Brock v. . Poor , 216 N.Y. 387 ( 1915 )

It may be that upon the trial the plaintiff could not prove the allegations of the complaint, but the existence of the demurrer requires us to assume the truth of the facts alleged. I do not think it is seriously contended that the complaint fails to state facts sufficient to warrant a court of equity in granting relief to the plaintiff. The chief ground of attack upon it is that it sets forth two causes of action which cannot properly be joined in the same complaint. In support of this attack it is argued that the complaint alleges a cause of action in favor of the plaintiff and also a cause of action in favor of the Anthony Scovill Company. The complaint is voluminous. It is necessary to indicate the substance of its allegations. In the first place it should be noted that the plaintiff brings the action in his own behalf and also in behalf of all similarly situated former stockholders and present stockholders of the Anthony Scovill Company. The complaint alleges the incorporation of the Anthony Scovill Company under the laws of the state of New York; that the plaintiff was one of the stockholders therein; that said company became involved in financial difficulties; that a creditors committee was formed to relieve this situation, and the defendants and others were members of that committee. As a condition of the reissue and extension of certain notes of the company the defendants demanded that a majority of the stock of the company be delivered to them as trustees for the purpose of giving them complete control of the company. In compliance with that demand a large majority of the stockholders, including the plaintiff, transferred, and delivered to the defendants, as trustees, upwards of 85% of the said stock and received trustees' receipts in exchange therefor. Pursuant to the agreement under which this stock was transferred to the defendants, the latter were to exercise all the rights of owners of said stock and have the right to sell the same and apply the proceeds to the payment of the debts of the company. Among the assets of the company was the so-called Goodwin contract under which 5,100 shares of the stock of the Goodwin Film and Camera Company had been transferred to the Anthony Scovill Company. The defendants as committee of creditors and trustees for the stockholders demanded that the Goodwin contract be assigned to them as security for the indebtedness of the company. The Goodwin contract had become a very valuable asset. In November, 1905, the defendants were in complete control of the Anthony Scovill Company and all of its property, and were in possession of 85% of the stock of the Anthony Scovill Company which they had obtained under the voting trust agreement. Having thus secured control of the rights and property referred to, the complaint alleges that the defendants conspired together to defraud the Anthony Scovill Company and its stockholders, including those who had transferred their stock to them under the voting trust agreement. The other acts of the defendants are alleged to have been done pursuant to this unlawful conspiracy. Pursuant to this conspiracy and in furtherance thereof, the defendants caused the Anthony Scovill Company to return to them the 5,100 shares of stock of the Goodwin Film and Camera Company and to cancel said Goodwin contract with said company, and the defendants then entered into a contract with the owners of said shares, whereby the said 5,100 shares of stock, which represented a controlling interest in said Goodwin Film and Camera Company, were delivered to them, individually, subject to a certain trust agreement for securing certain creditors of said Goodwin Film and Camera Company. Under this agreement, the subject-matter of which was the Goodwin patent, the defendants were to receive 51% of the proceeds of said patent. Pursuant to said conspiracy the defendants caused the Ansco Company to be organized, which company was completely under the control of said defendants, and caused the Anthony Scovill Company to transfer to said Ansco Company all of its property, rights, privileges and franchises, except the said Goodwin contract and the 5,100 shares of stock of the Goodwin Film and Camera Company and 1,240 shares of the common stock of the Anthony Scovill Company which they fraudulently retained in their possession. The defendants issued in return for the property of the Anthony Scovill Company so transferred to the Ansco Company 1,700 shares of the common stock of the Ansco Company. Said stock with the exception of 49.60 shares thereof was distributed by the defendants among the stockholders of the Anthony Scovill Company and the holders of the trustees' receipts. The complaint is replete with allegations showing the trust and confidence reposed by the plaintiff and other stockholders in the defendants and that the plaintiff and other stockholders were fraudulently induced by defendants to surrender to them the trustees' receipts and all right, title and interest that they had in and to their stock in the Anthony Scovill Company, and to execute and deliver to defendants receipts and releases. The defendants at the time of the transfer of the assets of the Anthony Scovill Company to the Ansco Company agreed to procure the legal dissolution of the Anthony Scovill Company but failed and neglected so to do and have kept said corporation "alive for the sole purpose of protecting themselves from any action which might be brought against them for the fraud herein alleged by maintaining said company as a barrier between themselves and its former stockholders." Pursuant to said conspiracy it is alleged that the defendants upon the 1,240 shares of common stock of the Anthony Scovill Company which had been transferred to them obtained 49.60 shares of the common stock of the Ansco Company which they appropriated to their own use. At the time of the transfer of the property of the Anthony Scovill Company to the Ansco Company all of the indebtedness of the Anthony Scovill Company was paid. The defendants retained in their possession the Goodwin contract and the 5,100 shares of stock of the Goodwin Film and Camera Company until May, 1910, when they sold said stock and contract to the Ansco Company in return for 4,030 shares of the common stock of that company. The Ansco Company has paid a 100% dividend on its common stock, and the defendants as holders of said 4,030 shares received $403,000 as a dividend thereon which they have appropriated to their own use. As holders of 49.60 shares of the stock of the Ansco Company which they received as dividends upon the 1,240 shares of stock of the Anthony Scovill Company, the defendants received about $25,000. The Anthony Scovill Company has ceased to do business since the transfer to the Ansco Company. All of its stock is under the control of the defendants except a few shares representing not more than 1% thereof. That company has now no indebtedness of any kind. No meetings of stockholders or directors have been held and no election of officers or directors has been had since the transfer of its assets to the Ansco Company, and since the transfer to the Ansco Company it is evident that the defendants have treated the Anthony Scovill Company as if it were non-existent. The complaint demands an accounting and other incidental relief. From these allegations of this complaint it is evident that the acts of the defendants as trustees under the trust agreement and as trustees in control of the Anthony Scovill Company are so closely connected and interwoven that they cannot be separated. It is a necessary inference from the allegations of the complaint that these acts were all a part of a common scheme to defraud, and if the defendants can only be called to account in two separate actions — one existing in favor of the plaintiff individually and others similarly situated and the other existing in the corporate entity, it is evident that complete and effective relief cannot be granted in either action. These facts reveal the history of the formation and execution of a conspiracy by the defendants to deprive the stockholders of the Anthony Scovill Company of the rights and profits arising from their individual ownership of that stock and to loot the Anthony Scovill Company and its stockholders. They also show as a part of that conspiracy that the defendants, contrary to their agreement, failed to cause the Anthony Scovill Company to be legally dissolved. The question is presented in this case whether the allegation of this fact,inter alia, makes the complaint demurrable for misjoinder of causes of action. In the last analysis this claim of the appellants reduces itself to the contention that, because the defendants in carrying out the fraudulent conspiracy alleged kept alive the corporate entity of the Anthony Scovill Company, contrary to their agreement, they cannot be called to account by the plaintiff in a cause of action which alleges all the facts as the pleader claims they took place. If the defendants had carried out their agreement and brought about the legal dissolution of the Anthony Scovill Company, the complaint would not be demurrable on the ground of misjoinder, but since they were cunning enough in carrying out the conspiracy to keep alive the corporate entity, although they stripped it of all its corporate attributes and plundered it of its property, they can now interpose the mere existence of that corporate entity as a shield of defense in this action to compel them to account. The plaintiff was required to set forth all the facts. It was a fact in this case that the defendants had not caused the corporation to be legally dissolved. I do not think that the allegation of this fact, when considered in connection with the other facts alleged, necessarily involves the statement of an independent cause of action, derivative in its nature, which cannot properly be joined with the cause of action which the complaint sets forth in behalf of the plaintiff and those for whom he brings this action. The fact that the defendants pursuant to the unlawful conspiracy alleged, kept the corporate entity alive cannot be used to defeat the plaintiff's present claim unless the defendants can avail themselves of their own fraud to defeat the claim of those whom they have defrauded for an accounting and other appropriate relief. The defendants treated the corporation as non-existent and are estopped from asserting the contrary. Upon the facts alleged it seems to me that a court of equity should look behind the fiction of corporate entity and examine the facts and if upon such examination it appears that the plaintiff has alleged a cause of action, his claim will not be defeated because the defendants in violation of their agreement and as a part of the fraudulent conspiracy kept the corporate entity alive. Conspirators cannot thus avail themselves of their own wrong, nor will a court of equity be tolerant of such a purely technical plea when it is interposed by the wrongdoer to enable him to reap the fruits of his unlawful conspiracy. It is doubtless true that corporate existence is not lost through mere corporate inaction or the transfer of its property or by the failure to elect officers. All this I concede, but this concession does not militate against the correctness of the plaintiff's position. The circumstance which distinguishes this case from those cited in support of the claim of the appellants is that here the fact that the corporation still exists is a result of the execution of the fraudulent conspiracy into which the defendants entered. If the defendants had kept their agreement with the stockholders of the corporation and caused the corporation to be legally dissolved, they would not now be possessed of any weapon with which to repel the plaintiff's present attack. A court of equity does not regard the mere fiction of corporate entity as such a sacred thing that it cannot upon the facts disclosed in this complaint be disregarded in order to enable it to do justice and to compel conspirators to account. The decisions which seem to indicate the contrary are to be read in the light of the facts in reference to which they were made. Examined in this way, I think no case can be cited which goes to the extent that the appellants would have us go in this case. In the case of Anthony v. American Glucose Co. (146 N.Y. 407, at p. 413) Judge FINCH, speaking for this court in reference to a technical plea similar to that made in this case, said: "The defense is not meritorious. It simply attempts to substitute circuity of action for direct responsibility, and requires us to blind our eyes with the theoretical abstraction so as to shut out the obvious and undoubted truth. We have of late refused to be always and utterly trammelled by the logic derived from corporate existence where it only serves to distort or hide the truth, and I think we should not hesitate in this case to reject the purely technical defense attempted." The opinion in that case is not merely a display of judicial rhetoric about dissolved and dead corporations and hollow and empty shells, but enunciates a wholesome and important rule which in cases such as the present should in the interest of justice be applied. It asserts a principle that has often been recognized. (McCaskill Co. v. U.S., 216 U.S. 504, 514; Booth v.Bunce, 33 N.Y. 139; U.S. v. Milwaukee Refrigerator TransitCo., 142 Fed. Rep. 247, 248; Matter of Rieger, Kapner Altmark, 157 Fed. Rep. 609; Cook on Corporations, vol. 3 [7th ed.], 663, 664 and notes.)

The complaint as I read it pleads a single cause of action against the defendants as constructive trustees for several breaches of trust. It is apparent from reading the whole complaint that it was not intended to allege a derivative cause of action. When this appears the mere fact that there are allegations in the complaint which might be appropriate in a derivative action will not change the charactor of the action The true character of the action is to be ascertained from an examination of the whole complaint. (Witherbee v. Bowles,201 N.Y. 427.) The defendants as trustees agreed to bring about the legal dissolution of the Anthony Scovill Company. Although they have not done this, they have acted upon the assumption that that corporation no longer exists. The corporation itself has no creditors. The plaintiff and other stockholders for whom this action is brought have a right to call upon the defendants to account for their acts as trustees. The accounting should involve all the acts of the trustees that were done pursuant to the common scheme to defraud in whatever capacity they may claim to have acted. I think that the decisions of this court in Witherbee v. Bowles (supra) and Bosworth v. Allen (168 N.Y. 157) afford ample basis for sustaining the plaintiff's contention.

The doctrine of misjoinder of causes of actions, which is invoked to sustain the demurrer to this complaint, when applied to equity pleading, rests upon considerations of inconvenience and expense. It is not a hard and fast rule applicable in all cases regardless of the circumstances alleged. (Hosmer v.Wyoming Ry. Iron Co., 129 Fed. Rep. 883; Pomeroy's Code Remedies, § 486.) It is doubtless true that the general rule is that the right to maintain a suit against the officers of a corporation for fraudulent misappropriation of its property is a right of the corporation rather than of the stockholders. (Porter v. Sabin, 149 U.S. 473, 478.) I think the circumstances disclosed in this complaint require the application of a different rule. The fact that the defendants agreed to bring about the legal dissolution of the Anthony Scovill Company, that they have violated this agreement, that they have treated the corporation as if it were dissolved, that they have fraudulently secured the stock of the stockholders, and obtained releases from the stockholders, and thus deprived the plaintiff and others similarly situated of any standing as a stockholder, and the fact that the acts of the defendants claimed to have been done in separate capacities are so related and confused that to disentangle them and prove two separate causes of action would as a practical matter be impossible, justifies the method of pleading adopted. Under such circumstances the rule against multifariousness or misjoinder should not be rigidly applied.

I have discussed the case on the theory that the complaint states only a cause of action on behalf of the plaintiff and others similarly situated. Even if it also states a cause of action in the Anthony Scovill Company it is not, in view of the facts alleged, demurrable for misjoinder. The pleader, for prudential reasons, has made the corporate entity or whatever may be left of it a party defendant in this action. If upon a hearing which shall develop all the facts it shall appear that this corporate entity may be re-invested with the property that had been misappropriated by the defendants a court of equity may so order. Assuming for the sake of argument that the complaint does state a cause of action on behalf of the plaintiff and also a cause of action on behalf of the Anthony Scovill Company under the circumstances alleged in the complaint, the demurrer for misjoinder should not be sustained. Any claim growing out of the facts alleged, that may exist in the plaintiff on his own behalf and any claim that may exist on behalf of the Anthony Scovill Company, is founded on the same facts and would warrant the same or similar relief. In equity in such a case such claims or causes of actions may be joined without being obnoxious to the rule against misjoinder or multifariousness. (Jones v.Missouri Edison El. Co., 144 Fed. Rep. 765.) In the case last cited the corporation in which the plaintiff was a stockholder was consolidated with another corporation. The plaintiff brought an action as a minority stockholder on behalf of his corporation and on his own behalf and it was held that a bill is not multifarious which presents a common point of litigation, the decision of which will affect the whole subject-matter and settle the rights of all the parties to the suit. In that case Judge SANBORN wrote what with slight change could be appropriately written here: "Counsel for the defendants argues with an ingenuity and persuasive force that command admiration that, conceding the wrong, there are many reasons why a court of equity can apply no remedy under this bill. He says that the existence of the consolidated corporation may not be collaterally assailed and annulled by a private party and that it may be successfully questioned by the state only, and he cites in support of this contention * * * [citing cases] * * *. But not one of these decisions holds that the perpetrator of a fraud or the abuser of a trust or their privies may shield themselves behind the inactivity of the state, quiet the conscience and escape the grasp of a court of chancery more successfully by appropriating the property of a cestui quetrust by means of a consolidation of corporations than he may by a decree of foreclosure and sale (Jackson v. Ludeling, 21 Wall. 616), by a transfer of all the property of a corporation and its dissolution (Ervin v. Oregon Ry. Navigation Co., 20 Fed. Rep. 577, 580), by a lease (Meeker v. Winthrop Iron Co., 17 Fed. Rep. 48), or by any other legal device he may happen to adopt. The cases he cited have to do with transactions free from fraud, and while possibly pertinent to the charge in the bill that the consolidation was not authorized by law, they have no relevancy to the cause of action for fraud and breach of trust in the conception and execution of the consolidation." Whether we view the complaint as I think it should be viewed, as stating a cause of action in the plaintiff or regard it as stating a cause of action in behalf of the plaintiff and also a cause of action in behalf of the corporation is immaterial, as it is clear from the complaint that it presents a common point of litigation the decision of which will determine the whole subject-matter and settle the rights of all the parties to the suit. If the view that the complaint states only a cause of action on behalf of the plaintiff is correct, the demurrer should be overruled. If, however, the complaint does unite two causes of action demanding the same relief, it is not under the circumstances existing in this case such an improper union as to render the complaint demurrable on the ground of a misjoinder of causes of action.

For the reasons stated above I vote in favor of affirming the order of the Appellate Division on each appeal which reversed the judgment of the Special Term sustaining the demurrer to the complaint and in favor of answering the first question certified to us in the negative and the second question in the affirmative.

CHASE, CUDDEBACK and HOGAN, JJ., concur with HISCOCK, J.; SEABURY, J., reads dissenting opinion; WILLARD BARTLETT, Ch. J., absent; CARDOZO, J., not sitting.

Orders reversed, etc.