author: Froessel, J. Desmond, J. Van Voorhis, J.

text:
    William Rosenfeld, on Behalf of Himself and All Other Stockholders of Fairchild Engine and Airplane Corporation, Similarly Situated, Appellant, v. Fairchild Engine and Airplane Corporation et al., Respondents, et al., Defendants.
    Argued March 2, 1955;
    decided July 8, 1955.

      Abraham Marcus, Alan J. Stein and William Bosenfeld, in person, for William Rosenfeld, appellant.
    I. The expenditure by the incumbent board of directors of corporate funds to obtain its own re-election in a proxy fight was improper. (Lawyers' Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., 187 N. Y 395; Cherwien v. Geiter, 272 N. Y. 165; Matter of Marchant v. Mead-Morrison Mfg. Co., 252 N. Y. 284; Weissman v. Banque De Bruxelles, 254 N. Y. 488; Savage v. O’Neil, 44 N. Y. 298; Hall v. Trans-Lux Daylight Picture Screen Corp., 20 Del. Ch. 78; Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649; Peel v London & North Western Ry. Co., [1907] 1 Ch. 5; Steinberg v. Adams, 90 F. Supp. 604.) II. The holdings below approving reimbursement out of corporate funds for proxy expenses oi successful insurgents are based on fundamental misconceptions of legal theory. III. The Appellate Division, in denying recover) on procedural grounds for the “ substantial amount of needless expense which was charged to the corporation ”, ignored the settled rule in equity actions that proof of wrongdoing requires a judgment for an accounting; and ignored the rule placing the burden of proof upon the directors who caused the improper expenditures to be made. (Owen v. Blumenthal, 280 N. Y. 96; Sheehan v. Moore & McCormack Co., 219 App. Div. 317; Sage v. Culver, 147 N. Y. 241; Fur & Wool Trading Co. v. Fox, 245 N. Y. 215; German-Amer. Coffee Co. v. O’Neil, 216 N. Y. 726; Godley v. Crandall & Godley Co., 153 App. Div. 697, 212 N. Y. 121; Hine v. Lausterer, 135 Misc. 397, 232 App. Div. 719, 257 N. Y. 523; Kreitner v. Burgweger, 174 App. Div. 48; Hyams v. Calumet & Hecla Min. Co., 221 F. 529.) IV. The new board of directors should have been held liable for permitting payment to be made by the corporation of improper expenditures incurred by the former board. (Matter of Horowitz, 272 App. Div. 942, 297 N. Y. 252; Carr v. Kimball, 153 App. Div. 825, 215 N. Y. 634.) V. Stockholders’ ratification of the improper expenditures of corporate moneys to reimburse the successful insurgent group was invalid and ineffective. As a gift and waste of corporate funds, the reimbursement could not be ratified. (Matter of Pennsylvania Whiskey Distr. Corp. v. Bruckman, 256 App. Div. 781; Continental Securities Co. v. Belmont, 206 N. Y. 7; Rogers v. Hill, 289 U. S. 582; Pollitz v. Wabash R. R. Co., 207 N. Y. 113; Schwab v. Potter Co., 194 N. Y. 409; Wheeler v. Home Sav. Bank, 188 Ill. 34; Holland Baking Co. v. Continental Nat. Bank, 324 Mo. 1.) VI. Ratification, in any event, was ineffective because obtained upon a false and misleading proxy statement. (General Investment Co. v. American Hide & Leather Co., 97 N. J. Eq. 214; Berendt v. Bethlehem Steel Corp., 108 N. J. Eq. 148; Cahall v. Lofland, 12 Del. Ch. 299, 13 Del. Ch. 384.) VII. Stockholders’ ratification of insurgents’ reimbursement cannot be held to constitute an implied ratification of incumbents’ improper expenditures. (Pollitz v. Wabash R. R. Co., 207 N, Y. 113.) VIII. The release of Ward did not have the effect of releasing the other old directors. The old directors other than Ward, having given no consideration, cannot be deemed released. (Rider v. Morrison, 54 Md. 429; McQuillen v. National Cash Register Co., 27 F. Supp. 639, 112 F. 2d 877, 311 U. S. 695, 311 U. S. 729; Rogers v. Hill, 289 U. S. 582; Gilbert v. Finch, 72 App. Div. 38, 173 N. Y. 455; Bessilieu v. Brown, 177 N. C. 65.)

      Harold R. Medina, Jr., for O. Parker McComas and another, respondents.
    I. The old board properly used corporate funds to present their views to the stockholders and to solicit support of those views. (Peel v. London & North Western Ry. Co., [1907] 1 Ch. 5; Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649; Steinberg v. Adams, 90 F. Supp. 604; Atwater v. Elkhorn Valley Goal-Land Co., 184 App. Div. 253, 227 N. Y. 611; Godley v. Crandall & Godley Co., 181 App. Div. 75, 227 N. Y. 656; Rascovor v. American Linseed Co., 135 F. 341; Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., 187 N. Y. 395.) II. Even if the old board improperly expended corporate funds in the proxy contest, the ward release was valid and therefore discharged them from all claims.

      Jacquelin A. Swords and William K. Zinke for Sherman M. Fairchild, respondent.
    I. Management may expend corporate funds to finance a proxy contest provided the contest revolves around matters of corporate policy and provided the expenditures, under the circumstances, are reasonable. (Peel v. London & North Western Ry. Co., [1907] 1 Ch. 5; Hall v. Trans-Lux Daylight Picture Screen Corp., 20 Del. Ch. 78; Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649; Steinberg v. Adams, 90 F. Supp. 604; Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., 187 N. Y. 395; Rascovor v. American Linseed Co., 135 F. 341.) II. Respondent Fairchild cannot be held liable for having permitted payment of expenses incurred by the old board in connection with the proxy fight. III. Members of a stockholder’s committee successful in a proxy contest in ridding their corporation of its old management may be reimbursed by vote of majority stockholders for theii expenses. (Murray v. Requardt, 180 Md. 245; Pollitz v. Wabash R. R. Co., 207 N. Y. 113; Trustees v. Greenough, 105 U. S. 527: Sprague v. Ticonic Bank, 307 U. S. 161.) IV. The proxy statement accompanying the notice of the 1950 annual stockholders meeting, at which the reimbursement was approved, was not false or misleading. (Koplar v. Warner Bros. Pictures, 19 F. Supp 173; Doyle v. Milton, 73 F. Supp. 281.)

      Samuel J. Silverman for James A. Allis, respondent.
    Respondent Allis acted both prudently and reasonably in a situation in which neither bis good faith nor his disinterestedness if questioned; he merely exercised his best judgment on a corporate problem, receiving no personal benefit from it. In these circumstances, there can be no recovery as against Allis for any part of the sums expended. (Blaustein v. Pan Amer. Petroleum & Transport Co., 263 App. Div. 97, 293 N. Y. 281; Carr v. Kimball, 153 App. Div. 825, 215 N. Y. 634; Matter of Horowitz, 272 App. Div. 942, 297 N. Y. 252; Simon v. Socony-Vacuum Oil Co., 179 Misc. 202, 267 App. Div. 890; Macdougall v. Gardiner, 1 Ch. D. 13.)
   Froessel, J.

In a stockholder’s derivative action brought by plaintiff, an attorney, who owns 25 out of the company’s over 2,300,000 shares, he seeks to compel the return of $261,522, paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses. The Appellate Division has unanimously affirmed a judgment of an Official Referee dismissing plaintiff’s complaint on the merits, and we agree. Exhaustive opinions were written by both courts below, and it will serve no useful purpose to review the facts again.

Of the amount in controversy $106,000 were spent out of corporate funds by the old board of directors while still in office in defense of their position in said contest; $28,000 were paid to the old board by the new board after the change of management following the proxy contest, to compensate the former directors for such of the remaining expenses of their unsuccessful defense as the new board found was fair and reasonable; payment of $127,000, representing reimbursement of expenses to members of the prevailing group, was expressly ratified by a 16 to 1 majority vote of the stockholders.

The essential facts are not in dispute, and, since the determinations below are amply supported by the evidence, we are bound by the findings affirmed by the Appellate Division. The Appellate Division found that the difference between plaintiff’s group and the old board went deep into the policies of the company ”, and that among these Ward’s contract was one of the main points of contention ”. The Official Referee found that the controversy ‘ was based on an understandable difference in policy between the two groups, at the very bottom of which was the Ward employment contract ”,

By way of contrast with the findings here, in Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co. (187 N. Y. 395), which was an action to recover for the cost of publishing newspaper notices not authorized by the board of directors, it was expressly found that the proxy contest there involved was ‘1 by one faction in its contest with another for the control of the corporation * * * a contest for the perpetuation of their offices and control ” (p. 399). We there said by way of dicta that under such circumstances the publication of certain notices on behalf of the management faction was not a corporate expenditure which the directors had the power to authorize.

Other jurisdictions and our own lower courts have held that management may look to the corporate treasury for the reasonable expenses of soliciting proxies to defend its position in a bona fide policy contest (Peel v. London & North Western Ry. Co., [1907] 1 Ch. 5; Kadel v. Segal Lock & Hdwe. Co., N. Y. L. J., Sept. 21, 1953, p. 488, col. 4 [Sup. Ct., N. Y. Co.]; McGoldrick v. Segal, N. Y. L. J., Sept. 14, 1950, p. 461, col. 2 [Sup. Ct., N. Y. Co.]; Matter of Zickl, 73 N. Y. S. 2d 181,185; Howard v. Segal Lock & Hdwe. Co., N. Y. L. J., Feb. 13, 1953, p. 496, col. 6 [City Ct., N. Y. Co.]; Appeal Print. Co. v. Segal Lock & Hdwe. Co., N. Y. L. J., Dec. 22, 1952, p. 1563, col. 3 [City Ct., N. Y. Co.]; Steinberg v. Adams, 90 F. Supp. 604 [S. D. N. Y.]; Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649 [D. Del.]; Empire So. Gas Co. v. Gray, 29 Del. Ch. 95; Hall v. Trans-Lux Daylight Picture Screen Corp., 20 Del. Ch. 78).

It should be noted that plaintiff does not argue that the aforementioned sums were fraudulently extracted from the corporation ; indeed, his counsel conceded that ‘ the charges were fair and reasonable ’ ’, but denied ‘ ‘ they were legal charges which may be reimbursed for ”. This is therefore not a case where a stockholder challenges specific items, which, on examination, the trial court may find unwarranted, excessive or otherwise improper. Had plaintiff made such objections here, the trial court would have been required to examine the items challenged.

If directors of a corporation may not in good faith incur reasonable and proper expenses in soliciting proxies in these days of giant corporations with vast numbers of stockholders, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a quorum, where there is no contest. In the event of a proxy contest, if the directors may not freely answer the challenges of outside groups and in good faith defend their actions with respect to corporate policy for the information of the stockholders, they and the corporation may be at the mercy of persons seeking to wrest control for their own purposes, so long as such persons have ample funds to conduct a proxy contest. The test is clear. When the directors act in good faith in a contest over policy, they have the right to incur reasonable and proper expenses for solicitation of proxies and in defense of their corporate policies, and are not obliged to sit idly by. The courts are entirely competent to pass upon their bona fides in any given cast/, as well as the nature of their expenditures when duly challenged.

It is also our view that the members of the so-called new group could be reimbursed by the corporation for their expenditures in this contest by affirmative vote of the stockholders. With regard to these ultimately successful contestants, as the Appellate Division below has noted, there was, of course, “ no duty * * * to set forth the facts, with corresponding obligation of the corporation to pay for such expense ”. However, where a majority of the stockholders chose — in this case by a vote of 16 to 1 — to reimburse the successful contestants for achieving the very end sought and voted for by them as owners of the corporation, we see no reason to deny the effect of their ratification nor to hold the corporate body powerless to determine how , its own moneys shall be spent.

The rule then which we adopt is simply this: In a contest over policy, as compared to a purely personal power contest, corporate directors have the right to make reasonable and proper expenditures,- subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corporation. The stockholders, moreover, have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny. That is not to say, however, that corporate directors can, under any circumstances, disport themselves in a proxy contest with the corporation’s moneys to an unlimited extent. Where it is established that such moneys have been spent for personal power, individual gain or private advantage, and not in the belief that such expenditures are in the best interests of the stockholders and the corporation, or where the fairness and reasonableness of the amounts allegedly expended are duly and successfully challenged, the courts ivill not hesitate to disallow them.

The judgment of the Appellate Division should be affirmed, without costs.

Desmond, J.

(concurring). We granted leave to appeal in an effort to pass, and in the expectation of passing, on this question, highly important in modern-day corporation law: is it lawful for a corporation, on consent of a majority of its stockholders, to pay, out of its funds, the expenses of a “ proxy fight ”, incurred by competing candidates for election as directors? Now that the appeal has been argued, I doubt that the question is presented by this record. The defendants served' were Allis who was on the old board but was re-elected to the new board, McOomas and Wilson, defeated members of the old board, and Fairchild, leader of the victorious group and largest, stockholder in the corporation. The expenses of the old board, or management group, in the proxy fight, were about $134,000,. and those of the victorious Fairchild group amounted to about $127,500. In the end, the corporation paid both those sums, and it is for the reimbursement thereof, to the corporation, that this stockholder’s derivative action is brought. Of the proxy fight expenses of the management slate, about $106,000 was paid out on authorization of the old board while the old directors were still in office. The balance of those charges, as well as the whole of the expenses of the new, and successful, Fairchild group, was paid by the corporation after the new directors had taken over and after a majority of stockholders had approved such expenditures. The election had been fought out on a number of issues, chief of which concerned a contract which Ward (a defendant' not served), who was a director and the principal executive officer of the company, had obtained from the corporation, covering compensation for, and other conditions of, his own services. . Each side, in the campaign for proxies, charged the other with seeking to perpetuate, or grasp, control of the corporation. The Fairchild group won the election by a stock vote of about two-to-one, and obtained, at the next annual stockholders’ meeting and by a much larger vote, authorization to make the payments above described.

Plaintiff asserts that it was illegal for the directors (unless, by unanimous consent of stockholders) to expend corporate moneys in the proxy contest beyond the amounts necessary to give to stockholders bare notice of the meeting and of the matters to be voted on thereat. Defendants say that the proxy contest revolved around disputes over corporate policies and that it was, accordingly, proper not only to assess against the corporation the expense of serving formal notices and of routine proxy solicitation, but to go further and spend corporate moneys, on behalf of each group, thoroughly to inform the stockholders. The reason why that important question is, perhaps, not directly before us in this lawsuit is because, as the Appellate Division properly held, plaintiff failed to urge liability as to specific expenditures ”. The cost of giving routinely necessary notice is, of course, chargeable to the corporation. It is just as clear, we think, that payment by a corporation of the expense of proceedings by one faction in its contest with another for the control of the corporation ” is ultra vires, and unlawful (Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., 187 N. Y. 395, 399). Approval by directors or by a majority stock vote could not' validate such gratuitous expenditures (Continental Securities Co. v. Belmont, 206 N. Y. 7). Some of the payments attacked in this suit were, on their face, for lawful purposes and apparently reasonable in amount but, as to others, the record simply does not contain evidentiary bases for a determination as to either lawfulness or reasonableness. Surely, the burden was on plaintiff to go forward to some extent with such particularization and proof. It failed to do so, and so failed to make out a prima facie case.

We are, therefore, reaching the same result as did the Appellate Division but on one only of the grounds listed by that court, that is, failure of proof. We think it not inappropriate, however, to state our general views on the question of law.principally argued by the parties, that is, as to the validity of corporate payments for proxy solicitations and similar activities in addition to giving notice of the meeting, and of the questions to be voted on. For an answer to that problem we could not do better than quote from this court’s opinion in the Lawyers’ Adv. Co. case (187 N. Y. 395, 399, supra): “ The remaining notices' were not legally authorized and were not legitimately incidental' to the meeting or necessary for the protection of the stockholders. They rather were proceedings by one faction in its contest with another for the control of the corporation, and the" expense thereof as such is not properly chargeable to the latter. This is so apparent as to the last two notices that nothing need be said in reference to them but a few words may. be said in regard to the first one calling for proxies. It is to be noted that this is not the case of an ordinary circular letter sent out with and requesting the execution of proxies. The custom has become common upon the part of corporations to mail proxies to their respective stockholders often accompanied by a brief circular of directions, and such custom when accompanied by no unreasonable expenditure is not without merit in so far as it encourages voting by stockholders through making it convenient and' ready at hand. The notice in question, however, was not published until after proxies had been sent out. It simply amounted to an urgent solicitation that these proxies should be executed' and returned for use by one faction in its contest, and we think there is no authority for imposing the expense of its publication upon the company. * * * it would be altogether too dangerous a rule to permit directors in control of a corporation and engaged in a contest for the perpetuation of their offices and control, to impose upon the corporation the unusual expense of publishing advertisements or, by analogy, of dispatching special messengers for the purpose of procuring proxies in their behalf.”

A final comment: since expenditures which do not meet that test of propriety are intrinsically unlawful, it could not be any answer to such a claim as plaintiff makes here that the stockholder vote which purported to authorize them was heavy or that the change in management turned out to be beneficial to the corporation.

The judgment should be affirmed, without costs.

Van Voorhis, J.

(dissenting). The-decision of this appeal is of far-reaching importance insofar as concerns payment by corporations of campaign expenses by stockholders in proxy contests for control. This is a stockholder’s derivative action to require directors to restore to a corporation moneys paid to defray expenses of this nature, incurred both by an incumbent faction and by an insurgent faction of stockholders. The insurgents prevailed at the annual meeting, and payments of their own campaign expenses were attempted to be ratified by majority vote. It was a large majority, but the stockholders were not unanimous. Begardless of the merits of this contest, we are called upon to decide whether it was a corporate purpose (1) to make the expenditures which were disbursed by the incumbent or management group in defense of their acts and to remain in control of the corporation, and (2) to defray expenditures made by the insurgent group, which succeeded in convincing a majority of the stockholders. The Appellate Division held that stockholder authorization or ratification was not necessary to reasonable expenditures by the management group, the purpose of which was to inform the stockholders concerning the affairs of the corporation, and that, although these incumbents spent or incurred obligations of $133,966 (the previous expenses of annual meetings of this corporation ranging between $7,000 and $28,000), plaintiff must fail for having omitted to distinguish item by item between which of these expenditures were warranted and which ones were not; and the Appellate Division held that the insurgents also should be reimbursed, but subject to the qualification that “ The expenses of those who were seeking to displace the management should not be reimbursed by the corporation except upon approval by the stockholders.” It was held that the stockholders had approved.

No resolution was passed by the stockholders approving payment to the management group. It has been recognized that not all of the $133,966 in obligations paid or incurred by the management group was designed merely for information of stockholders. This outlay included payment for all of the activities of a strenuous campaign to persuade and cajole in a hard-fought contest for control of this corporation. It included, for example, expenses for entertainment, chartered airplanes and limousines, public relations counsel and proxy solicitors. However legitimate such measures may be on behalf of stockholders themselves in such a controversy, most of them do not pertain to a corporate function but are part of the familiar apparatus of aggressive factions in corporate contests. In Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co. (187 N. Y. 395, 399), this court said: “ The notice in question, however, was not published until after proxies had been sent out. It simply-amounted to an urgent solicitation that these proxies should be executed and returned for use by one faction in its contest, and we think there is no authority for imposing the expense of its publication upon the company. It may be conceded that the directors who caused this publication acted in good faith and felt that they were serving the best interests of the stockholders, but it would be altogether too dangerous a rule to permit directors in control of a corporation and engaged in a contest for the perpetuation of their offices and control, to impose upon the corporation the unusual expense of publishing advertisements or, by analogy, of dispatching special messengers for the purpose of procuring proxies in their behalf.”

The Appellate Division acknowledged in the instant case that “It is obvious that the management group here incurred a substantial amount of needless expense which was charged to the corporation ”, but this conclusion should have led tó a direction that those defendants who were incumbent directors should be required to come forward with an explanation of their expenditures under the familiar rule that, where it has been established that directors have expended corporate money for their own purposes, the burden of going forward with evidence of the propriety and reasonableness of specific items rests upon the directors (Godley v. Crandall & Godley Co., 153 App. Div. 697, 711, mod. 212 N. Y. 121; Hine v. Lausterer, 135 Misc. 397, 401-402, mod. 232 App. Div. 719, affd. 257 N. Y. 523). The complaint should not have been dismissed as against incumbent directors due to failure of plaintiff to segregate the specific expenditures which are ultra vires, but, once plaintiff had proved facts from which an inference of impropriety might be drawn, the duty of making an explanation was laid upon the directors to explain and justify their conduct.

The second ground assigned by the Appellate Division for dismissing the complaint against incumbent directors is stockholder ratification of reimbursement to the insurgent group. Whatever effect or lack of it this resolution had upon expenditures by the insurgent group, clearly the stockholders who voted to pay the insurgents entertained no intention of reimbursing the management group for their expenditures. The insurgent group succeeded as a result of arousing the indignation of these very stockholders against the management group; nothing in the resolution to pay the expenses of the insurgent group purported to authorize or ratify payment of the campaign expenses of their adversaries, and certainly no inference should be drawn that the stockholders who voted to pay the insurgents intended that the incumbent group should also be paid. Upon the contrary, they were removing the incumbents from control mainly for the reason that they were charged with having mulcted the corporation by a long-term salary and pension contract to one of their number, J. Carlton Ward, Jr. If these stockholders had been presented with a resolution to pay the expenses of that group, it would almost certainly have been voted down. The stockholders should not be deemed to have authorized or ratified reimbursement of the incumbents.

There is no doubt that the management was entitled and under a duty to take reasonable steps to acquaint the stockholders with essential facts concerning the management of the corporation, and it may well be that the existence of a contest warranted them in circularizing the stockholders with more than ordinarily detailed information. As this court said in Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co. (supra, p. 399): “ Proper and honest corporate management was subserved by widespread notice to stockholders of questions affecting the welfare of the corporation, and there is no impropriety in charging the latter with any expenses within reasonable limits which were incurred in giving sufficient notice of the special meeting at which the stockholders could be called upon to decide these questions.”

What expenses of the incumbent group should be allowed and what should be disallowed should be remitted to the trial court to ascertain, after taking evidence, in accordance with the rule that the incumbent directors were required to assume the burden of going forward in the first' instance with evidence explaining and justifying their expenditures. Only such as were reasonably related to informing the stockholders fully and fairly concerning the corporate affairs should be allowed. The concession by plaintiff that such expenditures as were made were reasonable in amount does not decide this question. By way of illustration, the costs of entertainment for stockholders may have been, and it is stipulated that they were, at the going rates for providing similar entertainment. That does not signify that entertaining stockholders is reasonably related to the purposes of the corporation. The Appellate Division, as above stated, found that the management group incurred a substantial amount of needless expense: That fact being established, it became the duty of the incumbent directors to unravel and explain these payments. : Regarding the $127,556 paid by the new management to the insurgent group for their campaign expenditures, the. question immediately arises whether that was for a corporate purpose. The Appellate Division has recognized that upon no theory could such expenditures be reimbursed except by approval of the stockholders and, as has been said, it is the insurgents ’ expenditures alone to which the stockholders’ resolution of ratification was addressed. If unanimous stockholder approval had been obtained and no rights of creditors or of the public intervened, it would make no practical difference whether the purpose were ultra vires — i.e., not a corporate purpose. (Kent v. Quicksilver Min. Co., 78 N. Y. 159; Capitol Wine & Spirit Corp. v. Pokrass, 277 App. Div. 184, 187, affd. 302 N. Y. 734.) Upon the other hand, an act which is ultra vires cannot be ratified merely by a majority of the stockholders of a corporation. " (Continental Securities Co. v. Belmont, 206 N. Y. 7; Pollitz v. Wabash R. R. Co., 207 N. Y. 113; Schwab v. Potter Co., 129 App. Div. 36; Davis v. Congregation Beth Tephila Israel, 40 App. Div. 424; Fletcher’s Cyclopedia Corporations, §§ 764, 767, 3432, 5795.) In Schwab v. Potter Co. (supra, p. 41) it is said that “ it cannot be'contended successfully that the minority stockholders may not maintain a suit to enjoin the ultra vires acts of their corporation.” It was further held not to be a defense that a majority of the stockholders had adopted a resolution of ratification. In Davis v. Congregation Beth Tephila Israel (supra), it was held that a single dissenting member of a corporation might maintain an action to vacate an ultra vires agreement. In Continental Securities Co. v. Belmont (supra, pp. 18-19), the court discussed ‘1 The distinction between acts that can and those that cannot be confirmed and ratified ** by the stockholders. Quoting from Bagshaw v. Eastern Union Ry. Co. (7 Hare 114), the court said: ‘“No majority of the shareholders, however large, could sanction the misapplication of this portion of the capital. A single dissenting voice would frustrate the wishes of the majority. ’ ’ ’

The familiar rule, applied in those and other decisions, is that merely voidable acts of the directors of a corporation can be ratified by majority stockholder approval, such as contracts between corporations having interlocking directorates (Continental Ins. Co. v. New York & Harlem R. R. Co., 187 N. Y. 225), loans of surplus funds by a trading corporation (Murray v. Smith, 166 App. Div. 528 — although not in the case of loans to stockholders in violation of the Stock Corporation Law, § 59), and other irregularities involving acts which are neither ultra vires, fraudulent or illegal.

In considering this issue, as in the case of the expenses of the incumbents, we begin with the proposition that this court has already held that it is beyond the power of a corporation to authorize the expenditure of mere campaign expenses in a proxy contest (Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., supra).. That decision is not distinguishable upon the ground that those expenditures were made by the secretary of that corporation without previous authorization by its directors. That point was involved, but this court said: ‘ ‘ Thus we have it that the publication of the last three notices was not authorized by the hoard of directors and that it could not have been lawfully authorised even if the attempt were made. They bore upon their face sufficient notice to the plaintiff [the printer suing for printing fees] that they were of a character beyond the limit of anything which could be published in behalf of or at the expense of the corporation ” (p. 400; italics supplied). The decision was placed upon both grounds. The statement in the carefully considered opinion written by Judge Hiscock was not dictum that “ it would be altogether too dangerous a rule to permit directors in control of a corporation and engaged in a contest for the perpetuation of their offices and control, to impose upon the corporation the unusual expense ”. In that case, and in all of the other decisions which have been cited with the single exception of a Federal district court decision (Steinberg v. Adams, 90 F. Supp. 604, 606), the question concerned reimbursement of a management group. Moreover, with the exception of an English decision (Peel v. London & North Western Ry. Co., [1907] 1 Ch. 5), all of the appellate court cases which have been cited, and Steinberg v. Adams (supra), were decided under the law of the State of Delaware. The Delaware law contains more latitude than in New York State, as was recognized by Judge Rifkind in his opinion in Steinberg v. Adams, who said (p. 607): The instant case is concerned with a Delaware corporation and the law of that state determines the scope of the corporation’s powers. Both parties, as I have indicated, agree that this case is governed by a less stringent rule ” than the ruling by this court in Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co. (supra). We are called upon to decide whether to abandon the rule as previously established in this State and adopt the less strict doctrine of the State of Delaware.

The Delaware cases which are cited consist of Hall v. TransLux Daylight Picture Screen Corp. (20 Del. Ch. 78), Empire So. Gas Co. v. Gray (29 Del. Ch. 95), and the Federal cases applying Delaware law (Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649, and Steinberg v. Adams, supra). The Hand case (supra) merely denied a preliminary injunction to restrain the management from expending corporate funds to hire professional proxy solicitors. There is a difference between hiring-solicitors merely to follow up proxy notices so as to obtain a quorum, and a high pressure campaign to secure votes by personal contact. The district court in the Hand case did not attempt to decide that aspect of the case, merely ruling that it should be determined after trial, and that no irreparable injury had been shown justifying the issuance of a temporary injunction even if the practice were ultimately held to have been ultra vires. In Empire So. Gas Co. v. Gray (supra), it was held that a corporation might sue to enjoin insurgents from soliciting proxies fraudulently by means of a false statement that such solicitation was being made by order of the board of directors. The case most frequently cited and principally relied upon from among these Delaware decisions is Hall v. Trans-Lux Daylight Picture Screen Corp. (supra). There the English case was followed of Peel v. London & North Western Ry. Co. (supra) which distinguished between expenses merely for the purpose of maintaining control, and contests over policy questions of the corporation. In the Hall case the issues concerned a proposed .merger, and a proposed sale of stock of a subsidiary corporation, These were held to be policy questions, and payment of the management campaign expenses was upheld.

In our view, the impracticability of such a distinction is illustrated by the statement in the Hall case (supra, p. 85) that “ It is impossible in many cases of intracorporate contests over directors, to sever questions of policy from those of persons ’ ’. This circumstance is stressed in Judge Rifkind’s opinion in the Steinberg case (supra, p. 608): The simple fact, of course, is that generally policy and personnel do not exist in separate compartments. A change in personnel is sometimes indispensable to a change of policy. A new board may be the symbol of the shift in policy as well as the means of obtaining it.”

That may be all very well, but the upshot of this reasoning is that inasmuch as it is generally impossible to distinguish whether “ policy” or “ personnel” is the dominant factor, any averments must be accepted at their face value that questions of policy are dominant. Nowhere do these opinions mention that the converse is equally true and more pervasive, that neither the “ ins ” nor the “ outs ” ever say that they have no program to offer to the shareholders, but just want to acquire or to retain control, as the case may be. In common experience, this distinction is unreal. It was not mentioned by this court in Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co. (supra). As in political contests, aspirations for control are invariably presented under the guise of policy or principle. A valiant effort was made in the English case of Peel v. London & North Western Ry. (supra, p. 21) to conserve the distinction in the opinion by Buckley, L. J., who said: “ Those who are conversant with the affairs of joint stock companies are well aware that cases often arise in which the board in power are anxious to maintain themselves in power, to procure their own re-election, or to drive a policy not really in the interests of the corporation, but for some private purpose of their own, down the throats of the corporators at a general meeting, and in which they issue at the expense of the company circulars and proxy papers for the purpose of attaining that object. When a case of that kind comes before the Court, I sincerely trust that the decision of this Court in this case will not be cited as any authority for justifying the action of the directors.”

The main question of “ policy ” in the instant corporate election, as is stated in the opinions below and frankly admitted, concerns the long-term contract with pension rights of a former officer and director, Mr. J. Carlton Ward, Jr. The insurgents’ chief claim of benefit to the corporation from their victory consists in the termination of that agreement, resulting in an alleged actuarial saving of $350,000 to $825,000 to the corporation, and the reduction of other salaries and rent by more than $300,000 per year. The insurgents had contended in the proxy contest that these payments should be substantially reduced so ■that members of the incumbent group would not continue to profit personally at the expense of the corporation. If these charges were true, which appear to have been believed by a majority of the shareholders, then the disbursements by the management group in the proxy contest fall under the condemnation of the English and the Delaware rule.

These circumstances are mentioned primarily to illustrate how impossible it is to distinguish between “ policy ” and personnel ”, as Judge Rifkind expressed it, but they also indicate that personal factors are deeply rooted in this contest. That is certainly true insofar as the former management group is concerned. It would be hard to find a case to which the careful reservation made by the English Judge in the Peel case (supra) was more directly applicable.

Some expenditures may concededly be made by a corporation represented by its management so as to inform the stockholders, but there is a clear distinction between such expenditures by management and by mere groups of stockholders. The latter are under no legal obligation to assume duties of managing the corporation. They may endeavor to supersede the management for any reason, regardless of whether it be advantageous or detrimental to the corporation but, if they succeed, that is not a determination that the company was previously mismanaged or that it may not be mismanaged in the future. A change in control is in no sense analogous to an adjudication that the former directors have been guilty of misconduct. The analogy of allowing expenses of suit to minority stockholders who have been successful in a derivative action based on misconduct of officers or directors, is entirely without foundation.-

Insofar as a management group is concerned, it may charge the corporation with any. expenses within reasonable limits incurred in giving widespread notice to stockholders of questions affecting the welfare of the corporation (Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., supra). Expenditures in excess of these limits are ultra vires. The corporation lacks power to defray them. The corporation lacks power to defray the expenses of the insurgents in their entirety. The insurgents were not charged with responsibility for operating the company. No appellate court case is- cited from any jurisdiction holding otherwise. No contention is made that such disbursements could be made, in any event, without stockholder ratification; they could not be ratified except by unanimous vote if they were ultra vires. The insurgents, in this instance, repeatedly announced to the stockholders in their campaign literature that their proxy contest was being waged at their own personal expense. If reimbursement of such items were permitted upon majority stockholder ratification, no court or other tribunal could pass upon which types of expenditure were needless ”, to employ the characterization of the Appellate Division in this case. Whether the insurgents should be paid would be made to depend upon whether they win the stockholders election and obtain control of the corporation. It would be entirely irrelevant whether the corporation is benefited ” by their efforts or by the outcome of such an election. The courts could not indulge in a speculative inquiry into that issue. That would truly be a matter of business judgment. In some instances corporations are better governed by the existing management and in others by some other group which supersedes the existing management. Courts of law have no jurisdiction to decide such questions, and successful insurgent stockholders may confidently be relied upon to reimburse themselves whatever may be the real merits of the controversy. The losers in a proxy fight may understand the interests of the corporation more accurately than their successful adversaries, and agitation of this character may ultimately result in corporate advantage even if there - be no change in management. Nevertheless, under the judgment which is appealed from, success in a proxy contest is the indispensable condition upon which reimbursement of the insurgents depends. Adventurers are not infrequent who are ready to take advantage of economic recessions, reduction of dividends or failure to increase them, or other sources of stockholder discontent to wage contests in order to obtain control of well-managed corporations, so as to divert their funds through legal channels into other corporations in which they may be interested, or to discharge former officers and employees to make room for favored newcomers according to the fashion of political patronage, or for other objectives that are unrelated to the sound prosperity of the enterprise. The way is open and will be kept open for stockholders and groups of stockholders to contest corporate elections, but if the promoters of such movements choose to employ the costly modern media of mass persuasion, they should look for reimbursement to themselves and to the stockholders who are aligned with them. If the law be that they can be recompensed by the corporation in case of success, and only in that event, it will operate as a powerful incentive to persons accustomed to taking calculated risks to increase this form of high-powered salesmanship to such a degree that, action provoking reaction, stockholders’ meetings will be very costly. , To the financial advantages promised by control of a prosperous corporation, would be added the knowledge that the winner takes all insofar as the campaign expenses are concerned. To the victor, indeed, would belong the spoils.

The questions involved in this case assume mounting importance as the capital stock of corporations becomes more widely distributed. To an enlarged extent the campaign methods consequently come more to resemble those of political campaigns, but, as in the latter, campaign expenses should be borne by those who are waging the campaign and their followers, instead of being met out of the corporate or the public treasury. Especially is this true when campaign promises have been made that the expenses would not be charged to the corporation.

Nothing which is said in this opinion is intended as any reflection upon the motives of the insurgent group in instigating this corporate contest, nor upon the management group. Questions of law are involved which extend beyond the persons and the corporation presently before the court. It is the established law of this State that expenditures may be incurred by management limited to informing the stockholders fully and fairly concerning1 the affairs and policies of the corporation, which may well include an explanation of the reasons on account of which its policies have been undertaken, nor is there any reason on account of which stockholders who have neglected to sign proxies through apathy may not be solicited so as to insure a quorum, which would ordinarily occur in instances where there is no contest, but beyond measures of this character, the purely campaign expenses of a management group do not serve a corporate purpose, and paying them is ultra vires. The same is true of all of the expenses of insurgent stockholders.

The release given to J. Carlton Ward, Jr., by the authority of his codirectors, could not have the effect of discharging liability to which they were otherwise subject upon the theory that it operated to release them as joint tort-feasors.

The judgment appealed from should be reversed so as to direct respondent Fairchild to pay to the corporation the sum of $118,448.78, with appropriate interest, representing the moneys reimbursed to him by the corporation and, upon his default, the respondent, Allis should be required to pay said sum; respondents Fairchild and Allis should be required to pay to the corporation the sum of $9,107.10, with appropriate interest, representing the amount reimbursed to L. M. Bolton by the corporation; and an interlocutory judgment should be entered for an accounting to determine what part of the $133,966, representing expenses incurred by the old board, was improperly charged to the corporation and requiring the respondents Wilson and McComas to pay to the corporation the sum thereof, and the respondents Allis and Fairchild such amounts thereof as were paid out after July 15, 1949, with costs of the action to the plaintiff in all courts.

Conway, Ch. J., and Burke, J., concur with Froessel, J.; Desmond, J., concurs in part in a separate opinion; Van Voorhis, J., dissents in an opinion in which Dye and Fuld, JJ., concur.

Judgment affirmed.


source: Caselaw Access Project

author: Van Voorhis, J. Desmond, J.

license: Public Domain

text:
    Edward Geraghty, Jr., an Infant, by Edward Geraghty, Sr., His Guardian ad Litem, Appellant, v. State of New York, Respondent.
    (Claim No. 30713.)
    Argued April 15, 1955;
    decided July 8, 1955.

      M. Maurice Chacchia for appellant.
    I. The Superintendent of Public Works had no authority to abandon this section of the highway. (City of Mount Vernon v. New York, N. H. & H. R. R. Co., 232 N. Y. 309; Hughes v. Bingham, 135 N. Y. 347.) II. Service of copy of the order upon the Ontario County Board of Supervisors was ineffectual: (a) To impose responsibility upon the County of Ontario, and (b) to impose responsibility upon the Town of Geneva for future maintenance of this section of the highway. III. The conduct of the State of New. York, its engineers and employees is inconsistent with its claim that this highway was abandoned.

      Jacob K. Javits, Attorney-General (John R. Davison and Henry 8. Manley of counsel), for respondent.
    I. The finding of the courts below that “ the State of New York was free from any negligence which caused or contributed to the happening of this accident ” is conclusive in this court. (Canepa v. State of New York, 306 N. Y. 272; Drivas v. Lekas, 292 N. Y. 204; Harrington v. Harrington, 290 N. Y. 126; Sturman v. State of New York, 244 App. Div. 865, 269 N. Y. 627; Shaw v. State of New York, 196 Misc. 792, 278 App. Div. 871, 303 N. Y. 644; Griffin v. State of New York, 250 App. Div. 244; O’Brien v. State of New York, 270 App. Div. 877; Lyons v. State of New York, 274 App. Div. 1086, 299 N. Y. 593.) II. The record does not disclose any conduct on the part of the State of New York, through its officers and employees, inconsistent with its claim, that it had duly divested itself of responsibility. III. The procedure required by section 181 of the Highway Law, as it read in 1926, was followed. (Isaac v. Town of Queensbury, 277 N. Y. 37.)
   Van Voorhis, J.

The injured claimant was a passenger in an automobile which went out of control on an abandoned section of State highway. The question concerns what is the duty of the State with respect to portions of State highways that have been discontinued. In this instance, as Route 245 formerly approached from the south the single main highway known as Routes 5 and 20, it ran northeastward into an historical thoroughfare known as the Preemption Road, at a location several hundred feet south of the junction of the latter with Routes 5 and 20. In 1926 this portion of Route 245 was relocated, by the construction of a curve to the left (north) off from the old course of the route at a distance of less than one mile before the latter joined the Preemption Road, and the relocated course then proceeded north directly into Routes 5 and 20 at a point several hundred yards west of the intersection of those routes with the Preemption Road. Preemption Road thus ceased to be a link in Route 245. This was one of those changes that have become necessary to lengthen curves and avoid abrupt intersections, so as to adapt old roads to rapid modern motor traffic.

Upon the day of this accident (May 12,1949), three high school students from Montour Falls, sixteen and seventeen years in age, were riding in an automobile driven by one of them named Charles Marquardt. He was a licensed operator. The automobile belonged to Marquardt’s father. One of the other occupants of the auto was plaintiff, Edward Geraghty, Jr. They had driven south on Route 245 along its new course for a distance of about three miles southerly from Routes 5 and 20 to a milk and ice cream bar which was their destination.

In returning they reached the point where the new and improved Route 245 diverged from the course of the old road. At this location, as has been stated, the new highway bears to the left whereas the old road continues straight ahead. The driver of this car evidently knew that he was leaving Route 245, and taking the old road. The new highway was of concrete, marked by a solid white line in the center turning to the left, and by the usual <£ curve ” sign five hundred feet in advance of the bend. The curve was also indicated by white posts guarding the circumference around the outside of the shoulder. These facts are not disputed. Upon the other hand, there was nothing to indicate that the old road had been closed or that vehicles were not permitted to enter it. There were no £ 1 Road Closed ’ ’ signs or barriers, showing that maintenance of the abandoned section had been discontinued, and the gap between the white guard posts around the circumference of the newly constructed curve and the straight line of posts leading to the entrance of the old road bore witness to its being open. The driver of this auto evidently turned off from Route 245 so as to vary the scenery in going to and from the milk bar. He admitted that he knew that if he had continued on the concrete pavement he would have re-entered Routes 5 and 20 where he left them. It is of no consequence that he did not notice the white line bending to the left in the center of the concrete road, nor the curve sign before reaching the curve. He considered that he had the right to depart from the new course of Route 245 along the old road and return to Routes 5 and 20 via the Preemption Road. Knowing that Route 245 veered to the left, he chose to take the other road and in doing so assumed that it was passable. All of that is evident from the testimony and the circumstances of the accident. The basis for negligence is that there were no signs, barriers or warnings to indicate that the old road had been discontinued and that, by some mischance, it had not been maintained by the State, by the county or by the town. For twenty-two years it had simply been left, as the sequel proved, to the care of the elements alone.

The Court of Claims found that it was negligent to have permitted this discontinued section of highway to have deteriorated into the condition in which it was — £ rough, broken and unkept ” with ££ numerous holes and depressions Claimant was found to have been free from contributory negligence. These findings were not disturbed by the Appellate Division, and are supported by evidence. But the claim was dismissed upon the ground that responsibility for maintenance of this part of the road no longer rested upon the State. That is the question in the case,

The discontinued portion of this road was concededly an Ontario County highway prior to 1910 when it became a State road. From 1910 until 1926 the State maintained and repaired it. When the change occurred in 1926, the State took some steps to divest itself of its duty to maintain the discontinued portion. The applicable statute was section 181 (now § 62) of the Highway Law. It provided, as amended to that date, that “ Whenever in the maintenance and repair of state and county highways under the provisions of this chapter, the commission [State Commission of Highways] shall have determined upon the necessity of a change in location for the improvement of alignment or of dangerous conditions on a limited section of such highway * * * the commission may proceed with such improvement. * * * The commission shall cease to maintain the section of highway discontinued upon the completion of the substituted section.”

Those were the material portions of statute in force when the State attempted to abandon this stretch of road in 1926. Nothing was said about what became of the abandoned portion of such a road. Section 181 was later amended and renumbered (L. 1937, ch. 739; L. 1944, ch. 515), so as to provide specifically that if such an abandoned portion of highway had been located within a village before it went on State maintenance it should revert to the village, and in similar fashion to the town or county if it had been a town or county highway. These amendments further provided: “ The transfer of maintenance of a section of highway and of any bridge and culvert thereon, to any county or counties, town or towns, or village or villages as herein provided, shall become effective upon the mailing of a certified copy of such official order [of discontinuance by the State Superintendent of Public Works] to the clerk or clerks of the board or boards of supervisors of the county or counties, to the town clerk or clerks or to the clerk or clerks of the village or villages, as the case may be. ’ ’

These amendments are held to be declaratory of the substance of the earlier statute. The dispute in the instant case (which presents a question of law) arises due to the circumstance that, upon the discontinuance of this section of road by the State, the Superintendent of Public Works made an order of discontinuance pursuant to section 181 of the Highway Law which was sent to the Ontario County Board of Supervisors, hut the last paragraph of it stated: “ Ordered: That such section of highway be and it is hereby turned over to the Town of Geneva, Ontario County, for future maintenance and repair.” (Italics supplied.)

In Isaac v. Town of Queensbury (277 N. Y. 37, 48), section 63 of the Highway Law was before the court concerning grade crossing eliminations. In that instance, the elimination had resulted in the abandonment of a portion of State highway which crossed the railroad tracks at grade, and the substitution of an altered route beneath the tracks. A fence had been constructed across the old road at the former grade crossing,, into which an automobile ran at night. This condition amounted to a nuisance, but the question was presented who was liable for the nuisance. The court said at page 48: “ Under section 63, the portion of the highway eliminated reverted to- the town upon completion of the elimination work only where a determination had been made to the effect that it no longer served a useful purpose as a part of the State highway system. Notice of such determination was required to be given to the town. Although the section contained no provision for notice, inasmuch as the determination affected the rights of persons and property, reasonable notice was required-.” (Italics supplied.)

It is the contention of the State that under former section 181 of the Highway Law the mere cessation of maintenance was sufficient at the time when the substituted road was completed, that the State did not need to abandon the highway to any other governmental unit or authority. Claimant, upon the other hand, contends that it was necessary to have given notice to the County of Ontario that State maintenance had ceased and that county maintenance was to begin.

Inasmuch as this was a county highway before its accession to the State system in 1910, in point of law it reverted to Ontario County after being discontinued in 1926, notwithstanding the absence of any specific clause to that effect in the statute then in force. But, as was held in the Town of Queensbury case (supra), more than this was necessary in order to absolve the State from its duty to the traveling public. The State had to notify the governmental unit to which the duty of maintenance was being transferred before the State could be relieved of all responsibility. The notice which was given to the Board of Supervisors of Ontario County by transmitting the order of the Superintendent of Public Works, would have been adequate except for its last paragraph, which stated that this portion of the road was to be maintained by the Town of Geneva. In view of that express admonition, it would not be expected that the Ontario County Highway Department would assume maintenance contrary to the direction of the State Superintendent.

The town clerk’s records were produced, which showed that the Town of Geneva had received no notice from the State concerning the abandonment of this section. The behavior of the State at no time put the town on notice of the transfer to it of a road which had never before been under its control or supervision as a town highway.

Respondent argues that everyone is presumed to know the law, and that the County of Ontario, at whose Board of Supervisors’ meeting the State Superintendent of Public Works’ order was read, should have known that the final paragraph abandoning this section of road to the town was erroneous and carried no force or effect. Although it may well be that the State could have divested itself of the duty of maintenance if the other parts of the Superintendent’s order had been transmitted to the Ontario Board of Supervisors, the common-sense interpretation is that the last paragraph nullified the effect of notice. More was necessary to relieve the State than mere transfer of the duty of maintenance by operation of law. If notice was required, as was held to be necessary in the Queensbury case (supra), then a notification to the county that this section of highway had been abandoned would be meaningless if coupled, as it was here, with a direction to the county to do nothing about it for the reason that the obligation of maintenance was imposed elsewhere. That is particularly true since even the State Engineer’s oEce at that time was unaware of where the duty of maintenance would vest. The State Engineer, on whose recommendation the State Superintendent of Public Works acted in ordering the discontinuance, testified that he did not know who was obligated to undertake maintenance of the abandoned portion of this highway. The fiun.l paragraph of the State Superintendent of Public Works’ order destroys its effect as notice to the county to undertake maintenance, and the Town of Geneva was charged with no obligation in regard to it whatever. Consequently, it is held, the State did not divest itself of the legal duty of maintenance, and must respond in damages for claimant’s injuries.

The judgment of the Appellate Division and that of the Court of Claims should be reversed, with costs in all courts, and the case remitted to the Court of Claims for an assessment of damages and for other proceedings not inconsistent with this opinion.

Desmond, J.

(dissenting). The State took over in 1910 and continued till 1925 the maintenance of a certain county highway in Ontario County. In 1925, the State, to eliminate a dangerous curve in that road, replaced about 1,100 feet of the old road with a new, differently located piece of road. The State then discontinued (as it had not only the right but the statutory duty to do, as we shall see) maintenance of the old strip. Since that strip was part of a county highway, the duty to keep it in repair or close it, could not, when the State so abandoned it, go anywhere except back to the County of Ontario. The State Superintendent of Public Works, in December, 1926, after the new section had been finished and opened, sent to the Clerk of the Ontario County Board of Supervisors a copy of an official order of the State Public Works Department, which order plainly stated that ‘1 the State shall cease to maintain said section upon the completion of the substituted section ”. That notice to the Board of Supervisors specifically quoted and called attention to the then section 181 of the Highway Law which mandated in such situations that the State should “ cease to maintain * * * [said] section # * upon the completion of the substituted section ”. Ontario County was thus officially put on notice of a public statute and an official order which, by requiring the State to cease maintaining the old section, necessarily meant that all future public duties as to that section of road would automatically pass to the County of Ontario. Since Ontario County owned the highway, such duties could not thereafter be lodged elsewhere. The State had lawfully, finally and forever (as both courts below held) divested itself of all responsibility for repair and maintenance of the old or 11 cut off ’ ’ road. Never thereafter did the State have, in fact or law, anything to do with that piece of highway.

Despite all that, the State is being held to damages because the dangerous condition of the road caused an accident, twenty-two years later. The sole basis for that result is a typographical error found in the notice (supra) which the State Superintendent sent to the County of Ontario in 1926. The last paragraph thereof said that the eut-pif section of highway was being turned over to “ Town of Geneva, Ontario County ” for future maintenance and repair. That was a mistake, since any such turnover or turnback of a county highway had to be to the County of Ontario, not to any town. But the error could not have misled anyone and there is no proof or finding that it did. Surely the county knew of its ownership of its own roads. Actually, as the majority opinion herein points out, the then statutes did not provide for any notice at all to be given by the State. But the courts (Isaac v. Town of Queensbury, 277 N. Y. 37, 48) held, in 1938,'that “ inasmuch as the determination, affected the rights of person and property, reasonable notice was required.” In other words, the State, having assumed the care of a road, could not, secretly and without notice, stop such care, otherwise the public might be left without protection. But, under Isaac v. Town of Queensbury (supra), no particular kind of notice was needful, só long as it was reasonable ”. Certainly, the notice given by the State to the Town of Queensbury in the Isaac case and there held to be sufficient, was no fuller or more informative than the notice here given to the County of Ontario. All the notice the Tówii of Queensbury got was a copy of a Public Service Commission order in a proceeding to which the town was a party, which order, among many other things, provided that the street in question should be discontinued. The State Department of Public Works as such gave the Town of Queensbury no notice at all until after the Isaac accident (see 277 N. Y., p. 49). Nor did the notice given prior to the accident in the Isaac case in the form of a Public Service Commission order, say that the reverter would be to the town. From all that it necessarily follows that the notice given in the present instance to the County of Ontario, was ample as to the only fact of which notice had to be given (see the Isaac opinion, 277 N. Y., p. 50) — that is, notice that the State was abandoning the old strip. And in the present case we had another and much more informative kind of notice not present in the Isaac case (supra). That better and fuller notice in our case consisted of the known and obvious fact that after giving the written notice in 1926 the State ignored the cut-off strip entirely for more than twenty years prior to this accident and instead took care of the new, substituted piece of highway.

The order appealed from should be affirmed, with costs.

Conway, Ch. J., Froessel and Burke, JJ., concur with Van Voorhis, J.; Desmund, J., dissents in an opinion in which Dye and Fuld, JJ., concur.

Judgments reversed, etc.


author: Dye, J. ' Fuld, J.

text:
    Anna B. Katzman, Appellant, v. Ætna Life Insurance Co., Defendant, and Minnie Katzman, Respondent.
    Argued May 25, 1955;
    decided July 8, 1955.

      Murray I. Sommer for appellant.
    I. The Statute of Frauds is inapplicable to constructive trusts. (Lightfoot v. Davis, 198 N. Y. 261; Falk v. Hoffman, 233 N. Y. 199; Foreman v. Foreman, 251 N. Y. 237; Equity Corp. v. Groves, 294 N. Y. 8; Latham v. Father Divine, 299 N. Y. 22, 299 N. Y. 599; Pattison v. Pattison, 301 N. Y. 65; Beatty v. Guggenheim Exploration Co., 225 N. Y. 380; Cassidy v. Cassidy, 283 App. Div. 618; Blanco v. Velez, 295 N. Y. 234; Fischer v. New York Sav. Bank, 281 App. Div. 747; Mitchell v. Mitchell, 265 App. Div. 27, 290 N. Y. 779; Considine v. Considine, 255 App. Div. 876; Bernstein v. Prudential Ins. Co. of America, 204 Misc. 775.) II. Delivery of the policy obviates the objection of the Statute of Frauds. (Matter of Pastore, 155 Misc. 247; Matter of Van Alstyne, 207 N. Y. 298; Jackson v. Twenty-Third St. Ry Co., 88 N. Y. 520; Marcus v. St. Louis Mut. Life Ins. Co., 68 N. Y. 625; McGlynn v. Curry, 82 App. Div. 431; Ridden v. Thrall, 125 N. Y. 572; Loucks v. Johnson, 70 Hun 565; Jacobs v. Strumwasser, 84 Misc. 28; Opitz v. Karel, 118 Wis. 527; McEwen v. New York Life Ins. Co., 42 Cal. App. 133; Matter of Chryssikos, 135 N. J. Eq. 451.) III. Special Term properly denied the motion for summary judgment. (Joehl v. Tricarico, 271 App. Div. 898; President & Director of Manhattan Co. v. Monogram Associates, 276 App. Div. 766; American Agric. Chem. Co. v. Gatewood, 260 App. Div. 861; Matter of Loftus, 193 Misc. 704; Jacobson v. Jacobson, 268 App. Div. 770; First Trust & Deposit Co. v. Dent, 263 App. Div. 1058; Chelsea Exch. Bank v. Munoz, 202 App. Div. 702.)

      Sidney Orenstein, David Drechsler and Herbert Ferster for respondent.
    I. The alleged agreement upon which plaintiff relies is unenforcible under the provisions of subdivisions 1 and 9 of section 31 of the Personal Property Law. (Bayreuther v. Reinisch, 264 App. Div. 138, 290 N. Y. 553; Meltzer v. Koenigsberg, 277 App. Div. 1050, 302 N. Y. 523; Matter of Ditson, 177 Misc. 648; Coler v. Coler, 271 App. Div. 877, 297 N. Y. 488; Matter of Douglas v. Irving Trust Co., 169 Misc. 716, 256 App. Div. 1070; Matter of Seiler, 258 App. Div. 303; Mitchell v. Mitchell, 265 App. Div. 27, 290 N. Y. 779; Ward v. New York Life Ins. Co., 225 N. Y. 314; Fischer v. New York Sav. Bank, 281 App. Div. 747; Rubin v. Irving Trust Co., 305 N. Y. 288.) II. A policy of life insurance cannot be assigned without a writing, and delivery is immaterial in the absence of a writing. (Matter of Adler v. Levene, 107 Misc. 574, 191 App. Div. 40; Bernstein v. Prudential Ins. Co. of America, 204 Misc. 775.) III. The theory of constructive trust is inapplicable. (Wooley v. Stewart, 222 N. Y. 347; Wojtkowiak v. Wojtkowiak, 273 App. Div. 1052; Cassidy v. Cassidy, 283 App. Div. 618.) IV. The answering affidavit establishes that there is no triable issue of fact. (General Investment Co. v. Interborough R. T. Co., 235 N. Y. 133; Gnozzo v. Marine Trust Co. of Buffalo, 258 App. Div. 298, 284 N. Y. 617; Dodwell & Co. v. Silverman, 234 App. Div. 362; Anderson v. City of New York, 258 App. Div. 588.)

      Albert Hirst for New York State Association of Life Underwriters, amicus curiae, in support of respondent’s position.
    I. Amicus curiae sponsored subdivision 9 because of an impressive line of court decisions. (Hamlin v. Stevens, 177 N. Y. 39; Matter of Ditson, 177 Misc. 648; Matter of Block, 258 App. Div. 342; Considine v. Considine, 255 App. Div. 876; Rosseau v. Rouss, 180 N. Y. 116; Ward v. New York Life Ins. Co., 225 N. Y. 314; Mitchell v. Mitchell, 177 Misc. 1050, 265 App. Div. 27, 290 N. Y. 779.) II. Our courts always have been emphatic in condemning claims asserted for the first time after death. (Hamlin v. Stevens, 177 N. Y. 39; Matter of Ditson, 177 Misc. 648; Rosseau v. Rouss, 180 N. Y. 116; Considine v. Considine, 255 App. Div. 876.) III. Neither part performance nor full performance by plaintiff is sufficient to take the alleged contract out of the operation of the Statute of Frauds. Nothing short of full performance by both parties will do that. (Burns v. McCormick, 233 N. Y. 230.) IV. Neither full nor part performance nor the alleged delivery to her of the insurance policy can take plaintiff’s case out of the statute, subdivision 9 of section 31 of the Personal Property Law.
   Dye, J.

The plaintiff’s complaint has been dismissed pursuant to rule 113 of the Rules of Civil Practice, on the ground that the cause of action is barred by the Statute of Frauds.

The plaintiff is the widow of David Katzman, deceased. The defendant is the sister of the deceased. They each claim the proceeds of a $5,000 policy on the life of the deceased, issued by the defendant iEtna Life Insurance Company — the widow, on the ground that as the original beneficiary named in the policy pursuant to an oral agreement, she is the victim of fraud and deceit • — ■ and the sister, on the ground that she is the presently named beneficiary. Pursuant to court order the Insurance Company has paid the net proceeds of the policy to the treasurer of the City of New York and has no further interest in the suit.

The main question raised by the motion is whether the action is barred by the Statute of Frauds which renders unenforcible any “ contract to assign or an assignment * * * of a life * * * insurance policy * * * or a promise * * * to name a beneficiary of any such policy ” unless the agreement or some note or memorandum thereof is in writing. (Personal Property Law, § 31, subd. 9.)

The allegations of the complaint, which for the purposes, of this motion we accept as true, may be briefly summarized, viz.:

That plaintiff and decedent were married June 28, 1927; that they lived happily together until the marriage ended by the husband’s death; that much of the time during their married life the husband was unemployed and depended for his support largely on the wife’s earnings; that because of this adverse economic status, they were unable to put aside any savings for sickness and death expenses, so the husband and wife agreed on or about May 15, 1944 — after some seventeen years of married life — that the husband would take out a policy on his life and name the wife as beneficiary if she, the plaintiff, would pay the premiums. The application was made on that date. The policy was issued and plaintiff was named beneficiary and the policy delivered to her. Thereafter she paid the whole or a substantial part of the annual premiums from her earnings. When the husband died accidentally on July 13, 1953, she made arrangements for his funeral and burial in reliance on the avails of the policy. After delivery of the policy to the plaintiff, as alleged in the complaint: 1 ‘ without the knowledge and consent of the plaintiff herein, the said deceased, David Katzman, at the behest of and in conspiracy with his said sister, Minnie Katzman, surreptitiously withdrew and took from the possession of the plaintiff the aforesaid policy of life insurance and allegedly caused the beneficiary on or about the 21st day of December, 1950, to be changed from the plaintiff herein to the defendant, Minnie Katzman, sister of the insured.”

By way of relief, the plaintiff demands judgment that she be declared the legal owner of the policy; that the proceeds be paid to her and that the defendant sister-in-law be declared a trustee for and on behalf of the plaintiff.

The defendant filed an answer denying all of the material allegations of the complaint and set up the Statute of Frauds as an affirmative defense, demanding that the proceeds be paid to her as named beneficiary. Defendant then made a,motion for summary judgment, in support of which she showed by affidavit, that on or about December 21, 1950, the deceased executed a request for a change of beneficiary in which he changed his beneficiary to Minnie Katzman, sister of the insured, if she survives the insured, otherwise to Bose Katzman, sister of the insured, if she survives the insured, otherwise to the executors or administrators of the insured. ’ ’ This request was duly accepted and countersigned by the Insurance Company on December 22, 1950, and indorsement of such change of beneficiary made on the policy. The policy had reserved to the decedent the right to change the beneficiary at any time.

Special Term denied defendant’s motion for summary judgment on the ground that issues of fact were presented “ which cannot be summarily disposed of by affidavits but rather should await complete determination by trial. ’ ’ The Appellate Division placed its decision on the ground that the action was barred by the statute.

The power of the court to treat a wrongdoer as a trustee de son tort or trustee ex maleficio is beyond question (Lightfoot v. Davis, 198 N. Y. 261; Falk v. Hoffman, 233 N. Y. 199). A constructive trust is ‘ ‘ the formula through which the conscience of equity finds expression ” (Beatty v. Guggenheim Exploration Co., 225 N. Y. 380, 386; Meinhard v. Salmon, 249 N. Y. 458). (For an interesting discussion see Warren in 41 Harv. L. Rev. 309.) Constructive trusts are created by equity “ whether the evidence on which they are based is oral or written, and whether the property involved is real or personal ” (Bogart on Law of Trusts [Hornbook Series, 3d ed., § 78, p. 332, 1952]), such, for instance, as when the device of a constructive trust is needed to protect the rightful party against the acts of a wrongdoer. Violation of a confidential relation has produced injury to the survivor of the relationship as to personalty, such as proceeds of a war risk policy (Blanco v. Velez, 295 N. Y. 224) and realty (Foreman v. Foreman, 251 N. Y. 237) or has been accomplished by will (Latham v. Father Divine, 299 N. Y. 22) or by agreement (Hartkopf v. Hesse, 49 N. Y. S. 2d 162) or superior knowledge (Cassidy v. Cassidy, 283 App. Div. 618; Stephens v. Evans, 75 N. Y. S. 2d 909).

It is undeniable that subdivision 9 of section 31 of the Personal Property Law, enacted by chapter 104 of the Laws of 1943, effective March 11, 1943, under the sponsorship of the amicus curice with the approval of the Insurance Department, was designed as the insurance counterpart of section 347 of the Civil Practice Act to prevent fraud against a deceased person and to end litigation based upon unsupported oral agreements with decedents “ to assign ” or to “ name-beneficiaries ”. However pertinent such enactment may be to situations depending for proof solely upon oral promise, it is not authority for dismissing the within complaint for insufficiency. Here we are not dealing with a cause of action based on an oral promise to give property in the future as in Matter of Ditson (177 Misc. 648); Rosseau v. Rouss (180 N. Y. 116), or to name a beneficiary (Ward v. New York Life Ins. Co., 225 N. Y. 314), but rather to prevent consummation of a scheme between the insured and his sister to undo surreptitiously that which he, in fact, had done openly just as he had agreed to do. In this instance the plaintiff’s case does not depend solely on an executory oral promise “ to assign ” the policy for, concededly, the policy when originally issued was delivered to her under circumstances indicating an intent ‘ ‘ to assign ” same to her. An insurance policy is but a chose in action (Matter of Pastore, 155 Misc. 247) and delivery to the assignee or donee with intent to vest title is essential to a valid gift (Matter of Van Alstyne, 207 N. Y. 298; Jackson v. Twenty-Third St. Ry. Co., 88 N. Y. 520; Marcus v. St. Louis Mut. Life Ins. Co., 68 N. Y. 625; McGlynn v. Curry, 82 App. Div. 431) and that delivery with such an intent also accomplishes a valid assignment (Ridden v. Thrall, 125 N. Y. 572; Loucks v. Johnson, 70 Hun 565). Delivery in this instance was not equivocal, but was a deliberate and intentional act to carry out the terms of an entirely natural and probable transaction, that is, an intent to protect the wife, if she survived, from the burden of expense incident to last illness and death of husband. The naming of a wife as beneficiary of a policy arouses no suspicion. It is a normal and natural thing to do. Here the complaint avers an intent to make the wife beneficiary and when the husband did, in fact, do just that, and delivered the policy to her, an effective inter vivas gift, or — in this setting — • assignment was made (Jacobs v. Strumwasser, 84 Misc. 28; Young v. Prudential Ins. Co., 131 N. Y. S. 968; Opitz v. Karel, 118 Wis. 527; McEwen v. New York Life Ins. Co., 42 Cal. App. 133; Matter of Chryssikos, 135 N. J. Eq. 451) and such a transaction is not impaired by the Statute of Frauds (Bernstein v. Prudential Ins. Co., 204 Misc. 775; John Hancock Mut. Life Ins. Co. v. Sandrisser, 95 N. Y. S. 2d 399).

The respondent and the amicus curice stress with great emphasis a statement made by our learned brother, Judge Froessel, when he sat as a Supreme Court Justice in Siegel v. Tankleff (95 N. Y. S. 2d 178, 182). There a widow claimed proceeds of a policy against decedent defendant’s 11 girl friend ”, an after-named beneficiary. The widow was allowed recovery on the theory that what she claimed the insured did was quite natural and probable under the circumstances. He had named her as beneficiary. He gave her possession of the policy.” Because delivery had occurred prior to the effective date of the statute, Judge Fboessei/s statement that “ an oral assignment or gift of a life insurance policy prior to March 11, 1943, when subdivision 9 was added to Section 31 of the Personal Property Law, by manual delivery of the policy to the assignee or donee with intent to make a gift thereof is valid ” — has been seized upon as indicating a contrary result had delivery occurred subsequent to the statute. We do not believe the language, when read in its setting, bears such a construction — and even when read out of context — it cannot very well be reconciled with long-established decisional law respecting inter vivas gifts when delivery is accompanied by intent. The date of the delivery can be of little importance so long as it appears that it in fact occurred. Subsequent lower court cases have been decided without reference to the effective date of the statute (cf. Bernstein v. Prudential Ins. Co. and John Hancock Mut. Life Ins. Co. v. Sandrisser, both cited above).

The case of Fischer v. New York Sav. Bank (281 App. Div. 747), relied on by the majority of the court below, is distinguishable on its facts. There the deceased, pursuant to an oral agreement, named Fischer, a creditor, as beneficiary in a policy on his life. Subsequently the decedent named his wife beneficiary and, as a widow, her claim to the proceeds was upheld. In that case there was no delivery of the policy, no payment of premiums and no confidential relation such as springs from the marriage relation to support and give credence to the alleged oral agreement.

All that has been said pertaining to the words to assign ” is equally applicable to the statutory phrase ‘ ‘ to name a beneficiary ”.

This view does no violence to the general proposition that nothing short of full performance by b°th parties will operate to take the alleged contract out of the operation of the statute (Burns v. McCormick, 233 N. Y. 230; Bayreuther v. Reinisch, 264 App. Div. 138, affd. 290 N. Y. 553; Meltzer v. Koenigsberg, 99 N. Y. S. 2d 143, affd. 277 App. Div. 1050, affd. 302 N. Y. 523). That rule must yield to the demands of justice, particularly, when ostensibly such statute is being used to preserve the fruits of apparent wrongdoing in the hands of the wrongdoer (cf. Latham v. Father Divine, supra).

Here the husband’s action under the circumstances was suspect. What motivated the husband to eliminate the name of his wife as beneficiary does not appear but, nonetheless, it had the consequence of perpetrating a fraud upon his wife with whom he had spent his entire married life in apparent harmony, mutual respect and confidence. On the face of the complaint, the husband committed an inexcusable wrong, which, if established by the weight of the credible evidence, the court has the equitable power — as well as the duty — to correct.

The widow should be allowed her day in court to show, if she can, that she is the victim of fraud and wrongdoing. As in any lawsuit, the burden of proof rests with the plaintiff widow to establish the allegations of her complaint. If the statute is to be used as a shield, it is only right that the court should know whether it is protecting a wrongdoer. On this record a triable issue of fact is presented which should not be summarily disposed of by motion but only after a plenary trial.

The judgment of the Appellate Division should be reversed, the order of Special Term reinstated, and the matter remitted to Special Term for further proceedings in accordance with the opinion herein, with costs to abide the event.

' Fuld, J.

J. (dissenting). The question presented by this appeal is whether plaintiff may maintain an action on the oral agreement, allegedly made by her late husband, in the face of subdivision 9 of section 31 of the Personal Property Law. I do not see how she may, for that subdivision, insofar as here relevant, provides that

“a contract to assign or an assignment * * * of a life * * * insurance policy, or a promise * * ’ # to name a beneficiary of any such policy ” ' '

is void ” unless in writing and subscribed by the party to be charged. Concededly, there is in this case no writing or memorandum of any sort whatsoever.

The purpose of subdivision 9, as plain as its language, was to bar all claims based on oral evidence of an assignment, or of a promise to name a beneficiary, of a life insurance policy. To allow such claims, it was recognized, would introduce great uncertainty into the disposition of life insurance proceeds; and, by opening the door to perjured testimony and fraudulent claims, it might work to defeat the intent of the deceased more often than to effectuate it. (See, e. g., Memorandum submitted to Governor by Superintendent of Insurance, in connection with bill adding subd. 9.) In requiring a writing, therefore, the legislature gave effect to the wise public policy favoring certainty in the rights of a deceased’s named beneficiaries — the same policy which this court voiced some 50 years ago in Hamlin v. Stevens (177 N. Y. 39, 47-50), when it wrote that oral agreements, such as the one before us, “ are easily fabricated and hard to disprove, because the sole contracting party on one side is always dead when the question arises. They are the natural resort of unscrupulous persons who wish to despoil the estates of decedents [pp. 47-48]. * * * Such contracts are dangerous. They threaten the security of estates and throiv doubt upon the power of a man to do what he wills with his own [p. 50].”

Whether plaintiff’s arrangement with her husband be considered an assignment, a promise to assign or a promise to name a beneficiary, it is precisely what, in express terms, the statute renders void. And it matters not, in the words of subdivision 9, whether it was “ with or without consideration ” to the promisor, in this case, the husband. Plaintiff wife seeks to avoid the inexorable force of the statutory language, first, by urging that her husband made a valid gift of the policy through manual delivery, and, second, by invoking the doctrine of constructive trust. We find no aid for her position in either theory, for both fly in the face of subdivision 9. To permit that provision to be by-passed would, in effect, be to write it out of the statute of frauds.

Delivery, without a writing or other signpost, is equivocal and ambiguous, and the purpose of the legislation, the policy underlying it, would be entirely frustrated were we to say that the requirements of the statute could be avoided by delivery. Upon the death of the insured, the policy must, of necessity, come into the hands of some other person. If that individual, though not the beneficiary named in the policy, were permitted to bring an action based on an oral assignment, by merely asserting delivery, the doors would again be opened wide to perjury and fraud, for the action would still be based on paroi evidence, the very thing that the statute, with its insistence on a writing, was designed to prohibit. Indeed, plaintiff is not even in possession of the policy at the present time, and there is nothing more than her oral assertions to lend any color or support to her claim of delivery; there is nothing more, in short, than just the paroi evidence of an assignment which the statute categorically proscribes. The conclusion is inescapable that the statute means what it says, that it makes no exception for delivery, but voids any assignment or gift of a policy which is not evidenced by a writing.

Nor is there any place here for the doctrine of constructive trust. While plaintiff’s account of the transaction, if true, may arouse our sympathy, that surely is not sufficient reason to ignore the statute of frauds. We misconceive the constructive trust doctrine if we were to apply it in this case to overcome the statute. (Cf. Meltzer v. Koenigsberg, 302 N. Y. 523, affg. 277 App. Div. 1050.) In point of fact, it appears that the provision in question was passed to prevent the very type of claim now being advanced by plaintiff. (See, e. g., Mitchell v. Mitchell, 290 N. Y. 779, affg. 265 App. Div. 27, which was followed by L. 1943, ch. 104, adding subd. 9.)

Claims asserted in opposition to a statute of frauds are, in the very nature of things, frequently of an appealing character, and the present one is undoubtedly no more so than many that will arise in the future. We may not, by judicial construction, repeal a plainly worded provision because it may appear to operate against a dutiful wife or because it may seem to work a hardship. The simple fact is that the statute in terms voids every oral assignment of a life insurance policy and every oral promise to name the beneficiary of such a policy. There is neither warrant nor justification for a court to dispense with the legislative requirement of a writing. The alleged agreement being oral is unenforcible. The Appellate Division was eminently correct in granting defendant’s motion for summary judgment.

Conway, Ch. J., Froessel and Burke, JJ., concur with Dye, J.; Fuld, J., dissents in an opinion in which Desmond and Van Voorhis, JJ., concur.

Judgment reversed, etc.