Shielcrawt v. Moffett

• Decision Date: 12 April 1945
• Citation: 294 N.Y. 180,61 N.E.2d 435
• Parties: SHIELCRAWT et al. v. MOFFETT et al.
• Court: New York Court of Appeals Court of Appeals

294 N.Y. 180

61 N.E.2d 435

SHIELCRAWT et al.

v.MOFFETT et al.

Court of Appeals of New York.

April 12, 1945.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Samuel R. Shielcrawt and another, suing on behalf of themselves and all other stockholders of Corn Products Refining Company, against George M. Moffett, Corn Products Refining Company, and others for accounting of the corporation's net profits for certain years and reimbursement of the corporation for moneys wrongfully computed and paid out in connection with a profit-sharing plan. From an order of the Appellate Division, 268 App.Div. 352, 51 N.Y.S.2d 188, which affirmed, by a divided court, an order of a Special Term of the Supreme Court (Collins, J.), entered in New York County, 49 N.Y.S.2d 64, granting a motion by defendant Corn Products Refining Company and directing, among other things, that plaintiffs, within thirty days after September 25, 1944, give to said defendant, pursuant to the provisions of chapter 668 of the Laws of 1944 (adding s 61-b to General Corporation Law, Consol.Laws, c. 23), security in the amount of $25,000 for the reasonable expenses, including attorneys' fees, which might be incurred by said defendant and by the other parties defendant in connection with the action, and for which said defendant might become subject pursuant to the provisions of section 61-a of the General Corporation Law, unless by September 25, 1944, joinder in the action was effected by plaintiffs of shareholders holding 5% of the outstanding shares of said defendant Corn Products Refining Company or shares of the Company having a market value in excess of $50,000, the plaintiffs appeal, by permission of the Appellate Division of the Supreme Court.

The following questions were certified:

‘1: Is s 61-b of the General Corporation Law (Chap. 668 of the Laws of 1944) applicable to suits begun prior to the enactment thereof?;

‘2: Is s 61-a of the General Corporation Law (Chap. 350 of the Laws of 1941) applicable to suits begun prior to the enactment thereof?;

‘3: Is s 61-b of the General Corporation Law applicable to this litigation?;

‘4: Is s 61-a of the General Corporation Law applicable to this litigation?;

‘5: Does s 61-b of the General Corporation Law contravene: a) s 6 of Art. 1 of the Constitution of the State of New York; b) s 11 of Art. 1 of the Constitution of the State of New York; c) s 1 of Art. 6 of the Constitution of the State of New York;

‘6: Does s 61-a of the General Corporation Law contravene: a) s 6 of Art. 1 of the Constitution of the State of New York; b) s 11 of Art. 1 of the Constitution of the State of New York; c) s 1 of Art. 6 of the Constitution of the State of New York;

‘7: Does s 61-b of the General Corporation Law contravene: a) Amendment V of the Constitution of the United States; b) Amendment XIV of the Constitution of the United States; c) Art. 1 s 10 of the Constitution of the United States;

‘8: Does s 61-a of the General Corporation Law contravene: a) Amendment V of the Constitution of the United States; b) Amendment XIV of the Constitution of the United States; c) Art. 1 of s 10 of the Constitution of the United States;

‘9: Is application of s 61-b of the General Corporation Law to this litigation in contravention of: a) s 6 of Art. 1 of the Constitution of the State of New York; b) s 11 of Art. 1 of the Constitution of the State of New York; c) s 1 of Art. 6 of the Constitution of the State of New York;

‘10: Is application of s 61-a of the General Corporation Law to this litigation in contravention of: a) s 6 of Art. 1 of the Constitution of the State of New York; b) s 11 of Art. 1 of the Constitution of the State of New York; c) s 1 of Art. 6 of the Constitution of the State of New York;

‘11: Is application of s 61-b of the General Corporation Law to this litigation in contravention of: a) Amendment V of the Constitution of the United States; b) Amendment XIV of the Constitution of the United States; c) Art. 1, s 10 of the Constitution of the United States;

‘12: Is application of s 61-a of the General Corporation Law to this litigation in contravention of: a) Amendment V of the Constitution of the United States; b) Amendment XIV of the Constitution of the United States; c) Art. 1, s 10 of the Constitution of the United States;

‘13: Was the motion of the defendant, Corn Products Refining Company for recurity and a stay of this action and for other relief, made pursuant to s 61-b of the General Corporation Law, properly granted?’

Orders reversed and motion denied, and 1st, 3rd and 13th certified questions answered. Samuel Gottlieb, I. Gainsburg, and Oscar Schleiff, all of New York City, for appellants.

Ralph M. Carson, of New York City, Walter A. Dane, of Boston, Mass., and Samuel A. McCain, of New York City, for respondent.

Nathaniel L. Goldstein, Atty. Gen. (Wendell P. Brown and John R. Davison, both of Albany, of counsel), in support of constitutionality of sections 61-a and 61-b of the General Corporation Law.

Paul A. Crouch, Clarence Fried, and Franklin S. Wood, all of New York City, for Chamber of Commerce of State of New York, amicus curiae.

H. Lewis Brown and Clyde D. Sandgren, both of New York City, for West Virginia Pulp & Paper Co., amicus curiae.

William S. Bennet and Victor House, both of New York City, in person, amici curiae.

LEHMAN, Chief Judge.

Two stockholders of Corn Products Company brought derivative actions against the corporation and some of the officers and directors of the corporation to compel the individual defendants to account for and to pay back to the corporation moneys which, it is alleged, they wrongfully caused the corporation to pay to its officers, directors and employees under a profit sharing plan, resulting in the unjust enrichment of the individual defendants ‘in that they wrongfully, negligently, carelessly, fraudulently and deliberately, manipulated the accounts of Corn Products * * * by improperly computing profits before computing net profits * * *.’ The two actions were consolidated by order of the court on June 28, 1940. On July 3, 1940, an order was entered for the examination before trial of the individual and corporate defendants. That oral examination and the examination of the books of the corporation extended from July 16, 1940, to July 24, 1942. On August 13, 1942, the defendants demanded a bill of particulars of the plaintiffs' claim. It was served on April 22, 1943. In September, 1943, the trial of the case was adjourned to the December term because of the serious illness of one of the defendants who was secretary and treasurer of the corporation. In December, 1943, the trial was adjourned to the April 1944 term at the request of defendant's counsel. The case was marked ready at all call of the calendar in April. It was not reached for trial in April but it was assigned for trial to the first available part of the court on May 1st.

At the time the action was instituted and until April 9, 1944, a stockholder of a corporation owning a single share of stock might institute and maintain a derivative stockholders' action in behalf of the corporation, incurring, if defeated in the action, only the same liability for costs which a plaintiff, owning a substantial financial interest in the corporation, would incur if defeated in a similar action; and no stockholder bringing such an action could be compelled to give security for the expenses which might be incurred by a party plaintiff or party defendant in the successful prosecution or defense of the action. By chapter 350 of the Laws of 1941 a new section (61-a) was added to the General Corporation Law, Consol.Laws, c. 23, providing that in any action, suit or proceeding against one or more officers or directors of a corporation ‘brought by the corporation, or brought in its behalf * * * by one or more stockholders * * * the reasonable expenses, including attorneys fees, of any party plaintiff or party defendant incurred in connection with the successfulprosecution or defense of such action, suit or proceeding shall be assessed upon the corporation.’ The effect of that statute was to impose upon the corporation the burden of paying the reasonable expenses incurred by a stockholder who successfully prosecuted an action in behalf of a corporation as well as the expenses incurred by an officer or director who successfully defended himself against a charge of wrong to the corporation. No additional burden was imposed by the statute upon any individual plaintiff or defendant.

The Legislature by chapter 668 of the Laws of 1944 added a new section (61-b) to the General Corporation Law, which it is said was intended to supplement section 61-a. Under the provisions of the new section, ‘in any action instituted or maintained in the right of any foreign or domestic corporation by the holder or holders of less than five per centum of the outstanding shares of any class of the corporation's stock * * * unless the shares * * * held by such holder of holders have a market value in excess of fifty thousand dollars, the corporation in whose right such action is brought shall be entitled at any stage of the proceedings before final judgment to require the plaintiff or plaintiffs to give security for the reasonable expenses, including attorney's fees, which may be incurred by it in connection with such action and by the other parties defendant in connection therewith for which it may become subject pursuant to section sixty-one-a of this chapter, to which the corporation shall have recourse in such amount as the court having jurisdiction shall determine upon the termination of such action. The amount of such security may thereafter from time to time be increased or decreased in the discretion of the court having jurisdiction of such action upon showing that the security provided has or may become inadequate or is excessive.’

The statute adding section 61-b to the General Corporation Law became...