
    George A. Treadwell, Respondent, v. United Verde Copper Company and Others, Appellants.
    First Department,
    November 5, 1909.
    Corporation — action by stockholder to enjoin sale of assets—ultra vires — estoppel — equity — rights of other stockholders — terms of settlement.
    Where a stockholder claims that the acts of his corporation are ultra vires, although neither mala prohibita nor mala in se, he cannot maintain an action in his own behalf based on such acts if he himself, with knowledge of their character, has accepted pecuniary benefits thereunder.
    The directors'of a corporation proposed to the stockholders, including the plaintiff, to dissolve the corporation, organize a new corporation in another State and sell the assets of the original corporation to the new one in order to avoid a heavy tax. The stock of the old corporation was to be exchanged, share for share, for the stock of the new and a bonus of bonds to be distributed. The stockholders voted to dissolve the corporation pursuant to the plan. Plaintiff instituted suit to prevent the sale, alleging that the proposed reorganization was in fraud of the minority stockholders, and that the affairs of the corporation had been mismanaged in the interests of one C., who owned about ninety-five per cent of the stock. He secured an injunction forbidding the sale, and on the return of an order to show cause the injunction was vacated and the plaintiff appealed. Pending the appeal the sale was consummated. Plaintiff, who then owned 673 shares, on nearly the last day on which the stock of the old corporation could have been exchanged for the new, indorsed and delivered to a business associate, a clerk in the office of his counsel, 600 of his shares, and they were by her duly exchanged for new stock and the bonds. The order vacating the inj unction was reversed on appeal, and plaintiff served a supple- " mental complaint asking that the sale of the corporation’s assets be declared void and a resale had.
    
      Held, that plaintiff could not maintain his suit, for whether the sale of the 600 shares was bona fide or not, the plaintiff, so far as the real motive of the transaction was concerned, might just as well have exchanged the stock himself and sold the stock and bonds of the new company, and he has thus secured and accepted pecuniary benefits under the very acts of which he complains.
    Further, where plaintiff’s allegations that the reorganization was in fraud of the minority stockholders and that the corporation had been mismanaged are disproved, and where the sale is acquiesced in by all the stockholders except • plaintiff, who owns but one four-thousandth of the stock of the company, and they are all satisfied with what has been done, it would be inequitable to annul the transaction and destroy a going and profitable concern by ordering a resale of the property.
    
      The complaint should be dismissed on condition that the defendants permit the plaintiff to exchange his remaining stock for the new stock and bonds on the same terms as the other stock was exchanged, or at his option pay him the value of his shares with interest, such value to be determined by an appraisal, as provided in section 57 of the Stock Corporations Law.
    Appeal by the defendants, the United Verde Copper Company and others, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 16th day of January, 1908, upon the decision of the court rendered after a trial at the New York Special Term.
    
      Elihu Root, for the appellants.
    
      Charles M. Demond, for the respondent.
   McLaughlin, J.:

The defendant United Verde Copper Company, a domestic corporation, was organized in 1883, with a capital stock of $3,000,000, divided into 300,000 shares of the par value of $10 each. The defendant Clark, from December, 1888, to 1899, held about ninety-five per cent of the stock in his own name and had complete control of the affairs of the corporation. The corporation owned certain mining properties in the Territory of Arizona, which, under Clark’s management, had become very valuable. In 1899, and for some time prior thereto, the corporation had been compelled to pay taxes in the State of New York amounting annually to something like $38,000, and by reason of that fact the directors, in that year, determined that it was for the best interests of the stockholders to dissolve the New York corporation and continue the business by means of a new corporation of the same name, to be organized under the laws of the State of West Virginia. The plan proposed by the directors, which was communicated to all the stockholders, was that the new corporation was to have the same capitalization as the old and its stock was to be issued to the old stockholders share for share, thus giving them exactly the same interest in the new corporation that they had in the old. It was also deemed advisable to divide among the stockholders of the old corporation $3,000,000 of accumulated surplus, and as a means of making such division it was proposed to have the new corporation issue its unsecured bonds to that amount, and the stockholders, upon exchanging their shares in the old for shares in the new, were to receive such bonds to the par value of their shares, or, if they preferred, the same amount would be paid in cash. In accordance with this proposed plan, which was subsequently carried out, the old corporation was, in October, 1899, dissolved, 299,099 shares of its stock being voted in favor, and only 700 against the dissolution. The 700 shares were those held by the plaintiff and he was the only stockholder, so far as appears, who ever protested or objected to the carrying out of the proposed plan. The West Virginia corporation was organized and the property and assets of the New York corporation were, after its dissolution, advertised for sale, and in November, 1899, the plaintiff, then being the owner of 673 shares, commenced this action, alleging that the affairs of the New York corporation had been grossly mismanaged in the private interests of the defendant Clark and others ; that they had tried to compel him to sell ins stock at an inadequate price ; that the proposed reorganization was for the purpose of depriving the minority stockholders of their rights ; that the proposed sale of the property and assets of the New York corporation was not to be made in good faith, and if permitted, would result in great damage to him. The relief asked was the appointment, of a receiver ; an injunction forbidding the proposed sale and the doing of any further business ; an accounting by thé directors of the affairs of the corporation since 1888 ; an inspection of the mines and books of the company; that its property be sold under the direction of a referee appointed by the court, and that the plaintiff be paid his proportionate share of the proceeds derived from such sale.

After the commencement of the action the plaintiff obtained an injunction forbidding the sale, pending the return of an order to show cause why it should not be continued during the pendency of the action. Subsequently the application to continue the in junction was denied and the one theretofore granted vacated. Thereupon the plaintiff appealed to this court, but before the appeal was determined, and on the 9th of January, 1900, all of the property and assets of the corporation were sold to the defendant Macdonald for $500,000, he buying the same in behalf of the reorganization committee and immediately thereafter transferring the same to the West Virginia corporation. The court subsequently reversed the order vacating the injunction which the plaintiff had obtained and continued it. (47 App. Div. 613.) Immediately following the sale the plaintiff, together with other stockholders, was notified that it had been made and that he must deposit his stock with the reorganization committee on or before February 9, 1900, if he wished to exchange it for the stock and bonds of the new corporation ; that otherwise he would only be entitled to his share of the amount realized upon the sale — one dollar and sixty-seven cents per share — and of the cash assets two dollars and seventy-five cents per share. After receiving this notice, and on February 9, 1900, or a few days prior thereto, he indorsed in blank and delivered 600 of his shares to one Myra B. Martin, who exchanged them in accordance with the proposed plan of reorganization for stock and bonds of the new corporation. This left the plaintiff the holder of but 73 shares. He then served a supplemental complaint setting forth the transfer and also the fact that a sale of the property and assets of the Hew York corporation had taken place, and that they had been purchased by Macdonald for the reorganization committee and transferred to the West Virginia corporation. The relief asked was substantially the same as in the original complaint, except that instead of enjoining the sale he asked that the same be declared void. The West Virginia corporation was also made a party and the supplemental complaint served on it. All of the material allegations of the complaint, except the dissolution of the Hew York corporation, the organization of the West Virginia corporation, the sale by the former of all its assets and the purchase of the same by the latter, were put in issue by the answers of the defendants.

Upon the facts as disclosed at the trial the learned trial justice reached the conclusion that the charges of mismanagement of the Hew York corporation had not been proved, but as appears from his opinion, relying upon the former decision of this court, he held that the sale was illegal and void and for that reason should be set aside; that the West Virginia corporation and its directors should return all the property of the old corporation and account for the same; that the directors of the old corporation should account for all of the corporate property and its management since December, 1888; that all of the property should be resold and the, proceeds derived therefrom distributed among the stockholders of the Hew York corporation. An interlocutory judgment was entered to this effect, from which all of the defendants appeal.

Applying the principle laid down in Wormser v. Metropolitan St. R. Co. (184 N. Y. 83) to the conceded facts in this case, I do not see how this judgment can be sustained. It was there held that where the objection to the acts of a corporation is that they are ultra vires without being either mala prohlbita or mala in se, a stockholder cannot maintain an action in his own behalf based on such objection, where he himself, with knowledge of the character of the acts, has acquired and accepted pecuniary benefits thereunder. After the dissolution of the Hew York corporation, and after all of its property had been sold and acquired by the West Virginia .corporation, the plaintiff transferred 600 of his shares to one Myra B. Martin, who was an officer in several corporations in which he was interested, and was secretary, according to his own testimony, of “ my George A. Treadwell Mining Company.” She was also a clerk in the office of Mr. Demond, his counsel, and was the notary public before whom the complaint, supplemental complaint, and two affidavits which were introduced in evidence, were verified. With reference to the transfer she testified: “ I know the plaintiff, Prof. Treadwell, very well. I have known him about twelve years. I am an officer in some of the corporations in which he is interested.- In February, 1900, Prof. Treadwell handed me some certificates of stock in the United Verde Copper Company of Hew York, indorsed by him in blank. I took them down to the company’s office and exchanged them for stock in the new United Verde Copper Company of West Virginia. I got an equal amount of shares of stock and also for every share of the stock a bond. The number of shares for which he gave me certificates were 600.” The defendants allege that this transfer was colorable only and the plaintiff was in fact the real owner of the stock in the new company and received' the dividends thereon. The plaintiff himself testified that he sold the stock to Miss Martin and got “an adequate price ” for the same. What he considered “ an adequate price ” does not appear, nor does it appear how or in what manner he was paid. Miss Martin, it will be noticed, says that the plaintiff handed her the certificates indorsed in blank and she took them to the corporation’s office and had the exchange made. It is certainly very significant that the plaintiff, on or nearly the last day when an exchange could have been made under the notice previously sent out, if the sale were in good faith, should have sold so large a proportion of his holdings (retaining only 73 out of 673) to a business associate, a clerk in the office of his counsel, and that she should have immediately taken advantage of the opportunity to exchange them for stock in a corporation, when, if the plaintiff succeeded in this action, that corporation would be deprived of all its property. If this was not a bona fide sale of his stock, then the plaintiff clearly, under the decision referred to, is not in a position to attack the reorganization, for he has received the pecuniary benefits of the very plan which he attacks. If it was a bona fide sale I think the same conclusion follows because it cannot be seriously doubted, from the-relation of the parties to the transfer, that Miss Martin bought the stock for the very purpose of having it exchanged and that the plaintiff knew it and sold it to her for that purpose. That was then its only value, except an interest in the result of this action which the plaintiff by retaining the seventy-three shares proposed to carry on. So far as the real nature of the transaction is concerned the plaintiff might just as well have exchanged the stock himself and then sold the stock and bonds of the new company, and if he had done that the case would fall directly within the Worm&er case.

But I do not care to place my opinion that the judgment should be reversed solely upon this ground. The action is in equity and its determination must be governed by equitable principles, having regard not to the interest of the plaintiff alone, but to all of the parties interested. The fact that this court, on the prior appeal, held that the sale should be enjoined is not controlling, nor does it in any way affect the question as now presented. At that time, under section 57 of the Stock Corporation Law (Laws of 1892, chap. 688, added by Laws of 1896, chap. 932), when the Mew York corporation was dissolved, the plaintiff had a right to have the business of the corporation wound up and its property sold in good faith by the directors and to share proportionately, according to his stock, in the proceeds. When the order which was there under consideration was made, the sale had not taken.place, and the burden of the plaintiff’s complaint was that the reorganization and sale were for the purpose of depriving him, a minority stockholder, of the value of his stock. But at the time of the trial the sale had been made, a reorganization had been brought about, and the new corporation was then, and for a long time prior thereto had been, prosecuting its business in a highly profitable way. Not only this, but the plaintiff’s allegation of mismanagement of the old corporation was not proved, and his allegation that the reorganization and sale were for the purpose of “freezing out” the minority stockholders was disproved. It then appeared that all of the stockholders, except the plaintiff, who held about a one four-thousandth part of the .stock, were entirely satisfied and had exchanged their stock in accordance with the plan of reorganization. The dissolution having been accomplished, the sale having been made, and about three thousand nine hundred and ninety-nine four-thousandths of the stockholders satisfied with what had been done, it would be unjust and inequitable to them, at the behest of one holding only about one four-thousandth, to wipe out all that had been accomplished and destroy a going and profitable concern by ordering a resale of the property. The plaintiff’s position in now insisting upon .such sale, taking into consideration its necessary result and the expense.attending the same, does not commend itself to and cannot receive the sanction of a court of equity. The defendants, in their answer and at or near the conclusion of the trial, offered to deliver to the plaintiff an equal number of shares in the Virginia corporation to what he had in the New York corporation, together with the dividends that had been declared thereon and interest on such dividends, and bonds or cash equal to the par value of such shares, with interest, or, if he preferred, the value of such shares, such value to be determined as the court might direct. The plaintiff, through his counsel, then announced that he would accept the proposition if, in addition, he were tendered $2,500,000 in cash, representing the proportionate amount he was entitled to receive by virtue of the misappropriation of the funds of the corporation. The real purpose of the action was thus disclosed. It was to recover money or property claimed to have been wrongfully appropriated by the defendant directors. The proof introduced at the trial' failed to establish that any property had been misappropriated. The court expressly found that the defendant Clark acted in good faith in all contracts made in behalf of the New York corporation, and that neither he nor any of the directors received any secret profits through their relation with the corporation.

The case in some respects is quite similar to that of Drake v. New York Suburban Water Company (36 App. Div. 275). There a minority stockholder sought to have a foreclosure sale set aside, and Mr. Justice Cullen, who delivered the opinion of the court, said: “ We are further of opinion that under the circumstances of this case the plaintiff should not, either in this action or by motion in the foreclosure suit, be permitted to set aside the sale of the property to its present owner, the New York Suburban Water Company, unless that company refuses to pay the plaintiff the fair value of his interest in the property. The plaintiff is the holder of but 10 shares of. the capital stock of the consolidated company of 2,000 outstanding. In other words, his aliquot interest in the property was a one-two-hundredtli part. * * * The plaintiff is the only stockholder who seeks to avoid the transactions of which he complains. He is appealing to a court of equity whose first rule is that he who seeks equity must do equity. * * * If this foreclosure suit is set aside and the judgment opened, the parties will be remitted to a litigation that may last for years before it is finally composed. The expense of such a litigation would be many times the value of the plaintiff’s interest. By enforcing such a litigation the plaintiff can subject the parties to this expense, or compel them to buy him out at an exorbitant price. We do not think he should be allowed to take such a course. * * * When he stands simply on his legal rights and proceeds in a court of law, he may be entitled to the benefit of that course, however much wrong it may inflict on innocent parties; but when he finds himself compelled to appeal to equity for relief, a different rule should dervail. He should be entitled merely to full indemnity.”

The defendants, at the trial, as we have already seen, offered to deliver to the plaintiff seventy-three shares of stock in the W est Virginia corporation, together with the accrued dividends and interest thereon, and an equal amount of bonds, or cash if he preferred, with interest. Under section 57 of the Stock Corporation Law, as amended (Laws of 1900, chap. 760), soon after the New York corporation was dissolved, he would have been obliged to have accepted one of these offers, or have taken proceedings as provided in such section to have the value of his stock appraised and then accepted such valué, and, upon the facts presented, I think he should do so now.

The interlocutory judgment, therefore, is reversed and the complaint dismissed, with costs, on condition that the defendants tender to the plaintiff seventy-three shares of stock in the West Virginia corporation, together with the accrued dividends and interest thereon and of bonds or cash, at liis option, equal to the par value of such shares, with interest, or, at his option, pay to him the value of his shares, with interest, such value to be determined by an appraisal as provided in section 57 of the Stock Corporation Law, as amended by chapter 760 of the Laws of 1900 —the time of such tender, or in case of its refusal, when the appraisal shall be made and the value as there ascertained paid, to be fixed by the order of this court reversing the judgment — such order to be settled on notice.

Ingraham, Laughlin and Scott, JJ., concurred; Patterson, P. J., concurred on first ground of reversal.

Judgment reversed and complaint dismissed on the conditions stated in opinion. Settle order on notice.  