9. Abatement and revival

9-Pendency of another similar action by an

other is not a defense to representative action.

Pendency of another similar action by another bondholder is not a defense to bondholders' representative action; defendant's remedy being by consolidation of actions, and not dismissal.

10. Executors and administrators 513 (11)-Discharge of deceased director's executors held no defense to bondholders' representative action against directors (Decedent Estate Law, § 150 [as added by Laws 1920, c. 919, § 1]; Surrogate's Court Act, § 208 [Laws 1920, c. 928]).

Discharge of executors completing administration of deceased director's estate is no defense to bondholders' representative action to enforce director's personal liability, discharge merely relating to enforcement and not validity of claim; plaintiff being entitled in certain circumstances to follow estate assets, in view of Decedent Estate Law, § 150 (as added by Laws 1920, c. 919, § 1), and Surrogate's Court Act, § 208 (Laws 1920, c. 928).

11. Corporations ~~360(4)—Defense alleging that plaintiff bringing representative bondholders' action owned no bonds held to raise no issues not raised by denials.

In bondholders' representative action against directors for unlawful payment of dividends, impairing capital, defense alleging on information and belief that plaintiff was not bondholder, when action was commenced or thereafter, will be stricken out, as raising no issue not raised by denials.

12. Judgment 949 (5)-Defense of res judicata in bondholders' action against director's executor held insufficient, without showing claim was involved in action settling estate.

In bondholders' representative action against directors for unlawful payment of dividends, impairing capital, defense of res judicata, interposed by executor of one of directors, held insufficient, in absence of showing that plaintiff's.claim was involved in action to settle director's estate; presumption being that it was not.

Appeal from Supreme Court, New York County.

Action by Herbert Small, suing on behalf of himself and all bondholders and creditors similarly situated, against Francis De C. Sullivan and others. From orders in part granting and in part denying plaintiff's motion to strike out defenses for insufficiency, all parties appeal. Orders modified, and, as so modified, affirmed.

Argued before CLARKE, P. J., and MERRELL, FINCH, MARTIN, and BURR, JJ.

Gustavus A. Rogers, of New York City (Abraham Benedict and Eugene W. Small, both of New York City, on the brief), for plaintiff.

Nicoll, Anable & Nicoll, of New York City (De Lancey Nicoll, of New York City, of counsel, and J. Tufton Mason, of New York City, on the brief), for Reid's ex'rs.

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

(219 N.Y.S.)

Davies, Auerbach & Cornell, of New York City (Charles H. Tuttle, of New York City, of counsel, and Joseph S. Auerbach and Martin A. Schenck, both of New York City, on the brief), for Belmont's ex'rs.

Stetson, Jennings, Russell & Davis, of New York City (Allen Wardwell, of New York City, of counsel, and William R. Carlisle, of New York City, on the brief), for Juilliard's ex'rs.

Geller, Rolston & Blanc, of New York City (George S. Mittendorf, of New York City, of counsel, and Edward M. Cameron, Jr., of New York City, on the brief), for Bacon's ex'r.

MARTIN, J. This suit is brought on behalf of bondholders and other creditors of the Interborough-Metropolitan Company against alleged directors. The gravamen of the action is unlawful payment of dividends, notwithstanding impairment of the capital, accomplished as planned by means of a consolidation of the Interborough-Metropolitan with a paper corporation known as "Finance & Holding Corporation," which had no assets outside of $550 in cash and had never engaged in business.

The answers deny all the important allegations of the complaint and plead various defenses. The trust deed, referred to and quoted in part in the answers, was before the court at Special Term. Plaintiff sought to strike out all the defenses for insufficiency. This relief was granted in part and denied in part, and these appeals resulted.

The action is brought by an alleged holder and owner of $5,000 par value 42 per cent. collateral trust bonds of the Interborough-Metropolitan Company on behalf of himself and others similarly situated, to have declared illegal and fraudulent a consolidation of these two companies, to have it declared that certain dividends, $8,233,290 in total amount, paid by the Consolidated Company were in fact paid by the Interborough-Metropolitan Company while its capital was impaired, and to require the defendants to account to the plaintiff and other bondholders for their disposition of the property of the Interborough-Metropolitan and Consolidated and for loss sustained by the payment of the dividends, which loss it is sought to recover from the defendants, jointly and severally, with interest.

The Interborough-Metropolitan Company was a domestic corporation organized in 1906, with an issued and outstanding capital of $45,740,000 of preferred stock and $93,262,192 of common stock, it having also issued $67,825,000 face value of 412 per cent. collateral trust gold bonds pursuant to a trust agreement with Windsor Trust Company, as trustee, which was afterwards succeeded as trustee by the Empire Trust Company. The complaint alleges that the Interborough-Metropolitan Company was a holding company, which before April 23, 1915, had sustained large losses by reason of its holdings in certain other corporations, and had suffered an impairment of its capital to the extent of $80,000,000 and upwards; that it had accumulated in its treasury a large sum of

money, resulting from the payment of dividends by the Interborough Rapid Transit Company, but such funds were not applicable to the payment of dividends on the Interborough-Metropolitan stock, because it had no surplus profits, and because, in view of its impairment of capital, earnings did not warrant dividends; and that none had been paid. by the Interborough-Metropolitan upon its preferred stock for upwards of seven years before April 23, 1915.

It is also alleged that the Interborough-Metropolitan directors, some of whom are now dead and their estates being represented by their personal representatives, conceived a plan to pay dividends upon Interborough-Metropolitan preferred stock, of which they themselves were large holders; and that they speculated in the purchase of both preferred and common stock in anticipation of its rise in value when dividends would be forthcoming. According to the complaint, difficulties inherent in lack of sufficient earnings and impairment of capital could be overcome, it was thought, by a consolidation of the Interborough-Metropolitan with the Finance & Holding Corporation.

The plaintiff asserts it was arranged that the new consolidated corporation should have a capitalization less than the fair net value of the Interborough-Metropolitan assets, and that part of the capital of the Interborough-Metropolitan should be paid out in the form of dividends. The Interborough Consolidated Corporation was organized in the spring of 1915, with an authorized share capital of approximately $50,000,000, divided into approximately $45,000,000 of preferred stock, in addition, to common stock without par value, but carried at $5 a share.

It is asserted that the liability of the Consolidated upon the aforesaid Interborough-Metropolitan 42 per cent. bonds amounted to $67,825,000; that the fair net value of Interborough-Metropolitan assets immediately prior to the consolidation was $52,559,397.54; that the assets of the Consolidated immediately after the consolidation was the same plus the $550, which, it is said, made up the assets of the Finance & Holding Corporation; that at the time of the consolidation the fair net value of the Interborough-Metropolitan assets did not equal the par value of its issued preferred and common stock; and that after the consolidation the fair net value of the consolidated assets did not equal the par value of the preferred and common stock of the Interborough-Metropolitan outstanding immediately prior to the consolidation.

The directors of the Consolidated, beginning on June 23, 1915, declared and paid quarterly dividends of 12 per cent. upon the preferred stock of the Consolidated up to and including April, 1918, aggregating 18 per cent., or $8,233,290, paid in cash. The complaint further sets forth that the consolidation was illegal, a device under color of statutory authority to pay dividends not legally payable, because not paid from surplus profits, and resulted in a withdrawal of part of the capital of the

(219 N.Y.S.)

Interborough-Metropolitan and a reduction thereof in a manner not authorized by law.

On or about March 28, 1919, the Consolidated was adjudicated bankrupt. In October, 1922, the successor trustee sold the collateral securing the Interborough-Metropolitan bonds, and thereupon the balance of principal of the bonds became immediately due and payable. The trustee in bankruptcy of the Consolidated fully administered the estate and paid the final dividend.

The bondholders and creditors of Interborough-Metropolitan have received less than 30 per cent. of the amount of their claims, and there are no further assets available to them, so that the plaintiff and other bondholders have suffered a loss of at least 70 per cent. of the par value of their bonds, with interest from October 1, 1918. It is also alleged that such loss exceeds the aggregate amount of the dividends paid as aforesaid upon the Consolidated preferred stock.

The defendants at this time do not desire to challenge the sufficiency of the complaint. The defenses which the plaintiff moved to strike out, and which are to some extent differently numbered and pleaded in the various answers, are: (1) The "no recourse" provision of the trust deed; (2) consolidation was permitted by trust deed and statutes, and was in good faith; (3) acquiescence and laches of plaintiff and other bondholders, who deposited their bonds under a certain plan of readjustment and took and retained the benefits of the plan; (4) dividends complained of were paid from surplus profits of the Consolidated, and defendants acted in good faith; (5) the cause of action, if any there be, is vested in the trustee, and not in individual bondholders; (6) adequate remedy at law; (7) six years statute of limitations; and (8) another action pending. In addition, some of the defendant executors pleaded that the estates have been administered, and failure to present plaintiff's claim has the effect of barring a recovery.

[1] The first defense pleaded article 12 of the trust agreement under which the bonds were issued, which reads in part as follows:

"No recourse under or upon any obligation, covenant, or agreement of this indenture, or of any purchase-money bond or coupon, or because of the creation of any indebtedness hereby secured, shall be had against any incorporator, stockholder, officer, or director of the company or any successor corporation, either directly or through the company, by the enforcement of any assessment or by any legal or equitable proceeding by virtue of any statute or otherwise. This indenture and the purchase money bonds are solely corporate obligations, and no personal liability whatever shall attach to, or be incurred by, the incorporators, stockholders, officers or directors of the company or any successor corporation, or any of them, because of the incurring of the indebtedness hereby authorized, or under or by reason of any of the obligations, covenants or agreements contained in this indenture, or in any of the purchase money bonds or coupons, and any and all personal liability either at common law or in equity, or by statute or constitution, of every such stockholder, officer or director, is released and waived.

This "no recourse clause" appears to relate principally to liability for the indebtedness or the obligations intended to be placed on the corporate borrower. It might be conceivable that, corporate liability failing on account of a defect, individual liability would be asserted in some jurisdiction, the laws of which were unfamiliar, or it might be that, though acting in good faith and in the exercise of due care, individual responsibility would result from some act or conduct on the part of di

rectors.

It is argued for defendants that the "no recourse" clause may be regarded as releasing in anticipation and leaving to other claimants liabilities which creditors generally could enforce, such as the secondary liability of stockholders or their obligation to pay subscriptions for stock. But it cannot reasonably be read as meaning that those who might disburse corporate funds, intending illegally to divert the same, were to be free of all liability therefor to the bondholders, even for fraud or willful wrongdoing.

The first defense, however, sets up that "all acts by these defendants as directors * * * were done by them in good faith and without fraud," and the clause quoted from the trust agreement provides that directors shall be free from "any and all personal liability, either at common law or in equity, or by statute" under or by reason "of the obligations" of the agreement. Plaintiff is claiming thereunder, and attempting to charge defendants with personal obligations "contained in this indenture.”

Good faith here implies that under the circumstances the directors used reasonable diligence and judgment when determining that dividends should be paid. We think the clause referred to was under such circumstances intended to protect them from becoming charged because of nonpayment of the corporate obligations or any part thereof. We do not agree with counsel for the plaintiff that the provisions under consideration look solely to the past, affording protection against technical defects, and not to the future.

Nor do we accept the statement that protection cannot be thus afforded to a director, for example, one serving long after the consolidation, who, innocently and with reasonable diligence and inquiry, participated in the declaration of a dividend. Conceding, for the purpose of argument, his obligation to see that everything is in order, to be absolute, we see no reason for holding that he could not safely seek protection in a clause of this kind against a mere mistaken conclusion. Though it be admitted that good faith is not an answer to failure to perform a statutory duty (Darcey v. Brooklyn & New York Ferry, 196 N. Y. 99, 89 N. E. 461, 26 L. R. A. [N. S.] 267, 134 Am. St. Rep. 827), good faith would seem to imply innocence as well as due care, and to negative the suggestion that protection of this kind against unexpected and undeserved liability is not permissible