Blum v. Whitney

• Decision Date: 15 May 1906
• Citation: 77 N.E. 1159,185 N.Y. 232
• Parties: BLUM v. WHITNEY et al.
• Court: New York Court of Appeals Court of Appeals

185 N.Y. 232

77 N.E. 1159

BLUM

v.WHITNEY et al.

Court of Appeals of New York.

May 15, 1906.

Appeal from Supreme Court, Appellate Divison, First Department.

Action by Edwin Blum, on behalf of himself and other stockholders of the Distilling Company of America, against Harry Payne Whitney, as executor, etc., and others. From an order (96 N. Y. Supp. 1114) affirming interlocutory judgment sustaining demurrers to third amended complaint, plaintiff appeals. Affirmed.

Leave was granted the plaintiff to appeal, and the question certified is: ‘Does the third amended complaint state facts sufficient to constitute a cause of action?’

Vann, J., dissenting.

William M. Bennett, for appellant.

De Lancey Nicoll and John R. Dos Passos, for respondents.

EDWARD T. BARTLETT, J.

The plaintiff alleges in his third amended complaint that he is a stockholder of the Distilling Company of America, hereafter called the ‘corporation,’ and brings this action as such, against the individual defendants and the Distilling Company of America, for the reason that the said corporation has refused and neglected and still refuses and neglects to do so. The plaintiff, so acting on behalf of the corporation, seeks to recover alleged unlawful secret profits retained by the individual defendants in certain transactions, set forth in detail, to the damage of the corporation.

It appears that in the month of June, 1899, there existed four corporations, to wit, the American Spirits Manufacturing Company, a corporation incorporated in August, 1895, under the law of the state of New York; the Standard Distilling & Distributing Company, incorporated in June, 1898, under the laws of the state of New Jersey; the Kentucky Distilleries & Warehouse Company, incorporated in February, 1899, under the laws of the state of New Jersey; and the Spirits Distributing Company, incorporated in January, 1896, under the laws of the state of New Jersey. The aggregate capital stock, common and preferred, of these four companies, amounted in par value to $94,500,000. These companies will be hereinafter referred to as the ‘constituent companies.’ On or about June 20, 1899, the secretaries of the respective constituent companies sent out to their stockholders a notice, known as ‘Exhibit B,’ naming at the head thereof the constituent companies, notifying them that an agreement had been lodged with the State Trust Company contemplating the formation of the Distilling Company of America, with an authorized capital stock of $55,000,000, 7 per cent. cumulative preferred, and $70,000,000 common, which the organizers proposed should be applied towards the purchase of the capital stock of the above-mentioned companies and certain rye distillery properties, and for an additional working capital of $1,500,000, leaving in the treasury of the new company for future purposes $23,750,000 of its preferred stock and $23,750,000 of its common stock. The notice further sets forth the percentage of the preferred and common stock of the corporation which the constituent companies, respectively, would receive for their stock. A few other details follow that are immaterial at this time. The agreement deposited with the State Trust Company, referred to in Exhibit B, is known as ‘Exhibit A.’ It recites that P. Lewis Anderson and Henry D. Macdona, both of the city and state of New York, hereinafter called ‘organizers,’ propose to create under the laws of the state of New Jersey, or some other state to be approved by their counsel, a corporation to be known as the Distilling Company of America, the object of which corporation being, among other things, the manufacture, sale, distribution, and warehousing of whisky, spirits, and alcohol. It then sets forth the amount of capital of the proposed corporation, the existence of the four constituent companies, and the aggregate amount of their capital stock as set forth in Exhibit B. It then states, in substance, that the organizers contemplate that the corporation shall become the owner of at least a majority of the entire issued capital stock of the said manufacturing company, of the said Kentucky company, and of the said Standard company, and shall also become the owner of at least a majority of the entire issued preferred stock of the said distributing company. Also, that the organizers contemplate that the corporation shall become the owner of certain rye properties, or the entire capital stock of a certain other company which may be organized, called the ‘Rye Company,’ and which company, if created, shall acquire, by purchase or otherwise, certain rye distilling properties, as follows: At least 95 per cent. of the entire capital stock of the Hannis Distilling Company of Philadelphia and Baltimore, and the St. Paul Distillery. Also, that the organizers further contemplate that the corporation shall be furnished with a cash working capital of at least $1,500,000. Exhibit A also states the amount of preferred and common stock that each of the companies shall receive for its stock. June 30, 1899, was designated as the date of the expiration of the time for the deposit of the shares of stock of the constituent companies with the trust company. Exhibits A and B are made a part of the complaint.

The plaintiff alleges the completion of this contemplated scheme, so far as it was carried out, and the subsequent organizationof the Distilling Company of America. He further alleges that the individual defendants ‘confederated together in or about the summer of 1899 to make for themselves a secret profit at the expense of the stockholders of the ‘constituent companies,’ and at the expense of the Distilling Company of America, and its stockholders and this plaintiff.' Also ‘that the entire scheme for the formation of said Distilling Company of America herein set forth was not a legitimate business operation intended for the benefit and improvement of the business of said ‘constituent companies' to the profit of its stockholders, but was purely a stock jobbing operation conceived and executed in the manner hereinbefore set forth,’ etc. Also, that in pursuance of the said scheme certain of the individual defendants obtained an option from the stockholders of the Hannis Distilling Company upon about 95 per cent. of the stock of said corporation; ‘that the capital stock of said Hannis Distilling Company was $1,500,000; and the said Whitney and others procured an option thereon to purchase the same for the sum of $1,500,000 in cash and $250,000 in preferred and $250,000 in common stock of the Distilling Company of America, a corporation not then formed, but to be organized as hereinafter set forth; and the said Hannis Distilling Company, and the stock thereof, was not worth more than the said sum of $1,500,000.’ It is further alleged in this connection as follows: ‘The said prospectus [referring to Exhibit B] did not state that the said William C. Whitney and the individual defendants hereinafter mentioned had an option on or were interested in the Hannis Distilling Company, or its stock, or the amount that it was contemplated they should be paid for their said interest, or that they intended to make a profit out of the sale to the said Distilling Company of America for their option on the stock of the said Hannis Distilling Company; nor did the said William C. Whitney, or any of the said defendants, at any time, or in any way, state that they were interested in said Hannis Distilling Company or its stock, and intended to cause the said Distilling Company of America to acquire the same from themselves, but they fraudulently concealed the same from the stockholders of the ‘constituent companies' and caused the same to be acquired by the Distilling Company of America at the direction of their own agents and representatives as directors as hereinafter set forth.’ It thus appears that the parties to the agreement contracted with each other to form a corporation and issue its stock for certain properties and cash definitely set forth in a written agreement. The plaintiff alleges that the carrying out of this scheme was in fraud of the rights of the stockholders of the constituent companies; also of the stockholders of the Distilling Company of America and himself. It is obvious that plaintiff has no concern with the rights of the stockholders of the constituent companies, who have carried out the agreement, and, so far as this record discloses, have made no complaint.

It remains to consider whether the Distilling Company of America has a cause of action against these individual defendants. This transaction, stripped of details and immaterial figures, is exceedingly simple and governed by well-settled legal principles. It is alleged that the defendants Anderson and Macdona, the organizers so-called, were in fact the representatives of the individual defendants. It must be assumed, under the demurrers, that such was the fact. These individual defendants, several of whom were officers and directors in one or more of the constituent companies, entered into a written agreement with the stockholders of the said constituent companies to form the Distilling Company of America, with a capitalization and disposition of its stock as already stated. The plaintiff alleges that 95 per cent. of the stock of the Hannis Distilling Company was not worth more than the sum of $1,500,000, being the amount paid therefor by the organizers as hereinbefore stated. It is, of course, entirely immaterial what the organizers paid for the stock of the Hannis Distilling Company-it might have been presented to them-as their part of the agreement was to turn into the corporation at least 95 per cent of said stock, which they did. The pleading of plaintiff shows that the organizers paid out in cash $3,000,000, half of which went in as working capital of the corporation and the balance was paid to the Hannis Distilling Company for 95 per cent. of its stock at full value. The only...