Meyers v. Scott — 20 N.Y. St. Rep. 35

Majority

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Alered G. Meyers et al., App’lts, v. William L. Scott and William H. Barnum, Impleaded, etc., Resp’ts.

(Supreme Court, General Term, First Department,

Filed November 24, 1888.)

Headnote

1. Corporation—Stockholder—Action by—Sufficiency op complaint.

The plaintiffs alleged that they were stockholders in a construction com-

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pony, which company constructed the N. O. P. R. R. under a contract, for which it received and held certain land grant bonds secured by mortgages, which were to be taken by the shareholders at their appraisment value. That it was determined to dissolve the construction company, and this means was taken as alleged to secure the equality among stockholders. That this equality had not been preserved, but that bonds had been issued by the officers of the company having charge of its affairs, under which they themselves and others benefited by the delivery of such bonds, had appropriated valuable unappraised portions of the land, leaving to the plaintiffs and other shareholders in the company an inferior quality of land that would fail to compensate them for the amount for which they held their bonds. Held, that the facts alleged were sufficient to entitle the plaintiffs to bring an action for their protection and redress. That the complaint stated a cause of action.

3. Same—Equitable action—Proper parties.

To connect S. and B. with the right of -action, and to secure part of their redress, the complaint alleged that S. & B. were’parties to the agreement and transaction, through and by which the bonds were issued to the construction company, and that in connection, the president and secretary had conspired to secure for themselves (the said B. & S. and others) that the first of said bonds should bo issued to them, and that they had used them to locate land, and obtained thereby an unfair advantage and preference. It did not appear by any allegation in the complaint that S. & B. gave a valuable consideration for said bonds. It asked for an accounting of the transactions and affairs of the construction company, and also of the receipts of money, stocks and bonds received by the officers of that company, and that “ S. & B. also, account for the bonds received by them, etc.” Held, that under Code Civil Procedure, section 447, sufficient facts were stated as against S. & B. to make them proper parties. That in actions in courts of equity all persons may be brought in having any claim or interest in or to the subject matter or any part of it to be affected by the action.

3. Same—Application to officers to bring action—When meed not be made.

When the officers of a corporation are alleged to be themselves identified with and agents in an unlawful or wrongful act which is to he the subject of inquiry or redress, it is not necessary that application be made by the shareholders to them to bring action, before a suit may be maintained by the shareholders themselves.

4. Same—When shareholders have right of action.

An action brought by shareholders to secure the rights of the shareholders themselves to the effects and property of the company to be distributed for the winding up of its affairs, upon Jits dissolution, is maintainable by shareholders in their own rights and interests, and does not require that application he made first to the officers of the company to bring the action.

Appeals from interlocutory judgments sustaining demurrers to the plaintiff’s complaint.

Robert S. Green, for app’lts; Thomas G. Shearman, for respondent, William L. Scott; Thomas Thacher, for respondent W. H. Barnum.

The plaintiffs are shareowners in the American Railway Improvement Company, a corporation formed under the laws of the state of Colorado. It undertook the construction, for the New Orleans Pacific Railway Company, of a railroad with its branches, extending from New Orleans to Shreveport, in the state of Louisiana, including

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a mileage of 336 miles. The New Orleans Pacific Railway' Company was incorporated under the laws of the state of Louisiana to construct and operate this line of road. For the work of constructing the railroad, it was agreed that the Improvement Company should be paid $40,000 a mile: $20,000 per mile in the stock of the New Orleans Pacific Railway Company, and 820,000 per mile in its bonds, and, also, that it should receive land grant bonds secured by a mortgage upon a grant of land made by act of congress, "to the New Orleans, Baton Rouge and Vicksburg Railway Company. This latter company obligated itself to transfer its right to the grant of land, consisting of ten alternate sections per mile in each side of its road, to the New Orleans Pacific Railroad Company, and such transfer was after-wards made, which received the approval of the United States commissioner of the general land office in the city of Washington.

The commissioner of the general land office by order of the secretary of the interior, afterwards issued to the New Orleans Pacific Railway Co., patents for 619,281 acres of the land, and that company issued or prepared to be issued its bonds, amounting to the sum of $4,000,000, secured by a mortgage upon the land granted in this manner. It after-wards received additional patents for lands under the assignment for which the New Orleans Pacific Railway Company has executed and prepared its land grant bonds and mortgages. But whether this latter issue is intended to include the residue of the lands, amounting to upwards of nine hundred thousand acres, has not beén stated' in the complaint.

The Improvement Company completed the construction of the railroad and branches early in 1884, and thereupon became entitled to the bonds secured by the mortgage upon the grants of land. These bonds were designed to be payable out of the proceeds of the lands, or by the location and acceptance of lands by the owners or holders thereof. They were issued on the valuation of the lands at a price not exceeding two dollars and a half an acre. Some of the lands were of no substantial value, while other portions varied in value up to the sum of thirty dollars an acre.

In 1885, the Improvement Company, by order of its board of directors, issued a circular to its stockholders, in which it was stated, that a resolution had been adopted declaring a final dividend of sixty per cent, payable in the certificates of the New Orleans Pacific Railway Company, for the delivery of land grant and sinking fund bonds of the company, secured by a mortgage, and supplemental mortgage in the lands, acquired and patented, and to be patented under the authority of the United States, and also forty per cent in bonds secured by mortgages in lands already patented.

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Upon the delivery of these bonds and certificates to the stockholders, it was proposed to wind up the affairs of the Improvement Company, and to receive from the shareholders their receipts for instalments paid, together with authority by way of proxy, to vote in their shares of stock and to take all needful steps to dissolve the corporation.

It is also stated in the circular that the New Orleans Pacific Railway Company would issue bonds to the holders of the land certificates, as the'additional lands were patented to it by the United States government. It was further stated in the complaint that the construction bonds received by the company from the railway company should amount to the sum of $6,120,000, and that there was a deficit of $384,000 in these bonds, as the construction company was willing to account for them, and a similar deficit of 3,500 shares of the stock of the railway company.

It was further averred in the complaint that the lands upon which the land-grant bonds were to be issued should be appraised by an appraiser selected for that purpose, and that the holders of bonds locating the lands under the pivilege secured for that purpose, should take the lands at the value placed upon them by the appraiser, in that manner securing to each of the share-holders in the improvement company an equality of rights and privileges. But it was alleged that this equality had not been preserved, but that bonds had been issued by the officers of the company having charge of its affairs, under which they themselves, and others1 benefittéd by the delivery of such bonds, had appropriated valuable unappraised portions of the lands leaving to the plaintiffs and other share-holders in the company, an inferior quality of land that would fail to compensate them for the amounts for which they held their bonds.

The two defendants who have demurred to the complaint, set forth in their demurrers, that the complaint failed to state facts sufficient to constitute a cause of action. In the demurrer of the defendant Scott this was qualified by the words “cause of action against him,” and probably, without those words, it was designed that the other demurrer in which they were omitted should have the same effect. That the complaint, by the allegation of these facts which have not been stated in it in any logical or consecutive order, did set forth a cause of action in favor of the plaintiffs, and of other stockholders who might make themselves parties to the action, seems to be reasonably free from doubt. For if the president and secretary of the company, united with its treasurer, and acting under the authority of the board of directors, deprived the plaintiffs of their rights and interests under these land-grant bonds, .then they very manifestly had the right to come into court

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for the purpose of protecting themselves and securing redress against this alleged injury arising out of the manner' in which in part these bonds had been distributed, and to maintain their right secured equally to locate them upon; the land of the railway company.

The complaint sets forth the right of the plaintiffs in this respect and this violation by the officers of the Improvement Company. And so far as that violation has extended, or may extend, through the acts of the officers of the company, the plaintiffs are entitled to protection and redfess, and that so far discloses a cause of action.

To connect the defendants, William L. Scott and William H. Barnum, with this right of action, and to secure a part of the redress expected to be obtained against them, they have been alleged to be parties to the agreements and transactions through which the land grants were obtained from the New Orleans Pacific Bailway Company, and by which the bonds were to be issued to the Improvement Company and secured by a mortgage upon the land grant. In this connection it is stated that the defendant, William H. Barnum, became the president of the New Orleans, Baton Bouge and Vicksburg Bailway Company, and that he and the defendant,. William L. Scott, with other parties representing the New Orleans Pacific Railway Company, made the agreement by which the land grant was to be assigned to the New Orleans Pacific Railway Company.

It was further alleged that a supplemental agreement was also made and executed by the defendants, William H. Barnum and William L. Scott, stating that it was agreed and understood that orders for 575,000 six per cent land grant bonds, to be delivered to the defendant Barnum and his associates, should be accepted by the New Orleans Pacific Railway Company, and that a certain amount of the bonds were to be delivered to the defendant Barnum for the; purpose of paying debts owing, by the New Orleans, Baton Bouge and Vicksburg Railway Company. These agreements rendered it reasonably plain that these two defendants were, to a great extent, connected with, and parties to, the avenues devised under which the land grant bonds were to be issued to the Improvement Company, which and whose shareholders were to be entitled to their benefit.

It was also averred in the complaint that one-fourth of the bonds, not exceeding $1,000,000, were to be delivered to John J. McCook for the use of the defendant, William H. Barnum, and associates, but who those associates were has not been stated or set forth in the complaint. This, however, as it has been set forth, is another circumstance tending to connect this particular defendant with the use and disposition of a part of the bonds forming the subject of

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the plaintiffs’ complaint. It was also added in the twenty-fifth paragraph of the complaint that the president and ¡secretary of the Improvement Company, in violation of their duty and trusts, as officers and directors, had confided and confederated with these two defendants, and other persons unknown to the plaintiffs, to secure to themselves the first of the bonds, in fraud of the rights of the plaintiffs and the other" stockholders, and that some of Stlch bonds had been issued to the defendants, William H. Barnum, William L. Scott,, Granville M. Dodge, the president of the improvement company, and John T. Granger, the secretary of that company, or to some person, for their use. And that such use had been made by the defendants of bonds already issued, that lands had been located under them, securing improper preferences over the rights of these plaintiffs and the other stockholders of the improvement company, that the other bonds already issued and those afterwards to be issued, would accordingly be of small market value. These allegations did connect these two defendants with what has been alleged and' relied upon in the complaint, as an improper issue and use of a portion of these bonds violating the agreement under which all the shareholders of the company were entitled to equal .advantages. It has not been stated, neither is the fact to be inferred from anything contained in the complaint, that any of the bonds in this manner issued to these-two defendants were obtained by them for a valuable consideration. But the statement simply is that they were delivered to these persons, and that delivery is charged to have been fraudulent and prejudicial to the rights of the plaintiffs and the other stockholders in the company. These allegations, of course, were not designed to include the bonds which the defendant, William H. Barnum, was entitled to for the purpose of paying the debts of the company of which he was the president. But they are limited to the bonds through which it is stated a fraudulent preference was obtained by these two defendants and the president and secretary of the improvement company, diminishing thereby the residue of the bonds to be divided between the shareholders of the improvement company very considerably in their value.

By the judgment demanded, an accounting has been asked for of the transactions' and affairs of the improvement company; and also of the receipts of money, stock and bonds received by the officers of that company, and that these two defendants shall also account for the bonds received by them, and that the plaintiffs shall be decreed to -be entitled to their distributive share or dividend of land grant bonds in the hands of the improvement company

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without the surrender of their installment receipts, or giving proxies to vote for a dissolution of the company, and that they shall have such further or other relief as they may be entitled to in the action. And these demands comprehend all that is essential to redress the wrongs alleged or apprehended by the plaintiffs.

The substantial cause of action it is evident is the preservation of the equality of right of the shareholders, and this accounting required from the company itself, and also from its officers and the demurring defendants. And contributory to that and also to any other redress which the plaintiffs may be entitled to secure, will be the inquiry concerning the bonds alleged to have been delivered to the defendants, Wm. H. Barnum and Wm. L. Scott, and received by them in this manner. That is an incident certainly of the right of action set forth in the complaint, and it is not important that it is not co-extensive with the right of action alleged, as long as it plainly affects a portion of the subject-matter to which the accounting will be addressed, and also the right and title of the plaintiffs to have these bonds included, made a part of and considered in that accounting. If it had been stated in the complaint that the defendants, Wm. H. Barnum and Wm. L. Scott had received these bonds for a valuable consideration without notice,then no right to join them in the action would have existed. But the complaint discloses no such state of facts, but it in substance alleges that these bonds had been unlawfully and improperly .received by these two defendants. And that they are chargeable with notice of the object and design of issuing the bonds, it is to be inferred from their participation in the agreements which were made concerning the bonds, and their acts in carrying out the transfer under the agreements. And sustaining as they did these relations to the principal subject-matter of the controversy, justified the plaintiffs in making them parties to the action. For in actions in courts of equity,' all persons may be brought in, having any claim or interest in or to the subject-matter or any part of it to be affected by the action. This is the provision made by section 447 of the Code of Civil Procedure, and it was designed to include the preceding rule in equity permitting all parties to be brought into the action who may in any manner be affected by the controversy, or whose claim may pertinently be made the subject of examination and adjudication. The rule upon this subject is as broad as the necessities or proprieties of the case. And it has the sanction of an unbroken course of authorities. Dodge v. Woolsey, 18 How. U. S., 331, 341; Brinkerhoff v. Brown, 6 John. Chy., 139; Fellows v. Fellows, 4 Cowen, 682; Campbell v. Mackay, 1 Mylne & C., 603; Parr v. Atty G., 8 Clark & Finn, 409; Atty G. v. Cradock, 3 Mylne & C., 85; Turner v. Conant, 18 Abb. M. C., 160.

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A further objection taken in support of the demurrers is that the action should have been brought by the improvement company itself, and that sufficient reason for the interference of the plaintiffs as stockholders has not been stated. It has been alleged that the president and secretary of the company were confederated with these two defendants and others, in this misconduct set forth, as the foundation of the action, and by the circular which has been issued and is contained in the complaint, through which it is alleged that an inequitable and unjustifiable settlement of the affairs of the company, and distribution of it's property are to be made, it is stated by the president to have been issued by order of the board of directors. And from this statement, as well as those relating to the conduct of these two officers, while the fact itself is not positively set forth in the complaint, it may reasonably be inferred that the board of directors, as well as these officers, sanctioned, and designed to carry out, an improper .and inequitable division and distribution of the property arid bonds subject to the control of the improvement company. And that, under the authorities, as the law has generally been stated, is sufficient to entitle the shareholders to intervene for their own protection. It is true that the rule of law has not been so broadly laid down in Hawes v. Oakland ( 104 U. S., 450 ). For notwithstanding the misconduct of the officers and directors themselves, it was " there said that the shareholders should first be required to apply to'them to bring an action in behalf of the corporation for the redress of the alleged misconduct. But the.other authorities do not go to this extent. When the officers of the corporation are alleged to be themselves identified with, and agents in the unlawful, or wrongful act, which is to be made the subject of inquiry and redress, .there it has generally been assumed that no application by the shareholders to those persons is necessary before a suit may be maintained by the shareholders themselves. It has been considered that such an application would be entirely futile, for the reason that the officers could not be expected to institute a suit for the purpose of vindicating the company or its stockholders against the consequences or effects of their own misconduct. And that seems to be the more reasonable rule to be applied to cases of this description. It was enforced and followed in Brewer v. Boston Theatre ( 104 Mass., 378 ); Smith v. Rathbun ( 22 Hun, 150 ); Brinckerhoff v. Bostwick ( 88 N. Y., 52 ); Courier v. N. Y. and West Shore R. R. Co. ( 35 Hun, 355 ); Barr v. N. Y., L. E. and W. R. R. Co. ( 96 N. Y., 444 ); Menier v. Hooper's, etc., Works (L. R., 9 Chy. App., 353); Mason v. Harris (11 Ch. Div., 97), and Gray v. Vir.

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Steamship Co. ( 3 Hun, 383 ); Leslie v. Lorrillard ( 40 Hun, 392 ), do not in any respect stand in conflict with this rule."

But this action certainly is not wholly dependent upon this rule, or either of these authorities, for it has not been brought to vindicate, or sustain, the rights of the Improvement Company in these bonds, but it has been brought to maintain and secure the rights of the shareholders themselves. It depends upon their interest, or title to these bonds, and also to the other effects of the company designed to be distributed for the purpose of winding up its affairs, and obtaining its dissolution. They have, therefore, a direct and important interest, in the subject of the controversy in their own right, which it is the purpose and object of this action, to secure and redress. And as they have alleged these rights to have been violated by the officers of the company, as well as by these two defendants, they have presented a right of action in their own favor, over which, at their instance, the court is bound to take jurisdiction, and, if the facts shall be found to sustain the statements made, to award appropriate and adequate relief. What the plaintiffs complain of, are wrongs not so much against the Improvement Company, as they are against-themselves, and their own rights and interests, and an action for redress on account of such wrongs, is in no re7 spect, dependent upon the authorities, or principles relating to suits brought by stockholders, to vindicate corporate rights, against the misconduct of corporate officers and others. Upon the facts supporting this part of the complaint, the plaintiffs are entitled to maintain the action, even though the complaint would not be sufficient, if that was the nature of the action, to warrant a suit in their behalf,to maintain the rights of the Improvement Company itself.-

The facts as they are set forth in the complaint, disclose but one cause of action. All that is demanded, and all that it is the plain endeavor of the plaintiffs to secure, is centered in one controlling statement of facts. The other facts are incidental to that, extending the scope of the' action, but not alleging, or creating another cause or ground of action. The demurrers should not have been sustained, as they were at the special term. And the judgment should be reversed and judgment ordered for the plaintiffs on the demurrers, and the defendants should be permitted within' twenty days to answer the complaint, on payment of the: costs of the demurrers, and the costs of the appeals.

Van Brunt, P. J., and Brady, J., concur.