Quintal v. Kellner

• Decision Date: 27 February 1934
• Citation: 189 N.E. 770,264 N.Y. 32
• Parties: QUINTAL et al. v. KELLNER.
• Court: New York Court of Appeals Court of Appeals

264 N.Y. 32

189 N.E. 770

QUINTAL et al.

v.KELLNER.

Court of Appeals of New York.

Feb. 27, 1934.

Action by Edward J. Quintal and others, as trustees in bankruptcy of the Consolidated Factors Corporation, bankrupt, against Gilbert W. Kellner. Judgment dismissing the complaint was affirmed by the Appellate Division (238 App. Div. 651, 265 N. Y. S. 206), and plaintiffs appeal.

Affirmed.Appeal from Supreme Court, Appellate Division, First department.

John W. Simpson, 2nd, Abram I. Elkus, Charles F. Bailey, and Hamilton A. Long, all of New York City, for appellants.

David Haar, and Michael Berman, both of New York City, for respondent.

Arnold A. Jaffe, of New York City, for Samuel Shapiro, amicus curiae.

LEHMAN, Judge.

An action brought by trustees in bankruptcy of a corporation has been dismissed on motion of the defendants. Two questions arise on this appeal: First, does the complaint set forth facts sufficient to constitute a cause of action which was vested in the corporation at the time of its bankruptcy? Second, did that cause of action pass to the trustees in bankruptcy?

The complaint seeks to set forth three causes of action. The gist of each is that the defendant has received moneys which the officers of the corporation ‘caused to be paid by said corporation from its moneys * * * in the attempted discharge of their personal and individual obligation to the said defendant.’ There can be no doubt that a corporate officer who applies the funds of a corporation to purposes beyond the scope of his authority is guilty of conversation of the corporate funds, and the corporation may maintain an action against him and against any person who participates in the conversion and accepts its fruit. Against such person an action will lie for money had and received. There can also be no doubt that a corporate officer has no power, implied or apparent, to apply corporate funds to the discharge of his personal indebtedness. These rules have been enunciated so frequently, and are so fundamental in the law governing corporate rights and powers, that citation is unnecessary. Here, however, there is no allegation that the corporate officers acted without authority, at least in so far as the corporation could give such authority. Indeed, any possible inference of lack of authority that might be drawn from the allegation that the corporate moneys were used without consideration moving to the corporation is negatived by the allegations that the officers ‘caused’ the corporation to pay the moneys. The action is not for conversion, for there can be no conversion of corporate funds through acceptance of corporate moneys paid out by the corporation itself. It is true that, where action by the corporation is dictated by its officers for their personal interest, the corporation may, in proper case, disaffirm the transaction and demand restitution of corporate property alienated in its course. A stockholder, injured by refusal or failure of the corporate officers or directors to bring an action for the protection of the corporation, may bring such action in equity in its behalf, at least where he did not acquiesce in the transaction;but here there is no allegation that the corporation disaffirmed the transaction or even that all the stockholders did not acquiesce in payment by the corporation.

In actions brought to compel officers and directors to account for loss occasioned to a corporation by their misfeasance, we have drawn a distinction between transctions which, though voidable at the option of the corporation, were not void, and might be ratified by the corporation by a majority vote of its stockholders; and transactions which were void and, therefore, not subject to ratification by such vote. ‘The direct or indirect misappropriation of assets of the corporation to his own use or benefit by an officer is incapable of being authorized or ratified by a vote or any act or omission of the majority of the stockholders.’ Pollitz v. Wabash R. Co., 207 N. Y. 113, 127,100 N. E. 721, 724. Where ratification cannot render a void act valid, disaffirmance is unnecessary before action is instituted by the corporation to compel a delinquent officer to make good loss which the corporation sustained thereby, and, though acquiescence by all the stockholders may furnish a defense to such an action by the corporation or one of its stockholders, such acquiescence will not be presumed, but must be alleged in the answer and proven at the trial. Continental Securities Co. v. Belmont, 206 N. Y. 7, 99 N. E. 138,51 L. R. A. (N. S.) 112, Ann. Cas. 1914A, 777. The allegations of the complaint are sufficient to show that here the officers of the corporation induced the corporation to use the corporate funds for purposes which the corporation could not authorize, at least without the acquiescence of all of its stockholders, but the action is not brought to compel the officers to account for loss occasioned by their wrongful acts. The action is brought against the person to whom, it is alleged, the moneys were transferred by the corporation.

The Bankruptcy Law (section 70) provides that (a) ‘the trustee of the estate of a bankrupt * * * shall * * * be vested by operation of law with the title of the bankrupt * * * to all * * * (4) property transferred by him in fraud of his creditors; (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold...