
    Robert Holmes, Individually and as Trustee, and Others, Respondents, v. Saint Joseph Lead Company and Others, Defendants, Impleaded with Edward C. Smith, Appellant.
    (No. 1.)
    First Department,
    July 9, 1915.
    Corporations—action by stockholders against directors for negligence — complaint.
    A complaint, in an action by stockholders of a corporation against its directors to compel them to account for losses claimed to have been sustained through their negligence, which alleges that subsidiary corporations which had contracted for the purchase of a superior quality of coal had been furnished coal of an inferior quality, although they had paid the contract price for the better coal; that the plaintiffs had demanded an investigation, and that steps be taken to recover the losses, but that no adequate investigation had been made, except as to the losses sustained by one of the companies; that the defendant directors have refused and have voted to make no further investigation, does not state a cause of action, as there are no allegations that the defendants in so voting acted other than for what they believed to be the best interests of the corporation, or which charge the directors with a breach of trust, or impose upon them the burden of defending their acts.
    Appeal by the defendant, Edward 0. Smith, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 16th day of April, 1915, overruling his demurrer to the complaint and granting the plaintiffs’ motion for judgment on the pleadings.
    
      Henry C. Quinby, for the appellant.
    
      Edward W. Hatch, for the respondents.
   McLaughlin, J.:

This action, like the one brought by the same plaintiffs, in which the appeal of the defendants Camp and Smith is decided herewith (Holmes v. Saint Joseph Lead Co., No. 2, 168 App. Div. 688), is an action by stockholders of the St. Joseph Lead Company to compel the defendant directors of the company to account for and pay over to it the amount of losses alleged to have been sustained through their negligence. The defendant Smith demurred to the complaint upon the ground that it did not state facts sufficient to constitute a cause of action against him. After the demurrer was interposed the plaintiffs moved for judgment on the pleadings. The demurrer was overruled, the motion for judgment granted, and Smith appeals.

The complaint alleges in substance that the St. Joseph Lead Company, a domestic corporation, of which defendant Smith is a director, owns practically the entire outstanding capital stock of the Doe Run Lead Company and of the Mississippi River and Bonne Terre Railway, which latter company in turn owns the entire outstanding stock of the St. Francois County Electric Railroad Company, and all of which are corporations organized and operating in Missouri; that these corporations all use considerable quantities of coal, and for some years immediately prior to the commencement of the action had contracted for the purchase of Carterville coal, a superior quality of coal produced in the Carterville district of Illinois; that for some years coal of an inferior quality and a lower price has been delivered instead of Carterville coal, though the corporations have paid the contract price for Carterville coal; that the plaintiffs have demanded that a thorough investigation of the matter be made and steps taken to recover the losses sustained, but that no adequate ” investigation has been made nor any action commenced to recover such losses except those sustained by the St. Francois County Electric Railroad Company, and that the defendant directors have refused and have voted not to make any further investigation or take any further action except in the case of the St. Francois Company. The judgment demanded is that the defendant directors account for the losses sustained by the lead company and that judgment be entered against them for the amount so determined.

I am of the opinion that this complaint fails to state a cause of action against the appellant. Disregarding the fact that this action is brought by stockholders of the St. Joseph Lead Company against its directors, who would not ordinarily be accountable in this action for losses sustained by the subsidiary companies, the complaint shows that at the request of the plaintiff Robert Holmes—himself a director—the defendants did make an investigation and are continuing it and taking action in the case of one of the companies. There is nothing in the complaint to show that in voting to make no further investigation, and take no further action, the appellant acted other than for what he believed to be the best interest of the corporation.

It is true there are general allegations of losses sustained and that the alleged fraudulent practices grew up through the connivance and knowledge of some of the officers or employees of the companies, but there are no allegations which charge this appellant with a breach of trust or impose upon him the burden of defending his acts as a director. As has been pointed out in the other case to which reference has been made, decided herewith, the appellant is not liable for an error of judgment and his refusal to make such further investigation as the plaintiffs deem adequate and institute litigation, especially where the financial responsibility of the prospective defendants is not disclosed, does not establish that he was negligent or derelict in any way in performing his duties as a director.

The order appealed from, therefore, is reversed, with ten dollars costs and disbursements, and the demurrer sustained, with ten dollars costs, with leave to the plaintiffs to serve an amended complaint on payment of costs.

Ingraham, P. J., Laughlin, Dowling and Hotchkiss, JJ., concurred.

Order reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs, with leave to plaintiffs to serve amended complaint on payment of costs in this court and in the court below.  