Phenix National Bank v. A. B. Cleveland Co. — 34 N.Y. St. Rep. 498

Majority

p. 498

The Phenix National Bank, Resp’t. v. The A. B. Cleveland Company, Limited, Conrad N. Jordan, Horace K. Thurber, Peter W. Gallaudet, and George M. Hard, Impl’d., Appl’ts.

(Supreme Court, General Term, Fourth Department,

Filed December 6, 1890.)

Headnote

1. Pleading—Action against dibectoes oe cobpobation.

A complaint in an action against the directors and stockholders of a corporation which was indebted to plaintiff alleged that the corporation, contrary to statute, made and issued to certain of the defendants bonds for purposes foreign to its lawful business, and a trust deed or mortgage to secure the same and for future loans, which provided that until default the company should hold its property as agent of the bondholders ; that before giving the mortgage the company had failed to pay its notes, and the same was given in contemplation of insolvency; that said defendants Pad taken possession of the property under the mortgage ; that the mortgage had been foreclosed and a sale directed; that defendants had caused to be incorporated a company in New Jersey, and that such acts were part of a scheme entered into between the corporation and the individual defendants and others to purchase the property for a nominal price and transfer it to the New Jersey company and defeat the lawful claims of plaintiff and other creditors to the benefit of the directors, stockholders and certain creditors of the corporation. On demurrer, Ildd, that the complaint sufficiently alleged an alienation or threatened alienation of the property of the corporation, and stated facts constituting a cause of action.

p. 499

2. Same—Parties.

As the action was brought in hostility to the trust created by the mortgage or trust deed, to have it set aside, as void, the creditors holding bonds secured thereby were not necessary parties.

Appeal from an interlocutory judgment overruling a demurrer to the complaint herein by the defendants A. B. Cleveland Company, Limited, Conrad N. Jordan, Peter W. Gallaudet and George M. Hard, impleaded with others, entered in the office of the clerk of the county of Jefferson.

The appellants demurred to the complaint on the grounds: 1. That it did not state facts sufficient to constitute a cause of action; 2. That there was a defect of parties defendant.

It is in substance alleged in the complaint that the A. B. Cleveland Company, Limited, was a domestic corporation; that the defendant Hard was president and the defendant Stearns treasurer of such corporation; that defendants Hard, Stearns, Jordan, Thurber and Gallaudet were stockholders: that the plaintiff was a judgment creditor of the defendant corporation; that the debt upon which such judgment was rendered arose before the issuing of the bonds or the giving oE the trust deed herein mentioned; that said corporation, contrary to statute, made and delivered 425 bonds of $1,000 each to the defendants Jordan, Thurber and Gallaudet, for purposes foreign to the lawful business and objects of the defendant corporation, as was well known to said defendants; that by the defendants Hard and Stearns, its president and treasurer, contrary to the statute and for purposes foreign to its lawful business or objects, as was well known to the defendants Jordan, Thurber and Gallaudet, it also made and executed to Jordan, Thurber and Gallaudet a mortgage or trust deed of all its property of every kind whatsoever and wherever situated to indemnify the defendants Jordan, Thurber and Gallaudet for future loans and advances and to secure the payment of such bonds; that said instrument also provided that until default in the payment of the interest on said bonds, the defendant corporation should hold its property as agent for the defendants Jordan, Thurber and Gallaudet and carry on its business as such agent; that a large number of the bonds were owned by the defendants Hard, Stearns, Jordan, Thurber and Gallaudet, and others were owned by certain creditors of the defendant corporation, but none were owned by the plaintiff; that 'before said mortgage was made ' the said corporation had failed to pay its lawful notes and drafts on which it was liable, and actions had been commenced against the defendant corporation thereon; that such corporation was largely in debt when the mortgage or trust deed was given; that all the defendants, except the defendants Emerson and the Farmers’ Bank of Borne, well knew that the defendant corporation was, or was about to become insolvent; that such mortgage or trust deed was made in contemplation of insolvency and to the benefit of the stockholders and to the detriment of its creditors; .that a few days after said mortgage or trust deed was given, the defendants, Jordan, Thurber and Gallaudet, claiming to act under the alleged power-conferred by said mortgage, and solely for the

p. 500

purpose of preventing creditors of the defendant corporation from obtaining their lawful demands, seized and took possession of the goods and chattels of the defendant corporation, and sold, or were about to sell them, and apply the proceeds to their own use and to the use of certain creditors and holders or said bonds; that shortly afterwards the defendants, Jordan, Thurber and Gallaudet, commenced an action against the defendant corporation and foreclosed said mortgage or trust deed; that no defense was interposed ; that a judgment was recovered directing the sale of the real estate of the defendant corporation, and the defendant Emerson was appointed to make such sale; that notice thereof had been given ; that the defendants Jordan, Thurber and Gallaudet, and certain directors and stockholders of the defendant corporation, procured to he incorporated under the laws of the state of New Jersey the Cleveland Seed Company; that defendants, except Emerson and the Farmers’ Bank of Rome, well knew that the defendant corporation would be unable to pay the interest on said bonds; that the making of the bonds, the execution of the mortgage or trust deed, the commencement of the action of foreclosure, the obtaining of a judgment therein, the proposed sale and the incorporation of the Cleveland Seed Company were a part and parcel of a plan or scheme collusively and fraudulently entered into by and between the defendant corporation and the defendants, Jordan, Thurber, Gallaudet, Hard and Stearns, and certain other directors, stockholders and creditors of the defendant corporation, whereby all the property of "the defendant corporation should be purchased at a nominal price and transferred to the Cleveland Seed Company, and whereby the lawful claims of the plaintiff and other creditors of the defendant corporation should be extinguished to the benefit of the directors, stockholders and certain creditors of said corporation; that said mortgage or trust deed was made with an intent to hinder, delay and defraud the plaintiff of its lawful debts against such corporation.

The relief demanded by the plaintiff was : 1, That said deed of trust or mortgage be set aside; 2, that the judgment of foreclosure and sale be vacated; 3, that the defendants Jordan, Thurber, Gallaudet and the defendant Emerson be restrained from selling the real estate of the defendant corporation ; 4, that the defendants Jordan, Thurber and Gallaudet be directed to transfer to the defendant corporation all the personal property seized by them and in their possession, and that they account for the proceeds of that which had been sold.

James Dunne, for app’lts ; J. 0. McCartin, for resp’t.

It is quite obvious that this action was brought under §§ 1781 and 1782 of the Code of Civil Procedure, which, so far as material to the questions involved, are as follows :

“ Section 1781. An action may be maintained against oneormore trustees, directors, managers, or other officers of a corporation, to procure a judgment for the following purposes, or so much thereof as the case requires: 1. Compelling the defendants to account for their official conduct in the management and disposition of _the.

p. 501

funds and property committed to their charge. 2. Compelling them to pay to the corporation which they represent, or to its creditors, any money and the value of any property which they have acquired to themselves or transferred to others, or lost or wasted by a violation of their o duties. * * * 5. Setting aside an alienation of property made by one or more trustees, directors, managers, or other officers of a corporation, contrary to a provision of law, and for a purpose foreign to the lawful business and objects of the corporation, where the alienee knew the purpose of the alienation. 6. The restraining and preventing such alienation where it is threatened, or where there is good reason to apprehend that it will be made.”

“ Section 1782. An action may be brought, as prescribed in the last section, by the attorney-general in behalf of the people of the state, or, except where the action is brought for the purpose specified in subds. 3 and 4, by a creditor of the corporation * * * .”

All the allegations of the complaint are admitted by the defendant’s demurrer, as well as what can by reasonable and fair intendment be implied therefrom, as a complaint will be deemed to allege what can by reasonable and fair intendment be implied from the allegations therein. Marie v. Garrison, 83 N. Y., 14 ; Lorillard v. Clyde, 86 id., 384; Milliken v. Western Union Tel. Co., 110 id., 403; 18 N. Y. State Rep., 328.

The defendant’s demurrer not only admits that the mortgage or trust deed was given contrary to statute and for purposes foreign to the lawful business and objects of the defendant corporation, and that this was known to the defendants who took such mortgage or trust deed, but it also admits that the making of the bonds, the execution of the mortgage, the commencement of the action of foreclosure, the obtaining of a judgment therein, . the proposed sale of the property of the defendant corporation and the incorporation of the Cleveland Seed Company were a part of h collusive and fraudulent plan or scheme entered into by the officers of the defendant corporation, with the other defendants, to transfer the property of the defendant corporation to the Cleveland Seed Company for a mere nominal price, and to defeat the rights of the creditors of the defendant corporation. These allegations were, we think, sufficient to show that the officers of the defendant corporation had acquired to themselves or transferred to others property of the corporation in violation of their duties, the value of which they should be compelled to pay to said corporation.

But the appellants contend that the complaint cannot be sustained because no alienation of the property of the defendant corporation is alleged. Their claim is, that the giving of a mortgage does not constitute an alienation of property within the meaning of the statute under which this action was brought. We do not deem it necessary to a proper determination of this case that we now decide whether the giving of a mortgage on real property amounts to an alienation of the property mortgaged within the provisions of the Code. A judgment creditor may maintain an action to compel the officers of a corporation rto

p. 502

account for their official conduct in the disposition of the funds and property committed to their charge, and to pay the corporation or its creditors any money or property which they have acquired to themselves or transferred to others by a violation of their duty, as well as to set aside and prevent any alienation or threatened or apprehended' alienation of the property of the corporation contrary to law, or for a purpose foreign to its lawful business.

The complaint in this action not only shows that the defendants who were officers of the corporation had violated their duties by the wrongful transfer of property which belonged to the defendant corporation, but also that there had been an alienation of such property by the officers contrary to law and for a purpose foreign to the business and objects of the corporation. It is alleged that a mortgage on all the personal property of the corporation was given by its officers, and that after default other of the defendants seized and took possession of it and had sold or were about to sell the same.

The title of a mortgagee of chattels upon default becomes absolute in law, and his right of possession perfect. The only right a mortgagor has is the right 'of redemption, which may be barred by a sale of the property, and the default is as perfect when there is a default in the payment of an instalment as in the payment of the whole debt. Judson v. Easton, 58 N. Y., 664 ; Halstead v. Swartz, 1 T. & C., 559. In the case at bar the 'defendants had taken actual possession qf the personal property of the corporation, thus having not only acquired the legal title, but the possession, and had sold or were about to sell the same and apply the proceeds thereof to their own use. We think this amounted to an alienation. If, however, the allegations of the complaint were insufficient to show that an actual alienation had been completed, they were clearly sufficient to show that an alienation -was threatened, or was with good reason to be apprehended. That the allegations of the complaint were sufficient to establish an alienation of the personal property of the defendant corporation, or at least a threatened or apprehended one, we cannot doubt.

The appellant’s contention that this ground of demurrer should be upheld because the facts stated would not justify the relief demanded, cannot be sustained. We think the facts alleged fully justified the demand for a portion, if not for all, the relief sought Moreover, if the proper form of relief was not demanded, the complaint was not demurrable for that reason. Hemmingway v. Poucher, 98 N. Y., 281 ; Hall v. Hall, 38 How. Pr., 97 .

We are of the opinion that the complaint stated facts sufficient to constitute a cause of action, and that the court properly overruled that ground of defendant’s demurrer.

This brings us to the question whether there was a defect of parties defendant. The appellants allege “ that there is a defect of parties defendant in the omission of the names of the creditors of the A. B. Cleveland Company, Limited, to whom the bonds issued by said company were delivered as alleged in the twelfth paragraph of the complaint and to whose use the proceeds of the

p. 503

property sold by the trustees has been applied as alleged in the sixteenth paragraph of said complaint”

In the twelfth paragraph of the complaint it is alleged that a portion of the bonds wrongfully issued by the defendants was owned by certain unnamed creditors of the defendant corporation. If we assume that the appellants’ demurrer was sufficient to present the questions sought to be raised, it leads us to inquire whether creditors holding a portion of the bonds wrongfully issued by the defendants were necessary parties to this action. That they were proper parties is not enough. Unless they were necessary parties, demurrer will not lie. Wing v. Bull, 38 Hun, 291 . “ The Code permits all those who have an interest in the action or any property, the title to which may be affected, to come in; but it does not require any to be brought in except those without whose presence no effective judgment could be had. Such are the only necessary parties to an action.” 1 Rumsey’s Pr., 105, and cases cited. “ Necessary parties are those without whom no decree at all can be effectively made determining the principal issues in the case.” Pomeroy’s Remedies and Remedial Rights, § 329.

There seems to be a well recognized distinction between the case of an action brought in hostility to a trust to set aside the deed or other instrument by which it was created and that of an action brought in furtherance of a trust to enforce its provisions. In the former case the suit may be maintained without the presence of the beneficiaries, since the trustees represent them all and defend for them. In the latter all the beneficiaries must be joined, if not as plaintiffs then as defendants. As illustrating this doctrine, see Rogers v. Rogers, 3 Paige, 379 ; Russell v. Lasher, 4 Barb., 232 , 237 ; Loomis v. Cline, id., 456; Wheeler v. Whedon, 9 How. Pr., 293 ; Bartlett v. Drew, 57 N. Y., 587 ; Wheeler v. Millar, 90 id., 361; Hatch v. Dana, 101 U. S. Sup. Ct., 205.

As this action was brought in hostility to the trust created by the mortgage or trust deed set out in the complaint, to have the the same set aside as void, it is quite manifest, we think, that the creditors holding bonds secured thereby were not necessary parties and that the special term committed no error in refusing to sustain the appellants’ demurrer upon that ground.

If correct in these conclusions it follows that the interlocutory judgment appealed from should be affirmed.

Interlocutory judgment affirmed, with costs, but with leave to the appellants, on payment of the costs of the demurrer and the costs of this appeal, to withdraw their demurrer and answer within twenty days after a copy of the judgment of this court affirming .the judgment of the special term shall be served upon them.

Hardin, P. J., and Merwin, J., concur.