Schwarz v. General Aniline and Film Corp., 305 N. Y. 395, 113 N. E. 2d 533 (1953); New York Credit Men\u27s Adjustment Bureau, Inc. v. Weiss, 305 N. Y. 1, 110 N. E. 2d 397 (1953); In Re Silverman, 305 N. Y. 13, 110 N. E. 2d 402 (1953)

Holzman, Donald J.

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Buffalo Law Review Volume 3 Number 1 Article 13 12-1-1953 Business Associations—Corporations Donald J. Holzman Follow this and additional works at: https://digitalcommons.law.buffalo.edu/buffalolawreview  Part of the Business Organizations Law Commons Recommended Citation Donald J. Holzman, Business Associations—Corporations, 3 Buff. L. Rev. 62 (1953). Available at: https://digitalcommons.law.buffalo.edu/buffalolawreview/vol3/iss1/13 This The Court of Appeals Term is brought to you for free and open access by the Law Journals at Digital Commons @ University at Buffalo School of Law. It has been accepted for inclusion in Buffalo Law Review by an authorized editor of Digital Commons @ University at Buffalo School of Law. For more information, please contact lawscholar@buffalo.edu. BUFFALO LAW REVIEWelection officials. The citizen wrongfully deprived of the rightto vote can sue for damages."'Where a valid petition for nomination was arbitrarily de-clared invalid and the plaintiff's name was not put on the ballot,the Court of Appeals held a damage action would lie against theindividual members of the election board.2 In reaching this de-cision the court followed Frank v. Eaton,53 which also was author-ity for the proposition that plaintiff did not have to exhaust hisstatutory remedies by court review of the board's action.5 4Thus not only can a citizen, wrongfully deprived of his rightto vote, sue, but also a candidate who has been deprived of hisrights.5 The bases for these decisions rest upon grounds ofpublic policy, the importance of the personal rights involved, andthe difficulty of vindicating them in any other way.""I. Busn-ss AssoCIAToNsCorporationsa. Reimbursement of Corporate Officials: Sections 63-68 ofthe General Corporation Law make up Art. 6-A which is concernedwith reimbursement of litigation expenses of corporate officials.Section 63 does not concern us here; sections 65-68 are procedural;section 64 reads as follows: "Any person made a party to anyaction, suit or proceeding by reason of the fact that he . . . is orwas a director, officer or employee of a corporation shall be entitledto have his reasonable expenses, including attorneys' fees, actuallyand necessarily incurred by him in connection with the defenseof such action, suit or proceeding . . . assessed against the corpo-ration . . . except in relation to matters as to which it shall beadjudged in such action, suit or proceeding that such officer, di-rector or employee is liable for negligence or misconduct in theperformance of his duties."In Schwarz v. General Aniline & Film Corp.' a majority of theCourt of Appeals interpreted the court-mandated reimbursementprovisions of Art. 6-A as not applying to expenses incurred in acriminal prosecution.51. Goetcheus v. Matthewson, 61 N. Y. 420 (1875).52. Schwartz v. Hefferman, 304 N.'Y. 474, 109 N. E. 2d 68 (1952).53. 225 App. Div. 149, 231 N. Y. S. 477 (3d Dep't 1928).54. ELEmo LAW § 330.55. .raffarian v. Murphy, 280 Mass. 402, 183 N. E. 110 (1932).56. See Note, 153 A. L. R. 148; 29 C. J. S. Elections § 64 (1941).1. 305 N. Y. 395, 113 N. E. 2d 533 (1953).THE COURT OF APPEALS, 1952-53 TERMSchwarz, a former vice-president and director of GeneralAniline & Film Corp., was one of several defendants indicted in-dividually with the corporation in 1941 for alleged violations ofthe Sherman Anti-Trust Act.' After having pleaded not guilty tothe indictment, Schwarz, in 1950, was allowed to plead nolo con-tendere. He paid a $500 fine and requested General Aniline to re-imburse him but, the corporation declined to do so without courtorder. The United States District Court declared itself withoutpower to provide such an order and referred petitioner to hisrights inthe state courts.The Special Term, quoting People v. Daiboch& by saying that"while a plea of nolo contendere is not an admission of guilt, itnonetheless is a conviction and has the same consequences, in thecriminal cause in which it is entered, as a plea of guilty,"' 4 con-cluded that the imposition of a fine amounted to an adjudicationthat Schwarz was liable for misconduct in the performance of hisduties within the meaning of section 64 and refused to awardreimbursement.Although the Appellate Division affirmed this decision,5 a dis-senting Justice, declaring himself reluctant to agree that a pleaof nolo contendere necessarily showed any "misconduct" towardthe corporation, suggested that the conduct of petitioner mighteven have been in promotion of the corporation's interests andthat defendant's plea might well have been a mere settlement inthe anti-trust suit, not involving any adjudication or any miscon-duct at all.In the Court of Appeals, Judge Desmond, speaking for themajority, injected for the first time the proposition that Art. 6-Awas not intended to apply to expenses incurred by an officer ordirector in his defense against a criminal indictment. The legis-lative intent, he said, revolved around stockholders' suits in whichcertain corporate officers and directors had to pay their own law-yers. This intent was found in part by referring to New YorkDock Co. v. McColtmG where it was pronounced that the corpora-tion in whose behalf a stockholder's suit is brought was not obli-gated, at common law, to pay legal fees incurred by its directorsin defending themselves as individual defendants in such an action.That case, which was concerned with a civil action, was a fore-runner to the change in the General Corporation Law which tended2. 15 U. S. C. A. § 1.3. 265 N. Y. 125, 191 N. E. 859 (1934).4. Schwarz v. General Aniline & Filn Corp., supra note 2 at 399, 113 N. E. 2dat 534.5. 279 App. Div. 996, 112 N. Y. S. 2d 146 (1st Dep't 1952).6. 173 Misc. 106, 16 N. Y. S. 2d 844 (Sup. Ct. 1939).BUFFALO LAW REVIEWto alleviate this burden on corporate officials. Therefore, the beliefthat 6-A was directed to civil actions.A further aid to statutory construction was found when themajority viewed Art. 6-A as a supplement to Art. 6 which de-scribes civil actions involving corporations and its officers. It isthought that both articles are in pari materia and both refer tocivil litigation. In addition, "strange public policy" was theclassification given to any program which would allow one chargedwith a crime to require the corporation by whom he was employedto pay his legal expenses.This approach by the majority, concurred in by Judge Cars-well in a separate opinion, rendered it unnecessary to examine thequestion of whether a plea of nolo contendere is an adjudicationof misconduct. Judge Desmond did add, however, that "it isinstructive . . . to look a little closer at the exception found atthe end of § 64, which denies reimbursement to a corporation offi-cial who has been adjudged to be 'liable for negligence or miscon-duct in the performance of his duties.' We think 'negligence ormisconduct', as there used, refers right back to §§ 60 and 61, set-ting up civil actions by or on behalf of corporations against theirofficers or directors who have injured the corporations by wrong-doing or inattention to duty." 7This case raised two main issues concerning § 64, (1) itsapplicability to criminal actions; (2) if so applicable, the relationof nolo contendere and "misconduct." While the latter is quiteunsettled, the 4-3 decision produced a definite conclusion as to theformer. However, this decision has attached to it as a permanentfixture a strong dissenting opinion by Judge Fuld.The dissent, in which Lewis and Conway concur, mentionssearching in vain for any limitation restricting the scope of § 64to civil cases and uses an historical approach as one method ofsustaining the "plain-meaning" rule of interpretation. Before1945 the statute was expressly limited to "any action, suit orproceeding . . . brought by the corporation, or brought in itsbehalf." A sharp contrast is illustrated by Fuld as he shows therejection of the former narrow language by a new section callingfor reimbursement in "any action, suit or proceeding."In addition, the report of the Law Revision Commission'which preceded the adoption of the broad language mentionedthat such language might include a "criminal" anti-trust suit andsuggested having a special proceeding for collecting such fees in7. Schwarz v. General Aniline & Film Corp., supra note 2 at 403-404, 113 N. E.2d at 537.8. Report of New York Law Revision Commission, p. 161, n. 36 (1945).THE COURT OF APPEALS, 1952-53 TERMcase a court, lacking equity power, would not be in a position topass upon the right to indemnification.9Neither did Fuld find his interpretation to be repugnant topublic policy. He suggested that the cost of such a suit againsta corporate official because of his acts in the best interests of thecorporation might be considered as a normal risk of corporateoperation to be assumed by the corporation, whether the officialbe acquitted or not. Siman v. Socony Vacuum Oil Co.10 is quotedas providing court sanction for reimbursing a corporate officialfor expenses incurred in defending a criminal anti-trust proceed-ing.The dissent sees also a flaw in the courts' reasoning when itfinds an essential difference between the criminal and the civilin the area of anti-trust regulation.Fuld continued by discussing the nolo contendere aspect. Hereasoned that a judgment entered upon such a plea is in the natureof a compromise settlement and is in no way an adjudicationof any fact, particularly not a fact of misconduct as to a corpora-tion.As the law now stands, § 64 will not be made to apply tocriminal prosecutions." However, should the court reverse itselfat a later date or should the legislature indicate its intent is otherthan as expressed in the instant case, then the effect of pleading,nolo contendere will be in issue. The language of this case wouldseemingly indicate that so far as the New York Court of Appealsis concerned, a judgment following a plea of nolo contendere is notnecessarily an adjudication of misconduct to the corporation with-in § 64 of Art. 6-A of the General Corporation Law.b. Liquidation: New York courts generally take the positionthat directors of a corporation owe to their corporation, its stock-holders, and its creditors a duty of promoting the interest of thecorporation by using good faith in business judgment.2 A slightvariance is implied, however, when a corporation is on the vergeof insolvency.'39. The majority considered this a mere comment referring to a contention thatthe section might be applicable in a criminal cause-but which view lacked any indi-cation of adoption by the Legislature or even the Law Revision Commission.10. 267 App. Div. 890, 47 N. Y. S. 2d 589 (1st Dep't 1944), affirming 179 Misc.202, 38 N. Y. S. 2d 270 (1942).11. See note I supra.12. Rous v. Carlisle, 261 App. Div. 432, 26 N. Y. S. 2d 197 (1st Dep't 1941),aff'd, 290 N. Y. 869, 50 N. E. 2d 250 (1943). Everett v. Phillips, 288 N. Y. 227, 43N. E. 2d 18 (1-042). GEN. CoRr. LAw § 60.13. New York Credit Men's Adjustment Bureau, Inc. v. Weiss, 305 N. Y. 1,110 N. E. 2d 397 (1953).BUFFALO LAW REVIEWIn New York Credit Men's Adjustment Bureau, Inc. v. Weisset al.'4 defendants were sole directors and stockholders of such acorporation. The corporation's inventory had a balance sheetvalue of $73,000 and a cost value of at least $60,000; claims ofcreditors aggregated approximately $52,000. Defendants ar-ranged an auction sale in liquidation which netted slightly under$20,000. Creditors had not been notified of the sale, and news-paper advertisements did not contain the name of the corporation.Shortly thereafter the corporation was adjudged an involuntarybankrupt. This action against the directors was brought by thetrustee in bankruptcy for the wasting of assets under § 60 of theGeneral Corporation Law.The Court of Appeals was of the opinion that while the direc-tors were under no obligation to give notice to each creditor oftheir intention to convert the assets into cash, they were obligatedto obtain for the corporation the full value of the assets under thecircumstances at that time, the trustee having established a primafavie case.The directors were termed "trustees by statute for the credi-tors by virtue of § 60 of the General Corporation Law whichobligated them to protect the trust res . . and account forwaste . . . if there was any waste by reason of their conduct.""The language of the decision seems to indicate a preferencefor liquidation proceedings under court supervision and to showa desire on the part of the court to give full protection to corpo-rate creditors when a corporation approaches insolvency.c. Appeal to Stock Valuation: It is a general rule in NewYork that ordinarily, a party who accepts the benefit of a judg-ment thereby waives his right to appeal.16 However, a right toappeal will survive the acceptance of benefits in some cases, mostcommon of which involve condemnation proceedings where theclaimant seeks to question the amount of the award he has re-ceived,17 or cases where the situation is such that separate claimsare dealt with in the same judgment. 8In re Silverman9 adds to these exceptions a stock valuationproceeding pursuant to § 21 of the Stock Corporation Law. Inthis case dissenting stockholders objected to appraisers' valua-tion of their shares. Special Term confirmed the appraisers' re-port and denied petitioners' request that the order provide that14. Ibid.15. Id. at 7, 110 N. E. 2d at 398.16. Alexander v. Alexander, 104 N. Y. 643, 10 N. E. 37 (1887).17. Matter of New York & F. R. Co., 98 N. Y. 12 (1885).18. Goepel v. Kurtz Action Co., 216 N. Y. 343, 110 N. E 769 (1915).19. 305 N. Y. 13, 110 N. E. 2d 402 (1953).THE COURT OF APPEALS, 1952-53 TERMthey could surrender their stock and accept payment without pre-judicing their right to appeal the valuation.During their appeal to the Appellate Division, stockholdersdid surrender their stock and receive payment. The AppellateDivision subsequently granted corporation's motion to dismissthe appeal on the ground that the stockholders' interest was nowterminated.The Court of Appeals reversed on the basis of the languageof § 21 (6) of the Stock Corporation Law which states: "Anystockholder demanding payment for his stock shall have no right. . . with respect to such stock, except the right to receive pay-ment for the value thereof.' '[italics added.] The majority of thecourt held the word "value" to mean the "proper value" and re-fused to allow the language of § 21 (7) ("upon receipt of suchpayment, the objecting stockholder shall cease to have any inter-est in the corporation or its assets by reason of his ownership ofthe stock so paid for . . . ") to narrow its meaning. Such inter-pretation involves no inconsistency, the court maintained, becausesubdivision 7 refers to rights such as to notice, to attend meetings,and to vote and; therefore, it does not conflict with the right to re-ceive "payment for the value thereof."Bulk Sale---"ordinary course of trade"To come within the scope of the Bulk Sales Act,20 a bulk salemust be "otherwise than in the ordinary course of trade and inthe regular prosecution of said business." "Whether or not aparticular transfer in bulk is or is not within the ordinary courseof trade depends on the facts of each case."'"Sternberg v. Rubenstein22 presented an interesting fact situa-tion in which plaintiff trustee in bankruptcy sought to hold Ruben-stein, a dealer in leftover footwear, accountable for the value of abatch of "off season" shoes sold to him by the bankrupt. 3 It ap-pears that in the business of shoe retailing the sale of "off season"merchandise, that rendered obsolete by the passage of time, is anestablished operating pattern.2"Special Term rendered judgment in favor of the view thatsuch sale was in the ordinary course of bankrupt's business. The20. PmEs. PROP. LAw § 44.21. WHTNEY, OUTnINE OF THE LAW OF SALES 87 (4th ed. 1947).22. 305 N. Y. 235, 112 N. E. 2d 210 (1953).23. The sale of 1,294 pairs of shoes represented approximately one-sixth ofbankrupt's stock on hand in money value.24. Sternberg v. Rubenstein, supra note 22 at 240, 241, 112 N. E. 2d at 212, 213.

Business Associations—Corporations

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Business Associations—Corporations

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