Smith v. Rathbun

20 N.Y. Sup. Ct. 47

Opinions

Boardman, J.:

The questions arising upon this appeal involve, first, the nature and effect of the amendment to the complaint and the power of the referee to allow it, and, second, the regularity and validity of the demurrer. The question as to the frivolousness of the demurrer cannot be considered here. That has been passed upon by the Special Term, and its decision is clearly not appealable. (Dabney v. Greeley, 12 Abb. [N. S.], 191.)

It is clear that the referee had power to allow the amendment in either of two cases: First, if it was to meet an immaterial variance between the pleadings and the proof (Code, §§ 169, 110); second, if it did not change substantially the cause of action. (Code, § 113.) To decide whether the amendment falls within these cases we must consider the nature of the complaint. The gist of the complaint is, that the defendants “ negligently permitted and allowed ” the president to do the wrongful and fraudulent acts set forth, “ and aided and countenanced and assisted him in so doing,” by reason whereof the plaintiffs were damaged in their property. It alleges, therefore, both negligence and fraud. Now we might consider both of these allegations as being, in effect, but one cause of action; and this seems to have been the view taken by the court in the decision of the former demurrer. (66 Barb., 402.) It is there said “ the acts set forth in the complaint are fraudulent acts.” And again, “ I am also inclined to hold, that when directors * * * knowingly and in violation of their duty commit fraud, * * * or knowingly allow it to be done by one or more of their associates or chosen officers, they become answerable mdivicfooally to stockholders or other beneficiaries of the fund, on the basis of fraud.” It is plain, I think, from this language, that while the com-t puts the responsibility on the basis of fraud, it means by “ fraudulent acts,” not merely acts fraudulent per se, but also, willful negligence, in permitting and allowing such acts. I do not think, therefore, that the decision will bear the construction put upon it by the defendants’ counsel, viz., “ that a part of the directors of a corporation may” be sued by the stockholders for fraud, but not for negligence. Whether the acts complained of were fraudulent or only willfully or knowingly negligent, the gist of the allegation is, that they were wrongful, tortious acts, based upon fraud, and for which the guilty person was responsible in damages. But suppose that these are separate causes of action; they were none the less alleged in the complaint before the amendment was made. The most that can be said is, that they were not properly separated; and that the cause of action for negligence was defectively and incompletely stated. It cannot be said that it was not stated at all. Now the amendment was made to remedy this defect, to complete and fill out the cause of action which the plaintiff intended and endeavored to allege, but did not allege in full. There was no new cause of action alleged nor any radical change made in the issue presented. It follows, therefore, that this amendment might be allowed, either as. an allegation which did not change substantially the cause of action, or as an amendment to meet a variance between the plead ings and the proofs that plaintiffs expected to introduce. The amended complaint could have been met on the trial by a corresponding amendment to tbe answer not introducing a new defense, thus effectually protecting defendants’ rights, and the trial could have proceeded. But if defendants wer’e taken by surprise or were misled to their prejudice, they had a remedy, viz., to make proper proof of that fact, and thereupon they would have been 'entitled to an adjournment and upon application to the court, to the privilege of answering or demurring. Such proof is indispensable. Without it no variance will be deemed material. (Catlin v. Gunter, 10 How., 315; S. C., 11 N. Y., 368.) No such proof was made in the present case.

But defendants claim that this was not a case of variance at all. They do not rest this claim upon the ground that the cause of action is unproved in its entire scope and meaning, so as to be deemed a failure of proof under section 111 of the Code, but upon the ground that no proof was made upon the trial that Mr. Benjamin was a director. Evidence, however, was repeatedly offered to show that Mr. Benjamin was a director, and it was excluded by the referee because the fact that he was a director was not alleged in the complaint. It was to meet this state of things that the amendment was made. The referee was not obliged to wait until all the evidence was in before allowing the amendment; he could make it also before the evidence began, so as to make the complaint conform to the proofs the plaintiffs proposed to introduce. Such an amendment was made in Therasson v. Petersen (22 How., 98), and the court, on appeal, held that it was proper.

If the foregoing views are correct, the defendants had no right to demur arising fi’om the nature or effect of the amendment. It introduced no new cause of action ; it did not change substantially the issue involved, and it did not surprise or mislead the defendants to their prejudice. This conclusion is supported by the case of Therasson v. Petersen (ante), In that case the answer;was amended on the trial to meet the proofs defendants expected to introduce. Plaintiffs made no proof of surprise or prejudice, but merely proposed to demur to the amended answer on the ground of insufficiency. Leave to demur was refused," and upon appeal, the General Term sustained the refusal.

But it is said that the amendment was “ in matter of substance,” and that under 2 Revised Statutes (Edm. ed., 442, § 2), the defendants were entitled to answer, and by implication, to demur. This provision of the Revised Statutes is, no doubt, still in force, but it must be construed in connection with the subsequent provisions of the Code. The cases cited by defendants’ counsel do not sustain their position. In Harriott v. Wells (9 Bos., 631) the judge at Special Term says: “ the right to answer amendments under the chancery system was absolute,” but speaking of the practice under the Code, he says: “ If the variance was immaterial no amendment was necessary. If made under section 110 of the Code no amendment was necessary or .proper. But if, under section 113, the amendment substantially changed the claim, the aiiiendments were necessary and could only he allowed (if) at all by the court ” (that is, at the Special Term), “ and then a right to answer must exist.” (Rage 633.) That case was tried before a referee, and the amendment allowed by him substantially changed the claim. The complaint was on a sealed contract and averred a strict performance of all the conditions necessary to establish a cause of action. The proof showed failure in the performance of a condition precedent, and plaintiff gave evidence to show a waiver by defendants of this condition. The referee allowed plaintiff to amend by alleging this waiver; that is, he allowed him to allege a new parol contract, thus changing substantially the issue. Defendants asked to amend by setting up a new defense to this new issue, viz., the statute of limitations, whereupon the referee referred the whole matter to the Special Term. It is plain that the referee erred in allowing the amendment. He would have erred still further if he had allowed the new defense. But the Special Term allowed the new defense, and the General Term affirmed its decision. With this decision we have no fault to find. The Special Term has the power to allow a new cause of action, or a new defense, but a referee or the court, on the trial, has not. (Ford v. Ford, 53 Barb., 525.) In the case of the Union Bank v. Mott (19 How., 267; S. C., 11 Abb., 42), also- cited, the amendment inti’oduced a new cause of action. It was allowed by the referee, but his order was set aside by the court at Special Term. The court then, on motion, allowed the amendment to he made, but in the absence of cause shown, did not allow the defendants to answer anew or to demur. Tbe General Term, however, on appeal, allowed them to answer. These are the principal cases cited by defendant’s counsel in this connection. Instead of supporting his position they bear distinctly against it. If we are to construe the provisions of the Revised Statutes in question in accordance with these and the other decisions-under the Code, I think an amendment “in matter of substance ” must be taken to mean where there is a material variance, or a new cause of action alleged, or a substantial change made in the claim, and that even then leave to answer will be given only on application.to the Special Term. In the case of a trial before a referee there are still other reasons why a demurrer should not be allowed. It does more than introduce a new,defense; it changes the issue from one of fact to one of'law, strikes out the answer, and, in effect, vacates the order of reference, for there is no issue of fact left for the referee to try.

A question is made in this case, whether the referee actually gave the defendants leave to demur, and a mass of affidavits is introduced upon either side. Defendants claim that he did, at the same time that he gave leave to amend the complaint. This the plaintiffs deny. I am satisfied, upon examination of these affidavits, and from the stenographer’s report, that the ireferee intended to give and, as matter of fact, did give leave to demur. In view, however, of the conclusion arrived at, it does not seem to me of much inqportance. If he did not, the demurrer is clearly unauthorized. If he did, the conclusion defendants seek to draw, that, therefore, the demurrer is neither unauthorized nor irregular, and must be sustained, does not follow; for he exceeded his authority so palpably that his order must be disregarded. The same considerations dispose of the view that leave to amend the complaint was given, only upon condition that defendants should have leave to demur, and that the terms upon which the amendment should he granted were discretionary with the referee and not subject to review. But the discretion of a court or referee is not purely arbitrai’y. It must be regulated by legal principles, and it can be exercised only within the limits prescribed. When it is said that a referee may impose terms in his discretion on allowing an amendment, it merely means that he may do so within his lawful powers. If he exceeds his authority and imposes terms he has no lawful power to impose, it ceases to be a matter of discretion, and his mistake may be corrected.

Have tbe plaintiffs mistaken their remedy? Defendants insist tbat they should have appealed from tbe order of tbe referee instead of moving to set aside tbe demurrer. There is no doubt tbat an appeal would be tbe most regular course to take, but it is not tbe only course. In Ford v. Ford (53 Barb., 525), it is held, tbat where an order is made by a referee which be has no authority to make, tbe aggrieved party is not restricted to an appeal for redress, but is entitled to a more expeditious and less expensive mode, viz., be may move, at Special Term, to set it aside. Tbe same reason given applies in the present case, and I see no good cause why the plaintiffs should not be allowed to move to strike out tbe demurrer, more especially as it is in effect tbe same as moving to set aside tbe order. It is asking tbat tbe order be disregarded. At least it does not seem to me to be so irregular as to justify us in bolding tbat tbe motion ought to have been denied on that account.

Tbe objection tbat plaintiffs ought to have returned tbe demurrer to defendants’ attorneys is not well taken. Rule 26, cited by counsel, has no application whatever. Tbat has reference to pleadings or other papers objected to either because they are not folioed or not legibly written, or because they are letter-press copies; and tbe provision is tbat they must be returned within twenty-four hours or tbe objection will be considered waived. Tbe case of Rogers v. Rathbun, (8 How., 466), also cited, held tbat an amended complaint which tbe defendant proposed to disregard ought to have been returned, or notice given to tbe plaintiff tbat defendant intended to disregard it as unauthorized. Now, in tbe present case, tbe plaintiffs gave notice on tbe trial tbat they considered tbe demurrer as unauthorized, and again, immediately upon tbe receipt of tbe amended demurrer, plaintiffs’ attorney wrote to defendants’ attorney tbat be should disregard it as. unauthorized. Besides, I think tbe plaintiffs bad a right to elect'whether they would return it and treat it as an absolute nullity, or move at Special Term to strike it out. (Fredericks v. Taylor, 52 N. Y., 596.)

It is not necessary to consider defendants’ preliminary objections to tbe affidavit of tbe referee. Tbe only question affected by it, viz., whether leave to demur was given by tbe referee, has been decided in defendants’ favor.

In any view of tbe ease I think tbe demurrer is irregular as to the defendant Rathbun. The oi’iginal complaint alleged that he was a director, and the amendment did not and could not affect the cause of action alleged against him. It affected only the executors of Benjamin. If the considerations hereinbefore stated are just, the demurrer was equally illegal and invalid as to the executors of Benjamin. The amendment allowed to the complaint was not of a character to change the cause of action. It was not a material variance. The referee had, therefore, the power to allow it. But it did not follow, nor was-it true, that the defendants, for that reason, had the right to answer or demur of course. The referee had not the power to grant the defendants that piúvilege, and no case was made by virtue of which they could apply to the court therefor.

We conclude, therefore, that the order of the Special Term should be reversed, with ten dollars costs and expenses of printing, and the demurrer to the complaint, as amended on the trial, should be stricken out as irregularly and improperly interposed, with ten dollars costs of the motion to plaintiffs.