Case ID: nys_23/html/0592-01.html
Source: Caselaw Access Project
Author: {"author": "VAH BRUNT, P. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

(69 Hun, 216.)
    BAUMGARTEN v. NICHOLS et al.
    (Supreme Court, General Term, First Department.
    May 12, 1893.)
    Conveyance to Qokpobation—Action to Set Aside.
    Two partners and a third person formed a corporation under an agreement by which the partners were to put in their business, and the third person, certain money. Held, that the fact that the third person obtained his money from the partner having the smaller interest in the firm, and that they, together having a majority of the stock, combined to take the control of the business from the other partner, constitutes no ground for an action by the latter to set aside the conveyance of the partnership property to the corporation, there having been no misrepresentations.
    Appeal from special term, New York county.
    Action by William Baumgarten against William Gr. Hichols and others. From interlocutory judgment sustaining demurrers of defendants William S. Hichols and the corporation of Herter Bros, to the amended complaint, plaintiff appeals.
    Affirmed.
    Argued before VAH BRUNT, P. J., and O’BRIEH, J.
    Hoah Davis and J. Henry Work, (A. L. Pincoffs, of counsel,) for appellant.
    Foster & Thomson and Seymour & Hopkins, (J. Thomson and J. H. Seymour, of counsel,) for respondents.
   VAH BRUNT, P. J.

This action is brought to set aside a conveyance made to the corporation of Herter Bros, by the plaintiff and one William Gr. Hichols on or about the 2d of February, 1891. The complaint alleges that prior to said date the plaintiff and said William Gr. Mchols were copartners in business under the firm 'name of Herter Bros., and that in said copartnership the plaintiff was the senior partner, and owner of a majority interest therein, —the plaintiff being entitled to 60 per cent, of the profits, and the defendant Mchols to 30 per cent, thereof,—they being the only partners in the firm; that the defendant Horton had been for several years in the employment of the plaintiff as salesman, and was familiar with the affairs and business of said firm; that during the year preceding the said deed mentioned the said William Gr. Hichols repeatedly expressed to the plaintiff his desire to retire from the active participation in said business, and proposed to the plaintiff the formation of a corporation in the nature of a stock company, to which the business of said firm should be transferred, and that the plaintiff and said William Gr. Mchols should receive shares of stock in said corporation representing their proportionate interest in the assets thereof, which proposition was accepted by the plaintiff; that said Hichols further proposed that said Horton should be asked to contribute to the assets of said corporation by paying for and receiving stock in said corporation, so that said Horton should be independently interested in the assets and business of said corporation; that the plaintiff assented to the proposition, and thereafter proposed to said Horton that he should invest a certain sum, in cash, in the stock of «said corporation, and Horton accepted the proposition, and agreed with the plaintiff to make such investment on his own behalf, and to pay for an interest in the stock of the corporation to be formed thé sum of §50,000 in cash; that it was thereupon agreed between thé plaintiff, Mchols, and Horton that a corporation should be formed, to which should be transferred the capital account of the plaintiff, as the same stood upon the books of said Herter Bros, on the lSt of February, 1890, and also the capital account of said HicholS, and the good will of the old firm of Herter Bros., including the right to use the firm name of Herter Bros., and to which corporation there should also be transferred and paid over an additional sum of $50,000 in cash; that such corporation should have k capital stock, in all,, of §375,000, of which the plaintiff was té receive §175,000 on the transfer to him of his interest in said firm, and the defendant Mchols was to receive §145,000 on a lif# transfer by him, and the defendant Horton, on the payment a ¿id investment by him, on his individual behalf, of the sum of $50]-000, should receive shares in the capital stock of said corporation to the amount of $60,000, par value. (There seems to be some discrepancy in the figures here stated, but they are so contained in the complaint.) The complaint further alleges that it was further agreed between the plaintiff and the defendants MchifiS and Horton that the trustees who were to conduct the business-^ the corporation for the first year thereof “should be the defendafffs William Gr. Mchols and William S. Hichols, the father of the süd William Gr. Mchols, who should represent upon said board the ifiterests of said defendant William G-. Nichols, and this plaintiff William Baumgarten, and the brother of this plaintiff, Emile Baumgarten, who represent the interests of this plaintiff in said’ corporation, and the defendant Arthur Norton, who should represent the separate individual interest of said Norton, consisting of his individual investment in the stock, and assets thereof;” the parties seeming to have the idea which too commonly pervades trustees of corporations, that they were made such trustees for the purpose of looking after individual interests, instead of the interests of the corporation which they were supposed to represent. The complaint further alleges that pursuant to this agreement, and for the purpose of carrying the same into effect, the plaintiff united with Nichols in making and filing a certificate for the incorporation of a stock company to be known as Herter Bros., the names of the trustees who were to conduct the business for the first year being inserted as above stated to have been agreed upon; and subsequently the plaintiff united with Nichols in the execution of the conveyance and transfer to such corporation of the property and business of such copartnership; “that at the first meeting held for the purpose of organization of such corporation the defendant Norton stated that he was not able to comply with his agreement to pay the sum of §50,000 in cash for an interest in the assets of said corporation, and was prepared to pay only the sum of §30,000;” that said Norton thereupon paid over to said corporation §30,000 in cash as his own individual payment, •and representing the individual investment of said Norton in the •assets of said corporation, and the remaining capital stock of said •corporation, to wit, the sum of §345,000, was issued to the plaintiff. and the defendant William G-. Nichols in consideration of the •conveyance by said plaintiff and said Nichols to the corporation •of the business and property of said Herter Bros. The complaint further alleges that in joining in the making and execution of such conveyance the plaintiff relied upon the agreements herein-before set forth, and the facts hereinbefore stated, as to the respective interests to be taken and paid for by the parties named; the allotment and payment for such interests being material facts in said agreement, as affecting the action of the plaintiff with respect to the carrying out of the same. The complaint further alleges that, owing to the premises, “there existed between the defendants William G-. Nichols and Arthur Norton and the plaintiff relations of trust and confidence, and that the plaintiff relied, in consenting to the conveyance of the property of the firm of Herter Bros, to the corporation, on the good faith of such defendants, and on the fact that they owed to this plaintiff the duty of disclosing to him all material facts relating to their connection with each other and said corporation.” The complaint then alleges that the true facts and relations between the parties to said agreement were not those stated to and relied upon by the plaintiff, as. hereinbefore stated; that Norton did not, and did not intend to,, become interested in said corporation by the investment therein of money on Ms individual behalf, and did not intend to, and did not, acquire, as independent owner thereof, the interest in said corporation agreed to be transferred to him;- that it was not true that Norton paid his own money for an interest in said corporation, but said money was given or advanced by the defendant William G-. Nichols, and. was in fact the money of Nichols, and that the fact was that Nichols intended to, and did, acquire an additional interest in the property, sufficient, when added to his interest, to confer upon said Nichols the control of the corporation, as against the plaintiff; and that all these things .were concealed from the plaintiff, the object of such concealment upon the part of Nichols being to take away from the plaintiff the control of the business of Herter Bros., and obtain the same himself. These allegations are amplified in the complaint, but it is not necessary to refer to them more at length. The complaint then alleges that the reason he consented “to the formation of the corporation in which Norton was to be a stockholder, and the conveyance of the property of the firm of Herter Bros, to such corporation, was that plaintiff relied on the fact that the defendant Norton would act as such stockholder in the interests of said corporation,” (which seems to be the only allegation in this complaint that any trustee was to act in accordance with the duties which his office devolved upon him,) “and that there was nothing in his relation, either to this plaintiff or to the defendant William Gr. Nichols, which could in any way influence him, or which might tend to prevent him from acting with impartiality, in any conflict which might arise between this plaintiff and the defendant William G-. Nichols.” Then follows the allegation “that no money has been paid to the treasury of the corporation by any person except the plaintiff and the defendants William Gr. Nichols and Arthur Norton, and'that all other persons appearing as stockholders of record on the books of such corporation, and any persons to whom certificates may have been transferred, hold their stock without having paid any consideration for the same, or with full knowledge of the said fraudulent concealment, and of the deceit practiced on this plaintiff, or both.” To this complaint the defendants Herter Bros, and the defendant William S. Nichols demurred upon the ground that it did not state facts sufficient to constitute a cause of action. These demurrers being- sustained, :f'vom the interlocutory judgment thereupon entered this appéal is taken.

It may be sufficient answer .to this complaint to say that Norton had paid |30,000 in cash into this corporation on the strength of the transfer to it of the business of the firm, and of property belonging to the plaintiff and the defendant Nichols, and until that money is returned to him it is difficult to see how the plaintiff can have annulled and set aside the transaction in which Norton advanced this money. As far as this point is concerned, it is entirely Immaterial as to whether Nichols advanced the money to Norton or not. Even if he did, it was Norton’s individual money, and he would be liable to Nichols for the repayment there-' of. And certainly before the corporation into which he has put this money upon the strength of the receipt of this property can be deprived of that property, and his money rendered valueless, Norton must be reinstated in the position he occupied prior to the payment in of the money. One of the first principles in the law of rescission is that what has been received must be returned, and this seems to have been entirely lost sight of in the previous consideration of this case. But, aside from this, no ground for setting aside this conveyance is set out in this complaint. It is manifest, that the plaintiff supposed, when Norton was given the balance of power in this corporation, that he was going to use this balance of power for the purpose of keeping the plaintiff in, and he has found himself mistaken. The defendant Nichols seems to have captured the independent trustee, who alone was to look out for the interests of the corporation; and, if the result of the continuation of the majority is that the minority must lose their control, that is only the natural result which always happens in the management of corporate affairs,—the majority of the stock controls. Now it is to be observed that, as far as the defendant Norton is concerned, all the allegations in the complaint are that he was to put in $30,000 as his own individual payment. There is no allegation that he represented, or that the plaintiff supposed, that he had $30,000 of his own to put in. But the plaintiff assumes that, although Norton might borrow the money from all the world, he was precluded from borrowing the same from Nichols; and yet we fail to find, in all the allegations in relation to the condition of affairs upon which plaintiff alleges that- he relied, that there was any representation upon the part of Norton or Nichols as to how Norton should get the money which he was to put into this corporation. The allegation that there was any relation existing between the parties which required a disclosure as to the means by which Norton was to procure the money that he was to put into- this business is a clear assumption. There is nothing in the complaint which bears out any such conclusion. Certainly, if Norton had gone to the plaintiff to borrow this money, Nichols would have had no cause for complaint. How, then, can it be assumed that because he borrowed the money of Nichols a fraud has been perpetrated? There is no allegation that either Nichols or Norton have done anything in the management of the business of this corporation detrimental to its interests. It is alleged that this combination between Nichols and Norton" was made to take away from the plaintiff the control of the business theretofore carried on by Herter Bros., and to obtain the same himself. The complaint contains no evidence of the carrying out of any such design; and, if it did, the plaintiff asserts the fact to be that the defendant Norton was to act as such stockholder in the interests of the corporation, and he might think such action was necessary in the interests of the corporation, and who is to dispute his judgment? It would thus appear that the whole atmosphere of the case indicates that the plaintiff'was of the opinion that ¡Norton would act in his interest, but for some reason he has concluded that he is mistaken in that regard, and that ¡Norton will probably transfer his allegiance to the other largest stockholder in the concern. We do not see how, under such a state of facts, the plaintiff can claim to set aside a conveyance made to the corporation. The judgment should be affirmed, with costs.