Erie Railway Co. v. Vanderbilt , 12 N.Y. Sup. Ct. 123 ( 1875 )

DoNohue, J. :

The complaint in this case sets out, in substance, and the facts prove, that in 1868 several suits were brought by parties named against the plaintiff, corporation, and its officers and trustees, for matters alleged in those suits to be frauds on the plaintiff and its stockholders; that the claims made in such suits were for the protection of the plaintiff and its stockholders; no damages were asked against plaintiff herein, and the relief asked was for the benefit of plaintiff; that-the defendant was not nominally a party to those suits, and denied any interest in them. The complaint in this case further alleges, in substance, the settlement of those suits, and a payment of money of the plaintiff to defendant, by which plaintiff was defrauded. The complaint offered to rescind all such contracts, and asked that the money and securities be returned to it. The answer substantially denies the connection of the defendant with the suits referred to, or his interest in any of them. He denies any connection or interest in any of these compromises or payments on the part of the present plaintiff.

The substance, in fact, of allegation and denial is, that the plaintiff contends, and defendant denies, that certain suits, brought at the time to compel the performance of justice by certain defaulting officers to the company, were settled by the defendant and his friends by not taking the money from the alleged defaulters, but settling with them by taking more money out of the company plaintiff to settle stock speculations in which such officers had obtained an advantage over the defendant and his friends.

Neither time nor opportunity has enabled the preparation of an opinion giving minutely the facts at which I have arrived, and on which my conclusion is founded, but the facts, it seems to me, can be summed up in a short space.

■ Drew and others were in the control of the Erie Railway Company, as its trustees. The defendant had given an unlimited order to buy that stock. One of the directors of the railroad company acting with Drew, taking advantage of a clause in the charter of the Erie Railroad Company, which allowed the issue of bonds convertible into stock, procured, as the former complaint alleged, fraudulently, the issue of bonds which were converted into stock and used in filling contracts for stock sold defendant. It seems to me at this point proper to say, that the defendant cannot contend such issue was valid, because, if he does so, then there was nothing to settle, as we shall presently see, and the proceedings that resulted in the settlement were, in law, a fraud on plaintiff. The defendant and those acting with him, finding that the contracts under which they had hoped by taking stocks to control the road, were being filled by stock thus issued (the money for the stocks, I shall assume, the plaintiff received), applied to the court to prevent the issue, and obtained an injunction against such issue, and asked for relief against the trustees, and that they account to the present plaintiff. The defendants in those suits violated that injunction and continued to issue the stock. The friends of the defendant, who brought those suits, succeeded in driving the directors of the plaintiff out of the State by the legal proceedings “commenced by them for violation of the injunction.

The parties plaintiff in those suits and the defendant had the right, if they saw fit, to hold the present plaintiff, as in the case of the Schuyler frauds; to attack the issue of the stock and make the railroad company responsible for the, act of their agent in so issuing it. But the facts disclosed show that that would not meet the object the then plaintiffs wanted, and the scope of those suits sets up that the directors of the plaintiff had, in fraud of its rights, issued the stock, and they should be compelled to replace the stocks and compensate the defendant and his friends for the loss. Whatever may be the statement of the parties, the court cannot shut its eyes to the fact that these facts are true. Now, with this direct fair road that those suits on these facts presented to compel the officers of the plaintiff’s company to respond for their improper acts, the defendant and his friends chose their own course with them.

The directors charged thus, finding that the only relief they had was in making a settlement with the plaintiffs in those suits, started to make it, and here the wrong exists; those suits in apparent good faith, and which the parties in interest with the present defendant, professing to do what they did for the benefit of plaintiff, and using the process of the court for that purpose, and by which they could and should have compelled a proper settlement with plaintiff, did not do so. Nothwithstanding the fact that the -wrong to plaintiff was apparent, the real object of the suits by defendant’s friends was attained by a settlement, taking the money out of the plaintiff to settle an alleged fraud of the directors, and it is now before the court to say whether the courts of this country will consent to set their seal of approval on such acts. If these are the facts, it seems to me it is high time to have the courts take a stand and condemn such transactions with trust funds and hold all parties to a rigid account.

It is not a question what right the defendant or his associates had against unfaithful agents, but what is just to the stockholders, who are bound to rely on the trustees for justice, and what duty was cast on the defendant and his associates when dealing with these trustees, and, as has been said by high authority, whilst technical rules may be used to preserve lights, the court should never be astute to find rules or enforce technical rules which will permit a wrong.

The first point taken by the defendant is, that no privity or relation existed between the parties out of which any debt or obligation arose. In the abstract, perhaps, this might be so, but it is hardly an answer to shield a defendant who has (if I am right-in the facts) the plaintiff’s money in his hands, taken with full knowledge from a trustee for the debt of such trustee. Suppose these trustees had, without any regard to an existing -contract or right, paid voluntarily the plaintiff’s money to the defendant, would the point made avail them ? I think not. The redress asked here on the facts arises in something not depending on any contract or privity; in addition, tbe mere fact that tbe defendant dealt with tbe trustees individually is no answer.

If, through all the facts, it appears that, no matter what tbe form used was, tbe plaintiff’s money was used with defendant’s knowledge to settle private stock dealings between tbe so-called third parties and defendant, be is liable.

Tbe defendant’s counsel boldly takes tbe ground — and it seems necessary to sustain it in this case to relieve defendant — that, conceding the dealing to be directly with tbe company, no recovery can be had, because tbe plaintiff is m pa/ri delicio. I should be sorry to think that tbe law in this country was in such a condition, that when trustees used tbe name of a corporation, and bad dealt in that name with tbe knowledge of those they are dealing with, for their own benefit, their wrongful act could be upheld, merely because they used their cestui g%ie trusts name to commit a fraud. I am not prepared to discuss such a question. It is, in my judgment, clear that the law presents no such case for the worst of wrongs. It is no answer to say that the company had the right to purchase its own stocks, or to retire a spurious issue; no such issue is set up by any answer, and none is pretended on the pleadings. The case is one where the defendant should be discharged altogether, or should be held to have taken the corporation’s money without r'ight. It was no settlement with the company, no purchase of its own stock by the company, or to retire a spurious issue; all parties to that settlement evidently understood it was to settle a contest between the defendant and directors of a corporation who had been declared, as the suits stated, delinquent to their trusts, and to enable them to return to the State from which defendant and his associates’ acts had driven them. It would be monstrous to call it a settlement with the company. The defendant contends that the litigations settled by the compromise were really ruinous to the plaintiff, and their settlement was a relief to them. The fallacy of this is shown, when the situation at the time of settlement and the result of that settlement are considered. The pretense in the suit was the present plaintiff’s benefit, and the compelling of the trustees to replace the stock so improperly issued; in fact to buy back from the defendant the stock so issued. The result of the settlement was to throw on the plaintiff the loss of the acts claimed by the present defendant to be fraudulent, and in fact to take the present plaintiff’s money to pay the loss which the fraud the present defendant pretended, in these suits, they were desirous of putting- on the trustees. The pretense that these suits were not the acts of the present defendant, is negatived by the fact that when Drew made his peace in these suits, the settlement was with the present defendant, and when he received the money the suits were ended. The defendant and his ■friends, when these suits were brought, had the right, established in the New Haven Railroad cases, to hold this company for the loss they had sustained by the improper issue of its stock, which would leave the present plaintiff a right of action against its agents; or the defendant had the right to do as he pretended to do here: take steps to compel the trustees to return to the company the fraudulent stock and make the damage good ; and attempts to do this would be applauded; but no right existed to use the process of the court to this apparent end, when his own end was obtained, by taking the trust funds to settle his claims. It is evident that the suits were used .only to press the former defendants into a settlement with trust funds, and the pretense of doing justice to the present plaintiff was ended when the defendant had pressed the trustees into a settlement with himself.

It seems to me, whichever way the case is turned, the same result presents itself, and, unless courts are prepared to let trust property be sacrificed to the frauds of,its trustees, the defendant here must be held. It is said, by one of the counsel for the defendant, that the charge of fraud wholly fails. If in this case the facts here do not present in law such a case as will entitle the plaintiff to redress, I am mistaken. The evidence of Mr. Drew alone shows by what mode the suits which the defendant controlled were used, and did, in fact, compel the settlement, and how the trustees made their peace, and how they discharged their obligations by using the funds of the company to settle the claim; it may present no merits to the counsel, but it does to me.

It is unnecessary to discuss here to what extent a recovery can be had; it is only necessary to establish the use, with the knowledge of defendant, of any of plaintiff’s funds, to hold him; the extent is for the court below, where the case is tried.

The claim that the transaction has been consummated, seems to me to beg the whole question.

The true question presented here in the facts above discussed, is this: What right has a corporation, defrauded by joint acts of its trustees and a third party ?

It is hardly necessary to cite or discuss authorities to show the duties of trustees, or those dealing with them, as to the trust property; the authority cited by plaintiff' fully sustains it, and the result from this is, that all who deal with such trusts must keep themselves ready to .defend their right to money so obtained. The doctrine in the cases cited by plaintiff’s counsel (Story Eq., § 125, C., 1258; Bliss v. Matteson, 22 N. Y.; Perry on Trusts, §§ 825, 855 ; 100 Mass., 382), contain authority on this point, if any were needed, as to what is supposed to be the foundation of law ; that is, to do justice; and I think the cases cited by plaintiff (Perry on Trusts, §§ 211, 272, 823, 828; Bassett v. Noseworthy, 2 Lead. Cas. in Eq., 103, 109), show that receivers of such money can be called on to account, when no new consideration has been parted with.

If I am in error in the facts, of course the conclusions are erroneous, but it seems to me that when the case is digested, there is nothing in it but the use of the process of the court against individuals for wrongs to the plaintiff, and for the alleged purpose of benefiting plaintiff, ending in a settlement that obtains the plaintiff’s money for the very wrong done, not by, but to it, and leaves the plaintiff without redress. To sustain defendant’s view would, it seems to me, on this evidence, lay down the law that trusting stockholders were helpless, and their property beyond the protection of the law. It seems to me that the evidence is clear that the suits, for the settlement of which the money was paid, were settled in fraud of the plaintiff’s rights, arid with their funds, and that such funds should be returned; that there is evidence tending to prove notice to the defendant of the ownership of the funds, or some part of them, and that justice requires the refunding of it. That the findings below on the facts are erroneous.

The j udgment should be reversed and a new trial had.