Cuppy v. Ward

187 A.D. 625, 176 N.Y.S. 233, 1919 N.Y. App. Div. LEXIS 7084

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: May 5, 1919
• Status: Published

Opinions

Page, J.:

This .is a suit in equity wherein the plaintiff has joined the defendant Ward, with whom he has a contract, the Ideal Cocoa and Chocolate Company, a Pennsylvania corporation, and the directors of said corporation, to obtain the following relief: 1. An injunction restraining Ward and all other defendants from doing any act in violation of the contract with Ward, and particularly from excluding, or doing any act tending to exclude, the plaintiff from the management of the business and factory of the corporation, and directing Ward to exercise his stock control of said company to restore the plaintiff to the position and salary of manager, of the factory of said company, and to keep said position and cause said salary to be paid to the plaintiff until the expiration of the time fixed in said contract. 2. That a mandatory injunction issue directing Ward to transfer or cause to be transferred to plaintiff, without cost to the plaintiff, a sufficient number of shares of stock of the corporation now held by Ward, or by his agents, so that the plaintiff shall have forty-nine per cent of the total issued stock of said corporation, or, in the alternative, directing Ward, at his own cost and expense, to cause to be issued to the plaintiff 157 shares of the stock of said company now authorized but not issued, so that plaintiff shall thereby have forty-nine per cent of the total stock of the said company. 3. Restraining Ward and the other defendants from transferring to any person other than plaintiff any stock now held by them over and above the number of shares necessary to give the plaintiff forty-nine per cent of the total issued capital stock of the company as the same shall be at the time of said transfer. 4. That a receiver be appointed pendente lite to take and hold the stock of the corporation, and be directed to call a meeting of the stockholders and take such action at said meeting as shall be necessary to restore to the plaintiff the management of said business or so much thereof as the court shall determine the plaintiff entitled to under the said contract, and to cause the salary to be paid pending the action. 5. For general relief.

I cannot find a sufficient statement of facts to constitute a cause of action for this specific relief demanded nor for any other equitable relief. It cannot be seriously contended that the Supreme Court of New York State would have power to appoint a receiver for stockholders of a Pennsylvania corporation who should be empowered to call meetings of stockholders and directors, and direct the action to be taken at such meetings. This proposition is too absurd to require discussion. Nor can the plaintiff compel Ward to transfer or cause to be transferred to him a sufficient number of shares of stock in the corporation so that the plaintiff shall have forty-nine per cent of the total issued stock, for there is no provision in the contract that the plaintiff should ever be entitled to receive from Ward stock sufficient to make his holdings therein forty-nine per cent of the total issued stock. Under the contract, Ward was entitled to fifty-one per cent of the authorized stock, and the plaintiff was entitled to the remainder of the stock purchased by the parties. When the $300,000 contributed by Ward to purchase the stock should have been repaid with interest, and the amount contributed by plaintiff had likewise been repaid in the manner specified in said contract, then Ward was to transfer out of his holdings two per cent of the issued stock. The complaint states that this money has not been repaid. Hence the plaintiff is not entitled to receive even the two per cent of stock. In this alternative, the plaintiff asks that the court direct Ward to purchase at his own expense the 157 shares of unissued stock and present it to the plaintiff. For such a gift there is not the slightest foundation in the contract or in the complaint. The complaint alleges that the plaintiff has been excluded from the management of the business and factory of the corporation. An injunction restraining the commission of acts already committed would be futile. A preventive injunction necessarily operates upon an unperformed and unexecuted act, and prevents a threatened but non-existing injury. It is, therefore, not an appropriate remedy to procure relief for past injuries, or to restore parties to rights of which they have already been deprived. (See Kent, Ch., in Watson v. Hunter, 5 Johns. Ch. 169.) In my opinion the plaintiff is not entitled to a mandatory injunction restoring him to the position of manager of the factory of the said corporation and to keep him in that position and cause the salary to be paid to him until the expiration of the time fixed by the contract. It is stated in the complaint that charges were preferred against the plaintiff of dishonesty and inefficiency, that a committee of the directors was appointed to investigate these charges and at another meeting of the directors the committee presented a report charging him with dishonesty and unfaithfulness, and thereupon the directors adopted a resolution discharging the plaintiff from the employ of the corporation. To be sure it is alleged, that these charges were false and untrue, and that the action was taken at the instigation of Ward. This, however, does not give the court jurisdiction to try out the alleged cause for the discharge of the plaintiff, and reinstate him in his position, if we should decide that he had been wrongfully discharged. If he held a contract binding on the corporation to employ him for a definite time! at a fixed compensation, and he was wrongfully- discharged, he has a full and adequate remedy at law for damages. If his contract was not binding on the corporation, but Ward personally was obligated to him to so far as he was able to keep him in that position for a definite time at a fixed compensation, and Ward caused his discharge by making or instigating others to make false and untrue charges which caused him to lose his position, he also has a full and adequate remedy at law against Ward for damages. As I understand Mr. Justice Shearn’s opinion, he does not controvert this proposition, but he says that this corporation is but an incorporated partnership, and that where two individuals own all the issued stock of a corporation,, a court of equity will disregard the legal fiction that a corporation is a separate entity, where justice requires. This is undoubtedly the .fact when copartners incorporate their business, or where two persons enter into an agreement to form a corporation to carry on a business under certain stipulated engagements, one to the other, in the conduct of a business, and also in some cases where the promoters of a corporation have been held to have bound the corporation by their engagements. But in the case under consideration, the Ideal Cocoa and Chocolate Company was a corporation organized and existing under and by virtue of the laws of the State of Pennsylvania, engaged in the business of making chocolate products in that State for some time prior to this agreement between plaintiff and Ward. It was a distinct corporate entity. They entered into an agreement for the purchase of its stock and acquired all the issued shares, and agreed that the net earnings of the company should be distributed in the form of cash dividends and as between the parties should be distributed as follows: Twenty per cent to the stockholders as dividends; eighty per cent to Ward, until the amount he had advanced ($300,000) with interest at five per cent should be repaid him and then to plaintiff until the amount he had advanced with interest at six per cent should be repaid to him. I cannot see how this provision changes an existing corporate entity into an incorporated copartnership. Nor is this the case where a man is seeking to take advantage of corporate forms to perpetrate a fraud. The contract provided that the net earnings were to be divided as above set forth. The complaint states that while the plaintiff was in control of the business, a period of seven years, the company earned about 300 per cent, but no dividends were declared. This money was used to increase the working capital and acquire additional assets. It is not alleged that this was done with Ward’s consent. As plaintiff had received bonds of the corporation to the extent of $100,000 for the purchase of the stock and assets of a corporation owned by him, and was in receipt of an annual salary of. $10,000, it can be readily seen that it was to his advantage to build up the security for his bonds and extend the time within which he could continue to draw the salary; but what of Ward, $300,000 invested and not one cent of return for seven years, either of principal or interest? There was one way open to him; he had the stock control of the corporation, and the contract secured this to him for the entire period of the contract. He had the power to elect directors who would not be under the control of the plaintiff. The directors are the only persons who can appropriate the earnings of the corporation either to the payment of dividends or to extension of plant. This he did. It may be a source of regret to the plaintiff that he did not perform the terms of the agreement on his part, and while he was in control of the corporation distribute the dividends in the manner therein provided, when as he now states Ward would have been repaid a large part of his investment, and the plaintiff would be nearer to the realization on his investment and the increase of his stock holdings. But in this situation I can discover no reasonable grounds for the granting of a mandatory injunction taking the control of this corporation from the directors elected by the majority stockholders and vesting it in 'the sole and exclusive management of a minority stockholder. I have not discussed this case from the viewpoint that it was a foreign corporation, as I concur in the opinion of Mr. Justice Lattghlin in which that phase of the case is discussed.

In my opinion the judgment and orders should be affirmed, with costs.

Clarke, P. J., and Lattghlin, J., concurred; Shearn and Merrell, JJ., dissented.

Laughlin, J.:

This is a suit in equity and I am of opinion that the plaintiff fails to show that he is entitled to any equity relief which it is competent for the courts of this State to grant and that, therefore, the demurrers interposed by all of the defendants separately on the ground that the complaint does not state facts sufficient to constitute a cause of action are well taken.

The equitable relief demanded necessarily involves the direction and control of the management of the defendant, the Ideal Cocoa and Chocolate Company, which is a foreign corporation organized and existing under the laws of Pennsylvania. The individual defendants other than Ward are directors of and constitute the board of directors of the corporation. One of them is its president, another its treasurer, and another its general manager. It is the business of the corporation to manufacture and sell chocolate and its factory is in Pennsylvania. It is alleged that the plaintiff resides in Pennsylvania and that the defendant Ward resides in this State. After the contract with the plaintiff, the substance of which is stated in the opinion of Mr. Justice Shearn, was made and after the plaintiff was ousted as general manager of the company, its general office was removed to the city of New York and it is now engaged in business in this State and has an office for the regular transaction of business in the city of New York. It was conceded on the argument that under the law of Pennsylvania the directors áre not required to be stockholders. . It is not alleged that any of the directors or officers are residents of this State. The only relief to which the plaintiff claims to be entitled now is to have the officers and directors of the corporation and the corporation itself enjoined from permitting him to act as general manager of the company pursuant to his private contract with the defendant Ward, which it is not alleged was made by authority of the company or of its board of directors or ratified by either, and to have him reinstated as general manager of the company. In all the decisions cited by Mr. Justice Shearn and relied upon by the plaintiff, the courts were adjudicating with respect to the rights of stockholders of domestic corporations. In my opinion it is not competent for a court of this State to compel this foreign corporation or its board of directors, directly or indirectly, through any authority or control that the defendant Ward may have as owner of the majority of the capital stock, to reinstate and continue the plaintiff as manager of the corporation. Without regard to the concession, which is not part of the record, with respect to the law of Pennsylvania to the effect that directors need not be stockholders, it must be assumed from the allegations of the.complaint that the individual defendants other than Ward are the lawful directors of the company. It is their duty both to the stockholders and to the creditors of the company to exercise their best judgment in the management of the affairs of the company including the appointment of the general manager; and for the due performance of their duties it must be assumed that they are answerable under the laws of Pennsylvania, which, with respect thereto, are to be construed and applied by the courts of that jurisdiction.

It is a well-settled general rule of equity jurisprudence that the courts of equity of one jurisdiction will not assume jurisdiction of a cause involving the internal affairs and management of a corporation regulated by the" statutory law and public policy of a foreign country or a sister State and that such issues will be relegated to .the local jurisdiction of the incorporation. (Hallenborg v. Greene, 66 App. Div. 590; Butler v. Standard Milk Flour Co., 146 id. 735; People ex rel. Ruman v. National Slavonic Society, 144 id. 574; Gregory v. N. Y., L. E. & W. R. R. Co., 40 N. J. Eq. 38; Guilford v. Western Union Telegraph Co., 59 Minn. 332; Edwards v. Schillinger, 245 Ill. 231; Wason v. Buzzell, 181 Mass. 338; Clark v. Mutual Res. Fund L. Assn., 14 App. Cas. [D. C.] 154; 43 L. R. A. 390. See, also, note 12 R. C. L. § 21, p. 31.) This rule precludes the exercise of jurisdiction to determine the validity of the incorporation of a foreign company, or to dissolve it, or to appoint a general receiver for it, or to control the election of its officers, or to determine the validity of their election, or to remove or reinstate them; and necessarily, I think, precludes the exercise of jurisdiction to control the judgment and discretion of the board of directors of such a corporation with respect to the appointment, removal or reinstatement of the officers or agents of the corporation.

It is, however, consistent'with this rule for the courts of another jurisdiction to enjoin a fraudulent conspiracy to dissipate the property of a foreign corporation and to call the directors and officers to account for misconduct or negligence, for this is in aid of the corporation and its creditors; and the rule does not preclude enjoining an illegal issue of stock by a board of directors acting within the jurisdiction where the injunction is sought, provided the illegality of the issue of stock depending on the foreign law is clear, or enjoining the depository of stock where the injunction is sought from voting it under a voting trust agreement which has expired (Miller v. Quincy, 179 N. Y. 294; Jacobs v. Mexican Sugar Refining Co., Ltd,., 104 App. Div. 242; Ackenv. Coughlin, 103 id. 1; Weber v. Wallerstein, No. 1, 111 id. 693; Hallenborg v. Greene, supra; Kraft v. Griffon Co., 82 App. Div. 29; Butler v. Standard Milk Flour Co., supra); or compelling the transfer of stock on the books of the corporation where it has a transfer office and agency in the jurisdiction to which the application is made. (Travis v. Knox Terpezone Co., 215 N. Y. 259.)

I am of opinion that the plaintiff should be left to his remedy by application to a court of Pennsylvania, where the company was incorporated and its plant is located, and I, therefore, vote for affirmance.