Argued April 27, 1960
Decided June 10, 1960
Appeal from the Appellate Division of the Supreme Court in the Second Judicial Department, SAMUEL RABIN, J.
Charles H. Miller, Sidney Friedman and Donald L. Laufer for appellants. David Friedman, Adolph J. Eckardt and Wallace J. Borker for respondents.
The petitioners, representing deceased shareholders of the Baldwin Trading Corporation, a dissolved corporation, seek an accounting of the surviving directors pursuant to section 106 of the Stock Corporation Law. Special Term dismissed the petitions on the ground that the proceeding was barred by the six-year period of limitation (Civ. Prac. Act, § 48, subd. 8). The Appellate Division reversed on the ground that the ten-year period (Civ. Prac. Act, § 53) was applicable. That court has certified as a question for review the propriety of its order.
Petitioners allege that the final distribution of the corporate assets was illegal as it was made without regard to the shareholder contributions and that certain shareholders received a disproportionate share of the assets.
The principal question presented because of the contrariety of the views of the courts below is whether a proceeding sought by stockholders to compel an accounting pursuant to section 106 of the Stock Corporation Law is one brought in the right of the corporation or the right of the individual stockholders.
The appellants construe the petitions as an effort to seek redress for wrongs which flow from corporate mismanagement and wasting of corporate assets — hence a corporate action that must either be prosecuted in the name of the corporation (General Corporation Law, § 29) or form the basis of a stockholders' derivative action.
As section 106 specifies no time limitation, it is the argument of the appellants that the character of relief requested placed this proceeding in the category of cases governed by the six-year period of limitation of actions.
The legislative history surrounding the enactment of section 106 sheds little, if any, light on the inquiry. The essence of the legislation was to provide for a speedy termination of corporate affairs under judicial supervision and control upon proper notice to all parties concerned, thereby accomplishing at least two definite purposes: (1) the removing of any claim of liability against directors in dissolution, and (2) allowing individual stockholders a means of presenting individual or corporate claims without the necessity of instituting an individual action. (See legislative memoranda accompanying L. 1922, ch. 125.) The statute, however, is not to be interpreted by its text alone. It takes meaning from the rights granted to the corporate shareholders of a dissolved corporation, the status of the directors of a dissolved corporation, and the nature of the proceeding.
It is evident that an accounting proceeding brought pursuant to section 106 is an equitable proceeding. The right to such an action is specifically given to individual stockholders. Nowhere does section 106 mention a corporate action for it presupposes a dissolved corporation and implies, at least negatively, that the primary right to an accounting lies at the behest of directors seeking discharge, creditors seeking payment and shareholders seeking distributable assets.
Although directors of a corporation in dissolution are not trustees of an express trust, directors in dissolution have been classified as trustees of a trust fund created by operation of law for the benefit of the creditors of the corporation and its stockholders (see, e.g., Lammer v. Stoddard, 103 N.Y. 672; Ludington v. Thompson, 153 N.Y. 499; Marine Trust Co. v. Tralles, 147 Misc. 426 [Sup. Ct., Erie County, 1933]; Matter of Friedman, 177 App. Div. 755 [1st Dept., 1917]; De Martini v. McCaldin, 184 App. Div. 222 [1st Dept., 1918]; Wilson v. Brown, 107 Misc. 167 [Sup. Ct., Erie County, 1919]).
In the case of Darcy v. Brooklyn New York Ferry Co. ( 127 App. Div. 167, affd. 196 N.Y. 99), the action was in equity against trustees to compel them to account for breach of duty. The Appellate Division wrote (p. 169): "That the property of a corporation [dissolved] is a trust fund in the hands of its directors for the payment of its debts has long been settled. ( Bartlett v. Drew, 57 N.Y. 587; Hastings v. Drew, 76 id. 9 * * *)". It was held that the trustees could not transfer the funds in their hands in disregard of the rights of their cestuis, no matter how honest their motives be. In affirming, this court wrote ( 196 N.Y. 99, 102): "The liability of the directors is predicated not on the ground that their action in making the transfer was fraudulent but upon * * * violation of duty".
At that time the predecessor statute of section 29 of the General Corporation Law referred to dissolution directors as trustees. However, in 1932, this section was amended (L. 1932, ch. 552) and the word "trustees" was removed from the statute. The legislative memoranda discloses that the purpose was to prevent a change of status then existing between directors of a going corporation and those in dissolution.
But it is clear that directors have always been found to stand in a confidential position. They act as fiduciaries in the operation of corporate affairs, especially in regard to minority interests. We have continued to recognize that the basic status of corporate directors was essentially that of trust guardians of corporate property ( Sialkot Importing Corp. v. Berlin, 295 N.Y. 482).
While directors of a "going" corporation are only under a duty to account for a six-year period (Civ. Prac. Act, § 48, subd. 8), it does not necessarily follow that the directors of a dissolved corporation must of necessity be governed by the same or any definite period of limitation. A basis for distinction does exist. In a going concern there are yearly meetings of stockholders, balance sheets are struck yearly, and books are kept and maintained in the principal office wherein they may be inspected (Stock Corporation Law, §§ 10, 45, 55, 77). However, when the corporation is dissolved and no longer continues to function, even as a de facto corporation, individual stockholders have little, if any, means of ascertaining the exact state of the corporate affairs. In the case of the dissolved corporation, it may be readily inferred that laches or some form of estoppel was intended to govern the presentation of corporate and individual claims. Here, there is no claim that Trading continued to function actively and prosecute corporate business, but rather, it is quite clear that Trading had ceased to exist for all purposes except final liquidation.
Therefore, whether the directors be labeled "Trustees", "Liquidating Directors" or "Statutory Liquidators", they occupy a position of fiduciary responsibility having a unique advantage over the shareholders. The directors here should be held to the same standards of trust as apply to other fiduciaries. In De Martini v. McCaldin ( 184 App. Div. 222, 226, supra) the standard as applied to directors was restated in this way: "Here, the corporation having no creditors, the stockholders were the equitable owners of the property. `Whoever has an interest in the trust property or funds is entitled to sue for an accounting with respect thereto.' (1 C.J. 631.) There is nothing unfamiliar about the maintenance of a suit against a trustee for an accounting at the hands of one who is the equitable owner of the property held by the trustee. The right to maintain the action is the same whether the trustee is vested with the legal title and was duly made a trustee or is a trustee ex maleficio."
It should be noted that the proceeding is not brought on the basis of a fraud (which is imperfectly alleged, Reno v. Bull, 226 N.Y. 546) but on the basis of a right granted by section 106 of the Stock Corporation Law. It is not an action at law for damages sustained as the result of mismanagement or waste but rather for a return of trust funds alleged to have been fraudulently and secretly distributed. We find nothing in the petitions that lends credence to appellants' interpretation of the petitions. The petitions in this case contain no allegations that Trading was improperly dissolved or that its assets were appropriated, or that the corporation was injured through the mismanagement of the directors. Cases like Brock v. Poor ( 216 N.Y. 387); Niles v. New York Cent. H.R.R.R. Co. ( 176 N.Y. 119 ), and Kavanaugh v. Kavanaugh Knitting Co. ( 226 N.Y. 185), upon which appellants heavily rely, are inapposite.
Brock was concerned solely with the misappropriation of the assets of a going corporation. Niles involved a conspiracy to undermine a solvent corporation by refusing to pay debts and carry on the corporate business. Kavanaugh dealt with the proposed dissolution of a prosperous corporation which would have wasted corporate assets and substantially affected the plaintiff's proportionate interest.
Here, Trading was not improperly dissolved. The pledged shares, when released, were immediately distributed in final liquidation. The wrong complained of is not that they were liquidated but that they were not ratably distributed. We fail to see how the injury complained of would be a direct injury to Trading so as to justify the application of a derivative action theory to this proceeding. The manner of distribution could not and did not affect the worth of the corporation. There has been no wasting of corporate assets in the true sense, but merely a disproportionate distribution of property among individual shareholders. If the allegations are true that, at the time of final distribution, the estates of the petitioners received neither their prorata share of Baldwin stock or other property in kind, absent a defense, an improper distribution may have resulted. Therefore, although the released shares, when received, were taken in the corporate name, the actual owners of this property were the individual shareholders of the dissolved corporation. Hence the status of the directors here bears the hallmark of a trusteeship. Therefore, if any period of limitation should be applied, the ten-year period would govern (Civ. Prac. Act, § 53).
Accordingly, the order of the Appellate Division should be affirmed, with costs, and the question certified answered in the affirmative.
I vote to affirm.
I agree with Judge BURKE that the applicable time limitation is ten years (Civ. Prac. Act, § 53). I agree with the Appellate Division majority that, since this is a proceeding against trustees for a compulsory accounting of their trust, no time limitation begins to run until repudiation of the trust (4 Bogert, Trusts and Trustees, pt. 2, § 952; 3 Scott, Trusts, § 409; Mabie v. Bailey, 95 N.Y. 206; Douglas v. Phenix Ins. Co., 138 N.Y. 209; Lammer v. Stoddard, 103 N.Y. 672, 673; Gilmore v. Ham, 142 N.Y. 1, 10; Yeoman v. Townshend, 74 Hun 625, 627). This settled rule applies to all sorts of trusts ( Devoe v. Lutz, 133 App. Div. 356, 358, 359, and cases cited). Directors of a corporation in dissolution are truly and actually, not figuratively or by analogy, trustees for the owners of the corporation stock (General Corporation Law, § 29; Heath v. Barmore, 50 N.Y. 302; Sturges v. Vanderbilt, 73 N.Y. 384; Cunningham v. Glauber, 133 App. Div. 10, 12).
Therefore, section 106 of the Stock Corporation Law is, so far as applicable here, a simple provision setting up a proceeding whereby the cestuis may require their trustees to account, much like section 259 of the Surrogate's Court Act. It is not a proceeding ex contractu or ex delictu, nor is it brought on behalf of the corporation. The inclusion in these petitions of charges of misapplication of the trust assets does not change the nature of the proceeding or bring it within subdivision 8 of section 48 of the Civil Practice Act. It would be quite remarkable if the Legislature, in giving the stockholders a device (General Corporation Law, § 106) for compelling their trustees to file an account, had produced a result where trustees who had secretly disposed of the assets six years before, would get complete immunity not only from liability but even from filing an account.
The petitioners, complaining of an illegal and disproportionate distribution of corporate assets made by directors to themselves and others, seek an accounting in order to fix the liability of the directors responsible for the asserted diversion. Although the proceeding is brought under section 106 of the Stock Corporation Law, that provision does no more than provide that, upon the petition of a stockholder (or creditor), the Supreme Court may order an accounting by the directors. The fact, remarked by the court (opinion, p. 147), that "no time limitation" for seeking an accounting is specified, indicates not the absence of any statutory time bar, but rather that the applicable Statute of Limitations of the Civil Practice Act is to control.
In my view, and it is well expressed by the Appellate Division dissenting Justices, the action brought is controlled by the six-year Statute of Limitations prescribed by subdivision 8 of section 48 of the Civil Practice Act. That the subject corporation is dissolved does not mean that the action is not brought, within the meaning of subdivision 8, "by or on behalf of [the] corporation". (See Stock Corporation Law, § 105, subd. 8; General Corporation Law, § 29.) Nor does the fact of dissolution alter or change the status or responsibility of the directors who handled the liquidation and allegedly effected the illegal diversion. Subdivision 8 of section 48 refers to an action against a "director" without regard to whether the corporation is or is not functioning.
While I agree that directors of a corporation, whether functioning or dissolved, are fiduciaries and are duty bound to safeguard, administer and properly apply the corporate assets, they cannot as liquidators of a dissolved corporation be regarded as trustees of an express trust so as to render applicable the ten-year Statute of Limitations or import into the case the doctrine, relied upon in the concurring opinion, that no time limitation begins to run "until repudiation of the trust". (Cf., e.g., Gilmore v. Ham, 142 N.Y. 1, 9-10.) After a corporation is dissolved, its net assets are distributable to the stockholders pro rata subject to any existing preferences, and any breach of duty committed in distributing the assets renders the directors liable to an accounting. Misdirection of the assets to others is subject to subdivision 7 of section 49 of the Civil Practice Act — with its three-year Statute of Limitations — while wrongful retention of assets by a director is subject to subdivision 8 of section 48, or, if the plaintiffs do not sue on behalf of the corporation, to subdivision 1 of section 48 — with its six-year statute.
The cases are at one in holding that a period of limitations — six years, for instance — may not be extended or enlarged by casting the claim in some other form, by electing to proceed in equity, for example, when an action at law has already been barred. (See, e.g., Cohen v. Hughes, 291 N.Y. 698; Cwerdinski v. Bent, 281 N.Y. 782, affg. 256 App. Div. 612; Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259, 264; Hanover Fire Ins. Co. v. Morse Dry Dock Repair Co., 270 N.Y. 86, 89-90; Hifler v. Calmac Oil Gas Corp., 258 App. Div. 78, 89; Corash v. Texas Co., 264 App. Div. 292, 296.) In other words, if there be concurrent remedies, the resort to one rather than the other will not enlarge the shorter period prescribed by the applicable Statute of Limitations. Consequently, the fact, noted in the court's opinion (p. 147), that an accounting proceeding, brought pursuant to section 106, is an "equitable proceeding" cannot assist the plaintiffs. Subdivision 8 of section 48 covers actions at law as well as in equity, but, even were this not so, where, as here, there was available a concurrent legal remedy to redress an illegal diversion of corporate assets, namely, a suit by the stockholder for his prorate share, the statute may not be extended by the device of seeking an accounting, that is, by switching the form of relief or attaching to it a different label.
The circumstance that the corporation has been dissolved and that the illegal diversion occurred in the course of liquidating the corporation should make no difference in view of the fact that its existence continued after dissolution for the purpose, among others, of "collecting and distributing its assets" (Stock Corporation Law, § 105, subd. 8; also, General Corporation Law, § 29). Whether or not it is more difficult for stockholders or creditors of a dissolved corporation to ascertain the state of affairs of such corporation — and I do not believe that it is (see Stock Corporation Law, § 10, as well as common-law rights of inspection) — is beside the point since ignorance of facts giving rise to a cause of action does not, absent a charge of fraud, serve to extend the operation of the Statute of Limitations. (See Chance v. Guaranty Trust Co., 282 N.Y. 656.)
I would reverse the order of the Appellate Division and dismiss the petitions.
Judges DYE and FROESSEL concur with Judge BURKE; Chief Judge DESMOND concurs in a separate opinion in which Judge DYE concurs; Judge FULD dissents in an opinion in which Judges VAN VOORHIS and FOSTER concur.
Order affirmed, etc.