Gardiner v. Automatic Arms Co.

CourtUnited States District Courts. 2nd Circuit. United States District Court of Northern District of New York
Citation275 F. 697
PartiesGARDINER et al. v. AUTOMATIC ARMS CO. et al.
Decision Date19 September 1921

Gilbert H. Baker, of Penn Yan, N.Y. (Elijah H. Zoline, of New York City, Arthur P. Greeley, of Washington, D.C., Edwin G Gutherey, and James Hamilton Lewis, of Chicago, Ill., of counsel), for complainants.

Warnick J. Kernan, of Utica, N.Y., and Pendleton, Anderson, Iselin &amp Riggs, of New York City (Francis K. Pendleton, John H Iselin, and Lawrason Riggs, Jr., all of New York City, of counsel), for defendant Savage Arms Co.

COOPER District Judge.

This is a motion by one of the defendants, the Savage Arms Corporation, to dismiss the bill of complaint and also to strike out certain allegations. The plaintiffs are stockholders of the McClean Arms & Ordnance Company, which company is not a party to this suit. The plaintiffs bring the suit on behalf of themselves and all other stockholders of the McClean Company who may join in this action as parties complainant and share the expenses. The defendants are the Automatic Arms Company and the Savage Arms Corporation, New York State corporations.

The bill of complaint alleges that one Samuel N. McClean was the inventor of a number of different improvements in firearms that he applied for and received patents on these inventions, or some of them, and assigned the patents and applications for patents, as the case might be, to the McClean Arms and Ordnance Company, a New Jersey corporation; that on or about May 13, 1910, certain Messrs. Calfee, Bradley, Brown, Cowles, Babcock, and Ward, being all the directors and officers of the company, except one director, who was merely a nominal director, by various means, devices, acts, and proceedings such as, among others, foreclosure of mortgage defaulting on loans and written instruments of assignments, wrongfully and fraudulently, for the purpose of diverting all the property and profits of the company to themselves and their associates, caused or procured all the patents and patent rights belonging to said McClean Arms & Ordnance Company, save two patents, to be transferred to and record title to be vested in the defendant the Automatic Arms Company, a corporation organized by them for the purpose and in which they were large stockholders; substantially all the stock being held by them and a coconspirator.

It is also averred that the directors purchased at the expense of McClean Arms Company patents of North and Cochrane, and assigned them to Cowles and Calfee, who in turn assigned them to the Automatic Arms Company, all in fraud of the stockholders; also, that the Automatic Arms Company in 1914 issued and gave to defendant the Savage Arms Company a license to manufacture under the patents transferred to it, or some of them, the said last-named defendant having full knowledge of all the facts alleged, and that a large number of arms were manufactured thereunder by said last-named defendant and others having license or right from the Automatic Arms Company, on royalties or otherwise, and large profits were made by both defendants herein.

In addition to manufacturing the firearms under the patents assigned to it, it is alleged that the defendants manufactured and infringed the two patents, title to which is still in the McClean Arms Company, and intend and threaten to continue such manufacture.

The complaint also avers that the McClean Arms & Ordnance Company was dissolved in January, 1911, by the Governor of New Jersey for nonpayment of franchise taxes, pursuant to statutory requirement.

The prayer for relief is: (1) That the assignment of patents to defendant the Automatic Arms Company be adjudged void, and that said patents are the property of said McClean Arms & Ordnance Company; (2) for ad interim and permanent injunctions, restraining defendants from manufacturing under such patents or infringing them; (3) that the defendants account for and pay over to a receiver to be appointed by the court the gains and profits by way of sales, royalties, dividends on stock or otherwise received by or accrued to them, or either of them, for the manufacture or sale of guns, or parts of guns, embodying inventions covered by letters patent owned by McClean Arms & Ordnance Company on May 13, 1910, or issued on application owned by said company on said date, including those assigned and the two not assigned, and for damages sustained by complainants and other stockholders by reason of the unlawful doings of said defendants.

At the threshold of the proceedings we are met with the objection which is the main ground of this motion, that the McClean Arms & Ordnance Company is not made a party to the litigation, and it is conceded that if it is an indispensable party, an amendment to the pleadings, adding the company, would oust the court of jurisdiction, because the company is a resident of New Jersey.

If the McClean Company were a corporation in the full enjoyment of all its corporate powers and were the owner of the patents alleged to have been infringed, or would be the legal or equitable owner of the patents alleged to have been fraudulently assigned to the defendant Automatic Company, if the assignments were set aside there would be little question but that the McClean Company would be an indispensable party, and that the complaint should be dismissed. The reason for this is that the undissolved corporation is the owner of the legal title of the corporate property, and an action by stockholders concerning the corporate property in which the corporation is not a party would not be res adjudicata as to the corporation, the owner of the legal title. In Davenport v. Dows, 85 U.S. (18 Wall.) 626, 21 L.Ed. 938, the court said on this point:

'Manifestly the proceedings for this purpose should be so conducted that any decree which shall be made on the merits shall conclude the corporation. This can only be done by making the corporation a party defendant. The relief asked is on behalf of the corporation, not the individual shareholder, and if it be granted the complainant derives only an incidental benefit from it. It would be wrong, in case the shareholder were unsuccessful, to allow the corporation to renew the litigation in another suit, involving precisely the same subject-matter. To avoid such a result, a court of equity will not take cognizance of a bill brought to settle a question in which the corporation is the essential party in interest, unless it is made a party to the litigation.'

But the McClean Company was dissolved in 1911 pursuant to the provisions of the New Jersey statute. Upon such dissolution, the dissolved corporation has corporate power only for the purpose of winding up its affairs and the distribution of assets after ascertainment and payment of its debts. This is so by the statutes of New Jersey Corporation Law (2 Comp.St. 1910, pp. 1634-1637), Secs. 53-60, and also probably by the doctrines of equity irrespective of statute. Boyd v. Hankinson, 92 F. 49, 34 C.C.A. 197; Greenwood v. Union Freight R. Co., 105 U.S. 13, 26 L.Ed. 961; 14 A Corpus Juris, Sec. 3807.

Upon dissolution, the legal title of the property of the corporation passes to the stockholders subject to the payment of the debts of the corporation. Pewabic Mining Co. v. Mason, 145 U.S. 349, 12 Sup.Ct. 887, 36 L.Ed. 732; Stearns Coal Co. v. Van Winkle, 221 F. 590, 137 C.C.A. 314; Boyd v. Hankinson, 92 F. 49, 34 C.C.A. 197; 14 A Corpus Juris; Doherty v. Rice (C.C.) 186 F. 204, 212, affirmed 184 F. 878, 107 C.C.A. 202; Greenwood v. Union Freight R.R. Co., supra; sections 54 and 84, Corporation Law of New Jersey.

In view of the 10 years since dissolution, the creditors, if any, may be deemed barred by statute of limitations, and have no claim on the property of the corporation. If the dissolved corporation, by reason of its dissolution, is no longer the owner of the legal title to the corporate property, and that title is, after dissolution, in the stockholders, in the absence of creditors, then a judgment in an action by the stockholders for injury to property formerly belonging to the corporation would be res adjudicata, and the reason for holding that the nondissolved corporation is an indispensable party, because holder of the legal title, no longer exists.

Authorities, therefore, holding that an undissolved corporation is an indispensable party to an action involving the corporate property, are not applicable after the dissolution of the corporation.

In actions by the stockholders of a dissolved corporation, the corporation is not an indispensable, though perhaps a proper, party. Boyd v. Hankinson, 92 F. 49, 34 C.C.A. 197; Stearns Coal Co. v. Van Winkle, 221 F. 590, 137 C.C.A. 314; Southern Pacific Co. v. Bogert, 250 U.S. 485, 39 Sup.Ct. 533, 63 L.Ed. 1099; Ervin v. Oregon Ry. & Nav. Co. (C.C.) 20 F. 577, 581; Davenport v. Dows, 85 U.S. (18 Wall.) 626, 21 L.Ed. 938; Morshead v. Southern Pac. Co. (C.C.) 123 F. 350; Lawrence v. So. Pac. Co. (C.C.) 180 F. 822; Kendig v. Dean, 97 U.S. 423, 425, 24 L.Ed. 1061; Minnesota v. Northern Sec. Co., 184 U.S. 199, 22 Sup.Ct. 308, 46 L.Ed. 499; Hyams v. Old Dominion Co. (D.C.) 204 F. 681.

That a dissolved corporation is not a necessary party defendant to a suit involving the property or affairs of the dissolved corporation, and adverse to the corporation, is established as to a New Jersey corporation governed by the same New Jersey statutes, by Gen'l Ry. Signal Co. v. Cade, 122 A.D. 106, 106 N.Y.Supp. 729, and as to a West Virginia corporation endowed with certain limited corporate powers under a statute very similar to the New Jersey statute in Atlantic Dredging Co. v. Beard et al., 203 N.Y. 584, 96 N.E. 415, affirming 145 A.D. 342, 130 N.Y.Supp. 4.

In the latter case the action was...

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