Court Opinion

ID: 5225579
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:44:03.589354+00
Date Added: 2024-06-11T08:27:34.994584
License: Public Domain

Spring, J. (dissenting) :
Patrick H. Costello, a resident of Camden, in the county of Oneida, died December 17, 1890, leaving him surviving his widow, a daughter and two sons, Alfred and John H., the latter of whom had three sons, the eldest, the plaintiff in this action, then about eight years of age.
The decedent left a last will and testament, in which he provided for his widow and daughter, and also for other relatives by general bequests, and disposed of one-half of his residuary estate to Alfred Costello by the tenth provision and the other half by the eleventh item, which reads as follows:
"I give, devise and bequeath the other one-half of the rest, . residue and remainder of all my "property, both real and personal, to my said son Alfred Costello and tó Patrick O. Costello, of blew York City, to be held in trust by them and to pay over all the rents, issues and profits thereof to my son John H. *291Costello during Ms natural life and at Ms death, I give, devise and bequeath the said one-half of my estate to his children him surviving, share and share alike; and until such children respectively arrive at the age of 21 years, I order and direct that the share of each of the said cMldren be held in trust by the said Alfred Costello and Patrick 0. Costello, and the income thereof used for his or her education, maintenance and. support. But, I order and direct that such part of the portion of my estate hereby left in trust for John H. Costello, and in case of his death, in trust for his children, until they reach the age of 21 years, as shall be in the business of P. C. Costello & Company or in the business of Alfred Costello & Company at the time of my death shall he allowed to remain by the trustees hereby appointed, so long as the said trustees think fit; and m case such portion he lost or diminished through losses sustained by either said firm of P. C. Costello & Company or Alfred Costello & Company, I hereby reheve the said trustees from all liability therefor.”
The will was admitted to probate in the Surrogate’s Court of Oneida county December 29, 1890, and letters testamentary issued to the'executors named in the will.
The testator had long been engaged in the business of tanning hides and dealing m leather, and his property consisted chiefly in tM’ee copartnerships owning tracts of hemlock timber and other property devoted to the business of tanning leather. In the firm of P. & P. Costello, whose only assets were obligations of the other companies, he owned a one-half interest; in P. C. Costello & Co. eighteen and three-fourths per cent interest, and in Alfred Costello & Co. one-fourth mterest. The other members of these firms were Patrick C, Costello, who had been associated m the tanning business with the testator contmuously since 1848. (and who died after the trial of this action), and the two sons of the testator.
An inventory was made as of January 31, 1891, by Patrick C. and Alfred Costello and filed in the office of the surrogate, which showed total assets of the testator amounting to $433,014.30, and which was arrived at by taking the estimates appearing on the books of the firms mentioned. After the payment of the legacies and the transfer of one-half of the *292residuary estate to Alfred Costello, the remaining one-half, comprising the trust estate, was kept in the two firms of P. 0. Costello & Co. and Alfred Costello & Co. in compliance with the directions of the testator, the other firm having gone out of business, or been absorbed by these two interests. John H. Costello, the life beneficiary, was apparently permitted to withdraw money from the firm from time to time as he desired and in excess of the income derived from the trust fund or from his own share.
In March, 1892, Patrick 0. and Alfred Costello filed in the Surrogate’s Court' an account as executors. They had withdrawn funds from the firms to pay debts, expenses and legacies; otherwise the interests remained intact in the copartnerships. A decree was entered on this accounting determining the balance of the assets of the testator at the sum of $399,910.18, subject to deductions for commissions, expenses, etc. This property, consisting not of money or securities of a precise determinate value, was fluctuating in its value and the surrogate in the 32d finding stated the amount “will vary from the value of such interests stated in the 31st finding according as the sums realized from the different items of the assets of such firms, stated in the inventory herein, differ from the valuation thereof contained in the inventory. And the surrogate in his decree permitted the trustees to keep the trust property in the' copartnership business, as authorized by the will, and directed the executors to transfer the trust estate, to the trustees, which was done. This transfer involved no change in the character of the assets. They still constituted an aliquot part of the firms’ assets, subject to increase or decrease in value as the general firm property fluctuated in value. In fact the legal title was held by the surviving partners, and it was to some extent _a fiction in transferring the trust estate formally to the trustees, for after the payment of the debts and legacies title pasSed to them ipso facto, only subject to the control of the surviving partners for the purpose of closing out the business. The executors were copartners, so that they continued the booking along without change, recognizing in the withdrawal of assets or income, that the interests of the testator now belonged one-half to Alfred Oos*293tello and the other half to the trustees who were expected to pay the income to John H. Costello during his life.
In 1892 and 18.93 there was much industrial expansion and the centralizing of companies into trusts or combinations. In the early part of 1893 an agreement was entered into by many constituent leather companies with a view to organizing into a trust, which soon culminated into a syndicate comprising more than seventy-five per cent of the sole leather tanneries in the United States, and known as the United States Leather Company. The two Costello firms executed this agreement January 25, 1893, and they were among the early projectors of the enterprise. Patrick C. Costello, a veteran in the leather business, investigated carefully the plan devised and believed in its efficiency, and John H. Costello after investigation was satisfied of the propriety of entering into this combination. Within three months the organization was completed and Patrick C. Costello was- on the directorate and a member of the executive committee, the real managing board of the corporation. He, therefore, was familiar with its affairs, had an insight into its business and believed in its financial standing.
By the agreement of January twenty-fifth two Costello firms agreed to assign to the corporation, when formed, all the property and estate, including the good will of the firms, excepting the mineral rights of Alfred Costello & Co. and the merchandise in stock in the store. In this agreement no distinction was recognized between the trust estate and that held by the other copartners. The entire interest was expected to pass to the syndicate, if formed. It is clear the trustees at that time had no expectation of selling the property to John H. Costello or of treating it any differently than the other property held by the copartners. The required signatures to the agreement of consolidation were obtained February 25, 1893, and the corporation created out of these component companies, managed by sagacious men of business, in May elected its directors. The United States Leather Company was a Hew Jersey corporation, and a statute in the State of Pennsylvania prohibited a foreign corporation owning real property in that State in excess of §10,000,000, which was less than the value of *294that expected to he owned by it. The Penn Tanning Company was organized to take the title, a mere subsidiary holding company, and stock was issued by it in an amount equal to that issued by the real organization, and each holder of the Penn Company stock exchanged it, dollar for dollar face value, for the stock of the leather company. Some point seems to be made that the agreement of January 25, 1893, was not carried out because of this intermediary body created to meet an emergency, not to prevent performance of the original agreement, but to facilitate the execution to the letter of the plan devised by the founders of the enterprise.
On April twenty-fifth the three Costellos, designating themselves as copartners in the two companies, entered into an agreement with the Penn Tanning Company in order that the combination scheme might be carried into operation. A definite plan had been.adopted to ascertain the value of the property of each of the companies forming the trust. For instance, tanneries were to be rated at their vat or tanning capacity, and bark lands by the cord. Preferred stock at eight per cent was to be issued for two-thirds of the ascertained value of the property when made over to the . corporation, and a like amount of common stock for the good will of the company making the transfer.
The value of the propert^^Khe Alfred Costello firm was appraised at $2,795,252.75, a^upjy subsequent correction it was ascertained to be $2,476,000, and of the firm of Patrick 0. Costello & Co. $673,800, and upon the transfers being made 24,766 shares of preferred stock of the corporation were issued and delivered, representing the first company; and 6,378 shares of like stock, all of the par value of $100 a share, for the second company, and the same number of shares of common stock were issued.
Instead of carrying out the agreement of January twenty-fifth, as was intended, and permitting the trust estate to be the recipient of its allotment of these shares, a sale was made of all the interest of the trustees in the firm properties to John II. Costello' for its value as found subsequently in the decree of the Surrogate’s Court in 1897, to wit, $174,708.26, and which was approximately the value according to the decree of 1892. *295His promissory note was taken for that sum, secured by the shares of stock of the United States Leather Company representing his own interest and that for the trust stock as they were issued from time to time.
The reason for this shift is that the attorneys for the Costellos, and they were acting in like capacity for the trustees as well, advised the adoption of this plan. The investment of trust funds in shares of stock of a new corporation like the United States Leather Company is hot to be advised or commended, and yet the real motive for the advice given seems to be that the trustees would be “personally liable to John’s children for the value of the trust interest sold, for all profits realized from these stocks, and for all losses which result from them.”
Let us see if the course pursued avoided the objections to the investment directly in the United States Leather Company stock. The property of John H. Costello was invested in the two Costello companies, and he was a debtor to them by reason of excessive withdrawal of assets. The value of his promissory notes, therefore, depended upon the value of the stock of the United States Leather Company. If that organization proved to be a success the note would be paid; otherwise not. In other words, if a profitable venture'John H. reaped the benefit; if a failure, his children might suffer the loss. The sale of this large trust estate to John H. Costello, one of the copartners, secured by these shares of stock, was no more to be justified than the sale of the property to the United States Leather Company. If the note was not paid the trustees would still be personally responsible to the ultimate owners of the trust estate.
It is obvious , that the Costellos had the utmost faith in the new enterprise, and their judgment was fully justified. At the time of the judicial settlement in 1891, John H. had paid on the note $125,615. The record does not disclose what the copartners or John H. received for the stock which they sold. The court found: “I find that at no time. during any of the proceedings before the surrogate was any evidence produced informing him of the amount for which the property of the various firms was inventoried and sold to the United *296States Leather Company, nor informing him as to the amount of stock of said Company which the various partners received, nor.of sales of said stock made by the partners, nor of the actual proceeds received.”
There is a schedule of sales in evidence, of both the preferred and common stock from June, 1894, to 1908. The preferred was sold on the first date at sixty-four dollars and fifty cents, a share, and the common at 'nine dollars. The sales of the former tended -upward generally until in 1908 they reached one hundred and twenty dollars per share. There was more of less fluctation in price, and during a brief depression in business they sold at forty-one dollars and fifty cents a share, but only for a short time. The common stock varied from six dollars to twenty dollars a share. It is clear that John H. Cos-tello received for the trust property which was sold to him far in excess of the amount he paid for the same.
There is no controversy over the material facts in this action, and we may assume to be true every important fact which the respondents urge to uphold the judgment.
It is claimed that the value of the property as stated in the inventory and in the decree of 1892 was correctly given. We will so assume. Assets not in money are always liable to change in actual value. The trustees are not held liable for any diminution in value which may ensue and not attributable to their remissness. On the other hand, whatever they receive from the property intrusted to them must be accounted, for. This property was interlinked with that owned by the copartners. It was very important for them to sell their interests. Patrick 0. testified that the leather business was depressed and that he appreciated the wisdom of the combination Which was made. They could not become members of the new organization unless all the property of the two firms was transferred to it. They agreed to do that at the outset. In order, as they apprehended, to relieve themselves from personal responsibility to the children of John and still accomplish the plan so important to them, the makeshift was advised. Trustees cannot juggle with trust property in that way. Their own personal interests and those in the fiduciary relation may have come in collision. The latter could not be put aside merely because in *297dollars and cents they were of less value. The fairness of the inventory is not impeached. The vice in the conduct was not in making the inventory or fixing the value on paper in their first account filed. The misconduct is found in their manipulation and exchange of the trust property so that they were the gainers in effectuating their scheme of organization and enabling John, the other executor and copartner, to reap large financial returns, and all at the expense of' the minor children, whose interests they were bound to safeguard.
The respondents lost sight of the controlling fact that whatever was the value of these tangible assets at the time of the inventory and when transferred to John, they belonged eventually to these three children. An unexpected situation arose which imparted added worth to all this Costello property. These copartners Immediately became active. The enterprise may have been speculative. It is of no importance, for the trust property was sold to the company in fulfillment of the plan for which'the trustees were sponsors and they ought to account for exactly what was realized from the sales of the shares of stock representing the trust estate.
I do not deem it important to consider the question of book values or of the swollen estimates of the property to be taken over by the United States Leather Company. However, on the latter subject, in 1895 Patrick C. Costello, as a member of the executive committee of the new organization and after he had ample opportunity to investigate its business condition, joined with the other members of the committee in a circular to the stockholders which contained this statement: “ The company paid one dollar of its Preferred stock at par, for.each one dollar in value acquired of real and personal property connected with the tanneries and at a valuation mutually agreed upon as fairly representing its cash worth. The basis upon which the various kinds of property were acquired, to wit: Leather, Hides, raw and in process, Bark, Bark Lands, Tanneries, Sawmills, Railroads, etc., is on record at the Hew York Stock Exchange, and was furnished at the time of listing the Company’s Bonds.”
It is also to be noted that simultaneously with the accomplishment of the syndicate plan the agreement to sell the trust *298estate to John was entered into. The highest good faith is required of persons acting as trustees. Certain management of an estate committed to them in one instance may clearly denote integrity of purpose, and in another may not measure .up to that standard. • If the estate has heen managed to aid the trustees in an undertaking in which they are personally interested their conduct will be subjected to rigid scrutiny. In this case I think the facts show that these trustees in their anxiety to accomplish the sale of all the Costello properties overlooked their obligation to these infants.
In 1897 the trustees had a judicial settlement of their account in the Surrogate’s Court of Oneida county, and a decree was entered adjusting their account and confirming the sale of the property to John and determining the amount of the trust estate at the selling price to him. It is claimed (1) that this decree is a bar to the maintenance of this action, and (2) that the only remedy available to these beneficiaries, who are now of age, is to open that decree.
At the time the account was rendered the trustees knew the effect of the consolidation of the constituent companies in the United States Leather Company. It had proved to be a success, and its stock was appreciating in value. Patrick 0. and Alfred Costello were sworn on the hearing and in substance testified that the trust estate was inventoried at its fair value, and that the sum of “ $174,708.26 was a full and fair value, under all the circumstances, for the trust property which was transferred.” On the. basis of the inventory and former accounting the trustees had converted the assets into cash for all they were worth. These two trustees .carefully abstained from giving the details of the transaction which terminated in the. organization of the United States Leather Company and the Penn Tanning Company and the facts connected with the transfer of all the Costello property, and there was no disclosure of the amount John H. Costello received for the shares of stock delivered to him. Had these facts been presented the special guardian would, unless recreant to his duty, have investigated ‘and ascertained the real purpose of the sale to John H., and the surrogate would not have approved of the action of these trustees. Objections were filed to the account as to three small items, *299aggregating $198.88, and “generally ‘to all items diminishing the trust estate, but raised no issue as to the right of the trustees to limit the credit to the trust estate to $174,708.26.’ ” The special guardian made no examination of the witnesses produced, and filed a written report containing this statement: “ As evidence was produced before the court concerning the amount and condition of the trust funds in which said infants are interested, also evidence as to the reasons why the executors and trustees should resign their trust, I do not deem it my duty to report thereon.”
The care and extraordinary caution to a finical degree, which have hedged about the transactions connected with the management, apparently affected the special guardian. The decree was entered ratifying the sale and permitting the trustees to resign, which they did, and the defendant Symonds was appointed substituted trustee of this fund.
It is well settled, as a general proposition, that the decree of the Surrogate’s Court is conclusive on all the parties to the proceeding. (Matter of Denton v. Sanford, 103 N. Y. 607; Weintraub v. Siegel, 133 App. Div. 677, 680.) And it is also true that where two courts possess concurrent jurisdiction, the one first entertaining the action or proceeding retains authority over it. The rule is not an inflexible one in its application to Surrogate’s Court, which is of limited power. (Matter of Schnabel, 202 N. Y. 134.)
And if there are special circumstances calling for the intervention of a court of equity it will assume jurisdiction in order that its broader powers maybe exercised to adjust the rights of the parties. (Douglass v. Ferris, 138 N. Y. 192; Douglass v. Low, 36 Hun, 497; Dobson v. Pearce, 12 N. Y. 156; Sanders v. Soutter, 126 id. 193.)
In Leet v. Leet (12 App. Div. 11), which was in effect an action to set aside a decree of the Surrogate’s Court, the rule was thus stated (at p. 15): “Unquestionably the relief thus sought was attainable by the plaintiff in a court of equity, provided he was able to sustain his allegations by competent proof, for it is well established by abundant authority that where a judgment or decree is obtained either by imposition upon the court which grants it, or by reason of any fraud or deceit practiced by the *300party who obtains it, the same will be declared mill and void in a proper action brought for that purpose.”
There was no trial in the Surrogate’s Court on the judicial settlement. Of their own volition the accounting parties gave proof showing the sale to John H. Costello, and that the property, was sold at its fair value, but the opinion was founded on the inventory and former decree. The trustees suppressed, or omitted to disclose, the transactions as they occurred. They practiced an imposition on the court, and may have misled or deceived the special guardian. Their good faith is impugned, and these questions are peculiarly within the province of a court of equity when the conduct of the trustees is up for review.
Again, John H. Costello is a party defendant, and the complaint seeks to set aside the sale to him. That is the gist of the action. The decree of the Surrogate’s Court would be ineffective against him. It only would be operative against the trustees, as the fund had been segregated and transferred to them in pursuance of the decree of 1892, so that they held it independent of any authority which the executors originally had over it. John H. Costello never acted even as executor, and did not join in either accounting. If the decree were opened and a trial had in the Surrogate’s Court, and the trustees compelled to account for the amount received for the stock delivered to John H., representing the trust estate, an action might still be necessary in order to adjust the rights of the parties. The trustees never had these shares of stock. Their liability, if any, is because of their fraud or mismanagement of the trust estate. John H. may have been privy to all these transactions, but his liability, if any, is on other grounds, and a judgment against him may be essential if plaintiff maintains his action. . .
I think, therefore, the plaintiff is not precluded by the decree of the Surrogate’s Court, and his remedy is not confined to' an 'application to open that decree, but the present action is well laid.
The judgment should be reversed.