Bosworth v. . Allen , 168 N.Y. 157 ( 1901 )

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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The defendants conspired to wreck the corporation of which they were directors and to thereby make money for themselves. Although they sustained a relation of trust to the corporation and were bound to promote its interests and protect its property, they entered into a combination to destroy it in order to enrich themselves. While not technically trustees, for the title of the corporate property was in the corporation itself, they were charged with the duties and subject to the liabilities of trustees. Clothed with the power of controlling the property and managing the affairs of the corporation, without let or hindrance, as to third persons they were its agents, but as to the corporation, itself, equity holds them liable as trustees. (2 Pom. Eq. Juris. secs. 1061, 1063, 1088, 1097; 2 Beach Eq. Jur. sec. 845; Potter Corp. sec. 330; Thompson's Liability of Officers Agents of Corporations, 351, 360, 375; Aberdeen Ry. Co. v. Blakie, 1 Macq. 461; Taylor v. Chichester M. Ry. Co., L.R. [2 Exch.] 379; Ervin v.Oregon Ry. N. Co., 27 Fed. Rep. 625, 630; Duncomb v. N.Y.,H. N.R.R. Co., 84 N.Y. 190, 198; Marvin v. Brooks, 94 N.Y. 71;Hiscock v. Lacy, 9 Misc. Rep. 578, 592.)

While courts of law generally treat the directors as agents, courts of equity treat them as trustees and hold them to a strict account of any breach of the trust relation. For all practical purposes they are trustees when called upon in equity to account for their official conduct. (Brinckerhoff v. Bostwick,88 N.Y. 52, 58; Robinson v. Smith, 3 Paige, 222; Verplank v.Mercantile Ins. Co., 1 Edwards' Ch. 46; Charitable Corp. v.Sutton, 2 Atkyns, 400; Hodges v. New England Screw Co.,1 R.I. 312.) The corporation itself had the right to call the directors to account, and such was originally the form of the action before us, but since the trial a receiver has been appointed and substituted as plaintiff herein.

While detached portions of the complaint, when read by themselves, would support several causes of action, when all the allegations are considered together we find but two, one an action against trustees, or those liable as trustees, for an accounting, and another, incidental thereto and consistent therewith, arising out of the same transaction and belonging to the same class, to wit, an action to set aside a written contract entered into through the defendants as trustees pursuant to the same fraudulent conspiracy upon which the main cause of action is founded. Both rest upon the same equitable principle, although one depends upon a single overt act and the other upon many, committed in carrying the conspiracy into effect. That principle is that the directors of a corporation are charged with the duties of trustees and bound to care for its property and manage its affairs in good faith, and for a violation of that duty resulting in waste of its assets, injury to its property, or unlawful gain to themselves, they are liable to account in equity the same as ordinary trustees. The corporation has the right to call upon them to account, not only for all the property intrusted to their care, but also for all moneys furtively made by them at its expense. It is the peculiar province of courts of equity to supervise the execution of trusts and to call trustees to an accounting for their management of trust estates, and especially for every violation of their primary duty not to deal with trust property for their own advantage. (Hiscock v. Lacy, supra; Husted v. Thomson,158 N.Y. 328, 335.) Equitable jurisdiction extends to all culpable acts and omissions of the directors, by which the pecuniary interests of the corporation are or may be injured. If they are treacherous to its interests and appropriate its property, or intentionally waste its assets, or take money for official action, or "sell out" by resigning and thus giving control to others, they are liable to account in equity to the corporation or its representatives, not only for the money or property in their hands, but also for such as they fraudulently disposed of or wasted, as well as for the damages naturally resulting from their official misconduct, and even, as we have recently held, for money received by virtue of their office. (McClure v.Law, 161 N.Y. 78.) A court of equity has power, at the instance of the proper party, through its flexible and comprehensive action for an accounting, to inquire into every official act of the officers and directors, and testing them by the standard of good faith and the absence of gross negligence, to compel restitution of property withheld, with compensation for assets wasted, and to award damages for the natural consequences of official misconduct, when such damages are claimed, in connection with equitable relief, on account of a general course of injurious action or a conspiracy to despoil the corporation. Even if part of the relief could be had in actions at law, still, when it is sought in connection with strictly equitable relief, such as the discovery of trust property and the recovery thereof, and the right to all relief springs from a common cause, such as a conspiracy, all may be included in the sweeping action for an accounting.

The sum of $1,168.53, specifically alleged to have been paid to the defendants in excess of the withdrawal value of their shares, belonged to the corporation, and they are liable to account for it as money wrongfully paid to them pursuant to the conspiracy. The amount, not specifically alleged, paid to them for official action, was money obtained pursuant to the same conspiracy by virtue of their office as directors, for which they must account as part of the assets of the corporation. This money they could not lawfully receive for themselves. They received it as the price of the transfer of all the corporate assets to the custody of irresponsible third parties, and the law, in order to protect the corporation, treats it as its property, and, therefore, money which it is entitled to recover from all the defendants. Their conspiracy was to keep it themselves, and the receipt thereof was an overt act in execution of the conspiracy. The loss of money by the corporation subsequent to the conspiracy, and in consequence thereof, through the wrongful acts of the defendants' successors placed in office by their treachery, was the natural, and, therefore, the expected result of the conspiracy itself.

The value of the assets wasted and the amount of expense incurred as the direct and natural result of the conspiracy must be accounted for by the defendants, because those assets were intrusted to their care and protection as trustees, and having broken their trust they are liable for all the proximate consequences. Through an action for an accounting a court of equity has power to discover and fix the value of all assets improperly withheld pursuant to the conspiracy, and of all property lost and damages caused by the wrongful acts of the defendants, and to compel them jointly and severally to pay the aggregate amount over to the plaintiff. Through the conspiracy and the overt acts in execution thereof, the defendants violated their duty as trustees, and equity will award complete relief in a single action for all the consequences of such violation, even if a part thereof might be had in an action at law. While thecestui que trust may sometimes proceed at law against his trustee, he need not do so but may always call him into a court of equity. That course was pursued in this case and the entire complaint, although verbose and inartificial in form, is simply an action to compel trustees to account, except so far as it seeks to set aside a written contract, entered into between one of the defendants and the corporation in partial execution of the conspiracy, whereby assets were to be wrongfully diverted to him. All the defendants are responsible for that contract, for it was part of the fraudulent confederation into which they all entered. It was part of the wrong intended and accomplished by them. The cause of action to set it aside was properly united with the cause of action to compel the defendants to account for the injurious results of the arrangement of which it was a part. Both causes of action were founded upon claims against trustees arising by operation of law. (Code Civ. Pro. sec. 484, par. 8.) The fundamental fact upon which the right to all relief rested was the conspiracy entered into by the trustees against the corporation to do or aid in doing all the acts complained of. All the injuries charged result from the overt acts of the defendants pursuant to and in execution of the conspiracy. As all stand on that common ground, all were affected by each cause of action, although not equally. All were proper parties and the cancellation of the contract was relief appropriate and incidental to the main object of the action, which was to compel trustees to account for official misconduct and make restitution of property withheld, with compensation for property wasted and expenses necessarily incurred to prevent further injury. In a single equitable action the court may go to the bottom of the wrong, and work out, in such form as the facts require, all the relief called for by the conspiracy of the defendants against the corporation toward which they stood as trustees.

The order appealed from should be reversed, the demurrers overruled, with costs in all courts, and the questions certified answered in the affirmative.

PARKER, Ch. J., BARTLETT, HAIGHT, LANDON, CULLEN and WERNER, JJ., concur.

Ordered accordingly.