Niles v. New York Cent. & H.R.R. Co.

• Decision Date: 06 October 1903
• Court: New York Court of Appeals Court of Appeals
• Parties: NILES v. NEW YORK CENT. & H. R. R. CO. et al.

176 N.Y. 119

68 N.E. 142

NILES

v.NEW YORK CENT. & H. R. R. CO. et al.

Court of Appeals of New York.

Oct. 6, 1903.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Robert L. Niles against the New York Central & Hudson River Railroad Company and others. From a judgment of the Appellate Division (74 N. Y. Supp. 617)affirming a judgment (71 N. Y. Supp. 271) sustaining demurrers to and dismissing the complaint, plaintiff appeals. Affirmed.Louis Marshall and Nathaniel A. Elsberg, for appellant.

Thomas Thacher and Ira A. Place, for respondents.

HAIGHT, J.

The demurrers interposed to the plaintiff's complaint were upon the ground that the facts stated therein were not sufficient to constitute a cause of action. The allegations of the complaint are somewhat voluminous, but, so far as they are necessary to present the question to be determined upon this review, they may be summarized and stated in substance, as follows: The plaintiff was a stockholder of the New York & Northern Railroad Company, which owned and operated a railroad from its junction with the Manhattan Railway, near 155th street, in the city of New York, to a point on the New York & Harlem Railroad at or near Brewster, in Putnam county. The company had about 60 miles of railroad, with terminal facilities and other property, in the city of New York and elsewhere, of great value, which competed with the New York Central & Hudson River Railroad, or roads which it controlled. Under these circumstances the defendants wrongfully, unlawfully, fraudulently, and maliciously entered into a combination and conspiracy to procure for the New York Central & Hudson River Railroad Company the possession, control, and virtual ownership of the property and franchises of the New York & Northern Company. Among the overt acts alleged to have taken place in order to accomplish this result are the following: A majority of the stock of the New York & Northern Company was purchased by the defendants, and officers friendly to them were elected. These officers, after obtaining the possession of the company, obstructed and hampered its business by refusing traffic offered to it by other transportation companies and shippers, thus depriving it of the income which it might have received, and diverted its earnings so as to leave it without sufficient funds with which to pay the interest accruing and accrued upon its bonded indebtedness. That thereupon the defendants purchased or secured the control, by contract, of a majority of the outstanding bonds, and then procured the trustee to institute an action for the foreclosure of the mortgage given to secure the payment of the bonds. This action resulted in a sale of the property of the company to the New York & Putnam Railroad Company, who leased the same to the New York Central & Hudson River Railroad Company for a period of 999 years, who thereupon mortgaged its property to secure the payment of bonds amounting to $100,000,000, which have passed into the hands of bona fide purchasers, thus rendering the plaintiff's stock of no value. He demanded judgment for the value of his stock before it was injured by the action of the conspirators.

The action is at law for the purpose of recovering the damages which the plaintiff has sustained, and is not brought for or on behalf of the corporation or of its stockholders. The question raised for review is as to whether the damages resulting from the conspiracy belong to the corporation or to the individual stockholder. In determining this question we must bear in mind that the rights of creditors are superior to those of the stockholders, who are only permitted to share in the earnings of the corporation or in the division of its assets after the claims of creditors have been satisfied. We are thus brought to a consideration of the nature of the injury inflicted by the conspirators. Many of the overt acts alleged are lawful and justifiable when done in good faith, and without any intent or purpose to harm others-as, for instance, it was lawful for defendant Morgan and his associates to purchase stock and bonds of the New York & Northern Company, and to hold the same for investment or for profit. Upon the failure of the company to pay the interest accrued upon the bonded indebtedness, they had the right to petition the trustee to foreclose the mortgage; but they had no right to enter into a conspiracy with the officers of the corporation, elected by them after they had acquired a majority of the stock, to refuse to accept traffic from other railroad and transportation companies, from which the corporation could have derived an income sufficient to pay the interest accruing upon the bonded indebtedness, or to otherwise divert the earnings of the company so as to bring it in default, and permit the bringing of the foreclosure action for the purpose of cutting off the interest of the minority stockholders or of the general creditors. The refusing of traffic and the diversion of funds operated to deplete the company's treasury, and was a direct wrong to the corporation. It was an injury for which an action could have been maintained by the corporation, its receiver, if one had been appointed, or by any stockholder, after proper demand, in behalf of the company and for its benefit. In such an action the creditors are vitally interested. They have the right to have the action prosecuted on behalf of the company, so that their interests may be protected, and their claims paid out of any recovery which may be obtained.

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