PEOPLE v. BRUFF

PEOPLE v. BRUFF. N. Y. Supreme Court ; Ulster Special Term, November, 1880. Mismanagement of Corporation by its Officers.—Grounds for their Removal. —Collusive Action.—Action by People after Action by Director. An action may be brought in the name of the people, against a corporation and its officers, on the ground of mismanagement by them, for the purpose of compelling them to account, and for their removal and for the appointment of a receiver. When the president of a railroad company takes an assignment of the contract for the construction of the railroad, obtains all the securities under pretense of paying the nominal contractor, and as chief engineer, makes to himself, as contractor, certificates for work done, and then as president pays himself many hundred thousand dollars in advance of what the original contractor was entitled to receive under the contract, ample cause is shown for the appointment of a receiver, and the duty of the attorney-general to bring an action becomes imperative. Officers of a corporation, who have defrauded it, cannot, by causing a suit to be begun by one of their confederates, and having another confederate appointed as receiver, prevent the attorney-general from bringing an action against them and their company, and his having a receiver appointed therein. Thus, while legal proceedings were being threatened, one of the directors of an elevated railroad began an action against the company and its officers, alleging mismanagement, &c., and caused another director to be appointed receiver, but both directors had been such during the mismanagement, and had agreed with the guilty officer to resign whenever he should request. Seld, that these proceedings would not prevent the prosecution of a suit by the people, and the appointment of a new receiver in that action. It seems, that an action brought by a director to recover corporate property from the officers, will not, even though brought in good faith, be a bar to one brought by the State, in which the officers can be removed and complete relief granted. No rule of court can modify a statute. Motion for a receiver. This was an action brought in the name of the People of the State of New York against W. Fontaine Bruff, W. Hawkins Bruff, Harry Y. Bruff, Edward S. Keeler and Richard Gr. Phelps, as directors and officers of the Brooklyn Elevated Railway Company ; The Brooklyn Elevated Railway Company, Alfred Wag-staff and Richard Gr. Phelps personally. Wagstaff and Phelps had been previously appointed receivers of the company in an action brought by Keeler. Further facts sufficiently appear in the opinion. S. W. Knevals, Ashbel Green, George W. Wingate and E. Lauterbaeh, for the motion. Thomas M. North, for the receivers. Howard H. Morse, for the officers and directors, and Augustus Schoonmalcer, opposed. See note at the end of this case, and compare next case. [MAJORITY — Westbrook, J.] Westbrook, J. The application for a receiver and an injunction in this action was made, and the questions involved therein fully argued, three days since, but the pressure of other official duties prevented an immediate examination, and the continuance of such pressure precludes as full a discussion of its merits as would otherwise be attempted. The Brooklyn Elevated Railway Company was originally incorporated by a special act of the legislature of this State, passed May 26, 1874 (chapter 585 of Laws of 1874), which original act of incorporation wasa amended in 1875 (chapter 422 Laws of 1875) and in 1879 (chapter 350 of Laws of 1879). By its charter the said railway company was “authorized and empowered to construct, maintain and operate an elevated railway between the proposed terminus on the Brooklyn side of the East River Suspension Bridge and Wood Haven, in the town of Jamaica, county of Queens and State of New York,” the route between such points being designated, subject to an alteration thereof by the common council of the city of Brooklyn. The complaint charges official misconduct and waste of the property of the company by the officers thereof, W. Fontaine Bruff, W. Hawkins Bruff, Henry V. Bruff, Richard Gr. Phelps and Edwin S. Keeler, and asks, 1st: That such officers, they being defendants in the action, should be compelled to account for their official conduct in the management of the corporation and its property. 2d. That they should also be suspended from their offices. 3d. That the corporation and the said officers should be enjoined from receiving any debt or demand due to the railway company, and from paying out or transferring any money or property belonging to it. 4th. That a receiver or receivers of the property of the defendant, the Brooklyn Elevated Railway Company, be appointed by the court, with the usual powers of receivers in like cases ; and, 5th. That the plaintiffs shall have such further or other relief in the premises, as to the court shall seem just, together with the costs of this action. The present motion is for an injunction and receiver, and is brought to a hearing upon an order to show cause, granted on the 30th day of October, 1880. In the disposition thereof, the following points will be considered: 1st, The power of the court to grant the relief asked; 2d, the facts proved ; and, 3d, the objections made to the present application. By sections 1781 and 1782 of “The Code of Civil Procedure,” the attorney-general, in behalf of the people of the State, may maintain an action “against one or more trustees, directors, managers or other officers of a corporation to procure a judgment .• . compelling the defendants to account for their official conduct in the management and disposition of the funds and property committed to their charge ; ” and “ compelling them to pay to the corporation, which they represent, or its creditors, any money, and the value of any property, which they have acquired to themselves, or transferred to others, or lost or wasted, by a violation of their duties ; ” and “suspending a defendant from exercising his office, when it appears that he has abused his trust; ” and for various other purposes, as are in said section 1781 specified. By section 1808 of the Code it is declared that the attorney-general ‘‘must bring an action” for the purposes just enumerated, and also for other purposes mentioned in such section, “if, in his'opinion, the public interests require that an action should be broughtand by section 1810, in an action brought, for the objects specified, by the attorney-general, the court has power to appoint a receiver of the property of the corporation. These provisions make it clear that the application is regular, provided the facts shown justify it. What is established ? The Messrs. Bruff and Keeler are now directors of the company. W. Fontaine Bruff was the president and chief engineer of the company, and the defendant, Bichard Gr. Phelps, was a director until a very recent day. On September 1, 1879, the railway Company executed a mortgage to The Farmers’ Loan and Trust Company of the city of New York, to secure bonds, of $1,000 each, to the amount of $3,500,000,. but by the terms of the mortgage and the’ bonds issued thereunder, the issue of such bonds was to be limited, and confined to three hundred and fifty bonds for each mile of said railroad. The contract for the construction of the railway bears date February 7,1879, and purports to have been made with Bobert B. Floyd Jones. By its terms the contractor was to be paid for each completed mile of road, by the issue and delivery to him of three hundred and fifty bonds of $1,000 each, and $500,000 of the Capital stock of said company, but the issue was not to be in advance of the completion of the road, unless the bonds were sold, in which case the proceeds were to be paid out no faster to the contractor than as the work-was completed. Prior to the actual execution of the contract' with B. B. Floyd Jones for the construction of the road, and on December 24, 1878, the said contractor had in writing assigned said contract to the defendant, W. Fontaine Bruff, then and afterwards the president and chief engineer of the railroad company, as the same was “set forth in letters and documents, dated from 11th to 24th Dec. (’78) inst.,” and after the actual execution of such contract of construction, and on the very day of the date thereof (February 8, 1879), the said Floyd Jones made another and formal assigment thereof to the said Bruff. Both assignments were to Bruff, as trustee, but who the parties interested were, if other than Bruff, does not appear. The interests of the corporation in the execution of the contract were intrusted to W. Fontaine Bruff, W. Hawkins Bruff, Harry V. Bruff, Richard G. Phelps and Edwin S. Keeler, and they also obtained all the stock and bonds of the company. Not a single mile of railroad has yet been built, but $1,203,000 of the mortgage bonds have been issued, also $225,000 of scrip bonds, and capital stock to the amount of $5,500,000, and obligations to issue and deliver stock to the amount of $1,500,000 more have also been delivered. In other words, after an expenditure of stock and bonds to the amount of $7,928,000, not a, mile of road is completed, and May 26,1881, by which date the structure must be finished under penalty of forfeiture of charter, is rapidly approaching. The contracts for the construction of the road purport to be signed by W. Fontaine Bruff, as president of the railway company, in its behalf, and by R. B. Floyd Jones, in his own. The certificates, under which hundreds of thousands of dollars have been paid to the assignee of the contract, W. Fontaine Bruff, are signed by himself thus, “ W. Fontaine Bruff, C. E., Engineer in Chief.” Many other facts are shown, but they will not be herein recited, as those which have been stated are sufficient to warrant action. When the president of a railroad company makes a contract with himself for the construction of a railway; when he obtains all the securities, stock and bonds under the pretense of paying the nominal contractor; when as chief engineer he makes to himself, as contractor, certificates of work done ; and then as president pays himself many hundred thousand dollars in advance of what the nominal contractor was entitled to receive under the contract for construction, ample cause is shown for the appointment of a receiver, and the command of the statute to the attorney-general that he “must bring an action,” becomes imperative. Now, what answer is made to the application % None of the facts herein detailed are denied. On the contrary, they are all admitted. But it is claimed, that Mr. Edwin S. Keeler, one of the defendants herein, had already brought a suit against the Messrs. Bruff, and The Brooklyn Elevated Railway Company, making similar allegations to those made in this action, in which Mr. Richard 0. Phelps, one of the defendants herein, was made receiver, and afterwards, on the petition of said Phelps, as receiver, Mr. Wagstaff was made a co-receiver with him, and therefore the present motion should be denied. Before dealing, with the legal questions which have been presented in connection with this objection, it is well to see who and what Messrs. Keeler and Phelps are. Edwin S. Keeler, though a director of said company, was an employee of his co=-defendant, Richard Gr. Phelps, holding one share of stock therein, transferred to him by W. Fontaine Bruff. He was made a director on the second Tuesday in June, 1880, but Mr. W. Fontaine Bruff held his written agreement to resign as director whenever Bruff requested him so to do. Richard G-. Phelps was a director of the corporation during its gross mismanagement by Bruff, and was either cognizant of, or ought to have been, of the whole thereof. As receiver he will be called upon to investigate his conduct as director, and however much he may be disposed to act fairly, he occupies the singular, and impossible position of representing interests, as receiver, which are in direct antagonism to his own as an individual (McArdle v. Barney, 50 How. Pr. 97, 103, 104). Phelps had also signed a written agreement to resign as director, whenever Bruff demanded it, thereby evidencing his subserviency to the very party towards whom he professes to occupy a position of antagonism. Various parties had threatened legal proceedings, when Mr. Keeler instituted his action, with, as the facts fully satisfy me, the full consent, approbation and cooperation of Bruff. In that suit, as has been previously stated, Mr. Phelps, was made receiver, and afterwards Mr. Wagstaff was added. Of course, in making that appointment, the court was uninformed of Mr. Phelps’ and Mr. Keeler’s connection with the very frauds which they alleged, and in utter ignorance thereof, its order was made. Ought that order to be a bar to this application ? It is true, that under section 1782 of the Code, Mr. Keeler, as a director of the corporation, could bring an action, not to suspend or remove a director, but to recover for the corporation the assets and property which its officers had wasted, but the attorney-general can also bring an action for that purpose, and for the additional one of suspending and removing directors. The action begun by Keeler can only afford partial relief at best, and though it was brought in good faith, and for the purposes it professes, which I do not believe, I should be loth to hold that it was a bar to the one brought by the State, which alone can grant complete relief. Is a remedial statute, passed for grave and salutary reasons, to be nullified by any such narrow construction as that on which this objection rests? Can it be possible that the officers who have defrauded a corporation, can, when they fear action by' the attorney-general, cause a suit to be instituted by one of their confederates, place all the property and assets of the corporation, by a formal order of the court, but made by a suppression of truth, into the hands of another confederate, and thus controlling all as much as ever, successfully defend an honest suit by the highest law officer of the State to protect honest creditors and shareholders? If this can be done, then justice is mockery, and laws are mere waste paper. Besides, section 1808 of the Code requires the attorney-general, as we have already said, to bring this action. Upon that duty no restraint or limitation whatever is put, and that cannot be a sound construction of another section of the same statute, giving permission to another person to bring an action for some of the same purposes, that makes one brought thereunder a bar to that which a high State official is imperatively commanded to institute. Buie 87 of this court is also cited in opposition to this motion. That rule was adopted prior to the present Code. The latter, as has been already shown, gives the court full power to appoint a receiver in this action, and no rule of the court, prior or subsequent, can modify the statute. Perhaps, if rule 87 were literally construed, as the principal place of business of the corporation is at No. 48 Wall street, New York city, the appointment of receivers in the Keeler action, which was in Kings county, was bad. There is no occasion, however, so to hold ; the rule does not abrogate the statute ; and any construction thereof which would permit a collusive receivership and a collusive suit, to bar a bona fide application by the attorney-general, will not be adopted, even though its language, literally construed, favored the objection more strongly than it does, and though the Code had not since been enacted. Very clearly, neither the spirit nor intent of the rule favors the defendants. It was adopted to promote justice, and not injustice; and it requires a substantial and honest previous appointment, to be a bar to a new application, and no fraudulent cover under the forms of law can prevent the recovery of a corporation’s property from the possession of dishonest officers thereof. No order is asked to remove receivers appointed in another action. What is demanded is an appointment in this action, and that relief must be granted. Which, whether those appointed in this, or in the other action, shall hold and take the property, is a question for another proceeding. A collusive suit, and a collusive prior appointment, cannot bar action looking to justice. The honest creditors must be protected, and such person or persons as they may nominate will be appointed for the trust. No reflection whatever is intended to be made upon Mr. Wagstaff. No complicity in past actions with the officers of the defendant corporation is shown, but he was appointed at their instance, and by their request, with the intent, probably, on their part, to give a color of fairness to their proceeding. If he is continued, he can only be with the consent of those who hold the honest obligations of the corporation, and by severing his connection with those with whom he is associated. Note on Corporation Litigation. Provisions of the Code of Civil Procedure, which took effect September 1, 1880, and govern actions commenced on or after that day, settle some questions previously open, and carry further than hitherto the statutory restrictions on the right of individual creditors, stockholders, and dissenting directors, to litigate on the conduct of corporate officers, or to conduct the necessary proceedings in case of insolvency. From the following summary of the statutory rules now in force, it will be seen that in general they contemplate that: A majority, or at least half of the directors or trustees, may have dissolution on petition without action. Dissenting directors or to'ustees may sue for an accounting, and to set aside or enjoin transfers; and for such purposes may sue in their own name or retain the attorney-general; but if removal or suspension of an officer is sought, they must retain the attorney-general. A stockholder who would enjoin an act ultra vires, or call the officers to account, must (unless he enlists a creditor as plaintiff), retain the attorney-general; or, in case of Ids inaction, must rely on the general power of courts of equity, to relieve stockholders (on the refusal of the directors to sue); a power which, though recognized by the statute only in section 1810, subd. 3, is not expressly taken away by the statute ; but the stockholder suing in his own name cannot have a receiver appointed if there is an officer empowered to hold the assets; and he cannot have an officer suspended or removed. A creditor with judgment and execution unsatisfied, may sequester the assets and compel satisfaction. So he may call the officers and transferees to account, and enjoin or set aside transfers; but he cannot have the corporation dissolved, or an officer suspended or removed, except through the attorney-general suing in the name of the State. The following analysis of the present statutory remedies should be premised by noticing that many of these provisions (all of them which aflect creditors’ and stockholders’ actions), are inapplicable to municipal or political corporations, and to literary or religious societies and academies (§§ 1804, 2431); and the further very important qualification that the remedy given in case of insolvency, &c., &c. (under Code Oiv. Pro. c. 15, tit. 2, art. 3), does not repeal or aflect other statutes as to dissolution of particular kinds of corporations, or enforcing individual liability (§ 1796). Visitatorial power over corporations, vested by any statute in a corporate body or a public officer, is expressly saved from the provisions of article 2 (§§ 1781, 1782), but this is a power very rarely resorted to in this country. Action by judgment creditor.] Where the object is to sequester the property of the corporation, and distribute the assets, so far as necessary "to pay its creditors (it being a domestic corporation), the action may be brought by a judgment creditor having- execution issued in the county where it transacts its general business or where its principal office is, and returned wholly or partly unsatisfied (§ 1784); and the court, but not a judge out of court, may grant an injunction against its collecting or paying out, pending the action, unless by leave of court (§ 1787), and may also appoint a receiver (§§ 1788, 1810), who may collect, preserve, and turn into money the assets (§ 1788), and may recover on unpaid stock, as on other debts due the corporation, as may a receiver in case of dissolution, as stated below. In this class of cases the creditor may, at his option, join as defendants, the stockholders and officers individually liable by law for the payment of his demand, so that their liability may be declared and enforced by the judgment. Id. § 1790. Or he may maintain a separate' action against them. Id. § 1791. The usual practice, however, is for the receiver to bring such actions. As to whether a receiver appointed in an action not brought by the attorney-general nor by leave of court after unsuccessful application to him, can set aside wrongful conveyances, compare §§ 1788, 1810; 1 L. 1880, p. 368, c. 245, § 1, subd. 3 (5). The pi'ovisions of the New Code, as to creditor’s actions (c. 15, tit. 4, art. 2), do not apply to these actions against corporations. § 1879. —for accounting; m- to avoid transfers.] Where the object of the action is to compel corporate officers to account for their management; to compel them to pay to the corporation or its creditors any value they have acquired or transferred to others, or lost or wasted by violation of their duties, or to set aside or enjoin an alienation of corporate property, in violation of a provision of law, or made ultra vires, to an alienee having notice of the purpose of the alienation (§ 1781, subd. 1, 2, 5, 6), the action may be brought by the attorney-general (§ 1782); or it may be brought by a creditor (Id.), or by a trustee, director, manager or other officer having a general superintendence of its affairs. Id. Courts of equity have heretofore sustained such actions by one or more stockholders, where the board refuse or neglect, on request, to sue, or where the majority are so implicated in the wrong complained of, and so persistent in it, that a request would necessarily be a useless form. The new statute does not expressly forbid a stockholder’s action (§ 1783), but read literally it forbids a receivership in such an action except where there is no officer empowered to hold the assets (§ 1810). An injunction suspending the general and ordinary business of the corporation, or the performance of duty by an officer of it, or suspending him from office, can only be granted by the court on notice. Godo Oiv. Pro. § 1809. The court may also enjoin corporate creditors from suing the defendants for the recovery of money (§ 1806), and may, by advertisement, require them to come in and prove their claims (§ 1807). Suspension or removal from office can only be effected by final judgment, in an action brought by the attorney-general (§ 1811). Reading the statute literally, a creditor, stockholder or officer, though suing by leave of the court, after omission of the attorney-general to sue, could not have judgment for suspension or removal of an officer. —for suspension or removal from office.] Where it is sought to suspend an officer from the exercise of his office, for abuse of trust, or to remove him therefor, and direct a new election (§ 1781, subd. 3, 4), the action must be brought by the attorney-general (§ 1783). The creditor, stockholder or officer, applying to the attorney-general in these classes of cases, must give security to indemnify the State against costs and expenses, and pay the attorney-general’s compensation as he would his private attorney and counsel (§§ 1986, 1808). —for dissolution.] Where the object is to dissolve the corporation (being a domestic corporation) and forfeit its franchises, on the ground that it has remained insolvent for a year (§ 1785, subd. 1); or has neglected or refused, for at least a year, to pay or discharge its notes or other evidences of debt (Id. subd. 3) ; or has suspended its lawful and ordinary business for at least a year (Id. subd. 3); or (having banking powers, or power to loan on pledges or deposits, or to make insurance), it has become insolvent or unable to pay its debts, or violated any provision of the act by or under which it was incorporated, or of any other act binding upon it (Id. subd. 4), the action may be brought by the attorney-general (§ 1876.) A creditor or stockholder, desiring such an action to be brought, must first apply to the attorney-general, with proofs of a cause of action, and wait sixty days; and if the attorney-general, for that tims, omits to commence an action, the creditor or stockholder then may apply to the court for leave to bring it. Tlie court, but not a judge, may appoint a receiver (§§ 1788, 1810), 'vko may collect, preserve, and turn into money the assets (Id.); and under this general power he may (as a common law receiver may, Dayton v. Borst, 31 N. Y. 435; affirming 7 Bosw. 115), sue subscribers for stock on their unpaid subscriptions, and the holders of stock not fully paid, upon their implied promise to pay the unpaid subscriptions (2 Barb. 291). In these classes of cases, if the action is by a creditor, and perhaps if it is on the relation of a creditor, but not, it seems, if it is by a stockholder, plaintiff may, at his option, join as defendants, stockholders and officers individually'liable by law for the payment of his demand, or sue them separately as a judgment creditor proceeding only for sequestration may (Id. § 1790, 1791). There seems no reason why the attorney-general, who has, by the new act, a priority of right to bring the action, should not, when he sues at the instance of a creditor, have the same power to join individual defendants; although the statute does not expressly include him. In these classes of cases the court, but not a judge, may grant an injunction, not only against receiving and paying out, but also against all exercise of corporate rights, pending the action, without leave _of court (§ 1787). ■—■ voluntary dissolution.] Where the object is to dissolve the corporation in the interest of stockholders, or on account of inadequate property, the only remedy is by petition, under sections 2419-2421, in which at least one-half of the directors must join. This remedy is allowable equally in case of insolvency. The powers of a receiver appointed in such a proceeding are defined by 3 B. 8. c. 8, saved from the repealing act of 1880, by L. 1880, c. 245, § 1, subd. 3 (5). If the action is by the attorney-general, security, on provisional remedies and other applications in general, is dispensed with by section 1990, except where otherwise specially provided. —for forfeiture of charter.) If the object is to annul the corporation and vacate the charter for fraud or concealment in obtaining the charter (§ 1797), or for violation of law, or forfeiture, surrender, or usurpation of franchise (§ 1798), the action must be by the attorney-general: and in this class of cases the court, but not a judge, may grant an injunction (§ 1803), and by final judgment may appoint a receiver. — to restrain usurpation.) Where the object of the action is to restrain the usurpation of corporate existence and franchise, it is to be brought by the attorney-general, with or without a relator {Code Civ. Pro. § 1949); and in this case an injunction pending the action may be granted (§ 1955). Where the object is to determine which of two classes, of persons are entitled to a franchise, the action lies by the attorney-general (§ 1954), but whether this applies to cases of the franchise of corporate existence, compare People v. Miner, 2 Lans. 396; People v. Tweed, 13 Abb. Pr. N. S. 25; People v. Ingersoll, 58 N. Y. 1; People v. Albany & Susquehanna R. R. Co., 57 Id. 161; rev’g in part 5 Lans. 25; 1 Id. 308; 7 Abb. Pr. N. S. 265. If the action is for relief, such as was formerly sought by information in the nature of quo warranto, it must be brought by the attorney-general (§ 1984), and if, on the information of a private person having an interest, the relator must give security, and compensate the attorney-general, as if his private attorney and counsel. For recent act authorizing the attorney-general to apply for the removal of receiver, see 1 L. 1880, p. 756, c. 537. As to the discretionary authority and control of the attorney-general over actions conducted by his consent by private counsel, see People v. Central Crosstown R. R. Co., 21 Hun, 476.