Pollitz v. Wabash R. Co.

• Decision Date: 31 December 1912
• Citation: 100 N.E. 721,207 N.Y. 113
• Parties: POLLITZ v. WABASH R. CO. et al.
• Court: New York Court of Appeals Court of Appeals

207 N.Y. 113

100 N.E. 721

POLLITZ

v.WABASH R. CO. et al.

Court of Appeals of New York.

Dec. 31, 1912.

Appeal from Supreme Court, Appellate Division, First Department.

Action by James Pollitz, suing for himself and other stockholders of the Wabash Railroad Company, against the Wabash Railroad Company and others. A judgment sustaining a demurrer to certain separate defenses, and overruling them as to other separate defenses in the separate answers of the defendants was modified by the Appellate Division, First Department (150 App. Div. 715,135 N. Y. Supp. 789), and plaintiff and defendant Thomas H. Hubbard appeal. Modified.

See, also, 136 N. Y. Supp. 1145.

J. Aspinwall Hodge, of New York City, for appellant Pollitz.

John Larkin, of New York City, for appellant Hubbard.

Rush Taggart, of New York City, for respondents Wabash Railroad Company, George J. Gould, Pierce, and Terry.

Graham Sumner, of New York City, for respondent McHarg.

COLLIN, J.

The action is in behalf of the plaintiff and all other stockholders of the defendant company similarly situated against the company and five of its directors. Each defendant separately answered the complaint, and each answer contained six or more separate defense. The plaintiff demurred to each separate defense. The Special Term sustained the demurrers as to certain and overruled them as to other separate defenses contained in the answer of the defendants, except it sustained them as to all the separate defenses contained in the answer of defendant Hubbard. The Appellate Division, upon the appeals of the plaintiff and defendants, modified the interlocutory judgment of the Special Term by overruling the demurrers as to certain separate defenses which the Special Term condemned. The Appellate Division allowed the plaintiff to appeal to this court and certified the following questions:

‘(1) Are the second separate and distinct defenses contained in the separate answers of the defendants the Wabash Railroad Company and Henry K. McHarg and the first separate and distinct defenses contained in the separate answers of the defendants Winslow S. Pierce, Thomas H. Hubbard, George J. Gould, and John T. Terry, or any of them, sufficient in law upon the face thereof?

‘(2) Are the third separate and distinct defense contained in the separate answer of the defendant the Wabash Railroad Company, the third and fourth separate defenses contained in the answer of the defendant Henry K. McHarg, and the second separate and distinct defense contained in the separate answers of the defendants Winslow S. Pierce, George J. Gould, and John T. Terry, or any of them, sufficient in law upon the face thereof?

‘(3) Are the fourth separate and distinct defense contained in the answer of the defendant the Wabash Railroad Company, the sixth separate defense contained in the answer of the defendant Henry K. McHarg, and the third separate and distinct defenses contained in the separate answers of the defendants Winslow S. Pierce, George J. Gould, and John T. Terry, or any of them, sufficient in law upon the face thereof?’

The Appellate Division allowed the defendant Hubbard to appeal to this court, and certified the following question: ‘Is the second separate and distinct defense contained in the separate answer of the defendant Hubbard sufficient in law upon the face thereof?’

The complaint alleges, in substance: The plaintiff since June, 1906, has been a stockholder in the defendant company, which was incorporated under the laws of the states of Ohio, Indiana, Michigan, Illinois, and Missouri. The defendants George J. Gould, Hubbard, Terry, Pierce, and McHarg, with other named parties, constituted a majority of and dominated its board of directors during the years 1903 and 1904. About August, 1904, a prearranged transaction was consummated, as follows: The individual defendants caused the issue to the Wabash-Pittsburg Terminal Railway Company, a corporation (hereinafter designated Pittsburg Company), the directorate of which was controlled by them, of $10,000,000 par value of its common stock in exchange for a like amount of the common stock of the Pittsurg Company. The Pittsburg Company delivered to a syndicate of which some or all of the individual defendants were members $13,400,000 of its first mortgage bonds and $20,000,000 of its second mortgage bonds par value, and the $10,000,000 of Wabash stock for the consideration of $20,000,000 . At that time the bonds were worth, and were actually selling in the open market at prices which aggregated, about $22,000,000, and the $10,000,000 of Wabash stock was issued to the syndicate as a donation. The Wabash stock was marketable and valuable. The Pittsburg Company stock was valueless. The complaint alleges that the transaction was a violation of the duties and obligations of the defendants as trustees and of their fiduciary relations to the said defendant corporation and its stockholders, a fraud upon them, unauthorized by law, and ultra vires of the company. It contains excerpts from the existing constitutions or statutes of the incorporating states, in differing phraseology, to the effect that a corporation shall not issue stock or bonds except for money paid, labor done, or property actually received, and that all fictitious increase of stock or indebtedness shall be void, and alleges that the transaction was in violation thereof; that the $10,000,000 of Wabash stock has been dealt in and become so commingled that it would be impossible to follow it, or distinguish it from other outstanding stock of the company; that the request of the plaintiff to the company to institute this action, made on or about December 29, 1909, was refused, and prays judgment that the defendant company have judgment against the individual defendants for $10,000,000 with interest, and that they be compelled to account to the company for their official conduct as officers or directors during the period, and pay to the comapny the loss it sustained as a result of the wrongful and illegal transactions set forth.

[1] The pith of the action is that the defendant directors caused the company to donate to themselves $10,000,000 or thereabouts of its stock. The plaintiff in his brief denominates it ‘a stockholder's suit brought in behalf of the Wabash Railroad Company against its directors to compel them to account for losses sustained by the corporation through a fraudulent issue of stock of the company for worthless securities.’ Again he says: ‘It is well settled that in any event an action such as is stated in the complaint may be brought in equity by a stockholder on behalf of the corporation, if the corporation refuses to sue.’ The complaint sustains his characterization of the action as equitable, in that it alleges the violation of fiduciary obligations and prays for an accounting. Bell v. Merrifield, 109 N. Y. 202, 16 N. E. 55,4 Am. St. Rep. 436. The action is in equity.

The defendants, other than McHarg, heretofore moved for judgment on the pleadings, and were defeated. Pollitz v. Gould, 202 N. Y. 11, 94 N. E. 1088,38 L. R. A. (N. S.) 988, Ann. Cas. 1912D, 1098. The defendant McHarg, unhampered by such prior decision to which he was not a party and invoking the rule that the demurrer to an affirmative defense enables the answering defendant to question the sufficiency of the complaint (Baxter v . McDonnell, 154 N. Y. 432, 48 N. E. 816), urges that the complaint does not state facts sufficient to constitute a cause of action. His counsel asserts that the stockholders of a corporation may ratify any transaction executed by its board of directors which is not ultra vires of the corporation or a fraud upon the corporation or the minority stockholders; that the transaction alleged was neither ultra vires nor fraudulent. It may, therefore, he urges, be accepted by the stockholders through a majority, and the minority stockholders cannot act for the corporation, and cannot maintain this action to repudiate or otherwise question it. The transaction, he asserts, must stand until a repudiation by the corporation or majority stockholders, which must be alleged.

[2][3][4] Inasmuch as this appeal requires the consideration of the allegations of the pleadings, and not of the facts to be proven under and which may differ from them, it is neither wise nor useful that we should discuss propositions of law or fact not essential to the determinations sought by the questions certified. The proposition that the minority stockholders may not by this action question the acts of the directors, in the absonce of the repudiation of them by the majority, rests, avowedly and through principle, upon the claimed facts that the transaction was not ultra vires of the company, or was not fraudulent as to the corporation, and, through its effect upon the corporation,as to the minority stockholders. We think, however, that the facts alleged constructed a fraud as to them. The individual defendants, as directors, occupied the relation of trustees to the corporation and its stockholders, and the obligations of this trusteeship are the basis of ascertaining whether or not their acts, as alleged, were fraudulent. They were the exclusive executive representatives of the corporation, and were charged with the administration of its internal affairs and the management and use of its assets. Their corporate acts, within the powers of the corporation, in the lawful and legitimate furtherance of its purposes. in good faith and the exercise of an honest judgment, are valid, and conclude the corporation and the stockholders. Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be...