An application for a receiver is addressed to the sound discretion of the court, to be exercised with due regard to the relevant statutes and rules, and such exercise is not to be disturbed unless abuse of discretion or other material error appears. If it appears that some expedient action or remedy, less stringent in its effect than a receivership, will meet the situation, that course should be taken. In the present case, held that the faults found in the conduct and situation of the corporation fully justified the judgment of the trial court that the intervention of a receiver afforded the most direct and practicable relief for and protection to the stockholders. A temporary receiver was appointed after the return day and the filing of an answer, and upon a hearing of all the evidence produced by both parties as to all the issues raised. Held that the defendant was not entitled to a retrial of the same issues before the making of the temporary receiver permanent.
Argued April 10th, 1930
Decided June 2d 1930.
ACTION for the appointment of a receiver of the defendant and for other equitable relief, brought to the Superior Court in New Haven County and tried to the court, Baldwin, J.; judgment for the plaintiff and appeal by the defendant. No error.
The finding, no correction of which is pursued on appeal, discloses that the defendant corporation, which was organized in 1924, was, in effect, a holding company for two other corporations engaged in the laundry business, in New Haven, which had been acquired by the defendant. The organization of the defendant corporation was brought about through the efforts of Edmund J. Coffey, who became its president and treasurer, and was employed as manager of the operating plants. He obtained the subscriptions to stock but failed to preserve the subscription lists or books of account of money collected thereon and subscriptions amounting to $4010 were allowed to remain unpaid with no attempt to collect, other than the writing of a letter. The only financial statements rendered to the stockholders, for each of four years, read the same and were meager and inadequate. No dividends were paid after 1924. Coffey took and received $10,000 worth of stock in the defendant corporation under a claim of being entitled to ten per cent commission on all stock sold by him. He claimed to have sold $91,500 worth, of which upward of three hundred shares were bought by himself.
At the annual meeting of stockholders in February, 1928, it was voted to sell, for $50,000, all the stock held in the two subsidiary corporations, the contract of sale providing that, thereafter, the Coffey Laundries, Incorporated, should continue in existence solely for the purpose of holding, collecting, and distributing the proceeds of the sale, including a note of $30,000, and then be dissolved.
At the end of December, 1926, Coffey's salary of $100 per week as manager of the defendant corporation ceased, he being incapacitated by illness, and he has collected disability insurance from November 25th, 1926, to date, on the claim of being "continuously and permanently prevented from the pursuit of any form of mental or manual labor for compensation, gain or profit." Nevertheless, in September and October, 1928, Coffey drew from the defendant corporation $2500 on a claim of back salary for the year 1927, also, without authority or right, $487.50 as a fee for securing his wife to furnish collateral on a loan. Coffey and Michael B. McGrail owned and controlled more than fifty per cent of the outstanding stock of the defendant corporation. McGrail was a friend of Coffey and voted with him. The majority of the directors also were controlled by Coffey. At the stockholders' meeting in February, 1929, at which time a financial statement presented by Coffey disclosed that he had drawn $2426.09 for salary, stockholders moved for the appointment of a committee to investigate the affairs of the corporation and to have the books audited. This motion was defeated by vote of Coffey of his shares and those of McGrail, whose proxy he held, and another director, Burland. It was voted, instead, that the books be open for inspection by or for any stockholder for sixty days. At this meeting minority stockholders stated that unless something was done they would apply for a receiver, but no action was taken by the plaintiffs until April 13th, following. At the date of the appointment of the receiver, Coffey was still holding the moneys above mentioned.
From the foregoing and other facts found the court reached the conclusions: (1) that Coffey had control of the voting power of the outstanding stock; (2) the plaintiffs could expect no help, relief or redress from the board of directors; (3) Coffey had such control of the corporation that the application of the plaintiffs for a receiver was a proper remedy; (4) Coffey was misappropriating the funds and property of the corporation; (5) there was gross mismanagement in the conduct and control of the defendant corporation; and (6) while the corporation was solvent, good and sufficient reason existed for the appointment of a receiver in order to secure to the stockholders the assets of the corporation.
Walter J. Walsh, for the appellant (defendant).
David M. Reilly, for the appellees (plaintiffs).
The first six reasons of appeal attack each of the conclusions as not reasonably supported by the facts found or a reasonable inference therefrom. The subordinate facts established that Coffey, through his own holdings and the allegiance and co-operation of McGrail, was in control of the action of the stockholders, and that he controlled the board of directors. It is a plain inference from his attitude and conduct that no redress was to be expected through the corporation, so controlled. The assignment attacking the conclusion (four) that Coffey was misappropriating the funds and property of the corporation is not pursued. The subordinate facts and the preceding conclusions amply sustain the charge of mismanagement in conduct and control. These considerations are sufficient to satisfy the broad and liberal requirements of our statute authorizing the appointment of a receiver. General Statutes, § 3443; Public Acts of 1919, Chap. 151, § 3; Sheehy v. Barry, 87 Conn. 656, 661, 89 A. 259; Cogswell v. Second National Bank, 76 Conn. 252, 262, 56 A. 574; 23 R. C. L., Receivers, §§ 14, 15, pp. 21, 22; 43 A. L. R. 244, note. The fact that the corporation was solvent is not a controlling or necessarily weighty consideration adverse to the appointment of a receiver; nor is the further fact that the assets of the defendant corporation other than the proceeds of the sale were included in the contract and belong to the vendee, since the defendant would be holden for any such assets diverted to or retained by individuals or wasted or otherwise disposed of. Zeckendorf v. Steinfeld, 225 U.S. 445, 32 Sup. Ct. 728, 56 L.Ed. 1156. The determinative inquiry is whether, considering all the circumstances, the affairs of the corporation should continue to be managed and wound up by those in control of it or, instead, it appears that those in control are so using their power that the property of the corporation should be taken over and administered under the direction of the court. Cogswell v. Second National Bank, supra. The application for a receiver is addressed to the sound legal discretion of the court, to be exercised with due regard to the relevant statutes and rules, and such exercise is not to be disturbed lightly nor unless abuse of discretion or other material error appears.
The availability and adequacy of another remedy is, as the appellant claims, a consideration to be carefully weighed in deciding whether a receiver is necessary. If it appears that some expedient action or remedy, less stringent in effect than a receivership, will meet the situation, that course should be taken. Massoth v. Central Bus Corporation, 104 Conn. 683, 695, 144 A. 39. Here, however, the faults found in the conduct and situation of the corporation are such as to fully justify the judgment of the trial court, inferable from its decision, that the intervention of a receiver afforded the most direct and practicable means of relief for, and to secure just protection to, the complaining stockholders, as compared with the stockholders' suits which the appellant suggests as an alternative. Considerations, such as the effect of a receivership upon the business standing, credit, and welfare of a going concern, which often dictate a preference for other means of redress, are wanting in the present situation.
It appears from the record that this action was returnable the first Tuesday of May, 1929; that on May 11th, after the return day, a motion for appointment of a temporary receiver was filed but it was not until July 9th that such temporary appointment was made, after an answer had been filed (June 24th) by the defendant corporation and, on several days thereafter, all the evidence produced by both parties as to all the issues raised, was heard. The hearing on confirmation was then set for August 9th, when the appointment was confirmed and made permanent. This procedure conformed to § 51, Rules of Court. Practice Book, p. 253. No valid reason was advanced or appears why, as the appellant claims in reasons of appeal, he was entitled to a retrial of the same issues before the making of the temporary receiver permanent.
The remaining assignments of error pertain to rulings on evidence. A claim adjuster for an insurance company was permitted to testify that the company was paying Coffey for total disability during the period covered by the salary as manager of the defendant corporation which Coffey had drawn. The only ground of the objection to the testimony which was urged — that it was irrelevant and immaterial — was not well taken. It had a direct and important bearing upon his right to the salary in question. William H. Yates who, in September, 1926, bought stock in the defendant corporation and became a director, testified that, in making the purchase, he dealt with Coffey, was inquired of if the latter told him whether or not the outstanding stock was paid for, and testified, over objection on the ground of lack of authority, that he was told that it was all paid for. The finding does not show whether Yates bought his stock from Coffey individually or, through him, from the corporation. If the former, the objection did not apply; if the latter, authority to make the representation is inferable from the scope of Coffey's position as president and manager and his agency to obtain stock subscriptions as appears from the finding of facts. Ackerson v. Jennings Co., Inc., 107 Conn. 393, 397, 140 A. 760; Dresser Son, Inc. v. Insurance Companies, 101 Conn. 626, 641, 126 A. 912. Furthermore, the ruling, even were it erroneous, was too trivial in effect to constitute reversible error, and the same is true as to the admission, as an exhibit, of the printed copy of the testimony of Coffey in a compensation case, appearing in the Supreme Court Record of Coffey v. Coffey Laundries, Inc. ( 108 Conn. 493, 143 A. 880). This was introduced for the purpose of contradicting testimony of Coffey in the instant case. If offered in proper form it would be admissible. Avery v. White, 83 Conn. 311, 314, 76 A. 368; Hedge v. Clapp, 22 Conn. 262, 266; Tomlinson v. Derby, 43 Conn. 562. The case of Roraback v. Pennsylvania Co., 58 Conn. 292, 20 A. 465, relied on by the appellant, is not in point. The offer was irregular and the transcript in that form should have been excluded. However, the record statement of the ruling does not show that the testimony was in fact contradictory, or tended to affect the credibility of Coffey and perusal of the evidence itself reveals nothing which could have so affected the result or worked any such prejudice to the defendant as would require or justify a new trial. Vitakunas v. Mastco, Inc., 106 Conn. 286, 137 A. 733; Carroll v. Arnold, 107 Conn. 535, 544, 141 A. 657.