Opinion
April 17, 1924.
Alexander Holtzoff, for the appellant.
Louis J. Halbert [ Henry R. Barrett with him on the brief], for the respondent.
The allegations of the complaint, both in respect to plaintiff being a stockholder of preferred stock, and as to the futility of a demand that the corporation sue directly to redress the alleged injury to it, are sufficient. ( Witherbee v. Bowles, 201 N.Y. 427; Brock v. Poor, 216 id. 387; Traub v. Arrow Manufacturing Corporation, 207 App. Div. 292.) The complaint also sets forth a cause of action by the plaintiff on behalf of the corporation. This is not a case in which it has turned out that an invention, or a business idea, for which corporate stock has been issued to a promoter, has less value than was originally hopefully supposed, as in the case of Insurance Press v. Montauk Wire Co. ( 103 App. Div. 472) and Morgan v. Bon Bon Co. ( 222 N.Y. 22), cited by appellant; nor is it a case to which may be applied the rule declared in Blum v. Whitney (185 id. 232) and Old Dominion Copper Mining Smelting Co. v. Lewisohn ( 210 U.S. 206). The latter cases decided, in brief, that stockholders participating in an illegality or a fraud upon a corporation in the issuance of its stock are estopped from asking for redress therefor, even in the right of the corporation. The complaint in the action at bar alleges a fraudulent purpose, antedating the promotion of the corporation and carried out thereafter, whereunder the defendant has secured the issuance to him of all the common stock; the consideration for such issuance of stock to defendant being the assignment by the defendant to the corporation of his right to a device falsely represented by him to be patentable and valuable. The transaction is now questioned by the plaintiff, who is the holder of non-voting preferred stock for which he has paid cash in ignorance of the alleged fraud. A stockholder may bring an action in behalf of the corporation to set aside as fraudulent a transaction consummated at the expense of the corporation before he acquired his stock. ( Pollitz v. Gould, 202 N.Y. 11.) Such an action may also be brought for an injury resulting from a wrongful purpose antedating the organization of the corporation ( Witherbee v. Bowles, 201 N.Y. 427) when the stockholder was ignorant of the wrong or fraud. The cases of Tooker v. Sugar Refining Co. ( 80 N.J. Eq. 305) and Scully v. Automobile Finance Co. ( 11 Del. Ch. 355; 101 Atl. Rep. 908) are authorities for the maintenance of such a derivative cause of action by holders of preferred stock to set aside the issuance of common stock to a promoter pursuant to the promoter's purpose to defraud the corporation.
The order should be affirmed, with ten dollars costs and disbursements.
KELLY, P.J., RICH, JAYCOX, KELBY and KAPPER, JJ., concur.
Order denying defendant's motion to dismiss the complaint affirmed, with ten dollars costs and disbursements.