In re Gardner — 67 N.Y. St. Rep. 69

Majority

p. 69

In the Matter of the Application of Emmons J. Gardner to set aside Certain Judgments, etc.

(Supreme Court, General Term, Fifth Department,

Filed April 12, 1895.)

Headnote

1. Corporations — Stockholders—Collusive judgment.

The director of a corporation is not, by reason of the fact that he is the husband of a stockholder,, interested in an action which he procures to be brought against the corporation for his wife’s benefit, so as to entitle a stockholder to set aside the judgment.

2. Same — Preference.

An application by a stockholder to set aside a judgment against the corporation, suffered for the purpose of preferring creditors, is not authorized by section 48, chapter 688 of 1892.

Appeal from a judgment, granting application to set aside certain -judgments.

B. F. Dake, for app’lts; Edward L. Jellinck, for resp’t.

The Walker Tailoring Company was organized under the business corporation law of New York, as a domestic corporation, about the 1st day of May, 1894, for the purpose of doing a general tailoring business in the city of Buffalo. The capital stock was fixed at the sum of $15,000, divided into shares of the par value of $50 each. Mrs. Madge L. Walker had, prior to the time of the incorporating of the company, been engaged in the tailoring business in Buffalo, and had on hand a stock of goods. What its value was, does not appear. She was insolvent, and unable to pay" her debts. The respondent, Emmons J. Gardner, and James L. Walker, the husband of Mrs. Walker, conceived and carried out the plan of organizing the corporation. Gardner seems to have been the master spirit in the scheme. He was at the time about twenty-one years old, without means, and entirely unacquainted with the business. It is quite evident he was not acting in good faith in organizing the company. It was a scheme to make money for himself at the expense of any parties who might be induced to extend credit to the company. Ninety of the shai'es were issued to Gardner, for which he paid nothing at all. Seventy shares of paid-up stock were issued to Mrs. Walker, ostensibly as compensation for her stock of goods. Ten shares were issued to a Mr. Fred W uer- smith, for which he paid their par value of $50 a share. He

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seemed to have acted in good faith. The concern started on in business. Gardner, Wuersinith, and Mr. "Waiter were made directors. Gardner drew a weekly salary of $20 from the business. He appears to have devoted his time, during the brief existence of the corporation, not in doing anything for the business, but in efforts to trade off his stock, with a view of realizing something for it. Mrs. Walker, at the time she transferred her stock to the corporation, was indebted to a firm in Buffalo, by the name of Oohen & Sinai, for goods which they had sold her. About four months after the organization of the corporation, Oohen & Sinai, by an arrangement with Mr. Walker, who was at the time president, and also a director in the corporation, assigned to the-corporation its claim against Mrs. Walker, amounting to between $1,600 and $1,700; and Walker, as president, gave to them four notes of the corporation, three of them for the sum of $400 each, and the other for the sum of $431.38; and, at the same time, Walker, as president, gave three other notes of the company to other creditors of the corporation, — one for the sum of $187.25, another for $183.69, and a third for $245.36. The holders of these notes at once brought actions against the corporation in the municipal court of Buffalo, serving the papers upon Mr. Walker, and in six days thereafter they obtained judgments for their various claims, filed transcripts, and issued executions to the sheriff; and he, by virtue thereof, seized the property of the corporation, and advertised it for sale. The purpose of dividing the claim of Uohen & Sinai into four different notes was obviously so that they could be sued in the municipal court. The maximum sum for which that court could render judgment was $500, and judgments could be obtained in six days after service of summons. Mr. Gardner, as a stockholder of the corporation, after learning of the recovery of the judgments, moved the court for an order setting them aside, and the order appealed from was granted. The motion was founded on section 28 of chapter 687 of the Laws'of 1892, which is as follows:

“ Stay of Proceedings in Actions Oollusively Brought. If an action is brought against a corporation by the procurement or. default of its directors, or any of them, to enforce any claim or obligation declared void by law, or to which the corporation has a valid defense, and such action is in the interest or for the benefit of any director, and the corporation has by his connivance made default-in such action, or consented to the validity of such claim or obligation, any member of the corporation may apply to the supreme court, upon affidavit, setting forth the facts, for a stay of proceedings in such action, and on proof of the facts in such further manner and upon such notice as the court may direct, it may stay such proceedings or set aside and vacate the same, or grant such other relief as may seem proper, and which will not injuriously affect an innocent party, who, without notice of such wrong doing and for a valuable consideration, has acquired rights under such proceedings.”

It will be observed that the section provides for relief only in case “ the action is in the interest or for the. benefit of a director,”

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There was an entire absence of any evidence that any of these actions were in the interest or for the benefit of Mr. Walker. He had not the slightest interest in the corporation. He was, it is true, the husband of a person who held stock in the company; but it is a pecuniary interest or benefit that the section contemplates, and not an interest arising, as in this case, out of relationship. It is stated in Gardner’s affidavit that these actions were prosecuted for the benefit of Mr. Walker, but there is an absence of any statements of facts or evidence to sustain the allegation, and hence it proves nothing. It is alleged in Walker’s affidavit used in opposition to the motion that he had no interest of any kind in the actions. We do not see how the motion could be granted, under the section of the statute quoted.

Can it be sustained under section 48 of chapter 688 of the Laws of 1892 ? That section prohibits any insolvent corporation, among other things, from making a conveyance or assignment or transfer of any property, or suffering a judgment to be obtained, when the corporation is insolvent, or its insolvency is imminent, with the intent of giving a preference to any particular creditor oyer other creditors of the corporation. It may be doubted if the notes given to Cohen & Sinai had any validity, as against the corporation, for want of consideration. But the validity of the notes given to the other creditors is not questioned. It is claimed that the debts for which they were given were not, at the time, due. It did not appear from Gardner’s affidavit, upon which the motion was based, that the corporation had at the time any other creditors than those mentioned, to whom these several notes were given ; but it did appear from the affidavit of Mr. Walker read in opposition to the motion that there were other creditors having claims against the corporation, and it further appeared that the corporation was insolvent at the time the notes were given. Before the motion was made a receiver had been appointed for the corporation. Gardner was a director and a stockholder in the corporation at the time he made his motion; but considering the manner of obtaining his stock, — he not Laving paid anything for it, — and considering his purpose in organizing the company, he was not entitled to much consideration. It was made to appear pretty conclusively that the judgments were suffered to be recovered, and that the purpose of recovering them was to give the judgment creditors preference over other creditors •of the corporation, and they had seized the property of the corporation under their executions. It is provided by section 48 that every person receiving, by means of any such prohibited act or deed, any property of a corporation, shall be bound to account therefor to its ■creditors or stockholders, or other trustees. It may be ' doubted whether the levying upon the property of the corporation by virtue of these executions was receiving the property of the corporation by means of any act prohibited by this section. This motion was not in behalf of any creditor of the corporation. So far as was made to appear, they were content with the situation, and did not care to have the judgments vacated. This is not a proceeding to compel the judgment creditors to account for property which they had received. It was instituted and prosecuted under section 28 of

p. 72

chapter 687 of the laws of 1892, above quoted ; and, as suggested, the respondent having failed to show that the actions were in the interest or for the benefit of a director of the corporation, he was. not entitled to the order appealed from. It should be reversed, with $10 costs and disbursements.

All concur.