From Casetext: Smarter Legal Research

Bloom v. National Sav. Loan Co.

Court of Appeals of the State of New York
Mar 2, 1897
152 N.Y. 114 (N.Y. 1897)


Argued February 11, 1897

Decided March 2, 1897

John B.M. Stephens for appellants. John H. Hopkins for respondent Beir. Henry J. Sullivan for respondents Tracy and Sheridan.

We think that the judgment in this case was properly reversed by the court below.

Without dealing with all the questions so fully covered by the opinion in the Supreme Court, it will be sufficient to refer to one or two features of the action, after stating the theory of the plaintiff's case, and the nature of the claims that were sanctioned by the judgment of the trial court.

The plaintiff, as a shareholder of the defendant company, brought the action in his own behalf, and in behalf and for the benefit of all other shareholders who might elect to join with him in the action, to recover the loss and damage sustained by them in consequence of the negligence of the directors of the company, who were made the principal defendants, and who alone answered the complaint. The substance of the charge against the directors and individual defendants is that they so managed the affairs of the corporation that the shares of stock were lost or became worthless, and debts were contracted, for which the shareholders are personally liable. The company was in business only about one month from the time of its organization to the time when it was found to be financially wrecked. The business was transacted by three persons who are not parties to this action, but who were officers of the company, that is, president, secretary and treasurer, respectively. Whatever of fraud, dishonesty or mismanagement with respect to the affairs of the company that appears in the record, resulting in loss to any one, is directly chargeable to those officers or to some one of them. The complaint against the directors is that they did not exercise proper care and vigilance in the discharge of their trust, in that they failed to detect the wrongdoings of the officers, or to remove them as they had the power to do when they either knew, or ought to have known, the facts in regard to their official acts and conduct.

During the progress of the cause several of the other shareholders joined with the plaintiff in the prosecution of the action, and the judgment provides for relief by way of damages to all of them. There is no proof and no charge of any personal dishonesty against any of the directors, and the negligence found consisted entirely in acts of omission, that is, in failing to remove the delinquent officers or in want of proper diligence in ascertaining their unfitness for the positions before they were appointed.

The court below was of the opinion that the evidence before the learned referee did not justify the finding of negligence, and when we consider that the burden of proof on this issue was with the plaintiff, that the business operations of the company extended over a period of but one month, and the other facts and circumstances disclosed by the record, we are inclined to agree with this conclusion. The facts found by the court, without a jury, or by a referee, are open to review in the General Term, and this court will not interfere with its judgment of reversal when it can fairly be said that the findings were against the weight of evidence or that the proof so clearly preponderates in favor of a contrary result that it can be said, with reasonable certainty, that the conclusions of the trial court upon the evidence were erroneous. ( Baird v. Mayor, etc., 96 N.Y. 567; Aldridge v. Aldridge, 120 N.Y. 614; Devlin v. Greenwich Savings Bank, 125 N.Y. 756; Barnard v. Gantz, 140 N.Y. 249.)

Passing over all questions as to the form of the action and the procedure and all questions as to the right of the shareholders to recover judgments payable directly to themselves, instead of to the corporation or to the receiver appointed for their benefit, we think that the measure of damages awarded by the trial court to the plaintiff was not proper nor warranted by any proof or findings in the case. The directors were, by the judgment, held liable to the shareholders for all the money they had invested in the concern and which was represented by the stock. They were also held liable for all the debts upon the theory that the shareholders were, by law, personally liable for such debts, and this contingent liability was computed as part of the damages. It was not claimed that the shareholders had, in fact, paid any of the corporate debts or had been made liable to pay by any suit or judgment, and it was impossible to say that they ever would pay. Moreover, it was undisputed that a portion of the money paid in by the shareholders was disbursed for the ordinary and legitimate expenses of the business, such as office rent, clerk hire, salaries and the like, besides some other items amounting to a considerable sum, for which the directors could not, upon any fair theory, be made liable.

It is not at all likely that under the most prudent management the business of one month could be conducted without some loss. It was a new concern without any business and without the necessary machinery for commencing business. The liability of shareholders for corporate debts is founded upon the statute, and their own voluntary act in becoming members of the corporation by purchase of stock, and to attribute this contingent liability to the acts or omissions of the directors in the management of the business was a remote conclusion not warranted by any feature of the case. The money disbursed from the treasury to defray the expenses of a new business not yet established could not in any view of the case be held to be an element of loss or damage to the shareholders, and much less could such a loss be attributed to the negligence of the directors.

The relations of trust and fidelity existed between the corporation and the directors, and not between the latter and the shareholders, and they could be held liable on the ground of negligence only for such damages sustained by the corporation as were the natural and proximate result of their acts or omissions. It is obvious that in this case the directors have been held liable for moneys that represented no element of damage whatever to the corporation, and which could not be recovered by the corporation had the action been brought in that form. The defendants have not only been practically treated as insurers and the shareholders relieved from all risks of the business in which they had invested their money, but they were permitted to recover in anticipation of some statutory liability as members of the corporation that had not matured in any judgment and may never mature. They were thus subjected to a measure of liability without precedent, and that cannot, under any possible view of the case, be sustained or defended.

We have recently held that, in actions of this character, the liability is not in equity but at law. That question has not been raised on this appeal, and since the judgment was properly reversed on other grounds, it is not necessary to refer to the point now. There are some other questions in the case; but, since they have all been considered in the court below and properly disposed of, any further discussion of them is unnecessary.

The order should be affirmed, with costs, and judgment absolute ordered for the defendants.

All concur, except HAIGHT, J., not sitting.

Ordered accordingly.

Summaries of

Bloom v. National Sav. Loan Co.

Court of Appeals of the State of New York
Mar 2, 1897
152 N.Y. 114 (N.Y. 1897)
Case details for

Bloom v. National Sav. Loan Co.

Case Details

Full title:HYMON BLOOM, Suing in His Own Behalf, et al., Appellants, v . THE NATIONAL…

Court:Court of Appeals of the State of New York

Date published: Mar 2, 1897


152 N.Y. 114 (N.Y. 1897)
46 N.E. 166

Citing Cases

Walker v. Man

"They [directors] are liable only for the losses of its funds attributable to their negligence." ( Bloom v.…

Taylor v. Smith

The case of Brumfield v. Hill (28 N Y St. Repr. 362) was distinguished on the ground that the order was made…