Heckscher v. Edenborn

• Decision Date: 17 October 1911
• Citation: 203 N.Y. 210,96 N.E. 441
• Parties: HECKSCHER v. EDENBORN.
• Court: New York Court of Appeals Court of Appeals

203 N.Y. 210

96 N.E. 441

HECKSCHER

v.EDENBORN.

Court of Appeals of New York.

Oct. 17, 1911.

Appeal from Supreme Court, Appellate Division, Second Department.

Action by August Heckscher against William Edenborn. From a judgment of the Appellate Division (137 App. Div. 899,122 N. Y. Supp. 1131) affirming a judgment on a verdict directed for defendant at Trial Term, plaintiff appeals. Reversed, and new trial granted.

The action was brought by plaintiff, in behalf of himself individually and also as assignee of several others, to recover the amounts which they severally subscribed and paid under a syndicate agreement, on the ground that they were induced so to subscribe and pay by the fraud of the defendant. On the first trial of the action, plaintiff secured a verdict and judgment for the full amount of these claims, but this was reversed by the Appellate Division, and on the second trial, in accordance with the views of the latter court, a verdict was directed in behalf of defendant.

The defendant was the principal promoter and organizer of a syndicate which had for its purpose the raising of $2,500,000, to be expended in the acquisition, improvement, and development of certain iron properties. The basic property in the enterprise, and the one which indirectly has furnished the occasion for this litigation, was the United States Iron Company of New Jersey, with a capital of $1,000,000, of which defendant owned more than one-half.

The syndicate agreement which was formulated by or under the supervision of the defendant in its opening paragraph is stated to be ‘by and between William Edenborn, August Mann and J. C. Walker (hereinafter called the ‘syndicate managers'), parties of the first part, and the subscribers hereto, severally, parties of the second part * * * and all of whom, together with the said parties of the first part, constitute the syndicate.’ It sets forth the advantageous opportunities for acquiring the ownership and control of the various properties involved, specifically mentioning the ‘ownership, control and possession of the United States Iron Company of New Jersey at par,’ and the location of blast furnaces thereon, the necessity for raising $2,500,000 and the desirability that ‘a syndicate be formed which shall furnish and supply said sums * * * for the purposes above mentioned.’ It then recites: ‘This agreement witnesseth, that in consideration of the premises and the mutual promises herein contained, the parties hereto agree and the subscribers, severally, agree with each other and with the syndicate managers as follows: First. The parties hereto hereby from a syndicate to purchase, acquire, use, develop and dispose of the lands and properties above mentioned or so much or such part thereof as, in the judgment and opinion of the said syndicate managers, is deemed advisable and proper. Second. Each subscriber shall set opposite his name the amount of his subscription to the said syndicate.’

Said agreement then in substance, amongst other things, provides that calls on subscribers shall be made by the syndicate managers, who ‘shall issue, or cause to be issued, to the subscribers receipts in respect of payments made hereunder or certificates of interest in said syndicate, of such tenor and form as they deem suitable;’ that the syndicate managers ‘shall have the direction and management of the subject-matter of said syndicate, and each subscriber nominates and appoints the syndicate managers, his agents and attorneys, * * * to exercise all the rights of the subscribers in and to the properties proposed to be acquired, and to enter into and execute any and all arrangements or agreements deemed by the syndicate managers expedient or necessary to carry out and perform the object and purpose of this syndicate;’ that said syndicate managers ‘shall take the title to any of the lands and properties to be acquired by the syndicate in such form and in the names of such persons, firms or corporations as in their judgment and opinion shall be deemed proper and advisable;’ that in case said syndicate managers, ‘in the exercise of their absolute power and discretion hereunder, sell, convey or transfer any of the money or properties acquired by the syndicate, for either cash, bonds, stocks or securities, each of the subscribers hereto shall be entitled to receive, on the termination of this agreement and the dissolution of the syndicate, his pro rata share thereof. And, if the money and property acquired by the syndicate, or any part thereof, is caused to be sold and conveyed to any corporation which may be formed for the purpose of acquiring the same from the syndicate, and issuing in payment therefor its stocks, bonds, or other forms of securities, then and in that event the syndicate managers shall have and retain the exclusive right and power to supervise and superintend each and all of the steps and proceedings in respect to the organization of any such corporation.’ In addition to the enumeration of specific powers, said agreement confers ‘all other general and specific powers which, from time to time, they [the managers] may deem necessary in order fully and effectively to carry out the purposes of this agreement and of this syndicate.’ The assent of two of the three syndicate managers was necessary to any act to be performed by them.

The defendant was in terms the largest subscriber to this agreement, and the plaintiff and his assignors severally subscribed and paid in substantial sums. The defendant did not in any manner solicit or invite the plaintiff himself to subscribe, but the latter so subscribed of his own volition and at his own suggestion. In answer to his inquiries, the defendant did say, and this is claimed to be material in view of what subsequently took place, that ‘every one [of the subscribers] was to pay cash, and it was exactly on the same basis; that there would be no commissions nor any profit to any one.’ The defendant did in effect solicit the subscriptions of plaintiff's assignors, in general terms characterizing the enterprise as a promising one, and in connection with the agreement, which showed his own subscription of $500,000, did state in substance, in varying terms, to some of the assignors that every subscriber was to pay his subscription in cash.

The syndicate agreement having been executed by a sufficient number of persons, the parties thereto proceeded to carry the same out. The syndicate managers seem to have effected an organization by making the respondent chairman. From time to time calls were made by and in behalf of the managers for payments by the various subscribers on account of their syndicate subscriptions, and payments were made by the plaintiff and his assignors. The checks by which these payments were made were in most cases payable to the order of the respondent as chairman, but in some cases seem to have been payable to him individually. But, however this may be, it is apparent that the payments were all in legal effect made to the syndicate managers, and that the moneys paid in were legally and constructively in their possession, and were expended by their joint action as such managers.

The moneys which were collected were expended in purchasing properties in accordance with and within the terms of the agreement. Of the $2,500,000 subscribed, $647,500 in effect was expended for purchasing the entire capital stock of the United States Iron Company at $70 per share, instead of par. The balance of the aggregate subscriptions, with the exception of something over $900,000, which was reserved for future use, was expended in purchasing other properties. As has already been indicated, respondent purported to pay his subscription of $500,000 to a large extent by turning in his holdings of the capital stock of the iron company at $70 per share. Thereafter, and in purported compliance with the terms of syndicate agreement, the managers, instead of organizing a new corporation to take over the properties which had been acquired and the balance of the subscriptions remaining in cash assets, caused the United States Iron Company to be reorganized under the name of the Sheffield Coal & Iron Company, and caused its capital stock to be increased from $1,000,000 to $2,500,000 par value, and thereafter said managers transferred the properties which they had acquired and the cash assets above mentioned, all aggregating a face value of $2,500,000, to said Sheffield Coal & Iron Company, which thereupon issued certificates of its capital stock, made out to and in the name of the various syndicate subscribers, for an amount representing at par their respective subscriptions, and these certificates of stock, through the syndicate managers, were delivered to the various subscribers, including the plaintiff and his assignors.

For some reason, the enterprise did not prove successful, and plaintiff and his assignors then first discovered, as they claim, that respondent owned a majority of the capital stock of the United States Iron Company, which had been purchased by him and his associate managers in behalf of the syndicate, as above stated. After making this alleged discovery, claiming that respondent had been guilty of fraud in procuring them to become subscribers to the syndicate agreement which authorized him and his associate managers, in their discretion, to buy property from himself, without disclosing this ownership and interest, plaintiff and his assignors tendered back to respondent the stock which had been issued and delivered to them respectively, as above stated, and demanded from him payment back of the moneys subscribed and paid by them respectively under the agreement.

Hiscock and Gray, JJ., dissenting in part.

Henry Wollman, for appellant.

Frederic B. Jennings, for respondent.

HISCOCK, J. (after stating the facts as above).

Plaintiff, in his own behalf and as assignee of several others, asks that he and they be relieved and released...