Stokes v. Stokes

O’BRIEN, J.

The complaint charges “that the defendants, Stokes, Foote, Cornwell, and Cornish, have had since its organization, and now hold, the control of said corporation, and have been guilty of official misconduct therein, and in the management and disposition of its funds and property committed to their charge, and that the said defendant Stokes' has wrongfully acquired to himself, and transferred to others, money and property of the corporation, and has lost or wasted the same, with the knowledge and concurrence or acquiescence of” the defendants. From the complaint as construed in the former opinion of this court (87 Hun, 153, 33 N. Y. Supp. 1024), and by the concession of the respondent, it is clear, to quote from the opinion, that:

“The object of this action was to compel the defendant officers to account ■ for official misconduct, and not for the examination of a long account; and the latter could not be ordered until there was some proof to sustain the allegations that there had been some official misconduct, and a determination to that effect reached by the trial judge, and put in the form of an interlocutory judgment directing the accounting. The issue here presented was as to whether the defendants, or one of them (Stokes), had been guilty of official misconduct. Without, however, reaching any determination upon this question, the trial judge, as already stated, appointed a referee. For such practice we can find no authority. * * *”

And the orders' directing a reference upon this ground were reversed. Thereupon the plaintiff, without any additional testimony being taken or proceedings had, obtained a decision, among other things—

“That said corporation (the Hoffman House] being under the control of said Edward S. Stokes, as an officer and director thereof, he received to his own use funds of said corporation, as appears by three accounts on the books of account of said corporation, entitled, respectively, ‘The E. S. Stokes Account,’ ‘The E. S. Stokes Yacht Account,’ and ‘The Fenwick Hall Account.’ ”

And thereafter an interlocutory judgment was entered directing a reference to take and state an account of the dealings and transactions between the said Stokes and said corporation on said three accounts. This decision eliminates any and all questions of fraud or misconduct on the part of the defendant Stokes, and does not find that any of the specific charges of misconduct alleged in the complaint are sustained; but the ground upon which the issues were decided is the fact of the existence of the three accounts mentioned in the books of the corporation, and that, as these show a debit balance against the defendant Stokes, he accordingly received moneys to that extent to his own use, from the corporation, and that he should account for all his dealings and transactions appearing in such accounts. We held on the former appeal that the action was brought “under section 1781 of the Code of Civil Procedure, to compel the defendants to account for their official conduct in the management and disposition of the funds and property of the corporation”; and, as shown by the provisions of such section and our former opinion, its object “was to compel the defendant officers to account for official misconduct, and not for the examination of a long account.” The issues in such an action do not concern or affect the defendant Stokes, as a debtor, unless such debt was caused by official misconduct or fraud on his part. That the learned trial judge did not find fraud or official misconduct appears, not only from his decision, but also from his opinion, wherein he says:

“When an officer of a corporation makes the corporation his banker, as it were,—where he draws on the corporation, managing the corporation as its

officer, and at the same time allowing the corporation to occupy the position of a banker,—it seems to me the corporation has a right, at the termination of the relation, to come and say, ‘We want an account taken of our relation between us as an officer of the corporation and our president, and as a depositor who has occupied that relation.’ There is no objection to such a relation existing, that I know of,—no reason why an officer of the corporation, if the corporation has a mind to act in that position, there is no reason why he should not do it; but I think he puts himself in the position of having the corporation come and say, ‘We want our accounts, as between us, settled.’ I don’t see why that is not so. If an officer occupies that position, I don’t see why the corporation has- not a right to come in and say, ‘We want a regular accounting between our president and ourselves, the corporation.’ * * * I don’t want to be understood as saying there is the slightest impropriety in it, but there were money transactions between Mr. Stokes and the corporation. Very likely it was necessary, to carry on the business, of the corporation, that it should be so. I don’t know anything about that. It is not necessary to determine that, one way or the other. But he had money transactions between himself and the corporation; he was the corporation’s agent; he was the corporation’s trustee; and it seems to me that, occupying that relation, the corporation has a right to come in and ask to have the account settled in the usual way.”

Were this a mere action for an accounting, these views might be controlling; but we think now, as we did upon the former appeal, that the learned judge has misconceived the nature of this action, which, brought as it is by the plaintiff in his capacity either of stockholder or creditor on behalf of the. corporation itself, is made to depend upon the official misconduct of the defendants; and this, involves issues of fraud, misconduct, willful neglect, or other willful culpability of the defendants. The defendant Stokes "was justified in concluding that the action was not one intended to hold him as a debtor on an account which ran on the books of the corporation, but to show that his official misconduct as a director had been willfully corrupt, and that he had been guilty of gross misconduct in his office as president and trustee of the corporation. Had this been an action to recover a debt on the balance of an account, the pleadings and the issues would necessarily be different, and the defendant would have had the opportunity of showing, if he could,—as he-claimed to be able to do,—that the corporation, at the time the action was commenced, was indebted to him. As said, however, he-was not sued upon, nor was the issue presented to him of, an" indebtedness, but he was charged with having fraudulently converted the property of the corporation to his own use. And such charges, not having been sustained, in the opinion of the trial judge, there is. no proper basis for the judgment directing the defendant to account.. The plaintiff realized the burden thus placed upon him, and, to support the charges in his complaint, he introduced a voluminous. correspondence, replete with charges of official misconduct, and up- • on the trial selected certain of these, with a view to proving that the accounts were in some respects fictitious and fraudulent, and that certain money taken from the corporation had not been entered upon its books. It is unnecessary for us to refer to the evidence ■ upon these points, in view of the conclusion of the trial judge that such evidence failed to establish fraud or other misconduct; his. opinion and decision showing clearly that the existence of these ac- ■ counts on the books of the corporation, between the defendant ■ Stolces and the corporation, of themselves, was sufficient to require the defendant Stokes to account for all transactions thus appearing. With respect to such accounts (and upon their competency and strength this decision must rest), although the case of Rudd v. Robinson, 126 N. Y. 113, 26 N. E. 1046, is authority for the proposition that “in an action by the receiver of a corporation against one of its directors to recover for money and property alleged to have been improperly appropriated, the books of account of the corporation were not per se competent evidence to establish a liability,” but assuming, from the additional fact which appears in this case that the defendant Stokes had knowledge of the existence of such accounts in the books of the corporation, that this fact made them competent evidence against him, we have still to consider what was the result and effect of such evidence. It appears that the personal account of the defendant Stokes was commenced with a cash credit of $35,000; and while, during different periods, this amount was lessened by withdrawals until at times there was a debit balance against him, it yet appeal's that at the time the action was brought there was in such account a credit balance in his favor. The plaintiff, for the purpose of proving the withdrawal of moneys or property of the corporation, attempted to introduce but one side of the account, namely, the debit side; but the learned trial judge, upon the other side being offered by the defendant, correctly held that, if either, then both sides of the accounts were admissible, which therefore went in together, showing the results already outlined. The effort to falsify these accounts, as made by the plaintiff, was not, in the opinion of the judge below, successful. With respect to the suggestion, therefore, that the debit side of the account furnishes evidence that the defendant Stokes has funds of the corporation in his hands, the answer is that the credit side of the account shows that he has not only accounted and returned them to the corporation, but, in addition, has something in. his favor.

■ So we are brought back again to the proposition with which we started,—as to whether or not the mere fact that a director or officer has transactions with the corporation, appearing on the books, which show at the time the action was brought a credit balance, the correctness of which accounts is not successfully assailed, can be made the basis for a decision and an interlocutory judgment directing an accounting by such officer in an action brought, as this is, under section 1781 of the Code, to compel such officer and director to account for his official misconduct. The conclusion reached that such evidence was sufficient is equivalent to a finding that an officer and director who has any transactions with .the corporation can be proceeded against for official misconduct under section 1781 of the Code. We have been referred to no authority which supports this proposition, nor do we think any case has gone so far as to hold that there is any such penalty attached to or involved in a transaction carried on between an officer and director of a corporation.and the corporation itself. We know from common experience—and must therefore take notice of the fact—that it does frequently happen that the affairs of corporations require at times the advancement of sums of money by such officers which are clearly for the benefit of the corporation. Where such moneys are advanced, it is not wrongful for the person malting such advances to withdraw from the corporation when its treasury will permit enough to reimburse him therefor; and such transactions we do not think would expose the officer or director occupying such a relation to the corporation to a successful action being maintained against him for misconduct. In this, as in all other actions, the judgment should be secundum allegata et probata. Here, however, while the allegations charge fraud, violation of duty, and gross misconduct, the trial judge finds that such allegations or charges are not sustained, but nevertheless renders a j udgment subjecting the defendant to the same penalties and burdens as would be entailed had they been sustained by competent proof. If these accounts in the books of the corporation are competent evidence in favor of the corporation, as against the defendant Stokes, we fail to see why they are not equally good in his favor, as against the corporation; assuming, as we do, from the conclusion reached by the learned trial judge, that the correctness of these has not been successfully assailed, and that his conclusion has been derived, not from the fact that there was any fraud or deceit or falsity in the accounts themselves, but that the transactions, being those between an officer and a corporation, entitled the latter to an accounting, notwithstanding a comparison of the debit and credit sides of such accounts would show at the time the action was brought,- and as is now made to appear by the accounts filed, a large credit balance in favor of the defendant. We think now, as we did upon the former appeal, that as this action, brought under section 1781 of the Code, is “to compel the defendant officers to account for official- misconduct, and not for the examination of a long account,” the latter could not be ordered “until there was some proof to sustain the allegations that there had been some official misconduct, and a determination to that effect reached by the trial judge.” The absense of such a determination we think fatal to the judgment, which should be reversed, and a new trial ordered, with costs to appellant to abide the event.

VAN BKUNT, P. J., concurs.