the specialty, was not subject to attack on the ground that it failed to disclose an effort on the part of complainant to induce the corporation to act; it being obvious that such effort would have been futile. [Ed. Note.-For other cases, see Corporations, Cent. Dig. § 1433.] 3. CORPORATIONS 320(4)-ACCOUNTING AND DISCOVERY-STOCKHOLDER'S ACTION AGAINST OFFICERS. In such case, notwithstanding the contract provisions designed to keep the formula a secret, and to require the corporation to accept as conclusive the verified statement by the president as to the cost of producing the specialty, complainant is entitled to relief by discovery and accounting, though such procedure might possibly reveal the secret formula, for otherwise the president, by increasing his charges, might readily absorb all of the corporate earnings. [Ed. Note.-For other cases, see Corporations, Cent. Dig. §§ 1429, 1431.] In Equity. Bill by George M. Forbes against Odell Wilson and another. On motion to dismiss the bill. Motion denied. Frederick A. Henry, of Cleveland, Ohio, for complainant. WESTENHAVER, District Judge. This case is before the court on defendant's motion, under equity rule 29 (198 Fed. xxvi, 115 C. C. A. xxvi), to dismiss complainant's bill for insufficiency in law. The motion is based on two grounds, namely: (1) Complainant, being a stockholder of the corporation defendant, does not show compliance with new equity rule 27 (198 Fed. xxv, 115 C. C. A. xxv). (2) The facts alleged are not sufficient to constitute a valid cause of action in equity. [1,2] This motion is a substitute for a general demurrer, and, in consideration of it, all of the facts therein pleaded must be taken as true. The outstanding facts may be briefly stated: The defendant the Corega Chemical Company was promoted and organized by the defendant Odell Wilson. In consideration of a transfer from Wilson to this corporation of certain rights to sell a dental specialty known as "Corega," all of the stock was issued to Wilson. The contract was agreed upon either at or prior to the organization of the corporation, and at the time the contract was adopted and made by the corporation Wilson was the owner of substantially all of the stock. A part of the agreement required him to transfer to the corporation 6,000 of its 20,000 shares, and these shares, thus transferred, were from time to time to be sold to provide capital for the corporation thus organized. Complainant is now the owner of some part of this stock. His entire holdings, it is stated, are 30 per cent. of the total outstanding, and he has invested therein, or advanced to the corporation, an aggregate of $24,000. The defendant Wilson, and members of his family, are now the holders of 60 per cent. of the capital stock. The board of directors, it is alleged, is and always has been composed of five persons, of whom Wilson, his sister, and his personal lawyer constitute a majority. Wilson is and has been president and manager of the corporation. The absolute control of the corporation is alleged to be in him. For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes The product known as "Corega" is produced according to a secret formula devised by Wilson. He had devised and was producing and selling it before the organization of the corporation. The contract between him and the corporation provides for the manufacture and delivery by him of this product to the defendant corporation, in packages ready to be sold and delivered to the trade. The contract fixes prices at which Wilson was to furnish this product during the first two years. At the end of the second year, the price for the preceding year was to be adjusted on the basis of actual cost to Wilson of producing the same. It is alleged that Wilson represented the prices fixed in the contract were the actual cost to him of manufacturing and delivering the product, ready for sale and distribution, The bill alleges that the prices originally fixed in the contract, and the prices set forth in Wilson's statement of the actual cost of manufacturing and production during the second year, are grossly in excess of the true cost; that the actual cost is substantially not more than one-third of that fixed in the contract; that on October 16, 1914, an accidental discovery was made of the overcharge, and voluntary restitution was made in part by Wilson, but that there still remains large excess charges, both as to the first and second year's cost; that the statement of actual cost for the second year submitted by Wilson is false and misleading, and grossly in excess of the true cost; and that the defendant Wilson refuses to furnish his books or records for inspection, or to give detailed information, because so doing would, in his judgment, disclose the secret formula according to which the product "Corega" is made. The contract in question contains careful provisions for safeguarding the secret formula, devised by Wilson, and according to which this product is made. It is expressly agreed that he shall not be obliged to disclose the same. A presumptively correct copy of this formula was, pursuant to the agreement, placed in trust, subject to the joint control of Wilson and of the defendant corporation. The contract provides that, in case of death or other incapacity of Wilson, this formula should be turned over to a trustee to be selected by a four-fifths majority of the board of directors, which trustee and his successors should continue to supervise its manufacture and preserve the secret thereof inviolate for the benefit of both parties. The contract also provides that nothing therein contained is to oblige Wilson to submit his books or records for inspection, or to furnish detailed information of any kind, which, in his judgment, might lead to exposure of the secret process. The actual costs to Wilson, the contract provides, should be determined by him after careful inventory, and from his sworn statement furnished to a board of directors. The foregoing is not an exhaustive, but in my opinion a sufficient, statement of the controlling facts. On the basis thereof, complainant seeks a discovery and an accounting as to the exact cost to Wilson of manufacturing and delivering his product to the defendant corporation. Certain additional allegations are made, tending to show why application to the board of directors or to stockholders for relief would be useless and unavailable. I am of opinion that the allegations of the bill are a sufficient compliance with equity rule 27. If they do not set forth with sufficient particularity the efforts made by complainant to secure action from the managing directors and shareholders, they do clearly set forth sufficient reasons for not making any further effort than is alleged. The relations of Wilson to the corporation from its organization to the present time are themselves sufficient reasons why an application to a board of directors or to a meeting of stockholders would be a vain and useless thing. The board of directors or the meeting of stockholders, which he controls, would have to seek relief from Wilson himself. He is the alleged offender and wrongdoer, against whose action all relief is sought. These considerations bring the case within the rule of Doctor v. Harrington, 196 U. S. 579, 588, 25 Sup. Ct. 355, 49 L. Ed. 606; Delaware & Hudson Co. v. Albany, etc., R. R. Co., 213 U. S. 435, 29 Sup. Ct. 540, 53 L. Ed. 862. The rules invoked by defendant's counsel are properly applicable only when the parties against whom relief is sought are not those in control of the corporation itself. In that situation, the directors and stockholders properly represent the corporation and are entitled to exercise a judgment and discretion in determining whether the interests of the corporation require action or litigation. In this situation, however, those in control of the corporation are not in a position to determine fairly and impartially whether the interests of the corporation require legal action. These considerations alone are sufficient reasons for not requiring further effort than the bill alleges has been made to obtain relief from the directors and stockholders of the defendant corporation. [3] If the allegations of the bill are true, a good cause in equity for discovery and accounting is made. The principles sustaining the jurisdiction of equity, upon the facts set forth, are familiar and need not be reviewed. See 1 Cor. Jur. 616, 617, 716, 717; Morris & Co. v. Whitley, 183 Fed. 764, 106 С. С. А. 206. The contract provisions designed to keep secret Wilson's process for making Corega, and to require the corporation to accept, as conclusive, his sworn statement of cost, furnish no adequate legal reason why complainant should be denied the relief he seeks. This is not an action to reopen an account for fraud or mistake; but, if it were, the allegations of the bill would be sufficient. See 1 Cor. Jur. 716, 717. The situation here is an agreement imposed by the defendant Wilson upon a corporation promoted and organized by him, and places in him a power adequate to absorb all the earnings and capital of that corporation; indeed, there is no limit, except his conscience, to his ability to raid its treasury. If his contract right to keep secret the process for making Corega conflicts with the corporation's right to a discovery and an accounting of the exact cost, the latter would have to prevail. It does not necessarily follow that both rights cannot be adequately protected. That contracting parties cannot oust the power in this respect of a court is established by B. & O. R. R. Co. v. Stankard, 56 Ohio St. 224, 46 Ν. Ε. 577, 49 L. R. A. 381, 60 Am. St. Rep. 745. Many considerations have been urged upon me by defendants' counsel, both orally and in brief. All of them have been duly weighed and considered, even if not adverted to in this memorandum. Counsel will, of course, understand that the expressions herein apply only to the bill as framed, and the admission, for the purposes of this motion, that its allegations are true, and that if, after answer and upon a hearing, a different situation is created, it will be promptly recognized. (District Court, N. D. New York. July 5, 1917.) 1. BANKRUPTCY 143(10) - TRUSTEES-RIGHTS OF. While, under Bankr. Act July 1, 1898, с. 541, § 70, 30 Stat. 565 (Comp. St. 1916, § 9654), declaring that the trustee of the estate of a bankrupt, upon his appointment and qualification shall be vested by operation of law with the title of the bankrupt to all documents relating to his property interests and patents, powers which he might have exercised for his own benefit, property transferred by him in fraud of his creditors, and property which prior to the filing of the petition he could by any means have transferred, or which might have been levied upon and sold by judicial process, the surplus income accruing under a testamentary trust created for the support of the bankrupt does not pass to the trustee, yet such income may be reached by the trustee under section 47, as amended by Act June 25, 1910, c. 412. § 8, 36 Stat. 840 (Comp. St. 1916, § 9631), providing that the trustee shall be deemed vested with all the rights, remedies, and powers of a creditor holding a lien by legal or equitable proceedings, and as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights and remedies of a judgment creditor holding an execution duly returned unsatisfied, for the act must be interpreted as a whole, and the unamended language of section 70 cannot neutralize the amendment. [Ed. Note. For other cases, see Bankruptcy, Cent. Dig. § 224.] 2. TRUSTS151(2)-INCOME-POWER OF STATE. Real Property Law (Consol. Laws, N. Y. c. 50) § 98, subjecting to creditors surplus income accruing out of a trust, is valid; it being competent for the Legislature to change the law and subject to the claim of creditors such property. [Ed. Note.-For other cases, see Trusts, Cent. Dig. § 1952.] 3. BANKRUPTCY 143(10)-TRUSTEE RIGHTS OF. Real Property Law N. Y. § 98, declares that, where a trust is created to receive the rents and profits of real property and no valid direction for accumulation is given, the surplus of such rents and profits beyond a sum necessary for the education and support of the beneficiary shall be liable to the claims of his creditors in the same manner as other personal property which cannot be reached by execution. Section 100 declares that, except as otherwise prescribed, an express trust, valid as such in its creation, shall vest in the trustee the legal estate, subject only to the execution of the trust, and the beneficiaries shall not take any legal estate or interest, but may enforce the performance of the trust; while section 103 declares that the right of a beneficiary of an express trust to receive the rents and profits of realty and apply them to the use of any person cannot be transferred by assignment or otherwise. Personal Property Law (Consol. Laws N. Y. c. 41) § 15, provides that the right of the beneficiary to enforce the performance of a trust, to receive the income of personal property and apply it to the use of any person, cannot be transferred by assignment or otherwise. Bankr. Act, § 47, as amended in 1910, gives the trustee the right of a judgment creditor. Held, that Real Property Law, § 98, applies to personal property, and so a trustee in bank For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes ruptcy may, where the bankrupt was beneficiary under a testamentary trust and entitled to support out of the income arising from the land and funds constituting the corpus of the trust, reach any surplus income. [Ed. Note.-For other cases, see Bankruptcy, Cent. Dig. § 224.] 4. BANKRUPTCY143(10)-TRUSTEES-RIGHTS OF STATUTE. In such case, the right of the trustee cannot be denied on the theory that Bankr. Act, § 47, operated as an amendment to the New York Real Property Law, by giving the trustee the rights of a judgment creditor, though no such judgment had been recovered. [Ed. Note. For other cases, see Bankruptcy, Cent. Dig. § 224.] In Bankruptcy. In the matter of the bankruptcy of Florence I. Reynolds. Application, on return of order to show cause, for an order making permanent, or until the application of the bankrupt for discharge should be determined, an order staying suits and proceedings by the trustee to reach the surplus income, if any, to which the bankrupt might be entitled under a trust created under the last will and testament of Matthew H. Bender, now deceased. Order as granted vacated, and injunction denied. By "surplus income" is meant the income accruing under the trust not necessary for the suitable support and maintenance of the bankrupt. Mills & Mills, of Albany, N. Y. (Borden H. Mills, of Albany, N. Y., of counsel), for bankrupt. Prior & Aufsessor, of Albany, N. Y., for trustee. RAY, District Judge. By his last will and testament, Matthew H. Bender, now deceased, gave and bequeathed to Charles C. Bullock, Jr., as trustee, in trust, a considerable sum of money and property, much of which is in real estate, he "to receive the rents, issues and profits thereof and after defraying all taxes and other lawful charges upon the same to semiannually pay the net income thereof in equal shares to Florence Irving Reynolds [the now bankrupt] and Frederick R. Bender during their natural lives." There are provisions in the will as to the disposition of the trust fund, etc., on and in case of the death of either or both of these beneficiaries of the trust. It is claimed, and facts appear showing it probable, that there is a considerable sum of income in the hands of such trustee under the will, and that, as the income becomes due and payable from time to time, there will be a surplus of income over and above what is necessary for the suitable and proper support and maintenance of such bankrupt, and that this will be applicable to the payment of her debts. [1] It is contended by Florence I. Reynolds, the bankrupt, one of the beneficiaries of the trust referred to, that under the provisions of section 70 of the Bankruptcy Act, relating to "title to property," the surplus income of a trust fund does not pass to the trustee in bankruptcy. This is undoubtedly true, and it was so decided prior to the amendment to section 47 of the Bankruptcy Act in 1910. By the amendment to section 47, above referred to, there was inserted in the section the following language: For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes |