Wilson v. Brown

107 Misc. 167

• Court: New York Supreme Court
• Decided: May 15, 1919
• Status: Published

Opinion

Sears, J.

The Coats Manufacturing Company was a corporation organized under the Business Corporations Law of the state of New York, and its certificate of incorporation provided that the term of its exist-1 ence should he twenty years. The certificate of incorporation was filed in the proper offices in June, 1894, and the period of the corporate existence expired in June, 1914. At that time the Coats Manufacturing Company was solvent, and its assets were sufficient to liquidate its indebtedness,. and retire its outstanding capital stock. In June, 1914, when the corporation ceased to exist by limitation of its charter, the defendants Charles B. Hyslip, Mark B. Hyslip, Hiram A. Coats, Patrick L. O’Connor and Edward C. Brown composed the board of directors. Notwithstanding the expiration of the corporate existence, the business of the Coats Manufacturing Company was thereafter continued, stockholders’ meetings were held, and the defendants, other than those who were directors in 1914, as stated, were, between the date of the expiration of the corporate existence and the adjudication in bankruptcy hereafter mentioned, elected by the stockholders to be directors of the Coats Manufacturing Company, and acted in the management of the affairs of the Co-ats Manufacturing Company, so that after the expiration of the term of its corporate existence, provided for in the certificate of incorporation, and until its adjudication in bankruptcy, the defendants, as directors for all or part of said time, continued to conduct the business of the Coats Manufacturing Company as a corporation and in the corporate name. Each of the defendants failed, omitted and neglected to ivind up such corporation, or take any steps toward such purpose; each of them, during the period of his service, participated in the continuance of the business, but also failed and neglected to perform the duties imposed by law on directors; additional real estate was purchased; extensive borrowings occurred; assets of the corporation were assigned and pledged, and its real estate was mortgaged; dividends Avere illegally declared; assets of the corporation were unlavffully dissipated; great loss occurred in the continuance of the business, and insolvency resulted, and finally, on or about November 10, 1917, the defendants Mark B. Hyslip, Stanley F. Booth, George E. BroAvn, EdAvard C. BroAvn, Hiram A. Coats and James H. McEwen, being at such time the acting directors of such “ defunct ” corporation, at a meeting held on that day, and attended by all of said acting directors, except James H. McEavcii, by resolution duly adopted in Avriting, admitted inability to pay its debts in full, and willingness to be adjudged a bankrupt, and directed voluntary proceedings in bankruptcy to be instituted. On November-15,'1917, the Coats Manufac-| turing Company, as a corporation, was duly adjudicated a bankrupt at a term .of the United States Dis-j trict Court for the Westerh District of Noav York,| and the plaintiff was thereafter appointed the trustee in bankruptcy of the estate-of the Coats Manufacturing Company, and qualified,.and is uoav acting as such. This action has been authorized by the referee in bankruptcy. The complaint .also alleges sundry wrongful acts committed by one -or more of the defendants, but none by all of them, in the control and management of the business of the Coats Manufacturing Company, after the expiration of its corporate existence.

All of the demurrers may be considered together, and discussed under íavo main headings:

First. The Aralidity of the bankruptcy proceeding, and the authority of the plaintiff as a trustee in bankruptcy; and

Second. The question as to the misjoinder of the causes of action. "

First. The contention of the defendants is that in June, 1914, at the expiration of the period of the corporate existence, all corporate power was terminated; that after that date there was no artificial entity recognizable as a corporation, capable of being adjudged a i bankrupt, and that the Bankruptcy Court was, there- , fore, entirely without jurisdiction, and the plaintiff is ¡' a complete stranger to the transactions of the defendants, as well as to any rights which the creditors of the Coats Manufacturing Company business, or the stockholders of the Coats Manufacturing Company, may have against the defendants.

It is beyond question that it was the strict legal duty of the directors, who were such in June, 1914, to have then proceeded to wind up the affairs of the corporation. By the statute (Gen. Corp. Law, § 35), the then directors became trustees of the creditors and stockholders of the Coats Manufacturing Company, and had full power to settle its affairs, collect and pay 'outstanding debts, and divide among persons entitled thereto other property remaining after the payment of debts and necessary expenses. The legal title to the property and property rights of the Coats Manufacturing Company, which during the corporate existence had been vested in the corporation itself, upon the termination of the period of its corporate existence, became vested in those who were directors, in trust for the creditors and stockholders, and the stockholders thereafter were merely costuis que trust entitled to share ratably in the property after the payment of debts. Central City Savings Bank v. Walker, 66 N. Y. 424. No provision of the statute continued the corporate existence even for the winding-up proceedings. Section 221 of the General Corporation Law, which provides for the continuation of the existence of a corporation after dissolution, for the purpose of paying, satisfying and discharging its existing debts, obligations, etc., applies only to a dissolution before the expiration of the term of corporate existence limited in the certificate of incorporation. The directors, who became trustees under the statute in June, 1914, failed to act in accordance with the provisions of the statute above referred to, and the other defendants participated in the violation of the statutory obligations, and all of the defendants transacted business in all respects as though the Coats Manufacturing Company was still a corporation. The defendants contend that, under these circumstances, at the time of the institution of the bankruptcy proceedings, the Coats Manufacturing Company was not only not a corporation de jure, but was not even a corporation de facto, and that the adjudication in bankruptcy is nugatory and subject to collateral attack. Several cases are cited by the plaintiff of adjudications in bankruptcy of corporations after judicial or statutory dissolution. ' Matter of Munger Vehicle Tire Go., 159 Fed. Repr. 901; Matter of Moench & Sons Co., 123 id. 965, and White Mountain Paper Co. v. Morse & Co., 127 id. 643, are cases where there was a statute applicable, continuing' the corporation for winding-up purposes, and none of these cases is, therefore, strictly analogous. Matter of Cordova Shop, 216 Fed. Repr. 818, is the case of the adjudication of an irregularly organized corporation, a well-recognized type of de facto corporation. Matter of Adams & Hoyt Co., 164 Fed. Repr. 489, is a ease where dissolution by judicial decree was obtained by the corporation, in order to forestall bankruptcy proceedings, and the court held that it was ineffective for such purpose.

While these particular authorities are not, in my opinion, a sufficient basis for holding the Coats Manufacturing Company a de facto corporation at the time of the bankruptcy adjudication, the question remains as to whether the facts alleged in the complaint are sufficient to establish such de facto corporate existence. The necessary elements are thus stated in Methodist Episcopal Union Church v. Pickett, 19 N. Y. 482: “ Two things are necessary to be shown in order to establish the existence of a corporation de facto, viz.: 1. The existence of a charter, or some law under which a corporation with the powers assumed might lawfully be created; and, 2. A user by the party to the suit, of the rights claimed to be conferred by such charter or law. (United States Bank v. Stearns, 15 Wend. 314).”

In Von Lengerke v. City of New York, 150 App. Div. 98, the court said: “In order to establish the existence of a de facto corporation it is necessary to sIioav not only that there is a Iuav under AAdiich the corporation might be organized, and an attempt to organize it, but that corporate powers have been thereafter exercised. (Methodist Episcopal Union Church v. Pickett, 19 N. Y. 482; Emcry v. DePeyster, 77 App. Div. 65; Van Buren v. Reformed Church of Gansevoort, 62 Barb. 495).”

It is, doubtless, true that the dissolution of a corporation by the expiration of its corporate terms can be set up as a defense in an action brought by or against the corporation upon an obligation created during such term. Sturges v. Vanderbilt, 73 N. Y. 384. To this there is no theoretical or practical objection. But the present case presents an entirely different problem. The Business Corporations Law, under which this company Avas organized (Laws of 1892, chap. 691) proAdded that the certificate of incorporation should state the duration of the corporation, not to exceed fifty years. No public policy of the state Avas, therefore, infringed by the continuance of the user of corporate form up to the time of the bankruptcy. At the time of the expiration of the corporate existence, a statute was in force under which the corporate existence could have been continued. Gen. Corp. Law, §. 37. Although the certificate required thereunder was not filed, yet other papers were filed in the same offices where such .certificate would have been filed if the legal steps for an extension' of the corporate existence had been followed, for the capital stock of the Coats Manufacturing Company was twice increased after June, 1914. A corporate mortgage was executed. Stockholders’ meetings were held and dividends were declared and paid, and finally • a voluntary petition in bankruptcy was filed, and an adjudication followed.

If the analogy of physical death is sought to be applied to the expiration of the term of corporate existence of an organization which the law recognizes as a person, it is easy to answer that there is no greater difficulty in considering the organization as existing after its death than before its birth. And yet it is never necessary that the initial steps .should be taken in absolute accord with the statute to hold, the organization de facto existent. Such analogies are often misleading. Physical life with birth and death is an evidence of immutable natural law. Corporate life rests upon legislative fiat, and there is no reason to apply-such a doubtful analogy to such a case as this, where the same kind of acts, in so far as the corporate character of the same is concerned; were done by men similarly, .authorized by their.. associates after,, .as before, the limit of..the term of. the - corporation’s existence.

In Miller v. Coal Co., 31 W. Va. 836, where, after the termination of the period of the defendant’s corporate existence, the directors, instead of winding up the business, continued it, and in the course of such continued operation the plaintiff’s intestate was killed by negligence for which the defendant, if it existed as a person recognized by the law, was responsible, the Supreme Court of Appeals of West Virginia held the defendant to be a de facto corporation and responsible as such. The court there said: “ The principle, it seems to me, to be deduced from our statute and these authorities is, that a private business corporation acting and carrying on its corporate business in its corporate name, after its legal existence has ended by the expiration of its charter, must be held to be a corporation de facto; and that as such, so long as it in fact so carries on its business and contracts or incurs liabilities with or to third persons dealing with it as such de facto corporation, it may sue and be sued at laiv either in actions ex contractu or ex delicto, and it cannot defeat such action by alleging that its charter had expired, before the cause of action arose. Its directors and stockholders by failing to Avind up its business, Avhen the charter expires, as it is their duty to do under our statute, cannot relieve the corporation from liability for acts done in its name and during its actual existence as a de facto corporation. In order to relieve it from liability the corporation must have ceased to exist both in laAV and in fact. And consequently, >vhen it is sued as a corporation, a plea averring simply* that it has ceased to exist in law or as a legal corporation aat.11 be insufficient, but it must aver also, that it had ceased to exist' in fact,, at the- time the-alleged cause* of action arose. ” ...' .

For. these reasons;. T.anr of the opinion that the Coats Manufacturing" Company; when adjudicated a bankrupt, was a de facto corporation, and that the plaintiff, as its trustee in bankruptcy, has capacity to maintain this action especially against the defendants, each one of whom has acted as though a director, and has been instrumental in carrying on the organization’s business career which finally culminated in the voluntary bankruptcy proceeding.

Second. The other question raised is whether different causes of action are improperly united in the complaint. Whether the action is deemed one against trustees (Gen. Corp. Law, § 35), and those to whom property has been transferred, or is deemed one against directors under section 91-a of the General Corporation Law, the action is, in all events, one in equity for an accounting as to the business transaction of those occupying positions of trust. The nature of the action in either case is the same. If the defendants, Avho were directors at the time of the expiration of the corporate existence, are deemed to be sued as trustees OAving a duty to the creditors and stockholders under section 35 of the General Corporation Law, the other defendants are added as trustees ex maleficio, or as transferees of the trust estate to account for property over which they exercised dominion. In this vieiv of the case, all of the defendants united in an unlawful common purpose, to Avit: the carrying on of the business of the'Coats Manufacturing Company Avhen the statutes expressly provided that the business should be Avound up.- Such an action is single, and Avhat is said in Mabon v. Miller, 81 App. Div. 10, of an equ’ty action by a stockholder against the directors of a corporation is applicable: “ It is- no objection to the

complaint that the defendants may- not be all equally culpable or equally liable to respond in damages or otherwise to account for the property which has been misappropriated. The principle upon which such an action is based rests in the fact that the defendants occupy a fiduciary relation, and in the discharge of their duties represent the corporation. Their dealings in such relation have reference to the property and management of the same intrusted to their care. There may be many breaches, but they are of a single duty. There may be different trustees, but they deal with the same matter. There may be different degrees of participation in the disposition of the property, but the dealings are had with the property of the corporation, and the duty in such dealing is owed by the trustee to it; consequently, the act which furnishes the ground of action is the breach of duty, and an accounting is asked of the property affected by such breach, together with the damages which flow therefrom. The whole cause of action is, therefore, single, and the fact that all of the directors may not have acted at a given time or have been guilty of the same waste or involved in the same measure of damage inflicted upon the corporation is of no consequence. To the extent that they have been guilty of wrongful acts whereby property has been dissipated, for such acts and property they may be called upon to account, and variance in degree of acts, or culpability, or property wasted, or damage sustained, does not make different causes of •action. Equity lays hold of the entire transaction and is invested with power in a single equitable action to •submit each and every action of the directors to scrutiny, and award such judgment as is consonant with the facts and will remedy the wrong, and may determine therein the liability of each director for his culpable act. - (Bosworth v. Allen, 168 N. Y. 157; People v. Tweed, 63 N. Y. 194; Porter v. International Bridge Co., 163 id. 79.)"

This action, in my opinion, however, is rather to be considered one against the directors of a corporation (de facto to be sure, but none the less a corporation).

If this view is correct, section 91-a of the General Corporation Law is applicable, and the action is a single omnibus equity action against directors. In German American Coffee Co. v. Diehl, 86 Misc. Rep. 547; affd., 168 App. Div. 913, on opinion below, Mr. Justice Page, speaking of such an action, says:

“ It is then claimed in support of the second ground of demurrer, namely, for misjoinder of causes of action, that if the action be not one against the directors for an accounting in the strict sense, that each separate wrongful act constitutes a separate tort for which a separate action must be brought and no relief in any way partaking of the nature of an accounting in equity can be joined with any of the tort actions. This was clearly the law of this state prior to the enactment of the statute under which this action is brought. Gen. Corp. Law, § 91-a; Laws of 1913, chap. 633. An action for damages for the misfeasance or nonfeasance of a director or officer of a corporation was an action at law subject to the rules and restrictions .governing' such actions, and could not be joined with an action for equitable relief (Higgins v. Tefft, 4 App. Div. 62; O’Brien v. Fitzgerald, 143 N. Y. 377; Mutual Life Ins. Co. v. Gillette, 119 App. Div. 430; People v. Equitable Life Assur. Soc., 124 id. 714; Moran v. Vreeland, 81 Misc. Rep. 664). But by section 91-a, supra, a jurisdiction to entertain such an action in equity on behalf of the corporation or its representatives has been expressly conferred upon this court, with a provision for the separate. trial by jury, pursuant to section 970 of the Code óf Civil Procedure, of any issue of negligence which may arise in such an action,, if either party, should ■ apply'for it.- The effect of this statute is to. do . away -with- the distinctions recognized in the cases above cited between strict actions for an accounting of property actually received and for wrongful acts, and to authorize a single comprehensive action in equity in which the directors or officers of a corporation may be called to account for all of their acts while in office, whether the said acts consisted of the actual misappropriation of funds or were negligence or neglect of duty, resulting in damage.”

I am, therefore, of the opinion that the complaint states but one cause of action.

All of the demurrers are overruled with motion costs against each defendant demurring separately, with leave to each defendant demurring, on payment of said costs, to ivithdraw the demurrer and ansAver Avithin twenty days from the date of the service of a copy of the order or judgment overruling the demurrers.

Ordered accordingly. .