Court Opinion

ID: 3631457
Source: CourtListenerOpinion
Date Created: 2016-07-06 00:10:51.694354+00
Date Added: 2024-06-11T14:07:40.943526
License: Public Domain

This is an appeal by the plaintiff from a nonunanimous judgment of the Appellate Division affirming an order at Special Term dismissing the complaint on motion on the ground that the action was barred by the six-year Statute of Limitations. If under the allegations of the amended complaint plaintiff is not entitled to recover any amount in excess of losses recoverable in an action at law, then the decision below is correct and must be affirmed (Dunlop's Sons, Inc., v. Spurr, 285 N.Y. 333), but if in equity the plaintiff is entitled to recover gains in excess of the correlated losses recoverable at law, then the ten-year Statute of Limitations applies. (Goldstein v. Tri-ContinentalCorp., 282 N.Y. 21; Potter v. Walker, 276 N.Y. 15;Hastings v. Byllesby  Co. [Haystone], 293 N.Y. 404, 412.)
According to the allegations, the plaintiff corporation (hereinafter sometimes called "Equity") succeeded by merger to all the rights, privileges, powers and franchises and all property, real, personal and mixed, of Interstate Equities Corporation (hereinafter called "Interstate") and Chain  General Equities (hereinafter called "Chain  General"). Before the merger the defendant, Groves, entered into a contract with Chain General to underwrite 500,000 shares of its common stock at a price of $2 per share, provided he could obtain 51% of the total number of such shares outstanding and entitled to vote. He then made arrangements and executed a contract with an investment banking corporation to purchase from said corporation 542,517 shares of the common stock of Interstate at a price of $1.50 per share, or a total of $813,775.50, agreeing to pay the purchase price in installments, and also entered into a contract to purchase from an individual 100,000 shares of said common stock at the same price, on which he made a down payment of $5,000 and paid the balance of $145,000 thereafter. By virtue of these agreements he obtained voting control of Interstate and control of its board of directors, intending, at the time he purchased or agreed to purchase the 642,517 shares of Interstate, to resell the same to Chain  General at a profit to himself immediately upon obtaining complete control of the board of directors of Chain  General through the election of his nominees and agents by its board of directors. He was elected to the board of directors of Chain  General on October 16, 1931, *Page 18 
and continued to act as such director until the year 1933, with the exception of a brief interval of a few moments, hereafter referred to, and between September 23, 1931, and November 4, 1931, by reason of his underwriting contract with Chain 
General, was able to and did elect his nominees and agents as a majority of the board of Chain  General, thus acquiring complete control and domination of said board. On or about November 4, 1931, the defendant, through his ownership of a majority of the voting stock of Interstate and his domination and control of a majority of its directors, fraudulently caused Interstate to make him a loan of $1,000,000, with which money he fulfilled his underwriting agreement with Chain  General and took down and purchased 467,938 shares of its common stock, which amounted to more than a majority of the voting stock of that corporation issued and outstanding, thereby obtaining complete domination and control of the board of directors of Chain  General by causing his nominees and agents to be elected to its board, who together with his nominees and agents previously elected constituted a large majority of the board. Thereupon he fraudulently caused Chain  General to purchase from him his 642,517 shares of the common stock of Interstate for the sum of $1,325,034, having purchased these shares within the preceding month for the sum of $963,775.50, thus realizing a profit to himself of $361,258.50.
At the meeting of the board of directors of Chain  General at which this purchase from the defendant was authorized and approved, and immediately prior to said authorization and approval, defendant by means of his domination and control of said board of directors caused said board to accept his resignation as a director of Chain  General, and immediately after the board, acting under his domination, had authorized and approved the purchase from himself of his Interstate stock, the defendant, at the same meeting, by means of his control and domination caused the board to re-elect him a director of Chain 
General, whereupon he took his seat as before and participated in the meeting.
The plaintiff Equity brings this suit in the right of Chain 
General, its constituent company, and alleges that all of these acts of the defendant constituted a plan and scheme on his part to defraud Chain  General and to make large, illegal and secret *Page 19 
profits by the improper and illegal use of the money of said corporation and at the expense of said corporation, all in violation of his fiduciary duty to said corporation and its stockholders and in oppression of said corporation.
If the complaint stopped there, the action would be barred by the rule in the Dunlop case (supra), no basis for recovery in excess of the secret profit of $361,258.50 obtained by the defendant from Chain  General being affirmatively shown. But according to additional allegations of the complaint the defendant used this illicit profit, acquired in breach of his fiduciary duties to Chain  General, to acquire a large block of the common stock of Yosemite Holding Corporation (hereinafter called "Yosemite"), another investment company, and in or about December, 1932, together with certain other persons, caused Equity to be organized and certain of its stock to be exchanged for all or substantially all of the common stock of Yosemite which he had theretofore purchased with the funds procured, in violation of his fiduciary obligations, from Chain  General. He has, it is alleged, since sold the stock in the plaintiff corporation thus acquired at a profit.
Upon these allegations Equity contends that the defendant is accountable not merely for the profit of $361,258.50 realized upon the sale of his Interstate stock to Chain  General, but, as a constructive trustee of this money, title to which was received by him in violation of his fiduciary duties to Chain  General, that these funds thus impressed with a constructive trust may be traced into the stock of Equity acquired in exchange for the Yosemite stock purchased by him with trust funds, and, further, that the Equity shares having been sold at a profit, the plaintiff is entitled to an accounting for whatever was received by the defendant upon the sale of these shares.
The briefs for the appellant concede that the Interstate loan to the defendant was repaid with interest, but the fraudulent character of this loan, subsequently repaid, is in no sense essential to the plaintiff's right to an accounting in equity and is unimportant in this lawsuit except insofar as it shows the unconscionable means by which the defendant contrived to procure control and domination of Chain  General and thus, in violation of fiduciary obligations, to sell to it the common stock of Interstate which he had purchased to resell to it at a profit. *Page 20 
The right to follow the funds thus acquired springs from the fiduciary nature of the defendant's relation to these moneys acquired in breach of his fiduciary duties. (Holmes v.Gilman, 138 N.Y. 369, 377; In re Hallett's Estate, L.R., 13 Ch. D. 696.) Equitable rights and remedies arise whenever a fiduciary relationship is abused, and if by such abuse the legal title to property is acquired equity intervenes to declare the wrongdoers trustees. The trust with its incidents is the foundation of the equitable remedy. (Falk v. Hoffman,233 N.Y. 199, 201; Lightfoot v. Davis, 198 N.Y. 261; Newton v.Porter et al., 69 N.Y. 133.)
Although a director is not a trustee in a strict sense, his relation to his corporation is fiduciary and he is accountable as a constructive trustee for property obtained from the corporation in derogation of his duties as a director. (Bosworth v.Allen, 168 N.Y. 157; Lightfoot v. Davis, supra, at p. 274;Asphalt Construction Co. v. Bouker, 150 App. Div. 691, affd.210 N.Y. 643; Parker v. McKenna, 10 Ch. 96.) The complaint plainly states that Groves bought the stock with intention to resell to the corporation. Having so bought, he held the stock in trust for Chain  General. He could not rid himself of this trust by negotiating a sale, at a profit to himself of $361,258.50, to the corporation which he dominated and to which he is accountable as a constructive trustee. (N.Y. Trust Co. v. American RealtyCo., 244 N.Y. 209, 219.) He has not made distribution or accounted for anything.
In equity the device of a constructive trust is not confined in its use to strictly trust relationships. It is applied, with all its incidents, where by virtue of a fiduciary relationship one has obtained property in derogation of his duties as partner (Holmes v. Gilman, supra,) joint adventurer (Meinhard v.Salmon, 249 N.Y. 458), agent (Beatty v. GuggenheimExploration Co., 225 N.Y. 380), bailee (In re Hallett's Estate,supra,) attorney (Matter of Will of O'Hara, 95 N.Y. 403), parent (Wood v. Rabe et al., 96 N.Y. 414), child (Harrington v. Schiller, 231 N.Y. 278), or wife (Ahrens v.Jones, 169 N.Y. 555). As Chief Judge CARDOZO so well said inMeinhard v. Salmon (supra, p. 467), "Equity refuses to confine within the bounds of classified transactions its precept of a loyalty that is undivided and unselfish. * * * A constructive trust is then the remedial *Page 21 
device through which preference of self is made subordinate to loyalty to others. * * * Many and varied are its phases and occasions."
In a leading English case (In re Hallett's Estate, supra), decided in 1879, Sir GEORGE JESSEL said: "* * * it must now be considered settled that there is no distinction, and never was a distinction, between a person occupying one fiduciary position or another fiduciary position as to the right of the beneficial owner to follow the trust fund, and that those cases which have been cited at Law so far from establishing a distinction, establish the contrary; * * *."
In Holmes v. Gilman (supra), we held that, although partners do not in the strict sense of the term occupy the position of trustees towards each other and towards the firm funds, yet the position is one of a fiduciary nature, calling for the maintenance and exercise of the greatest good faith between them, and that such a relationship authorizes the same remedy on behalf of the wronged partner as would exist against a trustee, so called, on behalf of a cestui que trust, citing JESSEL, M.R., In re Hallett's Estate (supra). In that case it was stated the partner could not embezzle partnership funds, but we held that the right to follow the funds sprang from the fiduciary nature of his relation to them. There is neither reason nor authority to support the contention that the same remedy of tracing trust funds applicable to trusts in the strict sense does not apply to property the title to which has been obtained through the breach of fiduciary obligations by a corporation officer, director and controlling stockholder.
Upon the allegations of the amended complaint the funds received from the treasury of Chain  General in excess of the price paid for the stock by Groves are clearly traceable into the shares of Yosemite for the purchase of which the funds were used and into the Equity shares for which the Yosemite shares were exchanged. It appearing that the defendant has disposed of the Equity shares, the question arises whether the plaintiff is now entitled upon an accounting in equity to the proceeds of the sale of such shares. We need not pause to examine the question of rescission. (N.Y. Trust Co. v. American Realty Co., supra;Harrison v. Egan, 270 N.Y. 387.) That the plaintiff has an election to recover upon such an *Page 22 
accounting the amount so received by the defendant, or to claim its actual loss, whichever is the greater, is clear. (Harrison
v. Egan, supra; see, also, 3 Scott on Trusts, § 508, p. 2433.)
Plaintiff having the right to recover the amount for which defendant sold the Equity shares, and it being alleged that the defendant made profits upon the sale of these shares, the plaintiff, if it supports its allegations by proof, will be entitled to recover upon the accounting an amount in excess of the amount recoverable at law. Accordingly, the ten-year Statute of Limitations applies.
The judgments should be reversed and the motion to dismiss the complaint denied, with costs in all courts.
LOUGHRAN, LEWIS and DESMOND, JJ., concur with LEHMAN, Ch. J.; THACHER, J., dissents in opinion in which CONWAY, J., concurs.
Judgment affirmed.