Appeal from Special Term, New York County.
Action by Fanny L. Waters against Horace Waters & Co. and others. From a judgment adjudging the issuance of the three shares of stock of said corporation illegal and a fraud on it and its stockholders, and decreeing that they be delivered to it for cancellation, and that they be forthwith canceled, certain defendants appeal. Reversed, and complaint dismissed.
[115 N.Y.S. 433] H. Aplington, for appellant Kohn.
Sanborn & Sanborn (David Leventritt, of counsel, and N. B. Sanborn, on the brief), for other appellants.
Horace Waters & Co., White, Sanborn & Scholz, and Samuel T. White, pro se.
Parker, Hatch & Sheehan (Edward W. Hatch, of counsel), for respondent.
Argued before INGRAHAM, McLAUGHLIN, LAUGHLIN, CLARKE, and SCOTT, JJ.
Prior to the month of July Horace Waters, now deceased, William H. Alfring, now deceased, and the defendants Samuel T. White and Timothy Leeds Waters, were copartners engaged in a mercantile and manufacturing business in the city of New York under the name and style of " Horace Waters & Company." They entered into a written agreement under their hands and seals dated July 15, 1886, by which they agreed to form a corporation by the name of Horace Waters & Co., with a capital stock of $150,000. Pursuant to the agreement, the defendant Horace Waters & Co. was duly organized as a corporation according to the laws of the state of New York, and said copartners were the incorporators thereof. The assets of the firm were assigned to the said corporation, and certificates of stock were thereafter duly issued to the said incorporators in payment for their several interests therein, to wit, to Horace Waters, 530 shares, to Alfring, 198 shares, to White, 141 shares, and to Timothy Leeds Waters, 141 shares, of the par value of $100 each. Said agreement provided, among other things, that the parties thereto should immediately on the receipt thereof " invest any dividends and any interest on undrawn dividends and any amounts paid to them by said Horace Waters as hereinafter provided in the purchase from the corporation of its capital stock for so long as and whenever it has any unissued either of its original stock or of any increase thereof" ; that, " in all cases of the purchase of unissued stock of the corporation, each of the parties hereto shall be entitled during the lifetime of the said Horace Waters to purchase an equal share thereof and an equal share of any shares which any other party hereto may be entitled to take but shall elect not to take, and after the decease of said Horace Waters each of the other parties hereto, and the executor, trustee, and legatees of the said Horace Waters, shall be entitled to purchase all such shares of stock in the proportion of the number of shares then held by the said several parties, respectively," and the said Horace Waters covenanted and agreed that:
" So long as he should live and each of the other parties hereto shall live and in good faith observe all the conditions, agreements, and covenants herein contained to be kept, performed, or observed by them, and so long as he shall receive his said salary of $175 per week, he will pay to them and each of them out of any dividends which may be declared and which he may from time to time receive on his said stock a sum of money which added to the dividends then declared on the stock then held by them respectively shall equal one-quarter of the dividend then declared."
[115 N.Y.S. 434] In October, 1886, a dividend was declared by the said Horace Waters & Co., and, pursuant to the agreement of July 15, 1886, five shares of the capital stock were thereupon sold and issued to each of the incorporators, and on January 25, 1887, a further dividend was declared and 37 shares of the capital stock of the said corporation were then sold and issued to each of the said incorporators, after which the capital stock of the corporation was held and owned as follows, to wit, Horace Waters, 572 shares; William H. Alfring, 240 shares; Timothy Leeds Waters, 183 shares; and Samuel T. White, 183 shares. William H. Alfring died in the month of February, 1887. After the dividend of January 25, 1887, and prior to April 22, 1893, various stock dividends were declared for which stock was issued in equal amounts to the stockholders, except that, after the death of William H. Alfring, the dividends on his stock were paid in cash to his personal representatives. The whole of the 1,500 shares of authorized capital stock having been issued and disposed of in the month of February, 1890, the stockholders duly authorized an increase in the capital stock from $150,000 to $250,000. Horace Waters died April 22, 1893, and at the time of his death there had been sold and issued, as provided in said agreement, $211,500 of the authorized capital stock of $250,000 which was held as follows: Horace Waters, 1,007 shares; Samuel T. White, 554 shares; Timothy Leeds Waters, 554 shares. Horace Waters left a will which was duly probated. He bequeathed to his son, the defendant Timothy Leeds Waters, and to the plaintiff, Fanny L. Waters, the wife of Timothy, one-half of his shares in the capital stock of Horace Waters & Co., which he directed his executor to assign and transfer to them in specie, to be divided equally between them share and share alike, and declared with respect to said shares that the same were bequeathed subject to the conditions of the agreement hereinbefore referred to, and on the condition that the agreement, so far as it related to his personal representatives or purported to bind them, should be fully carried out and observed by the legatees, executor, and trustee. Horace Waters by his will appointed the defendant Noel B. Sanborn executor of and trustee of the trust created therein and thereby, and he duly qualified and entered upon the discharge of his duties as such, and is still so acting.
On May 3, 1893, the defendants Waters and White each sold and transferred one share of stock to Alexander Hamilton, for which the said Hamilton paid cash at par, and was thereupon elected a trustee of said company. In July, 1896, the defendants Waters and White each sold and transferred one share to I. C. Swazey, who was thereupon elected a trustee. The shares of stock were sold to Hamilton and Swazey for the purpose of qualifying each of them to fill the office of trustee. In April, 1898, Sanborn, as executor of Horace Waters, held 1,007 shares of the stock for distribution under the will, and, as these shares could not be divided without leaving fractions, he sold and transferred to the defendant Waters two shares, and to the plaintiff Fanny L. Waters one share belonging to the estate of the said testator, which sale was made at private sale, and without giving any notice to the other stockholders of the corporation. White had notice of such sale after the same was made and acquiesced therein. [115 N.Y.S. 435] On April 22, 1898, Sanborn transferred and distributed the remaining 1,004 shares of stock by assigning and transferring to the defendant Waters 251 shares thereof, and to the plaintiff Fanny L. Waters 251 shares thereof, and to himself as trustee for Horace Waters, Jr., 251 shares thereof, and as trustee for Josie K. Waters, 251 shares thereof, and the same were duly transferred on the books of the company, and have been held and owned in the names of the respective transferees at all times since the transfer thereof. After such transfers, the stock of the corporation was held and owned as follows: T. Leeds Waters, 805 shares; Fanny L. Waters, 252 shares; Noel B. Sanborn, as trustee for Horace Waters, Jr., 251 shares; Noel B. Sanborn, as trustee for Josie K. Waters, 251 shares; Samuel T. White, 552 shares; Alexander Hamilton, 2 shares; and I. C. Swazey, 2 shares. On September 20, 1899, at the request of the defendant White, Swazey sold and transferred one of his shares to the defendant Waters and one to the defendant White, and thereupon the said T. Leeds Waters became the owner of 806 shares, and the plaintiff Fanny L. Waters of 252 shares, the two together owning 1,058 shares, while all the other stockholders owned 1,057 shares.
The defendants Waters and White have been trustees and directors of Horace Waters & Co. ever since its organization, and since the death of Horace Waters T. Leeds Waters has been the president and treasurer, and the defendant White has remained the vice president and secretary of the corporation. Since July, 1905, the trustees have been T. Leeds Waters, Samuel T. White, Noel B. Sanborn, and Charles Scholz, the defendants in this action. On February 12, 1900, the defendant Waters, acting as president and treasurer, and the defendant White, acting as secretary of said corporation, sold to Alexander Hamilton three shares of the then unissued capital stock, and issued and delivered to him a certificate therefor, which said stock was so issued and delivered at par and without giving the other stockholders of the corporation an opportunity to subscribe for or to make the same or a proportional part thereof. At the time said shares of stock were sold and issued to Hamilton he had for many years been in the employ of Horace Waters & Co. as its cashier, and for nearly seven years had been and then was one of the trustees thereof. At the time of said issue, the defendants Waters, White, and the said Hamilton were the only trustees of the corporation, and all of them assented to and participated in the issue of the stock to Hamilton, but no formal resolution was passed and entered authorizing such issue. Hamilton died in July, 1901, and at the time of his death he was the owner of five shares which stood in his name on the books of the corporation. After the death of Hamilton, the defendant White purchased from his administratrix said five shares of stock, paying her therefor $500, the par value thereof, which sum be borrowed from the corporation through its treasurer, the defendant Waters, and such stock was duly assigned and transferred to him by said administratrix, and was thereafter transferred on the books of the corporation to said White, but no new stock certificate therefor was issued. White repaid to the corporation the $500 so loaned to him. From the time Alexander Hamilton became the owner [115 N.Y.S. 436] of the three shares said shares have been regularly voted at stockholders' meetings at which the defendant Waters, who is the plaintiff's husband, and who at the election in July, 1905, held her proxy as a stockholder, was present and voted, and dividends have been paid thereon by the said Waters, as treasurer of the defendant corporation. At a meeting of the trustees held on October 17, 1905, at which the defendants Waters, White, Sanborn, and Scholz were present, a resolution was introduced, which, after reciting the issue of stock of the corporation on various occasions from the year 1886 to the year 1901, and which included in express terms the issue of said three shares of stock to Alexander Hamilton on the 12th day of February, 1900, provided among other things as follows:
" Resolved, that we do hereby ratify, approve and confirm the said several issues of stock, and each and every one of them, and do hereby direct and declare that each of said issues of stock, shall have the same force and effect and be of the same validity as if the board of trustees of this company had by a formal resolution, entered in the minutes, authorized and directed each of the said issues of stock before the issue thereof."
The defendant Waters protested against such action, and asked that the matter be deferred, which request was denied, and the resolution was adopted by the votes of a majority of the trustees; said Waters voting in the negative. In November, 1905, the defendant Samuel T. White transferred three of the shares of stock which had formerly been issued to Alexander Hamilton to the defendant Solomon H. Kohn at their par value of $100 each. The plaintiff, who is the wife of the defendant Waters, and the owner of 252 shares out of the 2,118 issued, brings this action in a representative capacity to have the three shares of stock issued to Hamilton in 1900 surrendered and canceled. She alleges that the stockholders, by virtue of their relation as stockholders and of the agreement, were and are legally and equitably entitled to subscribe for and purchase any unissued stock in preference to others, and the same could not be lawfully issued to others than said stockholders without their express consent and sanction; that without the authority, knowledge, or consent of the plaintiff or of any stockholder, except themselves, the defendant White acting as secretary and the other officer or officers (which included her husband), whose duty it was to authenticate its certificates of stock, acting in bad faith and in disregard of the legal and equitable rights of the stockholders, wrongfully, unlawfully, and fraudulently, and in violation of their, and each of their obligations, as trustees, sold and issued three shares of stock to Alexander Hamilton without giving the other stockholders an opportunity to subscribe for or to take the same; that such sale was done at the instigation of the defendant White, and to his nominee, and the issue of such stock was a part of a scheme and plan on the part of White to obtain control of the corporation, and was a fraud upon the corporation and its stockholders; that, in pursuance of his fraudulent scheme and plan to obtain control of the corporation, the defendant White caused the resolution to be introduced at the meeting of the trustees which ratified and confirmed the several issues of stock which had been made; that said White threatens and intends [115 N.Y.S. 437] to procure the ratification by the board of trustees of the fraudulent, wrongful, and unlawful issue of said certificates of stock to said Hamilton, and to procure the transfer thereof to the defendant Kohn on the books of the corporation, and the issue to him therefor which will perpetuate the fraud upon the corporation and its stockholders heretofore perpetrated by and through the defendant White and the said trustees, and will do so, unless restrained by the order of this court, to the irreparable injury and damage of said corporation and its stockholders, for which injury and damage there is no remedy at law; that the defendant corporation is still under the control of the same trustees, a majority of whom voted to ratify and confirm the alleged fraudulent issue of stock, and whose further acts in that behalf it is sought to restrain in this action, and it would therefore be useless to ask them to bring this action in the name of the corporation; wherefore, the action is commenced and will be ...