Court Opinion

ID: 5713723
Source: CourtListenerOpinion
Date Created: 2022-01-12 15:57:43.846416+00
Date Added: 2024-06-11T08:40:34.786976
License: Public Domain

Botein, P. J.
On a prior appeal, Northridge Cooperative Section No. 1 v. 32nd Ave. Constr. Corp. (2 N Y 2d 514, affg. 286 App. Div. 422), certain paragraphs of the complaint were stricken, and leave to replead was granted as to the balance. Although the transactions complained of in the amended complaint appear to differ substantially from the allegations stricken in the earlier pleading, defendants-appellants contend that the repleaded allegations, though possibly obscured by pleading verbiage, are in fact essentially the same as those previously stricken. They moved unsuccessfully at Special Term, under rule 103 of the Rules of Civil Practice to strike specified paragraphs as sham, and for certain other relief. The issue on this appeal is limited only to the propriety of that part of Special Term’s ruling which denied the motion to strike such paragraphs contained in the first cause of action. Therefore, it is only that cause of action with which we are concerned.
The first cause of action, seeking an accounting from the defendants for the breach of fiduciary obligations in the waste and diversion of corporate assets and opportunities and the profits obtained thereby, alleges in essence the following:
Plaintiff, a co-operative corporation, was organized in December, 1950 by individual defendants Winston and Muss to take over ownership of a garden apartment project to be constructed in Jackson Heights, Queens. Prior to the election by the tenant stockholders of their first board of directors and officers, Winston and Muss exercised working control over the plaintiff corporation. Subsequent to December 23, 1950, the time the first tenant stockholders subscribed for their stock, when the defendants owed a fiduciary obligation to the plaintiff corporation, they put into execution a plan, scheme, and conspiracy to obtain excessive prices and fees
(a) by diverting to themselves a premium in excess of $100,000 for placing a mortgage loan which was in fact a legitimate corporate opportunity for plaintiff corporation;
(b) by causing plaintiff, on or about May 2, 1951, to enter into a construction agreement with the 92nd Street Building Córp., which was wholly owned and controlled by Winston and Muss, under terms and conditions which were unconscionable and *247unfair to plaintiff, and at charges substantially in excess of the true value of the work done;
(c) by causing the 92nd Street Building Corp. to carry out its construction work in an inferior and unworkmanlike manner, using defective materials, to insure greater profits for themselves ; and
(d) by causing plaintiff to agree to certain changes in the plans and specifications during the course of construction to cheapen costs without any corresponding reduction in price to plaintiff.
Plaintiff prays for a discovery of all of the transactions entered into after the subscription by the first tenant stockholders for their stock and for an accounting of all profits made and moneys received in breach of the fiduciary obligations of the defendants.
Defendants’ main thrust is directed at the allegations seeking damages resulting from the excessive charges under the construction contract of May 2, 1951, and this is the only issue meriting discussion.
The allegations of the earlier complaint, which were stricken without leave to replead on the prior appeal, were quite different from the ones challenged now. The original complaint referred to the excessive profits derived by the promoters from the ground lease between the plaintiff and one of defendants’ creature corporations, and from a building contract dated December 8, 1950 between plaintiff and 32nd Avenue Construction Corp., another of their creatures. Both these agreements were entered into before any tenants subscribed to shares of plaintiff’s stock, were expressly referred to in the tenants’ subscription agreements, and were explicitly ratified by them. Accordingly, this court held that since there was no fiduciary obligation running to future tenants, the project would be a legitimate profit-making venture for the promoters until such time as the tenants subscribed for their apartments. At the time that the promoters alone held plaintiff’s stock, self-dealing would be proper (Northridge Coop. Section No. 1 v. 32nd Ave. Constr. Corp., 286 App. Div. 422, 427). There would, of course, be a duty of full disclosure of such prior transactions to those to whom apartments were sold (id., p. 427). Since there appeared to have been full disclosure to the subscribers and they had agreed to ratify those terms, the tenants were held without standing to attack such transactions. The Court of Appeals, in affirming, emphasized that the allegations finally stricken related solely to transactions prior to the date of the first stock subscriptions by tenant owners (2 N Y 2d 514, 525, 528).
*248In the pleading presently before the court, complaint is not made of the original construction agreement which had been expressly ratified by the tenant owners, but, among other things, of a new and superseding construction agreement which was entered into on May 2, 1951 between plaintiff and the 92nd Street Building Corp. No claim is now predicated upon the ground lease recited in the earlier complaint. It is the contention of defendants-appellants that since their right to realize profits under the original construction contract was unassailable, they would retain that right to profits for the duration of the transaction governed by the original contract; and that in any event the new contract of May 2, 1951 is basically the same as the one between plaintiff and 32nd Avenue Construction Corp. of December 8, 1950 which was ratified by the tenant stockholders and held immune to attack on the prior appeal.
They maintain that the last-mentioned contract was amended on January 12, 1951 to comply with certain technical requirements of the Department of Housing and Buildings, that it was assigned by 32nd Avenue Construction Corp. to defendants Winston, Muss and Mika Stiftung (Corporation) on April 7, 1951, and reassigned to the 92nd Street Building Corp. on April 26, 1951, and that the subsequent, allegedly ‘ ‘ new ’ ’ construction contract was essentially the same as the amended contract with 32nd Avenue Construction Corp.
The consent and confirmation given by shareholders in their subscription agreements to other previously executed agreements which are incorporated by reference must of necessity be narrowly construed. Such consent cannot be dichotomized to preserve to the promoters the profits realizable upon those provisions in the original contract that were preserved in the later one, while at the same time imposing upon the promoters fiduciary responsibilities only as to the added provisions of the subsequent contract. As is the case with sureties, liberties may not be taken with assent previously given (Becker v. Faber, 280 N. Y. 146; Antisdel v. Williamson, 165 N. Y. 372). The promoters whose profits under the original contract were unquestionably sealed off against tenant stockholder challenge, may have exposed those profits to fiduciary accounting by entering into the new agreement. A change or variation in the agreement expressing the underlying transaction might vitiate the original consent and effect a release from binding obligations arising thereunder unless consent is obtained anew. Ratification is the expression of acquiescence in past transactions (King v. MacKellar, 109 N. Y. 215, 223; Stevens v. Melcher, 80 Hun 514; 75 C. J. S., Ratification, pp. 608-610). It presupposes *249knowledge of past transactions, actual or constructive, not prescience.
Hence, when subsequent transactions were contracted for and concluded, after tenant shareholders had come into the picture, fiduciary obligation did exist. Defendants were legally entitled to retain without attack whatever profits accrued from contracts entered into when there were no other stockholders, provided such contracts were disclosed to and ratified by the shareholders. If, however, such ratified contracts never came to fruition, but were replaced by others, a different result might follow. Differences in the date of the agreement, the contract price, or the entity with which it is made might have resulted in the withholding of assent when such changes were proposed. After other shareholders have appeared on the scene, the traditional fiduciary obligations of disclosure and accountability for secret profits of which other shareholders had no notice come into play (Northridge Coop. Section No. 1 v. 32nd Ave. Constr. Corp., 2 N Y 2d 514, 527, supra; 1 Fletcher, Cyclopedia Corporations, §§ 192, 193).
‘ ‘ Sham matter is that which is good in form but false in fact, and which is demonstratively false as to leave no reasonable doubt in the mind of the court as to its falsity ” (Santasiero v. Briggs, 278 App. Div. 15, 21). Defendants contend in essence that the paragraphs of the complaint under review are sham because they are repetitious of the matter previously stricken from the original complaint. Whatever other theories defendants may reserve for trial, the argument that these paragraphs are sham can be sustained only upon a clear showing that the construction contract sued upon is the same as the earlier one accepted and confirmed by the subscribers; and under which this court has earlier upheld defendants’ right to realize profits.
The allegations challenged cannot be held sham at this stage of the litigation. The May 2, 1951 contract provided for a moderate reduction in total price, but also required the contractor to build a substantially smaller number of apartments. The later agreement was with a different construction company, perhaps less experienced, competent and reliable than the original contractor. The considerable interval in time between the two contracts, with consequent fluctuation in cost of labor and material, may have reflected on the fairness of the contract price under subsequent market conditions.
A resolution of the factual questions involved cannot be made adequately upon a motion of this nature. The order appealed from should be affirmed, upon the law and the facts, ydtb costs to plaintiff-respondent.