Kelley v. 74 & 76 West Tremont Ave. Corp.

• Decision Date: 08 March 1960
• Citation: 24 Misc.2d 370,198 N.Y.S.2d 721
• Parties: Harold C. KELLEY, as a director of 74 & 76 West Tremont Avenue Corporation and as a director of University Heights Sanitarium, Inc., suing in the right of said two corporations, Plaintiff, v. 74 & 76 WEST TREMONT AVENUE CORPORATION, University Heights Sanitarium, Inc., and William Aronson, Jacob E. Burstan, Matthew J. Coppola, William G. Chorba, Arthur M. Freund, Charles M. Kapp, Forris E. Chick, Angelo Procario, Edward Flood and Alphonse Ziviello, united in interest, as directors of said two corporate defendants, Defendants.
• Court: New York Supreme Court

Page 721

198 N.Y.S.2d 721

24 Misc.2d 370

Harold C. KELLEY, as a director of 74 & 76 West Tremont Avenue Corporation and as a director of University Heights Sanitarium, Inc., suing in the right of said two corporations, Plaintiff, v. 74 & 76 WEST TREMONT AVENUE CORPORATION, University Heights Sanitarium, Inc., and William Aronson, Jacob E. Burstan Matthew J. Coppola, William G. Chorba, Arthur M. Freund Charles M. Kapp, Forris E. Chick, Angelo Procario, Edward Flood and Alphonse Ziviello, united in interest, as directors of said two corporate defendants, Defendants.

Supreme Court, Trial Term, Bronx County, Part V.

March 8, 1960.

Silas W. Sollfrey, New York City, for plaintiff.

Miller & Miller, New York City (Morton Miller, and Meyer Schwartz, New York City, of counsel), for all defendants except Jacob E. Burstan.

Archer, Bosch & Engeler, New York City (Louis L. Archer, New York City, of counsel), for Louis L. Archer, executor of Estate of Jacob E. Burstan, deceased, and substituted as defendant. MORRIS E. SPECTOR, Justice.

This is another of the internecine legal battles that have been going on between the directors of these corporations in the courts since 1954. This is a director's derivative action brought against two corporations, and the other directors of said corporations, seeking to establish that the fees paid by the corporations to attorneys who acted in behalf of said corporations and their directors in previous lawsuits were ultra vires and/or excessive, and, further, that the corporations sold certain units of stock in said corporations for a sum below the fair value of such stock. The prayers for relief demand of the individual defendants (directors) an accounting to the corporations for loss and damage sustained because of the payment of said fees and for the aforesaid sale of stock.

There previously had been brought a mandamus proceeding by this very plaintiff in this action and others to compel the Boards of Directors of said corporations to call a special meeting of the stockholders for the purpose of restoring to the status of authorized but unissued shares 237 units of the capital stock of said corporations, which had theretofore been reacquired by said corporations.

Shortly thereafter, one Dr. Angelo Procario brought a derivative action, individually and as a director of said corporations, against said corporations and various directors thereof for fraudulently acquiring stock from a retiring stockholder without first offering same to the said corporations, upon the same terms and conditions upon which these directors acquired same, as provided in the provisions of the stock certificates and by-laws.

Both actions were tried jointly.

The firm of Miller & Miller, Esqs., represented the corporations and directors in the defense of the mandamus proceedings and represented Dr. Procario in the specific performance action.

The mandamus proceeding was dismissed upon the merits and Dr. Procario prevailed in the specific performance action and the respective defendants in said action were required to turn over the stock units in question to the corporation at the price of $90 per unit.

The judgments were appealed to the Appellate Division. The judgment in the mandamus proceeding was affirmed and the judgment in the specific performance action was modified, in that the price of $90 per unit was reduced to $66.67 per unit, which was the price that these directors had paid. The judgment was otherwise affirmed.

The firm of Miller & Miller, Esqs., received a fee of $3,500 from Dr. Procario plus disbursements for the prosecution of his action, which sum was reimbursed to Dr. Procario by the corporations. Said firm of attorneys received $14,000 from the corporations for their services to the corporations and directors in both actions. These fees were duly voted by resolutions of the Boards of Directors and duly approved at a subsequent stockholders' meeting. The vote in each instance was by a majority (but not a unanimous) vote.

The plaintiff contends that the payment of a fee by the corporations to these attorneys for services in the actions was ultra vires and relies upon the recent case of Garlen v. Green Mansions, 9 A.D.2d 760, 193 N.Y.S.2d 116, 117, wherein the Appellate Division, 1st Dept., stated 'While a corporation is usually a passive litigant in a stockholder's derivative action, it may well be that the equitable relief sought in the complaint requires an appearance and answer by the corporate defendant. However, such appearance must be by independent counsel whose interests will not conflict with those of the individual defendant.'

In the specific performance action, it must be noted that the corporations, when informed of the action, passed a resolution that the action 'is justifiably brought and that this corporation does hereby consent that an order to that effect may be entered.'; also that many of the directors who had acquired these stock units with 'taint of fraud', defaulted in the proceedings and came forward and testified on behalf of the petitioner and offered to turn the stock units over to the corporations. It was because of the refusal of the other...