Opinion
April 25, 1947.
Proceeding in the matter of the application of Gabrielle Chanel for an order under Civil Practice Act, article 78, section 1283 et seq., against Chanel, Inc., respondent, and Pierre Wertheimer and another, respondents-defendants, directing respondent corporation and individual respondents, its president and secretary respectively, to exhibit to petitioner all stock books, books of account, by-laws, and other papers and records of respondent corporation from 1924 to date.
Order directing provision to be made for trial after service of amended answer and amended reply.
See, also, ___ Misc. ___, 74 N.Y.S.2d 211.
Paine, Kramer Marx, of New York City (David Paine and Robert O. Swensen, both of New York City, of counsel), for petitioner.
Olvany, Eisner Donnelly, of New York City, for respondents.
Petitioner is, and has been since 1924, the owner of 10% of the capital stock of respondent Chanel, Inc., a domestic corporation. She brings this proceeding under Article 78 of the Civil Practice Act for an order directing respondent corporation, and the individual respondents, who are respectively its president and secretary, to exhibit to her "all stock books, books of account, by-laws and other papers and records of said Chanel, Inc. from 1924 to date." Petitioner alleges that her demand for such inspection has been refused. Her application is opposed by the corporation, by the Wertheimer family, who own 70% of its stock, and by two other stockholders owning the remaining 20% of the stock.
Respondent's answer alleges that the application is not made in good faith and is not in the best interests of the corporation, but is, in fact, made to embarrass the corporation, and is sought for ulterior purposes, one of which is the complete destruction of the corporation.
In Matter of Schulman v. De Jonge Co., 270 App.Div. 147, 59 N.Y.S.2d 119, 121, a similar application was made by the holder of 5% of the stock of the corporation involved therein. Said corporation similarly pleaded bad faith in its answer, alleging specific facts showing that petitioner was its competitor and was seeking the information for use in his competing business. The comprehensive opinion of Cohn, J., speaking for a unanimous court, sets forth the legal principle which governs the case at bar:
"From an order granting petitioner a general inspection of the books of the company, appellant corporation appeals. In ordering the inspection the Special Term provided against disclosure of lists of customers, sources of supply and the business secrets of the corporation. Appellant urges that these precautions are inadequate to protect the company from the alleged ulterior motives of petitioner and that the application should have been denied in its entirety.
"A stockholder has the right at common law to inspect the books of his corporation at a proper time and place and for a proper purpose. If this right is refused by the officers in charge, an order may issue in the discretion of the court with suitable safeguards to protect the interests of all concerned. Matter of Steinway, 159 N.Y. 250, 263, 53 N.E. 1103, 1107, 45 L.R.A. 461; Matter of Durr v. Paragon Trading Corporation, 270 N.Y. 464, 1 N.E.2d 967; Hughey v. Du Bois Press, Sup., 37 N.Y.S.2d 343, 345. In addition to his common law right, by statute a stockholder of record is given the right to inspect the stock books of his company, subject to the restrictions therein set forth. Stock Corporation Law, § 10; Matter of Brentmore Estates, Inc. v. Hotel Barbizon, 263 App. Div. 389, 393, 33 N.Y.S.2d 331, 335.
"Petitioner's application for an order under Article 78 of the Civil Practice Act is in the nature of what was formerly termed a mandamus proceeding. The order may be granted in the first instance where the applicant's right to it depends only upon questions of law. It may not issue where vital questions of fact are presented. Matter of Wong Wah Yew v. Mun Hey Pub. Co., 275 N.Y. 615, 11 N.E.2d 783; Civil Practice Act, § 1295. The remedy rests in the sound discretion of the court, and should not be granted unless the right to it is clear. Matter of Ellsworth, Barrows Co. v. Ward, 255 App.Div. 91, 92, 5 N.Y.S.2d 605, 606.
"For the purposes of the application all facts disclosed in appellant's affidavit must be deemed true. Matter of Durr v. Paragon Trading Corporation, supra, 270 N.Y. at page 467, 1 N.E.2d at page 968; People ex rel. Pumpyansky v. Keating, 168 N.Y. 390, 398, 399, 61 N.E. 637, 639.
"Though petitioner in his moving papers has met the legal requirements to the extent of showing that he is a stockholder and that he has made a demand upon the officers in charge for an inspection of the books which was refused, there is an issue of fact presented as to whether the proceeding was brought in good faith and for a proper purpose. While it has been held that the mere denial by the corporation of mismanagement and waste is insufficient to defeat an application by a stockholder to examine its books (Matter of Durr v. Paragon Trading Corporation, supra, 270 N.Y. at page 471, 1 N.E.2d at page 970), it is equally well settled that an examination will not be permitted where the ulterior purpose of the inspection is to supply knowledge of the inner workings and details of a corporation's business to a competitor, or to embarrass the corporation. People ex rel. Lehman v. Consolidated Fire Alarm Co., 142 App. Div. 753, 754, 127 N.Y.S. 348, 349; People ex rel. Giles v. Klauder-Weldon Dyeing Machine Co., 180 App. Div. 149, 167 N.Y.S. 429. If appellant can sustain the charges it has made, it would appear that the proceeding is not brought in good faith or for a proper purpose, and in such case petitioner would not be entitled to the inspection.
"We conclude that the question as to the good faith of petitioner and as to his purpose in seeking the inspection, upon this record, is one of fact which must be determined before a final order may issue. Accordingly, the order should be modified by granting an alternative order directing a trial of the issue in accordance with the provisions of Section 1295 of the Civil Practice Act."
That decision is determinative of the disposition of the instant application. Here, too, respondents have affirmatively alleged petitioner's bad faith by a general allegation to that effect in Paragraph 9 of the answer, and petitioner has served a reply denying such allegation. Accordingly, a trial of the issue of good faith will be directed in accordance with Civil Practice Act, § 1295.
Respondents, however, are not willing to accept such disposition. They urge summary dismissal of the application upon the ground that Paragraphs 10 to 38 of the answer are deemed admitted by petitioner's failure to reply thereto and that the allegations thus deemed admitted conclusively establish that the application is not brought in good faith nor for a proper purpose. Most of these allegations are clearly immaterial, and petitioner's motion to strike them out pursuant to Civil Practice Act, § 1294 is granted to the extent indicated in the companion motion decided herewith. ___ Misc. ___, 74 N.Y.S.2d 211. The evidence received at the trial in support of the remaining allegations may persuade the court, in the exercise of its discretion, to deny the application in whole or in part. But the allegations, as pleaded, even if deemed admitted by the failure to reply, cannot as a matter of pleading justify summary dismissal of the application.
An examination of the record on appeal in Matter of Schulman v. De Jonge Co., supra, indicates that no reply was served, although the answer alleged bad faith and ulterior motives, and then alleged further specific facts in support of such charges. Nevertheless, the Appellate Division ordered a trial of the issues and did not dismiss the application, although it concluded that "if appellant can sustain the charges it has made, it would appear that the proceeding is not brought in good faith or for a proper purpose, and in such case petitioner would not be entitled to the inspection." 270 App. Div. at page 149, 59 N.Y.S.2d at page 122.
That decision is determinative of respondent's contention herein; in fact the instant case is even stronger. There the sole issue was whether the petitioning stockholder was a competitor of the corporation and was seeking the information for use in his competing business. Paragraphs 20 and 28 of the answer herein allege that petitioner is engaged in competition with respondent corporation, these allegations being less specific than in the Schulman case. In this case there is an important additional factor. Petitioner alleges that the Wertheimers also control Bourjois, Inc., and Parfums Bourjois, with whom respondent corporation has many business dealings, and that they are using their control of respondent corporation to operate its business for the benefit of these other companies and to the detriment of respondent. If petitioner's evidence at the trial establishes this allegation, the court may conclude that she is not precluded from obtaining an inspection necessary to stop such injury to respondent because she also may be in competition with it, or may be able to frame an order in such manner as to prevent the alleged wrongs to respondent without giving petitioner information which she might use for competitive purposes.
The only other material allegations in the answer are those relating to petitioner's suits against Les Parfums Chanel, S.A., a French corporation. It appears that petitioner, who operates a dressmaking establishment in Paris, also manufactured and sold perfumes under the same name of "Chanel," prior to 1924. In that year she entered into an agreement with the French corporation whereby, in exchange for 10% of its stock, she transferred to it the ownership of all brands of perfume sold under the name "Chanel", and the exclusive right to manufacture and sell perfumery products under that name, together with the formulae and processes therefor. The corporation was required to offer for sale only first quality products, in order not to impair the prestige of the name "Chanel" in respect to petitioner's dressmaking establishment "where she sells only articles `du plus grand luxe'."
Paragraph 22 of the answer alleges that in 1938 petitioner instituted proceedings in a French court against the French corporation, seeking to enjoin it from manufacturing beauty products and toilet accessories. Paragraph 29 alleges that in June, 1946, petitioner instituted a second proceeding in a French court in which she characterized the manufacture of perfumes by the French company as detrimental to her name, and sought an order directing them to cease the manufacture and sale of all products having the name of "Chanel" and to restore to her all trademarks, trade names, formulae and manufacturing processes. Paragraph 30 alleges that petitioner issued a press release stating that the foregoing suit was the opening gun of a world-wide battle for control of numerous corporations, from the description of which it might be inferred that respondent's was one of these corporations. The pertinency of these allegations arises from the fact that in 1924 the French corporation had transferred all its rights in connection with the Chanel perfume business in the United States and Canada to respondent corporation, and had agreed to manufacture for and sell to the latter exclusively in such territory.
Petitioner has a right to seek to enjoin the French corporation from allegedly violating its covenant to preserve the prestige of the name "Chanel" without thereby sacrificing any of her rights as a stockholder of respondent corporation. On the basis of the foregoing allegations, it cannot be said that petitioner's suit against the French corporation will result in any detriment to respondent corporation, or that her inspection of the latter's books and records will give her any aid in that suit. If either of these facts should be established at the trial, it may be possible, nevertheless, to frame an order which will protect against disclosure of any data which could be used in the French litigation, and yet afford the petitioner all other proper information regarding the business of respondent corporation. On the other hand, if the evidence should establish that petitioner is bound on destruction of or damage to respondent corporation, then the inspection may be denied in toto.
Petitioner cites the recent decision of the Appellate Division, First Department, in Matter of Tate v. Sonotone Corp., 272 App.Div. 103, 69 N.Y.S.2d 535, 536. That case does not change the rule laid down in Mater of Schulman v. De Jonge Co., supra, as may be seen from the following quotation from the opinion: "It is not intimated that the burden is on the stockholder affirmatively to show his good faith, but where, as here, the papers before the court establish that the purpose of the inspection is unrelated to the welfare of the petitioner as a stockholder, the application should be denied. If the papers before the court disclosed an issue of fact on this subject, an order in the nature of an alternative mandamus would be warranted, but the facts in this record lead only to the conclusion that the application is made in bad faith. That petitioner is not motivated by a desire to aid a competing business has no tendency to establish that he is trying to better his economic position as stockholder where what actuates him is clearly `disinterested malevolence' (American Bank Trust Co. v. Federal Reserve Bank of Atlanta, Georgia, 256 U.S. 350, 41 S.Ct. 499, 65 L.Ed. 983, 25 A.L.R. 971; Beardsley v. Kilmer, 236 N.Y. 80, 88-90, 140 N.E. 203, 205, 206, 27 A.L.R. 1411) against the individuals in charge of the corporation."
Respondent cites certain proceedings under the Civil Service Law where the applications were dismissed, but in each of these cases the affirmative issue could be resolved by a single fact which was alleged in the answer and not denied in the reply. Thus, in Matter of Hines v. La Guardia, 293 N.Y. 207, 56 N.E.2d 553, petitioner sought a retirement allowance upon the ground that though he had been appointed to his position without taking a competitive examination, that was proper because it was urgent to fill the position. The answer alleged that petitioner's appointment was made "for the sole purpose of affording [him] the privilege of having the Board of Estimate pass upon his application for service retirement." 293 N.Y. at page 215, 56 N.E.2d at page 557.
In Matter of Marasco v. Morse, Sup., 22 N.Y.S.2d 315 (Van Voorhees, J.), affirmed 289 N.Y. 768, 46 N.E.2d 364, the issue was whether petitioner had acquired permanent tenure because of having been retained in his postion after the three month probationary period. The answer alleged that petitioner had been notified on the last day of the three months that he would be carried until noon on the next day in order to complete a payroll period. In Bentley v. Jeacock, Sup., 14 N.Y.S.2d 366, the issue was whether petitioner was entitled to a veteran's preference under Section 22(1) of the Civil Service Law which did not apply to temporary appointments. The answer alleged that petitioner's appointment had been only a temporary one. These cases have no application to the instant case, where the ultimate issue of petitioner's bad faith and improper purpose involves the determination of many subsidiary issues of fact which must be fully developed upon a trial before the court is in a position to exercise properly informed discretion in disposing of the application.
The petition covers a wider range than is necessary for a determination of the instant application, and petitioner will therefore be required to serve an amended petition. She need only allege that she is a stockholder, that she has made a demand upon the officers in charge for an inspection of the books and that this was denied. Matter of Durr v. Paragon Trading Corporation, 270 N.Y. 464, 1 N.E.2d 967. Petitioner is not required to prove good faith, respondents must establish her bad faith or other reasons why the application should not be granted. Ibid; Matter of Schulman v. De Jonge Co., supra; Matter of Tate v. Sonotone Corporation, supra. Further, it is not necessary for petitioner to allege mismanagement. Matter of Durr v. Paragon Trading Corporation, supra.
Some of petitioner's allegations of mismanagement have no possible relevancy in this proceeding, e.g., the allegation that 90% of the stock of respondent corporation should have been issued to the French corporation. That claim could be asserted only by such corporation, not by petitioner. Additional allegations of mismanagement could become material at the trial as rebuttal to respondent's evidence, but they have no place in the petition. Therefore the amended petition should confine itself to Paragraphs 1 to 7, inclusive, eliminating the last two sections of Paragraph 2.
In her prayer for relief petitioner seeks an inspection of all books and records of respondent corporation from 1924 to date. This prayer should be modified to reduce this to a reasonable period, or petitioner must allege facts to justify going so far back.
Amended petition to be served within ten days. Settle order to provide for a trial pursuant to Civil Practice Act, § 1295 after service of the amended answer and amended reply directed by decision on companion motion decided herewith, ___ Misc. ___, 74 N.Y.S.2d 211.