MATTER OF COHEN v. Cocoline Prods.

309 N.Y. 119 (1955)

In the Matter of Samuel Cohen, Respondent,
v.
Cocoline Products, Inc., et al., Appellants.

Court of Appeals of the State of New York.

Argued April 28, 1955. Decided July 8, 1955

Elliot A. Wysor and Leonard S. Halpert for appellants.

Charles Gottlieb for respondent.

CONWAY, Ch. J., VAN VOORHIS and BURKE, JJ., concur with FROESSEL, J.; DESMOND, J., dissents in part in an opinion in which DYE and FULD, JJ., concur.

FROESSEL, J.

This is an article 78 proceeding, in the nature of mandamus, for an order compelling respondent corporation to permit petitioner Cohen to inspect its corporate books and records. At the time this proceeding was instituted, Cohen was a director of the corporation, and had been such continuously since its organization in 1940. He transferred his previously held stock in this corporation to his wife.

Cohen, who is an attorney, took an active part in organizing the corporation, acting as its financial and legal adviser. It is apparent from the papers presented on this appeal that the underlying dispute here is over an alleged unauthorized $25,000 salary now being drawn by the president, plus the cost and maintenance of an automobile for his use, on the one hand, and the reduced retainer and legal fees Cohen claims are due to him from the corporation, on the other. Moreover, Cohen makes additional charges of mismanagement, defalcations and misappropriation of corporate funds.

On November 29, 1954, Cohen sent a letter to Samuel Klein, president of and dominant figure in the corporation, charging him with misappropriating moneys of the corporation for automobiles and maintenance, and demanding that he restore said moneys. Cohen also requested information regarding expenditures for salaries, commissions and expenses over the past six years. Klein did not answer the letter, but called a special meeting of the board of directors for December 10, 1954.

At that meeting, Klein and one Collins voted, over Cohen's objection, to have a new board elected on December 20th. They also voted to postpone consideration of Cohen's charges until the new board was installed. At this December 10th meeting, Cohen demanded an inspection of the corporate books and records, but was refused. Cohen thereupon brought the instant proceeding to compel that inspection.

The case came on for hearing on December 20, 1954, the same day for which the stockholders' meeting was scheduled. At about 12:30 P.M., following the hearing, Special Term ruled from the bench in petitioner's favor, and indorsed the moving papers as follows: "Petitioner's motion to examine books and records of Cocoline Products, Inc., granted with accountant." However, no order was signed at that time.

Later that same day, the stockholders' meeting was held, and Cohen was not re-elected to his position as director. On the following day, by order to show cause, the corporation moved for leave to file a supplemental answer and for a "re-hearing". Special Term granted this motion for "reargument", but, "in view of the allegations made by the petitioner and the refusal of the officers of the corporation to allow him to inspect the corporate books", he adhered to his original determination, notwithstanding that petitioner was "no longer a director". Then, on January 18, 1955, the order appealed from, reciting the application for a "rehearing", and granting petitioner's motion to inspect the books and records, was made. The Appellate Division affirmed unanimously and without opinion, and our court granted leave to appeal.

In order properly to perform his directing duties, a corporate director must, of course, keep himself informed as to the policies, business and affairs of the corporation, and as to the acts of its officers. He owes a stewardship obligation to the corporation and its stockholders, and he may be subjected to liability for improper management during his term of office. Because of these positive duties and potential liabilities, the courts of this State have accorded to corporate directors an absolute, unqualified right, having its roots in the common law, to inspect their corporate books and records (Matter of Overland v. Le Roy Foods, 279 A.D. 876, affd. 304 N.Y. 573; Matter of Hafter v. Eagle Fish Co., 270 A.D. 995, affd. 296 N.Y. 808; People ex rel. Wilkins v. Ascher Silk Corp., 207 A.D. 168, affd. 237 N.Y. 574, motion for reargument denied 237 N.Y. 630; Matter of Davis v. Keilsohn Offset Co., 273 A.D. 695; People ex rel. Leach v. Central Fish Co., 117 A.D. 77; People ex rel. McInnes v. Columbia Bag Co., 103 A.D. 208; People ex rel. Muir v. Throop, 12 Wend. 183; People ex rel. Onderdonk v. Mott, 1 How. Prac. 247).

But when a director is removed from office, even if this is done while his suit to compel inspection of the books and records is pending before Special Term, his absolute right to such an inspection terminates forthwith (Matter of Overland v. Le Roy Foods, supra; Matter of Hafter v. Eagle Fish Co., supra). This is so manifestly because he no longer has a voice in governing the corporation, and consequently is under no further duty to keep himself informed either as to corporate business and policies or as to the acts of its officers. However, he still remains potentially liable for wrongful acts of the directors committed during his term of office.

Here Cohen claims (1) he may have "exposed himself to personal liability for what transpired during his term of office" (see Abrams v. Allen, 297 N.Y. 52, 55-56); (2) to that extent he is entitled to inspection; and (3) he should not be obliged to "sit back and wait until someone sues him for dereliction of duty".

Stockholders have long been granted a qualified right, resting in the trial court's discretion, to protect their financial interest in a corporation by inspecting its books and records (see Matter of Steinway, 159 N.Y. 250). Directors, while in office, must protect not only their own interests, but also those of the corporation and of the stockholders; consequently, as noted above, their right to inspect has been made absolute. While his duty to the corporation and to the stockholders ceases upon termination of his office, he may still have a personal responsibility interest to safeguard, the protection of which could very well inure to the benefit of the stockholders by a disclosure to them of any derelictions by other directors or officers. And this is more likely in the case, as here, of a director of long service who unexpectedly fails of re-election just at a time when he was about to undertake an investigation in his capacity as director.

It would seem to follow, then, that, although he has no absolute right, a discharged director may have a qualified right to inspect the corporate books and records covering a period of his directorship, whenever in the discretion of the trial court he can make a proper showing by appropriate evidence that such inspection is necessary to protect his personal responsibility interest as well as the interest of the stockholders.

In the instant case, however, Cohen was granted an order to inspect on the basis of the pleadings and affidavits only. The court so decided from the bench, and, after granting "reargument" — actually a rehearing since it considered the new matter — it adhered to its former determination, embodying the whole proceeding in a single order. If this was done on the theory Cohen had an absolute right to inspect, it was clearly error, for Cohen ceased to be a director while the proceeding was still pending before the court (Matter of Hafter v. Eagle Fish Co., supra; Matter of Overland v. Le Roy Foods, supra). And if it was done in the exercise of discretion, it would also have been error, for the answering papers supplemented by the rehearing papers raise triable issues of fact as to the purpose for which Cohen has sought this inspection, which issues should have been resolved only after a hearing (Civ. Prac. Act, § 1295; see Matter of Breswick & Co. v. Greater N. Y. Inds., 308 N.Y. 1041).

The order appealed from should be reversed, with costs in all courts to abide the event, and the matter remitted to Special Term for further proceedings in accordance with the opinion herein.

DESMOND, J. (dissenting).

I, too, am for reversal, but I oppose remission of the proceeding to Special Term for the exercise of discretion. Under settled rules and our own decisions, there is no power in any court to grant, to one who, like petitioner, is neither a director nor a stockholder of a corporation, an inspection of the corporate books. The applicable rule is so old, simple, and well known that we have no choice but to follow it, and to order this petition dismissed on the law.

Ever since People ex rel. Muir v. Throop (12 Wend. 183, 185, 187 [1834]) and People ex rel. Onderdonk v. Mott (1 How. Prac. 247 [1845]), it has been settled in this State, as it is elsewhere (see Machen v. Machen & Mayer Elec. Mfg. Co., 237 Pa. 212), that a director has an absolute and unqualified right to inspect the corporation's books and records. But it is settled, too, that such right is an incident of the office of director to help the incumbent carry out his duty of "directing" the corporation's affairs (People ex rel. Leach v. Central Fish Co., 117 A.D. 77, 80; People ex rel. Wilkins v. Ascher Silk Corp., 207 A.D. 168, affd. 237 N.Y. 574, note 15 A. L. R. 2d 41). Since he cannot perform those duties without knowledge of the company's affairs, he must have free access to the books (People ex rel. McInnes v. Columbia Bag Co., 103 A.D. 208). Accordingly, so long as he is a director (see McInnes and Machen cases, supra) his exercise of the right of inspection cannot be challenged. Likewise, of course, the absolute right ceases absolutely when his term of office ends, however abruptly and for whatever reason (Matter of Hafter v. Eagle Fish Co., 296 N.Y. 808; Matter of Overland v. Le Roy Foods, 304 N.Y. 573). One who is a director must be given his inspection, regardless of bad motives (see Machen and McInnes cases, supra) and, by the same reasoning, one who has ceased to be a director cannot be granted such relief, no matter how pure his motives. A director has an absolute right so long as he holds office. A stockholder has a qualified right so long as he holds stock (Matter of Steinway, 159 N.Y. 250). Since petitioner is neither a director nor a stockholder, he has no rights at all, as to inspection. A holding that inspection of corporate books by a discharged director may be ordered in the discretion of the courts, is without precedent, unnecessary and in conflict with all the previous decisions, especially Hafter and Overland (supra).

The order should be reversed and the proceeding dismissed, with costs in all courts.

Order reversed, etc.