Opinion
June Term, 1897.
George D. Reed, for the appellants.
William F. Cogswell, for the respondent.
This is an action by shareholders: First, to get reinstated as such in the corporation, and, second, to have certain acts of the defendant declared void as against them, or at all events to allow the plaintiffs to recover what they have respectively paid on their shares to the defendant.
The present status of these plaintiffs is that of persons holding forfeited shares in the corporation and with no right or standing in it at law, but claiming equitable relief, and through it restoration to their forfeited rights.
The first question to consider, then, is whether the evidence in the case entitles them to this equitable relief or to damages for being wrongfully deprived of their shares by the defendant. The shares held by the plaintiffs were not paid-up shares nor had their weekly dues been kept up, which were necessary to preserve their shares and maintain a standing in the corporation. The shares were forfeited in the way pointed out by the constitution, and upon due notice at the same time that the shares of a number of others in like position with themselves were forfeited. The proceedings to forfeit were regular in all respects. They were taken upon a notice of sixty days to pay up or the shares would be forfeited. The plaintiffs Reed and Shuster had been in default upon their dues from March, 1892, to December 28, 1894. The plaintiff P.C. Shutt was in default from August 31, 1891, to December 28, 1894. The plaintiff Buker from October, 1894, to July, 1895.
The chief claim that the plaintiffs make to excuse their default is that the defendant's officers refused to allow the plaintiffs to examine the books of the corporation, and they consequently could not learn the real condition of affairs so as to judge whether to keep up the payments upon the shares. There is no proof of such demand in the record, but it is claimed that the plaintiffs offered to prove such demand, and that it was excluded by the trial court, which was error.
Our attention has been called to only the following attempts to make this proof: Smith, the secretary of the defendant, while upon the stand as a witness at the trial, was asked by the plaintiffs' counsel if he did not remember a time when Buker came to his office and asked the witness to allow him to see the books of the association. This was objected to as immaterial, and sustained, to which the plaintiff excepted. Later on the witness was asked if, within thirty days prior to April 3, 1895, Buker asked the witness to allow him to see the books, accounts, documents and securities of the association. This was objected to as before and the objection sustained. It will be observed, as to the first question ruled upon, that no time is fixed when the request to examine the books was made. The other question points to about the 1st of March, 1895, which was several months after Buker was in default upon his payments and after he had apparently decided not to make any further payments; besides, Buker was a director and had access as such to the books and papers of the corporation, and it is absurd to say that he had not the opportunity from all his experience, as disclosed by the evidence in the affairs of the corporation, to learn its condition.
The plaintiff P. Cameron Shutt was examined as a witness, and he was asked by the counsel if he made a demand of Steele (one of the defendant's directors) to show him the books, accounts and securities of the Leighton Lea Association. This was objected to and excluded, to which the plaintiffs' counsel excepted. The time referred to was in the fall of 1894; that was long after this plaintiff was in default upon his payments. It does not seem that any demand was made by the other plaintiffs to examine the books and papers. The trial was before the court without a jury, and, conceding that it was error to reject this evidence, we do not see how it could have affected the result. The refusal to pay the weekly dues on the part of the plaintiffs was, evidently, upon consideration. What opposition occurred to the proceedings to amend the constitution and complete the settlement with Culver and the syndicate in a number of nearly 200 shareholders came from these four plaintiffs. They had fair and full notice of the consequences that would follow their failure to pay their weekly dues. In the meantime it was necessary to carry on the business of the corporation, raise money to pay the incumbrances upon its property, determine who were the shareholders and who were not; who had not paid in full their shares and who were to do so in the future; and but one course was left open to the officers of the corporation, if they did their duty, and that was to enforce the dues which the delinquent shareholders had contracted to pay or to forfeit their shares.
The case fails to disclose any equitable reason why the plaintiffs should be relieved from these forfeitures.
The plaintiffs' counsel insists that the new constitution was not legally adopted and was void, and that we should so declare. A careful examination of this subject leads us to the conclusion that this constitution was legally adopted and is the law of the defendant and its shareholders.
The defendant is not a stock corporation; therefore, the law as to the issue of stock and the responsibility of stockholders has no application to it. The point made by the plaintiffs' counsel that, under section 42 of the Stock Corporation Law (Chap. 564 of the Laws of 1890, as amended by chap. 688 of the Laws of 1892), the provision in the amended constitution and in the contract of settlement, allowing the syndicate members paid-up shares of $612 for the payment of $300 is void, is not tenable. That question cannot, in any event, be passed upon in this action, as the syndicate members are not parties to this action in such a sense that their individual rights to the shares can be passed upon.
Finally, the plaintiffs insist that the syndicate contract, which gave its members a bonus of $50,000, was fraudulent and void as against the plaintiffs, and this fraud was not eliminated, waived or settled by subsequent transactions and settlements between the syndicate and the defendant and the long-share holders, and it is the duty of the court so to declare in this case. The difficulty with this position is, that the defendant has settled this matter and put that settlement in its constitution, and has received substantial benefit by reason of such settlement, and all these plaintiffs, in one form or another, with full knowledge of all the circumstances, have approved of and consented to it. They have, therefore, waived the right to raise this question here.
Even an unconscionable arrangement will not be disturbed where there has been a ratification of it with knowledge of all its bearings, after time has been had for consideration. ( Kent v. Quicksilver Mining Co., 78 N.Y. 159.)
The syndicate had taken the initiative in securing the land necessary for the purpose of the incorporation of the defendant before it was organized. They had advanced money for that purpose, or had contracted to do so, but the long-share holders concluded that the syndicate members were asking too much and were taking an unfair advantage of the other shareholders, and they rebelled, investigated, and finally it was all settled upon such reasonable terms as seemed to suit all, or nearly all, of the parties interested in the shareholder's property. It was a compromise, which left the defendant in a much better situation than it was before. This compromise was made with full knowledge of all the circumstances of the case. The parties in interest having made it, or assented to it, the court will not disturb it.
The true rule in such cases was laid down in Gamble v. Q.C.W. Co. ( 123 N.Y. 99), by PECKHAM, J., speaking for the Court of Appeals, where he says: "It is not, however, every question of mere administration or of policy, in which there is a difference of opinion among the shareholders, that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally the rule must be that in such cases the will of the majority shall govern. The court would not be justified in interfering, even in doubtful cases where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint stock association as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with its interests."
In another portion of the opinion, the learned judge says (at page 98): "I think that where the action of the majority is plainly a fraud upon, or, in other words, is really oppressive to the minority shareholders, and the directors or trustees have acted with and formed part of the majority, an action may be sustained by one of the minority shareholders suing in his own behalf and in that of all others coming in, etc., to enjoin the action contemplated, and in which action the corporation should be made a party defendant."
From the rule thus laid down, we must reach the conclusion in this case that the majority, in making the settlement with Culver and the syndicate, and in amending the constitution to enforce such settlement, acted in fraud of the rights of the minority, and in reckless disregard of its interests to sustain the plaintiffs' contention in this respect.
We cannot find any evidence of this on the part of the majority. The whole proceeding of settlement and adjustment seems to have been with an honest desire to adjust all differences upon a fair basis, so that the corporation might proceed to transact its business and its shareholders in the future be protected in their rights; and we are not prepared to say but that they made the very best settlement, under the circumstances, that could have been made.
The judgment appealed from should be affirmed, with costs.
All concurred, except FOLLETT and GREEN, JJ., dissenting.
It is alleged in the complaint, and is admitted in the answer, that the defendant has assumed to forfeit the shares of the plaintiffs for non-payment of dues, and it is now argued that, by reason thereof, they have no interest in the corporation and no right to maintain this action. Whether the action of the defendant in declaring their shares forfeited was justified, was an important issue in the case. It stands confessed that a gross fraud was attempted to be perpetrated by this defendant in the purchase of the real estate as against the class of shareholders to which the plaintiffs belong. By a suit in equity the perfect consummation of this fraud was frustrated. This naturally created a feeling of distrust on the part of the so-called long-share holders towards the defendant's managers and the so-called syndicate shareholders, and it seems to me that it was not unreasonable for the long-share holders to insist on their right to examine the books and papers of the defendant before making further payments on their shares; and that it was inequitable for the defendant to assume to forfeit the interests of these plaintiffs in the corporation for the non-payment of their dues without first affording them an opportunity to examine into its affairs.
Section 8 of article 1 of the constitution provides: "The books, accounts, securities and other properties in the charge of the secretary and treasurer, and each of them, shall be at all times subject to the examination of the association and board of directors, or any member thereof."
It was offered to be shown upon the trial that while Buker was a member of the board of directors, and before his shares were forfeited, he called upon the secretary and asked to examine the books, accounts and documents of the defendant. This was objected to and was excluded.
It was also offered to be shown that several of the plaintiffs other than Buker, before their shares were forfeited and while they were members of the association, asked to examine its books and accounts, and that this right was denied them, and afterwards their shares were forfeited. By the judgment the action of the defendant in forfeiting the shares of these plaintiffs, who have paid considerable sums into the corporation, is sanctioned. The plaintiffs were not bound to assume that the confession, after discovery, of a fraud, and a partial restitution, under compulsion, was an absolute guaranty of the integrity of the subsequent management of the affairs of the corporation. Forfeitures are not favored by the courts, and they are easily excused if the conduct of the person or corporation attempting to enforce them has been inequitable. If these plaintiffs had been able to establish that this defendant had refused to allow them to examine into the affairs of this company, and for that reason they refused to make further payments, it would have afforded a sufficient ground for setting aside the resolution declaring their shares forfeited It was error to exclude this class of evidence.
The judgment should be reversed and a new trial granted, with costs to abide the event.
GREEN, J., concurred.
Judgment affirmed, with costs.