Lilienthal v. Betz

• Decision Date: 08 May 1906
• Citation: Lilienthal v. Betz, 185 N.Y. 153, 77 N.E. 1002 (N.Y. 1906)
• Court: New York Court of Appeals Court of Appeals
• Parties: ALBERT LILIENTHAL et al., Suing in Behalf of Themselves and Other Creditors of D. G. YUENGLING BREWING COMPANY, Appellants, v. JOHN F. BETZ, Respondent.

185 N.Y. 153

77 N.E. 1002

LILIENTHAL et al.

v.BETZ.

Court of Appeals of New York.

May 8, 1906.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Albert Lilienthal and another, on behalf of themselves and other creditors of D. G. Yuengling Brewing Company, a dissolved corporation, against John F. Betz. From an order of the Appellate Division (95 N. Y. Supp. 849,108 App. Div. 222), reversing an interlocutory judgment overruling defendant's demurrer to the amended complaint, plaintiffs appeal. Reversed, and judgment ordered for plaintiff's on the demurrer, with leave to defendant to withdraw the demurrer and serve an answer on payment of costs.

The Appellate Division held that the complaint stated facts sufficient to constitute a cause of action, but that the discharged receiver of the D. G. Yuengling Brewing Company was a necessary party either as plaintiff or defendant, and hence that there was a defect of parties.

The order allowing the appeal certified the following questions to this court: (1) Is there a defect of parties plaintiff? (2) Is there a defect of parties defendant? (3) Does the complaint state facts sufficient to constitute a cause of action?

Edward T. Bartlett, J., dissenting, and Gray, J., dissenting in part.

Harold Nathan, for appellants.

Abram I. Elkus and Carlisle J. Gleason, for respondent.

WILLARD BARTLETT, J.

This is a suit in equity brought by two creditors of the D. G. Yuengling Brewing Company, a dissolved corporation, suing in behalf of themselves and of all other creditors similarly situated, against the former treasurer of the corporation to impress a trust for the payment of the general creditors of the corporation upon certain property acquired by the defendant on a sale thereof by the receiver in voluntary dissolution proceedings. The amended complaint alleges that the defendant with intent to hinder, delay, and defraud the creditors of the D. G. Yuengling Brewing Company, entered into a fraudulent conspiracy with the corporation to the end that the defendant should acquire all its property for an amount far less than the real value thereof; that pursuantto such conspiracy the defendant represented to the creditors, including the plaintiffs, that he would assume and undertake the payment of the merchandise debts, that is to say, all the claims of the general creditors other than the bonds and debts secured by mortgage; that said representations were made with intent to induce the creditors to refrain from making themselves parties to the dissolution proceedings, and to refrain from organizing or combining for the protection of their interest and to refrain from bidding upon the sale; that such representations were wholly false being merely part of the conspiracy aforesaid and that by means thereof the plaintiffs and other creditors were induced to forego all efforts to have the property of the corporation realize its fair value at the sale, and that at such sale all the personal property of the corporation being then reasonably worth $500,000, and not being subject to any valid mortgage or lawful lien, was without any competitive bidding purchased by the defendant for $75,500. The amended complaint further alleges that all the real and personal property of the D. G. Yuengling Brewing Company was upon the sale thereof and pursuant to the aforesaid scheme and conspiracy delivered to the defendant, who thereupon went into possession of the same, and has appropriated the same to his own use and has made large profits out of his use of the said property, but has wholly repudiated his promise to assume or pay the merchandise debts of the said corporation, and claims to hold the property free from all claims on the part of its creditors. It is also expressly alleged in the amended complaint that the receiver in the voluntary dissolution proceedings was, by an order of the Supreme Court made on August 17, 1898, duly discharged as such receiver, having before his discharge exhausted all the assets of the corporation which came into his hands, and which assets were insufficient to pay the debts of the corporation.

Two questions are presented by the appeal: (1) Whether the complaint states facts sufficient to constitute a cause of action, and (2) whether, assuming that it does state a cause of action, the receiver of the D. G. Yuengling Brewing Company, who was discharged prior to the commencement of the action, is a necessary party thereto either as a plaintiff or defendant. The learned Appellate Division was of the opinion that the action could be maintained under sections 1781 and 1782 of the Code of Civil Procedure. We are unable to concur in this view. Subdivision 2 of section 1781 provides that an action may be maintained against one or more trustees, directors, managers or other officers of a corporation to procure judgment ‘compelling them to pay to the corporation, which they represent, or to its creditors, any money, and the value of any property, which they have acquired to themselves, or transferred to others, or lost, or wasted, by a violation of their duties.’ Section 1782 provides that an action as prescribed in subdivision 2 of section 1781 may be brought by a creditor of the corporation. It is to be observed, however, that the basis of the action authorized by subdivision 2 of section 1781 against the trustees, directors, managers or other officers of a corporation is ‘a violation of their duties.’ This, we take it, means a violation of their duties as such officers. We think that the phrase quoted can hardly be deemed to apply to such a cause of action as is attempted to be set forth in this amended complaint, the gravamen of which is not any official act or omission on the part of the defendant as a director or the treasurer of the D. G. Yuengling Brewing Company, but rather his promise to pay all the debts of the corporation in case he should be allowed to acquire its property at a judicial sale for less than its real value and his failure to keep that promise. We think, however, that the amended complaint may be sustained irrespective of these provisions of the Code of Civil Procedure. The pleading is not a model of perspicacity or direct statement. It does, however, distincitly allege the fact that the defendant assured the creditors of the corporation, and among them the plaintiffs, that he would assume and undertake the payment of the merchandise debts of the corporation;that he made this representation with intent to induce the creditors, including the plaintiffs, to refrain from making themselves parties to the dissolution proceedings and to refrain from organizing or combining for the protection of their interest, or from bidding upon the sale of the property; and that by means of his representations the plaintiffs and other creditors were induced to forego all efforts to have the property of the corporation realize its fair value when offered at public sale.

The other allegations of the amended complaint, to which reference has already been made, suffice to justify the inference that the defendant acquired personal property of the corporation for about $425,000 less than it was actually worth. Under these circumstances, if established by the proof upon the trial, the plaintiffs and such other creditors as may join with them in the prosecution of the action, seems to be entitled to a judgment in equity that the defendant holds the property...