People v. Lyon , 104 N.Y.S. 319 ( 1907 )

Scott, J.:

In this action by the Attorney-General for the removal of the defendants as directors of the Zeltner Brewing Company, the defendants have demurred to, the complaint for general insufficiency, and now appeal from an interlocutory judgment overruling their demurrer. . •

The complaint sets out with considerable detail a so-called syndicate agreement between the defendants and one De .Witfc . C, Flanagan to acquire from a trustee in. bankruptcy, the assets of the; Henry Zeltner Brewing Company ; to organize the Zeltner Browing Company'to acquire these assets, issuing stock and-¡bond^;ip payment therefor and the disposition of the stock and bonds so to be issued. It alleges the carrying- out of this- agreement to a certain point, the election of the defendants with others as directors of the new corporation, and the selection of Zeltner as vice-president and of Lyon as secretary and treasurer. It also alleged that by agreement between the defendants and said Flanagan, the stock and bonds of the new company when issued were, as to part thereof, to be given to those who had advanced money for the purchase of the assets from the trustee in bankruptcy, and as to a part to the •payment of other obligations, the balance to be issued solely for the benefit of the corporation in order to raise working capital.

The gravamen of the charge .against these defendants is to be found in the 8th paragraph of the complaint, which alleges that the defendants, “ without any authority from the board of directors or otherwise,”. issued stock certificates to certain persons, much in excess of the amounts previously agreed upon, and, as is alleged, without consideration and in .violation of the by-laws, which required that certificates of stock should be signed by the president.

If it be true, as alleged in the complaint, that defendants issued stock of the corporation without authority of the board of directors,- and without any consideration therefor flowing to the corporation, they certainly have been -guilty of misconduct toward the corporation. Indeed, no serious argument is made in their behalf that the facts alleged do not charge them with misconduct in their offices of vice-president and secretary respectively, their claim being that they cannot be removed as directors for misconduct as officers. This, as we think, is too narrow a construction to be placed on section 1781 of the Code of Civil Procedure. That section authorizes an action to remove One or more trustees, directors, managers or other officers of a corporation upon proof or conviction of misconduct, and there is nothing in the statute to warrant the doctrine that a man -who is at the same time a director and an. executive officer of a corporation may,.notwithstanding grave misconduct in one capacity, still insist that he is entitled to remain in partial control of the company in his other capacity. It would be especially unreasonable to so construe the statute in a case like the present, since it is the directors who elect the officers; and if defendants Were to be removed as officers, but retained as directors, they could in the latter capacity vote to re-elec* themselves to the offices from which they had been removed.

The fact that after the alleged misconduct the defendants were re-elected directors does not serve to condone their fault or to protect them from removal, as their tenure of office must be treated as continuous. The judgment appealed from is affirmed, with costs and disbursements, with leave to defendants to withdraw their demurrer and answer over within twenty days upon payment of the costs in this court and the court below.

Ladghlin and Clarke, JJ., concurred; Patterson, P. J., and Ingraham, J., dissented.