Higgins v. Tefft

4 A.D. 62, 38 N.Y.S. 716, 74 N.Y. St. Rep. 100

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: April 15, 1896
• Status: Published

Opinion

Ingraham, J :

The plaintiff brings this action as receiver of the North River Bank, a banking corporation organized under the laws of the State of New York, to recover from the defendants, who were the directors of the bank, the. damages which the said bank, its depositors, stockholders and other creditors have sustained by reason of the wrongful and negligent acts of the defendants as its directors.

The defendant William E. TefEt demurs to the complaint upon two grounds: (1) That causes of action have been improperly united in said complaint; and (2) that the said complaint does not state facts sufficient to constitute a cause of action. The issues raised by this demurrer were disposed of. by the Special Term by overruling the demurrer on the ground that the complaint does not state facts sufficient to constitute a cause of action, and also overruling that ground of demurrer whereby it was claimed that causes of action have been improperly united by joining a cause of action against this defendant demurring with causes of action against other directors arising at a time when this demurring defendant was not a director, so far as such causes of action arose because of negligence or improper conduct of their duties as such directors; but sustaining the demurrer on the ground of improper joinder of causes of action as to the causes of action for the making and publishing of false statements or reports of the financial condition or affairs of the bank. The plaintiff appeals from so much of the judgment as sustains the demurrer, and the defendant appeals from so much of the judgment as overrules the demurrer.

The main’ question argued before us, and the one which must determine tne question as to sufficiency of - -this -complaint, depends-upon whether or not this action can be considered as .an action in equity which would entitle this plaintiff, conceding the facts alleged in the complaint to be true, to any equitable relief. The plaintiff sues as the receiver of the bank, appointed in an action brought by the People of the State of New York for a dissolution of the bank, in which a- final judgment has been entered, whereby the said bank was dissolved and the plaintiff duly appointed permanent receiver of the property and effects thereof. The cause of action which plaintiff thus seeks to enforce was one that vested iri him by-his appointment as receiver of the bank. As such receiver he became vested with the property and rights Of action that had theretofore, vested in the bank, and he sues here to recover what the bank could have recovered if it had not been dissolved and no receiver had been appointed. It is quite important clearly to recognize that the plains tiff’s right, of. .action depends upon his ' succeeding to the right of action .that-had .vested in-the bank at the time of his appointment. What.evér-. right of action' had vested in the stockholders as stockholders, or in. the creditors as. creditors,, of the bank, has not been divested from them by the' appointment of the plaintiff as receiver. They still rétain any causé of action that they had as -against these defendants as: officers ,or directors of the bank prior to its dissolution,-arid. it. is; for them to enforce such cause or causes of action and iio.t-.the receiver. .

.-.Bearing this'in mind; we "may consider this action as one brought by.the .bank, against-.its officers, for negligent and improper conduct in-the execution of the triist reposed in them, and then determine whether, upon, the. facts, alleged, the action is to be deemed equitable, or an action at law, to recover damages sustained in consequence of the negligence in, or improper performance of, the duties of the defendants as directors of the hank.

The Court of Appeals, in the late case of O'Brien v. Fitzgerald (143 N. Y. 377), has settled certain questions as to the relations that existed between a corporation and its directors; and in the construction of a complaint in an action by a receiver of a corporation to recover from its directors damages for negligence or misconduct on their part, resulting in damage to the corporation. It was there held that the actual and real relation between the directors and the corporation is that of agents acting for their principal, and the directors may be sued at law for any damage whatever, caused by their culpable misfeasance or non-feasance; that in determining whether a complaint alleges a cause of action at law or in equity, the formal demand of relief with which the complaint concludes is not decisive of the legal or equitable character of the action; that where the action is for the recovery of money only, it is classed as legal, and is triable by a jury; that while the courts are not concluded by the formal demand of relief, but may look into the facts to see, nevertheless, if it be not equitable relief which they imperatively require, yet, where the facts do not aid us, where they are just as appropriate to a legal as an equitable cause of action, where they are ambiguous as to the subject of inquiry, we must be guided by the relief asked in reaching a conclusion. The court, in that case, stated generally the nature of the action as one in which “ the corporation, represented by its duly appointed receivers, sues individuals who were its directors for such neglect or wrong in the performance of' their duties as resulted in large losses, and demands a money judgment for the damages sustained. There is no suggestion that any equitable relief is essential to a full and complete redress, and no facts are stated which indicate a need of such intervention. It is not averred that a discovery is requisite to the completeness of the remedy; on the contrary, the acts of negligence are asserted as fully known, and capable of proof. It is not alleged that an accounting is necessary to ascertain the damages, but these are claimed as a definite and fixed sum, resulting directly from the negligent acts of the defendants. It is not asserted that such defendants are severally liable for separate and personal misconduct* and in separate and different amounts, although that is the reasonable inference from the facts stated in the complaint, but demands judgment against all and.against each for the full amount claimed.”

It- will first be necessary to .examine the complaint in this action to see how far it resembles the complaint thus described in the action above referred to. The. complaint in question first alleges the incorporation of the bank and the business it carried on under such incorporation; that the government and management of the association was committed to-a board of directors, who had provided bylaws as to how and .in what manner the business should be carried on; the fact that the defendants had been directors during the periods designated and had accepted the said office and the trust reposed in them, and thereby had and took upon themselves the duties and responsibilities of the office of directors of' the said corporation.. And the complaint then alleges" various acts of the defendants which it is alleged were either negligent or improper, and which were alleged to be a violation of the duty that such "directors owed to the bank, with a general allegation that the said directors had utterly failed and neglected to perform their official duties as such directors, and did not give proper care and oversight, to the affairs of the bank, and did not administer such affairs in an. honest, careful and prudent manner, but, on the contrary, negligently suffered'and permitted the money, property and effects of the bank to be stolen, wasted and squandered; that they did not keep correct books of account of the business and transactions of' the said bank, but permitted the accounts to be falsified by false and deceptive .entries; that they suffered and permitted various persons and 'corporations, who were insolvent and irresponsible, to overdraw their ■accounts to a large amount, "without security, whereby large sums of money were lost by the bank; that they did not elect nor employ ‘honest .and competent-persons as officers of the bank, .but, on the .-contrary, elected, employed and kept in office persons who were dishonest and unfaithful in the discharge of their duties* and who were incompetent to discharge such duties; that such directors did negligently pay to themselves and other stockholders dividends at times when there were no profits arising from the business of the- bank ;■ that they negligently and unlawfully made-loans to themselves who were directors of the said bank to an amount exceeding in the aggregate one-third of the capital stock of the bank, and carried upon the books of the bank as available assets, promissory notes and other securities which they well knew were of no value; that by reason of the negligence and misconduct of the directors as before stated, the depositors and stockholders of the bank have' sustained damage in.a large amount; and that the assets of the bank will not ■be sufficient .to pay the amount of the claims of the . depositors and creditors in full, nor to pay anything to the stockholders of the bank; and that such deficiency arises from the negligence and improper conduct of the defendants and others thereinbefore named, as directors and trustees of the said bank. Then follows the prayer for judgment which is as follows: “ Wherefore, the plaintiff demands judgment that the damages which the North Fiver Bank, in the city of New York, its depositors, ■ stockholders and other creditors, have sustained by reason of the matters and things heretofore stated and set forth, may be ascertained and determined, ■ and¡ that the defendants and the representatives of those who'-vere-direct-i ¡ ors of said bank may be adjudged to pay such damages, and thatdhe plaintiff may recover, collect and receive the amount so ascertained:', for the benefit of the creditors and stockholders of the bank, and that the plaintiff may recover the costs of this action.”

On the face of the complaint, this is an action, to recover damages for the misfeasance or non-feasance of the defendants as directors of - the bank. Calling it an action on behalf of the stockholders and creditors of the-bank, does not in any way change the nature of the cause of action. While all recovery by the corporation, or by its receiver, inures to the benefit of the creditors or stockholders of the corporation, it is still the cause of action that existed in favor of the corporation as an entirety that the receiver has authority to enforce; and it is the-misfeasance or malfeasance of the'defendants in their relation to the corporation that is the basis of the right of the receiver to sue. For, as before stated, this receiver has no right to enforce an action which is vested in the creditors or stockholders as such, but only the cause of action that had vested in the corporation.

The learned counsel for the plaintiff calls- attention to three points of difference revealed by a comparison of- the complaint in this action with the complaint 'in the O’Brien case. The first is, that in the. O'Brien ease all of the defendants had been directors, while in the case at bar some of the defendants are the personal represent-; atives of deceased directors. Second, in the O'Brien case there are no allegations equivalent to those contained in the 33d, 34th and 35th paragraphs .of the complaint. And, third, that in the OBrien case the plaintiff demanded judgment against each of the defendants. for a stated sum of money, while in the case at bar the. plaintiff alleges that, the depositors and stockholders of . the bank have sustained damage to a large amount, and asks, judgment that the damage which the bank, its depositors, stockholders and creditors have ' sustained may be. ascertained and determined, and that the defendants may be adjudged to pay such damages, and that the plaintiff may recover, collect and receive the amount so. ascertained for the benefit of the creditors and stockholders. No stress is laid ¡upon the first point of difference, and it is clear that it is not material, as the fact that a defendant is executor or administrator of a deceased wrongdoer cannot give a court-of equity jurisdiction where the nature of the claim against the deceased was of purely legal character.

As to the allegations contained in the 33d, 34th and 35 th paragraphs of the complaint, it is difficult to see upon what principle they give a different character to the cause of action. The 33d paragraph of the . complaint alleges that the plaintiff has, since his appointment as receiver, disposed of and realized upon the assets of the. bank, has paid sixty per' cent of the claims, of the creditors of the bank, and has realized all that can be realized from the assets-thereof, and that the deficiency of assets to pay such creditors arises from the negligence and improper conduct of. the defendants and others named, directors- and trustees of the bank. The 34th paragraph states that the plaintiff has been authorized by the court to bring this action as receiver against the above-named defendants. And the 35th alleges that some of the creditors of the. bank have •requested the plaintiff -to commence an-action against the. , directors and trustees -of the. bank to hold them liable for tlieif negligence and improper conduct as directors. None of these allegations shows any reason why the interposition of a court of equity is necessary to give to the plaintiff as receiver Of the bank any relief that he could not - obtain in an action at law against defaulting directors.. The fact that-the receiver, had been unable to, realize more.than sixty per cent of the claims of the creditors of the bank would not give the receiver or the bank that he represents any cause of action against the directors. If the malfeasance or misfeasance of the directors had injured the bank, it is entitled to recover, whether the recovery would go to the creditors or to the stockholders. The corporation was as much injured by the wrongful acts of its directors if it was solvent as if it were insolvent, and it is for this injury to the property of the corporation that the receiver can maintain an action, and not for an injury to its creditors or stockholders as distinct from the corporation. No fact is alleged which would give to the receiver a right to recover from the directors the debts due to the bank for distribution among its creditors, as distinct from the cause of action that existed in favor of the bank because of the malfeasance or misfeasance of its directors. The fact that the court authorized the receiver to bring this action certainly does not determine the nature of the action when brought, or the liability of the defendants to respond to the demands of the receiver. And the request of some of the creditors to bring this action Would not vest the receiver with any additional cause of action to that which he already had as-representing the bank.

We come, therefore, to the question as to whether or not the difference in the demand for judgment stamps this action as one different from that of O’Brien v. Fitzgerald (supra). It will be noticed that in this case the judgment that the plaintiff demands is a judgment for a sum of money. There is in this complaint, as in the O’JSrien complaint, no allegation that a discovery is requisite to the completeness of the remedy, nor is there any allegation that an accounting is necessary to ascertain the damages. The pleader has not seen fit to allege the amount of the damage that was occasioned by the wrongful or negligent acts, but it is nowhere alleged that such damage is incapable of being ascertained by the ordinary methods of a trial by jury. In every action to recover for unliquidated damages it is the province of the jury to ascertain the amount of the damages sustained in consequence of the acts complained of, and upon such damage being ascertained the verdict follows, and whatever recovery the plaintiff could obtain in this action from the directors would have to be applied by him, as receiver of the bank, according to law and would not depend upon the form of the judgmént. . We fail to see how this prayer for judgment can be said to be for equitable relief. No accounting is demanded, no discovery is demanded; the relief asked for is the same relief that is asked for in every action to recover unliquidated damages, i. that the damages be ascertained, and that when ascertained the plaintiff have judgment against the. defendant for them. It seems to us in. determining this question ■ that we must come down to the nature of the acts of the defendants for which relief is sought.

When'a trustee or an .agent, having possession- of his principal’s money, has committed any act in relation to it by which a court of equity can compel him to- account for the specific- money, the principal or cestui que trust has a right of action for such an accounting. Such a right of action depends, -upon the receipt by the trustee of the money of his cestui' que trust, or his interference with it, or some act of his which justifies a court of equity in calling him to account for the money that has been misappropriated or lost by the act -of the trustee. It is based upon the control that the trustee had over the money or property of the cestui que trust,, and that 'in consequence of some misfeasance or malfeasance of the trustee that money has been lost or is not in the possession of the trustee so that lie can account for it. And if a. trustee óf a bank should receive the money of the bank, use it as his own, or in any way interfere with it, so that in consequence of his wrongful act it was lost to the bank, the bank would have an action in equity to compel him. to account. On the other hand, when the bank appoints its trustees or directors to manage • its affairs, who appoint its officers and agents; and the. trustees neglect their duty and knowingly- appoint incompetent men as officers, and negligently, permit such officers to make injudicious or improper loans of the bank’s money, without the supervision required by them because of their position, .the foundation of the liability of a director is different. In a- suit tó recover for such negligence or wrongful performance of duty he is not chargeable with the sum received or paid -out or -lost for which he is compelled to 'account, but he is,.chargeable for the direct injury to the bank which results from his negligence in'not properly performing the duty that he undertook to perform. The rules of law'that are applied to the enforcement of these, distinct liabilities are different. The measure of damages is different, and the relief granted is distinct. In one case the director or trustee would be charged with the amount that he has received, and compelled to account for it. That would be an accounting in equity. In the other the neglect or wrongful act of the director is proved, with the consequences that have flowed from such wrongful act, and the jury are then directed to ascertain the damage resulting to the corporation from the wrongful or negligent act; and such an action is one at law in which the defendant is entitled to a trial by jury.

In this complaint this demurring defendant is not alleged ever to have received from the bank any of its money or property or in any way to have interfered personally with the property of the bank. There is no sum of money with which ■ he is chargeable and for which he must account. He is asked to respond in damages for certain negligent or wrongful acts which have resulted in other people’s obtaining the money or property of the bank, not because such money or property was received by him as trustee, but because other people have been allowed to get possession of the property of the bank in consequence of his neglect properly to perform his duties and thus prevent it. It is not disputed that when the relation of trustee and cestui qtte trust or principal and agent exists,, the principal or the cestui que trust may call his agent or trustee to an account for the property in the hands of the agent or trustee which had been misappropriated or lost by his negligence. But to sustain such an action there must be some allegation showing the necessity' of an accounting, or showing that a resort to a court of equity is necessary to give the plaintiff the relief to which he is entitled. Nothing of the- kind is shown in this complaint. No accounting is necessary. Conceding all the facts as alleged, there would be no sum of money to which these defendants or either of them would be held liable to account. It is a pure action for damages for the negligent and wrongful acts of certain officers of the corporation, and in such an action the defendants are entitled to a trial by jury, and no accounting or other equitable relief can be necessary or proper.

It follows, therefore, that the first ground of the defendant’s demurrer was well taken and should be sustained. This conclusion renders it unnecessary to consider the other grounds of the defendant’s demurrer. We may say, however, that we do not consider that the complaint alleges- any violation of a statutory obligation on the part’of the directors, or any cause of action for a penalty, but is based' wholly upon a liability for the wrongful and negligent acts of the' defendants as directors of the bank.

We think, therefore, that the judgment below should be reversed' and judgment entered sustaining the demurrer of the defendant on the ground that there is a misjoinder of causes of action, there' being joined a cause of action-against this demurring defendant for negligent and wrongful acts committed by-him as director, together witli an action for damages against the- other defendants for damages sustained by reason of the acts of such other directors while this demurring defendant was not a director of the bank,' with costs to the defendant, with leave to the plaintiff to amend the complaint within twenty days after the service- of the interlocutory judgment, upon payment of such costs.

Yak Brunt, P. J., Williams and O’Brien, JJ., concurred.

Judgment reversed and defendant’s demurrer sustained, with costs to the defendant in this court and in the court below, with leave to plaintiff to amend within twenty days on payment of such costs, -