Case ID: ny-super-ct_59/html/0007-01.html
Source: Caselaw Access Project
Author: {"author": "By the Court.—Ingraham, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

BEETHOVEN PIANO-ORGAN COMPANY, Respondent v. C. C. McEWEN CO., Appellant.
    
      Fraud, discovery of, by means of creditors—Action,forms adopted for perpetration of fraud, are of little importance—Pleading, deemed to allege what can be implied from its allegations.
    
    In this case Clarence C. McEwen, a minor, commenced business in his own name in October, 1886, for the benefit of his father, Edson H. McEwen, and the business was conducted by money supplied to said Edson II. Mc-Ewen by his wife Grace E. McEwen. That Clarence C. McEwen obtained on credit from the plaintiff merchandise for which he gave promissory notes endorsed by said Edson H. McEwen. That said Clarence C. Mc-Ewen being a minor, confessed judgment to the defendant, Grace E. Mc-Ewen, and on such judgment execution issued; and the property held in the name of Clarence C. McEwen was levied upon and sold by the sheriff under said execution and was bought in by said Grace E. McEwen. And thereafter the corporation-defendant, the “ C. C. McEwen Co.,” Was organized, of which Clarence C. McEwen was the president and Grace E. McEwen was treasurer, and the property purchased by the latter under the execution was turned into said corporation and the capital stock issued therefor.
    
      Feld, that under such circumstances the property of Clarence C. McEwen which was lawfully applicable to the payment of the plaintiff’s judgment can be followed into the hands of the corporation-defendant and applied to the payment of the plaintiff’s judgment. The officers of the corporation had knowledge of the fraud, and the organization of the corporation was part of the devise by which the property of the judgment debtor was to be divested from him so that it could not be reached and applied to the payment of his just debts. The corporation cannot be said to be a bona fide purchaser of the property for value. Its officers had knowledge of the fraud and were instruments in its perpetration. The organization of the corporation was evidently for the purpose of carrying out the fraudulent scheme. The mere forms adopted for the perpetration of fraud are of little importance. Schemes of fraud may be so cunningly devised as to blind the eye of justice, but they must not escape condemnation and reparation when discovered, and it is the duty of a court of equity to look beneath the surface and when the fraud appears, no matter what forms have been adopted to conceal it, redress the wrong done. It is well settled that a pleading on demurrer is deemed to allege what can be implied from its allegations by reasonable and fair intendment and facts impliedly averred and traversable in the same manner as though directly averred. It is sufficient that the requisite allegation can be fairly gathered from all the averments of the complaint although the statements of them may be argumentative and the complaint be deficient in technical language. Applying this rule the complaint alleges facts from which the inference of fraud is plainly inferred.
    Before Sedgwick, Ch. J., Freedman and Ingraham, JJ.
    
      Decided January 5, 1891.
    Appeal from interlocutory judgment entered on an order overruling a demurrer to the complaint.
    
      M. L. Townsend, for appellant, argued:—
    It is difficult from the complaint to understand whether the pleader intended to bring an action in the nature of a bill of discovery under section 1871 of the Code, or to set aside as fraudulent and void the alleged transfer by Edson H. McEwen to his wife of moneys, and the confession of judgment by Clarence to Grace McEwen, and the sale of the property thereunder and the subsequent transfer of the property to the defendant corporation. The prayer for relief in the'complaint is broad ; but nothing can be predicated of the prayer unless there are facts stated in the complaint justifying the judgment prayed'for. So far as the defendant corporation is concerned, nearly all the averments in the complaint are immaterial and irrelevant. If the action is for a discovery, then there' is no averment that the defendant corporation has any property belonging to the judgment debtor, either by a secret or any other trust or by a fraudulent transfer. If the action is to set aside the transfer of the personal property turned over to the defendant corporation at the time of its organization, then there is no averment either that the transfer was without consideration, or that it was made with intent to hinder, delay or defraud creditors of Edson H. McEwen, much less plaintiff. So far as the action is to set aside the confession of judgment and the sale thereunder, the defendant corporation has nothing to do with it, as that occurred before the organization of the company, and the defendant corporation was not a party to it, nor is there any averment of collusion or fraud on the part of the defendant corporation. The only facts averred in the complaint in any manner affecting the defendant corporation are in paragraphs XVIII. and XIX. Neither in these paragraphs nor elsewhere in the complaint is there any averment, either, (1.) Of any fraud committed by the defendant corporation upon the plaintiff or that the property was transferred without consideration ; or (2.) That the property which was turned over or transferred to said defendant corporation was transferred for the purpose of hindering, delaying or defrauding the creditors of Edson H. McEwen, the judgment debtor; or (3.) That the defendant corporation holds any property in trust for the judgment debtor; or (4.) That there was any collusion by the defendant corporation with the co-defendants. Without any averment of some or all of the above facts, no cause of action is stated against the defendant corporation. The defendant “ C. C. McEwen Co.," is a corporation organized under the laws of the state and had a lawful right to issue its capital stock for the purchase of property and the corporation as such is .in no manner affected by any equitable rights existing in favor of plaintiff against Edson H. McEwen or any' other stockholder of said corporation. If,- as averred in the complaint, the defendant Edson H. McEwen has indirectly through his.-wife or otherwise a large interest in the capital stock of the defendant corporation, the plaintiff has undoubtedly a right in a proper proceeding to reach such interest through •a receiver or otherwise. But we insist that the fact that a judgment debtor is the owner of some of the capital stock of the corporation furnishes no ground for sequestrating the property of the corporation itself. •The corporation is in law a person, and all its stockholders have rights which must be protected. There are other stockholders than the defendant.
    No fraud can be imputed to the corporation nor presumed upon any facts stated in the complaint. Plaintiff’s judgment upon which the action is founded was recovered October 31, 1889. There is no averment when the debt was created upon which the judgment was recovered nor any averment that the judgment debtor was indebted to plaintiff within the ten years within which, it is averred, he transferred property to his wife, nor- that he was indebted to plaintiff in 1886, when the son Clarence commenced business in his own name. Nor is there any averment that the moneys with which Clarence carried on busi-1 ness belonged to his father, Edson. This averment in the complaint about Clarence being a minor, and carrying on business, and confessing a judgment and the issuing an execution thereon and the sale of property thereunder, are immaterial and irrelevant so far as the defendant corporation is concerned. There are no facts stated in the complaint upon which can be predicated any judgment against the defendant corporation and the complaint is insufficient.
    
      Henry C. Andrews, for respondent, argued :
    I. It is admitted by the defendant that the complaint sets out a good cause of action against the defendants Edson, Grace and Clarence C. McEwen, but it is objected that no sufficient cause of action is set forth as against the defendant, the C. C. McEwen Co., because the company was a bona fide purchaser for value from the defendant Grace E. McEwen of the property sought to be reached. The error in this contention is that it is assumed that the company was a bona fide purchaser of the property in question, whereas, as a matter of fact, said company had, through its president, the defendant Clarence C. McEwen, full knowledge of all the transactions which constituted the attempted fraudulent transfer of the property, and which transfer was now sought to be set aside. The defendants Clarence C. McEwen and Grace E. McEwen were the very persons who made the confession of judgment under which the property was sought to be transferred from Clarence to Grace, and which property was shortly after transferred by Grace to the defendant company. It appears that the judgment debtor, Edson H. McEwen, had for the past ten (10) years, and while owing the debt on which judgment was obtained against him, advanced to his wife, Grace E. McEwen, fifty thousand dollars ($50,000) from time to time and at various times, and that Grace had loaned it to defendant Clarence, a minor, who was nominally doing business in his own name but really for his father, Edson. That Clarence being a minor, made a void confession of judgment to his mother, Grace, and under the void judgment so obtained the defendant Grace levied upon, sold and bought in in her own name the property sought to be reached by this action. The company having acquired the property by*the issue of stock and from the action of its officers, the only question to be determined is whether the company was a bona fide purchaser for value and thereby took title to the property so that it can hold it as against the creditors of Edson H. McEwen, who really owns it and whose money was originally used in acquiring it. The defendants Grace and Clarence, of course, had full knowledge of all the proceedings by which the void confession of judgment was made between them, for they were the parties who committed the acts complained of. The complaint alleges that Clarence C. McEwen is the president and Grace the treasurer of the defendant corporation, and that they both were trustees and incorporated the company with two others. The company therefore had knowledge of all the facts that its officers, the president, treasurer and trustees, had. This has long been well-settled law in this state. Fulton Bank v. N. Y. & Sharon Canal Co., 4 Paige, 127; McEwen v. Montgomery Co. Mut. Ins. Co., 5 Hill, 101; N. Y. & N. Haven R. R. Co. v. Schuyler, 34 N. Y. 30; Holden v. N. Y. & Erie Bank, 72 Ib. 286; Village of Port Jervis v. 1st Natl. Bk., 196 Ib. 55; Craige v. Hadley, 99 Ib. 131; Gibson v. Natl. Park Bank of N. Y., 98 lb. 87. The McEwen Company thus having full knowledge, through its officers, of the fraud attempted by its president and treasurer, and that the pretended confession of judgment and sale thereunder gave Grace E. McEwen no title as against the creditors of Edson, the company stood in no better position than its officers Clarence and Grace themselves. The company took the property charged with all the defects in the title of its vendors. This is expressly .held in Rothschild v. Mack, 115 N. Y. 1. At page 8 the court say : “ That an assignee of a party taking property through fraud takes it subject to such defect of title.” And the company is even responsible for the fraud of its officers. Bank of U. S. v. Davis, 2 Hill, 451. Approved in Cragie v. Hadley, 99 N. Y. 131, where at page 134 the court say : “ A corporation may be in a legal sense guilty of a fraud.”
    II. The omission • to characterize the action of the company in taking the property in question does not affect the validity of the complaint. The rule is that the pleadings should state the facts and. not evidence of the facts, nor conclusions. Bogardus v. N. Y. Life Ins. Co., 101 N. Y. 328; Swart v. Boughton, 35 Hun, 281. The complaint states that Clarence and Grace E. Mc-Ewen were guilty of a fraudulent intent in depriving creditors of Edson’s property, by means of the pretended confession of judgment, etc. It further states that Clarence and Grace were president and treasurer of the defendant company, and it follows, as a matter of law from these facts, that the company was chargeable with notice of the fraud, and even with its consequences.
    III. The complaint alleges that the capital stock of the company was issued for the purchase of the property in question, and that the judgment debtor, Edson H. McEwen, has a large interest therein through his wife. This allegation is the equivalent of saying that Grace E. McEwen still holds the entire capital of the defendant company, there being no allegation that she has parted with any of it, and the presumption being, in absence of anything to the contrary, that the matters continue as they were. That being so, it comes within the equitable jurisdiction of this court to restore the wrong that has been perpetrated upon the creditors of Edson H. McEwen, and also upon the incorporation of the pretended transfer to the corporation of property to which the vendor, Grace E. Mc-Ewen, could give no good title. If it shall appear in the evidence that the allegations of the complaint are true, and that Grace E. McEwen had no title to the property, and that she still holds all the stock of the defendant company, the court can decree that the stock be returned to the company, and that the property be applied to the payment of the debts of the judgment debtor.
    IV. The company has paid no consideration for the property that cannot be restored to it. It attempted to acquire the property by the issue of its stock to Grace E. McEwen. It appears that she still holds the whole of this, and the company can, without harm to it, be restored to the position in which it was before the attempted acquisition of the property. In the language of the court of appeals, in Rothschild v. Mack, 115 N. Y. at page 8, the court say: “ An action in the nature of an action of assumpsit lies against one who has obtained money from another by a fraud, and such a claim is a proper subject of set-off in an action brought by the party against whom it exists. An assignee of such party takes a cause of action subject to such defence. This money thus obtained is, in contemplation of law, money received for the use of the party who is defrauded, and the law implies a promise on the part of the person who thus obtains it to return it to the rightful owner.” The McEwen company, therefore, hold the property for the use of the creditors of Edson H. McEwen, and cannot avail themselves of a claim that they are bona ficle purchasers for value.
    V. The complaint showing a good cause of action against the three individual defendants, and the company not being a bona fide purchaser for value, and therefore not taking a good title as against plaintiff, it follows that the plaintiff has a right to proceed against the property in the hands of the defendant corporation, and the corporation is a proper party defendant. It stands in the relation of a trustee to the plaintiff, in regard to the possession of the property, to the extent of plaintiff’s claim. 2 Pomeroy Equity, § 1048, and cases cited.
   By the Court.—Ingraham, J.

The complaint alleges that the defendant, Clarence C. McEwen, a minor, commenced business in his own name about the 1st of October, 1886, for the benefit of his father, Edson H. McEwen, and the said business was conducted with money supplied said Edson H. McEwen through his wife, the defendant, Grace E. McEwen, and otherwise. That said Clarence C. McEwen obtained from plaintiff merchandise on credit and gave promissory notes therefor endorsed by said Edson H. McEwen. That said Clarence C. McEwen, being a minor, confessed judgment to the defendant, Grace E. McEwen, which judgment was void, and that upon such judgment an execution was issued and the property held in the name of said Clarence C. McEwen was levied on and sold by the sheriff of the city and county of New York under said execution and bought in by said Grace E. McEwen.

It is clear that upon these allegations plaintiff, as a.judgment creditor of Edson H. McEwen, who had exhausted his remedy at law, could maintain an action to have the property of the judgment debtor so transferred by this fraudulent device, applied to the payment of his judgment.

The complaint then alleges that the parties to the fraud organized the defendant corporation; that the defendant, Clarence C. McEwen, was the president and Grace E. McEwen was treasurer, and that the property so purchased by said Grace E. McEwen was turned over to said corporation and the capital stock issued therefor. I can see no reason why, under such circumstances, the property which was lawfully applicable to the payment of the plaintiff’s judgment cannot be followed in the hands of the corporation. The officers of the corporation had knowledge of the fraud, and, assuming these allegations are true, it is clear that the organization of the corporation was part of the device by which the property of the judgment debtor was to be divested so that it could not be reached and applied to the payment of his debts. The corporation cannot be said to be a bona fide purchaser of the property for value. Its officers had knowledge of the fraud; in fact were instrumental in perpetuating the fraud, and the organization of the corporation was evidently for the purpose of carrying out the fraudulent scheme. The mere forms adopted for the perpetration of fraud are of little importance. Schemes of fraud may be so cunningly devised as to blind the eye of justice, but they must not escape condemnation and reparation when discovered. Rice v. Manley, 66 N. Y. 87. And it is the duty of a court of equity to look beneath the surface, and when the fraud appears, no matter what forms have been adopted to cover it up, to redress the wrong done.

The rule is now settled “ that a pleading on demurrer is deemed to allege what can be implied from the allegations therein by reasonable and fair intendment and facts impliedly averred and traversable in the same manner as though directly averred. It is sufficient that the requisite allegation can be fairly gathered from all the averments of the complaint although the statement of them may be argumentative and the complaint be deficient in technical language.” Marie v. Garrison, 83 N. Y. 23. And applying this rule I think the complaint alleges facts from which the inference of fraud are plainly implied.

It does not appear that there are any innocent parties who have rights that will be injuriously affected by granting the relief asked for. If it appears that such parties exist the court has ample power by final judgment to protect them.

I think, therefore, that the judgment appealed from was right and that it should be affirmed, with costs.

Sedgwick, Ch. J., and Freedman, J., concurred.