Smith v. Rathbun

This is an action by the First National Bank of Elmira, and by Smith, a stockholder therein, against one of the directors, and against the executors of a deceased director. The complaint avers-that Yan Campen, the president of the bank, in violation of his-duty, lent money of the bank without security, and borrowed, took,, and appropriated money to his own use; and did other acts of misconduct, by which the bank sustained great losses. It avers that-the said director and the said deceased director knew of these acts of the president; might have prevented them ; negligently. permitted and allowed him to do them; aided, countenanced, and. assisted him in them ; concealed the facts from the plaintiff, Smith,, and other stockholders; and allowed, permitted, and assisted said president so to draw, loan, use, and waste the funds and property *154•of the bank, whereby the bank sustained damage to the amount of $135,000, and the plaintiff, Smith, to the amount of some $7,000. The complaint demands judgment that the defendants be required -to pay the damages, or so much as the damages of the several shareholders may amount to, who may come in and contribute, &c.

The defendants demur.

They insist that Yan Campen should be a party defendant, .and cite Sherman v. Parish (53 N. Y., 483.) But that case is not •exactly like the present. That arose between a cestui que trust •.and a trustee.. And it is plain that the relation between the stockholders of a corporation and the directors is not precisely that of ■cestuis que trust and trustees. The directors are not the legal ■owners of the property of the corporation. And the stockholders are legal owners of their respective shares of stock. To an action hy a stockholder against a director for mismanagement and the like, the corporation must be a party. (Greaves v. Gouge, 69 N. Y., 154.) If the directors were the immediate trustees of the ■stockholders, this could not be necessary.

In another respect Sherman v. Parish is not like the present ■case. The acts of the trustee who was sued, were “ innocent in •themselves and in the orderly course of the matter.” The present ■demurrer admits that the two directors countenanced, allowed, permitted and assisted the president, Yan Campen, to use and waste -the funds. To do that was not innocent, or in the orderly course ■of the matter. Furthermore, the court held that, in that case, the ■trustee sued was not, on the facts, liable at all for the acts of his •co-trustee. Whether a trustee who assists another to waste the trust property, when made to answer, can have recoinpense from the trustee whose wrongful act he has assisted is not decided in that •case.

Yery much of the argument on the part of the defendant rests ■on the assumption that the directors are trustees, and the stockholders cestuis que trust. Thus the defendants urge that Yan •Campen, as director, was trustee, and as stockholder was cestui que .trust / and that a cestui que trust who has participated in the breach of trust must be made a party defendant. Now, while we •often speak of the officers of a corporation as having trusts to dis*155■charge, we must remember that this phrase does not mean that tthey are trustees, in the accurate sense of holding a legal title to property of which another is the beneficiary. The officers are the .•agents of the corporation. (Smith v. Rathbun, 66 Barb., at 409.)

They insist further that Yan Campen must be a party, because, as a stockholder, the recovery would be for his benefit, and hence he would retain what he had taken, and, besides, would recover, as a stockholder, his ratable proportion from the defendants. "We need not examine here what amount might be recovered in this action from these defendants. But whatever that amount might be, it is plain that, as long as Yan Campen should remain indebted to the bank, he could not share in the recovery without paying what he owed. And to illustrate the incorrectness of the argument, suppose that two stockholders severally owed a bank on their notes, and one of them was insolvent. If the bank sued the solvent debtor, it would not lie with him to insist that the other debtor ought to be a party, on the ground that, if not, he would have the benefit of the recovery, while himself a debtor. The question here is whether the defendants have, by their acts, so injured the corporation that they are liable to it for the injury sustained.

The defendants insist that the other directors should be made parties defendant. To this it may be said that the pleadings do not show that there are other directors. Admitting that the National Bank act requires five, it does not follow that there was that number. And, again, the other directors may not, have aided or countenanced the acts of Yan Campen. , .

The most serious question, however, as it seems to us, arises on the matter of parties plaintiff. The complaint, as amended, alleges that the action was commenced originally by Smith, as sole plainxiif, and that the bank has since been ordered and allowed by the court to be joined as a party plaintiff, and is so joined by the amended complaint.

Now the action could not be maintained by Smith as sole plaintiff, because the right of a stockholder to sue in such cases depends upon the refusal of the corporation to sue. The right of action is’ primarily in the corporation, and it is only when the corporation refuses to sue, and for that reason only, that the stockholder him*156self-can bring an action. (Greaves v. Gouge, ut supra.) And it is-said there that the refusal of the corporation to sue is an essential element of the cause of action, and the complaint is defective and insufficient without it. It therefore follows that when the action was commenced there was not merely a defect of parties in the non-joinder of the corporation, but there was a defect as to the cause of action in the absence of a request to the corporation to sue, and its refusal. That is to say, Smith had not merely neglected to join all necessary parties (in omitting the bank), but he had not put himself in a position to have a right of action. In such a case tbe court cannot help him by joining to one who has not a right of action another plaintiff who has. This is but common sense, and is established in Davis v. Mayor (14 N. Y., 506). The defendant urges, therefore, that the demurrer should be sustained as to the plaintiff Smith. It may be argued, however, that, after all, the right of action in favor of a stockholder and that in favor of the corporation are not so distinct that the principle of the last case should apply. But we do not think it necessary to pass upon that question, because it seems to us that the validity of the order is not put in issue by the demurrer. If we admit (for the sake of the argument, and on the authority of the case last cited) that the court would have had no right, against the defendant’s objection, to add the bank as plaintiff, still the difficulty is that the demurrer admits that this has been done. For anything that we know the order was made by consent, or it may have been appealed from and affirmed by the Court of Appeals. For the decision in Davis v. Mayor is twenty years old. And therefore we do not think that on the demurrer-we can inquire as to the validity of the order for adding the bank as plaintiff. It must stand as a valid act. And we must, on the consideration of the demurrer, treat the parties plaintiff substantially as if the action had been commenced by both.

The defendants insist that the complaint is demurrable as to the bank because it is filed in behalf of cesfuis que trust, who have concurred in the breach of trust. If that argument is sound, a corporation has no right to recover against any officer for fraud or embezzlement, if that officer is a stockholder; for the reason that *157ns a stockholder he isa cestui que trust, and therefore has concurred, in his own wrong-doing. "We do not think there is much force in this argument, it could hardly be put forward, except, under the misapplication of the terms trustees and cestuis que trust, above noticed. Neither the corporation nor the directors hold the exact character of trustees, nor the stockholders the exact character of ■cestuis que trust.

The misjoinder of parties plaintiff was not a ground of demurrer when the issue was framed. (People v. Crooks, 53 N. Y., 648.) •So that, if a cause of action is shown, the demurrer cannot be sus • tained, though Smith be an unnecessary party.

The defendants insist that two causes of action are improperly joined; the one for negligence and the other for malfeasance, and they cite the case of Wiles v. Suydam (64 N. Y., 173). The court, in that case, commenting on the language of section 167 of the Code, says that it is impossible to lay down a general rule which will serve as an accurate guide for future cases. In the present case the alleged liability of the defendants arises upon what they did, or failed to do, in respect to Yan Campen’s wrongful acts, in misusing the property of the bank. Now it is plain, on a moment’s thought, that if Yan Campen did thus misuse the property of the bank, it would be almost impossible to draw a distinct line between acts of the defendants which would be only permitting, and those which would be aiding, his wrong-doing. One who permits, when he can prevent, and ought to prevent, assists. In the case of Wiles v. Suydam, there were two entirely distinct acts, charged as grounds of recovery; one a- neglect to lile a certificate that the stock had been paid in; the other a neglect (which could only be predicated of a trustee) to file the annual report. But a culpable neglect to prevent a thief from taking property .left in one’s charge, is an assistance to the theft.

The cpiestion in this case must be, whether there is anything .alleged in the complaint which, if proved on a trial, would authorize any recovery, to any amount, against the defendants. After a consideration of the very extended argument of the defendants, we think that there is; and therefore that the judgment should be affirmed, with costs, with leave to withdraw demurrer and answer *158over, on payment of costs in twenty days. But in coming to this conclusion we do not pass on the question whether the bank has-been properly made a party plaintiff.

Judgment affirmed, with costs, with leave to* withdraw demurrer and answer over on payment of costs in twenty days.