
    Averill v. Barber et al.
    
    
      (Supreme Court, General Term, First Department.
    
    July 9, 1889.)
    1. Corporations—Actions by Stockholders.
    Plaintiff wrote to one W\, as president of a corporation in which he was stockholder, requesting that action should be taken against two of the directors for misconduct and neglect of duty. W. wrote that he had resigned the presidency two years before. There was no evidence that he ever had resigned, and there had been no meeting of the corporation since his election. The two directors were most active in the management of the company. Bield, that these facts were sufficient to entitle plaintiff to sue as a stockholder in his own name.
    
    2. Same—Liability op Directors—Accounting.
    Two of the defendants, directors in a corporation, assumed to acquire title to certain patents in their own name, instead of in the name of the corporation, as they should have done, and transferred them to another corporation which had no knowledge of the equity of the first company therein. The second corporation transferred the patents to one of the same directors as trustee. Held, that a decree that such director should assign all the interest which he held individually and as trustee in the patents to a receiver, and that both directors should account for all profits made by them out of said patents, was proper.
    S. Equity—Accounting.
    The second corporation, having acquired the patents without notice of any outstanding equities, cannot be compelled to account for profits realized from their use. 4. Appeal—Intermediate Orders.
    Under Code Civil Proc. N. Y. § 1316, providing that intermediate orders can be reviewed only on an appeal from a final judgment unless separately appealed from, several intermediate orders cannot be reviewed on an appeal from an interlocutory judgment.
    Appeal from special term, Hew York county.
    William W. A veril 1 sued Amizi L. Barber, James McLain, the American Asphalt Pavement Company, the Hew York Improved Anthracite Coal Company, Andrew Langdon, the Barber Asphalt Paving Company, as stockholder in the American Asphalt Paving Company, against the individual defendants as officers of that company, for alleged breaches of trust, the appointment of a receiver, and an accounting. Defendants appeal from an interlocutory judgment in the case. The following is the opinion of Patterson, J., at special term;
    “ This action has been tried in a very unsatisfactory manner, not in consequence of any fault of counsel, (for, so far as it has been heard by me, it has been well and effectively presented by both sides,) but from the fact that the whole of the plaintiff’s case has by consent been put in on a record of a trial had a year ago before another judge, and I am obliged to take the evidence into consideration upon his rulings, and to give effect to the testimony then admitted. I have gone over that record with extreme care, and I may say, critically; partly with the view of ascertaining if I could with propriety revise some of the rulings upon evidence. Under the circumstances, I am compelled to adopt those rulings. I should not, perhaps, have made some of them had the questions been presented to me originally, but without the benefit of the .arguments made before him, and not knowing what reasons prevailed with the learned judge in admitting evidence, I cannot now undertake to review what he passed upon, and on this submission say what was and what was not (if anything) improperly admitted. It is understood that the exceptions of the defendants to the rulings referred to apply on this trial, and the evidence came in with that understanding. I make these remarks in the outset, because the defendants’ counsel has claimed that I should make specific rulings now on every question of evidence passed upon by the learned judge on the former trial. As the record is made, that cannot be done without virtually ordering a new trial, and subjecting the parties to serious expense and delay. I therefore adopt all the rulings made on the former trial.*
    “There are in reality but two principal subjects of consideration: First. Is the plaintiff entitled to maintain this action as a shareholder in the American Asphalt Company? Second. Was it the duty of defendants Barber, McLain, and Langdon, either by agreement or by reason of their relations as trustees to the American Asphalt Company, upon their acquiring the control of the two De Smedt patents, to transfer them to or hold them for the benefit of the American Company?
    “1. The right of action for the matters alleged in the complaint inheres in the American Company. The testimony establishes that the officers of that company refused to bring the suit. Thereupon the plaintiff, as a stockholder, was entitled to sue. Although brought in his name as plaintiff, the action is really for the benefit of the corporation, and is to enforce a right of the corporation, and not a private right of the plaintiff. He is personally interested only to the extent that he, as a shareholder, would participate in the benefit of a recqvery. The whole theory of stockholders’ actions in cases like the one at bar may be stated in a very few words extracted from the opinion of the court in Brinckerhoff v. Bostwick, 88 H. T. 52, which was an action by a stockholder, brought against directors of a bank for negligent and improper conduct in their official relations, whereby the bank suffered damage. A request liad been made that the receiver of the bank sue the directors, and he declined. The court said (page 56:) < The causes of action set forth in the complaint are losses and misapplication of the funds of the bank through the negligence and misconduct of its directors. For these losses the bank, if still exercising its corporate functions, would have a claim upon the guilty directors which it could enforce by action, but if it refused to prosecute, or if it still remained under the control of the very directors against whom the action should be brought, the stockholders would have a standing in a court of equity to sue in their own names, making the corporation a party defendant. Robinson v. Smith, 3 Paige, 222, 223; Greaves v. Gouge, 69 H. T. 154; Ang. & A. Corp. § 310. See review of cases in Heath v. Railway Go., 8 Blatchf. 347.’ The foregoing citation expresses in brief terms the rule as to the right of the stockholders to maintain an action for a wrong perpetrated by directors to the detriment of the company when the officers of the corporation refuse to institute the suit, or where the directors in control of the corporation are the very persons against whom the action is to be brought. The general idea deducible from the rule is that the stockholder, suing as a substituted plaintiff for the corporation, is merely asserting the corporate rights, and not his own. The cause of action belongs to it, and not to him.
    “It is claimed, however, by the defendants that the plaintiff cannot maintain this action because of certain alleged false statements and representations made by him as the promoter and organizer of the American Company. The matters referred to grow out of the plaintiff’s declarations as to his patents for making asphalt pavements, and are connected with the history of the organization of the American. Company, the transfer to it of the assets of the Trinidad Company, (so-called,) and involve an inquiry'into the circumstances under which the American Company was organized, and under which Barber, McLain, and Langdon were induced to or did become associated with the enterprise of the American Company. It is at this point of the case that I feel embarrassed by a mass of evidence taken at the former trial. Some of that evidence was received by the learned judge before whom the plaintiff’s proof was put in (so far ás I am able to gather) on the question of the right of the
    
      plaintiff to maintain the action at all upon equitable grounds relating to his good faith; and, looking at an opinion written by that learned judge, I should infer from the conclusion at which he arrived that lie deemed it wise to admit the evidence, rather than reject it, and imperil a possible recovery by the plaintiff on the whole merits. When the case came to me, finding such evidence already in, I allowed the defendant to add to it, and so the question is in the case as to the effect to be given to the alleged statements of the plaintiff, (conceding they are established,) made at or before the organization of the American Company, concerning his own patents and his control of the De Smedt patents, and as to other representations referred to in the proof on the record, to which special reference is not now necessary.
    “The action against the three individual defendants is to hold them to a responsibility incurred in their capacity as directors of the American Company, to compel them to account for property which, it is claimed, they should have acquired for the benefit of that company, but which, it is alleged, they obtained for their own individual benefit, and have held and used for their own behalf; and it is claimed that they are to be charged, as trustees for the company, with the value of that property, and with such profits as they may have realized from the use and control thereof. Alleged frauds of the plaintiff are urged as an affirmative defense going to the direct right to maintain the suit. It is not claimed that he is estopped to sue as a stockholder by reason of any complicity or connivance in the acts of the individual defendants, nor that he has been guilty of loches. If such a claim were made, there is absolutely no foundation for it in the evidence. Such matters, if proved, would have been available to defeat the action, but there is no such proof' concerning them as would authorize a finding of fact against the plaintiff. The substantive defense is that the plaintiff, although suing upon a cause of action belonging to the company, cannot maintain the action, because he, as the promoter of the corporation, did or said certain things which amounted to fraudulent acts or representations, whereby the individual defendants were induced to become shareholders, and have been injured. I think this subject must be considered as a question of law; and, if the conclusion at which I have arrived is correct, it is unnecessary to make any finding of fact concerning what the plaintiffs c 1 or said in connection with the formation of the American Company. If le cause of action belongs to the company, all that, the individual defendants 'ould set up by way of defense to it would be such • matters as tended to relieve them from responsibility to the corporation. What might have been said or done by persons inducing them to become shareholders would not relieve them. This may be illustrated by thg case of a subscriber sued by the corporation upon his subscription, and who sets up as a defense that the promoters of the company bought property transferred to and for the purposes of the corporation, and from themselves, as vendors, at such exorbitant prices as to amount to a gross fraud. That would not be a defense, (Hornaday v. Railroad Co., 9 Ind. 263,) and the precise illustration, given was in the ease of Dorris v. French, 4 Hun, 292, in which the promoters, owning patent-rights of small value, turned them into the corporation at several hundred per cent, in advance of their real value, and the defendant sought to escape liability on his subscription on that ground. A gross fraud had been perpetrated, but it was upon the corporation; and so in this case, if there were any wrong in putting in a patent of but small value, or in otherwise causing the capital stock to be issued in payment of comparatively worthless property, it was, as the proof stands, an injury to the corporation, and not to the individual defendants,—I mean, so far as this action is concerned only. For such injury as they individually may have sustained the defendants have their appropriate remedies. As nothing that the plaintiff is alleged to have done as a promoter in organizing the company would be a defense to an action by the company against those who were under contract, or owed a
    
      duty to it as a corporation, so it cannot be a defense to a suit brought by a shareholder in behalf of the company; and for the simple reason that the court will not try, in an action framed as this is, the particular grievances the defendants may have against the plaintiff individually, standing in court, as he does, merely to enforce corporate claims. Their wrong to the corporation cannot be excused and remain without redress, because the plaintiff, at some time, himself may have been guilty of an entirely independent wrong against the corporation or against them. If he really committed frauds upon the corporation or upon the individual defendants, he is responsible, but that cannot be urged as a reason for the corporation not recovering in this action. A plaintiff must enter a court of equity with clean hands,—that means concerning the subject-matter of the suit. If the plaintiff had done anything concerning the particular cause of action set forth in this complaint, he might be held estopped even from bringing the suit on behalf of the corporation, but no such estoppel can be raised upon the proof, and immunity for the wrong of the defendants (if there be any wrong) cannot be asked, because they choose to charge the plaintiff with having deceived them and others before the corporation was formed. The issue- cannot be changed and the action of the Court diverted from the proper subject of litigation by raising such a contest.
    “2. It remains then to be considered if on the whole evidence the defendants Barber, McLain, and Langdon have, as directors or trustees of the American Company, made themselves liable in equity to that company for the two Be Smedt patents, and the profits derived from their use. I speak of the reissued patents, or those which are now in contest, and I do not intend to consider the plaintiff’s claim as to the’value of his patents, and the'comparative value of the two Be Smedt patents before the reissue. The three defendants named were directors of the American Company. It is not necessary to cite authorities to the proposition that, if they were under a duty or obligation of any kind to get the control of Be Smedt patents for the benefit of the American Company, they could not do so for their individual benefit. The fact is conceded that they did get them, and that they have not transferred them to, nor held them for, nor had them used in any manner to the advantage of, the American Company. This they frankly admit, and in doing so they seek to justify their conduct by circumstances hereinafter to be adverted to. It is claimed by the plaintiff that the defendants Barber, McLain, and Langdon ■hold the Be Smedt patents in trust for the American Company; that they have so held them since 1881; that they have used them, done work under them, and realized large gains therefrom, which should have gone to the American Company; that by agreement of the three defendants named, or some of them, they were to get the control of those patents for the benefit of the company; or that, the company having been organized to work under those patents as well as under Gen. Averill’s patents, they were bound on securing them to turn them over to the American Company. As before stated, there can be no doubt that these three defendants did get the control of the Be Smedt patents by purchasing acontrolling interest in the Anthracite Company for a few dollars, and that they so used and manipulated those patents as to secure the benefit of their use to themselves. I am not satisfied that any specific or express agreement was ever made by either of the three defendants to transfer those patents to the American Company upon obtaining control of them, but these facts are established by uncontradicted testimony. Indeed, all seem to concur in stating it, viz., that Warren believed the Be Smedt patents were the foundation and security of the whole right to carry on the business of asphalt paving, and every one desired and intended that those patents should belong to and form part of the rights of the American Company; and further than that the evidence shows conclusively that both McLain and Barber believed those patents did virtually belong to the American Company, for they thought Gen. Averill controlled them, and had put them into that com-
    
      pony. There were nine De Smedt patents in all, and it seems Gen. Averill had but seven of them. Wheii it was ascertained that the two important De Smedt patents were not controlled by Averill, the defendants, or some of them, above named, sought to procure them. It is not all important whether they distinctly contracted to do so or not. They knew they were required by the American Company; that the company was organized to work under them; and they believed those patents to be necessary to the success of that company. Their duty was plain. They were bound to transfer them or hold them for the American Company, of which they were directors. Had the patents not been those under which the American Company was to operate, a different question might be presented; but there can be no doubt that they were required by the company, and that it w’as supposed by all, when that company was organized, that those very patents were or would become its property. The defendants, upon acquiring them, should have tendered them to the company, and transferred them, on being repaid what they cost; and in not doing so, but holding them for their own profit, they have become liable to the corporation. I have spoken of the three defendants in association without stating the part each took in the transaction, as it is admitted that after the purchase of the Anthracite stock the interests became vested in those three defendants. The only reason assigned for the Course pursued by the defendants in retaining these two De Smedt patents, seems to be that stated by McLain, that they wished to protect themselves against Averill, or against loss from their investment in the American Company: But such considera-
    tions cannot prevail. Those two patents should have been put into the American Company with the seven other De Sihedt patents, and the personal interests of the defendants can no more justify them-in retaining this property than if they had appropriated any other property of the corporation to indemnify themselves against loss from their investment in its stock. I cannot, in this action, appoint a receiver of the American Asphalt Pavement Company, but to make a decree effectual it is necessary that a special receiver should be appointed of the reissued De Smedt patents, and that such patents should be assigned to such special receiver, to hold the same for the benefit of the American Company, and that there also be paid to him such sum as maybe awarded as profits against the defendants above referred to, and such receiver act under the orders of the court to be hereafter given. Judgment must be entered in accordance with the findings I have made and handed down with this opinion. Mr. George B. Morris will be appointed referee, to take and state the accounts of profits, and Mr. Theron G. Strong will bel appointed receiver.”
    Argued before Van Brunt, P. J., and Daniels and Bartlett, JJ.
    
      W. W. Niles, for Barber and other appellants. A. L. Worthington, for Barber Asphalt Company, appellant. Buying & Southard and Herbert Valentine, for respondent. ■
    
      
       See note at end of case.
    
   Bartlett, J.

The principal questions involved in this appeal are satisfactorily discussed in the elaborate opinion which was rendered in the court below. The proofs warranted the conclusion that the defendants Barber, McLain, and Langdon, as directors or trustees of the American Asphalt Pavement Company, were liable in equity to account to that corporation for the profits which they derived from the so-called De Smedt patents, which they acquired, and sought to appropriate to their own use as individuals. The right of the plaintiff, as a stockholder of the American Asphalt Pavement Company, to enforce the cause of action growing out of the appropriation of these patents, depended upon a refusal of the corporation to assert its rights, or upon circumstances showing that any attempt to get it to do so would be ineffectual. -The evidence of a serious and determined effort on the part of the ¡ilaintiff to induce the company or its officers to take appropriate action in the premises was not so clear or conclusive as could be wished; but we are in-

dined to think it was suffident to sustain the prosecution of the suit in his own name. He addressed a letter to Mr. Cyrus M. Warren, as president of the corporation, on April 2, 1883, requesting that legal proceedings should at once be taken against the defendants Barber and McLain, by reason of their misconduct and neglect of duty. To this communication he received a response from Mr. Warren, to the effect that he had resigned the presidency of the company two years before. With the exception of the assertion contained in this answer, however, there is nothing in the case to show that Mr. Warren had actually resigned, or that his resignation had been accepted. Furthermore, it appears from the evidence of the defendant Barber that there never was a meeting of the company of any kind since the meeting in April, 1881, when Mr. Warren was elected president in place of the plaintiff. The testimony of the trustees other than the defendants Barber and McLain indicates that those two gentlemen were most active in its management, and practically controlled it; and, as this suit is based upon their alleged misconduct, these circumstances put the plaintiff in a position to sue as a stockholder in his own name. Brinckerhoff v. Bostwick, 88 N. Y. 52, 60. As we have intimated, it is preferable in this class of cases for the plaintiff to make clearer proof in the first instance of bis inability to secure redress by means of corporate action; but in view of the attitude which the American Asphalt Pavement Company itself has assumed throughout the litigation, and of the fact —which is sufficiently manifest—that its attitude in this suit is friendly, instead of hostile, to the defendants Barber and McLain, we are unwilling to grant a new trial simply because the court might properly have required the plaintiff to prove more positively than he did that the corporation would not enforce the rights which he seeks to assert herein.

Upon the present appeal a separate brief has been filed in behalf of the Barber Asphalt Paving Company, one of the defendants. The complaint charges that the defendants Barber, McLain, and Langdon, having acquired the De Smedt patents in controversy, have in their own names individually, and in the name of the Barber Asphalt Paving Company, and in the names of other persons unknown, made and fulfilled contracts for the manufacture and laying of pavements in various cities of the United States. This appears to be the only allegation of fact against the Barber Asphalt Paving Company. The findings of the court are to-the effect that the Barber Asphalt Paving Company is a foreign corporation, organized under the laws of West Virginia, of which the defendant' Amizi L. Barber is the president; that the nominal title to the said De Smedt patents is in the defendant Barber, in trust for the Barber Asphalt Paving Company; and that it does not appear that the Barber Asphalt Paving Company, as a corporation, has done anything contrary to equity and good conscience, or that such company or its board of directors or trustees has ever had any direct connection whatever with the De Smedt patents, or has in any way approved, ratified, adopted, or interfered with the transactions of the defendants Barber and McLain in regard to said patents. The judgment based upon these findings directs, first, that the defendant Barber, not only individually, but as trustee for the Barber Asphalt Paving Company, assign all right, title, and interest in and to the said De Smedt patents to a special receiver, who shall hold them in trust for the American Asphalt Pavement Company; and furthermore, that the Barber Asphalt Paving Company, as well as the defendants Barber, McLain, and Langdon, account and pay over to such receiver all profits made by them or either of them, directly or indirectly, out of the said De Smedt patents. We are unable to perceive anything in the proof or findings sufficient to sustain the judgment so far as it relates to the Barber Asphalt Paving Company. It was proper to decree that the defendants Barber, McLain, and Langdon should account for and pay over all profits realized by them out of their purchase of the De Smedt patents, which'they assumed to acquire for themselves individually when they ought to have acquired them for the American Asphalt Pavement Company; but if these patents, to which they held the legal title, have been transferred to the Barber Asphalt Paving Company without notice of any equity existing in behalf of the American Asphalt Company, there is no principle of law upon which the Barber Asphalt Paving Company can be made to account for profits whicli it may have realized from the use of the patents. These views lead to the conclusion that the judgment should be reversed so far as it relates to the Barber Asphalt Paving Company. ‘

Tiie notice of appeal attempts to bring up for review a number of intermediate orders granted in the cause at various stages of its progress. Unless separately appealed from, these are only reviewable upon an appeal from a final judgment, (Code Civil Proe. § 1316,) and the decree of the court below now under consideration is an interlocutory, and not a final, judgment. The iiiterlocutory judgment should be affirmed as to all the appellants except the Barber Asphalt Paving Company, and, so far as that corporation is concerned, should be reversed, with costs. All concur.

NOTE.

Corporations—Right op Stockholder to She—Refusal op Directors. No suit for equitable relief can be maintained against directors and officers of a corporation for mismanagement and negligence by the stockholders individually, unless the corporation, either actually or virtually, refuses to bring suit. Doud v. Railway Co., (Wis.) 25 N. W. Rep. 533; Boyd v. Sims, (Tenn.) 11 S. W Rep. 948. And the request to the corporation to sue must not be a simulated, but an actual, one, Bacon v. Irvine, (Cal.) 11 Pac. Rep. 646; Dannmeyer v. Coleman, 11 Fed. Rep. 97; and an allegation that the stockholders “repeatedly protested” against the evils complained of, without even averring that such protests were made to the directors, is entirely insufficient to authorize them to sue, Boyd v. Sims, supra; and the refusal of the directors to sue must be real, and persisted in after earnest efforts to overcome it, and not the result of collusion, City of Detroit v. Dean, 1 Sup. Ct. Rep. 560; Rathbone v. Gas Co. (W. Va.) 8 S. E. Rep. 570; Alexander v. Searcy, (Ga.) Id. 630. A demand upon and refusal by the president of a railroad company, who is also the general manager, to bring suit to have certain bonds issued by him declared iiltravires, is sufficient to enable the stockholder to maintain the action in his own name. City of Chicago v. Cameron, (Ill.) 11 N. E. Rep. 899. The fact that the treasurer of a corporation, of whose misconduct a stockholder complains, owns the major portion of the stock, does not excuse the stockholder from applying to the directors to bring suit before bringing it himself, Dunphy v. Association, (Mass.) 16 N. E. Rep. 426; Allen v. Wilson, 28 Fed. Rep. 677; and, where stockholders are allowed to bring suit because of the refusal of the directors to do so, the latter must be made parties defendant, Slattery v. Transportation Co., (Mo.) 4 S. W. Rep. 79; Taylor v. Holmes, 8 Sup. Ct. Rep. 1192, affirming 14 Fed. Rep. 498; Stromeyer v. Combes, 2 N. Y. Supp. 232. Before a stockholder can maintain an action to set aside a contract entered into by the directors, he must show that he has exhausted all means within his reach to obtain redress within the corporation. Dimpfel v. Railway Co., 3 Sup. Ct. Rep. 573; McHenry v. Railroad Co., 22 Fed. Rep. 130; Foote v. Mining Co., 17 Fed. Rep. 46; Bill v. Telegraph Co., 16 Fed. Rep. 14. See, also, City of Quincy v. Steel, 7 Sup. Ct. Rep. 520. Where officers of a corporation have assets, their possession belonging to the corporation, the corporation, and not the stockholders in, is the proper party to bring an action to compel them to account, unless it is made to appear that it is necessary for the stockholders to bring the action in order to prevent a complete failure of justice. In the latter case, the corporation must be made a party defendant. Byers v. Rollins, (Colo.) 21 Pac. Rep. 894. But in an action by a stockholder against an insolvent corporation to have his share of the assets given priority over the claim of a particular creditor, whom he alleges fraudulently induced him to become a stockholder, he need not allege any effort to induce the corporation to begin the action. Poole v. Association, 30 Fed. Rep. 513.

Courts of equity have jurisdiction, at the instance of one or more stockholders, to restrain the directors from doing acts which would amount to a violation of the charter, or to prevent any misapplication of the funds which would lessen the value of the stock, Wilcox v. Bickel, (Neb.) 8 N. W. Rep. 436; Davis v. Gemmell, (Md.) 17 Atl. Rep. 259; and to compel payment of dividends |o preferred stockholders, equitably entitled to receive them, when the finances of the corporation justify it, and the directors have refused or neglected to make the payment, Hazeltine v. Railroad Co., (Me.) 10 Atl. Rep. 328. But, to enable a stockholder to recover from a corporation for depreciation in his stock by mismanagement, he must show that the injury was peculiar to himself alone, apart from other stockholders. Oliphant v. Mining Co., (Iowa,) 19 N. W. Rep. 212.  