Summary
In Bell v. Frank Gilbert Paper Co., 117 Misc.Rep. 610, 193 N.Y.S. 26, 29, the court said: "A stockholder of a corporation has no absolute right to compel an accounting to him by the corporation or its officers.
Summary of this case from Foster v. ArataOpinion
January, 1922.
Thomas O'Connor (George E. O'Connor and Edgar T. Brackett, of counsel), for plaintiffs.
Shearn Hare, for defendants Josephthal, Schnitzer and Gerold.
Leventritt, Cook, Nathan Lehmann, for defendant Hercules Paper Corporation.
Stanhope Foster, for defendant Frank Gilbert Paper Company.
Tanzer Lane, for defendant Bowmall.
Lawrence B. McKelvey, of counsel for corporation defendants.
These are applications on the return of an order to show cause for leave to the plaintiff to have discovery and inspection of the stock books, minute books, books of account, and all other books and papers of the defendant corporations, the Hercules Paper Corporation, Frank Gilbert Paper Company, and Union Waxed and Parchment Paper Company, and for leave for additional discovery and inspection in action No. 2 of the stock books, registers, certificates and records of said Hercules Paper Corporation, at the office of the Bankers' Trust Company, its transfer agent, and at the office of the American Trust Company, the registrar of its stock.
The motions in the three actions were presented and will be considered together.
The actions are in behalf of stockholders for an accounting by the corporations and other defendants named, of the receipts, assets and property of said corporations, coming into their hands and under their control. The plaintiffs allege acts of mismanagement, waste, and misappropriation of the property of said corporations.
The brief of the plaintiff states that action No. 1 is governed by the Code of Civil Procedure, and that actions Nos. 2 and 3 are governed by the Civil Practice Act. The brief of the defendant claims that "All of these actions were begun prior to October first, nineteen hundred and twenty-one, and, therefore, the rights of the various plaintiffs to a discovery and inspection must be tested by the provisions of the Code of Civil Procedure and the General Rules of Practice."
I am unable to determine by the papers before me the date when the summonses in these actions were served or whether they were served on all of the persons to be served, prior to October 1, 1921.
It is within the discretion of the court to apply to the applications made in these actions, in the interest of justice, any remedial provision of the Civil Practice Act not inconsistent with proceedings theretofore taken in the action. Civil Practice Act, § 1569. All the applications, therefore, may be considered, in the interest of justice, by applying thereto the remedies and procedure found in the Civil Practice Act, and also must be considered in the light of the present Rules of Civil Practice. Laws of 1920, chap. 902; Laws of 1921, chap. 370.
Under rule 15 of the General Rules of Practice it was necessary that a party applying for discovery and inspection should show, "to the satisfaction of the court or judge the materiality and necessity of the discovery or inspection sought, the particular information which he requires, and in the case of books and papers, that there are entries therein as to the matter of which he seeks a discovery or inspection."
Under this rule, and the provisions of the old Code, a line of decisions was developed which applied to all applications for discovery and inspection the test of materiality and necessity, of particularizing the information sought, and of establishing the fact that there were entries in the books and papers sought to be examined relative to the merits of the action, in addition to the fact that the books and papers were not in the possession and control of the party applying for the discovery and inspection.
The force of these decisions to the pending applications has been broken by the provisions of the new Civil Practice Act and the Rules of Civil Practice. Rule 15 of the General Rules of Practice is no longer binding upon the courts. Chapter 902 of the Laws of 1920, as amended by chapter 370 of the Laws of 1921, provides for the formulation and adoption of suitable rules of practice not inconsistent with the Civil Practice Act, "which shall be binding on all the courts in this state and all the justices and judges thereof," and further provides that "The rules of practice adopted by the convention shall be filed in the office of the secretary of state before October first, nineteen hundred and twenty-one, and shall become effective on that date and shall supersede all general rules of practice theretofore binding on the courts of the state and the justices and judges thereof, except the court for the trial of impeachments and the court of appeals."
The requirements of rule 15 of the General Rules of Practice are not included within the Rules of Civil Practice as formulated and adopted. Rule 140 of the Rules of Civil Practice follows substantially rule 102 of the "Rules of Court" proposed in the report of the joint legislative committee on the simplification of civil practice, and which was presented to the legislature in 1919 and which was required by the statute to be considered by the convention in the formulation of its rules. See Report of Joint Legislative Committee on the Simplification of Civil Practice, 1919, p. 1420.
The note at the end of proposed rule 102 states that, "The general effect of the rule is to shift to the adverse party the burden of showing that the discovery or inspection is not necessary, instead of requiring the party applying for the order to show the necessity in the first instance." Such would seem to be the clear intent and effect of the rule and such effect materially changes the rules and force of decisions heretofore applied to applications for discovery and inspection.
Books and documents are, therefore, permitted to be discovered and inspected under the Civil Practice Act and the Rules of Civil Practice, as justice requires, providing they relate to the merits of the action.
Under the common law, a stockholder has the right, which may be enforced by the court, to inspect the books of a corporation of which he is a stockholder. Matter of Steinway, 159 N.Y. 250.
While the plaintiffs in the above actions are stockholders their right to discovery and inspection must be considered and determined in their character as litigants, as the applications here made are incidental to the prosecution of the actions and have reference to the merits of the issues therein framed. Walsh v. Press Co., 48 A.D. 333; Snyder v. DeForest Wireless Telegraph Co., 113 id. 840.
It is urged by the learned counsel for the defendants that discovery and inspection cannot be granted until after the right to an accounting has been established by interlocutory judgment.
A stockholder of a corporation has no absolute right to compel an accounting to him by the corporation or its officers. An accounting, however, may be decreed, upon proof of official misconduct, but the burden of proof resting upon the stockholder is only met when he established that waste and misconduct, or misappropriation of funds, has actually been committed by the defendants. Sage v. Culver, 147 N.Y. 341; Stokes v. Stokes, 87 Hun, 152; Kreitner v. Burgweger, 174 A.D. 48.
The interests of justice will not permit a stockholder to be denied the right of discovery and inspection of books and documents, so far as such remedy relates to the merits of the action, when such discovery and inspection is essential to afford him the opportunity of establishing the alleged misconduct of the defendants which must be established to grant him the remedy to which he may be entitled. A defendant corporation, through its officers, ought not to be permitted to escape the consequences of misconduct in its management, and shield itself against prosecution therefor, by withholding from a stockholder the evidence necessary for him to successfully assert his rights.
It is obvious from the allegations in the complaint that a discovery and inspection of the stock books, minute books, and books of account of the defendant corporations will disclose matters relating to the merits of the action.
An inspection, however, of all other books and papers, registers, certificates, and records of the defendant corporations, except the so-called creditors' agreement, is too sweeping in its scope, and is not justified upon the papers herein without more definite reference to the particular books or papers and of their relation to the merits of the action.
Plaintiffs may have orders permitting a discovery and inspection of the creditors' agreement and of the stock books and minute books of the defendant corporations, and of the books of account in so far as said books of account relate to the specific allegations of misconduct, waste, and misappropriation set forth in the complaint; and, in order that the business of the defendant corporations may not be unduly interfered with, and that such discovery and inspection may be had within the limits of the orders granted herein, such orders shall provide, in accordance with rule 142 of the Rules of Civil Practice, for the appointment of a referee, to direct and superintend the discovery and inspection as granted by the orders herein, and who shall file his certificates at the conclusion of such discovery and inspection, entitled in each of the actions herein, in the Saratoga county clerk's office, certifying to the compliance or non-compliance with the terms of the orders.
Plaintiffs may prepare proposed orders in conformity with this memorandum, and shall set forth therein the specific matters alleged in the complaint concerning which discovery and inspection is herein directed to be had. The orders may be settled by agreement or on three days' notice.
Ten dollars costs awarded to the plaintiff in each action.
Ordered accordingly.