17 N.Y. 592, New York and New Haven Railroad Co. v. Schuyler
| Citation | 17 N.Y. 592 |
| Party Name | THE NEW YORK AND NEW HAVEN RAILROAD COMPANY v. ROBERT SCHUYLER, WILLIAM CROSS and 324 others. |
| Case Date | June 01, 1858 |
| Court | New York Court of Appeals Court of Appeals |
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COUNSEL
William C. Noyes, for the appellant.
Francis B. Cutting, for the respondent.
COMSTOCK, J.
This case is somewhat special and extraordinary in its circumstances, and must be determined upon principles of reason and justice, with the aid of such analogies as the law will afford.
It is well settled that the directors or managers of a corporation are trustees for the holders of its stock. It is on this ground that the shareholders are entitled to relief in equity
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against an actual or threatened waste or misapplication of its corporate funds. It seems also to be settled that a suit for that purpose must be brought in the name of the corporation, unless it appears that the directors refuse to prosecute, or are themselves the guilty parties answerable for the wrong. If they do thus refuse, or are thus answerable, the shareholders may sue in their own names; but in such a case, the corporation must be made a defendant, either solely or jointly, with the directors sought to be charged. ( Robinson v. Smith, 3Paige, 222, and cases there cited.)I have nowhere seen it laid down that the corporation itself, considered as a pure legal abstraction, is a trustee for its stockholders; yet it is not difficult to see that certain trust relations exist between it and them. A corporation aggregate is clothed with a legal title to its real and personal estate, franchise, and privileges, while the shareholders, as individuals, have in them equitable interests; the interest of each being in proportion to the amount of stock which he holds. The corporation is entitled to receive, and does receive, the gross amount of the earnings; upon a trust, however, or at least under a duty, to pay over to the stockholders the net profits, as dividends upon their stock. If not under all circumstances bound to make and pay over in money the dividends earned, it must, at all events, use them for the shareholders' benefit, in the prosecution of its legitimate enterprises, and subject to ultimate accountability. If these relations are not precisely defined in the books, it is because the occasion has not arisen requiring this to be done.
The New-York and New Haven Railroad Company is a corporation aggregate, invested by its charter with certain privileges and powers, and with a legal title to all the real and personal estate acquired in the construction and operation of its road. Its genuine and undoubted stock amounts to $3,000,000, and by its charter cannot exceed that amount. All this stock, with an exception of no importance to the question before us, has been paid for, and is held by shareholders
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whose rights as such are not called in question. But, in addition to the $3,000,000 of undoubted stock, Mr. Schuyler, the president of the company, issued at different times, for his own private purposes, fraudulent and spurious certificates of stock, to the amount of nearly $2,000,000, which are now held by the numerous parties against whom this suit has been instituted. The president was the duly authorized agent to superintend the transfer of stock from any existing shareholder to another party, with authority in all cases to issue a new certificate, upon a transfer of the stock it represented being duly made in the books, and upon a surrender of the old one. The spurious certificates before mentioned were not based upon any transfer of genuine stock, nor did they represent stock in any sense whatever. In their appearance, however, they were genuine, and duly authorized. In form they were like those which represented the real stock of the company, and they were signed by a person who was known to have authority to sign under the conditions above named. Thus they obtained more or less currency throughout the community, being taken by various parties without attending to the forms and conditions prescribed by the charter and by-laws of the company, regulating the transfer of stock.
This extraordinary fraud could not fail to place the corporation in a situation of extreme difficulty and embarrassment. What was to be done with the spurious stock certificates? Were the holders to be recognized? Were they to share in the dividends, and were they entitled to vote at elections? Was the stock of the company practically increased to $5,000,000, when the charter confined it to $3,000,000? If this could not be done, then was the company bound to pay, in damages to each holder of these false instruments, the value which the genuine stock had borne in the market? These were grave questions, about which gentlemen of great emmence in their profession, and the courts also, differed. In the courts of original jurisdiction, it was
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determined, after the institution of this suit, that the corporation was, in some form, bound to make good the false certificates. On appeal to this court, we held them void to all intents and purposes, and that the corporation and its genuine stockholders were entirely unaffected by them. ( Mechanics' Bank v. The New-York and New Haven Railroad Company, 3 Kern., 599.)
Such was the situation of this company on the discovery of these acts of Mr. Schuyler. As a pure creation of law, the corporation was not a sentient being; but the law, nevertheless, clothed it with authority which enabled it to act, by its board of directors, as a natural person, within the sphere of its powers and duties. It had therefore the rights which a natural person would have in analogous situations, and in order to evolve the principle of this controversy, we may suppose that a natural person is clothed with the legal title to, and is in possession of, an extensive line of railroad, receiving the gross earnings for the purpose of dividing the net profits amongst a large class of individuals, whose right, in certain fixed proportions, is evidenced by a certificate or declaration of trust, which each one holds, signed by the legal owner or his authorized agent. If, then, a new class of individuals should come forward claiming the same rights, and presenting, as the evidence thereof, instruments of the same kind in all respects, bearing on their face all the appearances of genuineness and authority, but in fact unauthorized and spurious, what would be the rights and the duty of the legal owner in that exigency? Upon the settled principles of equity, it would be his right and his duty to call the false claimants into court, in order to remove the cloud upon the equitable interests of those whom he represented. It would be his right, as owner of the legal estate, to bring to a determination every claim upon that estate, in law or equity, resting upon facts and documents giving to it, prima facie, all the appearances of genuineness and validity. It would be his duty to call for such a determination, as the
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representative of numerous equitable interests carved out of his estate and placed under his protection. These are principles so familiar and elementary that citations from the books are not required to support them.
With the aid of these analogies, we can come to a conclusion as to the rights of this corporation in the exigency which had arisen at the commencement of this suit. It stood, as we have seen, in a quasi trust relation to its shareholders, holding, as it did, the legal estate, and they having, as individuals, an equitable right in the net earnings or income of the same estate. They also had the right to vote at the elections of the company, to the exclusion of all other persons. If the corporation yielded these rights to the holders of its original and genuine stock, and rejected the claims of those who held the false certificates, it became at once exposed, not merely to one, but to a multiplicity of suits, involving, as we have seen, questions of no inconsiderable difficulty. In these circumstances, its right of resort to a court of equity, in order to have the spurious certificates canceled and annulled, does not admit of a doubt, provided those instruments were such, in character and appearance, as to bring them within the principles on which courts of equity administer protective and preventive justice. There is no head of equity jurisdiction more firmly established than that which embraces the cancellation of instruments which are capable of a vexatious use after the means of defence at law may become impaired or lost, or when they are calculated to throw a cloud upon the title or interest of the party seeking relief. But the jurisdiction does not universally attach on the mere ground that the deed or other contract is invalid. If the invalidity plainly appears on the face of the writing, so that no lapse of time or change of circumstances can weaken the means of defence, it is held that no occasion arises for a suit in equity to decree its cancellation. And the doctrine now is, that such instruments do not, in a just sense, even cast a cloud upon the title or interest, or
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diminish the security of the party against whom the attempt may be made to use them. If, on the other hand, the invalidity does not appear on their face, the jurisdiction is not confined to instruments of any particular kind or class. Whatever their character, if they are capable of being used as a means of vexation and annoyance, if they throw a cloud upon title or disturb the tranquil enjoyment of property, then it is against conscience and equity that they should be kept outstanding, and they ought to be canceled. These principles of general jurisprudence are believed to be decisive in favor of the right of this corporation to demand the cancellation of the false stock and to maintain a suit in equity for that...
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