Morse v. Metro. S. S. Co.

• Citation: 100 A. 219,87 N.J.Eq. 217
• Decision Date: 13 February 1917
• Docket Number: No. 35/797.,35/797.
• Parties: MORSE v. METROPOLITAN S. S. CO. et al.
• Court: New Jersey Court of Chancery

100 A. 219

87 N.J.Eq. 217

MORSE

v. METROPOLITAN S. S. CO. et al.

No. 35/797.

Court of Chancery of New Jersey.

Feb. 13, 1917.

Suit by Jennie R. Morse against the Metropolitan Steamship Company. Heard on complainant's bill for receiver. Order made appointing receiver.

Conover English, of Newark, and Martin W. Littleton, Mr. Swacker, and James D. Brown, all of New York City, for complainant. Fred J. Faulks and Stirling D. Ward, both of Newark, for defendants. George Wickersham, of New York City, for a creditor.

LANE, V. C. (orally). I announced yesterday that I would appoint a receiver at once, owing to what I consider to be the exigencies of the occasion. It is now stated that appeal will be taken to the Court of Errors and Appeals, and as there may be a necessity for an early application to that court for ad interim relief, I will announce my conclusions on the law at this time. Counsel for the defendant corporation has made application for a stay of the operation of the order or interlocutory decree, and the application has been argued as if the order had actually been signed. I am going to deny the application; for the same reasons which induced me to act at once yesterday induce me now to refuse to practically nullify the action I then took.

The case was fully argued, and I have examined the authorities cited. I will not attempt to analyze them to any great extent. The power of a court of equity to appoint a receiver of a corporation, not insolvent, under certain circumstances, has been before the courts of this state in several cases, and, I think, is clearly settled. In Benedict v. Columbus Construction Company, 49 N. J. Eq. 23, 23 Atl. 48a, the Chancellor, while holding that the court cannot dissolve a corporation or declare its franchises forfeited and extinguished except under statutory provisions, yet said that:

"But where it plainly appears that the object for which the company was formed is impossible of attainment, it becomes the duty of the company's agents to put an end to its operations, and wind up its affairs; and should they, even though supported by a majority of the stockholders, pursue operations which must eventually be ruinous, any shareholder feeling aggrieved would upon plain equitable principle be entitled to the assistance of this court, and a decree should be made compelling the directors to wind up the company's business, and distribute the assets among those who are entitled to them, unless they can lawfully be used for other business purposes allowed by the charter. This course is pursued in the case of partnerships in similar situations, and, for the reasons there controlling, I perceive no reason why it should not also be pursued in the case of corporations."

He also said:

"If stockholders in a corporation disapprove of a company's management [which is] conducted without fraud, or by action ultra vires, or in gross abuse of trust, or consider their speculation a bad one, their remedy is to elect new officers, or sell their shares and withdraw."

In Einstein v. Rosenfeld, 38 N. J. Eq. 309, the Chancellor, while not doubting his power to appoint a receiver, did not do so under the circumstances of that case. In Avery v. Bless Manufacturing Company et al., 27 N. J. Eq. 412, the Chancellor upon a bill filed for relief against fraudulent acts of a board of directors alleged to be unlawful did appoint a receiver. He said:

"The property must be preserved pending this litigation, and the conduct of the president and his associates in the direction has been such that they cannot be permitted to retain control of the affairs of the company."

This is precisely the situation I find exists here. In Kean v. Colt, 5 N. J. Eq. 365, the Chancellor, while declining under the circumstances of that case to appoint a receiver, yet did not doubt his power. In Laurel Springs Land Co. v. Fougeray, 50 N. J. Eq. 756, 26 Atl. 886, the Court of Errors and Appeals, reversing Vice Chancellor Pitney, who had appointed a receiver, said:

"The frauds of these defendants as directors of this corporation are all capable of adequate remedy and complete redress by the court within the principles of remedial and preventive equity. This being so, the court was not justified in a decree of first instance in stopping the business of a solvent company and taking possession of its affairs for the mere purpose of aiding the withdrawal of the injured party with a proportionate share of the corporate property and its increment, assuming such jurisdiction to exist in any case in the first instance."

I direct attention to the language used by the court in that case, to wit, where the wrongs are capable of adequate remedy and complete redress. In Steinberg v. Wollf, 56 N. J. Eq. 396, 39 Atl. 397, 39 L. R. A. 762, 67 Am. St. Rep. 494, the Court of Errors and Appeals was careful to say that that court in Fougeray v. Cord, 50 N. J. Eq. 185, 24 Atl. 499, and Laurel Springs Land Co. v. Fougeray, 50 N. J. Eq. 756, 26 Atl. 886, did not deny the power of the Court of Chancery to appoint a receiver pendente lite for the management of the affairs of an incorporated company organized for the purposes of trade. It said:

"The ruling of this court was that 'the disturbance of corporate functions incident to a receivership are extreme powers, and may not be decreed by a court of equity when the specific acts complained of are capable of redress and complete restitution, and those apprehended fall within the ordinary jurisdiction by injunction.'"

In the last case the court cited with approval Edison v. Edison United Phonograph Co., 52 N. J. Eq. at page 620, 29 Atl. 197, in which case Vice Chancellor Van Fleet had said:

"The power of this court to appoint a receiver of a corporation, either because it has no properly-constituted governing body or because there are such dissensions in its governing body as to make it impossible for the corporation to carry on its business with advantage to its stockholders, I think, must be regarded as settled, but I think it is equally well settled that this power is subject to certain limitations, namely, it must always be exercised with great caution and only for such time and to such an extent as may be necessary to preserve the property of the corporation and protect the rights and interests of its stockholders. As soon as a lawfully constituted and competent governing body comes into existence, whether it is brought into existence by an adjustment of the dissensions or by the election of a new body, and such body is ready to take possession of the property of the corporation and proceed in the proper discharge of its duties, the court must lift its hand and retire."

I do not find all the circumstances under which the court may intervene have ever been definitely determined. In the nature of things they could not be. I do not find that the courts of this state have in any wise limited the general doctrine which prevails in England and throughout this country that, wherever because of gross abuse of trust, because of dissensions among the members of the board of directors or the stockholders, because there is no properly constituted board, or because the company has failed of its purpose, there is a necessity for judicial intervention, a court of equity may intervene under its general jurisdiction and appoint a receiver and grant such other relief as may be necessary. The text-book authorities are to the effect that the power exists, but, of course, must be exercised with discretion. Thompson on Corporations, vol. 5, § 6826; Beach on Receivers, § 424; Machen on Corporations, vol. 2, § 1161; Clark & Marshall on Corporations, § 556; High on Receivers (4th Ed.) § 288.

I will refer to only two of the cases from other jurisdictions cited by counsel for the complainant, because the facts are almost similar to those in the case at bar. Du Puy v. Transportation Co., 82 Md. 408, 33 Atl. 889, 34 Atl. 910; Miner v. Belle Isle Ice Company, 93 Mich. 97, 53 N. W. 218, 17 L. R. A. 412. In the latter case the court held that, because it would be impossible to elect a proper board of directors for the reason that the control of the majority of the stock was in the persons who had been convicted of gross fraud, the court would under its general equity power appoint a receiver and wind up the affairs of the corporation. In the case of U. S. Ship Bldg. Co. v. Conklin (Circuit Court of Appeals, Third' Circuit) 126 Fed. 132, 60 C. C. A. 680, where the bill was filed alleging insolvency produced by gross mismanagement of the directors and the appointment had been made under the statute of New Jersey, the court said:

"Upon the whole, we are of opinion that the bill presented a case of which the circuit court sitting in equity had jurisdiction, and that the appointment of a receiver was within the authority of the court."

The court struck out of the decree the provision that the appointment was under the statute and substituted therefor the words:

"The receiver to be subject at all times to the orders and directions of this court."

And it added to the end of the order the following provision:

"The foregoing order to stand until the further order of the court."

That a majority of the stockholders of a corporation, no matter how large, has no right to divert to themselves assets of...