Craigv.James

Appellate Division of the Supreme Court of New York, First DepartmentApr 1, 1902
71 App. Div. 238 (N.Y. App. Div. 1902)
71 App. Div. 23875 N.Y.S. 813

April Term, 1902.

Francis M. Applegate for the appellant.

David Gerber, for the respondent James.

John L. Hill, for the respondents Thompson and Lounsbury.

William Hepburn Russell, for the respondents Hard, Vermeule and Gilbert.


This action is brought by a stockholder of the Anglo-American Savings and Loan Association in his own behalf and in behalf of all other stockholders of said association, to recover damages resulting to the plaintiff as such stockholder on account of the negligence of the trustees and directors of such association, and also for all losses sustained by the plaintiff and other shareholders arising out of the negligence, fraud, misconduct, waste and breaches of trust of said directors and trustees, and for such other relief in the premises as may be just.

The complaint sets forth for all practical purposes the same state of facts in two counts or causes of action, the effect of which is, as the plaintiff claims to show, that the corporation and its stockholders have suffered damage by reason of various breaches of trust in the management by the directors and trustees of the affairs of said association. Among other things it is averred in the complaint that the said association is a domestic corporation and the plaintiff a shareholder therein; that in or about the month of December, 1900, the corporation became insolvent, and in an action brought in the Supreme Court by the People for its dissolution a decree was entered on the 7th day of January, 1901, dissolving the corporation and appointing permanent receivers for the distribution of its assets and the winding up of its affairs, and that such receivers duly qualified. The complaint further avers that prior to the decree of dissolution the defendants as officers, trustees and directors of the corporation from January 18, 1898, to the date of its dissolution, made loans of the funds of the association to one William R. Pierce, which loans were secured by mortgages upon real estate; that the real estate was inadequate security, and that the loans in fact were greatly in excess of the real and true value of the property and that losses to a very large amount resulted thereby. The complaint further avers that prior to the commencement of the action the plaintiff made a demand upon the receivers appointed upon the dissolution to bring an action against the defendant officers, trustees and directors to recover damages for their acts of misconduct, waste, etc.; that the receivers refused to bring such action, and that thereupon the plaintiff made application to and obtained leave of the Supreme Court to bring this action making the said receivers defendants herein. The second cause of action is practically the same, so far as the acts of the directors and trustees are concerned, except it is averred that instead of loans being made to Pierce upon the property secured by mortgages the land was purchased with the funds of the association and title thereto taken in the name of Pierce, who really acted as the agent of the association. The relief demanded in the complaint is for a decree that all of the defendants, except the receivers, be adjudged to be individually liable to the plaintiff for all losses resulting to him from the defendants,' other than the receivers,' negligence, fraud, misconduct, waste and breach of trust, and that the plaintiff and his costockholders who may come into the action have judgment against the defendants for the respective amounts which, upon an accounting, they shall appear to have, respectively, suffered as damage in the manner aforesaid, and that such judgment provide for the manner and method of such payment, and for such other and further relief as may be just.

The defendants separately demurred to the complaint upon the ground, among others, that it did not state facts sufficient to constitute a cause of action; that improper causes of action were joined and that there was a defect of parties defendant. The first ground of demurrer presents the real question to be considered.

It is asserted by the appellant that the plaintiff, as a stockholder, has a distinct right to sue for a breach of trust by reason of his relationship to the directors and to the property. If his contention in this regard can be sustained, then it is quite possible to uphold the present complaint. The difficulty, however, with such contention is that the wrongs which are averred and set out in the complaint show conclusively that they are injuries to the corporation. It is the latter's property and money that have been wasted and extravagantly used, and the misconduct of its officers, directors and trustees affects it, and not the property of the stockholders; consequently, the stockholders' right to any remedy authorized by law to right the wrong is purely derivative and is not based upon any relation of trustee and cestuis que trustent existing between the officers and directors and themselves. ( Alexander v. Donohoe, 143 N.Y. 203. ) Such is the rule last announced by this court when considering such subject. ( Niles v. N.Y.C. H.R.R.R. Co., 69 App. Div. 144.) Not only is this the rule announced by the authorities, but it is true in principle. Primarily the wrong complained of is against the corporation which holds the title to the property injured, and like a natural person is the real entity which suffers thereby. If the stockholder as such can maintain an action to redress such wrong, then it must follow that a right of action is given to a person not the owner of the property, and who does not suffer by the wrong. It also necessarily follows that distinct and independent parties have the inherent legal right to redress a wrong which, in the eye of the law, is only suffered by one. We know of no principle of law which enables it to be said that a cause of action against a wrongdoer is vested at one and the same time in the corporation and also in the stockholder. In a sense it may be that a trustee and director of a corporation is a quasi trustee for the stockholders, but this is only so because the stockholder is ultimately interested in the property of the corporation. Primarily, however, the directors and trustees are the managers of the corporation, and its interests are the subject of their care. It not unfrequently happens that a stockholder is distinctly inimical to the well-being of the corporation. The directors, therefore, in the management of its affairs, represent the corporate and not the stockholders' interest therein. Such being the relation between the director, corporation and stockholder, it necessarily follows that the rights and remedies of the corporation are primary, and those of the stockholders are incidental and secondary; and for wrongs committed against the corporation it is the right of the former to redress the same. In the nature of things, the rights of both cannot be equal respecting such matter. It is well-settled law that a stockholder cannot bring an action to redress the wrong inflicted upon a corporation until he has made a demand upon the corporate authorities to bring the action and they have refused; or unless a state of facts is averred from which it appears that such demand would be clearly unavailing. In the absence, however, of the latter condition the stockholder, as an integral part of his cause of action, must aver and prove the demand and refusal, or the circumstances which excuse it. ( Flynn v. Brooklyn City R.R. Co., 158 N.Y. 493.)

It seems clear to us, therefore, that this action may not be maintained upon any theory of inherent right in the stockholder by reason of his relation to the officers and directors as such. His right in this respect is derivative and must come in some form through the refusal or inaction of the corporate authorities charged with the primary obligation. The corporation having been dissolved by proper decree of the court and receivers appointed, it necessarily follows that such receivers became vested with all of the authority possessed by the corporation so far as a redress of its wrongs is concerned, and the right to bring this action undoubtedly became vested in them. ( Bosworth v. Allen, 168 N.Y. 157.) It seems clear also that the plaintiff as a stockholder would be invested with a cause of action upon failure of the receivers to bring an action to redress the wrong averred in this complaint. It is alleged therein that such demand was made upon these receivers after their appointment and before the commencement of this action, and that they refused to bring such action; that thereupon the plaintiff made application to the court for leave to bring the same and make the receivers parties defendant, which leave was granted. So far, therefore, as this cause of action is concerned, as is averred in the two counts of this complaint, it would seem that a good cause of action was alleged for the misconduct of the directors and trustees, and that the plaintiff, by proper demand upon those charged with the duty of proceeding against the defendant directors and by leave of the court, properly comes before this court, and is possessed of the right to maintain this action so far as the averments we have hitherto considered are concerned.

By the 10th paragraph of the complaint, however, it is averred that the receivers of the association have entered into a contract, which is attached to the complaint and made a part thereof, which contract it appears has received the approval of the court, and by direction thereof the receivers have executed the same in accordance therewith. By this contract all the property and assets of the corporation, except cash on hand, were taken over from the receivers by the Empire State Realty Company, and the defendants, the trustees, officers and directors of the corporation, being the same persons now sought to be charged with liability, were released from all personal claims or demands which existed against them as directors of the said corporation and for any and all acts done by them as such directors. It was undoubtedly competent for the receivers, acting in good faith, to settle with and release the liability of the directors to the corporation, and such release, if it received the sanction of the court, would be legal and binding. It appears that this contract was presented to the court, received its approval, and its terms were authorized by the court to be carried out by the receivers. Upon appeal such direction by the court was confirmed. ( People v. Anglo-American S. L. Assn., 66 App. Div. 9.) It is quite clear that after this ratification by the court of the acts of the receivers, they would be estopped from maintaining any action against the directors to enforce a liability from which, by their contract with the receivers, they were released.

In the present state of this pleading it appears, by affirmative averment, that the derivative right in the plaintiff to maintain this action comes through the receivers. As we have already seen, whatever right existed in the corporation to enforce liability against the directors became vested in the receivers upon their appointment; consequently the plaintiff, before he could bring an action as a stockholder, was required to make the demand upon the receivers. At the time he made such demand, the receivers had no cause of action, because they had prior thereto released the same by virtue of the contract with the Empire State Realty Company and the order of the court based thereon. The plaintiff has and can acquire no rights in addition to those possessed by the receivers, and as they can maintain no action, in the absence of fraud and bad faith, it necessarily follows that the stockholders can maintain none. In consequence of which the demurrers were properly sustained and the judgment entered thereon should be affirmed, with costs, with leave to the plaintiff to plead over within twenty days upon the payment of costs in this court and in the court below.

PATTERSON, INGRAHAM and McLAUGHLIN, JJ., concurred; HATCH, J., taking no part.

Judgment affirmed, with costs, with leave to plaintiff to plead over within twenty days on payment of costs in this court and in the court below.