *” We concur in the adoption of these principles for application to such actions. But it is not made to appear here that there was any collusion between the officers of the New York Company and these defendants, and as to the second contract, which was made between these defendants and the Delaware Company, of which plaintiff: was a stockholder, there is no allegation whatever of any deception or collusion. We think that as lliese contracts were not ultra vires or assailable on grounds of public policy, that they were such as came within the discretionary powers of the board of management to make in the interests of the corporation. Within the limits of the chartered authority the officers of a corporation have the fullest power to regulate' the concerns of the company according to their best judgment.

It is true that the powers conferred upon its agents by the charter of a corporation cannot be transcended by any considerations of expediency which they suppose may result to the stockholders from an act not within the scope of their authority ( 5 Denio, 567 ); but these contracts were such as the corporation could legitimately make, and consequently came within the scope of the ordinary powers of corporate management.

The conclusions at which we have arrived render further discussion of. the questions in this record unnecessary.

The interlocutory judgment overruling the demurrer should be reversed, the demurrer sustained and the complaint dismissed, with costs.

All concur, except Ruger, Ch. J., not voting.