
    (100 App, Div. 414)
    KNICKERBOCKER INV. CO. v. VOORHEES et al.
    (Supreme Court, Appellate Division, First Department.
    January 20, 1905.)
    1. Corporations—Voting Trust—Fraud—Injunction.
    Where, in a suit by a corporation to terminate a voting trust of stock which it owned in another corporation, on motion for a temporary injunction, it appeared that under the voting trust agreement the management of the affairs of plaintiff had been virtually turned over to persons who had but little personal interest thérein or in the success of the-other corporation, slight evidence of bad faith would be sufficient to justify a finding that the execution of the voting trust agreement was. procured by fraud so as to authorize the grant of the injunction.
    2. Same—Injunction—Statutes.
    Insurance Law, Laws 1892, p. 1958, c. 690, § 56, provides that no order, judgment, or decree restraining or interfering with the prosecution of the business of any domestic insurance company shall be made otherwise than on the application of the Attorney General after the approval of the Superintendent of Insurance. Held, that where a corporation sued to set aside a voting trust of stock owned by it in a domestic life-insurance company on the ground that it was procured by fraud, an injunction pendente lite restraining the voting trustees from taking any further action with .reference to voting stock of the plaintiff, but which did not enjoin them from acting as officers of the insurance company, or from voting their own stock in the insurance company, was not violativeof the statute.
    Van Brunt, P. J., and Ingraham, J., dissenting.
    Appeal from Special Term.
    Suit by the Knickerbocker Investment Company against Foster M. Voorhees and others as individuals and as voting trustees' of the stock in the Bankers’ Life Insurance Company. From an order continuing pendente lite an injunction granted ex parte, defendants appeal.
    Affirmed.
    Argued before VAN BRUNT, P. J., and HATCH, PATTERSON, INGRAHAM, and LAUGHLIN, JJ.
    Herbert Barry, for appellants.
    Eugene Van Schaick, for respondent.
   LAUGHLIN, J.

The plaintiff is a corporation organized under the-laws of New Jersey for the purpose, as shown by the admissions in the-answers and the affidavit of its president presented by the defendants in opposition to the motion, of controlling or managing and operating a new life insurance company through ownership of the majority of the shares of the capital stock. The incorporators of the plaintiff originally contemplated organizing, owning, and operating the Lincoln-National Life Insurance. Company, but they abandoned that project, and decided to obtain control of the Bankers’ Life Insurance Company, which was an existing, successful, insurance corporation organized under the laws of New York, having 1,000 shares of capital stock of' the par value of $100 each. The plaintiff corporation purchased 626 of these shares of stock, and by resolution of its board of directors constituted the individual defendants voting trustees thereof for the period of five years. The plaintiff now desires to terminate this voting trust, and to manage its stock in the insurance company as its duly elected, directors may deem best for its interests; and it brings this action to-annul the so-called voting trust on three grounds: First, that it was void upon its face; second, that it was void for fraud, in that its execution was obtained through false and fraudulent material misrepresentations of two of the individual defendants; and, third, that the voting trustees have been guilty of bad faith and mismanagement justifying its rescission. The temporary injunction order from which the appeal is taken enjoins the individual defendants from voting on the stock at any meeting of the' stockholders of the insurance company,, and from in any manner interfering therewith pending the action, except to properly indorse and return the same to the plaintiff, and “from in any manner dealing with the assets or property of the Bankers’ Life Insurance Company by virtue of their holding such certificates of stock.

Whether the formation of a corporation for the purpose of controlling or managing and operating another corporation through the ownership of a majority of its stock, as distinguished from leasing or purchasing its property and franchises, is valid under the laws of New Jersey, is a question not presented for decision on this appeal; but we cannot refrain from observing that the propriety or necessity therefor is not apparent. If, however, that be lawful under the statutes of New Jersey, and not opposed to our public policy—which it is unnecessary at this time to decide—it does not follow, as contended by the learned counsel for the appellants, that the corporation thus organized to control and manage another may delegate to individuals, not its directors or officers, exclusive power to manage and control the other corporation for a period of five years, leaving its directors, through whom the law contemplates that the corporation shall exercise its powers, virtually without any function to perform after thus delegating to others all of their powers and duties. The purchase by the plaintiff of the insurance company’s stock was made in December, 1902, from two individuals, one of whom held 501 shares and the other 125. The holder of the 125 shares had paid par therefor on the incorporation of the company in 1899, and the holder of the 501 shares had paid $120 per share therefor in September, 1902. The company bad accumulated a large surplus, its business was increasing, and it was paying dividends of 6 per cent. The stock was all purchased by the plaintiff at $300 per share. The moving papers tend to show that this was more than its value, and that the purchase'was induced by false and fraudulent representations of the individual defendants Voorhees and Stokes concerning its value, and in furtherance of a scheme formed by them with the defendant Sherer and the individuals from whom the stock was purchased to control the management of the insurance company for the benefit of the individual defendants, their relatives and friends. It does not appear but that the vendors of this stock had the absolute right to sell it unconditionally, or that in giving the option thereon pursuant to which the transfer was subsequently made they imposed an}*- conditions; but after the execution of a valid option for the sale of the stock and the payment of $30,000 thereon, but before the actual delivery of the stock, the board of directors of the insurance company passed a resolution declaring their unalterable opposition to the transfer of the control of the capital stock to the defendant Voorhees, or anybody else of whom they had no previous knowledge and directing that the resolution be communicated to the parties interested, that the attorney for the company take such steps as might be necessary to protect its interests in the premises, and that the chairman explain to the parties interested that the board was opposed to the transfer of the stock previous to the submission to it of the names of the purchasers in order to enable it to decide whether the transfer was for the interests of the company. Upon the presentation of this resolution to Voorhees and the investment company, negotiations were opened between the parties apparently with a view to averting friction, and not in recognition of the right of the board of directors of the insurance company to interfere with a sale of the stock. As a result of these negotiations, a voting trust agreement was signed by the plaintiff and the individual defendants as voting trustees. It purports to be an agreement between the stockholders of the insurance company who should become parties thereto and the three trustees, concerning whom it is recited that one had been chosen to represent the majority and one the minority of the stockholders of the insurance company, and that the other was selected by these two. It contains no reference to the insurance company, or recital that it had become a stockholder, or any condition or understanding that such agreement should be executed. It purports to give to these trustees exclusively the voting power on the stock of such stockholders as should subscribe thereto for the period of five years, and provides that the stock shall be transferred upon the books of the company to the names of the trustees, who were to give the stockholders certificates showing that at the expiration of the five years they would be entitled to have issued to them the same number of shares and to any dividends declared in the meantime. The trustees covenanted to “exercise their best judgment from time to time to select suitable directors, to the end that the affairs of the company shall be properly managed.”

There must be a trial of the issues, and therefore we should, in reviewing the propriety of issuing the temporary injunction, refrain as far as possible from expressing views that may be regarded as controlling on the final disposition of the case; and yet, in view of the many contentions of the appellants strenuously urged both upon the argument and in the points, we cannot refrain from making some observations that may have a bearing on the merits. The defendants contend that the voting trust agreement was made pursuant to the provisions of section 20 of the general corporation law (Laws 1892, p. 1807, c. 687), and that it is therefore valid and irrevocable. Doubtless a voting trust agreement made pursuant to that statute would ordinarily be valid; but on the question of whether it might not be revocable, in many instances depending on the facts, we refrain from expressing an opinion at this time. The circumstances here presented, however, appear to us' to. be extraordinary. If it should become necessary, the statute may be declared inapplicable to a corporation organized, as the plaintiff was, to control the operations of another through ownership of the majority of the stock; for otherwise the directors would be divested of any voice in the affairs of the corporation which they were elected to manage.

The appellant^ also contend that they have fully rebutted all charges of fraud and bad faith. The defendant Sherer, at the time of the ' purchase of the stock by the plaintiff, owned a single share of stock in the insurance company, and was director thereof, but, so far as appears, he had no interest in the investment company. The defendant Voorhees held 5 of the total issue of 2,400 shares of the capital stock of the investment company, for which the plaintiff claims he never paid. The defendant Stokes was a director, and held 100 shares of the investment company capital stock, which it is claimed was given to him for his good will and friendship, owing to his influence politically; but this he denies, and claims that full consideration was paid for the stock. After the making of the voting trust agreement, Stokes and Voorhees each purchased one share of the capital stock of the insurance company to qualify them as directors, and they were elected directors, and Voorhees, against whose control in the management of the corporation the board of directors had recently protested, was elected president. The moving papers tend to show that the other directors of the investment company were political or personal friends of Voorhees or Stokes, and that their action was dominated and controlled by them; that neither of them had had any experience or possessed any special qualification for conducting an insurance business; that during the succeeding year the volume of the business of the insurance company materially fell off, its surplus largely decreased, and its expenses largely increased, and it ceased to pay dividends; that an attempt was made to have the stockholders ratify the action of the board of directors in creating the voting trust agreement by having the stockholders convened on call of the chair, after an adjournment of the annual meeting subject to the call of the chair, without any special notice that this question was to be considered; and that, although the minutes show the adoption of a resolution of ratification, it was not in fact adopted and the action was not in fact taken by the requisite stock vote, which, 'however, is denied by the opposing affidavits. It thus appears without controversy that by the voting trust agreement the management of the affairs of the investment company have been virtually turned over to the voting trustees, who have but little personal interest therein or in the success of the insurance company. Even the uncontroverted facts disclose an extraordinary state of circumstances, and slight evidence of bad faith may be sufficient to justify a finding that the execution of the voting trust agreement was procured by fraud.

It is claimed that the injunction order violates the provisions of section 56 of the insurance law (Laws 1892, p. 1958, c. 690), which provides that:

“No order, judgment, or decree providing for an accounting or enjoining, restraining or interfering with the prosecution of the business of any domestic insurance corporation or appointed a temporary or permanent receiver thereof shall be made or granted otherwise than upon the application of the attorney general, on his own motion or after his approval of a request in writing therefor of the superintendent of insurance, except in an action by a judgment creditor or proceedings supplementary to execution.”

So far as the voting trustees are individual stockholders of the insurance company, they are not enjoined from voting, nor are they enjoined from acting as officers of the insurance company. They are merely enjoined from taking any further action with reference to voting upon the stock of the plaintiff, or attempting further to control or influence the action of the insurance company by virtue of the trust agreement. The plaintiff is concededly the owner of this stock. It makes out a prima facie case showing that these individual defendants have no right to represent it further in voting on the stock. If the plaintiff prefers that its stock should not be voted upon at all, rather than that these individual defendants should vote it, that would seem to be its privilege as the owner; and, if the individual defendants, moved by a commendable desire to protect the plaintiff, are solicitous lest the minority take advantage of the situation and control the next election, they are at liberty under the order of the court to return the stock to the plaintiff, its rightful owner, who may, in that event, -take part in the election of officers.

It follows that the order should be affirmed, with $10 costs and disbursements.

All concur, except VAN BRUNT, P. J., and INGRAHAM, J., who dissent.  