Moore v. Williams — 41 N.Y. St. Rep. 892

Majority

p. 892

James Moore, App’lt, v. Arthur D. Williams, Rec’r, Impl’d, Resp’t.

(Supreme Court, General Term, First Department,

Filed November 30, 1891.)

Headnote

Corporations—Implied trust.

The officers of a corporation sold stock to plaintiffs assignors and others who were stockholders, on the representation that the money received therefor was to he used in obtaining a disclosure of the secret of a process of manufacture which the company was organized to carry on, and which process ultimately turned out to he a fraud. The money received for the stock was not used for that purpose, hut was deposited and minded with other funds, and a portion sent to another state as security to a surety on attachment bonds given in actions brought hv the company. Tlnon discovering the fraud, plaintiff’s assignors rescinded the sale and demanded back their money. Held, that the representations and agree

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ment made by the officers created a trust for the disposition, of the proceeds and that plaintiff could maintain an action against the receiver of the company to recover back at least the amount of money which was used as security for the surety, and so came into the hands of the receiver.

Appeal from a judgment dismissing the complaint of the plaintiff, so far as the action was against the receiver, and from an order denying a motion made for a reargument of that part of the decision of the justice presiding at the trial.

Everett P. Wheeler, for app’lt; R. Burnham Moffat, for resp’t

The defendant, in whose favor the action of the plaintiff was dismissed, is the receiver of the Electric Sugar Refining Co., a corporation formed under the laws of this state in the year 1884. And the defendants, who were sued with him, were the president and secretary of the corporation. The business for which the company was incorporated was the refining of sugar by a process claimed to have been invented or discovered by Henry C. Friend, and to which, upon his decease, it was claimed .that his wife had succeeded. Shares of stock of the company were issued and exchanged for the process or invention represented to have been made. And 4,750 shares of such stock had become the property of the defendants, Robertson and Cotterill, prior to the 1st of December, 1888.

What this process was did not become known, either to these officers or to any of the shareholders of the stock of the corporation, until early in the year 1889, when it was discovered to be an entire imposition without any possible foundation to rest upon. The organization of the company and the issuing of the stock was what may be properly designated as a complete and unqualified fraud. But before this became known, and in December 1888, it was proposed by the two defendants already named, to make sale of one hundred shares of the stock of the company to obtain money to be paid for the disclosure of the process represented to have been -invented for the electrical refining of sugar. And a proposal was made by them, through an agent in Liverpool, to make the sale of such shares in the market at that city, for the price of sixty pounds, English currency, per share. He brought this proposal to the attention of persons residing in or near Liverpool who were stockholders in the company, and they agreed to purchase the one •hundred shares offered for sale, which were to be divided among these individuals in certain proportions, by which each person agreed to take a specified number of the shares. Five of these individuals agreed to take in all fifty-seven shares of the stock in this manner offered for sale, three of them each agreeing to take ten shares, one of them seven, and the other twenty, and also ten additional shares which never were paid for and need no special consideration in the examination of this case. When the fraud was discovered these person.: severally elected to rescind the purchases which they had made of these shares of stock. And the two defendants from whom they 'were purchase "1 were at once notified of that election, and the money which 1 : W then been paid for the shares was denunded, but its return w::- v-iv-sed by sin

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defendants. And after that, these individuals assigned their claims and rights of action arising out of their purchase of these shares and the existence and discovery of this fraud to the plaintiff in this suit. And he brought it to set aside the purchases of the-shares made by these individuals, and for the restoration to him as their assignee of the moneys which they had parted with in thefulfilment of their agreement to purchase the shares. Upon the-trial the action was sustained against the two defendants who were the president and treasxirer of the corporation, but it was dismissed as to the receiver. And whether that dismissal of the action -was justified under the circumstances is the question presented by this-appeal, which has been taken from the judgment record containing the decision, and the exceptions to it, and the requests and refusals to find other matters than those contained in the decision.

It appears by the findings in the decision that the object intended to be secured by the sale of the 100 shares of stock in Liverpool was to raise the money required to be supplied to obtain a knowledge or disclosure of the secret or process which it was claimed had been invented for the refining of .sugar by electricity. And information of this purpose was disclosed to the persons who were applied to for the purchase of these shares. Bach of the persons concerned in the offer, sale and purchase of the shares had full faith in the existence and genuineness of this alleged process. And no means had been afforded to either of them at that time for discovering that the representations concerning the process were false and the process itself did not exist. To induce these purchasers, and others who agreed to take the residue of the 100 shares, to receive and pay for them, it was represented to them that about $80,000 were required to complete the-necessary funds to obtain immediate possession of the knowledge-of this secret process. It was further represented, by these officers-of the corporation and defendants in the action, through their agent in Liverpool, that a special arrangement was completed for-insuring the speedy patenting of the process, and that the money to be raised by the sale of these shares would enable these two defendants to close the contract with Mrs. Friend and that the money would be paid to her in exchange for the specifications of this process. And it was agreed between them and the purchasers of the shares that the moneys to be paid by them should be handed to Mrs. Friend in exchange for the documents containing this-secret process. And these two defendants also represented to the-assignors of the plaintiff in this manner that the only purpose the money was required for was the payment to be made to Mrs.. Friend to obtain the possession of the knowledge of this process. And the purchasers of the shares were induced to buy and pay for the stock by means of these representations, and relied upon them when they contracted to buy their shares.

These facts are all distinctly found by the court in the decision-which was made after the.trial, and they were sufficient to create the obligation on the part of the defendants, Robei’tson and Cotterill, to use the money paid for the shares only in this manner. And the fact that- the money was also paid as the price of the-

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.shares to these two defendants did not relieve them from the •existence of that obligation and the duty to use and apply this money in that manner. For the persons who purchased the shares under these representations and promises did so for a two-fold consideration. The one was to acquire the title to the shares themselves, and the other to obtain a knowledge of the process alleged to have been discovered, and to secure to the corporation the exclusive right to use that process by virtue of a patent to be issued for its protection. Without the disclosure and patenting of the process, the company was not in a condition profitably to carry on its business and secure its protection against the rivalry or competition of other parties in case the process really had. any existence. And a controlling object of the purchasers of the shares, in taking and paying for them as they did, was to obtain the advantages expected to be derived from the disclosure and patenting of this alleged process. And when the two defendants, Eobertson and Cotterill, obtained the money under these representations and promises, they became obligated to use' that money to secure this result Sales under .similar circumstances and upon like representations of other shares of the stock were made to other persons, by which the 100 shares were agreed to be disposed of, and were in fact disposed of, with the exception of four of these shares. There was, in this manner, realized from the sale of the shares the sum •of 5,760 pounds. That money passed into the hands of the defendants Eobertson and Cotterill as the vendors of the shares, and also as the officers of this corporation. And on the 31st of December, 1888, they charged themselves in the books of the company for the sum of $28,108.80, which was the equivalent in American currency of the sum of 5,760 pounds English currency. And on the same day a credit was made in the loan account of the company to one of these persons, who was the treasurer, for the same sum, representing it to be the proceeds of ninety-six •.shares of the electric sugar stock sold by him upon the Liverpool market between the 21st and 24th of December, 1888. And in December, 1888, and before this credit had, in this manner, been made, Eobertson, the treasurer of the company, deposited this sum to his credit in the National City Bank of the city of New York, where he mingled it with his own funds, but he made no payments on account of the company until after the discovery of the fraud.

In January, 1889, the sum of $10,000 was drawn against this credit in favor of the company and sent by it to the state of Michigan, where it was deposited as security for a person who had become surety on the issuing of attachments against the personal property claimed to belong to Mrs. Friend and another person, and as security for costs for suits commenced and to be •commenced in behalf of the company, or of these two defend•ants, and which money was to be returned when all such liabilities should cease. The residue of the $28,108.80 was drawn from the bank for different objects, with the exception of the payment of a balance owing to the bank itself. Arid in tho¡¡

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manner the entire proceeds derived from the purchase of the ninety-six shares of stock were disposed of. And that reduced necessarily the claim of the plaintiff to this sum of $10,000, so far as the identity and following of the fund has been presented by the case.

That the representations and agreement made by these two defendants with the persons who purchased these shares created a trust for the disposition of the proceeds of their sales, or at least imposed upon these individuals a fiduciary obligation to fulfil their representations and agreement, seems to be reasonably the result of what is shown to have taken place. For without the assurance on their part that this money would be used and employed to obtain the process alleged to have been discovered for the refining of sugar by electricity, it is clear that these purchasers would not have parted with their money, or taken the title to these shares. And under this state of the case, the defendants, who obtained the money in this manner became obligated so to use it. What they represented and agreed to do were sufficient to create this obligation. For, as it was said in Day v. Roth, 18 N. Y., 448 : “ A written agreement is not necessary to create a trust in money or personal estate. Any declaration, however informal, evincing the intention with sufficient clearness will have that effect. Such declarations stand on somewhat peculiar grounds. They are not to be regarded as admissions merely of some antecedent fact in relation to the subject, but are to be looked upon and received as constituting the very trust which they acknowledge. The doctrine of equity is, that by their own force they impress the fund with a peculiar character, and hence they are receivable on the same grounds as a precise and formal agreement. A person in the legal possession of money or property, acknowledging a trust, becomes from that time a trustee, if the acknowledgment is founded on a valuable or meritorious consideration.” Id., 453 . And the obligation which was incurred by these two defendants through their representations and agreement was founded upon a meritorious consideration. For without that there is not the least reason to suppose that this money would have been parted with by the persons who took these shares, and so speedily, upon the discovery of the fraud, endeavored to rescind their purchases and secure a return of their money.

It has been supposed, inasmuch as this money, the proceeds of the sales, was deposited in the bank by the treasurer of the corporation with other moneys standing there to its credit, that the power of following it was thereby extinguished. And upon an examination of the cases, In re West of England, etc., Bk., L. R., 11 Ch. Div., 772, that was considered to be the law upon a review of the antecedent authorities where no actual trust attached itself to the fund, but at most the obligation was one of a fiduciary character. But this decision upon a further examination was overruled in the case of Hallett’s Estate, L. R., 13 Ch. Div., 696. And it was held in substance that there was no solid distinction, so far as the right to follow the fund should be in

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controversy, between the case of a technical trust and the existence of a fiduciary obligation. And that has been considered to be a true exposition of the law as it .has been administered in this state, and also in the supreme court of the United States. Bank v. Peters, 123 N. Y., 272 , 276-9; 33 St. Rep., 182 ; Bank v. Insurance Co., 104 U. S., 54 , 67-9. And the correctness of this principle was fully held and enforced in Newton v. Porter, 69 N. Y., 133 , 139, and in Ferris v. Van Vechten, 73 id., 113, and Barker v. N. Y., etc., Exchange Bk., 100 id., 31.

That the money obtained from the sale of the fifty-seven shares, now in suit went into the account of Bobertson and Cotterill on the books of the company, and to the credit given to Bobertson as its treasurer, and into the New York City ¡National Bank, and was then in part, and to. the extent of $10,000, drawn out and sent to the state of Michigan for the purposes already mentioned, where it now remains in that manner, are facts clearly found and declared by the decision of the court. And that certainly entitled the plaintiff, as the assignee of these purchasers, to follow at least so much of their money as went into this sum of $10,000. That it was made up to over six-tenths of the amount by their funds appears to be free from very substantial controversy. And to that, extent the plaintiff is entitled to reimbursement out of this sum of $10,000. And they should at least have been permitted so far to maintain their action against the receiver of the company. For neither the company nor the receiver parted with any consideration whatever for the money received by it, and which has been deposited to the extent of $10,000 in the state of Michigan. And under the case of Bank v. Peters, supra, it may very well be held, inasmuch as the other persons who purchased the residue of the ninety-six shares have taken no measures to rescind their purchases ; that this entire sum of $10,000, subject to the obligations to which it has been subjected as security in the state of Michigan, should be recovered by the plaintiff in this action.

The facts upon which that right depends have all been found in the decision of the court And they not only warrant, but require, a judgment to this extent to be ordered in favor of this plaintiff. It is not necessary, therefore, to consider the appeal from the order denying the plaintiff’s motion for a re-argument. For upon the case, as it is presented, the plaintiff is entitled to maintain this action for the recovery of this money. As to its identity, there is no possible ground of doubt And the judgment should, therefore, be reversed, and judgment ordered for the plaintiff, with costs of the action and costs of this appeal, to be settled as to its terms upon notice to the counsel for the receiver. And the appeal from the order should be dismissed.

Van Brunt, P. J., and Lambert, J., concur.