Clarke v. Greenberg

• Decision Date: 16 January 1947
• Parties: CLARKE v. GREENBERG et al.
• Court: New York Court of Appeals Court of Appeals

296 N.Y. 146

71 N.E.2d 443

CLARKE

v.GREENBERG et al.

Court of Appeals of New York.

Jan. 16, 1947.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Stanley Clarke, as trustee of Associated Gas & Electric Company, against Adolph Greenberg and others to recover amount received by defendants in settlement of a stockholder's derivative action brought by defendants. From a judgment of the Appellate Division of the Supreme Court, 270 App.Div. 923, 62 N.Y.S.2d 609, entered May 17, 1946, unanimously affirming a judgment of the Supreme Court for defendants entered upon an order of the court at Special Term (Levy, J.) which granted a motion by defendants for dismissal of the complaint upon the ground that it did not state facts sufficient to constitute a cause of action, plaintiff appeals.

Reversed in accordance with the opinion. Harold Harper, Ben A. Matthews, and Vincent P. Uihlein, all of New York City, for appellant.

Milton Paulson, William E. Haudek, and Leonard I. Schreiber, of New York City, for respondents.

DYE, Judge.

The challenge to the within complaint, for failure to state a cause of action, raises the question of whether a plaintiff in a stockholder's derivative action may be required to account to the corporation for moneys received in private settlement for discontinuance of the action.

The complaint alleges that the defendants commenced a stockholder's derivative action in behalf of the Associated Gas & Electric Company (called AGECO) entitled ‘Greenberg v. Mange et al.’ in which it was alleged that the defendants, as officers and directors, had so mismanaged its affairs that the company and its stockholders were damaged and prayed that an accounting be had, and that the court ‘impress a trust in favor of the Company (AGECO) upon all secret profits and gains obtained by any of the defendant directors,’ etc. No individual relief was asked except reimbursement for expenses. and before trial, a stipulation was made settling and discontinuing the action without notice to other stockholders and without approval of the court, by the terms of which Greenberg executed releases in his individual and representative capacity and transferred and delivered his stock, having a market value of $51.88, to the defendant directors and defendants herein received from them the sum of $9,000.

The complaint in this action alleges that the defendants received the money ‘to the use of, and in trust for AGECO’; that they had failed to account to it or its trustee, the plaintiff herein, and had accordingly unjustly enriched themselves in the sum of $8,948.12 which, in equity, should be paid over to the plaintiff, and prayed judgment accordingly.

The Appellate Division unanimously affirmed the dismissal of the complaint by the Special Term which relied upon Manufacturers Mutual Fire Ins. Co. of Rhode Island v. Hopson, 176 Misc. 220, 25 N.Y.S.2d 502, affirmed 262 App.Div. 731, 29 N.Y.S.2d 139, affirmed 288 N.Y. 668, 43 N.E.2d 71 in which we refused to set aside a stipulation settling a stockholder's derivative suit and revive the action. That case was limited to the right to discontinue and it did not consider whether the moneys received in settlement were impressed with a trust in favor of the corporation for which an accounting should be made.

The very nature of the derivative suit by a stockholder-plaintiff suing in the corporation's behalf suggests the application of the fiduciary principle to the proceeds realized from such litigation whether received by way of judgment, by settlement with approval of the court, which presupposes stockholders approval, or by private settlement and discontinuance of the action at any stage of the proceeding. Such action, we have held, belongs primarily to...