232 F. 35 (2nd Cir. 1916), 71, Howland v. Corn

Docket Nº:71, 72.
Citation:232 F. 35
Party Name:HOWLAND v. CORN et al. EMPIRE TRUST CO. v. IMPROVED PROPERTY HOLDING CO. OF NEW YORK et al.
Case Date:February 15, 1916
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 35

232 F. 35 (2nd Cir. 1916)

HOWLAND

v.

CORN et al.

EMPIRE TRUST CO.

v.

IMPROVED PROPERTY HOLDING CO. OF NEW YORK et al.

Nos. 71, 72.

United States Court of Appeals, Second Circuit.

February 15, 1916

Page 36

[Copyrighted Material Omitted]

Page 37

The first cause is a suit brought by a receiver against the directors of the corporation of which he has been appointed receiver, to establish a personal liability on the part of the defendants for reasons which are hereinafter more fully stated. The second cause is a suit for the foreclosure of a mortgage in which the same receiver appeared and answered, setting up the invalidity of certain bonds issued under the mortgage in foreclosure. In the first suit the receiver alleges as a portion of his cause of action the same facts asserted to show invalidity of the bonds in the second and which are relied upon to establish a personal liability of the defendants in the first suit. The two actions were tried together in the court below and were disposed of in a single opinion.

Separate decrees were entered-- in the first suit, on January 11, 1915; in the second suit, on August 6, 1914; and on February 4, 1915, a supplemental decree was filed. The trial court dismissed the bill of complaint in the first suit, having found that the directors, the defendants, had been honest in their dealings with the corporation. In the second suit the mortgage made by the Improved Property Holding Company to the Empire Trust Company as trustee, dated May 24, 1909, was adjudged valid, coupon bonds to the face value of $1,000,000 were adjudged duly issued, and $223,000 face value of these bonds were adjudged duly redeemed by payment in cash, and $777,000 face value of the bonds were adjudged outstanding, legal, and unpaid obligations of the company secured by the mortgage. And the prayers contained in the answer of the receiver were denied. An appeal has been taken in each suit. The two cases were argued together in this court.

The Improved Property Holding Company is a corporation organized and existing under the laws of the state of New York. It was organized to acquire and hold improved business properties in the borough of Manhattan.The

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complainant in the first suit was appointed by the District Court for the Southern District the receiver of the Improved Property Holding Company, and of all the property and assets of that company not covered by its mortgages dated June 1, 1906, and May 24, 1909. The General Realty & Mortgage Company is a corporation organized and existing under the laws of the state of New York, having its principal office in the city of New York. The defendants in the first suit, with the exception of the General Realty & Mortgage Company, constituted the board of directors of the Improved Property Holding Company; Corn being president of the company, Ball and Dowling vice-presidents, and O'Donohue treasurer and secretary.

At all the times mentioned in the complaint in the first suit, Ball and O'Donohue are alleged to have been officers and directors of the General Realty & Mortgage Company and are said to have controlled its affairs, holding a majority of the stock. Out of 10,000 shares of the stock Ball, it is alleged, held 4,800 shares, O'Donohue more than 1,000 shares, and O'Donohue's wife, brother, and brother's wife owned in the aggregate 3,000 shares. It is alleged that prior to May 24, 1909, Corn, Ball, O'Donohue and the General Realty & Mortgage Company, through its officers and directors, entered into a combination and conspiracy to cause the Improved Property Holding Company to issue and deliver its negotiable 6 per cent. coupon bonds, secured by a mortgage on its property, in the aggregate principal amount of $1,000,000, without receiving fair or adequate consideration therefor; to obtain for themselves $555,000 face value of said bonds, without giving any fair or adequate consideration therefor, and upon terms grossly inequitable, burdensome and unconscionable as to said Improved Property Holding Company and greatly to the advantage of said Corn, Ball, and O'Donohue, and said General Realty & Mortgage Company; to obtain for themselves large sums as interest on said bonds; to transfer from said General Realty & Mortgage Company and said Corn to the Improved Property Holding Company certain unprofitable and rapidly deteriorating parcels of real property, known as No. 476 Broadway and No. 395 Broadway, respectively, in the borough of Manhattan, city of New York, and to shift from the General Realty & Mortgage Company and said Corn to the Improved Property Holding Company the burdens and obligations incident to the operation and ownership of said properties; and to obtain for themselves large sums of money through the ownership of the bonds to be issued, both by selling or otherwise disposing of some of the bonds, and by causing many of the bonds to be redeemed at a premium and otherwise. Pursuant to the combination and conspiracy and with such purpose and intent as aforesaid, the said Corn, Ball, and O'Donohue, and the General Realty & Mortgage Company through its officers and directors, are said to have devised and consummated the wrongful and illegal scheme and schemes hereinafter set forth.

It is alleged that pursuant to this illegal conspiracy the defendants caused a meeting to be held of the directors of the Improved Property Holding Company to authorize the execution of a mortgage dated May 24, 1909, by the Improved Property Holding Company to the Empire Trust Company as trustee, covering all the property then owned by said Improved Property Holding Company, and also to authorize the issue, ostensibly for the purpose of securing capital for the transaction of the business of the Improved Property Holding Company and also for other lawful purposes of its incorporation, of $1,000,000 face value of 6 per cent. coupon bonds of the Improved Property Holding Company, secured by said mortgage, and that they further and in like manner and with such purpose and intent as aforesaid caused the board of directors of the Improved Property Holding Company to authorize and direct the purchase by the Improved Property Holding Company from the General Realty & Mortgage Company and from Henry Corn, respectively, of the premises known as No. 395 Broadway and No. 476 Broadway, respectively, both situated in the borough of Manhattan, city of New York, for $555,000 face value of said bonds, $450,000 face value of said bonds to be issued to the General Realty & Mortgage Company for premises No. 395 Broadway, subject to a mortgage to secure the principal sum of $750,000 and interest, and $105,000 face value of said bonds to be issued to Henry Corn for premises known as No. 476 Broadway, subject to mortgage to secure principal sums aggregating

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$545,000 and interest. It is alleged that defendants Dowling and Barlow were negligent and remiss in the discharge of their duty as directors of the Improved Property Holding Company and that they failed to exercise the degree of care which an ordinarily prudent and diligent man would have exercised under like circumstances in voting for the purchase of premises 395 and 476 Broadway.

The various acts set forth in the complaint are alleged to have been wrongful and illegal, and it is averred were all parts of and constituted a wrongful and illegal conspiracy and scheme on the part of the defendants Corn, Ball, O'Donohue, and the General Realty & Mortgage Company to derive benefit and profit for themselves at the expense, regardless of the rights and interests, and in violation of the rights and interests, of said Improved Property Holding Company of New York, and in violation of the trust and confidence reposed in said Corn, Ball, and O'Donohue, as officers and directors of the Improved Property Holding Company. The defendant General Realty & Mortgage Company is alleged to have participated in the conspiracy, and as the tool and dummy of the defendants Ball and O'Donohue to have had no independent object and interest, but to have been completely subservient, at all the times and with respect to all the acts mentioned, to the said Ball and O'Donohue. It is also alleged that each of the defendants became liable to account for all moneys and property received by him or it by reason of the unlawful acts complained of, and that all of the defendants became jointly and severally accountable and liable to pay to the complainant as receiver of the Improved Property Holding Company full compensation for all loss and damages incurred by the Improved Property Holding Company and its creditors, by reason of the wrongful and illegal acts charged.

The complainant asks that it be adjudged that none of the $555,000 face value of the bonds, and none of the interest coupons thereto appertaining, issued for the acquisition of the premises No. 395 Broadway and No. 476 Broadway, are valid or enforceable obligations of the Improved Property Holding Company, or entitled to any part of the security of the lien of its mortgage dated May 24, 1909, except such of said bonds and coupons as have come into the hands of purchasers for a valuable consideration without notice. The complainant also asks that the defendants be compelled to account before a master and that each of them be decreed to pay to complainant all moneys paid to them by the...

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