Fraw Realty Co. v. Natanson , 261 N.Y. 396 ( 1933 )

The plaintiff has recovered a deficiency judgment in a foreclosure action brought against the defendant Malex Realty Corporation. An execution issued on such judgment has been returned wholly unsatisfied. Malex Realty Corporation prior to the entry of said judgment had conveyed to the defendant Normar Real Estate Corporation several parcels of real property. In this action the plaintiff seeks to set aside these conveyances on the ground that they "were made without consideration and with the purpose and intent of hindering, delaying and defrauding the plaintiff and the other creditors of the said Malex Realty Corporation and with intent to cheat and defraud the plaintiff and prevent it from realising upon and collecting the moneys owed to it by the defendant Malex Realty Corporation." A judgment dismissing the complaint has been unanimously affirmed by the Appellate Division.

As Judge KELLOGG points out in his opinion, Malex Realty Corporation had made no payments out of its own money or property for any of the real property which it has conveyed to the Normar Real Estate Corporation. Such payments were in all cases made by Normar Corporation. But where purchase money bonds and mortgages were given as part consideration, these mortgages were in all cases signed, sealed and delivered by Malex, and it is the only party which can be held liable upon these bonds. (Crowley v.Lewis, 239 N.Y. 264.)

Max Natanson and his brother, Alexander Natanson, were the sole stockholders, both of Malex Realty Corporation and of Normar Real Estate Corporation. They managed the affairs of both corporations. They are the only persons who could eventually derive profit from successful business transactions conducted by these corporations, but they would not be personally liable for losses sustained by the corporation. The corporate entity may be disregarded where it is used as a cloak or cover for fraud or illegality, but the stockholders may create or use the corporation for the purpose of limiting their liability. Such use is not fraudulent or unlawful. Indeed, corporations are created and endowed by the State with an existence of their own largely for such use. They are not mere agencies or instrumentalities in the conduct of the copartnership or joint venture, and their stockholders may not in disregard of the corporate entity appropriate the property of the corporation on the claim that the title to such property was in the corporation merely as agent for them. We applied that rule inNatelson v. A.B.L. Holding Co. (260 N.Y. 233, 239.) It seems to me that it has no application here.

In that case the stockholders had furnished the corporation with the money which it used in its real estate ventures, and when the corporation was threatened with insolvency, the stockholders caused the corporation to transfer the property purchased with these funds to themselves. Though there was a finding that the corporation was organized by its stockholders for the purpose of holding, as their agent, the record title of real property purchased and paid for by them, we said: "there is no evidence that it did act as agent beyond the insufficient fact that all the money used in its business over and above its capital of $5,000 was furnished by Lilienstern and Beringer [its stockholders] in proportion to their stock holdings," and even those moneys were treated by the corporation as part of its general capital. Thus the claim of the stockholders that the real property purchased by the corporation was held by the corporation solely as their agent rested wholly upon the stockholders' disregard of the corporate entity when it suited their interests to disregard it.

In the present case the stockholders created two separate corporations. They controlled both, but each corporation was an entity separate from its stockholders, and separate from any other corporation controlled by the same stockholders. Normar Real Estate Corporation did not use its moneys for the business of Malex Realty Corporation. It could not do so lawfully without a disregard of the corporate entity, which the law does not permit, and if it had attempted to do so its creditors might properly have insisted upon the rescission of the transaction. It was not even a stockholder of Malex. The moneys paid for the purchase of the real estate taken in the name of the Malex Realty Corporation were entered in Normar's books. So, too, the properties purchased were entered in Normar's books as Normar's property. The rents when received were paid into Normar's treasury and were reflected in Normar's income tax reports. From the outset Malex held only the naked title to the property. As between it and Normar, Normar received all benefits accruing from the property. It may be that Malex was not endowed with corporate power to act as Normar's agent. It did do so in fact, and its officers and stockholders so intended. So, too, the same individuals, who happened to be the sole officers and stockholders of Normar, must, of course, have intended when Normar made payments upon such purchases. It is said that this constituted a fraud on the creditors of Malex and especially upon this plaintiff who received the purchase-money bond of Malex when its property was conveyed to Malex. Doubtless Normar used Malex as its agent to take the title to the property in order that liability on purchase-money bonds might not be fastened upon it. It could have done so lawfully by using an individual instead of a corporation as its agent. (Crowley v. Lewis, supra.) We know that it is a common practice in real estate transactions to use dummies or agents for such purpose. Such practice, however common, is fraudulent if the financial solvency of the dummy or agent is misrepresented and from such misrepresentation an estoppel may arise. (Natelson v. A.B.L. Holding Co., supra.) Here there was no such misrepresentation, and it is not disputed that the plaintiff in accepting the bond of Malex did not rely upon the fact that Malex held the record title to other real property; nor does it appear that any other creditor extended credit to Malex upon an appearance of solvency of Malex, or relied upon information that Malex held title to a number of parcels of real property. The claim of Normar that the properties are held by Malex merely as its agent or dummy rests upon no disregard of the separate corporate entity of Malex. Indeed, the basis of that claim is that Malex is a separate entity whose position is the same as if it were an individual agent instead of a corporate entity.

If Malex had corporate power to hold real property as agent for another, then there could be no doubt that property so held would not belong to it but to its principal. (Cf. Bing v. People,254 N.Y. 484.) If Malex did not have such corporate powers, then its act in taking such title would be ultra vires; that would not place this plaintiff in a better position than it is now, for the plaintiff is asserting that Malex should retain the benefit of its ultra vires act without being held to the promise upon which such benefit was obtained.

So far I have assumed that such promise was in fact made. In truth no such promise was expressly given by Malex either orally or in writing. It could hardly have been made orally by the officers acting for Malex to the officers acting for Normar, since the officers were identical, and men, whether acting as principals or agents, do not make oral promises to themselves. Words are used to convey intention from one person to the other. When a person acts in dual capacity no words are needed to convey intention. In such case intention is shown by acts rather than words, and words are used only for the purpose of creating evidence of intention. Here the acts of Malex and Normar are strong evidence of an intention which the triers of the fact have embodied in a finding which we may not disturb. When Malex conveyed the property held in its name to Normar, it was merely carrying out that intention. If the officers of the two corporations, though identical, had executed a written agreement that all property for which Normar furnished the cash consideration should be held by Malex, solely for the benefit of Normar, could it be doubted that the law would hold Malex to its promise? In that case a transfer of title by Malex to Normar would not have deprived the creditors of Malex of any right to have the property of Malex applied to the payment of the debts of Malex, for Malex would never have held more than naked title to the property. Now, unless we disregard the corporate entity, Malex has done exactly what fair dealing and ordinary honesty should have dictated it to do.

The only question that remains is whether in the absence of a written instrument, we are precluded from recognizing the existence of a trust. (Real Property Law, § 242.) If Normar were appearing as a suitor in this court, asking that Malex be compelled to convey to it the property to which Malex holds title, the courts would be powerless to act, unless repudiation of Normar's claim to the property constitutes an abuse of a confidential relation between Malex and Normar, and would result in unjust enrichment of Malex under cover of such relation of confidence. That rule is well established by our decisions, but we have never attempted to limit or define the nature of the confidential relationship which may set a court of equity in motion. Perhaps no such definition can be formulated which would cover all cases. Ordinarily men do not trust their property to strangers without at least requiring some evidence that the stranger is holding for them. Where there is blind trust there is usually a prior existing relationship which explains the confidence; but wherever under cover of a relationship of confidence, however created, there has been enrichment of one party, a court of equity should interpose its powers to remedy the wrong. Myriad are the circumstances which may give rise to such relationship. The parties may be united by blood, family affection, close friendship or business relations. Reputation and standing in the community may provide the element of confidence which might otherwise not be found in previous personal relations. However the relationship may have arisen, where a party accepts property knowing that it is intrusted to him because of the confidence which another places in him, there is a relationship of confidence, abuse of which should not be tolerated by a court of equity. Here Malex and Normar, though separate entities, had, as I have said, the same stockholders and officers. Identity of stock ownership and control of two corporations does not justify the diversion of the property of the one to the treasury of the other. It does necessarily create a relationship of confidence, because at all times those who direct the corporations must act with knowledge that they may not abuse their trust to either. It has not been abused here. The officers of Normar applied Normar's money to the purchase of real estate, to be held for its benefit by Malex as its agent, and they did so with knowledge that Malex would not appropriate to itself the benefit derived from the ownership of the property it held for Normar. So long as they remained the officers of both corporations, it was impossible that one should abuse a trust placed in it by the other or enrich itself at the expense of the other. Without transfer of record title of the property to Normar; there would be unjust enrichment of Malex at the expense of Normar, and indirectly both of its stockholders and creditors. The plaintiff is asking that a court of equity should interpose its powers and declare fraudulent a conveyance which Malex was under a moral, if not legal, duty to make. Such duty must be recognized by the courts, unless we disregard the separate entity and hold that all that has been done is merely part of a scheme by which the stockholders of the two corporations sought to evade liability for their just debts. I find in the record no basis for such a holding.

The judgment should be affirmed, with costs.

CRANE, O'BRIEN and CROUCH, JJ., concur with KELLOGG, J.; LEHMAN, J., dissents in opinion in which POUND, Ch. J., concurs; HUBBS, J., not voting.

Judgment accordingly.