Cont'l, Securities Co. v. Belmont

• Citation: 206 N.Y. 7,99 N.E. 138
• Parties: CONTINENTAL, SECURITIES CO. et al. v. BELMONT et al.
• Decision Date: 11 June 1912
• Court: New York Court of Appeals Court of Appeals

206 N.Y. 7

99 N.E. 138

CONTINENTAL, SECURITIES CO. et al.

v.BELMONT et al.

Court of Appeals of New York.

June 11, 1912.

Appeal from Supreme Court, Appellate Division, Second Department.

Action by the Continental Securities Company and Clarence H. Venner, stockholders in the Interborough Rapid Transit Company, on behalf of themselves and of other stockholders similarly situated, and on behalf of the company against August Belmont and others, impleaded with the Interborough Rapid Transit Company. From an order of the Appellate Division (134 N. Y. Supp. 635) affirming an order denying a motion by certain of the defendants for judgment upon the pleadings, defendants, other than the Interborough Rapid Transit Company, appeal by permission. Order affirmed, and certified questions answered in the affirmative.

See, also, 135 N. Y. Supp. 1106.

Joseph S. Auerbach, for appellants.

J. Aspinwall Hodge, for respondents.

CHASE, J.

This is a representative action derived from the Interborough Rapid Transit Company. It is brought in behalf of the plaintiffs and all others similarly interested, as stockholders of said company, against the directors of said company and said company to require said individual defendants to account to said company for fifteen thousand shares of its capital stock, alleged to have been issued fraudulently and illegally, and without any valid or adequate consideration therefor, but upon an alleged consideration that was a pretense and subterfuge and intended to cover a gift or bonus to the defendants Belmont and Luttgen, and their nominees, and also to require said individual defendants to account for the dividends which have been paid on said stock. It is alleged that by reason of the facts set forth in the complaint the defendant corporation has suffered damage to an amount exceeding $4,500,000. Each of the defendants answered the complaint, and, after the answers were interposed, a motion was made for judgment upon the pleadings dismissing the complaint pursuant to section 547 of the Code of Civil Procedure, which motion was denied. An appeal was taken therefrom to the Appellate Division, where the order denying said motion was unanimously affirmed. Leave was granted by the Appellate Division to the defendants, other than the defendant company, to appeal to this court, and the following questions were certified:

‘(1) Does the complaint state a cause of action?

‘(2) Was the motion of the defendants for judgment against the plaintiffs on the pleadings state its provisions except as required in

As the opinion will not discuss the complaint generally, but only in connection with the objections that are made to it by the appellants in this court, it is unnecessary to state its provisions eccept as required in considering such objections.

[1] It appears from the complaint that each of the plaintiffs purchased his stock subsequently to the transactions complained of in the complaint. This court in the recent case of Pollitz v . Gould, 202 N. Y. 11, 94 N. E. 1088, has definitely determined that a stockholder may bring an action in behalf of the corporation for the benefit of himself and all other stockholders to set aside as fraudulent an improper transaction consummated at the expense of the corporation before he acquired his stock.

It is alleged that the 15,000 shares of stock were issued pursuant to a resolution unanimously adopted by the directors of said company, of which the following is a copy, viz.: ‘Resolved that this company do purchase of August Belmont & Company one thousand nine hundred and seventy-five (1,975) shares of the capital stock of the Pelham Park Railroad Company of the par value of twenty-five dollars ($25) per share; one thousand nine hundred and thirty-five (1,935) shares of the capital stock of the City Island Railroad Company of the par value of twenty-five dollars ($25) per share; and twenty-seven thousand five hundred dollars ($27,500) in the first mortgage bonds of the Pelham Park Railroad Company, for the sum of one million five hundred thousand dollars ($1,500,000) to be paid by the issue and delivery of fifteen thousand (15,000) shares of the par value of one hundred dollars ($100) each in the full-paid non-assessable capital stock of this company, to such persons and in such amounts as the said August Belmont & Company may direct; which said sum is also to cover full compensation to the said August Belmont & Company for their services in procuring the assignment of the contract between John B. McDonald and the city of New York aforesaid, the sale to this company of the stock of the Rapid Transit Subway Construction Company and the subscriptions to the remainder of the capital stock of this company.’ It is further alleged that the statement in said resolution in substance that said 15,000 shares of stock was to be issued and delivered in part to cover full compensation for certain alleged services rendered by the defendants Belmont and Luttgen was a pretense and subterfuge designed and intended to cover up the real transaction which was (except as to the actual cost of said stock and bonds of said railroad companies, namely, $32,185.97) a gift or bonus to said defendants Belmont and Luttgen and their nominees of said stock in the defendant company.

[2] The appellants assert that the complaint is fatally defective because it does not offer to return the stock and bonds described in said resolution. The action is not brought for a rescission of the contract with August Belmont & Co., but for an accounting. The plaintiffs are not in possession of said stocks and bonds, and as individual stockholders are unable through no fault of theirs to return them. The plaintiffs do not bring this action because their rights have been directly violated or because the cause of action is theirs, or because they are entitled to the relief sought. They are permitted to sue in this manner simply in order to set in motion the judicial machinery of the court. Pomeroy's Equity Jurisprudence, § 1095. The court in the action can preserve and adjust the equities of the parties to it. Thompson on Corporations (2d Ed.) § 4568; 2 Mechem on Corporations, § 1179; Kley v. Healy, 127 N. Y. 555, 28 N. E. 593; s. c., 149 N. Y. 346, 44 N. E. 150;Pritz v. Jones, 117 App. Div. 643,102 N. Y. Supp. 549;Heckscher v. Edenborn, 203 N. Y. 210, 96 N. E. 441. The actual value of said stocks and bonds can be found in the action, and, if equity requires it, the defendant corporation can be directed to return such stocks and bonds to said august Belmont & Co.

[3] It was not necessary for the plaintiffs to allege in the complaint that their predecessors in title did not assent to or acquiesce in the alleged fraudulent issue of said 15,000 shares of stock. It is not necessary to negative such assent or acquiescence in a fraud, unless it is otherwise to be presumed from the delay in bringing the action or generally from the allegations of the complaint. If it exists, it is a matter of defense. Sage v. Culver, 147 N. Y. 241, 41 N. E. 513; Pollitz v . Gould, supra. If the rule were otherwise, the objection to the complaint would not avail the defendants in this case because the allegations of the complaint amount to a negative of any assent by the plaintiffs or their predecessors in title to the transactions alleged in the complaint.

[4] It is also claimed by the appellants that it does not appear from the complaint that the defendant corporation and its board of directors were requested to bring suit to recover said fifteen thousand shares of stock or the value thereof, or that said corporation or said board of directors neglected or refused to bring such action. It appears from the complaint that on the 12th day of March, 1910, the plaintiff corporation, then being the owner of the stock now owned by the two plaintiffs, delivered to the defendant corporation and to its officers and directors a written communication directed to said defendant corporation and its president and directors, calling attention to the fact of the issue and delivery of said 15,000 shares of capital stock for a grossly inadequate and illegal consideration, and requesting and demanding that suit be brought in behalf of the corporation and in good faith prosecuted against the incorporators of said company and members of its board of directors during the year 1902 and said firm of August Belmont & Co. to recover the damages suffered by reason of the action of the said incorporators and directors.

Said written communication also stated and provided as follows: ‘We hereby offer to properly indemnify the Interborough Rapid Transit Company against any damage or costs it may sustain as a result of bringing and prosecuting such suit . A copy of this letter is mailed to each director of the Interborough Rapid Transit Company. Unless within ten days from date you advise us that the request and demand herein will be complied with we shall conclude that you refuse.’ Thereafter the plaintiffs waited until May 4, 1910, when, no action having been commenced and no response having been made to said written communication, this action was commenced.

Upon the facts so alleged the plaintiffs treated the defendant corporation and its board of directors as having refused and neglected to bring such action and the allegations relating thereto are sufficient to sustain the complaint. Kavanaugh v. Commonwealth Trust Co., 103 App. Div. 95,92 N. Y. Supp. 543.

[5] On this appeal as on the motion at the Special Term and...