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W. H. Zeltner v. Zeltner Brewing Co. et al.

WILLIAM H. ZELTNER, INDIVIDUALLY AND AS EXECUTOR, ETC., RESPONDENT, v. THE HENRY ZELTNER BREWING COMPANY, RESPONDENT. WILLIAM B. SUTHERLAND, AS RECEIVER OF THE HERNY ZELTNER BREWING COMPANY, RESPONDENT; YORKVILLE BANK, APPELLANT.

SUPREME COURT-APPELLATE DIVISION-SECOND JUDICIAL DEPARTMENT-JANUARY, 1903.

§§ 1810 SUBD. 3, 2423.

Construction Subdivision 3, Section 1810, Code Civil Procedure— Resignation of Officers and Directors of Corporation for

the Purpose of Procuring Receivership.

Subd. 3, sec. 1810 of the Code of Civil Procedure does not authorize the appointment of a receiver of a corporation where the officers and directors resign for the purpose of procuring a receivership. There is no provision of law warranting the appointment of a receiver under such circumstances.

The officers and directors of The Henry Zeltner Brewing Company resigned for the purpose of permitting an action to be brought for the appointment of a receiver, and a stockholder brought an action under subd. 3 of sec. 1810 of the Code, praying for the appointment of a receiver upon the ground that the corporation had no officer empowered to hold the assets.

Held, that the resignations were unlawful and ineffective, and that the officers and directors continued to be responsible for the performance of their trust and were empowered to hold the

assets.

Smith v. Danzig, 64 How. Pr., 320, overruled.

(Decided January, 1903.)

Appeal by the Yorkville Bank from an order made in an action brought by William H. Zeltner against the Henry

W. H. Zeltner v. Zeltner Brewing Co. et al.

Zeltner Brewing Company, denying a motion to vacate an order appointing a receiver of the defendant corporation and enjoining the Yorkville Bank from prosecuting certain actions against said corporation.

Moses Weinman (Abraham Benedict with him on the brief), for appellant.

Henry A. Forster (Frederick P. Forster with him on the brief), for respondents.

WILLARD BARTLETT, J.-The receiver was appointed under subdivision 3 of section 1810 of the Code of Civil Procedure, which provides for a receivership in an action brought by the attorney-general, "or by a stockholder, to preserve the assets of a corporation, having no officer empowered to hold the same."

The action was brought by William H. Zeltner as an individual stockholder in the Henry Zeltner Brewing Company, and as the executor of a deceased stockholder. The complaint alleged that the condition of the business of the corporation was such that it was unable to obtain ready money to meet its obligations, and that there was great danger that, by reason of suits against it, its property would be seized and sacrificed, instead of being equitably and fairly distributed among its creditors and stockholders. It further alleged that the officers of the corporation had determined that the property of the defendant should forthwith be placed in the hands of the court to be administered, and that accordingly the directors and president and treasurer had resigned their offices so that their positions were all vacant and unoccupied, and no officer existed authorized or empowered to hold any of the assets or property of the corporation. Upon this complaint and affidavits in support of it, showing that all the officers of the company except the secretary had resigned in order to bring the case within the letter of subdivision 3 of section 1810 of the

W. H. Zeltner v. Zeltner Brewing Co. et al.

Code of Civil Procedure, the motion for a receivership came on to be heard and was granted without any opposition in behalf of the corporation. The order appointing a receiver contained an injunction restraining all creditors from proceeding to force any claims which they might have against the corporation. This injunction was operative upon the Yorkville Bank, which had already commenced two actions in the Supreme Court against the corporation upon promissory notes amounting to $10,000, and it is this feature of the order which gave the Yorkville Bank the requisite status to move to vacate the order and which enables it to prosecute the present appeal. The record indicates that no answer has ever been put in in behalf of the defendant corporation, and that the receiver, ever since his appointment on the 7th day of February, 1902, has carried on the business of the corporation secure from any interference on the part of its creditors.

The motion to vacate the receivership order was denied on the ground that no corporate action was necessary to make the resignation of the officers effective, and on the authority of the Special Term decision in Smith v. Danzig (64 How. Pr. Rep. 320, 330), in which Mr. Justice Pratt expressed the opinion that the directors of a corporation might properly resign for the purpose of securing a fair and equal distribution of the corporate property among its creditors. While the general proposition is undoubtedly true that the acceptance of a resignation is ordinarily not essential to its effectiveness (Noble v. Euler, 20 App. Div. 548), it does not follow that the officers of an incorporated organization can divest themselves of all authority over its property and all obligation to care for that property simply by resigning in a body in order to make out a case for judicial action under the provision of the Code which has been cited. Mr. Morawetz, in his well-known work on corporations, says: "It seems clear, also, that directors cannot terminate their agency or accept the resignation of

W. H. Zeltner v. Zeltner Brewing Co. et al.

others if the immediate consequence would be to leave the interests of the company without proper care and protection" (1 Morawetz on Corporations, sec. 563). This statement of the law was approved by the General Term of the First Department in Carnaghan v. The Exporters' & Producers' Oil Co. (32 N. Y. St. Rep. 1117, 1121). If such action on the part of corporate officers has been attempted in the present case can be sanctioned by the law, the effects would be most unfortunate. It would follow that the officers of a corporation having charge of millions of dollars' worth of property could at any time, by the simple act of resignation, relieve themselves of all responsibility for its care or protection, and leave it to become the prey of any evil-disposed person who might seize it. We are unwilling to admit any construction which could lead to such a result. In our opinion the wholesale resignation of the officers of the Henry Zeltner Brewing Company did not free them from the obligations which previously rested upon them in regard to the custody of that property until other officers should be duly appointed to care therefor. They still remained officers "empowered to hold the same" within the meaning of subdivision 3 of section 1810 of the Code of Civil Procedure.

The opinion of Mr. Justice Pratt to the contrary, in Smith v. Danzig (supra), was evidently based upon the idea that such action should be approved because the law furnished no other remedy in the case of an insolvent corporation whose affairs were growing worse every day and whose remaining property was liable to be wasted, leaving the bulk of its creditors unpaid. No such reason now exists, in view of the present provisions of law relating to the voluntary dissolution of a corporation by which provision is made, if necessary, for the immediate appointment of a temporary receiver in case the corporation is insolvent (Code Civ. Pro., sec. 2423).

The cases in which a corporation would have no officer

W. H. Zeltner v. Zeltner Brewing Co. et al.

empowered to hold its assets so that a suit might be brought under subdivision 3 of section 1810 of the Code to preserve such assets would ordinarily be those of foreign corporations having property within this jurisdiction, but no officer authorized to hold such property here (See Wilkinson v. The North River Construction Co., 66 How. Pr. Rep. 423, opinion by Vann, J.). In the case of a domestic corporation it is difficult to see how the subdivision could apply unless upon the sudden physical incapacity or decease of all the directors in office.

But however this may be, we are of opinion that the resignations in the present case did not deprive the directors of their authority over the corporate property, or release them from their obligation to care for the same until their successors should be duly chosen. They could not lawfully, by the expedient of resigning in a body, enable a stockholder, who otherwise could not maintain an action for the purpose, to institute a suit for the dissolution of the corporation, or procure a receivership to carry on the business indefinitely for his benefit, and in the meantime hold off the claims of creditors having valid demands against the company's assets.

Although the order under review, so far as it appoints a temporary receiver, affects the present appellant only indirectly, it has been necessary to consider the validity of that portion of the order as bearing upon the part containing the injunction which does affect the Yorkville Bank in common with all other creditors. As was held by Judge Vann, in Wilkinson v. The North River Construction Co. (supra), where the jurisdiction exists to appoint a receiver under subdivision 3 of section 1810 of the Code of Civil Procedure, in an action brought by a stockholder to preserve the assets of a corporation, the court, in the exercise of its inherent power, may, by a general order, restrain all creditors from commencing or prosecuting suits against the corporation of whose property the court, through its officers, has

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