# Metropolitan Elevated Railway Co. v. Manhattan Elevated Railway Co.

> New York Court of Common Pleas · April 15, 1884 · 11 Daly 373

URL: https://www.frixlaw.com/law-library/cases/6141118

## Case

- **Full name:** The Metropolitan Elevated Railway Company, against The Manhattan Elevated Railway Company
- **Court:** New York Court of Common Pleas
- **Decided:** April 15, 1884
- **Citations:** 11 Daly 373; 14 Abb. N. Cas. 103
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Brunt
- **Judges:** Brunt, Coleridge, Patteson, Wightman
- **Cited by:** 20 later opinions in the Frix Law Library

## Citator (automated)

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- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/6141118

## Opinion text

Van Brunt, J.
[After stating the facts as —This action is brought by the Metropolitan Railway Company, to set aside the agreements of October 22d, 1881, upon the following grounds:
1st. Because the Metropolitan directors had no power to modify the original leases and tripartite agreement of May 30th, 1879, without the consent of the shareholders.
2d. Because three of the Metropolitan directors were, at the time of the making of the October agreements, also directors of the Manhattan company—one of the contracting parties, whose interests were antagonistic to those of the Metropolitan company.
3d. Because the personal interests of several of the Metropolitan directors were opposed to those of that company.
4th. Because of the actual fraud upon the part of certain Metropolitan directors, who entered into a scheme to benefit themselves at the expense of their corporation.
The' defendants admit that the October agreements were not assented to by the stockholders of the Metropolitan company, and claim that such assent was not at all necessary to the validity of the contract. They further admit that three of the Metropolitan directors were also, at the time of the making of the October agreements, directors of the Manhattan company, but they deny that this circumstance in any way invalidated the action taken. They deny that the personal interests of any of the Metropolitan directors were opposed to those of that company; and they also deny that there was any actual fraud; and aver that the agreements of October, 1881, were for the best interests of all the parties concerned, and that they presented tire only solution of the difficulties and embarrassments which surrounded the elevated railway system,-in the summer and fall of 1881.
*431 In addition to the above defenses, the defendants also presented certain preliminary objections to the maintenance of this action, and also certain affirmative defenses.
The preliminary objections are as follows :
1st. No case is presented in this action for the interference of a court of equity.
2d. If the October agreements are fraudulent, as the plaintiff contends, then the plaintiff itself was a party to the fraud.
3d. The plaintiff, in its complaint, alleges that the agreements and leases of May 20th, 1879, which it seeks to reinstate, were a nullity, being made without authority of law.
4th. That the October agreements have never been dis-affirmed by the stockholders of the Metropolitan company in any way, nor even by the directors, by any direct vote.
The fifth and last preliminary objection is the lapse of time and the acquiescence of the plaintiff.
The following affirmative defenses are also urged:
1st. That the Manhattan company had at the time of the commencement of this action already brought its action in 'the Supreme Court against the New York company, the Metropolitan company, and all the persons who had brought actions to set aside the October agreements, in the nature of the old bill of quia timet, asking, in its complaint, that all matters relating to the October agreements should be determined in that action, and that the defendants and all others should be restrained from bringing any actions on account of these agreements.
2d. The judgment of the Supreme Court in the action of The People against The Manhattan Railway Company, entered on the 17th day of November, 1881.
3d. The judgment of the Superior Court of the City of New York, entered on the 8th of December, 1881, in the action wherein the New York Elevated Railroad Company was plaintiff, and the Manhattan Railway Company and the Metropolitan Railway Company were defendants.
4th. That restitution cannot be had.
I will first consider the preliminary objections, and then *432 the affirmative defenses, and lastly will discuss the four questions upon which the plaintiff bases the right to equitable relief in this action.
The first preliminary objection urged is, that the facts • elicited upon this trial do not present a case for the interference of a court of equity.
It is claimed by the defendants that the plaintiff has a complete remedy at law, and, therefore,'cannot seek the intervention of a court of equity. That the plaintiff could have sued for the rent, which is claimed to be due, under the leases and agreements of May 20th, 1879, and if the October agreements were set up as a defense, they could have been attacked upon precisely the same grounds as they have been in this action. -
In Grand Chute v. Winegar ( 15 Wall. 373 ), it was held that a municipal corporation, obligor in a bond, cannot ask in equity that the obligee be enjoined from proceeding at law, and that the bond be surrendered, when the bill alleges that the bond was issued, without authority, in violation of law, and in fraud of the plaintiff; that the obligee knew this when he took it; that the obligee’s possession is ' merely colorable, and that he gave no value for it, and never had any right or-title to it. Such allegations show a complete defense to the bond at law; and a judgment against the obligee at law would give as full protection in every way to the obligor as a decree in equity.
Mr. Justice Hunt in this case uses language as follows :
“And the result of the argument-is, that wherever a court of law is competent to take cognizance of a right, and has power to proceed to a judgment which affords a plain, adequate, and complete remedy, without the aid of a court of equity, the plaintiff must proceed at law, because the defendant has a constitutional right to a trial by jury. The right to a trial by jury is a great constitutional right, and it is only in exceptional cases and for specified causes that a party may be deprived of it.”
In Allerton v. Belden ( 49 N. Y. 373 )At was held that the right to apply to a court of equity to have a contract *433 annulled exists only when, from the form of the security, the defense cannot be made available at law, or where the instrument sought to be avoided is a cloud upon the title to land, or some other necessity for the interposition of a court of equity is shown.
The opinion of Judge Rapallo (page 377) has this:
“ The allegations in his complaint disclose a perfect defense at law to any action which might be brought against him on his indorsement, and no fact is stated showing any necessity for the interposition of a court of equity, or entitling the plaintiff to become an actor in the matter. . . . . . The most usual ground for going into equity in such cases formerly was the necessity for a discovery to prove the usury.
“ Bills of discovery being now abolished, some ground which formerly would have justified the filing of a bill for relief must appear in the complaint, or it shows no right of action......No authority has been cited sustaining an equitable action on such grounds; but on the contrary, it has been uniformly held, that where a perfect remedy, both as to the discovery and relief, can be had at law, an action in equitjr cannot be maintained, and that this objection is. available on demurrer.”
In The Town of Venice v. Woodruff ( 62 N. Y. 462 ), the-court said (at page 467) :
“ Whether, therefore, the question be regarded as one of jurisdiction or practice, it is established by the later decisions that some special ground for equitable relief must be-shown, and that the mere fact that the instrument ought-not to be enforced is insufficient, standing alone, to justify a resort to an equitable action.”
In Fowler v. Palmer (Id. 533), which was the case of' an action to compel the surrender of a note past due, on the-ground that it had been paid, but not taken up,' the court held that the action could not be maintained in equity, that the defense of payment was perfectly available to the plaintiff in an action upon the note, and no transfer could prejudice it.
*434 In Globe Mutual Life Ins. Co. v. Reals ( 79 N. Y. 202 ), it was held that an action to procure the cancellation of a written instrument cannot be maintained unless some special circumstance exists establishing the necessity of a resort to equity, to prevent an injury which might be irreparable, and which equity alone is competent to avert. It is not sufficient that a defense exists against the instrument, or that evidence may be lost.
In the case of Troy and Boston R. Co. v. Boston, Hoosac Tunnel, &c. R. Co. ( 86 N. Y. 107, 127 ), it is said by the court, Mr. Justice Dakforth speaking:
“ Although the form of actions and suits, and the distinction between actions at law and suits in equity has been abolished, a party, to entitle himself to the equitable remedy by injunction, must still make such a case as would, while the distinction existed, have made an equitable cause of action. This is well settled.”
In Hamilton v. Cummings ( 1 Johns. Ch. 517 ), the Chancellor states, as his conclusion from the authorities, that a resort to equity to compel the cancellation of written obligations, to be sustained, must be expedient either because the instrument is liable to abuse from its negotiable nature, or because the defense, not arising upon its face, may be difficult or uncertain at law, or from some other circumstances peculiar to the case, and rendering a resort to a court of equity highly proper and clear of all suspicion of any design to promote expense and litigation.
These authorities seem to establish, with great distinctness, the rule which has obtained in our courts since the practice of allowing equitable defenses in actions at law has been established, and none of the cases cited by the plaintiff at all conflict with it.
In the case of Gould v. Cayuga County Nat. Bank ( 86 N. Y. 75, 82 ), it is true that the court say that the party might have brought his action in equity to rescind the contract, and in that action might have had full relief; but in the next paragraph of the opinion the necessity of bringing in other parties is adverted to, which was to be the basis of *435 the relief to be granted by a" court of equity, and which could not be done in a court of law.
The Aberdeen Railway Case (1 Macq. H. L. Cas.), has no application to the question now under discussion, as equitable defenses were not available in actions at law in the English courts.
Equity jurisdiction of the court was applied in the case of McHenry v. Hazard ( 45 N. Y. 580 ), because the rights of all the parties could not be determined in any one action at law, and also because the defendants could not be allowed at their election to postpone the litigation of the question, and subject the plaintiff to the vexation of a litigation at a distant period when the means of defense might be lost or impaired, and when he might be disabled from contesting the validity of the claim with the same ability as at the present time. The latter ground for the entertaining of jurisdiction does not at all apply to the ease at bar, because the plaintiff here can sue at once to recover rent, under the May agreements. The defendants have no rights to be enforced against the plaintiff, but the plaintiff, the aggrieved party, can at any time enforce the rights which they think they have. In order to test the question as to the validity of the October agreements, the plaintiff has only to bring its action for the rent due under the May agreements, and the matter is at once brought up. Equitable jurisdiction cannot be entertained in this case upon the ground that otherwise there will be a multiplicity of suits. No such result would ensue. If an action had been brought upon the May agreements for rent due since the making of the October agreements, and a final .recovery had been- had for the amount of rent due, according to the terms of the May agreements, that final judgment would have ended, as far as the Manhattan company is concerned, the October agreements as effectually as any final judgment which can be rendered in this action can do¿ The fact that the agreements extend over a long period of years, does not alter the question. A final recovery is just as effectual, whether it be in a.court of law or a court of equity.
*436 Even if I, however, should find that there was no ground for equitable relief, yet, if the facts proven showed that the party was entitled to legal relief, the bill could not be dismissed (St ernberger v. McGovern, 56 N. Y. 12 ).
But there is another ground upon which the bill in equity can be sustained, and that is, that there could be no determination as to the validity of the October agreements without the presence of the New York company, a party to them. The New York company had a right to be heard upon the question. One party cannot be released by legal proceedings from a tripartite agreement, in an action against one other party. All the parties must be brought before the court, as all have a right to be heard upon the question as to whether the agreement which is mutual shall be broken up. Therefore, the New York company is a necessary party to any action seeking to avoid the October.agreements, that company being one of the parties to them. If an action was brought upon the lease of May 20th, 1879, the New York company could not have been brought in as has been done in this case, and which was the reason given in Gould v. Cayuga County Nat. Bank, for the entertaining a bill for rescission. It seems, therefore, that .the first preliminary objection is not well taken.
The second preliminary objection is, that if the October agreement is fraudulent, as the plaintiff contends, then the plaintiff itself was a party to the fraud.
The defendants claim, that as this is not a suit by a stockholder to set aside an agreement which is chargeable with fraud, but a suit by the corporation itself—one of the parties to the fraud—a court of equity will not interfere; and we are referred to the opinion of Mr. Justice McCrary, in the case of Lewis v. Meyer (14 Fed. Rep. 311, 312, 313), as an authority to sustain the proposition. The case cited, however, is not analogous to the one at bar.
That action was to avoid railroad bonds in the hands of innocent holders, upon the ground that the directors had issued them fraudulently. The bondholders were innocent parties, and not in any manner privy to the fraud perpetra *437 ted by the directors, and had no knowledge of such fraud. A stockholder could not maintain an action to set aside any fraudulent contract made by the corporation, without alleging a refusal, or good reason to suppose that the corporation would not bring any action. If this rule is to prevail, the directors of corporations may act as fraudulently as they please, and it is impossible to redress the wrongs which the corporation may have received at their hands, unless some stockholder is willing to undertake the labor and expense of an action therefor. Such cannot be the rule. Where directors are faithless to their trust, and have acted without any authority, the corporation may repudiate the acts so done, because the stockholders not only may claim but must claim their rights by and through the corporation, unless the corporation refuses to assert such rights. The directors are the agents of the corporation, and if they act without authority in making a contract for their principal, or fraudulently, certainly the principal may repudiate it. That it is the same principal who made the contract that seeks to repudiate it, is no bar to the relief.
The next preliminary objection is, that the plaintiff claims that the agreement and leases of May 20th, 1879, which it seeks to reinstate, were a nullity, being made without authority of law.
I understand that the claim that the agreements and leases of May 20th, 1879, were void, was abandoned upon the argument, it being conceded that under the statute of 1839 a corporation may lease its road.
But this is not at all necessary to answer the objection made. The plaintiff by its complaint does not seek to reinstate anything; it simply, asks that the agreement of October 22d, 1881, may be declared null and void; whether such judgment will reinstate anything or not is not a question involved in this action.
The next preliminary objection is, that the October agreements have never been disaffirmed by the stockholders of the Metropolitan company in any way, nor even by the directors, by any direct vote.
*438 If the directors had no authority to make the October agreements without the consent of the-stockholders, then certainly no expression of dissent was necessary by the stockholders, because the agreements were void unless ratified by the stockholders, or confirmed by action upon the part of the stockholders which amounted to ratification. But if it is sought tó set aside these agreements because of the fraud, either actual or constructive, then the contract is a voidable one, and due diligence must be used in electing to avoid it. What constitutes due diligence necessarily depends upon the facts of each particular case. Immediately after these agreements were made, various stockholders commenced their actions to set them aside, and it is well settled, that where one stockholder is asserting by suit the rights of the stockholders as a class, it is not required that each particular stockholder should sue.
In the case of Boardman v. Lake Shore & Michigan Southern R. Co. ( 84 N. Y. 157, 183 ), it is-said:
“It was not required that each particular stockholder should sue for his share of the dividends, to preclude the defendant from claiming an acquiescence and estoppel; and it is quite sufficient that it was advised of the character of the claim of the respective stockholders. The plaintiffs and other stockholders were entirely justified in awaiting the results of the suits pending without incurring the- hazard of losing their rights on account of the lateness of their demand.” „
The stockholders had no power to meet and act as a body, except as the statute and the by-laws prescribe, and must be called together in the manner provided by law, otherwise they have no power to act.
In the case at bar, the only way in which the stockholders were required to act was, upon the first opportunity to appoint other agents who would assert their rights, if they had any. Moreover, the Manhattan company, on the 9th day of December, 1881, commenced its bill of peace suit, and all stockholders were enjoined from suing, which injunction continued in force until February, 1883. Can the Man *439 hattan company now claim laches, because no other stock holders have brought suit to set aside these agreements, when they were prevented from so doing by reason of the injunction which that company had obtained?
It is urged, that because a new board of directors has been elected, no right is given to impeach the acts of a previous board, as the corporation is the same. I am unable to appreciate the force of this objection. If my agent has entered in my name into a fraudulent agreement, I know of no reason why I may not appoint a new agent and through him repudiate the fraudulent contract. In the case supposed, I am the party acting in both instances. I have never heard that a man was bound by the fraudulent contract made by his agent in his name, because he, the same person in whose name the fraudulent contract was made, sought to set aside the contract. The directors of the corporation are its agents and executive officers. They, as such agents, manage the business and affairs of the corporation, and when the business and affairs of the corporation are to be managed by directors, I do not think that the stockholders can do any act or make any contract, except by the use of the means provided by law, viz.: its directors. Therefore, if one set of agents act beyond their authority, or are recreant to their trust, the principal—that is, the corporation— may appoint a new set of agents and through them seek redress for the wrongs which it has suffered. The corporation being able to act only through its directors, at the very first opportunity after the October agreements were made, the shareholders of the Metropolitan company elected a new board of directors, such change in the board being evidently made because of the fact that the old directors had made these agreements; and within one month thereafter, this action was brought, and within one week after these agreements were executed, shareholders had commenced their actions to set them aside. I do not know how, if the most extreme diligence had been required, any more prompt action could have been taken; and thus is answered the last preliminary objection—that of laches.
*440 We are now brought to the consideration of the four affirmative defenses urged by the defendants.
1st.—That the Manhattan company had at the time of the commencement of this action already brought its action in the Supreme Court against the New York company, the Metropolitan company, and all the persons who had brought actions to set aside the October agreements, in the nature of the old bill of quia timet, asking in its complaint that all matters relating to the October agreements should be determined in that action, and that the defendants and all others should be restrained from bringing any actions on account of the October agreements.
The commencement of this action could not in any way interfere with the rights of the Metropolitan company to file its bill for a rescission. The mere filing of the bill by the Manhattan company restrained nobody, and the plaintiffs in that action knew this, because they, asked for, and obtained, an injunction preventing the bringing of any more suits, which was set aside by the General Term. Merely because the Manhattan company had filed a bill of peace against all the world in general, and the Metropolitan company and its stockholders in particular, the latter company did not lose any rights which it might acquire to the protection of the court. The Metropolitan company had the right to file its bill for rescission, and the Manhattan company could not deprive it of this right by filing a bill asking the court to adjudicate upon the question involved. Before such an action can restrain anybody’s proceedings, the right to an injunction must be established, either preliminarily or by final judgment.
The second affirmative defense is:
The judgment of the Supreme Court in the action of the People against the Manhattan Railway Company, entered on the 17th day of November, 1881.
I have searched in vain in the judgment-roll, in the case of the People against the Manhattan Railway Company, for anything which could in any way operate upon any rights which the Metropolitan company had. This company was *441 not a party to the action, and in the findings and judgment is not treated as a party. The second finding speaks of agreements made with the defendant by certain other corporations, to wit: The New York Elevated Railroad Company and Metropolitan Railway Company. So also in the fifth finding, similar language is used. In the judgment, also, the New York company and the Metropolitan company are treated as strangers to the record, and they evidently were so considered by the court. The only question at issue in that action was the solvency of the Manhattan company; with that issue the New York and Metropolitan companies had nothing to do. That question was one existing between the People on the one side, and the Manhattan company on the other, and nobody else had any interest in it. It is true that this question of solvency depended upon the October agreements, but an adjudication by the court in that action could only affect the parties to it, and as to them only to the extent of the question involved.
But it is said that the three companies united in a petition to have the property delivered back to the Manhattan company. The ■ order of restoration made upon that petition in no way adjudicated upon the question of the validity of the October agreements. No such question was pre- * sented to the court. The union of the New York company and the Metropolitan company in that petition operated only as a consent upon their part that restoration might be made. And no order that the court did make, in that proceeding, could have had the force of an adjudication, because the doctrine of res adjudieata does not apply to interlocutory judgments or orders which the court that rendered them has power to vacate or modify at any time. The order of restoration in the People’s case expressly reserved to the court the power of alteration and modification. These companies did not become parties to the record, and as has already been shown, they were not treated by the court, in its findings and judgment, as parties whose rights were being determined. Therefore, the judgment in that action barred no rights which this plaintiff might have.
*442 The third affirmative defense rests upon the judgment of the Superior Court of the City of New York entered on the 8th day of December, 1881, in the action wherein the New York Elevated Railroad Company was plaintiff, and the Manhattan ' Railway Company and the Metropolitan Railway Company were defendants.
In considering this question, it is necessary that we should have plainty before our minds the facts relating to that action and the proceedings therein.
The action was commenced upon the 2d of July, by the New York company against the Manhattan company and the Metropolitan company; and the plaintiff claimed the right to recover possession of its property from the Manhattan company, because of its . breach of the terms of the lease between the New York and Manhattan companies, and no relief whatever is asked for against the Metropolitan company. The Metropolitan company, in its answer, denied the right of the New York company to get back its road, and the Manhattan company put in a similar plea.
On the 22d day of November, 1881, the October agreements having then been made, the Manhattan company put in a supplemental answer, setting up the proceedings in the * People's suit, and also the October agreements above mentioned, alleging them to be an adjustment of all the controversies between the parties to the action. The parties then went before the court, and without the plaintiff offer: ing any proof whatever, the parties admitting the facts alleged in the supplemental answer of the Manhattan company to be true, obtained certain findings of fact and conclusions of law, all of which are expressly stated to be founded on the admissions of the parties, adjudging these October agreements valid, and a judgment to the same effect is entered thereon.
I fail to see how .this judgment can operate as a bar to the rights of the Metropolitan company to contest the validity of the October agreements. If those agreements are fraudulent, and this judgment should be held to preclude the Metropolitan company from rescinding them, then *443 the law would be used for the purpose of'fortifying a wrong, and not for the purpose for which it was instituted, viz: the redress of wrongs. When such a manifest injustice would result from the application of any rule of law as that a fraud would be protected, we may be sure that there is something wrong in our premises if they lead to such a conclusion, as equity and justice go hand in hand together.
If this judgment of the Superior Court is a bar to the right of this plaintiff to maintain this action, we have this state of things, as a necessary result: directors of a company may make an agreement which is absolutely void, and in the making of which there has been a plain violation' of duty, and if their corporation is sued upon it, the same board of directors being in office—their term not having expired—may confess judgment, and then there is no power in any court to redress the wrong. The mere statement of the proposition, it seems to me, shows that such cannot be the law, and it is not the law.
In order that a judgment may be a bar, there must be a real controversy. There was no controversy in the Superior Court. The Manhattan company alleged the making of the October agreements, and that they adjusted all matters in difference. The New York company and the Metropolitan company say, “ we agree that that is true,” and the judgment is entered. This was nothing more than a judgment by consent. All the parties to the action consented that these agreements had been made and had adjusted the differences, and the court so ordered. If these agreements were voidable for want of power in the directors to make them, or fraudulent, then the obtaining a judgment affirming these agreements by the same directors who made them, was a fraud upon the court, not necessarily an intentional fraud, but a fraud in law; and such a judgment binds no court, and its nullity upon that ground, though it has not been set aside or reversed, may be established in another action (Webster v. Reid, 11 How. U. S. 437).
In Earl of Bandon v. Becher (3 Clark & Fin. 479, 510), Lord Brougham adopts the language of Wedderburh, in the Duchess of Kingston’s case, as follows :
*444 “A sentence is" a judicial determination of a cause agitated between real parties, upon which a real interest has been settled. In order to make a sentence there must be a real interest, a real argument, a real prosecution, a real defense, a real decision. Of all these requisites, not one takes place in the case of a fraudulent and collusive suit; there is no judge, but a person invested with the ensigns of a judicial office is misemployed in listening to a fictitious cause proposed to him; there is no party litigating, there is no party defendant; no real interest brought into question.” In the case of Gaines v. Relf (12 How. U. S. 472), the principle was distinctly enunciated that in order that a judgment should be a bar there must be a real controversy, and that a judgment entered by consent to be used in the future cannot affect the parties to it, because there was no controversy carried on in earnest. In that case the defendant admitted the decree, but contended—
“ That said decree was designed as no honest exposition of the merits of the ease, but was brought about, allowed, and consented to for the purpose of pleading the same as res adjudieata upon points in litigation not honestly contended.”
The court say:
“ That this proceeding on the part of Patterson and General and Mrs. Gaines was amicable, and that no earnest litigation was had, is too manifest for controversy. They agreed to go to trial at once, on the depositions found in the Probate Court; and as Patterson was to lose nothing by the event, he was, of course, indifferent as to what evidence might be introduced on the hearing.
“ It also appears by his evidence that when a decree was obtained in the Circuit Court against him, his name was used to carry up an appeal to this court; but it was in fact brought up by General and Mrs. Gaines. Patterson employed counsel here, who, of course, had to take the record as they found it, and make the best of it they could; and it is conceded on all hands they did so, and made the best exertions for Patterson they could do, on the record brought *445 up by him, as they supposed. Nevertheless, an affirmance of the decree was had in this court. It could hardly be otherwise, in a case managed as this was; the object of the complainants below being to obtain a favorable opinion and decree on the law and facts of a case made up at their own discretion.”
In the case of Moses v. McDivitt ( 88 N. Y. 62, 68 ), the same principle is enunciated. The court say:
“The judgment does not stand upon the same footing as a judgment obtained in the usual course, in a hostile suit in which the defense of usury was either overruled or omitted to be interposed. It was a mere arrangement between the parties, put by their mutual consent in the form of a judgment, for the purpose of evading the statute.”
It seems, from the evidence in this case, that the judgment in the Superior court was obtained for future use. Claims had then been advanced by shareholders, that these October agreements were fraudulent and void, and this judgment would appear to have been obtained by and with the consent of the very directors whose acts were attacked in the suits by the shareholders, in order that it might be interposed as a bar to any relief to which the shareholder might show his corporation was entitled.
The denial of the motion to vacate the judgment, before Mr. Justice Feeedmaít, gave such judgment no greater force or effect than it had before. It left the judgment in precisely the same position that it was before, with the same force it before had and no more (Schrauth v. The Dry Dock Savings Bank, 86 N. Y. 390, 395 ).
The judgment, therefore, of the Superior Court does not operate in any way as a bar to the assertion of its rights by the Metropolitan company in this action.
The fourth and last affirmative defense is that restitution cannot be had.
It is claimed, that because, by any judgment in this case, the receivers cannot be put again in possession of the property of the Manhattan company ;
That because the People’s suit in the Supreme Court cannot be restored to the condition in which it then stood;
*446 - That because we cannot restore the bondholders’ suit to the position it then had, with its injunction;
That because the Superior Court suit cannot be restored to the condition it would have occupied had not so much time been lost; that, therefore, no rescission can be had.
It is urged that we would have to undo the “ increase of Manhattan stock. That it has been proved that this stock has been increased with the sanction of the State engineer and surveyor, pursuant to law, from thirteen millions to twenty-six millions of dollars. What can we do with that? Shall we reduce it? What will we do with the stockholders who hold it ? Shall they be paid, or will we take their stock away without payment? Then we would have to re-exchange the first preferred stock for New York stock, and the second preferred stock for Metropolitan stock. How is that to be done ? Then we would have to dismiss the Burnham suit, and the quia timet suit, and the merger suit; enter an order denying the New York application in the People’s suit, take an appeal from the order, put it on the calendar of the General Term for argument; pay back the interest which the Manhattan company had paid on the mortgage bond of the other two companies; make a question of the insolvency of the Manhattan company; restore to the other two companies their earnings since October, 1881; in short, undo everything that has been done since" October 22d, 1881, pursuant to the settlement. But that is impossible. The New York company cannot be restored to the condition it then held. It parted with its whole earnings, and if they could be ascertained and received back, there is no corporation or person to pay them; a portion of them have been paid over to the Metropolitan company and distributed to its bondholders and stockholders ; they are not parties to any pending suit, and, if they were, they are under no obligation to pay back. Each company has been released from the six and a half million claim; that release, must be cancelled, but it cannot be cancelled without imperilling the interests of the stockholders of the constituent companies.”
*447 Certainly, if all these things are to be done, as a condition of relief, then the plaintiff in this action is remediless, because it would be impossible for the plaintiff to comply with such a judgment.
But I do not understand the rule to be, that a plaintiff is deprived of all relief, because he cannot restore the other parties to the same position which they occupied before they entered into the void or voidable agreements, when the other parties to the agreement have put themselves in the position in which they find themselves, with full knowledge that the other party claims the agreement to be void and fraudulent, and every means had been taken at once, by those who have the right to question the legality of the proceedings, to restrain the wrong.
Long before any of these things were done, in respect to which restoration may now be impossible, suits had been brought by more than one stockholder seeking to avoid the October agreements, and indeed the first suit was begun within one week after the agreements had been made, by a stockholder to annul them and to have them declared void. These suits multiplied so rapidly that as early as December 9th, 1881, the Manhattan company filed its bill of peace, for the purpose of restraining the increase of this cloud of suits, with which it was threatened by stockholders of the Metropolitan company. The Metropolitan company could commence no action itself, because it was in the hands of the very directors who, it was claimed, had either exceeded their powers or acted fraudulently in fact or in law in the making of these agreements; and the stockholders, therefore, necessarily were required to assert their own rights. If, in the face of all these facts, the other parties to the agreement went on and acted in such a way that they cannot get back to the position which they occupied at the time of the making of the alleged fraudulent agreements, it certainly is not the fault of the plaintiff or of the court. They have only themselves to blame. Their heedlessuess cannot deprive the plaintiff of any rights to which it otherwise would be entitled. If this is not the rule, then all *448 that a party has to do, who has procured the execution of an agreement by fraud, even after the fraud has been discovered and the party defrauded has informed him that as soon as possible an action for rescission will be begun, to defeat such an action, is to hasten and put himself in such a position that his steps cannot be retraced. I do not understand this to be the rule. Where, however, a party has, without any knowledge of any intention to rescind and for no ulterior purpose, acted upon the faith of the agreement, and has lost rights thereby, and such rights cannot be restored, the injured party can obtain no relief except such imperfect reparation as his action at law to recover the damages occasioned by the fraudulent deceit will afford. The court would, however, compel the plaintiff to do everything that lay in its power to restore the then statu quo.
As to the People’s suit, I do not know that the Manhattan company is in any respect harmed by the discontinuance of a suit brought against it on account of insolvency, nor is it injured in any degree by not being in the possession of receivers.
As to the bondholders’ suit, it was not discontinued because of the October agreements; the discontinuance having taken place October 6th, more than two weeks before the agreements were made.
As to the Superior Court suit, the judgment and findings can be vacated, the injunction restored, and then the action will be in the same condition in which it was at the time of the October agreements.
With the increase of the capital stock of the Manhattan company and the result flowing therefrom, this plaintiff has nothing to do; all those things were done by the defendants with full knowledge of the claim presented in this action, and they acted at their peril.
As to the payment back of the moneys which have been received: before disposing of that part of the question, it will be necessary to examine a few of the authorities upon this question of rescission.
*449 The principles upon which rescission must proceed, are laid down with great distinctness in the case of Gould against The Cayuga County Nat. Bank ( 86 N. Y. 75 ). The court holds that “one who seeks to rescind a compromise of a disputed claim, upon the ground of fraud, must promptly upon the discovery of the fraud restore or offer to restore to the other party whatever he has received by virtue of it, if any, in full; the tender must be without qualifications or conditions.”
■ The court makes a distinction in this case, which should be borne in mind, between a suit in equity to rescind, and a suit at law upon a rescission, holding, that if you sue at law you must offer to restore before you bring suit; if you sue in equity you may make the offer in your complaint. The defrauded party has ample remedies. One situated as the plaintiff was in that case, can rescind by tendering or restoring what he has received, and then commencing his action; he may keep what he has received, and sue to recover damages for the fraud; or he may commence an action to rescind or for equitable relief, and offer to restore, in case he is not entitled to retain what he has received. If,, however, the plaintiff cannot restore absolutely, he cannot come into a court of equity for relief. This rule is illustrated by the learned court, in its opinion, by the following:
• '“ Suppose A. goes abroad, leaving in the hands of his agents debts to be collected, against various debtors, among-whom is B., a debtqr for $1000, and before his return his-agent dies. Upon his return he finds among his papers no evidence that B. paid his agent, and then he calls upon B. and he claims that he paid the agent the whole debt. A. disputes this, and they finally agree to compromise the dispute, B. paying $500. Afterward A. concludes that B. did not, in fact, pay his agent, and claims that he was induced by fraud to enter into the compromise. So long as the compromise-remains in force, no action, based upon the original indebtedness, can be maintained. The bar can be removed only by rescinding the compromise agreement, and that can be-rescinded only by a restoration of the $500, so that they *450 can resume their dispute upon a footing of equality, just where they left it before they entered into the compromise. When A. sues upon the original indebtedness, B. must be permitted to renew his dispute, and set up payment of the entire debt to A.’s agent. If he can establish that, the $500 will be again in his hands, where it belongs. If he fails, A. will recover his whole debt. If A. can maintain his suit without first returning the $500, he will have all the game in his own hands. If he wins the suit he will retain the $500 and get $500 more. If he loses the suit, in consequence of proof that the whole debt has been paid to his agent, he will still have the $500. He will thus, in effect, hold B. to the compromise, but himself be released. Such inequality and injustice cannot be tolerated by correct principles of law.”
It is plainly stated in the above case that the reason why restoration is made a condition of rescission is that the retaining of that which has been received is inconsistent with the abrogation of the contract.
But the rule that if any party to the agreement has done anything which cannot be undone, or has omitted to do anything which he might have done, no rescission can be had, does not apply to things done or left undone by such party to the agreement, who has knowledge before anything is done or omitted to be done, that the agreement is repudiated either by the other party or by those who have a right to contest its validity on his behalf.
It is claimed that as a condition of rescission, all the moneys paid out since October 22d, 1881, by the Manhattan company, both to the bondholders and shareholders of the New York company, must be restored; that the New York company cannot be restored to the condition it then held; that it has parted with its whole earnings, and they cannot be got together again and paid back; they have been paid out and distributed to bondholders and shareholders who are not parties to this action, and if they were they are under no obligation to pay back.
As far as the distribution of the earnings of the New. *451 York company by the Manhattan company is concerned, such distribution was not only permitted but connived at by the New York company—they well knowing of the claim that was made by the Metropolitan shareholders, that the October agreements were void or voidable, and that they would not be accepted by the stockholders of the latter company.
I say that the distribution of its earnings was connived at by the New York company, because, with the full knowledge above stated, they consentéd to the dismissal of the action in the Superior Court, and to the entry of a judgment in that court affirming the validity of the October agreements. They did all those things, not in ignorance, but with full knowledge of every claim which has ever been advanced affecting the validity of these agreements. Therefore, if they have empowered the Manhattan company to distribute their earnings, and they cannot now get them back, it has not been done in reliance upon anything which the plaintiff has done—in ignorance that there was any claim, of wrong affecting the validity of those agreements. They knowingly took the risk of the success of the attacks upon these agreements, and they cannot now complain if they have lost the battle.
Upon the question of the restoration of the money received by the Metropolitan company, it will be necessary to advert again to the rule governing restoration upon rescission.
The rule is very distinctly laid down, that to retain any part of what has been received upon a contract is incompatible with its rescission (Cobb v. Hatfield, 46 N. Y. 533, 537 ).
To retain the whole, or a part only, of what has been received upon the contract, is incompatible with its rescission, and hence the necessity of restoring what has been received upon it (Masson v. Bovet, 1 Denio 69, 74 ).
The same rule was held in the case of Grould v. Cayuga, County Bank (supra).
In all these cases, however, there was but one contract, *452 and the right to retain the money received depended entirely upon the contract which it was sought to avoid, and, therefore, its retention was incompatible with its rescission. But this rule does not apply where, if the contract sought to be rescinded had never been made, the plaintiff would have been entitled to receive more than the payments made under the said contract. In such a case no offer to return is necessary, nor is it proper for the court to order restitution. This principle was distinctly held in the case of Allerton v. Allerton ( 50 N. Y. 670 ). In that case, the complaint alleged that plaintiffs, defendant, and one McPherson were partners in conducting certain stockyards at Pittsburg, Pennsylvania; that plaintiffs, induced by the fraudulent representation of defendant (who had the management of the business), that the business was not profitable, and that he, in conjunction with them, would sell out to McPherson, consented to unite with him in such sale upon being refunded the amount invested by them, and that thereafter the defendant represented that he had sold out, and paid to plaintiffs the money advanced by them; that in fact defendant did not sell, but retained his interest and subsequently acquired McPherson’s interest; that the business had been profitable, and defendant had received large gains and ¡unfits. Plaintiffs asked that the sale be declared void, that defendant account for all moneys received by him, and that they have judgment for their portion of the profits under the co-partnership agreement, less the amount they had received. The case was tried by the court, who found the fraud as alleged, and decided that the plaintiffs were entitled to the share of the profits which they could have originally claimed, less the amount received by them on the sale; and that the defendants execute a re-transfer to plaintiff of the interest they had prior to the sale. Judgment was entered upon the decision, which was reversed by the General Term upon the ground that no fraud was shown ; that McPherson or his representatives should have been joined as defendants, and that the plaintiffs should have tendered back the sums received by them ■ on the sale. The Court of Appeals *453 reversed, the judgment of the General Term, and affirmed that of the Special Term, holding that the fraud alleged was established; that no tender of the amount received was necessary before suit brought, as the judgment sought for and given, allowed it to the defendant, and this was, in fact, an actual return of the consideration paid; that the question as to misjoinder or non-joinder of parties, not having been raised by the pleadings or upon the trial, could not be raised upon appeal. The principle contended for was clearly applied in the above case.
If the plaintiff is entitled to recover the money of the defendant, contract rescinded or not, no tender or offer to return'is necessary. It is only where the plaintiff has no claim to the money received, except by force of the rescinded contract, and, therefore, its retention is incompatible with the rescission, that a return or offer to return is deemed to be necessary.
I am of the opinion, therefore, that there are no obstacles which prevent the plaintiff from making all the restitution which the law requires in case it has been shown that the plaintiff is entitled to relief in this action.
It is now necessary to consider the grounds upon which the plaintiff claims relief.
The questions of law involved are of the greatest importance to the community at large, to the innumerable trading corporations with which our country is filled, and to such of our citizens as hold the shares of stock of such corporations. The respective rights, duties and obligations of both directors and shareholders in these corporations must be determined, unaided by any authoritative adjudications in our own state upon the subject.
Before, however, considering the legal questions presented, I shall endeavor to dispose of the only question of fact presented by the evidence, which bears; in any degree, upon the right of the plaintiff to relief; and that is:
Was there any actual fraud upon the part of the Metropolitan directors; and did they enter into a scheme to benefit themselves at the expense of their corporation?
*454 Upon the evidence in this case, I am clearly of the opinion that no charge of fraud can be sustained. In view of the elaborate arguments which have been advanced by the counsel for the plaintiff in this case, in support of an affirmative answer to this question, and their evident belief that they have established their right to such answer, it is necessary that I should consider the various points raised by them, somewhat in detail.
Upon an examination of the evidence in this case, and the arguments of counsel thereon, I have had forced upon my mind the conclusion, that their belief in the verity of their position was brought about by asking themselves the question: “Can any good thing come out of Nazareth?” by imputing bad motives when the moving cause may have been good; by considering past transactions by the light and knowledge which subsequent events have developed ; by taking that view of the future of these properties, whether supported most strongly by the evidence or not, which best accords with their desires, rather than by according to the defendants the right of a different judgment which they might in good faith entertain, than by placing themselves in the position of the defendants with no knowledge of the future, than by imputing good motives and meeting the question with the idea that the directors of the Metropolitan company intended to do their duty by that corporation.
Let us review, for a moment, the situation of affairs during the spring, summer and fall of 1881, and see what difficulties had to be overcome and what obstacles removed in order that the elevated railroad system, that these properties should be relieved from the incubus and dangers of this receivership (an invention of the courts in modern times, by which the enforcement of vested rights, rights secured by contract and by law, are arbitrarily and indefinitely stayed). It was soon ascertained, after the execution of the leases and tripartite agreements, that great miscalculations had been made as to the cost of completing the various lines, and that the net income derived from the *455 business of the roads would fall far below the sanguine anticipations of the parties interested; and that the properties of these corporations were subject to taxation to an extent which had not at all entered into the calculations fixing the rental which should be paid, to say nothing of the dangers which were threatened, in view of the decision of the Court of Appeals, that the owners of private property had some rights which even these corporations were bound to respect. The cost of the completing of the Metropolitan structure absorbed over fopr millions more of money than had been anticipated. The cost of operating these roads had greatly increased, and-the amount of travel, especially upon the Metropolitan system, fell far below what had been anticipated. (I am aware the plaintiff claims that unjust discriminations have been made against the Metropolitan company. These, however, I will consider later.) And taxation to a very large amount had been levied upon the property of these companies. That the dangers which subsequently overwhelmed the Manhattan company and certainly threatened the interests of the holders of the stock of the Metropolitan company, were foreseen and deemed inevitable long before the final catastrophe, seems to me to be evidenced very strongly by the fact that as early as the spring of 1880, the necessity of a complete consolidation of all interests in those properties was keenly felt by the then directors and managers of both the New York and Metropolitan companies, and led to the efforts to bring about such consolidation, which seems to have been defeated because of the greatly divergent views of the owners of the various properties as to their value, even after a commission of their own choosing had, after hearing both parties, fixed the equitable basis upon which such consolidation should be founded. It was the object, undoubtedly, of those urging the consolidation to fix the union of the elevated railroad system beyond a doubt, feeling, as they did, that united they could stand, but that divided it might be a much more difficult task. They anticipated the uncertainty, confusion and danger to union which must neces *456 sarily arise in the event of the Manhattan company being unable to comply with the leases, which event they plainly saw foreshadowed. But, for the reason above stated, no merger of interest could be agreed upon, and events were allowed to take their course.
In April, 1881, the president of the Manhattan company confessed the hopeless condition of the Manhattan company, unless relieved from the load of taxation. The Attorney-General thereupon commenced his first action the latter part of May for the dissolution of the corporation and the appointment of a receiver. This was long before there was any idea advanced of Mr. Gould becoming a director of the Metropolitan company. In July the Manhattan company was unable to pay the interest on the bonds of the New York and Metropolitan companies falling due on the first, as well as the rental then due. Some friends of the companies advanced the moneys requisite to pay the interest on the bonds. Shortly prior to 'this time, Mr. Kneeland, a holder of a considerable amount of Metropolitan stock, and also of a number of the proxies of Metropolitan shareholders, went to Mr. Sage to ask him about making up a board of directors, and it was suggested that it would be desirable to get Mr. Gould into the board; and Mr. Kneeland asked Mr. Gould to become a member of the board, and he finally consented to do so, if certain of his friends would also consent to go into the direction. There is not a scintilla of evidence that Mr. Gould desired to get into the board of directors of the Metropolitan company, that he made the slightest effort to get into that board, but on the contrary the evidence shows that he placed conditions upon his going into that board, which Mr. KneeEand, who was to elect him, refused to accept,- and which he did not accept until almost the very day of election; and yet I am asked to find, that as early as May, Mr. Gould had formed the plan of ruining the Metropolitan to build up the Manhattan, and that in furtherance of that plan he caused the Attorney-General’s action to be brought, and the bondholders’ action against the Metropolitan company, Mr. Lawrence, the attorney for *457 the bondholder, being a friend of Mr. Connor, who was a partner of Mr. Gould.
It is further urged, as an evidence of the fraudulent intent of Mr. Gould, that he insisted upon having certain of his friends go into the direction with him. May I ask, is there any crime in this ? Mr. Gould’s presence in the board was desired, either because of his financial and executive ability, or because his appearance in the board of directors would add strength to the management of the corporation. It is true that Mr. Gould says he did not expect, when he went in, to give much attention to its business, bub if his presence was considered so desirable, he had the right to say who his associates should be. If his presence was not wanted with this condition, then why did Mr. Kneeland consent to his terms? Can there be any impropriety, under such circumstances, in a man protecting himself from factious opposition, or from being overwhelmed by expedients worse than useless ?
I am unable to see any unfavorable deduction to be derived from this feature of the case. Indeed, one of the badges of fraud urged by one of the learned counsel for the plaintiff is that, although Mr. Gould is notorious for sustaining properties in which he is interested with his means and exertions, he did not advance a dollar, or take any action, to preserve the leases, and to maintain the Metropolitan company in its then condition. That is, because Mr. Gould did not advance his own money to support the Metropolitan company, although he may honestly have believed that the charges reserved in the leases could not be earned for years to come, he is to be charged with fraud! There is no rule of law which requires a director to use his own money to support a corporation in which he is a director. In fact a use of his money by a director for such a purpose puts him in a very different position from an ordinary creditor. In case of disaster he is liable to much greater hindrances in the collection of his debt, and means of protection of which the ordinary creditor can avail himself are closed to the director who has advanced his money to sup *458 port the corporation. If Mr. Goulcl is notorious for sustaining properties in which he is interested, as counsel say, then if he did not at once step to the relief of the Metropolitan company we must necessarily conclude that he fully realized the hopelessness of the task under the then existing arrangements.
On the 30th day of June, Mr. Kneeland made his liberal proposition to the directors of the Manhattan company, that if the board of directors of the Manhattan company would surrender the control of that corporation to him and his associates, they would take one million of the income bonds of the Manhattan company at sixty cents on the dollar. If it was such an evidence of guilt in Mr. Gould requiring the presence of his friends in the Metropolitan board as a condition of his acting as a director, what are we to think of Mr. Kneeland’s proposition to take possession of the Manhattan company and lend it $600,000 upon a promise to pay back $1,000,000 with interest out of its income? That Mr. Gould had anything to do with the rejection of this proposition, or even knew of it, there is not the slightest evidence. He was not then a director in either of the companies, nor did he ow;n any stock in either.
But, suppose he had been a director in the Metropolitan and Manhattan companies, and had held stock in the Manhattan, and he had come forward and said: I will take these bonds at sixty: would there be any doubt but that such a ruinous transaction would have been at once impeached, and the first to cry fraud would have been these very Metropolitan stockholders who now claim that Mr. Gould was guilty of fraud because he did not advance his money to support the Metropolitan company? The acceptance of such a proposition by the directors of the Manhattan company, the borrowing of money at such ruinous rates and upon such conditions, would be justifiable only if it could be made to appear that by no other means could the peril be warded off, and that it was thereby successfully averted. But, in fact, the sum of $600,000 would have put *459 off the evil day but little, if any more than six months, and shortly after the first of the next January, the Manhattan company would have found itself again confronted by its creditors with no money to pay their claims, and four hundred thousand dollars deeper in debt than it was before.
On the 2d of July, the Attorney-General had commenced the second action, and on the 13th of July, the receivers were appointed of the Manhattan companjq and the New York company had commenced its action in the Superior Court to get possession of its road, upon the ground of the insolvency of the Manhattan company. The New York company, also, on the 22d of July, presented its petition to the court in the second People’s suit, setting forth the hopeless insolvency of the Manhattan company and asking that the court give it back its property. In August, the $13,000,000 claim Avas started. Judge Emott, an eminent lawyer of this bar, had given it as his opinion, that the Manhattan company had a valid claim against the New York and Metropolitan companies. In this vieAV, Messrs. Allison & Shaw concurred; and Mr. Justice Westbbook intimated subsequently, that it was not to be brushed away without thought.
On September 1st Mr. John C. Watson, of Boston, a stockholder of the Manhattan company, commenced his action in the United States Circuit Court against the New York and Metropolitan companies, for the ptirpose of testing this claim. The adviser of Mr. Watson, in this city, was Mr. Ashley, secretary and transfer agent of the Wabash, St. Louis & Pacific Railway Company, of which Mr. Gould was a director. When Mr. Ashley Avas in the banking business here, Mr. Watson had been his Boston correspondent. Mr. Watson wrote to him asking him what to do. Mr. Ashley consulted his son and a Mr. Wheeler, lawyers, and then he advised Mr. Watson to bring suit. Mr. Ashley states he never spoke to Mr. Gould on this subject until after this suit was brought, when he simply showed him the complaint in the cars; that Mr. Gould had no connection with the action in any manner, way or shape; and *460 yet it is claimed in the face of this evidence, given by an unimpeached witness, whose manner of testifying gave every evidence of honesty, that Mr. Watson’s suit was one of the schemes of Mr. Gould to cover up his design to ruin the Metropolitan company. The time was now drawing near when the ninety-day forfeiture clause in the leases would become operative, and the directors of the Manhattan company feared to allow a forfeiture to attach, lest the leases would be broken and the New York company get its property back. Accordingly, the device of receivers’ certificates was resorted to in order to bridge over the difficulty, and the receivers made an application to the court to be allowed to issue receivers’ certificates bearing twelve per cent, interest; and these certificates were, as I understand it, expected to be a first lien upon the properties held by the Manhattan company. (This kind of certificate is another of those modern improvements in reference to the administration of the affairs of an insolvent corporation, by which the first Hen given by his contract to a creditor loaning his money to a corporation, is made by the court subordinate to a subsequent creditor. I suppose the courts which grant such extraordinary relief look upon them as a sort of bottomry bond, the proceeds of which are to be devoted to keeping the sinking corporation afloat until it can be piloted by means of the operation of the court’s stay law under the guise of a receiver, into a safe harbor.)
Mr. Gould, Mr. Sage and Mr. Conner made affidavits opposing the application, upon the ground that it would be only a temporary expedient, and serve simply to prolong for a little while a hopeless struggle. In this opposition they were clearly right, as shown by subsequent events. The difficulties under which the Manhattan company labored were not of a temporary nature; they were radical and could not be overcome by any temporary expedients. The revenues of the elevated railways have never, up to this time, yielded enough to pay the enormous burdens which the Manhattan company had assumed by the leases and tripartite agreement of May 20th, 1879; and when they *461 will, depends upon the development of the earning capacity of the Metropolitan roads in the future, as the Third Avenue road of the New York system has about reached the limit of its capacity.
To this point I shall again revert.
If the roads had been kept in the hands of the receivers and forfeiture prevented by the issuing of these bottomry bonds, one upon the other, the end would inevitably have been, that although the bondholders would have received their interest and the stockholders their dividends, and thus a forfeiture averted, eventually the holders of the bottomry bonds would have owned the whole property, and the bondholders and stockholders would have had no interest therein. I can see no fraud in preventing such financiering. The court wisely refused to give its sanction to such a violation of vested rights, and simply authorized the receivers to borrow money upon certificates at legal rates, and none of the certificates were negotiated.
In the meantime the motion of the New York company to get back its road, made in the People’s suit, was argued, and on the 30th of September, the ninety days’ grace having elapsed, the New York company presented a supplemental petition, setting up the forfeiture, to reinforce its demand for its property. Negotiations for a settlement had been begun some time before, and Mr. Gould now began to purchase Manhattan stock, and also bought his Metropolitan and New York stock. About October 1st the necessity of a settlement upon some basis seems to have been generally conceded. It was apparent that some solution would be arrived at by which the Manhattan company could remain in possession of the property. Negotiations were carried on; conference committees appointed; that some concessions must necessarily be made was obvious; to what extent, and in what order, were the only subjects of discussion. The old controversy as to the relative values of the New York and Metropolitan properties was renewed; the $13,000,000 suit was held up in terrorem. (It may be doubtful whether anybody was very much frightened by it.) *462 And finally the rentals were reduced to six per cent., with a preference to the New York company; and this contract was not submitted to the stockholders of the Metropolitan company. Mr. Gould had, at this time, purchased twenty thousand shares of Manhattan, and held twentj-five hundred shares of the Metropolitan, and five thousand shares of New York.
If the New York company was presenting itself before the court, I might understand how such a settlement might be considered disadvantageous to it; and the fact that not only the board of directors but the stockholders of that company approved this settlement, seems to be conclusive evidence that at that time the settlement was deemed wise and proper by all unprejudiced minds.
But it may be said that this result was brought about by the fact that the New York company was to have a preference in the payment of dividends. That the New York company should have such a preference was inevitable. There is not the slightest doubt that if at any time there was a deficiency in dividends, it would arise from the fact that the Metropolitan roads did not earn them; and further, that the New York company would earn much more than sufficient to pay the rental dividends upon its lease, long before the Metropolitan company could possibly hope to earn rental dividends upon its lease.
I am aware of the fact that these conclusions are disputed by the plaintiff; but it seems to me very plain that the plaintiff’s deductions are based upon a greatly exaggerated view of the immediate future of the Metropolitan roads.
It is undoubtedly true that the Metropolitan roads might be run so as to show greater gross earnings; but that such a change in the running of the trains would result in an increase in the net earnings of the roads, is, in my judgment, far from being established. The idea of running heavy surface engines and trains over the Second Avenue line to Twenty-third Street, even if the structure would permit, is too conjectural to need much comment. This structure,.in consequence of its great height, is inaccessible, and the *463 only reason which will cause its earnings to be increased to any extent, is the fact that the Third Avenue road cannot accommodate any more travel.
Again, the Sixth Avenue -road cannot be as profitable as the Third. From Fifty-ninth Street up to the terminus at the Harlem River, it runs through a sparsely settled portion of the city, and it is compelled to run each train a much greater distance than the Third Avenue is required, and this has increased the cost of transportation of its passengers. Below Fifty-third Street this road has also nearly reached its limit of accommodation, and the result of an increase of travel above Fifty-ninth Street would be to deprive it of local travel below Fifty-third Street, and consequently the cost of transportation of its passengers would be increased in proportion to the greater distance each passenger travels.
For these reasons, it does not seem to me that the future of the Metropolitian properties is nearly so brilliant as its stockholders imagine, and that its net earnings will not for years, if ever, equal those of the New York company. Therefore, as far as the preference given to the New York road is concerned, no unjust discrimination was observed.
It may be said that Mr. Field, who was also interested in the Manhattan company, carried this settlement through the New York board. He undoubtedly urged it; but that the other directors were under his influence, or that they sub-served any other purpose than the interest of their company, is not by any means shown, but upon the contrary, the evidence shows that the proposition was vigorously canvassed and finally approved as the best solution of existing controversies, by men unbiased by any adverse interest.
Much has been said about that bugbear of the $13,000,-000 claim. This claim may have no foundation; it may be frivolous. As to this, I do not express any opinion, but respectable counsel had given it their sanction and it was a good thing to get it out of the way. It might have given trouble when least expected, and that it had no *464 foundation, in law, in the opinion of the eminent counsel for the plaintiff, does not alter the fact that it was very-desirable to dispose of it if possible.
I have had brought under my notice a case which illustrates how dangerous it is to leave outstanding a' claim which is declared without foundation by the most eminent counsel.
Not very many years ago, a suit was to be begun to have actual partition of certain real estate in this city, amongst the numerous tenants in common. It being a very important action, and as it would involve the title to a very large and valuable property, the most eminent counsel then at the New York bar was retained to supervise the proceeding. During the preparation of the complaint, a question arose as to whether it would not be desirable to make a person, who had been appointed an assignee in bankruptcy in 1841 of a party through whom an interest in the property descended, a party, to save all question. The attorneys favored it, although they were of the opinion that such assignee had no interest, upon the ground that it was best to make any or everybody a party in a partition suit, who not only could have or by the slightest possibility could claim to have, any interest; the eminent counsel examined the question a,nd was firmly convinced that any claim by the assignee would be of the most frivolous character, and the attorneys pressing the view that it was best anyhow to make this assignee a party, to save all question, the eminent counsel declared that he would retire from the case if any such unnecessary parties were made defendants. The assignee in bankruptcy was not made a party. The action went on, the property was partitioned, a large amount of-it sold, title taken, upon the eminent counsel’s opinion as to the regularity of the proceedings. Sometime afterwards the Court of Appeals decided that bj*- the assignment in bankruptcy in 1841, the whole title to that share in the real estate, claimed through the bankrupt, had passed to the assignee, and, as a result, the title to the whole of the property partitioned was defective. I therefore say, that no matter what any lawyer’s; *465 opinion may be as to the invalidity of a claim of the character of the $13,000,000 claim, no matter how frivolous in the opinion of some it may be, it is no evidence of fraud that its existence was recognized in this settlement.
That this claim, of itself, was the moving cause of the reduction in the rentals to be paid to the companies by the Manhattan, cannot, I think, with verity be asserted; or that it was a very potent factor in determining the terms of the new arrangement; but that it was thought advisable to get rid of this claim, and that it was taken into consideration with the many other things necessary to a determination as to the advisability of any particular action, is undoubtedly true.
The necessity of keeping the properties under the control of one management was recognized, and that the Manhattan afforded the best means of attaining that end was acknowledged, and how this result could be achieved without the dangers of the disastrous failure which had followed the making the leases of May 20th, 1879, was the problem to be solved. ■ It was solved by the October agreements, to the satisfaction of the directors and stockholders of the New York company, none of whom, except one, had any interest whatever in the Manhattan company—the New York company being called upon, in my judgment, to make much greater sacrifices than were called for from the Metropolitan company.
At the time the October settlement was made, by the terms of the lease of May 20th, 1879, the New York company was absolutely entitled to the possession of its road. There is not a pretense that there was any defense to its claim; and yet it is urged that it was the duty of the directors of the Manhattan and Metropolitan companies to resist this claim, and, because they admitted its validity and negotiated upon that basis, they are guilty of fraud.
The counsel say:
“ The New York company would have been powerless,formally months, to break up the lease, because of their nonpayment.
*466 “At the expiration of the ninety clays’ grace provided by the original lease, the New York company would have to bring an action of ejectment to obtain possession of the road.
“ That suit, with the two trials given as a matter of right to the Manhattan company by the statute, would have lasted months, if not years, and would have given the lessee ample opportunity to provide for its liabilities by its rapidly increasing earnings, to say nothing of raising the necessary funds in other ways.”
That is, by putting in defenses under oath having no foundation in fact, taking new trials and paying the costs of a previous trial, with the absolute assurance of a no better result, the New York company might have been delayed in the assertion of its rights for months, if not for years, so as to have given^the Manhattan company time out of increased earnings to pay its past indebtedness; and because the directors of the Manhattan and Metropolitan companies did not resort to these (I had almost said questionable, but there is no question as to their impropriety) devices, that, therefore, they are to be charged with the betrayal of their trusts. It is the first time, I imagine, that a court of equity has ever been asked to give its sanction to such a claim as this.
. Indeed, if the directors of the Manhattan and Metropolitan companies had taken this course and incurred expenses in such litigation and paid costs upon the obtaining of such new trials, and these expenses and costs had been paid out of the funds of the respective companies, the) could have been charged personally against such directors as disbursements incurred in proceedings which they had carried on in bad faith, in violation of their duty. It is no duty of a director to resist lawful claims against his corporation, and if legal forms are susceptible of abuse by the unscrupulous, a director is not censurable for not availing .himself of such improper methods to sustain his corporation.
The conduct of the Metropolitan directors, after the making of the October agreements, is claimed to be strong evi *467 dence of the fraudulent intent and bad faith with which these agreements were made. That the procuring of the judgment in the People’s suit and also in the action in the Superior Court, the adoption of the merger agreement of November 14th, and its terms, and the manner in which dividends were declared, was an attempt to use the forms of law to coerce the stockholders of the Metropolitan and New York companies into a ratification of the merger agreement is to my mind certainly apparent, but these facts are not sufficient to establish an original fraudulent intent.
In order that a fraudulent intent in the original act may be deduced from subsequent acts they must be inconsistent with anything but a fraudulent intent originally, and not relate to any subsequent fraudulent intent; because a fraudulent intent formed after an agreement has been executed and delivered, although formed for the purpose of aiding the carrying into effect the terms of the agreement, cannot relate back to the original agreement.
Great opposition to the October and November agreements had been manifested by some of the stockholders, and the endeavor was made to crush out this opposition, but these efforts by no means implied that any improper purpose was indulged in at the time of the making of the agreements themselves.
The absence of Mr. Connor, and the non-production of the books, are to my mind a very suspicious circumstance; and were it not for the rule laid down in Bleecker v. Johnston ( 69 N. Y. 309 ), I should necessarily conclude that their absence justified the strongest inference to be indulged in against the defendants. But as this rule is held by the court, in that case, only to apply to cases where it is shown that a party has resorted to improper means to get or keep witnesses away from the trial, my own opinion must conform. Although we may imagine a great many things in connection with this matter, yet unless our deductions are supported by some evidence, they cannot form the foundation of a legal judgment.
There are other minor points which have been urged by *468 counsel upon this question; but tliis opinion has already grown to such an inordinate length, that I am warned to take up no more time or space in the discussion of this point.
The next question to be considered is—
Had the Metropolitan directors the power to modify the original leases and tripartite agreement of May 20th, 1879, without the consent of the shareholders ?
In the disposition of this important question, I am but little aided by any authorities in the courts of this state or of the United States.
It is true that Mr. Justice Blatchfobd, in the United States Circuit Court, in the case of Flagg, held that these October agreements were valid, upon the authority of Hoyt v. Thompson ( 19 N. Y. 207 ), and McCullough v. Moss ( 5 Denio 566 ) ; and that the General Term of this Department sustained the same in the case of Content ( 26 Hun 82 ), upon the ground that the October agreements were nothing more than a compromise and adjustment of claims which the Metropolitan and New York companies held against the Manhattan, and that the boards of directors having charge of the management of the affairs of a corporation, can always exercise this power of adjustment in the administration of the affairs of their corporation. The weight to be given to the decision by Mr. Justice Blatohford has been much shaken by opinions given in our own courts; and the ground upon Avhich the decision of the Content case was based does not seem to be relied upon by the counsel for the defendants in the case at bar, although the case is presented as an authority in their favor. If the October agreements are to be held to be simply as a compromise and adjustment of an existing claim, then I am clearly of the opinion that the board of directors of the Metropolitan company, without the assent of its stockholders, had the power to make them, within the principle involved in the case of Hoyt v. Thompson ( 19 N. Y. 207 ). But, in my opinion, these agreements are not susceptible of any such limitation. They are rather new agreements radically modifying and changing previous *469 agreements, which for the purposes of the discussion in the present view, it must be conceded the directors of the Metropolitan company had no power to make without the consent of the shareholders, and as to all the terms and provisions of which such shareholders had been consulted, and to which they had given their assent. It appears to necessarily follow that, if the directors have no power to lease without the assent of the shareholders, such shareholders might determine the terms and conditions of the lease to be given. If their consent is necessary, it must be because they are to be consulted as to the advisability and desirability of leasing their property, and that question depends almost always upon the terms and conditions of the lease proposed. Therefore, how can they intelligibly act unless they know what is to be done ? They might give their assent to a lease upon certain terms and refuse it upon other conditions. The stockholders could, if they chose, give a power to lease to their directors, leaving the latter to determine the terms and conditions; but that was not done in respect to the agreements and leases of May 20th, 1879. The stockholders approved of these instruments after they were executed and after they had been read and considered. They consented to lease upon those terms and no other, and to say, that if the board of directors had no original power to lease they could, whenever they thought the exigency or the situation required, radically change and alter the terms and conditions of a lease granted by authority of shareholders, would be to deprive the shareholders of intelligent action.
If these agreements had merely been a settlement of existing claims due, or about speedUy to become due, they might be considered as mere compromise agreements, but when they change in many substantial particulars the leases of May 20th, 1879, and that, too, for a period of over nine hundred years, I cannot see how they can be called mere compromise agreements.
But it is urged, “ that, conceding the fact that shareholders have a voice as to the transaction of extraordinary *470 business, the extraordinary business of leasing the railroad for nine hundred and ninety-nine years had been approved by the shareholders.
“ This action settled the question of parting with the possession of the property for nine hundred and ninety-nine years. This having been done, what business, ordinary or extraordinary, was then left for the directors of the lessor road to do ? They had no railroad to run or manage. The usual ordinary business of the directors of a railroad as such had ended. Those in office and those afterward elected were empowered, and, in fact, employed in looking after the affairs and interests of the lessor under the lease, and nothing else. ■ Although called directors of a railroad company, they had no railroad to direct; all the property of the railroad company having passed into other hands for a long period of time, with the assent of its shareholders. The ordinary business which remained for the directors to attend to was the collection and distribution of the rents falling due under the lease. Would it be extraordinary business, and in excess of their powers, to accept and receive a less' amount than that reserved in the lease, if unexpected difficulties and complications arose ? In other words, to waive part of a demand if it appeared clear that the interests of their principals called for it. Although leasing may be extraordinary business, the element of leasing did not enter into the October agreements, and, therefore, were not the subsequent modifications as to rent, etc., a mere matter relating to money affairs and ordinary “ business,” as that term is generally understood ? It clearly appearing that the carrying out of the terms of the lease as to the amount of rent to be paid had become an impossibility, what was to be done ? A modification was necessary, and the October agreements -were simply modifications.
“If it be said that if the lessee could not perform, it was the duty of the directors of the lessor to have insisted upon the taking possession of the property, and to do anything else was extraordinary and not within the power, it must be remembered that all parties had agreed that the running of *471 the roads under one management was a necessity; that they could not be run otherwise, except at the risk of inconvenience and delay to the public and danger to human life.
“ To insist upon breaking up the lease because the lessor could not pay the full rent; to resume the old status which all concerned had agreed could not be maintained, except at the risk above mentioned, would have been directly opposed to the expressed views of the shareholders. Therefore, if the lessee was unable to pay all, it was the part of wisdom to agree to take less, when to maintain the former agreements was an impossibility; and was fairly within the meaning of ordinary business.”
That there is great force in the above argument must be conceded, but I think that its fallacy arises from overlooking the fact that, if the shareholders had the right .to determine the terms and conditions upon which their property was to be parted with, such terms and conditions form the consideration for the assent, and the consideration cannot be taken away without destroying the assent. The assent depended upon and was supported by the terms and conditions, it sprang from such terms and conditions, and when they were removed the foundation of the whole structure upon which the assent rested was removed and the assent necessarily fell. Although it might have been within the powers of the directors to have made temporary arrangements for relief from the difficulties, and such arrangements would be called ordinary business, yet they could not make radical changes in the terms and conditions of the lease as to which the stockholders had never been consulted.
The result of the October agreements certainly was a permanent and radical change in the terms and conditions of the lease.
If the board of directors could not make a new lease upon definite terms and conditions, then, clearly, they could not radically modify the old lease.
If they could not make a new lease directly, then they could not in effect make a new lease by striking out of the old *472 lease substantial covenants upon the part of the lessee and inserting others; what would be unlawful, if done directly, cannot be legal because done indirectly.
It is undoubtedly true that directors may compromise a debt due to their corporation; but the October agreement went much further than this. They changed the lease in many radical and substantial particulars, and took away rights which may have been the very things that induced the shareholders to assent to a leasing of their property, and without the presence of which such assent would never have been given.
It is true that all conceded the necessity of united management, and this concession might have justified the directors in.the making of temporary arrangements to continue such management if the lease could not be complied with, until they had an opportunity to consult with their principals ; but such concession could not possibly have given the directors power to radically change the old lease for all time, which was in effect done by the October agreements, simply because the corporation, through its shareholders, had consented to the leasing of its road upon certain other specified terms.
Directors, as I shall hereafter attempt to establish, are the agents of the corporation, having, as such, exclusive authority to act within their sphere. But they are also, in some respects, merely the executive agents of the shareholders, and as such may perform certain other acts, if specially authorized thereto by their principals, and in respect to such action they are simply the agents of the shareholders, as well as of the corporation. The shareholders, the principals, having fixed the terms and conditions, which they had a right to do, upon which the directors, their agents, were authorized to part with the possession of the property in their charge, and to commit the possession and management thereof into other hands; what right have the agents to radically change or alter these terms and conditions without consulting their principals ?
Suppose an agent parts with his principal’s property upon *473 certain terms, which have been determined upon by his principal, and the principal has the right to recover back his property if these terms are not complied with; can it be said that the agent, simply because he has a general authority to compromise debts due to his principal, would have the right to alter the terms upon which his principal had authorized him to part with his property, and which were the inducements, and the only ones, which led the principal to give such authority ?
In other words, in case of a failure to comply with the terms upon which the property had been parted with,, who is to elect whether the property shall be taken back or not? Is it not the principal? How can the agent claim any power to make this election, simply because he has a general authority to compromise debts ?
This would be exercising a widely different authority in the name of the principal from that which would be called into action by the mere taking of a smaller sum in settlement of a larger sum due.
The principal might much prefer to have his property back again rather than to take a smaller sum for it, and he would have the right to determine that question himself.
So in the case at bar; the Metropolitan shareholders fixed the terms upon which they would consent to part with their property, and they stipulated that in case those terms were not complied with they should be entitled to recover back their property. Can there be any doubt but that, in case of a failure to comply with the terms which they have fixed, it is a question for them to determine whether they would prefer to take their property again into their own possession and manage it for themselves, rather than to accept different terms from those which had originally induced them to part with their property ?
But it is not necessary to pursue further the discussion of this question, because I do not understand that the defendants base their claim of the validity of these agreements upon any such ground; but that they insist that the diree *474 tors of the New York company and those of the Metropolitan company did make and had the right to make these leases of Maj 20th, 1879, without any assent upon the part of the stockholders of their respective companies, and that the subsequent submission of the leases to the stockholders was merely to obtain their moral support.
That the directors of a corporation are agents, seems to be clearly recognized in all the cases in which the relations of directors and shareholders to their corporation have been discussed.
It is said in Twin Lick Oil Co. v. Marbury ( 91 U. S. 587, 589 ), that the directors arfe the officers or agents of the corporation, and represent the interests of that abstract legal entity, and of those who own the shares of its stock.
In Cumberland Coal &c. Co. v. Sherman ( 30 Barb. 553, 571 ), the court say: “There can be no question at the present time that a director of a corporation is the agent or trustee of the stockholders.”
In Angelí and Ames on Corporations, § 771, it is stated that, “The stockholders compose the company, and the managers, directors or officers are their agents, necessary for the management of the affairs of the company, but they are not essential to its existence as such, not forming one of the integral parts.”
In Abbott v. American Hard Rubber Co. ( 33 Barb. 578 ), the court say, at foot of page 591: “ Boards of directors are agents of the corporation to manage its affairs, and carry out the purpose and object of its formation.”
The directors thus being the agents of the corporation, what are their powers and from whence are they derived, and how must corporate powers residing in the corporation, the right to exercise which is not vested in the directors, be brought into operation ? These questions are so intimately connected that they must be disposed of together.
The powers of directors are such as are conferred by the charter of their corporation and the laws pertaining thereto, and such corporate powers as are not conferred by law upon the directors, remain in the corporation to be exercised, or *475 at least set in motion by its component parts, the shareholders.
In the case at bar, the charter provided that the directors were to manage the business and affairs of the company; and the question involved in this branch of the case is, whether this language conferred the right to exercise every corporate power possessed by the corporation, or merely to manage the ordinary business and affairs of the company for the carrying on of which it was organized, leaving the right remaining in the shareholders composing the company to set in motion or confirm corporate action within the limits of its powers, but extraordinary and unusual in its nature*.
Within the sphere of their duties, the right of the directors to act is undoubtedly exclusive, and further, all corporate acts must be done through them, as they are the exclusive executive and administrative authority, but, nevertheless, all corporate powers do not reside in the board of directors.
It is true that the court say, in McCullough v. Moss ( 5 Denio 567,575 ), that: “When a charter invests a board with the power to manage the concerns of a corporation, the power is exclusive in its character. The corporators have no right to interfere with it, and courts will'not, even on a petition of a majority, compel the board to do an act contrary to its judgment.”
That case was an action to recover upon a promissory note, which the corporation in the exercise of its legitimate business could have made, and the question presented was whether execution was proved. The note was signed by the president and secretary of the company, but no authority from the board of directors, who, by the charter, were to conduct the affairs of the company, to the president and secretary, was shown. Some resolution of the shareholders was shown, but it had no relation to this question, and then the court uses the language above quoted. This case nowhere decides that the directors'are clothed with all the corporate powers. It may be cited as an authority for the *476 proposition that the shareholders cannot compel the directors to act in any manner against their judgment in the exercise of a corporate power which remains in the corporation.
For example, if the power to lease was vested in the corporation, but the directors could not, because of the limitation in the charter, exercise this power, the shareholders could not cause the lease to be executed and delivered, nor could they compel the directors to execute and deliver the same against their own judgment; all that the shareholders could do would be to authorize the directors to act or confirm an act of the directors which would be incomplete without such ratification.
The case of Hoyt v. Thompson ( 19 N. Y. 207 ), is also claimed to be an authority against the suggestion made above ; but upon an examination it will be seen that much is said in respect to the relation of directors to their corporation, and their rights and powers, and the sources from which they are derived, which was not at all necessary to the decision of the question involved, and is directly contrary to the principles announced in the United States Supreme Court, in a case where the direct question was presented.
The adjudication in the case of Hoyt v. Thompson had necessarily to be put upon the ground that the act under investigation was “ ordinary business,” and in that case a distinction was plainly recognized between “ordinary business,” and such as was within the corporate powers, but unusual and not coming within the general business of the corporation. The court held, that although the charter of the corporation declared that its powers should be exercised by a board of directors, consisting of a specified number, yet the board might delegate its authority to agents or to a quorum of less than a majority of the number.
The court further held, that when a by-law of the corporation declared that five directors should be a quorum for the transaction of “ ordinary business,” the general business of the corporation was embraced in the authority thus *477 delegated, including as incident thereto, the power of pledging or assigning assets of the corporation for the purpose of securing a debt, it appearing that such pledge was made for the purpose of enabling the corporation to continue its business j and this is all that this case decides which is pertinent to the questions involved in the case at bar.
It is true that the learned judge who wrote the opinion in the case of Hoyt v. Thompson , uses the following language :
“ The board of directors of a corporation do not stand in the same relation to the corporate body which a private agent holds toward his principal. In the strict relation of principal and agent, all the authority of the latter is derived by delegation from the former, and if the power of substitution is not conferred in the appointment, it cannot exist at all. But in corporate bodies the powers of the board of directors are, in a very important sense, original and undelegated. The stockholders do not confer nor can they revoke these powers. They are derivative only in the sense of being received from the state in the act of incorporation. The directors convened as a, board are the primary possessors of all the powers which the charter confers.”
The whole of this argument was devoted to establishing the power of the board of directors to delegate the authority to manage the ordinary business of the corporation to five of their number, and had no other purpose.
That the directors convened as a board, are not the primary possessors of all the powers which the charter confers, is expressly held by the United States Supreme Court, in the case of the Railway Company v. Allerton (85 U. S. [18 Wall.] 233). In that case the charter provided as follows :
“ Section 3. The capital stock of said corporation shall be one hundred thousand, dollars, and may be increased from time to time at the pleasure of said corporation.
“ Section 4. All the corporate powers of said corporation shall be vested in and exercised by a board of" directors, and such officers and agents as said board shall appoint.”
*478 An increase of the capital stock of the corporation by the directors, without the assent of the stockholders, was held to be void, as beyond the power of the board of directors, although the charter provided that all the corporate powers of the corporation should be vested in and exercised b) a board of directors, etc., and that the powers thus granted to the directors refer only to the ordinary business transactions of the corporation. The necessary conclusion to be drawn from the reasoning employed in that case is, that the board of directors are the managers of the business which the corporation is chartered to carry on, and they have the control and management of that business; but that they have no power to effect organic and fundamental changes in the corporation or its business without the consent of the corporation. The Metropolitan company was chartered for the purpose of making, constructing, maintaining and operating a railway upon certain streets, avenues, thoroughfares and places in the City of New York. This was its business, and this was all the business upon the execution of which it entered. Could it be imagined that a change more fundamental could possibly be made, than that a corporation, chartered for the above purpose, should lease its road and properties to another corporation and deliver possession of the same for all time, and thus change its business from that of making, constructing, maintaining and operating a railroad, to that of receiving rent for the use of such road ?
In considering this question, it is not at all improper to look for a moment at the result arising from a rule, that the directors are the primary possessors of all the powers which the charter confers. If the board of directors have the power, without the assent of the shareholders, to lease the properties of the corporation for all time, then the shareholders may be deprived of, not only the administration of their property through its agents, the directors, but its very possession, without a moment’s warning. A board of directors are elected for one year, to manage the business and affairs of the porporation, such business being the operating *479 and maintaining a railroad. At the time of their election, the shareholders have no intimation that anything else is to be done by the directors, and the expectation is that such directors, at the end of their year in office, will turn over the property committed to them to their successors in office, with an account of their stewardship. Can it be possible that this board, elected for only one year, without any notice or warning, has the power to terminate the business of the corporation, and transfer all the properties to another corporation? It seems to me, clearly not. This is not the management of the business of the corporation. It is terminating the business, to carry on which it was incorporated. It is just as fundamental and radical a change as an increase of its capital stock, or the entering upon a new business by a corporation authorized by its charter, can possibly be. Although I have not intended to quote as authority any decision except those of our own State, or of the United States Supreme Court, I must refer to the language used by the learned court in the case of Cass v. Manchester (18 Rep. 167), in which it was held that directors had no power to make a lease, even for five 3'ears, without the consent of the shareholders. The court says :
“But if this conclusion is the result of too strict a construction of the charter, we are of the opinion that the power in question is not exercisable independently of the judgments of the stockholders. The directors and officers of a corporation are its exclusive executive agents, and, as it can only act by and through them, the powers vested in the corporation are deemed to be conferred upon its representatives, but they are, nevertheless, trustees for the stockholders. The law recognizes the stockholders as the ultimately controlling power in the corporation, because they ma3, at each authorized election, entirely change the organization, and may at any time keep the trustees within the line of faithful administration, by an appeal to a court of equity. Hence, it has been held that the directors of a corporation cannot alone increase its capital stock, where such increase was authorized by its charter at the pleasure of *480 said corporation,’ and where it was provided that ‘ all powers of such corporation shall be vested in and exercised by a board of directors,’ etc.; and this for the reason that the general power to perforin all corporate acts, refers to the ordinary business transactions of the corporation,’ and not to a change so fundamental and organic ( 18 Wall. 284 ).
“The change proposed is not organic, but it is thorough and fundamental, as it affects the administration of the company’s affairs. It involves a withdrawal from the control and management of the stockholders of the entire property of the corporation for at least five years; it will preclude, for a like period, the exercise by the stockholders of their judgment'as to the particular character and method of conducting the business affairs of the corporation; and it denies to the stockholders any right of suggestion or disapproval of the conditions, when such a relinquishment of important corporate faculties may be conceded. Surely a power which will be attended with such consequences does not relate ‘to the ordinary business transactions,’nor ‘to the orderly and proper administration of the affairs ’ of the company; and hence cannot be exercised by the directors without express authority to them.”
In opposition to this view is cited by the learned counsel for the defendants, the case of The Excelsior Fire Ins. Co. ( 16 Abb. Pr. 8, 14 ), in which it was said:
“ The statute says ‘ the company is authorized to reduce the number of its directors,’ etc. It makes no provision for a meeting of the stockholders for that purpose. In the absence of any provision of that -character, the power is vested in the board of directors. Stockholders, as such, possess no powers in the management of a corporation, except specially authorized so to do by their charter. Their power ends with the election of the directors.”
Also in Elwell v. Dodge ( 33 Barb. 336, 339 ), the court says:
“A general resolution of the directors delegating the power to transfer property or choses in action to meet the exigencies of the company, or a ratification of this particu *481 lar transfer by act or resolution of the board, or acceptance and appropriation of the fruits of the transaction, if a special resolution authorizing the transfer and use of this note was wanting, would be sufficient to sustain the indorsement as the act of the company, even as against the company, and might have been proved had the precise point now made been then taken.”
The language of Judge Selden, in the case of Robertson v. Bullions ( 11 N. Y. 243, 250 ), is also referred to. He says :
“ What, then, are the powers, rights and obligations of this class of corporate officers, and to what extent has this court jurisdiction over them ?..... These officers are trustees in the same sense with the president and directors of a bank or of a railroad company. They are the officers of the corporation to whom is delegated the power of managing its concerns, for the common benefit of themselves and all other corporators, and over whom the body corporate retains control, through its power to superséde them at every recurring election.”
In the Matter of St. Ann’s Church ( 23 How. Pr. 285 ), Judge Emott says:
“ The officers thus chosen are not trustees in the sense in which an individual becomes or is made a private trustee ; they are simply officers of the corporation. As such officers, they represent the corporation; they are its managing agents, and they may act for the corporation as fully as the directors or agents of an ordinary corporation may act in its behalf. A corporation ordinarily acts through its officers, and through them only. The power of managing its concerns is delegated to its officers, and they are to manage them for-the common benefit of themselves and all the other corporators. These officers are liable, it may be, to judicial proceedings to control their action, where it is fraudulent or destructive of the rights and interests of the corporation, They are responsible, however, more directly and practically to the corporate body itself, through the power of the corporators to supersede them at their elections.”
*482 In the case of Dana v. The Bank of the United States (5 Watts & S. [Pa.] 223, 246), the following passage occurs:
“This, I take (that is to say, the election), is the utmost that the stockholders can do according to the tenor and design of the act under which they must all act until an election of the directors shall come around, when the former, if dissatisfied with the conduct of the latter in managing the affairs of the bank, may turn any one, or more, or the whole of them, out of the direction, and place it .in other hands.”
The claim made by virtue of these decisions is that the stockholders have no power to do anything in relation to any matter whatever pertaining to their corporation, except that if dissatisfied with the conduct of their directors in managing the affairs of the corporation they may turn them out at the next election; and this is certainly the language of- all the above decisions. But how inapplicable is such remedy to an act of the directors which has terminated the business of the corporation, and placed all its property in other hands for a thousand years; will that give back the property to the corporation; will that set right any maladministration if the directors had the power to thus act? Clearly not, and the language was intended to apply to cases where the action taken was neither radical nor fundamental in its character. For mismanagement of the ordinary business of the company, the turning out of the directors is a reasonably adequate redress; but when the directors have divested the company of all its propert}, it is difficult to see how any remedy is afforded by turning them out. Further, the courts of this state, as has already been seen, expressly recognize the fact, notwithstanding the decision above mentioned, that the shareholders have certain other rights and privileges beside that of electing directors,- viz: the right to be consulted in respect to change of business, increase of capital stock, dissolving and winding up the affairs of the corporation, sale of any portion of its property necessary for the transaction of its business, etc.
It need hardly, therefore, be necessary, in view of the principles which have controlled the decisions already quoted, *483 to discuss further the question that there are powers reserved to the corporation which cannot be exercised by the directors without the assent of the shareholders, and that the shareholders, under some circumstances at least, may exercise other functions than simpiy those of electing their board of directors. Nor is it necessary now to dwell upon the scope of the act of 1839, or to attempt to show that by this act the Metropolitan Railway Company had the power to lease its road and properties. That such power existed is now conceded by the counsel for the plaintiff, in view of the decision of the Court of Appeals in the case of Woodruff v. The Erie R. Co. ( 93 N. Y. 609 ).
It is claimed by the counsel for the defendants that as far as this state is concerned, at least, the power of a board of directors to lease without the assent of shareholders, has been expressly recognized by the legislature of this state, and various acts of the legislature are cited, in which leases of railroads and consolidations of railroads are authorized to be made as the directors shall determine. It seems to me, that instead of these acts being an evidence of a legislative construction that, under the act of 1839, directors had the power to lease without the assent of the shareholders, it was only because such acts could not be performed by the directors alone that it was thought necessary to confer express powers upon the directors. If the power was conferred upon the corporation, the directors alone could not exercise it, and, therefore, the legislature conferred the power expressly upon the directors.
Attention has also been called to various cases where the assent of stockholders is provided for as a condition of corporate action.
It will be seen that in every case it is a limitation upon corporate action by requiring more than a majority of stockholders to assent, or the conferring of a new power upon corporations and affixing the conditions' upon which such power is to be exercised.
I fail to see that legislation of this character in any way aids us in the determination of this question. If, however, *484 a solution of the problem is to be reached by the light of legislative interpretation, chapter 349 of the Laws of 1880 seems to clearly indicate the necessity of stockholders’ assent, given at a stockholders’ meeting, to the leasing of the property of a railroad corporation; otherwise, what necessity for legislative intervention in the terms of the act referred to ?
The cases of Fisher v. New York Central &c. R. R. Co. ( 46 N. Y. 644 ), and The Central Cross Town R. R. Co. v. The Twenty-third Street R. R. Co. ( 54 How. Pr. 183 ), are cited as deciding that a lease may be made without the assent of the shareholders. I have failed to find any such adjudication in either of those cases. All that can be claimed for those cases is that they decide that a lease of its road, made by a railroad corporation, is not ultra vires, and they decide nothing more upon the question of power.
No question is raised or discussed as to the manner of the exercise of its power by the corporation. There was no person before the court seeking to impeach the lease, who could be heard upon the question of stockholders’ assent. The only question was whether the lease was not actually void, not voidable.
There is no question, but that admitting that a board of directors alone have no power to lease the property of their corporation, and if such lease is executed by the directors without the assent of the stockholders, such stockholders may accept thé lease or repudiate it; and that if they allow the parties to the lease to go on under the lease without any action being taken in respect thereto, within a reasonable time, they will be held to have acquiesced in the lease and ratified it. Therefore, conceding that the corporation has the power to lease, when the action is taken and the stockholders have acquiesced, no third party can raise the objection that the stockholders have not formally assented.
. In the cases cited the leases had long been in operation, and the time for dissent had long passed, and, therefore, the only question that could be raised was the power of the corporation to act at all. After an examination of the rea *485 soning in all the adjudicated cases (which has been by no means cursory), after a consideration of the principles governing the relations of shareholders of a corporation and its directors, conceding that a corporation can do no act unless specially authorized thereto, except through its board of directors, I am irresistibly brought to the conclusion that acts making organic or fundamental changes in the character or business of the corporation, cannot be done either by the directors alone, or by the shareholders alone ; but that both the executive and administrative officers of the corporation must unite with the shareholders of the corporation, who confer the right to act upon the individuals intrusted with the office of directors; that directors are merely temporary officers of the corporation, by virtue of their office entitled to manage the business and affairs of the corporation during their term of office, without interference from the stockholders, but they cannot say that a new board of directors, although duly elected by the stockholders, shall never thereafter interfere with the management of the properties of the corporation, because they have placed their possession and management into other hands forever.
This brings me to the consideration of the remaining question :
Were the agreements voidable at the option of the Metropolitan company, because three of its directors were also directors of the Manhattan company; or because Metropolitan directors held also stock in the Manhattan company?
In considering this question, it must be conceded at the outset that the interests of the Manhattan company were directly antagonistic to those of the Metropolitan company.
In the negotiations which resulted in the October agreements, it was for the interest of the Manhattan company to get as large a reduction of rental as possible; and it was the interest of the Metropolitan company to secure as advantageous terms as the Manhattan company could comply with, and a similar interest pertained to the New York company; but it was to the interest of neither to secure *486 such terms as would bring about again the disasters under which the whole elevated system was then suffering.
Three propositions are urged in answer to the claim of the plaintiff, that the conflicting interests rendered the October agreements voidable. The first is, that although conflicting interests may disqualify an agent, -strictly so called, from acting, that this rule does not apply to trading corporations, so many of whom have common directors. Secondly, if such conflicting interest induces any incapacity, it is not fatal to the agreement, if such agreement can be proven just and fair; and thirdly, that if any of the directors were disqualified because of an adverse interest, enough voted for the adoption of the agreement who were not disqualified, to have carried the measure, even if all the disqualified directors had voted no.
It will not be denied, I imagine, that as between natural persons, where an agent or trustee has a personal intez-est opposed to that of the principal, or where a man acts as agent of both parties to the contract, although he may have no personal interest on either side, the principal or cestui que trust may avoid the contract at will, even if there be no actual fraud or damage.
The cases in this state and izi England seem to be very explicit upon this point, and it might perhaps be zrecessary only to refer to the language of the chancellor, used in the case of Davoue v. Fanning ( 2 Johns. Ch. 252 , 260), which sets forth in the clearest language the principle upon which that rule is founded. He says:
“However izzzrocent the purchaser may be izi the given case, it is poisonous in its cozisequeziees. The cestui que trust is zrot bound to prove, zror is the court bound to judge, that the trustee has made a bargain advazrtageous to himself. The fact may be so, and yet the party not have it in his power distinctly and clearly to show it. There may be fraud, as Lord Haedwicke observed, and the party not able to prove it. It is to guard against this uncertainty and hazard of abuse, and to remove the trustee frozn temptation, that the rule does and will permit the cestui que trust *487 to come, at his own option, and without showing actual injury, and insist upon having the experiment of another sale. This is a remedy which goes deep, and touches the very root of the evil.”
In Taussig v. Hart ( 58 N. Y. 425, 428 ), the court say:
“ It is no answer that the intention was hones

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/6141118. Public record. Not legal advice.