Chelrob, Inc. v. Barrett

• Decision Date: 20 October 1944
• Citation: 293 N.Y. 442,57 N.E.2d 825
• Parties: CHELROB, Inc., et al. v. BARRETT et al.
• Court: New York Court of Appeals Court of Appeals

293 N.Y. 442

57 N.E.2d 825

CHELROB, Inc., et al.

v.BARRETT et al.

Court of Appeals of New York.

Oct. 20, 1944.

Appeal from Supreme Court, Appellate Division, Second Department.

Consolidated actions by Chelrob, Inc., and another, suing on their own behalf and on behalf of all other stockholders of Queens Borough Gas & Electric Company similarly situated, against Edward F. Barrett and others for accounting and damages alleged to have been suffered by Queens Borough Gas & Electric Company as a result of selling gas to its subsidiary Nassau & Suffolk Lighting Company, at alleged inadequate prices which were allegedly fixed by defendant Long Island Lighting Company, a stockholder in the Queens Borough Gas & Electric Company, for its own interest. From a judgment, entered upon an order of the Appellate Division of the Supreme Court in Second Judicial Department, 265 App.Div. 455,266 App.Div. 669,39 N.Y.S.2d 625, which reversed, on the law and the facts, a judgment of the Supreme Court in favor of defendant Queens Borough Gas & Electric Company and against defendants Long Island Lighting Company and Nassau & Suffolk Lighting Company entered upon a decision of the court on a trial at Special Term, McGarey, J., 177 Misc. 521, 31 N.Y.S.2d 259, which dismissed the complaint against the individual defendants, directors of the Queens Borough Gas & Electric Company, without prejudice to the bringing of another action against them if the judgment awarded was not paid, the plaintiff's appeal. The Appellate Division disallowed special findings of fact and conclusions of law of the Special Term, made certain new findings and conclusions and dismissed the complaint on the merits as to all defendants.

Judgment of the Appellate Division dismissing the complaint against the Long Island Lighting Company and Nassau & Suffolk Lighting Company reversed, and the matter remitted to the Appellate Division, and judgment of the Appellate Division dismissing the complaint against the individual defendants affirmed. Milton Paulson, Abraham L. Pomerantz. Harry Tabershaw, Robert C. Richter, Joseph A. Ruskay, and Edwin V. Hellawell, all of New York City, for appellants.

Charles G. Blakeslee, of New York City, John J. Donohue, of Mineola, and John C. Bruckmann, and Charles E. Elbert, both of New York City, for respondent Long Island Lighting Co.

Jackson A. Dykman, of Brooklyn, and Edward J. Crummey, of New York City, for respondent Nassau & Suffolk Lighting Co.

Stephen Callaghan, Ralph Stout, and Thomas A. Gaffney, all of New York City, for respondents Ellis L. Phillips and others.

Charles G. Blakeslee, of New York City, for respondents Edward F. Barrett and others.

Philip Huntington, of Glen Cove, for respondent F. H. Maidment.

LEHMAN, Chief Judge.

The defendant corporations, Long Island Lighting Company, Queens Borough Gas & Electric Company and Nassau & Suffolk Lighting Company, are public utility companies organized under the laws of the State of New York, serving sections of Long Island. Prior to 1927 Long Island Lighting Company (hereinafter referred to as ‘Long Island’) acquired the common or voting stock of Queens Borough Gas & Electric Company (hereinafter referred to as ‘Queens'). Six per cent cumulative preferred stock of Queens of the par value of $6,686,000 remains in the hands of the public. In 1927, Queens acquired the common or voting stock of Nassau & Suffolk Lighting Company (hereinafter referred to as ‘Nassau’). Seven per cent cumulative preferred stock of Nassau of the par value of $2,726,200 remains in the hands of the public. In 1928 Queens expanded its production plant and transmission facilities to enable it to sell gas to Nassau. Since that time Nassau has purchased from Queens a substantial part of the gas it furnishes to consumers within the territory it serves and in addition has purchased from Queens gas which it resold to Long Island. The price of the gas sold by Queens to Nassau was fixed by the directors of the two corporations. All of them had been elected by Long Island, which directly or indirectly held the voting stock of both corporations. Dividends on the preferred stock of Queens have been in arrears since 1937 and several holders of preferred stock of Queens, claiming that the price paid to Queens by Nassau was unreasonable and caused a loss to Queens, brought actions against the corporate and individual defendants for an accounting of the resulting profits which the defendants may have obtained and the losses which Queens suffered.

The actions were consolidated and, pursuant to the provisions of section 96-a of the Civil Practice Act, the consolidated action was tried together with an action brought by preferred stockholders of Nassau who claimed that Long Island had compelled Nassau to sell to it for an inadequate and unfair price some of the gas which Nassau had purchased from Queens (Espach v. Nassau & Suffolk Lighting Co., 293 N.Y. 463, 57 N.E.2d 835, decided herewith in separate opinion). Mr. Justice McGarey at Special Term (177 Misc. 521, 31 N.Y.S.2d 259) held that Long Island dominated both Queens and Nassau and that the price fixed by the directors of these companies for gas purchased by Nassau from Queens was inadequate and caused loss to Queens, and granted judgment in favor of Queens against Long Island and Nassau in the sum of $387,020, as an additional price for gas supplied after 1934, with interest at the rate of 2%. Any cause of action for additional compensation for gas furnished prior to that date, he held, was barred by the Statute of Limitations. The judgment directs that ‘as between Nassau and Suffolk Lighting Company and Long Island Lighting Company, said judgment shall be paid by Nassau and Suffolk Lighting Company’. The complaints against the individual defendants were ‘dismissed upon the merits * * * without costs to any party as against any other party and without prejudice to the bringing of an action against the defendant directors in the event that this judgment is not paid’.

All parties appealed to the Appellate Division. The plaintiffs acquiesced in the ruling that the six-year Statute of Limitations applied but claim that the judgment in their favor based on alleged wrongs since 1934 is inadequate. The defendants claim that the directors acted honestly and carefully, seeking in good faith to promote the interests of both corporations, and that the price fixed by them was fair. The Appellate Division unanimously reversed on the law and the facts the judgment in favor of the plaintiffs and directed judgment dismissing the complaint on the merits against all the defendants. It expressly reversed some of the findings of the Justice at Special Term and found many of the findings proposed by the defendants. It did not reverse some significant findings of the trial court.

Long Island acquired all the voting stock of Queens and indirectly of Nassau with the written consent and approval of the Public Service Commission of the State. The defendant Ellis L. Phillips and a small group of associates owned and controlled, directly or indirectly, a substantial majority of the voting stock of Long Island. By voting that stock they elected the directors of Long Island who, in turn, chose the directors of Queens and of Nassau. A majority of the directors of Queens and of Nassau were at all times also directors and, in some cases, were paid officers or employees of Long Island and some of the directors of Nassau were also directors of Queens. The three corporations maintained their separate corporate form and conducted their business as separate corporate entities. So long as preferred stock of Queens and of Nassau was outstanding the corporations could not be merged. Nevertheless the three corporations were operated through their interlocking directorate as parts of a single system. Such operation is not forbidden by law or unjust to any of the corporations in the system if the interests of each corporation are zealously safeguarded by its own board of directors. Indeed, such operation may be more economical and efficient and may benefit the public and all the corporations. We may perhaps assume that otherwise the Public Service Commission would not have given its consent and approval to the acquisition by Long Island of the voting stock of the other corporations.

Nonetheless, the directors of each corporation though all elected by Long Island may authorize corporate action by the corporation which they represent only if in their considered opinion such action will promote the best interests of that corporation and is fair to it. That is a fiduciary obligation to the corporation and indirectly to its stockholders and creditors which its directors have assumed. In the operation of separate utility corporations as a single system, agreement must be reached by the directors of the separate corporations in regard to the share of each corporation in such operation and the compensation to be paid by one to the other. The compensation to be paid for benefits received is ordinarily fixed by negotiation or bargaining, but where in negotiations between two corporations the same men represent both, their determinations are subject to judicial scrutiny. In this case we are confronted with the question of what relief may be afforded when such determinations are predicated upon mistake of fact entering into the fixation of the price to be paid by one corporation to the other. The plaintiffs challenge, on that and other grounds, the agreement reached by the boards of directors of Queens and of Nassau. Under its terms Nassau purchases gas from Queens at a price which it is said causes a loss to Queens. The plaintiffs charge that in making the challenged agreement the interests of Queens were disregarded by its directors acting under the domination of Long Island and for the benefit of Long Island and Nassau, rather than of Queens.

Most of the charges of flagrant wrong contained in the...