Court Opinion

ID: 5401541
Source: CourtListenerOpinion
Date Created: 2022-01-08 10:44:07.433154+00
Date Added: 2024-06-11T08:30:27.358701
License: Public Domain

Cohn, J.
(dissenting). Plaintiff, Northridge Cooperative Section No. 1, Inc. (hereafter called “ Northridge ”) a co-operative corporation organized under the Co-operative Corporations Law of this State to qualify for mortgage insurance in a co-operative *430housing project under section 213 of the National Housing Act (U. S. Code, tit. 12, § 1715e) seeks in this action to compel an accounting for the acts of misconduct allegedly committed against it by the sponsor-promoters of the project and various persons and corporations claimed to have been associated in conspiracy with them. The motion denied at Special Term was to dismiss the complaint for insufficiency pursuant to rule 106 of the Rules of Civil Practice, that plaintiff has not legal capacity to sue under rule 107, and for additional relief under rules 90, 102, 103. From the order entered upon its denial, this appeal is taken.
Only the first cause of action of the three stated in the complaint need concern us, as the attack on the second cause of action has been withdrawn, and it is agreed that at least at this time the denial of the motion was proper as to the third cause of action.
The first cause of action alleges essentially that Northridge was formed under the promotion and sponsorship of appellants Winston and Muss; that the latter and defendant 32nd Avenue Construction Corporation, their wholly owned subsidiary, organized plaintiff co-operative corporation, applied for and received in its name mortgage insurance under section 213 of the National Housing Act, arranged for the construction of the co-operative housing and sold the stock to the co-operative stockholders. Winston and Muss also formed other corporations, namely: defendants 92nd Street Building Corporation, E. & M. Greenway, Inc., Northridge Management Corporation, and Mika Stiftung Corporation; they were to perform certain other roles in connection with appellants’ sponsorship and promotion of the project. These companies, so it is alleged, were under the complete domination and control of Winston and Muss by selection of directors and officers of their own choosing, and by the designation of dummy stockholders. It is further alleged that the project was conceived under a plan by Winston and Muss, and their various designees, and wholly owned corporations, to draw off improper and excessive charges, fees and profits through various means and devices, and that they effected waste, misappropriation and unlawful diversion to themselves of plaintiff corporation’s assets to the detriment of plaintiff and its present tenant co-operative stockholders.
The prime charges made in the complaint are that Winston and Muss, using defendant E. & M. Greenway, Inc., their wholly owned corporation, caused plaintiff to enter into a ground lease with Greenway upon land at a net annual rental of $9,440 for ninety-nine years which they well knew bore no reasonable *431relation to the true rental value of the land, but was calculated to insure to them for a long period of time, excessive returns upon the amount invested by them in the land acquisition; that Winston and Muss, using the defendant 32nd Avenue Corporation, their own corporation, caused plaintiff to enter into a construction contract with the 32nd Avenue Corporation at a construction cost which they well knew was grossly in excess of the proper cost or charge therefor; that Winston and Muss pursuant to their plan to reap illegal profits for themselves at the expense of plaintiff, caused their wholly owned construction company, 92nd Street Building Corporation, assignee of the construction contract of the 32nd Avenue Corporation, to render defective and inadequate performance under the building contract by using inferior materials and doing the work in an unworkmanlike manner. Annexed to the complaint as Exhibit A is a detailed specification covering seventeen pages of the record setting forth such inferior and defective materials and work. There are other allegations of misappropriation by defendants relating to accounting claims and moneys taken. One in particular deals with a sum in excess of $100,000 paid by a mortgage lending institution to defendants as a premium for the mortgage loan on the property for which plaintiff asks defendants to account.
For the purpose of this motion, the allegations set forth in plaintiff’s complaint must be deemed true. Accepting this premise, the first cause of action is clearly sufficient. It shows waste, and diversion to the alleged defendant conspirators of the assets of plaintiff co-operative corporation and of its owners, the tenant co-operative stockholders.
The sponsor-promoters stand in a fiduciary relationship to plaintiff corporation and owe a fiduciary obligation to plaintiff, where, as alleged here, the sponsors and promoters of the project purportedly acting on behalf of future owners, employ their control of the operation during the period of its promotion and development to obtain illegal and excessive profits for themselves through various siphoning devices. (Elco Shoe Manufacturers v. Sisk, 260 N. Y. 100; Manson v. Curtis, 223 N. Y. 313.) Here there is imposed upon appellants the additional obligation of compliance with the intent and purpose of section 213 of the National Housing Act. Added by amendment in 1950 to title II of the National Housing Act, this section extended the coverage of mortgage insurance under the act to property held by a nonprofit co-operative ownership housing corporation, the permanent occupancy of which is to be restricted to members of *432such corporation. As to the purposes contemplated by Congress, the United States Senate Report No. 1286 in connection with the enactment of section 213 relating to co-operative housing stated (U. S. Code, Cong. Service, 81st Cong., 2d Sess., 1950, pp. 2100, 2102-2103): “it is essential that every possible economy in financing, construction, and maintenance be translated directly into corresponding reductions in the monthly charges which the individual consumer must pay for that housing” and as a further object: “Before any advances could be made, the Administrator would have to determine that the borrower is a bona fide cooperative or nonprofit corporation whose methods of operation are such as will avoid the use of funds for any speculative purpose or the payments of excessive fees, salaries, or charges.”
Within the framework of the Federal housing act it was never intended, so plaintiff argues, that promoters and developers were to make a profit out of the co-operative corporation (plaintiff here) and defendants themselves do not assert such a claim. While the corporate owner of the land may be entitled to a fair profit by its ownership and the corporate builder to a fair builder’s profit, neither the owner of the land nor the builder is privileged to exact exorbitant profits to the ultimate benefit of Winston and Muss whose creatures all of these corporations concededly were. The absolute control of plaintiff by Winston and Muss created a fiduciary obligation for the benefit of the true co-operative stockholders in whose behalf they were acting. The question is not the right of the builder and owner of the land to a profit, but rather the employment of means by defendants Winston and Muss of causing plaintiff to pay excessive prices and creating unfair profits for themselves out of the so-called ‘ ‘ builders profit ”, “ profit on the land ’ ’ and the numerous other devices pleaded in this complaint. Thus the tenant co-operative stockholder is ultimately required to pay an inflated price for his co-operative apartment and consequently higher monthly rental charges. There are no “tenants” as such involved here as was the case in Fieger v. Glen Oaks Vil. (206 Misc. 137) where a project was organized under section 608 of the National Housing Act (U. S. Code, tit. 12, § 1743). Plaintiff here is solely owned by the tenant co-operative stockholders and they, through plaintiff, are the ones who ultimately pay all costs.
Appellants argue that plaintiff is barred from suing because none of the present stockholders of Northridge was a stockholder at the time the challenged agreements were made and the *433improper acts pleaded in the complaint occurred. They rely upon the provisions of section 61 of the General Corporation Law and the case of Capitol Wine & Spirit Corp. v. Pokrass (277 App. Div. 184, affd. 302 N. Y. 734). This objection, it would seem, might properly be interposed by way of defense as we are dealing here only with the sufficiency of the complaint. Moreover, the doctrine of the Capitol Wine case was never intended to apply to an action of the type here involved. This is in no sense a “ purchased grievance ”. Appellants Winston and Muss were not beneficial owners of the stock at any time. They were merely the promoters and sponsors of the project supposedly for the benefit of the true owners — the tenant cooperative stockholders. The ownership and operation of plaintiff by Winston and Muss was no more than a method of convenience to facilitate the promotion and development of the project. This differs materially from the situation in the Capitol Wine case where the corporation sued former beneficial owners upon an alleged grievance which occurred before those suing in the corporation name had purchased their interest. Here the former directors and officers of plaintiff never owned any beneficial interest but were at best presumed to act not for themselves but in behalf of the tenant co-operative stockholders now in control of the corporation.
Plaintiff properly contends that the acts complained of took place after 90% of its present stockholders had acquired their shares by subscription. The project could not become operative until 90% of the stockholders had subscribed and until the 90% group embraced 65% who were to be World War II veterans. Pending that eventuality all agreements and proposals were merely tentative and did not ripen into binding obligations. Thus, the indenture of lease which is basis of plaintiff’s claim of excessiveness in the rental charges did not come into being until some time after 90% of the subscriptions had been obtained, whereas before any subscriptions existed it was merely an agreement to lease. The construction contract upon which plaintiff is suing, likewise did not come into being until considerably later. The objection that none of the stockholders owned stock at the time of the acts complained of, and at the time the agreements were made, would seem to be without merit.
The Special Term, therefore, properly denied the motion to dismiss for alleged legal incapacity to sue.
As a further basis for avoiding fiduciary responsibility to plaintiff, defendants urge that there was disclosure, ratification and consent by the present stockholders sufficient to relieve *434defendants of liability to plaintiff. Reliance is apparently predicated on the two contentions (1) that the subscription agreement, which is in the record and set forth as an exhibit attached to the affidavit of defendant Winston, disclosed all facts and that the subscribers’ signature to that agreement constituted a ratification and consent which bound plaintiff; and (2) that the Federal Housing Administration’s supervision and approval of certain of the acts complained of constitute a bar to plaintiff’s claim for relief. However, they involve elements more appropriately to be considered by way of defense rather than on a motion to dismiss the complaint before answer. There is likewise the factual issue which it seems should preclude its consideration on this motion. Furthermore, there appears to be an affirmative basis for denying the motion to dismiss the complaint on these grounds. It is difficult to understand how an agreement not yet in existence can be consented to and ratified. The agreement of lease and the construction contract could not ripen into effective and binding agreements until 90% of the stock had been subscribed. Yet it is the language of the subscription agreement upon which defendants rely in claiming ratification and consent.
Moreover, it cannot reasonably be assumed that the potential stockholder — a small co-operative owner or a World War II veteran, acting under the pressure of a housing shortage to obtain living accommodations — was in a position to pass upon and evaluate the complex details of this multi-million dollar building venture even if he were shown the documents referred to in the agreement. In any event, this perfunctory showing cannot meet the requirement of law regarding disclosure which must be established in order to bind a beneficiary against his fiduciary’s fraud irrespective of its extent or nature. (Craighead v. Peterson, 72 N. Y. 279, 285; Trustees of Town of Easthampton v. Bowman, 136 N. Y. 521, 526.)
The contention that the Federal Housing Administrator’s supervision and approval bars plaintiff’s claim is likewise without merit. Such supervision and approval as there may have been was directed solely to the insurance of a mortgage on the project. This limited function may not be magnified to encompass all of plaintiff’s rights irrespective of the extent to which appellants overreached plaintiff through improper employment of their position of trust. No review is here sought of an act of the Administrator of the National Housing Act, which this court jurisdictionally would be barred from reviewing, as was the case in Wasservogel v. Meyerowitz (300 N. Y. 125). The acts of the *435Federal Housing Administration in insuring the mortgage are in noway challenged in this complaint. There can accordingly be no basis for appellants’ contention that any action by the Federal Housing Administration may bar plaintiff’s rights against the promoters and developers of this project.
While voiding of the land lease is of course impracticable, if plaintiff is entitled to relief, equity will conform its decree to the established facts and if due to the allegedly improper acts of appellants, the stockholders of plaintiff are burdened with unfair and unreasonable leases, such provisions can be rescinded, and appropriate adjustments may be made. (Sage v. Culver, 147 N. Y. 241.)
The Special Term was right in holding that ‘ ‘ all promoters, nominees, stockholders, subscriber stockholders and qualifying stockholders, were agents for the beneficial owners, i.e., the tenant-co-operator-stockholders and the plaintiff corporation.” The party qualified to bring suit and to call appellants to account in equity for their alleged waste of assets and their alleged improper diversion of profits to themselves is the directly aggrieved plaintiff corporation, wholly owned by the tenant co-operative stockholders.
The order appealed from should be affirmed.
Peck, P. J., and Rabin, J., concur with Callahan, J.; Cohn, J., dissents and votes to affirm, in opinion.
Order modified, with $20 costs and disbursements to the appellants, and the motion granted to the extent indicated in the opinion herein. Settle order on notice.- [See post, p. 1078.]