Burkin, Application of

• Decision Date: 11 July 1956
• Citation: 154 N.Y.S.2d 898,136 N.E.2d 862,1 N.Y.2d 570
• Parties: , 136 N.E.2d 862, 64 A.L.R.2d 638 Application of BURKIN. In the Matter of the Arbitration between Benjamin Burkin et al., Appellants,and Joseph Katz, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 898

154 N.Y.S.2d 898

1 N.Y.2d 570, 136 N.E.2d 862, 64

A.L.R.2d 638

Application of BURKIN In the Matter of the Arbitration between Benjamin Burkin et al., Appellants,and Joseph Katz, Respondent.

Court of Appeals of New York.

July 11, 1956.

Abraham Kaplan, New York City, for appellants.

Irving Levine, New York City, for respondent.

VAN VOORHIS, Judge.

The question upon this appeal is whether the removal of a director of a corporation for misconduct can be the subject of an action, so as to be arbitrable under section 1448 of the Civil Practice Act. That section provides that controversies 'which may be the subject of an action' may be submitted to arbitration or contracted to be decided by arbitration. In Matter of Fletcher, 237 N.Y. 440, 143 N.E. 248, it was decided that 'Arbitrators under the Arbitration Law deal with the same kinds of controversies that are dealt with by the courts.' Matter of Buffalo & Erie Ry. Co., 250 N.Y. 275, 279, 165 N.E. 291, 292. This controversy is not one which is covered by the amendments to section 1448, such as labor disputes, appraisals or questions incidentally arising.

At common law, stockholders have the traditional inherent power to remove a director for cause which is known as 'amotion' Auer v. Dressel, 306 N.Y. 427, 432, 118 N.E.2d 590, 593, 48 A.L.R.2d 604; Matter of Koch, 257 N.Y. 318, 321-322, 178 N.E. 545, 546. The law permits this inherent right to be exercised notwithstanding a contractual obligation to vote for and maintain a man in the directorate, inasmuch as a condition of faithfulness is implied in the contract, and where that is violated the contract has been broken and consequently is not a bar. Therefore, in cases of misconduct, it is not a breach of such a contract for the stockholders to remove a faithless fiduciary as a director. Fells v. Katz, 256 N.Y. 67, 175 N.E. 516. This power may only be exercised by stockholders controlling a sufficient number of votes required for action, at least a majority, Levy v. American Beverage Corp., 265 App.Div. 208, 38 N.Y.S.2d 517, or, where the certificate of incorporation contains the provision permitted by section 9 of the Stock Corporation Law, McK.Consol.Laws, c. 59, such number greater than a majority as is therein provided.

The certificates of incorporation of the two corporations here involved require unanimity, therefore the common-law power of removal is not available to either of these present parties since neither one chooses to vote for his own removal. These are two real estate corporations, owned and controlled by Benjamin Burkin and Joseph Katz. Each corporation owns one building. Burkin holds a majority of the outstanding shares in each of these corporations. The contracts pursuant to which these corporations were formed do more than require each of these men to vote their shares so that they and Leonard Burkin shall constitute the board of directors; they also require unanimous vote for the transaction of any and all business in which the vote or consent of stockholders is authorized or required. Thus neither Benjamin Burkin nor Joseph Katz can remove the other even for cause, inasmuch as such action, like all other action to be taken by the stockholders, has to be unanimous. Benintendi v. Kenton Hotel, 294 N.Y. 112, 60 N.E.2d 829, 159 A.L.R. 280, has been superseded in this respect by statute, L.1948, ch. 862, L.1951, ch. 717, amending Stock Corporation Law, §§ 9, 35, 37, 55, 65 and General Corporation Law, McK.Consol.Laws, c. 23, §§ 27, 28, 103. Indeed, Burkin, holding a majority of the outstanding shares, did attempt to oust Katz on the basis of his alleged misconduct, but Katz was restored in a proceeding under section 25 of the General Corporation Law. Matter of Katz (Fulton-Washington Corp.), 2 Misc.2d 325, 143 N.Y.S.2d 282, affirmed 1 A.D.2d 657, 147 N.Y.S.2d 10.

The contracts on which these corporations were formed contain a clause that 'The parties hereto do agree that should any arbitrable controversy arise between them by reason of the terms of this agreement, or any other cause, such controversy shall be settled by arbitration as follows: * * *.' Such a controversy can only be subject to arbitration if it is 'arbitrable', and that means that it must be a controversy which might be the subject of an action as required by section 1448 of the Civil Practice Act. This is a proposed arbitration instituted by Katz to oust Burkin as a director for alleged misconduct by him. The Appellate Division, First Department, affirmed by a divided court the denial by Special Term of a motion to restrain this arbitration. The majority opinion recites the history of the litigation between these parties, and of the law pertaining to stockholders' agreements to perpetuate themselves as directors, citing Clark v. Dodge, 269 N.Y. 410, 199 N.E. 641. The conclusion reached was that inasmuch as an arbitrable question would have arisen if a director had been removed by sufficient votes of stockholders on a charge of wrongdoing, Matter of Landersman, 280 App.Div. 963, 116 N.Y.S.2d 495; Martocci v. Martocci, 2 Misc.2d 330, 42 N.Y.S.2d 222, affirmed 266 App.Div. 840, 43 N.Y.S.2d 516, it should also be true that an arbitrable controversy exists concerning whether or not a director should be removed even though he has not been for the reason that the requisite number of votes to remove him has not been obtained. With that conclusion we do not agree. The Supreme Court is bound by the substantive provisions of section 1448 of the Civil Practice Act to restrain applications for arbitration unless the controversy could be the subject of an action.

No resolution has been adopted by the stockholders of these corporations to oust Burkin; this is an endeavor, in the first instance, to have him removed by arbitration. Where stockholders under their traditional common-law power have removed a director before the expiration of his term on the basis that he has been guilty of misconduct, such a procedure is...