Gen. Rubber Co. v. Benedict

• Decision Date: 11 May 1915
• Citation: 109 N.E. 96,215 N.Y. 18
• Parties: GENERAL RUBBER CO., v. BENEDICT.
• Court: New York Court of Appeals Court of Appeals

215 N.Y. 18

109 N.E. 96

GENERAL RUBBER CO.,

v.BENEDICT.

Court of Appeals of New York.

May 11, 1915.

Appeal from Supreme Court, Appellate Division, first Department.

Suit by the General Rubber Company against Elias C. Benedict. From a judgment of the Appellate Division (164 App.Div. 332, 149 N.Y.Supp. 880) affirming the judgment of the Special Term overruling a demurrer to the complaint, defendant appeals. Affirmed.

See, also, 165 App. Div. 982, 150 N.Y.Supp. 1087.

William M. Ivins, of New York City, for appellant.

Francis Lynde Stetson, of New York City, for respondent.

CARDOZO.

[1] This case comes here on a demurrer to a complaint. The plaintiff is a corporation. It is organized under the laws of New Jersey. The defendant is one of its directors. There is another corporation, organized in the same state, known as General Rubber Company of Brazil. The capital stock of the latter company is made up of 3,000 shares; and all the shares, with the exception of 18, are held and owned by the plaintiff. For convenience, we shall refer to the plaintiff as the holding, and the General Rubber Company of Brazil as the subsidiary, company. The general manager of the subsidiary company at Para, Brazil, was one Arnold J. Hutter. While acting as manager for that company, he became the manager of a rival business. This business was conducted at first under the name of E. Levy, and later, after a corporation had been organized, under the name of the Moju Company. The defendant was the owner of more than one-fourth of the stock. He was also its vice president. The Moju Company met with reverses, and finally became insolvent. To relieve its embarrassments, Hutter, according to the allegations of the complaint, took the moneys of the General rubber Company of Brazil and gave them from time to time to the Moju Company. The defalcations extended over a period of more than a year, and caused a loss of $185,000. The charge is made that the defendant knew of this misuse of moneys, and that he acquiesced in it and approved of it. He neglected, it is said, to inform the plaintiff of Hutter's wrongdoing; he withheld and concealed the truth, so it is charged, intentionally and for his own profit; and the averment is that, if such information had been given, the plaintiff could and would have prevented the misapplication and the loss. Because of this violation of his duty, the value of the plaintiff's shares in the subsidiary company is said to have been lessened, and the plaintiff to have been otherwise damaged, in a sum exceeding $185,000. for the amount of this loss with interest judgment is demanded.

The foregoing summary states in briefest outline the averments of a voluminous complaint. It suffices, however, to indicate the problem of law which is involved. We are to determine whether the defendant is liable to the holding company for the diminished value of its shares resulting from the waste of the assets of the subsidiary company.

The defendant was not a director of the subsidiary company. He was a director of the plaintiff. Because of that relation, he owed to the plaintiff the duty of good faith and vigilance in the preservation it its property. the duty and the breach, coupled, it is here alleged, with damage, make out a cause of action. Ashby v. White, 3 Ld.Raym. 320. Such cases as Smith v. Hurd, 12 Metc. (Mass.) 375, 46 Am.Dec. 690, and Niles v. N.Y.C. & H.R.R.R. Co., 176 N.Y. 119, 68 N.E. 142, are pressed upon us by the defendant. They are inapplicable here. The distinction was well put by Taft, J., writing for the Circuit Court of Appeals in Ritchie v. McMullen, 79 Fed. 522, 533, 25 C.C.A. 50:

“It is undoubtedly true, as the Circuit Court held, that a stockholder, merely as such, cannot have an action in his own behalf against one who has injured the corporation, however much the wrongful acts have depreciated the value of his shares (citing Smith v. Hurd, supra, and other cases). But we are of opinion that this principle has no application where the wrongful acts are not only wrongs against the corporation, but are also violations by the wrongdoer of a duty arising from contract or otherwise, and owing directly by him to the stockholders.”

The stockholder in those cases did not sue his own agent. he sued another's agents, i.e., the directors of a company, and sued them for the waste of the company's property. In his own right, and not in a derivative action, he attempted to recover his own damages, which he measured by the diminution in the value of his shares. The decision was that the delinquent directors were the agents of the company; that they owed a duty to the company and not to the individual stockholders; and that if there had been any breach of that duty the company must redress the wrong. But here the situation is a different one. Here the stockholder is not suing the agent of another company; it is suing its own agent. The stockholder happens to be itself a corporation; the defendant happens to be a director; but the legal problem would be the same if the plaintiff were a natural person, and the defendant an executor or trustee. It would also be the same if the plaintiff, instead of being substantially the sole stockholder, were one stockholder among many. If the trustee of an estate, holding shares in a bank, should learn that the cashier was looting it, and with that knowledge should keep silent, the defendant would have us say that the beneficiaries under the will would have no remedy for the ensuing loss. A trustee in the case supposed would owe no duty of active vigilance to the bank whose property was stolen. If not liable to those interested in the estate, he would not be liable to any one. Yet his duty to preserve the estate, the breach of that duty, and the resulting damage, would seem to call for the application of the principle that there is no wrong without a remedy. The case supposed does not differ in its essence from the case presented.

[3] The defendant, as a director of a corporation, should have taken the same care of its property that men of average prudence take of their own property. Hun v. Cary, 82 N.Y. 65, 37 Am.Rep. 546;Latimer v. Veader, 20 App.Div. 418, 428, 46 N.Y.Supp. 823;Bosworth v. Allen, 168 N.Y. 157, 61 N.E. 163, 55 L.R.A. 751, 85 Am.St.Rep. 667. A jury might not unreasonably find that the care exacted by that rule would involve at least a warning that the subsidiary company was in the management of a thief, and that the value of the shares was vanishing. It is argued that, even if the warning had been given, the plaintiff was only a stockholder in the subsidiary company, and hence was not in a position to stop the waste. The allegation is, however, that it could and would have done so; and we must hold this sufficient on demurrer. There are many things it could have done. It could at least have sounded an alarm that might have led to Hutter's removal. The trial will show whether its intervention would or would not have been efficient. In any event, we cannot say, and least of all as a matter of law, the opportunity to intervene was valueless. Leather Mfrs. Bank v. Morgan, 117 U.S. 96, 115, 6 Sup.Ct. 657, 29 L.Ed. 811;Continental Nat. Bank v. Nat. Bank of Commonwealth, 50 N.Y. 575;Voorhis v. Olmstead, 66 N.Y. 113, 118;Rothschild v. title Guarantee & Trust Co., 204 N.Y. 458, 97 N.E. 879, 41 L.R.A. (N.S.) 740;Cassidy v. Uhlmann, 179 N.Y. 505, 518, 521, 63 N.E. 554.

[2] It is strongly argued, however, that the defendant is answerable for the same wrong to the subsidiary company, and is thus exposed to the risk of a double liability. We think the wrong to the plaintiff does not cease to be remediable because it may also be a wrong to some one else. If the defendant has violated any duty to the subsidiary company, it is not the same duty that he owes to the plaintiff. He is not liable to the subsidiary company qua director. He is not liable to that company for mere neglect. He is liable to it, if at all, only as a stranger might be liable. If he has joined in a conspiracy to plunder it, he must, like any other tort-feasor, make compensation for the plunder. there are allegations in the complaint which are broad enough to be construed as charging that he was a party to such a conspiracy. We cannot know whether they will be proved. If they are proved in all their fullness, they will show that the subsidiary company as well as the plaintiff has been wronged. Less, however, may be proved; the defendant may not have counseled or ratified Hutter's acts, or otherwise made himself a party to them; and still if he knew of them, and was silent, he may have failed in the stricter duty that he owes to the plaintiff. It is not for us at this time to say to what extent the duties are coterminous. It is enough that they have a different origin, a different standard, and a different measure.

The argument is made, however, that since the duties overlap a double liability is threatened. To-day the defendant is called upon to make good the diminished value of the plaintiff's shares. To-morrow he may be called upon at the suit of the subsidiary company to replenish its wasted treasury. We think the argument confuses the cause of action with the damages. If the defendant is solvent, and has so made himself a party to the conspiracy that he is liable as a tortfeasor to the subsidiary corporation, the existence of such a cause of action will be reflected, like the ownership of any other asset, in the value of the shares. The diminution in value will be one thing if the subsidiary corporation is without a remedy against any one. It will be another thing if there is a remedy against a solvent wrongdoer. It will be one thing if the cause of action in favor of the company is conceded or doubtful. A contested claim is rarely appraised at its face value. The expenses of litigation, its delays, its uncertainties, these and like elements may make the shares less valuable, even though a...