Falk v. Hoffman

• Decision Date: 18 April 1922
• Citation: 135 N.E. 243,233 N.Y. 199
• Parties: FALK v. HOFFMAN et al.
• Court: New York Court of Appeals Court of Appeals

233 N.Y. 199

135 N.E. 243

FALK

v.HOFFMAN et al.

Court of Appeals of New York.

April 18, 1922.

Action by Arthur Falk against Jacob L. Hoffman and another. From a final judgment dismissing the complaint, plaintiff appeals, with notice of intention to bring up for review an order of the Appellate Division (189 App. Div. 832,179 N. Y. Supp. 428), affirming, by a divided court, an interlocutory judgment sustaining a demurrer.

Reversed, and demurrer overruled.

Trusts 359(3)

Remedy at law does not prevent suit in equity to declare trust in proceeds of fraudulent purchase of stock. Where two stockholders of a corporation fraudulently purchased the stock of a third, by misrepresenting the amount which their purchaser was to pay for all of the stock of the corporation, the defrauded stockholder could sue in equity to impress a trust on the proceeds of the sale of the stock and the securities received therefor and for an accounting, since his remedy at law would be restricted to the value of his shares, if he rescinded, or to the difference between the value and the amount he received, if he affirmed while in equity he may reach all the proceeds of the resale, though the price received on such resale exceeded the value, and equity will not be overnice in balancing the efficacy of one remedy against another, when action will baffle, and inaction may confirm, the purpose of a wrongdoer.

Appeal from Supreme Court, Appellate Division, First department.

William Bondy, of New York City, for appellant.

Clarence J. Shearn and Gerald B. Rosenheim, both of New York City, for respondents.

CARDOZO. J.

The case is here upon demurrer. The plaintiff Arthur Falk, his brother Albert, and one Jacob L. Hoffman were the sole stockholders in the Falk Tobacco Company. Each stockholder had certain preemptive rights in the holdings of the others. The time came when the plaintiff was ready to sell his shares. The defendants, Albert Falk and Hoffman, undertook to find a purchaser. At first the project was to sell to the Tobacco Products Corporation of America. Later the defendants reported that this project had been abandoned, and that the corporation would not buy. They told the plaintiff that they intended to keep their own shares, and did not wish to sell to any one. They said, however, that they were in touch with some one other than the Tobacco Products Corporation, who might take the plaintiff's shares. To this end they would need an agreement giving them an option to buy his shares at par, and as agreement also that, for a term of years, he would not compete with them in business. They assured him that, in making the sale, they were acting solely for his benefit, that they were not gaining any profit or advantage for themselves, and that the price they were reporting was the full price they would receive. Relying on these assurances, he signed the required papers, and afterwards transferred the shares, receiving pay at par ($327,000). A few months later he learned that the statements which had induced the sale were false. The defendants had sold all the shares of the Falk Tobacco Company, their own as well as his; they had made the sale to the Tobacco Products Corporation of America; and the price was more than par. Upon discovery of the fraud, the plaintiff demanded of the defendants the return of his certificates. Compliance with this demand was impossible, for the resale had then been made. The price paid on the resale remained, however, in the defendants' hands as a substitute for the things resold. It was made up partly of securities and partly of cash. The purpose of this action is to charge it with a trust. The plaintiff, suing in equity, prays a rescission of his contract, and an accounting by the defendants for the proceeds and ensuing...