Pondir v. New York, Lake Erie & Western Railroad

FOLLETT, J. There is no conflict in the evidence in this case. All of the material facts were testified to by the officers and employes of the defendants, who offered no evidence except the order of December 30, 1879, discharging Hugh J. Jewett as receiver of the Erie Railway Company. By the transactions set forth in the statement of facts, the Erie Railway Company and its successor, the Hew York, Lake Erie & Western Railroad Company, have -acquired the property reserved in the lease, without any consideration being paid therefor. This was effected through the complaint board of directors of the Buffalo, Bradford & Pittsburgh Rail [563] road Company, elected and controlled by the Erie Railway Company, which held a majority of the stock of the Buffalo, Bradford & Pittsburgh Railroad Company. By this means the last-mentioned corporation was stripped of all of its property, except that used for railroad purposes, and for the use of which nothing will be paid for 499 years, except taxes assessed on its property, and the interest on its debt. This renders all of the shares not held by the Erie Railway Company practically valueless, and that such was the intended effect is apparent from the transactions. This was a fraud on the Buffalo, Bradford & Pittsburgh Railroad Company, and its shareholders. Such frauds are not uncommon in the management of corporations, and, when they are exposed, should be condemned by the courts, and a heavy hand laid upon all who participate in them. On the 16th of March, 1880, the plaintiff requested the Buffalo, Bradford & Pittsburgh Railroad Company to bring an action against the Erie Railway Company to redress the wrongs herein complained of, which request was not complied with; and it is apparent that further application would have been unavailing, for the three defendants appeared in this action by the same attorneys, and served answers in all respects alike, except it is alleged in the answer of Hugh J. Jewett that his accounts as receiver have been approved by the court, and that he has surrendered all of the property that came into his hands, and was discharged from his receivership on the 30th day of December, 1879. Under such circumstances, an action may be maintained by a shareholder to redress the wrong done to the corporation of which he is a member. Brinckerhoff v. Bostwick, 88 N. Y. 52; Barr v. Railroad Co., 125 N. Y. 263, 26 N. E. Rep. 145. In the case first cited, it was said: “The action to recover such losses, as before observed, should, in general, be brought in the name of the corporation; but, if it refuses to prosecute, the stockholders, who are the real parties in interest, will be permitted to sue in their own names, making the corporation a defendant Greaves v. Gouge, 69 N. Y. 154. And that course of proceeding is also allowed if it appears that the corporation is still under the control of those who must be made the defendants in the suit. See Butts v. Wood, 37 N. Y. 317; Robinson v. Smith, 3 Paige, 222. In such cases a demand upon the corporation to bring the suit would be manifestly futile and unnecessary. A suit prosecuted under the direction and control of the very parties against whom the misconduct is alleged, and a recovery is sought, would scarcely afford to the shareholders the remedy to which they are entitled; and the fact that the delinquent parties are still in control of the corporation is, of itself, sufficient to entitle the shareholders to sue in their own names. Hodges v. Screw Co., 1 R. I. 318; Heath v. Railway Co., 8 Blatchf. 347. If they could not be permitted, in such cases, to assert their own rights in a court of equity, the directors, so long as they remained in office, could set them at defiance.” The Buffalo, Bradford & Pittsburgh Railroad Company was not a party to the action for the foreclosure of the mortgage under the judgment in which the property of the Erie Railway Company was sold, and acquired by the Hew York, Lake Erie & Western Railroad Company, and the rights of the Buffalo, Bradford & Pittsburgh Railroad Company are not cut off by the judgment and sale; [564] and, besides, the mortgage was not a lien on the property and rights reserved to the lessor in the lease. Upon, the discovery of the fraud, an action could be maintained by a shareholder (the corporation refusing to sue) to set aside the deed of December 30, 1876, and the subsequent conveyances and liens, but' to such an action the subsequent grantees and holders of liens are necessary parties; or an action could be maintained against the parties to the fraud, and those who subsequently aided in its consummation, to compel them to account, as trustees ex maleficio, for whatever they have received through the wrongs which they committed. To such an action the subsequent grantees and lienors are not necessary parties, for no relief could be granted against them; and in this case, for a stronger reason, the Northwestern Mining & Exchange Company and the New York, Lake Erie & Western Coal & Railroad Company are not necessary parties to such an action, for the stock of both corporations is entirely owned by the New York, Lake Erie & Western Railroad Company. It is asserted that in no event can Jewett, as receiver, be compelled to account. This may or may not be so. The conveyance of December 30, 1876, by which the Buffalo, Bradford & Pittsburgh Railroad Company was deprived of its property, was executed when Jewett was acting as the receiver of the Erie Railway Company; and for several years he, as receiver, received a portion of the rents and profits of the lands conveyed. We think he should be required to account, and to show how these receipts were disposed of. It may be that it will appear that his accounts rendered to the court were so stated that its order approving of his transactions, and discharging him, will be a defense, but this cannot be determined in advance of the accounting. Under the evidence contained in this record, we can seen no answer to the plaintiff’s claim that the New York, Lake Erie & Western Railroad Company should be required to account, and pay over to the plaintiff the rents and profits acquired by it through these fraudulent dispositions of the property of the corporation in which the plaintiff is a shareholder. The defendants not having pleaded that the subsequent grantees of the Buffalo, Bradford & Pittsburgh Railroad Company, and the persons and corporations who have acquired liens upon the property, were necessary parties, they were not in a situation to ask to have the action dismissed on the ground that these corporations and persons should have been brought into the action. Code Civil Proc. § 499. • When a defect of parties is pleaded, and the plea is sustained by the evidence, the court may refuse to allow The the cause to stand over, and dismiss the suit; but when a defect to parties is not pleaded, and the necessity for other parties to the action appears on the trial, the plaintiff not being guilty of loches, the suit should not be dismissed, but ordered to stand over, on proper terms, to enable the plaintiff to bring the necessary parties before the court. Colt v. Lasnier, 9 Cow. 320; Van Epps [565] v. Van Deusen, 4 Paige, 64; 1 Barb. Ch. Pr. 321; 1 Daniell, Ch. Pr. (3d Amer. Ed.) 291 et seq. The judgment should be reversed, and a new trial granted, with leave to the plaintiff to apply to bring any such additional parties as he may be advised, with costs to the appellant, to abide the event.