People v. Commercial Alliance Life Insurance

Andrews, Ch. J.

The case of Barnes v. Newcomb ( 89 N. Y. 108 ) is an authority for the proposition that a court of primary jurisdiction in the exercise of its discretion may authorize the receiver of an insolvent corporation, appointed in an action brought for its dissolution, which was defended in good faith by the corporation, though unsuccessfully; to-pay as a preferred claim out of the fund in his hands, a reasonable sum for the compensation of counsel employed by the corporation in defending the action. The principle upon which an allowance in such case may be made is that counsel *565 fees are in the nature of expenses incurred by the corporation and its trustees in the protection and preservation of the trust which they represent, and even if it turns out that a case is made for the interference of the state, so long as the defense was made in good faith and upon reasonable grounds, there is apparent justice in subjecting the property and fund involved in the litigation to expenses incurred in discharging a general duty cast upon the corporation and its trustees, to take all reasonable means for its protection.

(Atty.-Genl.

v. North American Life Ins. Co., 91 N. Y.

57.)

But in any such case it is in the discretion of the court, in view of all the circumstances, to determine whether any or what allowance shall be made. The application, when made, must ordinarily be made after the judgment dissolving the corporation and appointing a receiver when the property has passed out of the control of the corporation, and may properly be made by or in behalf of the counsel employed, who are the persons beneficially interested in any allowance which may be made. But the compensation is due from the corporation upon whose employment the services were rendered, and unless the employment was justified under the circumstances, we can perceive no equitable reason why the claims of counsel for defending the action should be preferred to that of other creditors.

In the present case it appears and it is admitted that the counsel employed by the corporation acted in good faith, and defended the action, believing that the company was solvent, and stopped the defense when they discovered that they had been misinformed.

But both the Special and G-eneral Terms substantially found that the corporation and its officers knew before and when the action was commenced that the company was insolvent, and it appeared that its officers had resorted to fraudulent statements and devices in order to enable it to continue its business and maintain the confidence of policyholders.

In our opinion it would be contrary both to equity and to sound public policy to permit counsel fees out of the fund to be awarded to the applicant on the theory that counsel do not *566 hold their rights under the corporation which employs them, but independently of the corporation, or that they can assert a right unaffected by the fraud or had faith of the corporation in interposing a defense. There is little danger that this rule will disable corporations assailed from securing in proper cases the services of competent counsel. If any embarrassment-arises it will he in cases of dishonest attempts to keep corporations afoot to the prejudice of honest dealing. If it tends to this result the public will suffer no harm.

Our conclusion is that the General Term properly reversed the order of the Special Term, assuming, as is claimed by the appellants, that the reversal proceeded on the ground that upon the facts proved and found there was no discretion in the court to grant the application.

The order should be affirmed.

All concur.

Order affirmed.