Commercial National Bank of Cleveland v. Syracuse Rapid Transit Railway Co. , 54 N.Y.S. 429 ( 1898 )

Spring, J.

The defendant is a street railroad corporation of the city of Syracuse, and plaintiff, a national bank in the city of Cleveland, owns $49,000 of its preferred capital stock. The defendant needed money to pay pressing outstanding obligations, mainly interest and taxes, and also to make extensions deemed advisable, and also to expend in street improvements required by the local authorities of the city of Syracuse. Motice^ were "accordingly mailed to the various stockholders showing the earnings of the corporation, the urgency of the needs of the company, and consents were obtained of the owners representing more than two-thirds of ■ the capital stock of the company authorizing the directors to borrow $200,000 secured by $500,000 of second-mortgage bonds incumbering all the property of the company to be due in ten years, and bearing interest at- 5 per centum. By virtue of this explicit authority and after a clear and precise statement embodied in the notice showing the solvency .of the defendant, its augmented business and net earnings over and above every running charge and expense, the directors managed to arrange with a man named McCarthy to loan to the company $161,000, and with White & Company, $69,000, to be secured respectively by these second-mortgage bonds, and these loans have been substantially consummated, and $72,000 have already been delivered to the directors and expended by them for the benefit of the company. The fact was then developed that there was a bonus agreed to be paid to Edward C. Jones & Co. of $30,000 in cash and $70,000 of the capital stock of the company as a bonus for negotiating these loans. A resolution was passed by a majority of the directors authorizing the payment of this extraordinary bonus, and that resolution was based upon the representation of Jones as to its necessity, and Jones is a director of the company. While Jones makes an affidavit in attempted vindication of his conduct, and while other representatives of the defendant instrumental in consummating this loan through Jones as a paid intermediary give their version of the transaction, there is no intimation the lenders were to receive any bonus, that the transaction with them was any other than a loan of money upon security deemed by them adequate. So we have this remarkable situation of affairs presenting itself in two aspects:

1. Authority has been procured from the stockholders assenting to the making of a loan of about .$200,000 to be secured by the second-mortgage bonds on the property and franchise of the corporation without any=suggestion there was any bonus or extra payment in the carrying out of the transaction; and

2. The consummation of this contemplated loan by paying to one of the directors, or to a company of which he seems to be the chief factor, the enormous sum of $30,000 and $70,000 of the stock of the company, and all this preceded by the formal resolution of the directors recommending the payment of this tribute.

For what purpose this payment was exacted does not clearly appear in the affidavits of the officers of defendant seeking to defend this peculiar transaction. So far as can be determined from the papers, it was inspired by an endeavor to enrich the director Jones, and if the statements of Oonderman, the treasurer of the company, as set forth in the affidavits on behalf of plaintiff, are correct, other of these directors were to-share with him in this division of spoils at the expense of a corporation now claimed by the directors upholding this proceeding to be in a precarious condition. From whatever aspect the proceeding is viewed it is wholly indefensible and unconscionable. The directors procured the assents of the stockholders to make a loan for specific purposes. These officials were the representatives, the servants of these stockholders, the owners of this property. The principals were entitled to full notice of the contemplated loan, including information of any extra allowance to be contributed for negotiating it. The fact the communication so glibly parading the solvency of the corporation forbears any reference to this exaction is sufficient- warrant for the statement that it was agreed upon surreptitiously by the directors and with a view to their personal benefit. A tribute so liberal to one or more of the directors should not be upheld unless sanctioned by the stockholders. The directors have subjected themselves to the suspicion of carrying through the project under cover and with the object of preventing the stockholders from knowing its true inwardness. Good faith, open-handed sincere conduct on the part of these officials acting in a fiduciary capacity require that they, should advise with the owners. They did exactly the reverse. They obtained consent to a loan, and every person giving it must have done so in the belief that the company was to receive a full return for the obligations it authorized. The attempt to justify this transaction upon the ground of its necessity fails most lamentably. The statement rendered by these same directors shows minutely the responsibility of defendant, the increasing value of this property and franchise. The reason, why the loan was desired, was to enhance the growth and extend the earning power of a profitable investment. Every stockholder reading this glowing report must have considered his stock as valuable property. But, now, in justification of this scheme to pay Jones and his associates the enormous tribute designed to obtain this loan, it is urged by these same officials that the corporation is practically bankrupt, and that in no other way could the money be obtained. No such usurious exaction was demanded by the mortgagees. They apparently were willing to loan the money, and have done so already, in part at least, entirely satisfied with the adequacy of the securities issued under the express sanction of the owners of the franchise.

Any project which is founded upon an attempt of directors to enrich themselves out of the property of the corporation whose interests they are elected to conserve must receive the condemnation of the courts. The conduct of these directors in concealing from their principals the fact that a large bonus was to be paid to consummate these loans is reprehensible. But when to that fact is added the information that these same agents were to pay themselves with lavish liberality for performing their trust their conduct descends to a degree of culpability especially shocking when the reputation of the men enlisting in the enterprise is considered. The principle that the directors of a corporation cannot profit out of the directorship to the detriment of the incorporators is elementary. Their acts are always subjected to jealous scrutiny. They bear a fiduciary relation to the stockholders of the company. They are the trustees of its property. As was said by Judge Grover, in Coleman v. Second Avenue R. R. Co., 38 N. Y. 201, 202, they cannot make a bargain with themselves binding upon the company. Rockford, R. I. & St. L. R. R. Co. v. Boody, 56 N. Y. 456, 461.

The corporation as an entity is a trustee of the stockholders. Wait on Insolvent Corporations, § 41.

And as such may be enjoined from making any illegal expenditure of the money of the corporation. Id., § 587,• Leslie v. Lorillard, 40 Hun, 392.

Nor is it necessary for the plaintiff to defer action until the directors have disbursed this money among themselves, and then bring an action at law to recover it back. The recovery would then be dependent upon the ability of the directors to refund the money. That they intend at once to carry out the plan set forth in the complaint and pay themselves $30,000, and divide among themselves, or at best turn over to director Jones, $70,000 of the treasury capital stock of the company, is not questioned. These directors, the participants evidently in this bounty, have already authorized the transaction by formal resolution, and its payment was about to be made when this injunction order was granted, and it is eminently proper to restrain the consummation of the deal. There seems to be no objection to the directors expending the money within the line of their duties-and as indicated in the notice submitted to the stockholders. The only criticism that seems to be made upon the directors is the payment of the bonus, and the injunction order so far as it restrains that, is sustained with $10 costs of this motion.

Ordered accordingly.