Skinner v. Smith

• Decision Date: 01 October 1892
• Citation: 134 N.Y. 240,31 N.E. 911
• Parties: SKINNER v. SMITH et al.
• Court: New York Court of Appeals Court of Appeals

134 N.Y. 240

31 N.E. 911

SKINNER

v.SMITH et al.

Court of Appeals of New York, Second Division.

Oct. 1, 1892.

Appeal from supreme court, general term, second department.

Action by Charles E. Skinner, as trustee of the Smith Moquette Loom Company, against Warren B. Smith, William F. Cochran, Eva S. Cochran, and the Smith Moquette Loom Company. From a judgment of the general term, (10 N. Y. Supp. 81,) affirming a judgment of the special term dismissing the complaint on the merits, plaintiff appeals. Affirmed.

Theron G. Strong, for appellant.

Joseph H. Choate, for respondents.

FOLLETT, C.J.

This action was brought by a trustee of the Smith Moquette Loom Company, pursuant to sections 1781 and 1782 of the Code of Civil Procedure, which authorize actions against the officers of corporations, but not against corporations, to set aside alienations of property made or authorized by the individual defendants to themselves, who were at the time a majority of the trustees of the corporation, and also to compel them to account for all sums and property received under such alienations.

Before considering the facts of this case, it will be well to bring to mind and state one or two of the well-settled general rules of law applicable to actions of this class. A contract entered into by a corporation, by the authority or direction of its trustees, with themselves, and for their benefit, or a transfer of its property by the authority of the trustees to themselves, may be set aside, in case it injures any public interest or the private interest of any shareholder or creditor, even though the contract or transfer was executed in good faith by the trustees. Duncomb v. Railroad Co., 84 N. Y. 190. But this rule is not broad enough to condemn as void on the ground of public policy all contracts and transfers executed by a purely private business corporation with or to its trustees in good faith, in case no public or private interest is harmed thereby. Such contracts are not void, but voidable at the election of those who are affected by the fraud. Oil Co. v. Marbury, 91 U. S. 587-589;Thomas v. Railroad Co., 109 U. S. 522-524, 3 Sup. Ct. Rep. 315;Risley v. Railroad Co., 62 N. Y. 240;Barnes v. Brown, 80 N. Y. 527-536;Munson v. Railroad Co., 103 N. Y. 58-73, 8 N. E. Rep. 355; Barr v. Railroad Co., 125 N. Y. 263-277, 26 N. E. Rep. 145. Whether an action against trustees to prevent them from violating a public duty or to redress a public wrong can be maintained by any party other than ‘by the attorney general, in behalf of the people of the state,’ need not now be determined, for this action is not for the prevention or redress of a public wrong, but for damages for the violation of private rights. The public wrongs mentioned in the third and fourth subdivisions of section 1781 can be prevented or redressed only by an action brought in behalf of the people. Code Civil Proc. § 1782. What private interest was injured or imperiled by the transfer of the patent from the corporation to the individual defendants? Creditors were not injured by the acts complained of, for there were none, so far as the record shows, between the time when the corporation was orgauized and the date when this action was begun, except as the individual defendants became such by reason of advances made. The only private rights or interests alleged to have been impaired or jeopardized are those of shareholders. Who were the shareholders, and when and how did they become such? January 16, 1877, letters patent numbered 186,374 were issued by the United States to Alexander Smith, for an improvement in carpet looms, which were assigned on December 12, 1878, by his executors to the following-named persons, and in the following proportions: One half to Warren B. Smith, one fourth to William F. Cochran, and one fourth to Eva S. Cochran, which assignments were duly recorded in the United States patent office December 14, 1878. Warren B. Smith and Eva S. Cochran are brother and sister, the children of Alexander Smith, and William F. Cochran is the husband of said Eva S. Cochran. December 13, 1878, the Smith Moquette Loom Company was incorporated, pursuant to chapter 40 of the Laws of 1848, and the acts amendatory thereof and supplementary thereto, with a capital stock of $40,000, divided into 100 shares, of the par value of $100 each. The purpose of the formation of the corporation was stated in the certificate as follows: ‘That the objects for which the said company is formed are the manufacture and selling of carpets, and transacting of all business necessary for and incident to the manufacture and sale of carpets, and the development and introduction of the Smith moquette loom, and other inventions relating to the manufacture of carpets, and the issuing licenses and collecting royalties for the use of such inventions.’ December 24, 1878, said three assignees of said patent assigned their interests therein to the Smith Moquette Loom Company, in consideration of, and in payment for, the above-mentioned shares of stock issued by that corporation to them. January 20, 1879, these assignments were duly recorded in the United States patent office. These assignments were subject to a license granted February 1, 1877, by the original patentee, Alexander Smith, to Alexander Smith & Son's Carpet Company, by which that company acquired the right to use 100 looms upon the payment of 20 cents royalty for every yard of carpet made on them. Upon the organization of the corporation, Warren B. Smith became the owner of 200 shares of its stock, and William F. Cochran and Eva S. Cochran of 100 shares each, which they continued to own until November 18, 1880, when the capital stock of the corporation was increased to $600,000.

The court found in respect to the transfer from the individual defendants to the corporation as follows: ‘That the original transfer of the invention and patent by the individual defendants to the company for forty thousand dollars was made by them without any regard to its actual value, which was many times greater than the sum, and solely as a convenient mode of holding and enjoying title to the same, and to the royalties to be derived therefrom, for their exclusive benefit, as the sole owners thereof. Eighth. That the said defendants Warren B. Smith, William F. Cochran, and Eva S. Cochran, being the sole stockholders and trustees of said company, carried on the business of said company until the fall of 1880 upon the original plan, to wit, the collection of royalties under licenses issued under said patent, during which period a large amount of royalties was collected and divided between them, and that during such period no manufacturing was carried on by said company. Ninth. That in the fall of 1880 the demand for moquette carpets was large, and the future prospects of manufacturing were encouraging, and the said defendants concluded that it would be advantageous for them that said company should engage in such manufacturing business, and, as they were unwilling to part with the exclusive ownership of said patent and invention, that said patent should be transferred to themselves individually, at the same nominal figure at which they had transferred it to the company, and that, to enable the company to go into manufacturing, erect the necessary buildings, buy machinery, and to manufacture, its capital stock should be increased to six hundred thousand dollars, all of which should be issued to themselves; forty thousand of that amount of money to be paid by them for the retransfer of the patent, and in lieu of the four hundred shares originally issued to them, which were to be surrendered, two hundred and ten thousand dollars of that amount to be paid in cash by them, and the residue, of three hundred and fifty thousand dollars, for an unlimited license to use the patents upon payment of the same rate of royalty paid by the Alexander Smith & Sons' Carpet Company, viz., twenty cents per yard.’ September...