Case ID: ny-st-rep_62/html/0480-01.html
Source: Caselaw Access Project
Author: {"author": "Bischoff, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Howard J. Forker, as Receiver, etc., App’lt, v. Walston H. Brown et al., Resp’ts.
    
      (New York Common Pleas, General Term,
    
    
      Filed November 5, 1894.)
    
    1. Fraud—Kinds.
    Fraud in law, is of two two kinds, actual and constructive.
    2. Same—Emotion.
    Fraud is never predicated of a mere "emotion of mind.”
    3. Pleadings—Fraud.
    The complaint must set forth the issuable or ultimate facts of which the claim of fraud is predicated.
    4. Same.
    Denials merely, though of matter-which a properly framed complaint ought to have affirmatively alleged, do not supply the omission of such matter.
    
      5. Corporations—Directors.
    Directors of a corporation are fiduciaries, and subject to the rule that persons, standing in such a relation, will not be suffered to retain a personal profit out of transactions respecting the subject matter of the trust.
    6. Same.
    The election of the cestui que trust, to avoid the contract, cannot be defeated by showing that the contract was in every respect fair and reasonable, and prompted by none but honest motives on the part of the trustee.
    7. Same—Receiver.
    In the absence of an allegation that there are creditors, or the company is insolvent, the receiver cannot insist that he may avoid, or dis-affirm, the acts of the company, done in fraud of the rights of creditors or others interested in the trust estate.
    8. Same—Disaffirmance.
    The right to disaffirm a contract or conveyance, on the ground of fraud, is inseparable from the equitable title to the property affected thereby.
    9. Same—Title.'
    It is only in proceedings, instituted for the purposes of the dissolution of a corporation, that title to the corporate property is transferred to the receiver.
    10. Appeal—Dismissal of complaint.
    Where the plaintiff does not ask for leave to amend, and the facts alleged in the complaint do not set forth a cause of action, the granting of a motion to dismiss the complaint is not a matter of discretion.
    Appeal from a judgment which directed the dismissal of the complaint for insufficiency of the facts alleged to constitute a cause of action.
    ■ Action against the directors of a corporation for an accounting as trustees under a constructive trust.
    
      Charles F. Fstwiclc ( William Strauss, of counsel), for app’lt; Robert Q-. Ingersoll, Wheeler II. Peclcham and Thomas F. Went-worth, for resp’ts.
   Bischoff, J.

No evidence was adduced on the trial, and the complaint was dismissed for insufficiency of the facts alleged to constitute a cause for action. The judgment recites that certain allegations of the complaint, those referring to the construction contract of the railroad company with Brown, Howard & Co., were waived or withdrawn in open court, but since the record does not support the judgment in this respect-, we are constrained to predicate our decision of the complaint as it was presented to us upon this appeal. Kley v. Healy, 127 N. Y. 555; 40 St. Rep. 215.

5. Fraud, in law, is of two kinds, actual and constructive. The former arises from deception practiced by means of the misrepresentation or concealment of a material fact; the latter, from a rule of public policy, or the confidential or fiduciary relation which one of the parties affected by the fraud sustained towards the other. It is a constituent of actual fraud that the party alleged to have been defrauded was deceived. Lefler v. Field et al., 52 N. Y. 621. No positive dishonesty of purpose is required to show constructive fraud. Am. & Eng. Ency. of Law, vol. 8, p. 635.

The facts constituting the fraud must be alleged, that is to sayr the complaint must set forth the issuable or ultimate facts of which the claim of fraud is predicated. Goodrich v. Dorman, 38 St. Rep. 198. Fraud not alleged cannot be proved. Chautauqua Co. Bk. v. White, 6 N. Y. 236; Bailey v. Ryder et al., 10 id. 363.

Treating the complaint in this action asoné predicated of actual fraud, it is incontestably true that the facts alleged are inadequate to a cause of action. No misrepresentation, no concealment, and no deception is charged or inferable from the facts alleged. True, the complaint says that the defendants “ conspired and confederated together” to defraud the railroad company; but this, without allegations to the effect that the company was deceived, is palpably insufficient. Fraud is never predicable of a mere “ emotion of mind; ” to be actionable there must have been a wrong committed and an injury sustained. People v. Cook, 8 N. Y. 67.

Omissions in the complaint arc cured by admissions in the answer; Strauss v. Trotter, 55 St. Rep. 489; but denials merely, although of matter which a properly framed complaint ought to. have affirmatively alleged, do not supply the omission of such matter. Tooker v. Arnoux, 76 N. Y. 397; Scofield v. Whitelegge, 49 id. 259.

Assuming the plaintiff, in his capacity as receiver, to have succeeded to all the rights and property of the railroad company, and viewing the complaint as one grounded in constructive fraud, its allegations are sufficient. The facts alleged, and the facts inferable from such as are alleged, all of which must, for the purposes of the motion to dismiss the complaint, be taken as admitted, Culler v. Wright, 22 N. Y. 472; Marie v. Garrison, 83 id. 14; Kain v. Larkin, 141 N. Y. 144; 56 St. Rep. 675, are, in substance, that the plaintiff was duly appointed, and has duly qualified, as receiver of the “ Rochester & Pittsburgh Railroad Company,” a corporation organized under the laws of the state of New York, in September, 1881; that the plaintiff was, by order of the court, permitted to prosecute this action; that the defendants, while severally directors of the railroad company, and acting, or in duty bound to act, as such, caused the railroad company to issue to them, for their personal benefit, four million dollars of its capital stock in exchange for an equal amount of the capital stock of the “Rochester & Pittsburgh Coal & Iron Company,” which the defendants owned as individuals, and which was of lesser value than the railroad stock; that again, while the defendants were such directors, acting, or in duty bound to act, as such, they caused the railroad company to issue to them, for their personal benefit, twenty million dollars of its capital stock at less than its par and market values, 'from the sale of which stock the defendants have derived large profit; and lastly, that while such directors, acting, or in duty bound to act, as such, they caused the railroad company to enter into a contract with Brown, Howard & Co., for the construction of its way, and the extensions thereof, in which contract, and its performance, the defendants were at the time personally interested, and from which they derived a considerable profit.

Directors of corporations are fiduciaries and subject to the rule that persons standing in such a relation will not be suffered to retain a personal profit out of transactions respecting the subject matter of the trust, but will be compelled to account to their cestui que trust therefor. Beach on Mod. Eq. Jur., §§ 127, 845 ; Am. & Eng. Ency. of Law, vol. 17, pp. 91, etc.; Beach v. Miller, 17 Am. St. Rep. 298 and note; Munson et al. v. Syracuse, G. & C. R. R. Co. et al., 103 N. Y. 59; 3 St. Rep. 31; Koehler v. Hubby, 67 N. S. 339, Lawyers’ co-op. ed. and note; Wardell v. U. P. R. R. Co., 103 U. S. 509, L. co-op. ed.; McGourkey, Trustee, etc. v. The T. & Cent. Ry. Co., 146 U. S. 1079, L. co-op. ed., and note.

As in other cases of fraud, whether actual or constructive, the contract of a corporation with one or more of its directors is not void, but voidable merely at the election of the corporation, or others affected by the fraud. Skinner v. Smith, 134 N. Y, 240; 47 St. Rep. 528, and cases there cited. In the case of constructive fraud, however, arising from the fiduciary relation of the person charged therewith, the cestui que trust is not required to show that the contract was iniquitously conceived by the fiduciary. Neither can the election of the cestui que trust to avoid the contract, be defeated by showing that the contract was in every respect fair and reasonable and prompted by none but honest motives on the part of the fiduciary. Munson et al. v. The S., G. & C. R. R. Co. et al., supra.

A vice of the cdmplaint, however, whether it be considered as one for actual, or constructive fraud, is that the plaintiff’s right to disaffirm the transactions between the railroad company and the defendants, does not appear. It is not alleged that there are creditors of the railroad company, or that the company is insolvent. Hence the plaintiff cannot insist that he may avoid, or disaffirm, the acts of the company, done in fraud of the rights of creditors or others interested in the trust estate, pursuant to the authority conferred upon receivers and trustees generally, by chapter 314 of the Laws of 1858. Only such as are affected by the fraud may complain thereof. French v. Shotwell, 4 Johns. Ch. 555; aff’d, 20 Johns. 668. Yet it does not appear that either the railroad company, or its stockholders, have repudiated • the transactions with the defendants. Until such appears no cause of action is extant. Furthermore, the right to disaffirm a contract, or conveyance, on the ground of fraud, is inseparable from the equitable title to the property affected thereby. McMahon v. Allen, 35 N. Y. 402; Graham v. La Crosse & Ry. Co., 102 U. S. 107, L. ed.; Dickinson v. Durrell, L. R., 1 Eq. 337; Williams v. Boyle, 1 Misc. R. 364; 48 St. Rep. 713; Greenwood on Public Policy, 432, etc. But the complaint does not apprise us that the plaintiff has succeeded to the railroad company’s equitable title to the moneys sought to be recovered in this action. No transfer or assignment from the company is alleged. So far as appears the plaintiff, as receiver, is no more than the custodian of its property, without title, legal or equitable, thereto. Keeney v. Home Ins. Co., 71 N. Y. 396. Without statutory provision to that effect no transfer of title follows by operation of law from the appointment of a receiver of the property of a corporation. Decker v. Gardner, 124 N. Y. 335; 36 St. Rep. 267.

The complaint informs us that the plaintiff was “ appointed the-receiver of the property of the said railroad company, as also- its-books, papers, stock, bonds, rights, claims, franchises, contracts, things in action and effects of every kind and nature, with, the-usual power and duties of receiver;” but neither of the nature of the' plaintiff’s receivership, nor of the nature of the action or proceeding in which he was appointed receiver, is there any intimation. It is only in proceedings instituted for the purposes- of the dissolution of a corporation that the title to- the corporate property is transferred to the receiver, and the corporate existence- is merged in the receivership, but that is only by force of the- statute for such cases made and provided. Decker v. Gardner, supra.. It is not to be inferred, therefore, that the plaintiff has any title-whatever to the moneys sought to be recovered in this action, and without such title he is without right to disaffirm the contracts-under which the defendants are alleged to claim the right to. the possession of those moneys.

Where the plaintiff does not ask for leave to amend, and the facts alleged in the complaint do not set forth a cause of action, the granting of a motion to dismiss the complaint is not a matter of discretion. It is error to deny it. Tooker v. Arnoux, 76; N. Y. 397; Scofield v. Whitelegge, 49 id. 259; Coffin v. Reynolds, 3.7 id. 640.

The judgment should be affirmed, with costs.

All concur.