Singer v. Carlisle, 26 N.Y.S.
2d 172 (1940)
26 N.Y.S.2d 172
Supreme Court, New York County, New York,
Special Term.
SINGER et al.
v.
CARLISLE et al.
July 25, 1940.
Action by Bernard E. Singer and another, as
administrators of the estate of Rose M. Singer, deceased,
and others, suing on their own behalf and on behalf of
all other stockholders of the United Corporation similarly
situated, who may join in the action and contribute to
the expenses thereof, against Floyd L. Carlisle and others,
for damages for diverting underwriting business from
the United Corporation, and for eliminating the United
Corporation as a competitor and for recovery of dividends
allegedly paid out of the capital of the United Corporation
in violation of law. On motion to dismiss.
Order in accordance with opinion.
Judgment affirmed, 26 N.Y.S.2d 320.
West Headnotes (15)
[1] Corporations and Business Organizations
Time to sue; limitations and laches
In stockholders' derivative action against
directors and others for accounting for profits
allegedly diverted from corporation, such
of the defendants as were charged only as
coconspirators and joint tort-feasors, and
were not charged with receipt of profits, could
invoke six-year limitation statute and not ten-
year limitation statute. Civil Practice Act,
48, 53.
Cases that cite this headnote
[2] Corporations and Business Organizations
Time to sue; limitations and laches
A stockholders' derivative action for
accounting against defendants charged with
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receipt of profits allegedly diverted from
corporation was subject to six-year statute
of limitations and not ten-year statute
of limitations, where stockholders were
really seeking money damages at law from
defendants measured in amount of money
which defendants made and corporation did
not make. Civil Practice Act, 48, 53.
Cases that cite this headnote
[3] Corporations and Business Organizations
Time to sue; limitations and laches
A stockholders' derivative action against
directors and others for accounting, the gist
of which was improper diversion of business
from corporation, was an action for waste
governed by six-year limitation statute. Civil
Practice Act, 48.
1 Cases that cite this headnote
[4] Pleading
Construction in General
Where motion to dismiss was addressed
to pleadings and their sufficiency in law,
plaintiffs were entitled to have the complaint
taken at its face value and to the benefit of the
most favorable inferences that could be drawn
from complaint.
Cases that cite this headnote
[5] Corporations and Business Organizations
Nature of Relation
Corporations and Business Organizations
Stock ownership or membership in
different corporations
Corporations and Business Organizations
Fiduciary Duties as to Management of
Corporate Affairs in General
Corporations and Business Organizations
Director, officer, or agent of different
corporations
Directors, officers, and controlling
stockholders of corporation engaged in
business of underwriting securities in public
1
Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
utility holding and operating companies, must
make every effort consonant with good,
honest judgment to obtain for corporation
as much of the underwriting business as
possible and to make such field of activity as
profitable as it could be made, and must not
conduct themselves in a manner detrimental
to the interests of corporation, but need not
do anything detrimental to affairs of other
corporations of which they may be officers
and directors.
1 Cases that cite this headnote
[6] Corporations and Business Organizations
Controlling or majority shareholders and
minority shareholders in general
Corporations and Business Organizations
Right of shareholder or member to sue;
standing
Independently of statute, person in control of
majority of stock and of board of directors
of corporation occupies fiduciary relation
towards minority stockholders, and is charged
with duty of exercising high degree of good
faith, care, and diligence for protection of
their interests, and every act in his own interest
to detriment of holders of minority stock is
a breach of duty and a trust, which entitles
minority stockholders to plenary relief in
equity.
Cases that cite this headnote
[7] Corporations and Business Organizations
Engaging in competing business
Where fiduciary is engaged in business in
competition with his corporation, fiduciary
cannot actively use his position and power
over his corporation so as to prevent
corporation from seeking certain business in
competition with fiduciary.
Cases that cite this headnote
[8] Corporations and Business Organizations
Engaging in Competing Business
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Even though mere stock ownership without
management and control does not prevent
stockholder from competing with his
corporation, stockholder in position of
control cannot so exercise that power as to
cause his corporation's inability to purchase
that for which both are competing.
Cases that cite this headnote
[9] Corporations and Business Organizations
Majority and minority shareholders;
controlling interest
Corporations and Business Organizations
Engaging in Competing Business
Corporations and Business Organizations
Engaging in competing business
Directors and dominant factions of
corporation cannot by their acts and
control fail and refuse to attempt to
obtain certain business for corporation,
and cannot affirmatively prevent corporation
from competing with directors and dominant
factions for such business.
Cases that cite this headnote
[10] Corporations and Business Organizations
Allegations as to corporate right of
action
Corporations and Business Organizations
Plea, answer, or demurrer
In stockholders' derivative action against
directors and others controlling corporation
or directors, for damages for failure to attempt
to obtain certain business, complaint need
not allege that corporation was equipped to
handle such business and that corporation
would have obtained such business, but such
matters should be shown by directors and
others in defense.
Cases that cite this headnote
[11] Corporations and Business Organizations
Allegations as to corporate right of
action
2
Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
In stockholders' derivative action against
directors and others controlling corporation
or directors, for damages for failure to attempt
to obtain certain business, complaint should
state the specific transactions in respect of
which the directors and the others failed
and refused to obtain for corporation such
business.
Cases that cite this headnote
[12] Corporations and Business Organizations
Conflicts of Interest and Self-Dealing in
General
Corporations and Business Organizations
Director, officer, or agent of different
corporations
Directorship in two competing corporations
does not in and of itself constitute a wrong,
and it is only when business opportunity arises
which places director in position of serving
two masters and when, dominated by one, he
neglects his duty to the other, that a wrong has
been done.
1 Cases that cite this headnote
[13] Pleading
Particular causes of action
In stockholders' derivative action against
directors and others controlling corporation
or directors, for damages for failure to attempt
to obtain certain business, complaint should
separately state and number the alleged
wrongful acts complained of, where some of
such acts might be barred by six-year statute
of limitations. Civil Practice Act, 48.
Cases that cite this headnote
[14] Corporations and Business Organizations
Sufficiency of bill, petition, or complaint
In stockholders' derivative action against
directors and others to recover dividends
allegedly paid out of capital of corporation
in violation of law, complaint alleging that
corporation had no surplus in excess of
capital when dividends were declared and
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that dividends were paid while capital of
corporation was impaired, and that value of
assets of corporation remaining after payment
of dividends was less than aggregate amount
of debts and liabilities including capital, was
sufficient.
Cases that cite this headnote
[15] Corporations and Business Organizations
Allegations as to corporate right of
action
Pleading
Actions ex delicto in general
In stockholders' derivative action against
directors and others to recover dividends
allegedly paid out of capital of corporation
in violation of law, complaint need not set
forth figures of corporate assets, liabilities,
capital, and surplus, but such matters could be
obtained through bill of particulars.
Cases that cite this headnote
Attorneys and Law Firms
*174 Weinstein & Levinson, of New York City, for
Fannie Rickles, a stockholder of United Corporation.
Abraham L. Pomerantz, of New York City, for plaintiffs
in consolidated action.
Davis, Polk, Wardwell, Gardiner & Reed, of New York
City, for defendants J. P. Morgan et al.
Simpson, Thacher & Bartlett, of New York City, for
defendant George H. Howard.
Beardsley & Taylor, of New York City, for defendants
Floyd L. Carlisle and Roy K. Ferguson.
Bigham, Englar, Jones & Houston, of New York City, for
defendant Hendon Chubb.
Cravath, de Gersdorff, Swaine & Wood, of New York
City, for defendant Philip G. Gossler.
3
Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
LeBoeuf, Machold & Lamb, of New York City, for
defendants United Corporation and New York United
Corporation.
Opinion
SHIENTAG, Justice.
This is a motion by defendants to dismiss the second
amended consolidated complaint in a stockholders'
derivative action. Plaintiffs are stockholders of the United
Corporation which owns all the stock of its subsidiary,
New York United Corporation. Both companies were
organized with authority to engage in the business of
underwriting securities in public utility holding and
operating companies, and the United Corporation, in
addition, was authorized to engage in the business of
owning and holding such securities.
*175 The defendants are the directors of these two
corporations certain of the officers of the United
Corporation, the partners of J. P. Morgan & Co.,
the partners of Drexel & Co., Morgan, Stanley, Inc.,
Bonbright & Co., Inc., and two officers and stockholders
of the latter. All of the defendants other than the
individuals, as such, are engaged in the same underwriting
business in competition both with the United and New
York United Corporations.
The first cause of action alleges that the United
Corporation and New York United Corporation were
actually engaged in the underwriting business and were
fully equipped financially and otherwise to conduct such
business successfully on a large scale, and did actually
conduct various large scale underwritings successfully and
profitably; that in May, 1929, the defendant bankers
together with others caused to be organized a public
utility holding company known as Commonwealth and
Southern Corporation and underwrote 2,250,000 shares
of its common stock and 2,250,000 option warrants by
subscribing therefor at the price of $45,000,000; that the
defendant bankers and the then directors and officers of
the United Corporation caused it to buy and pay for 22.2%
of the securities and caused the United Gas Improvement
Company, of which the United Corporation had working
control, to buy and pay for an additional 11.1% thereof.
The complaint then alleges that the bankers, by virtue
of their control, fraudulently prevented the United
Corporation and New York United Corporation from
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making any effort or attempt to obtain this underwriting
business; that the defendant officers and directors of these
companies fraudulently neglected and refused to exercise
independent judgment to that end, all with the purpose
and effect of diverting the available underwriting business
and profits to the defendants' benefit; and accordingly an
accounting is demanded from the alleged wrongdoers.
In the second cause of action it is alleged that the
defendants Morgan & Co., Drexel & Co. and Bonbright
& Co., Inc., organized Niagara Hudson Corporation, in
June, 1929, and earned underwriting fees in which the
United Corporation and its subsidiary were fraudulently
prevented from participating.
In the third cause of action it is alleged that
during the year 1929, the United Corporation acquired
substantial blocks of the voting stock of various utility
holding and operating companies, to-wit, the United
Gas Improvement Co., Commonwealth & Southern
Corp., Public Service Corporation of New Jersey,
Niagara Hudson Power Corp., Columbia Gas & Electric
Corporation, Consolidated Gas Co., Electric Light &
Power Co. of Baltimore, American Water Works and
Electric Co., Consolidated Edison Co. of New York,
Lehigh Co. and Navigation Co., and Columbia Oil &
Gasoline Co.; that from 1929 to the present time these
corporations have obtained funds by the public issuance
of securities; that all of the aforesaid underwriting business
and large ensuing profits were obtained by J. P. Morgan
& Co., Drexel & Co., Bonbright & Co., Inc., and Morgan,
Stanley & Co., Inc., as underwriters, and the United *176
Corporation and New York United Corporation were not
permitted to participate therein.
Then follow the allegations as set forth in the first and
second causes of action with respect to the legal duty of
the directors and officers, the conflict of interest and the
fraudulent exercise of control by the bankers, and the
resulting inactivity of the directors to obtain the business
for United.
As a fourth cause of action the complaint alleges that
the defendants caused to be paid out of the assets of
the United Corporation as dividends on its preferred and
common capital stock during the years 193438 a total
of $19,704,553 when at the specific times mentioned it is
alleged the United Corporation had no surplus in excess
of capital and when its capital was impaired.
4
Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
As a fifth cause of action the complaint alleges that the
defendants caused dividends to be paid out of the assets
of the United Corporation on its preferred and common
stock during 193435 in the aggregate of $7,466,062, in
violation of the law of Delaware.
The defendants urge that the entire complaint fails to state
a cause of action because no facts are alleged giving rise
to any legal inference of a violation of duty on the part of
the defendants and of injury to the United Corporation. In
addition, the defendants urge that the first two causes of
action are barred by the six year statute of limitations, and
that the third cause of action should be made more definite
and certain and be separately stated and numbered so as
to permit the interposition of the defense of the statute of
limitations in so far as it may be applicable.
As to the first and second causes of action, it is
unnecessary to consider the defendants' motion in so far as
it seeks to dismiss such causes of action on the ground of
legal insufficiency. Both of those actions relate to profits
which, it is claimed by plaintiffs, the defendant bankers
made to the exclusion of the United Corporation, in 1929.
The question to be determined is whether the ten-year or
the six-year statute of limitations applies. Civil Practice
Act, 53, 48.
[1] Plaintiffs argue that since profits, in effect, are
involved and an accounting declared to be necessary,
the ten-year statute automatically applies. Whatever may
be the proper period of limitation as to the banking
defendants, those defendants who are not charged with
receipt of profits but charged only as co-conspirators and
joint tort-feasors are obviously entitled to invoke the six-
year statute.
[2] With respect to the defendants charged with the
receipt of profits, so called, it will be observed that what
plaintiffs are really seeking are money damages from
the defendant directors for their alleged negligence and
nonfeasance and money damages from the defendant
bankers measured in the amount of money which they
made and the United Corporation and New York United
Corporation thereby did not make. The claim, therefore,
is one for money damages limited by the six-year statute.
Cwerdinski v. Bent, 256 App.Div. 612, 11 N.Y.S.2d 208,
affirmed 281 N.Y. 782, 24 N.E.2d 475.
2017 Thomson Reuters. No claim to original U.S. Government Works.
*177 In that case plaintiff brought an action against
directors to recover alleged excessive bonus payments,
plaintiff setting up the usual averments of abuse of
trust, individual profit by fiduciaries, etc., and demanding
that the court determine the amounts paid under the
bonus plan in excess of eight per cent. of net earnings
of the corporation, after proper allowance for all
expenses including obsolescence and depletion but not
depreciation. The claim was made that an accounting
would be needed to ascertain this figure, and the court
at Special Term so ruled. The Appellate Division and the
Court of Appeals, however, held that, regardless of the
machinery that might be required, the essence of the claim
was for money damages to the extent of the excessive
compensation paid, and that the six-year statute governed.
To the same effect, see Dunlop's Sons v. Dunlop, 259
App.Div. 233, 18 N.Y.S.2d 818, 819. That action was
against directors for an accounting for profits alleged to
have been made by them. It appeared that the directors
individually contracted with a trustee in bankruptcy to
purchase for $80,000 a plant to be used by the corporation
for processing silk, and in June, 1931, sold this plant to the
plaintiff corporation at a price exceeding the price paid by
more than $15,000, which excess was alleged to constitute
secret profits derived by the defendants in violation
of their positions of confidence and trust. The Special
Term refused to apply the six-year statute on the ground
that unlawful profits may be unearthed more effectively
in equity; that it was the nature of the wrong rather
than the adequacy of the legal remedy which determined
whether the six or the ten year statute of limitations
applied; that where there was waste or negligence with
no personal profit to wrongdoing directors, the six-year
statute governed, but where the wrongful conduct of the
directors resulted in personal profit to themselves, the
longer period of limitations applied.
The Appellate Division, in reversing, said: What we have
in this case is a claim for the return to the corporation of
a loss suffered by the corporation. The amount of the loss
is the same as the amount of the so-called profit received
by the defaulting officers and directors. The wrong done
to the company is no different from the wrong done to
a corporation when an excess salary is paid to an officer
or when gifts are made to strangers or when bonuses are
wrongfully paid. The exact amount of the loss is known.
Though the pleader may call this loss to the corporation
a profit to the unfaithful fiduciary which ought to
5
Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
be accounted for, the pleader's characterization of the
resulting legal situation with the intention of producing
the application of a particular statute of limitations is not
binding in any way on the court. The wrong pleaded is
not a claim for profits in the sense in which that term is
properly used in stockholders' actions.'
See also Davis v. Cohn, 256 App.Div. 905, 9 N.Y.S.2d 881.
In the same way, any monetary benefits which the
defendants obtained to the exclusion of the United
Corporation represent merely the losses occasioned to the
corporation and the moneys which the corporation would
have received but for the defendants' improper neglect of
their duty to obtain the underwriting business. Despite
the fact that the defendants *178 would be entitled to
credit for their expenses in connection with the business
which the United Corporation subsidiary should have
had, the amount of the corporation's loss in respect to each
transaction is definite and ascertainable in an action at
law. In its nature and effect the claim is one for money
damages at law.
[3] There is no allegation that the subsidiary corporations
whose securities were underwritten were overcharged, nor
is there any allegation that the commissions were not
fair or that any directors as such improperly profited
therefrom. The gist of the alleged wrongdoing was
an improper diversion of business from the United
Corporation and New York United Corporation. This
amounts to waste and as such is barred by the six-year
statute of limitations.
In Lyon v. Holton, 172 Misc. 31, 14 N.Y.S.2d 436,
affirmed 259 App.Div. 877, 20 N.Y.S.2d 1015, the
defendant directors were charged with having committed
fraud by the initiation of a stock selling scheme and by the
purchase of the stock by the corporation in order to permit
the adoption of the plan to sell stock. While it was held
that the stock acquisition and selling were not fraudulent,
this court declared (172 Misc. page 35, 14 N.Y.S.2d page
440): In any event, the most that can be said is that it
constituted waste, mismanagement or negligence on the
part of the directors. That being so, any cause of action
based upon the alleged unlawfulness in the acquisition
of this stock in 1929 and 1930 is barred by the Statute
of Limitations. In such cases the six-year statute applies.
* * * Potter v. Walker, 276 N.Y. 15, 26, 27, 11 N.E.2d
335. There is nothing to show that the directors derived
any profits from the acquisition of the stock. Even if it
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be inferred that the directors received some benefit from
the stock acquisition, the character of the cause of action
would still remain one of waste or negligence and the six-
year period of limitation would apply. Cwerdinski v. Bent,
256 App.Div. 612, 11 N.Y.S.2d 208, 1st Dept.; see also
Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259, 11 N.E.2d
902, 114 A.L.R. 521; Carr v. Thompson, 87 N.Y. 160.
So, here, even if the banking defendants received some
benefit as a result of their interest in their banking
concerns, the action would still be one for waste or
negligence.
The authorities relied on by the plaintiffs do not conflict
with the rule here announced. In Goldstein v. Tri-
Continental Corp., 282 N.Y. 21, 24 N.E.2d 728, and
Potter v. Walker, 276 N.Y. 15, 11 N.E.2d 335 the ten-
year statute was held applicable where there were claims
of profits which were obtained by the directors in addition
to losses occasioned thereby to the corporation.
In the Goldstein case a differentiation was made between
the amount of recovery representing the loss to the
corporation and the amount of recovery representing
profits to the defendants over and above that loss, and it
was held that the ten-year statute governs only the latter
portion of the recovery. The court said (282 N.Y. page 30,
24 N.E.2d page 732):
The defendants contend that the allegations just quoted
state two distinct causes of actionone of tort for
the alleged losses and the other *179 to establish a
constructive trust of the alleged profits. All the securities
in question were purchased more than six years before the
commencement of this action. Hence the defendants say
that the six-year Statute of Limitations is a bar to what
they assert is the separate cause of action in tort for the
alleged losses.
The courts below have read this division of the complaint
as not stating any distinct right of recovery for injury to
the property of New Tri-Continental. They ruled, on the
contrary, that what is stated is a single cause of action for
an accounting to recover profits received by the defendant
directors of New Tri-Continental through Seligman &
Co., exceeding the losses to New Tri-Continental resulting
from the same transactions. The conclusion below was
that the ten-year Statute of Limitations is applicable.
Civil Practice Act 53. We agree that this was the right
interpretation of the face of the complaint. Potter v.
Walker, 276 N.Y. 15, 11 N.E.2d 335.
6
Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
In the instant case, as in the Cwerdinski and Dunlop cases,
the profit claimed to be due from the banking defendants
is not an amount exceeding any losses occasioned to the
corporation. The two items are identical. What plaintiffs
seek are the underwriting fees derived by defendants from
the issuance of the stock and option warrants of certain
corporations. What the corporations lost, the defendant
underwriters gained. The six-year statute of limitations
applies to the first and second causes of action and each
of them is accordingly barred.
[4] The legal sufficiency of the third cause of action is
challenged by the defendants. It should be emphasized
that this opinion does not purport to deal with the merits
of the plaintiffs' various claims. The motion is addressed
to the pleadings and their sufficiency in law. Plaintiffs
are therefore entitled to have the complaint taken at its
face value; in fact, they are entitled to the benefit of the
most favorable inferences that may be drawn from the
complaint.
The theory of the third cause of action is the elimination
by the fiduciaries of their cestui as a competitor. In
other words, plaintiffs charge that the defendant bankers
and directors of the United Corporation and New York
United Corporation, acting in concert with the defendant
bankers, made no effort to obtain the underwriting
business in connection with the issue of securities and,
further, that the defendant bankers, by virtue of their
domination and control over the United Corporation and
New York United Corporation, fraudulently caused the
latter corporations to use their influence and control over
their subsidiaries in order to induce such corporations
to award the underwriting business to the defendant
bankers. Having thus eliminated the United Corporation
and the New York United as their competitors for the
underwriting business of the subsidiaries, the defendants,
it is alleged, proceeded to utilize their domination,
control and influence in order to obtain this business for
themselves.
This conduct on the part of the fiduciaries if established on
a trial would amount to a violation of their legal obligation
to the corporations they were elected to serve and for such
violation they would have *180 to respond in damages
to the cestuis, namely, the United Corporation and New
York United Corporation.
[5] It must be borne in mind that the United Corporation
and New York United Corporation were also engaged
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in the business of underwriting securities of public utility
corporations. It was the duty of their directors and
officers to make every effort consonant with good, honest
judgment to obtain for those corporations as much of
the underwriting business as possible, and to make this
field of activity as profitable as it could be made. This
does not mean, however, that the directors and controlling
stockholders of plaintiffs were required to do anything
detrimental to the affairs of the other corporations of
which they were officers and directors. By the same token
they could not lawfully conduct themselves in a manner
detrimental to the interests of the United Corporation and
New York United Corporation.
[6] As pointed out by the court in Hyams v. Calumet &
Hecla Mining Co., 6 Cir., 221 F. 529, 537: * * * the rule,
independently of the state or national anti-trust statutes, is
fundamental that one in control of a majority of the stock
and of the directors of a corporation occupies a fiduciary
relation towards the minority stockholders, and is charged
with the duty of exercising a high degree of good faith,
care, and diligence for the protection of such minority
interests. Every act in its own interest to the detriment of
the holders of minority stock becomes a breach of duty
and of trust, and entitles [them] to plenary relief from a
court of equity.
To the same effect is the language of the Court of Appeals
in Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y.
185, 123 N.E. 148, 151: When a number of stockholders
constitute themselves * * * the managers of corporate
affairs or interests, they stand in much the same attitude
towards the other or minority stockholders that the
directors sustain generally towards all the stockholders,
and the law requires of them the utmost good faith.
The court in Hazzard v. Chase Nat. Bank of City of
New York, 159 Misc. 57, 287 N.Y.S. 541, 570, affirmed
257 App.Div. 950, 14 N.Y.S.2d 147, 282 N.Y. 652,
26 N.E.2d 801, further stated: So strict is the rule of
undivided loyalty to the beneficiary that the mere fact that
a trustee has an interest inconsistent with the interest of
his cestui, casts upon him the burdens of explanation and
justification.
In language peculiarly applicable here, Mr. Justice
Rosenman, in a learned and exhaustive opinion in
Blaustein v. Pan American Petroleum & Transport Co.,
174 Misc. 601, 21 N.Y.S.2d 651, 715, says: Where this
7
Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
fiduciary relationship exists, the duty of the trustee is to
manage the property and affairs of the corporation with
an eye single to the advantage of the corporation itself.
* * * In line with general principles of equity it was not
proper for the fiduciary to take these opportunities unto
itself, while at the same time it stayed the processes of its
subsidiary directed toward the same business ends. It is not
only a case of a fiduciary seizing business opportunities
of the cestui. There is the additional factor here that the
trustee at the same time kept its *181 dominant hand
upon the cestui, suppressing any attempt by the cestui to
go out and compete with the trustee.
This language almost paraphrases the situation claimed to
be present in the instant case. The gravamen of the third
cause of action, as already observed, is that the controlling
interests of the United Corporation and New York United
Corporation suppressed any attempt by the cestuis to go
out and compete with the fiduciaries. This is all the more
so in the instant case, where the companies, as here, were
engaged in precisely the same type of business and where
the opportunities were open to both. See Guth v. Loft,
Del. Sup., 5 A.2d 503; Irving Trust Co. v. Deutsch, 2
Cir., 73 F.2d 121, reversing D.C., 2 F.Supp. 971, certiorari
denied 294 U.S. 708, 55 S.Ct. 405, 79 L.Ed. 1243.
[7] [8] Where a fiduciary is engaged in a business
in competition with his corporation, he cannot actively
use his position and power over his corporation so
as to prevent the corporation from seeking certain
business in competition with himself. Even though mere
stock ownership without management and control does
not prevent a stockholder from competing with his
corporation, a stockholder in a position of control may
not so exercise that power as to cause his corporation's
inability to purchase that for which both are competing.
In re New York Rys, Corp., 2 Cir., 82 F.2d 739.
[9] It is charged that the directors here and the dominant
factions by their acts and control not only failed and
refused to attempt to obtain certain business for their own
corporations, in other words were guilty of inactivity when
they should have been active, but that they affirmatively
prevented the corporations from competing with them for
that business. This they may not do.
[10] It is argued by the defendants that no good cause of
action is pleaded in the absence of allegations that United
was as well equipped to handle the underwritings as the
defendants, and that the particular business obtained from
the named subsidiaries of the United by the defendant
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underwriters would have gone to United. Such allegations
are not required of the plaintiffs. The evil complained of is
that business was available but no opportunity was offered
to United and New York United to compete for such
business. That the defendants may show that in any event
regardless of competition they would have obtained such
business themselves is a matter of defense; it is not a matter
of affirmative allegation for the plaintiffs. That the door
was closed to them by wrongful domination and control
sufficiently spells out the cause of action.
[11] While the third cause of action generally is sound
in law, and the theory upon which it is based sufficiently
charges legal liability against the defendants, it fails to
incorporate certain essential allegations which may be
corrected upon amendment. There is no allegation, for
example, when the securities and what securities were
issued and that the same might have been underwritten
by United. The general allegations of conspiracy do
not supply this deficiency. The complaint should state
the *182 specific transactions in respect of which the
directors and officers under the defendants' domination
failed and refused to obtain for United the business
obtained for the defendants, and which was diverted by
defendants to themselves.
[12] Directorship in two competing corporations does
not in and of itself constitute a wrong. It is only when a
business opportunity arises which places the director in a
position of serving two masters, and when, dominated by
one, he neglects his duty to the other, that a wrong has
been done.
[13] The third cause of action alleges the commission
of certain acts beginning with the year 1929 to date.
Some of these acts may be barred by the six-year statute
of limitations. It is therefore necessary for the plaintiffs
separately to state and number the alleged wrongful
acts complained of in this cause of action so that the
defendants may be in a position to plead the statute as they
may be advised.
[14] [15] The fourth and fifth causes of action are
sufficient as matter of law. These actions seek to recover
from the defendants certain dividends paid out of the
capital of the United Delaware Corporation in violation
of the laws of New York and Delaware. See German-
American v. Diehl, 216 N.Y. 57, 109 N.E. 875, and
Quintal v. Greenstein, 142 Misc. 854, 256 N.Y.S. 462,
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Singer v. Carlisle, 26 N.Y.S.2d 172 (1940)
affirmed 236 App.Div. 719, 257 N.Y.S. 1034. It is not
necessary for the plaintiffs to set forth the figures of the
corporate assets, liabilities, capital and surplus. These
are matters which may be obtained through a bill of
particulars. The complaint alleges that at the times the
dividends were declared and paid the corporation had no
surplus in excess of its capital and the dividends were paid
while the capital of the United Corporation was impaired
and the payment of said dividends further impaired the
capital by the amount thereof; that the value of the assets
of the United Corporation remaining after the payment
of each of said dividends was less than the aggregate
amount of its debts and liabilities, including capital. Such
allegations are sufficient in law.
Accordingly, the motion to dismiss is disposed of as
follows:
End of Document
2017 Thomson Reuters. No claim to original U.S. Government Works.
(1) The first and second causes of action are dismissed on
the ground that they are barred by the six-year statute of
limitations;
(2) The third cause of action is dismissed with leave to
plaintiff to plead over in conformity with this opinion, and
in so pleading separately to state and number the causes
of action as indicated herein.
(3) The motion to dismiss the fourth and fifth causes of
action is denied.
Settle order on notice.
All Citations
26 N.Y.S.2d 172
2017 Thomson Reuters. No claim to original U.S. Government Works.
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