Court Opinion

ID: 5329515
Source: CourtListenerOpinion
Date Created: 2022-01-08 05:07:57.832577+00
Date Added: 2024-06-11T08:29:25.755885
License: Public Domain

Finch, P. J.
(dissenting). The order appealed from is right and should be affirmed.
So abhorrent to a court of equity is unfaithfulness in trustees that the court should remove successor trustees nominated and appointed by, and whose sole authority is derived from, the unfaithful trustees.
The fact that plaintiffs are not holders of bonds in all issues, or parties to all the deposit agreements, is not a bar to equitable relief where there has been a commingling by the trustees of the moneys received from all the properties and there are insufficient assets to pay bondholders in full.
Defendants appeal from an order wherein the court at Special Term, on behalf of the plaintiffs and others similarly situated, has appointed three persons as trustees in substitution for another group of trustees, parties defendant, constituting a so-called “ Independent Bondholders’ Committee,” purporting to have been elected by their predecessors, trustees who resigned because of demonstrated unfaithfulness to their trust. Further, the order appealed from enjoins the original fiduciaries and their alleged successors in trust, constituting said “ Independent Bondholders’ Committee,” from acting as committees or members of committees with respect to bonds of some seventy-eight issues deposited with the former committees on and prior to lebruary 25, 1933, from taking action ' under the original deposit agreements as to such bonds, and from disposing of money collected from the property securing the payment *15of said bonds without the order of the court. Further, the order appealed from appoints said three persons successor trustees as receivers to hold in custody said bonds deposited prior to February 25, 1933, and empowers them to take such steps and proceedings as they may deem necessary for the protection of the owners of certificates of deposit representing such deposited bonds. In effect this constitutes such trustees and receivers a committee for the protection of the owners of the bonds in place of the unfaithful trustees who have resigned and those whom said unfaithful trustees have elected as their successors/
The plaintiffs are purchasers and holders of seventeen different issues of bonds and certificates of deposit sold to them by S. W. Straus & Co. by fraudulent misrepresentations. These bonds are in default and many of them have been deposited with dummy committees, consisting of employees, officers and executives of Straus & Co., organized, controlled and directed by the fraudulent seller of the bonds, for the alleged protection of the parties defrauded by them. The action is a representative one. The complaint sets forth a conspiracy to defraud on the part of Straus & Co. on a very large scale, whereby Straus & Co. occupying a fiduciary relation with respect to plaintiffs and other purchasers of Straus bonds, by reason of being trustees of the mortgages securing the bonds in the case of eighty-five per cent of the issues, and organizing, through its officers and employees, committees for the so-called protection of the defaulted bonds, was enabled to market by fraudulent representations about $200,000,000 worth of bonds to about 190,000 bondholders, manage the properties for its own profit after the default, carry on the business of insuring them, and control the reorganization of the defaulted bond issue, in their own interest and to the detriment of the defaulted bondholders, as evidenced by plans called “ reorganization plans,” which have been denounced by the courts as unjust.
The complaint further challenges the abdication of the trust obligations by means of a consent decree and the attempted selection of successor trustees for the so-called protection of bondholders by the very parties and their principal who had originally defrauded the bondholders.
That the members of the various protective committees were all executives and employees of Straus & Co., selected and controlled by Straus & Co., and were acting as mere dummies for that concern, is not disputed. The so-called reorganization agreements attempted to be perpetrated by these dummy committees have been characterized as unfair and unjust in court decisions, one of which has been affirmed by this court. The gross frauds practiced by Straus & *16Co. in unloading worthless and misrepresented bonds upon the public are set forth in detail, in testimony of officers and employees of Straus & Co., including the defendants Roberts and S. J. T. Straus, in testimony taken by the Attorney-General of this State and set forth in the printed record made a part of the motion papers of the plaintiffs and submitted to this court. In that case the Appellate Division, Second Department, while modifying the order appealed from, was unanimous in condemning these frauds. (People v. Straus & Co., Inc., 236 App. Div. 796.)
To characterize this record as showing fraud does not do justice to the brazen fraud and hypocrisy well nigh unequalled in the records of this court. One example out of many will suffice. Compare advertising. “ Every bond we sell is simply a part of an old-fashioned first mortgage on land and building. * * * The relations between a bond house and its clients are confidential and their business is of high repute, built upon a basis of fair dealing and of constant watchfulness for their customers’ security;” that Straus & Co. “ should be consulted like a doctor or lawyer in financial matters and investors should give Straus their confidence * * that S. W. Straus gives “ close supervision over the property securing the bonds, seeing that taxes are paid promptly, repairs made, and they check the soundness of the security through periodic reports of earnings,” with the admission of Samuel J. Tilden Straus, as follows: “ Q. But you know that there were hundreds of thousands of dollars of bonds sold by Straus & Co. where the borrowers were in default? A. Yes. Q. And you characterize that as a rotten piece of business, don’t you? A. Yes.”
In connection with the above, consider the organization of the aopellant Straus Securities Company, Incorporated, three days after the injunction against Straus & Co. under the Martin Act, “ to deal in real estate bonds and other investment securities;” and the statement of this appellant that “ the principal executives and sales representatives formerly associated with S. W. Straus & Co., Incorporated, will be associated with the new company.” Not only is the fraud here exposed subversive of the existence of fair business dealings, but it threatens to become permanent tending to the destruction of all credit, trust and decencies upon which the business life is built.
To a very large extent this proceeding merely involves the application of well-established legal principles to a state of facts which in large measure has already been adjudicated and apparently cannot be changed upon a trial of the action. The plenary power of the Supreme Court over trusts and fiduciaries includes the power to remove an unfaithful fiduciary and a successor named by such *17unfaithful fiduciary, and to appoint in place thereof an independent substituted trustee, and this without regard for and without reflection upon the personal qualifications of the trustee named by the unfaithful fiduciary. The members of protective committees for bondholders are fiduciaries. Unfaithful fiduciaries about to be removed have never been considered a competent body to appoint a successor fiduciary, even though the respectability and standing of the successor fiduciary are not in question.
To the application of the above well-established legal principles there is interposed a number of technical objections, the chief of which, and the only one which would appear entitled to serious consideration, is that there are involved seventy-eight deposit agreements as to sixty-three of which none of the plaintiffs is a party. It is urged, therefore, that, as to the latter, plaintiffs have no capacity to sue or to apply for the removal of the trustees thereby appointed.
This argument is more superficial than real. Straus & Co. handled all these issues as one enterprise and under these agreements they had the specific right to use the moneys from any property upon any other property or in connection with any other property and all the moneys from all the properties were commingled. Since, through the entire course of dealings, Straus & Co. has treated these properties as interrelated, it is not possible for them now to seek to hold them as separate properties in order to escape from the conclusion to which their entire course of dealings up to this time has led. The complaint clearly states a cause of action with respect to the specific issues of which the plaintiffs are bondholders, and the court, having thus jurisdiction of the action, in order to do complete equity, must bring in all the transactions that constitute the substance of the underlying conspiracy pursuant to which all the funds from the various issues were commingled and administered for the benefit of the trustees. Where, as in the case at bar, there is a limited fund available for distribution, composed of funds drawn from all issues of bonds, obviously the rights of all the bondholders can be determined only in a representative action in equity. In such an action substance is given consideration over form, and the fact that plaintiffs individually may not be entitled technically to all the relief demanded, is not a bar to any relief. The final relief to be accorded may be molded to conform to the facts developed upon the trial. Here the decisive considerations are the facts that the defendant trustees have been nominated by their unworthy predecessors and are in control of property common to all the bond issues, and have been appointed to act under and carry out the pro*18visions of the original deposit agreements. These agreements have been judicially determined to be unfair and unjust to the bondholders, and a part of the aforesaid alleged conspiracy. In such case a court of equity has inherent power to grant relief. As already noted, the original committees were organized and controlled by the Straus trustees who have been judicially found to be unfaithful to their trust and to have personally profited at the expense of the cestuis, and their interest was adverse through their various money making corporations at the expense of the bondholders. When the exposure became such as to make it certain that no court would tolerate their continuance in office, they sought to keep their hand in by taking illegal advantage of a provision which they had inserted in the deposit agreements providing for the filling of vacancies where any member of the committees should resign, which obviously applied to resignations in the ordinary course and not wholesale, one by one, to permit a whole committee to resign because of the charge of unfaithfulness, and appoint its successor. The compelling reason why a court will not permit the defendants to act as trustees is that a court will not allow crooked trustees whose interests are adverse, to have a hand in naming the successor trustees, let alone, as in this case, being their sole source of authority.
It follows that the order appealed from should be affirmed.
Order reversed, with twenty dollars costs and disbursements, and motion denied.