Case Name: FORKER v. BROWN et al.
Court: New York Court of Common Pleas
Jurisdiction: New York
Decision Date: 1894-11-05
Citations: 30 N.Y.S. 827
Docket Number: 
Parties: FORKER v. BROWN et al.
Judges: 
Reporter: West's New York Supplement
Volume: 30
Pages: 827–830

Head Matter:
(10 Misc. Rep. 161.)
FORKER v. BROWN et al.
(Common Pleas of New York City and County, General Term.
November 5, 1894.)
1. Trusts—Action against Constructive Trustees—Pleading.
In an action against directors of a railroad company for an accounting as trustees under a constructive trust, the complaint states a cause of action against defendants where it alleges that they caused the company to issue to them for their personal benefit a large amount of its capital stock at less than its par and market value, from the sale of which defendants derived large profit, and that defendants caused the company to enter into a construction contract, in which defendants were personally interested, and from which they derived a profit.
3. Receivers—Right to Sue—Complaint.
A complaint, in an action by a receiver against the directors of a corporation to charge them as constructive trustees, which merely alleges that plaintiff was appointed receiver of the company, without specifying the nature of the receivership or of the action or proceeding in which plaintiff was appointed, does not, in the absence of averments that there are creditors, or that the company is insolvent, or that the stockholders have repudiated the transactions in question, disclose a cause of action to disaffirm such transactions.
Appeal from equity term.
Action by Howard J. Forker, as receiver of the Rochester & Pittsburgh Railroad Company, against Walsion H. Brown, Frederick A. Brown, and Herbert P. Brown, for an accounting. The complaint was dismissed, and plaintiff appeals. Affirmed.
Argued before DALY, C. J., and BISOHOFF and GIEGERICH, JJ.
William Strauss, for appellant.
Robert G. Ingersoll, Wheeler H. Peckham, and Thomas F. Went-worth, for respondents.

Opinion:
BISOHOFF, J.
No evidence was adduced on the trial, and the complaint was dismissed for insufficiency of the facts alleged to constitute a cause of 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(those referring to the construction contract of the railroad company with Brown, Howard & Co.) were waived or withdrawn in open court; but, since the record does not support the judgment in this respect, we are constrained to predicate our decision of the complaint as it was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, 28 N. E. 593.
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 onecí 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, 52 N. Y. 621. No positive dishonesty of purpose is required to show constructive fraud. 8 Am. & Eng. Enc. Law, p. 635. The facts constituting the fraud must be alleged; that is to say, the complaint must set forth the issuable or ultimate facts of which the claim of fraud is predicated. Goodrich v. Dorman (Com. Pl. N. Y.) 14 N. Y. Supp. 879. Fraud not alleged; cannot be proved. Bank v. White, 6 N. Y. 236; Balley v. Ryder, 10 N. Y. 363. Treating the complaint in this action as one 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 are cured by admissions in the answer (Straus v. Trotter [Com. Pl. N. Y.] 26 N. Y. Supp. 20); 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. Armoux, 76 N. Y. 397; Scofield v. Whitlegge, 49 N. Y. 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 (Cutler v. Wright, 22 N. Y. 472; Marie v. Garrison, 83 N. Y. 14; Kain v. Larkin, 141 N. Y. 144, 36 N. E. 9), 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, $4,000,000 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, $20,000,-000 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 cestuis que trustent therefor. Beach, Mod. Eq. Jur. § 127, 845; 17 Am. & Eng. Enc. Law, p. 91, etc.; Beach v. Miller (Ill. Sup.) 22 N. E. 464, 17 Am. St. Rep. 298, and note; Munson v. Railroad Co., 103 N. Y. 58, 8 N. E. 355; Koehler v. Iron Co., 2 Black, 715, 17 Lawy. Ed. 339, and note; Wardell v. Railroad Co., 103 U. S. 651; McGourkey v. Railway Co., 146 U. S. 536, 13 Sup. Ct. 170, 36 Lawy. Ed. 1079, 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, 31 N. E. 911, and cases there cited. In the case of constructive fraud, however, prising 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 v. Railroad Co., supra.
A vice of the complaint, however, whether it be considered as one for actual or constructive fraud, is that the plaintiff's right to dis-affirm the transactions between the railroad company and the defendants does not appeal*. 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, 5 Johns. Ch. 555, affirmed 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 dis-affirm 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. 403; Graham v. Railroad Co., 102 U. S. 148, 26 Lawy, Ed. 106; Dickinson v. Burrell, L. R. 1 Eq. 337; Williams v. Boyle, 1 Misc. 364, 20 N. Y. Supp. 720; Greenh. Pub. Pol. 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. Insurance Co., 71 N. Y. 396. With* out 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, 26 N. E. 814.
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 wras appointed receiver, is there any intimation. It is only in. proceedings instituted for the purposes of the dissolution of a cor poration 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. Armoux, 76 N. Y. 397; Scofield v. Whitelegge, 49 N. Y. 259; Coffin v. Reynolds, 37 N. Y. 640.
The judgment should be affirmed, with costs. All concur.