Case Name: CASS et al. v. REALTY SECURITIES CO. et al.
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1911-12-29
Citations: 132 N.Y.S. 1074
Docket Number: 
Parties: CASS et al. v. REALTY SECURITIES CO. et al.
Judges: 
Reporter: West's New York Supplement
Volume: 132
Pages: 1074–1084

Head Matter:
CASS et al. v. REALTY SECURITIES CO. et al.
(Supreme Court, Appellate Division, First Department.
December 29, 1911.)
1. Action (§ 50 ) — Joindeb op Causes — Action ^Against Cobpobation and Dibectobs.
Plaintiffs, claiming to own bonds issued by a corporation secured by lien upon real estate, sued both the corporation and its directors, and complained that property on which they had a lien had been sold, and part oí the proceeds used to pay the claims of general creditors, and sought to recover the balance retained by the corporation, and to recover from the directors the money that had been paid out to the general creditors. Held, that there was an improper joinder of causes of action.
[Ed. Note. — For other cases, see Action, Cent. Dig. §§ 511-547; Dec. Dig. § 50. ]
2. Corporations (§ 333 ) — Liability of Directors.
Plaintiffs, claiming to own bonds of a corporation secured by a lien on its property, sued the directors to recover money derived from -the sale of property on which plaintiffs claimed a lien, which money had been paid out to the general creditors of the corporation. Held, that-plaintiffs had no original right to sue the directors, but their right, if any, was derived from the corporation and to be prosecuted as the right of the company, so that, as the company was not harmed by the payment to general creditors, the corporation would have no cause of action against them; there being no allegation that the payment was fraudulent. and the directors of a corporation not being liable for mere errors of judgment, whether the mistake is of law or of fact.
[Ed. Note. — For other cases, see Corporations, Dec. Dig. § 333. ]
3. Pleading (§ 8 ) — Conclusions — Specific Charges obi Fraud.
In a suit against the directors of a corporation, by persons claiming to hold the bonds of the corporation, to recover money paid out'by the directors to general creditors, plaintiffs’ petition charged that the directors entered into a scheme to injure and defraud the corporation and its bondholders, and also contained other general charges of fraud and mismanagement; the only specific charge against the directors being that they paid the money received from property upon which plaintiffs claimed to have a lien for the payment of their bonds to the general creditors of the company instead of reserving it for plaintiffs. Held, that the complaint did not state a cause of action, as the conclusions pleaded were not supported by specifications of facts.
[Ed. Note. — For other cases, see Pleading, Gent. Dig. §§ 12-28%; Dec. Dig. § 8. ]
4. Corporations (§ 60 ) — “Stock” and “Bond” Distinguished.
Securities issued by a corporation, which were denominated “bonds,"’ contained a promise to pay a certain sum at a. fixed time with a stated interest, and further provided that, after the payment of specified dividends on the stock, the holders of the bonds were entitled to a proportionate share in the surplus income, if any. Held, that the securities were in effect a species of preferred stock, as “stock” confers upon the holder a part ownership of the assets with the right to share in the profits of the corporation, and on dissolution in the assets after payment of debts, but without a lien on the property, while a “bond" is an obligation to pay a fixed debt with interest, which debt, if secured, is not wiped out if the security proves insufficient.
[Ed. Note. — For other cases, see Corporations, Dec. Dig, § 60.
For other definitions, see Words and Phrases, vol. 1, pp. 830-834; vol. 8, p. 7592; vol. 7, pp. 6660-6664; vol. 8, p. 7804.]
Laughlin, J., dissenting.
Appeal from Special Term, New York Comity.
Action by Charles W. Cass and others against the Realty Securities Campany and others. From an order overruling separate demurrers to the complaint and granting judgment on the pleading, defendants appeal. Order reversed, and demurrer sustained.
See, also, 144 App. Div. 916, 129 N. Y. Supp. 400.
Argued before INGRAHAM, P. J., and LAUGHLIN, CLARKE, SCOTT, and MILLER, JJ.
Grenville Clark (Elihu Root, Jr., and Alfred C. Intemann, on the brief), for appellants.
Walter H. Bond, for respondents.
For other cases see same topic & § number in Dec." & Am. Digs. 1907 to date, & Rep’r Indexes
For other cases see same topic & § number in Dec. & Am. Digs. 1907 to date, & Rep’r Indexes

Opinion:
SCOTT, J.
The plaintiffs, claiming to own bonds issued by the Realty Securities Company which were secured by a junior lien upon certain real estate, complain that defendants, other than the Title Guarantee & Trust Company, have diverted a part of the net proceeds of the sale of the mortgaged property to the payment of the general creditors of the Securities Company, and threaten so to devote what remains of said net proceeds. Their claim is that their lien attached to the net proceeds, after satisfaction of the prior liens, and that their right thereto was superior to that of the general creditors. The relief sought is that a receiver be appointed of the assets of the Securities Company; that an accountinng be had of the management, application, and disposition by the individual defendants (who are directors of the Securities Company), and particularly in regard to the proceeds of the sale of mortgaged property; that the said defendants be required to pay to the receiver any money or the value of any property which they have wrongfully, illegally, and improperly paid out or transferred or lost or wasted; that the Securities Company and the individual defendants be enjoined from paying out any moneys of the company for any purpose, except under the order of the court; and that the assets of the company be collected and marshaled.
The amount said to be due upon the whole issue of bonds, and which plaintiffs seek to recover, is for unpaid interest and much exceeds in amount the net proceeds of the sale of' the mortgaged property, which is stated at $33,000, of which $20,000 has been paid to general creditors and $13,000 is still in possession of the Securities Company. The plaintiff's contention is that their lien upon the property was transferred and attached to the net proceeds of the sale of the mortgaged premises; that their right thereto was superior to that of the general creditors; and hence that the appropriation of any part of it to the payment of the claims of general creditors was unlawful. The demurrer, besides other grounds, challenges the complaint for general insufficiency and for misjoinder of causes of action. I think, that there can be no doubt that the plaintiffs have attempted to set forth at least two causes of action. If so, the complaint is obnoxious to the demurrer whether either or both have been well pleaded. There is a cause of action against the Securities Company tó recover the $13,000, part of the proceeds of sale of the mortgaged property, still remaining in its hands. To this action the individual directors are not proper parties. There is also a cause of action attempted to be set out against the individual directors to recover moneys or properties said to have been lost, disposed of, or wasted in consequence by their wrong. These two causes of action rest upon wholly different principles and must be sustained by quite different facts. They are incapable of joinder in one complaint. It may also be, as claimed by appellants, that there are two causes of action stated against the company, one legal and one equitable; but it is sufficient for present purposes to treat the complaint as containing only the two causes of action above mentioned.
So far as concerns the individual directors, the complaint does not, in my opinion, state a cause' of action. The directors, as individuals, owed no duty directly to the plaintiffs. The plaintiff's contract was with the Securities Company, and its claim is against that company. Consequently, whatever right it may have to proceed directly against the directors is a derivative one, and must be prosecuted in the right of the company. In other words, they cannot obtain any relief which the company could not obtain if it sued. Plaintiffs have not, I think, qualified to sue the directors because they have not yet exhausted the remedies against the company; but, passing that point, it seems clear that no action will lie in right of the company because it does not appear that the company has suffered from anything which the directors have done. They have simply paid one class of creditors, instead of another. Furthermore, it is not alleged that the individual directors, even if they have paid general creditors with moneys upon which plaintiffs had an equitable lien, have been guilty of anything more'than on honest mistake. It is well settled that directors are not liable for mere errors of judgment, if they act without corrupt intent. People v. Equitable Life Assur. Soc., 124 App. Div. at page 731, 109 N. Y. Supp. 453, and cases there cited. And this is equally true whether the mistake of judgment refers to the law or the facts. It was so held in Seymour v. Spring Forest Cemetery Association, 4 App. Div. 359, 38 N. Y. Supp. 726, affirmed on opinion below 157 N. Y. 697, 51 N. E. 1094, wherein the claim against the directors was quite similar to that embraced in this complaint, to wit, that the directors had failed to apply to the proper purpose certain funds of the association.
I do not overlook the fact that the complaint charges the directors with having entered into a scheme or plot to injure and defraud the Securities Company and its bondholders, and also contains other general charges of fraud and mismanagement. All those, however, are merely the1 conclusions of the pleader, and are of no moment except as supported by specification of wrongful acts, and, when we look for the specification, we find nothing more than an allegation that the directors have paid or caused to be paid a part of the proceeds of the mortgaged property to the general creditors of the company, instead of reserving it for plaintiffs. I am therefore clearly of the opinion that the complaint attempts to set up two causes of action which cannot properly be joined, and that the complaint does not state facts sufficient to constitute a cause of action against the individual defendants.
I am also of the opinion that the securities upon which plaintiff claims, although denominated "bonds," and drawn in that general form, are in effect nothing more than a species of preferred stock. The fact that the instrument is called a "bond" is not determinative of its character, for it is our duty to look to the substance of things, and there are many cases wherein securities denominated bonds have been held to be stock, and vice versa. Burt v. Rattle, 31 Ohio St. 116; Hilson Co. v. State Board of Assessors (N. J. Sup.) 80 Atl. 929. The distinguishing feature of a "bond" is that it is an obligation to pay a fixed sum, with stated interest. It may or may not be secured; but, if it is, and the security proves to be insufficient, the indebtedness is not thereby wiped out. The distinguishing feature of "stock" is that it confers upon the holder a part ownership of the assets and right to participate according to the amount of his stock in the surplus profits of the corporation, and ultimately, on its dissolution, in the assets remaining after the payment of its debts. Burrall v. Bushwick R. Co., 75 N. Y. 211; Plimpton v. Bigelow, 93 N. Y. 592. It is fundamental that a stockholder, whether common or preferred, cannot have a lien on the property of the corporation, even though the stock by its terms is accorded a lien. Cook on Corp. (6th Ed.) § 271; Warren v. King, 108 U. S. 389, 2 Sup. Ct. 789, 27 L. Ed. 769.
The securities upon which plaintiffs claim partake in a marked degree of the distinguishing characteristics of stock. It is true that they contain a promise to pay a. stated sum of money at a fixed time, and to pay meanwhile a stated rate of interest; but these obligations are qualified by what follows: It is provided that, after the payment of certain fixed dividends on the common and preferred stock, the holders of the bonds in suit are "entitled to a proportionate share in the surplus income, if any." So upon the liquidation of the company the holders of the bonds are entitled to share, after certain payments have been made, in the surplus capital of the corporation, and finally the bond will be satisfied, not only upon payment of its face value, but upon payment of a ratable proportion of the assets, whether more or less than the amount called for on its face. All these features are characteristic of stock and quite foreign to the accepted definition of a bond. In short, the attempt seems to have been to devise a form of security which should possess all the attributes of stock, including a right to share ratably in the profits and increase in value, and at the same time to preserve a specific lien upon the company's assets which should be superior to the claims of creditors. This cannot lawfully be done, for the two things are inherently inconsistent. It is said that we can sever the good from the bad, and disregard the feature which assimilates these securities to stock, retaining and affirming their validity as bonds. This, as it seems to me, would be to make a new contract for the parties.
The order overruling the demurrer should be reversed, with $10 costs and disbursements to the appellants, and the demurrer sustained, with $10 costs, with leave to the plaintiffs to amend upon payment within 20 days of costs in this court and the court below.
INGRAHAM, P. J., and CLARKE and MILLER, JJ., concur.