Hyde Park Terrace Co. v. Jackson Bros. Realty Co.

Majority

p. 699

Hyde Park Terrace Company, Respondent, v. Jackson Brothers Realty Company and Others, Appellants.

Second Department,

April 10, 1914.

Headnote

Mortgage — fraud — mortgage given by promoters of corporation to obtain secret profits — suit to cancel fraudulent mortgage — equity will not enable wrongdoers to reap benefit of fraud — fraudulent certificate of estoppel.

Suit to set aside a mortgage on the ground that it was given to the promoters of an incorporated realty company, without the knowledge of subscribers and stockholders, to enable them to reap secret profits. It appeared that subscribers to the stock of the plaintiff corporation to the extent of $67,000 were privy to the fraud, while subscribers holding stock to the value of $48,000 relied upon fraudulent representations, or were defrauded by concealment of facts as to the mortgage in question. The mortgage was assigned for value without knowledge on the part'of the assignees that it was subject to any defenses.

Held, that as a cancellation of the mortgage held by the assignees, who are bona fide purchasers for value, would have the effect of enabling the persons who committed the fraud, or were privy to it, to reap the benefit thereof, equity would not make such decree.

Held further, that although each subscriber to the stock of the plaintiff who had been defrauded might have his individual action for damages, an equitable result may be obtained in the action already brought, by ascertaining the persons who were defrauded and directing that they have their remedy through the medium of the plaintiff corporation;

That the bond and mortgage be adjudged canceled unless the damages of those defrauded be paid, in which latter case the moneys should be held by the plaintiff as trustee for distribution to the persons defrauded.

Held further, that as the defendant assignees, having been promised a certificate of estoppel by the persons perpetrating the fraud, advanced moneys for the assignment merely on the faith of the promise, and had not seen the certificate and being in ignorance of its terms, and the certificate itself, like the mortgage, having been obtained by fraud, it was no defense.

p. 700

Appeal "by the defendants, Jackson Brothers Realty Company and others, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Nassau on the 4th day of March, 1913, upon the decision of the court after a trial at the Nassau Special Term.

John H. Corwin [David B. Ogden with him on the brief], for the appellants.

Abram I. Elkus [Frederic E. Mygatt with him on the brief], for the respondent.

In the year 1907 persons subscribed an agreement “with each and all the others to purchase such fractional interests ” in land on Long Island, N. Y., “ as are indicated opposite our names respectively and do agree to pay therefor at the rate of $2,900 per acre $404,900 upon the following terms: ” cash August 1, 1907, $62,500; upon taking title $62,500, balance on mortgages. The total subscriptions by seventeen persons were $125,000, of which only $48,000 was paid in by twelve persons and delivered to Jackson Brothers Realty Company. In October, 1907, a corporation was formed under the laws of this State by two of the persons who did pay in subscriptions to the amount of $10,000, and four subscribers to the amount of $67,000, who did not "pay, for the general purpose of dealing in land and chattels, under the name of the Hyde Park Terrace Company, with authorized capital of $150,000, of which $125,000 was issued to the incorporators and distributed to the subscribers. The deed of the land was made to the corporation under date of October 5, 1907, subject to five mortgages, of which one was for $141,515.90, stated to be held by “Jackson Brothers Realty Company,” which in February, 1910, was assigned to Libbey & Dingley of Maine, who took it for value and without' knowledge that it was subject to any defenses, and who thereafter were paid, without protest, the interest thereon, until this action was brought to cancel it upon the ground that it represented a secret profit to the Jackson Company, and that it was fraudulent .as to the subscribers who made cash payments or as to some of them to whom, as now asserted, there had been representation by Jackson,

p. 701

president of the Jackson Company, or persons in privity with him, that the land would be bought of farmers without any advantage in which all subscribers did not share. The trial court found “That not all the subscribers to the capital stock of the Hyde Park Terrace Company were deceived and defrauded in the manner alleged in the complaint.” The representations were somewhat diverse and did not affect similarly all the paying subscribers. Indeed, it is urged that some of them received or relied upon fraudulent representations, or would be entitled to relief by reason of fraudulent concealment of facts which they were entitled to know. That is a matter for further inquiry at the trial court. For present purposes it must be assumed that some purchasers were wronged. The question then is, what remedy shall be afforded ? Subscribers in the sum of $67,000 were privy to the fraud, and subscribers in the sum of not more than $48,000 were damaged thereby. It has been adjudged that the assignees of the mortgage surrender $141,515.90 to the corporation for the benefit of the holders of the $67,000 interest as well as the $48,000 interest. Hence, the principal of the mortgage to the extent of $82,448.30 would inure to the benefit of the tort feasors, while $59,067.50 thereof would inure to paying subscribers — a result that is abhorrent to every conception of equity. When it is considered that the subscription paper provides for interests that should make the subscribers tenants in common without suggestion of a corporation; that it contemplated a purchase at a sum that included the amount of the mortgage; that the conveyance was made to the corporation subject to the mortgage; that the assignees of the mortgage purchased it, relying upon Jackson’s statement that an estoppel certificate was forthcoming, and that one was prepared under the- seal of the corporation and delivered, whatever effect it may have, it is most inequitable to enable the corporation to avail itself of a cause of action which some of the subscribers may have for fraud and deceit, and by virtue of it collect $82,448.30 for those who committed the fraud or were privy to it—the very persons against whom the cause of action exists. There is something abnormal in a judgment that allows the persons who did the fraudulent thing to share in

p. 702

the recovery for their guilt. The plaintiff, in any case, could take only such cause of action as the subscribers had and so far as they had it. Indeed, each subscriber, having a cause of action for the deceit, may recover his damages in his own behalf, and if the wrongdoers were financially responsible exact justice would be done to leave the remedy to the subscribers as each may show himself entitled, and it would be correspondingly unjust to permit the persons perpetrating the fraud to recover or share in the compensation for their own wrong. The case is peculiar in the. fact that the wrongdoers themselves would not suffer as in Midwood Park Co. v. Baker ( 128 N. Y. Supp. 954 ; 144 App. Div. 939 ; 207 N. Y. 675 ), but they would recover the larger part of the securities which they sold to innocent purchasers. However, in this action the same end can be reached by ascertaining the persons who signed the subscription paper and paid their subscriptions, relying upon false and fraudulent representations alleged in the complaint, as made by the Jackson Realty Company, any of its officers or any person in privity with them, and by directing that such innocent subscribers have their remedy through the medium of the plaintiff. The interlocutory judgment should direct the taking of further proofs as to the status and equities of the subscribers, and the proportion that such aggregate subscriptions fraudulently obtained bear to the whole sum subscribed, $125,000. It should then be adjudged that such damages should be paid to the plaintiff within six months after the entry of final judgment herein, subject to such extension of time as the court should make upon due notice, and that such bond and mortgage should be adjudged to be canceled of record and surrendered to the plaintiff unless such payment be made, to be evidenced by amendment of the judgment at the foot of the decree. Upon receiving such money plaintiff should be declared to hold it as trustee for distribution to the persons herein found to have been defrauded, or their representatives, or the assignees of their claims or causes of action therefor, less such allowance as the court may grant the plaintiff for the expenses of this action, and that, pending such payment, the enforcement of such bond and mortgage should be enjoined.

p. 703

The estoppel certificate of March 1, 1910, was obtained by fraud, but although appellants Libhey and Dingley did not know of this fraud they made their advances without having seen the certificate and in ignorance of its terms. Mr. Jackson informed Mr. Libhey that he had such a certificate, and in effect promised that it should be furnished with the mortgage. But the advance was on the faith of Mr. Jackson’s promise, not in reliance on the certificate, so as to raise a good estoppel. (Payne v. Burnham, 62 N. Y. 69 ; Assets Realization Co. v. Clark, 205 id. 105, 109 .)

We, therefore, modify finding of fact Ho. XXI to read: Defendants Libhey and Dingley did not make their advances and take the ■ assignment of this mortgage relying on the representations of the estoppel certificate. They were informed of such a certificate, but it was not shown to or delivered to them at or before the time they made advances to purchase this mortgage.

The interlocutory judgment should be modified in accordance with this opinion, and as so modified affirmed, without costs in this court.

Jenks, P.- J., Burr, Thomas, Carr and Putnam, JJ., concurred.

Interlocutory judgment modified on reargument in accordance with opinion, and as so modified affirmed, without costs in this court.

Cases cited

Midwood Park Co. v. Baker 207 N. Y. 675 N.Y. 1913-01-14 p. 702
Payne v. Burnham 62 N. Y. 69 N.Y. 1875-05-25 p. 703