Clark v. Dodge

• Decision Date: 08 January 1936
• Citation: 269 N.Y. 410,199 N.E. 641
• Court: New York Court of Appeals Court of Appeals
• Parties: CLARK v. DODGE et al.

269 N.Y. 410

199 N.E. 641

CLARK

v.DODGE et al.

Court of Appeals of New York.

Jan. 8, 1936.

Action by David H. Clark against John L. Dodge and others, wherein defendants filed a counterclaim. From an order of the Appellate Division, Second Department, entered on October 10, 1934, dismissing the complaint (242 App.Div. 728, 274 N.Y.S. 677), plaintiff appeals.

Judgment of Appellate Division reversed and order of Special Term affirmed.

Appeal from Supreme Court, Appellate Division, Second Department.

Mortimer B. Patterson, of Nyack, and James M. Gray, of Brooklyn, for appellant.

Arthur L. Barton and John S. Sickles, both of New York City, for respondents.

CROUCH, Judge.

The action is for the specific performance of a contract between the plaintiff, Clark, and the defendant Dodge, relating to the affairs of the two defendant corporations. To the complaint a joint answer by the three defendants was interposed, consisting of denials and a separate defense and counterclaim. To the separate defense and counterclaim a reply was made. The defendant then moved under rule 112 of the Rules of Civil Practice, and under sections 476, 96, and 279 of the Civil Practice Act, to dismiss the complaint. The motion was made ‘on the pleadings in this action and the admissions of the plaintiff’ in two affidavits submitted by him on a prior motion in the action. The alleged admissions are equivocal at best, and clearly were not ‘intended to be treated as a part of a pleading or made to avoid some question arising on the pleadings.’ Lloyd v. R. S. M. Corporation, 251 N.Y. 318, 320, 167 N.E. 456. We shall deal, therefore, with the questions here presented in the light of the facts most favorable to plaintiff appearing in the pleadings only.

Those facts, briefly stated, are as follows: The two corporate defendants are New Jersey corporations manufacturing medicinal preparations by secret formulae. The main office, factory, and assets of both corporations are located in the state of New York. In 1921, and at all times since, Clark owned 25 per cent. and Dodge 75 per cent. of the stock of each corporation. Dodge took no active part in the business, although he was a director, and through ownership of their qualifying shares, controlled the other directors of both corporations. He was the president of Bell & Co., Inc., and nominally general manager of Hollings-Smith Company, Inc. The plaintiff, Clark, was a director and held the offices of treasurer and general manager of Bell & Co., Inc., and also had charge of the major portion of the business of Hollings-Msith Company, Inc. The formulae and methods of manufacture of the medicinal preparations were known to him alone. Under date of February 15, 1921, Dodge and Clark, the sole owners of the stock of both corporations,entered into a written agreement under seal, which after reciting the stock ownership of both parties, the desire of Dodge that Clark should continue in the efficient management and control of the business of Bell & Co., Inc., so long as he should ‘remain faithful, efficient and competent to so manage and control the said business'; and his further desire that Clark should not be the sole custodian of a specified formula, but should share his knowledge thereof and of the method of manufacture with a son of Dodge, provided, in substance, as follows: That Dodge during his lifetime and, after his death, a trustee to be appointed by his will, would so vote his stock and so vote as a director that the plaintiff (a) should continue to be a director of Bell & Co., Inc.; and (b) should continue as its general manager so long as he should be ‘faithful, efficient and competent’; (c) should during his life receive one-fourth of the net income of the corporations either by way of salary or dividends; and (d) that no unreasonable or incommensurate salaries should be paid to other officers or agents which would so reduce the net income as materially to affect Clark's profits. Clark on his part agreed to disclose the specified formula to the son and to instruct him in the details and methods of manufacture; and, further, at the end of his life to bequeath his stock-if no issue survived him-to the wife and children of Dodge.

It was further provided that the provisions in regard to the division of net profits and the regulation of salaries should also apply to the Hollings-Smith Company.

The complaint alleges due performance of the contract by Clark and breach thereof by Dodge in that he has failed to use his stock control to continue Clark as a director and as general manager, and has prevented Clark from receiving his proportion of the income, while taking his own, by causing the employment of incompetent persons at excessive salaries, and otherwise.

The relief sought is reinstatement as director and general manager and an accounting by Dodge and by the corporations for waste and for the proportion of net income due plaintiff, with an injunction against further violations.

The only question which need be discussed is whether the contract is illegal as against public policy within the decision in McQuade v. Stoneham, 263 N.Y. 323, 189 N.E. 234, upon the authority of which the complaint was dismissed by the Appellate Division.

‘The business of a corporation shall be managed by its board of directors.’ General Corporation Law (Consol.Laws, c. 23) § 27. That is the statutory norm. Are we committed by the McQuade Case to the doctrine that there may be no variation, however slight or innocuous, from that norm, where salaries or policies or the retention of individuals in office are concerned? There is ample authority supporting that doctrine. E. g., West v. Camden, 135 U.S. 507, 10 S.Ct. 838, 34 L.Ed. 254;Jackson v. Hooper, 76 N.J.Eq. 592, 75 A. 568,27 L.R.A. (N.S.) 658. But cf. Salomon v. Salomon & Co., [1897] A.C. 22, 44, and something may be said for it, since it furnishes a simple, if arbitrary, test. Apart from its practical administrative convenience, the reasons upon which it is said to rest are more or less nebulous. Public...