New York Trust Co. v. American Realty Co.

• Decision Date: 31 December 1926
• Citation: 244 N.Y. 209,155 N.E. 102
• Parties: NEW YORK TRUST CO. v. AMERICAN REALTY CO. et al.
• Court: New York Court of Appeals Court of Appeals

244 N.Y. 209

155 N.E. 102

NEW YORK TRUST CO.

v.AMERICAN REALTY CO. et al.

Court of Appeals of New York.

Dec. 31, 1926.

Action by the New York Trust Company as trustee under a deed of trust from George F. Underwood and wife against the American Realty Company and another. From an order of the Appellate Division (215 App. Div. 416, 213 N. Y. S. 569) reversing an order of the Special Term, granting plaintiff's motion for judgment and answering certified question (216 App. Div. 755, 214 N. Y. S. 891), plaintiff appeals on certified questions by permission.

Order of Appellate Division affirmed, and certified questions answered.

See, also, 214 App. Div. 707, 209 N. Y. S. 886; 213 App. Div. 272, 210 N. Y. S. 64; 215 App. Div. 765, 213 N. Y. S. 867.

Appeal from Supreme Court, Appellate Division, First department.

Frank C. Laughlin and William E. Sims, both of New York City, for appellant.

Theodore Kiendl, and George A. Brownell, both of New York City, for pespondents.

LEHMAN, J.

The complaint herein sets forth seven separate causes of action at law. The first cause of action is for the unpaid principal and interest of a note for $100,000 dated November 12, 1920, and payable December 1, 1924, executed and delivered by the American Realty Company to the plaintiff, and guaranteed by the International Paper Company. The remaining causes of action are for unpaid interest on six other notes of identical form, but maturing serially in successive years thereafter. The defendants have served an answer containing two counterclaims. The plaintiff has moved for judgment dismissing the counterclaims. The order granting such motion has been unanimously reversed by the Appellate Division, which has granted leave to appeal upon certified questions.

The defendants allege in the first counterclaim that the defendant American Realty Company purchased in November, 1920, from the plaintiff more than 55,000 acres of timberland. The consideration agreed upon for the sale of this land was the sum of $1,364,895, to be paid to the plaintiff as trustee under a deed of trust from George F. Underwood and Jennie A., his wife, dated July 28, 1920, and, in addition, the execution of a contract between the said George F. Underwood and the International Paper Company, which owned all the capital stock of the American Realty Company; $1,000,000 of the said purchase price was paid in ten notes of American Realty Company, guaranteed by International Paper Company, each in the principal amount of $100,000, and maturing serially one on December 1st of each year from 1921 to 1930, both inclusive. Three of the said notes have been paid. The remaining seven are those referred to in to complaint herein.

George F. Underwood, named with his wife as the grantor of the deed of trust to the New York Trust Company, was a director of the International Paper Company from August 28, 1901, until his death on or about August 6, 1923, and was from October 24, 1906, until his death, a member of the executive committee of said company. He was also from September 25, 1918, until his death, the president and a director of the American Realty Company. The conveyance of the timberlands to the plaintiff under the deed of trust of July, 1920, from George F. Underwood and Jennie A. Underwood, his wife, was gratuitous. The land was to be sold as soon as possible. The trust deed directed that certain small amounts of the purchase price be paid over to designated charitable and other institutions, and that the great bulk be paid or applied either by outright gift or through the establishment of trust funds, to the benefits of the immediate family of George F. Underwood. The largest beneficiary under the said trust is his wife.

The counterclaim is based upon the theory that, at the time of the sale of the timberlands, Underwood stood in a highly fiduciary relation to the defendants, and that, in disregard of his duty of undivided loyalty and fidelity to them, he secretly took upon such sale an indirect profit which, in the counterclaim, is characterized as ‘exorbitant,’and that breach of trust on the part of Underwood gives rise to an affirmative cause of action against the plaintiff who benefited from it. The allegations of wrongdoing contained in the counterclaim are somewhat vague and indefinite. The rule by which the defendants arrive at the amount of damages which they demand is not disclosed. General allegations are in some instances merely conclusions, and in other instances limited by more specific allegations. Perhaps the counterclaim is vague and indefinite because the defendants are themselves in doubt as to where they can find basis for recovery herein; yet some facts have been pleaded which, if proven, would sustain some recovery, though not for all the damages claimed by the defendants.

In spite of general allegations of concealment by Underwood of matters which should have been disclosed by him to the defendant corporations of which he was a director, and in spite of claim that ‘secret’ profits were made, it appears conclusively that, when the defendants respectively made and guaranteed the notes in suit, Underwood did not hide from them his relation to the plaintiff and his indirect interest in the purchase price. The counterclaim alleges that ‘it was by him that the offer of sale was made to the International Paper Company and its subsidiary, and throughout the negotiations he acted as sole agent for the New York Trust Company, trustee.’ The notes given show on their face that the trustee held title under a deed of trust from George F. Underwood and Jennie A., his wife, dated July 28, 1920, and recorded. They even recite that the deed of trust is ‘recorded in Somerset [Maine] Registry of Deeds, vol. 363, p. 1.’ Under such circumstances it may not be said that the defendants were fraudulently kept in ignorance of the fact that, under the deed of trust, near relatives of Underwood were the principal beneficiaries. If his interest in effectuating a sale in behalf of the plaintiff might interfere with his obligations as officer and director of the defendants, it does not appear that the possible conflict was not disclosed. Though it is said that ‘throughout the deal he was acting for both the selling and buyingparties,’ it does not appear that he even voted as director of the defendant corporations to purchase the land. It is alleged that the officers and directors of the corporations relied on his judgment, integrity, and advice in matters pertaining to the purchase of, and the general policy regarding, timberlands, and that he ‘had general charge of such purchases, and exercised a dominant position in relation thereto.’ It is further alleged that it was ‘largely through the representations and recommendations of the said Underwood, acting in his capacity of officer and director of the defendant companies with particular charge of their timberland purchases as aforesaid, that the purchase by International Paper Company and American Realty Company was effected.’

We assume that, if the defendants, by reason of these circumstances, were induced to make a bargain which subsequently they discovered was not advantageous to them, they might rescind their contract of purchase. Barr v. N. Y., L. E. & W. R. Co., 125 N. Y. 263, 26 N. E. 145;Munson v. Syracuse, G. & C. R. Co., 103 N. Y. 58,8 N. E. 855;Wendt v. Fischer, 243 N. Y. 439, 154 N. E. 303. The corporations have not chosen to rescind. Indeed, they do not now urge that the contract of sale may not have been advantageous. They do say that the agreed consideration paid for the timberlands ‘was greatly in excess of the fair value of the said lands, and also greatly in excess of the amount paid by Underwood in acquiring them, resulting through the benefit to the wife and members of the immediate family of George F. Underwood and to the said Underwood himself in an exorbitant profit to the said Underwood. The amount of the said exorbitant profit was not disclosed to American Realty Company or International Paper Company,’ but it does not appear that the lands might not be of such use to the corporations in their business that the corporations would not be willing to pay even now more than the fair value of such land, if such payment was required for its acquisition. Since the defendants retain the land to which they have no right or title except by virtue of the contract with the plaintiff, they must pay the agreed purchase price. The allegations of the counterclaim are insufficient as a defense to the action, and are not pleaded as a defense. If they are sufficient to constitute a cause of action which may be pleaded as a counterclaim, it must be upon the theory that Underwood, because of his fiduciary relations to the corporation, may be compelled to account for any profits he might make upon a sale of his property to the corporations, or for excess of price received over the fair value of the property, and that the plaintiff, to whom the lands were conveyed, perhaps in contemplation of anticipated sale to the corporation, may not retain more than the price which Underwood could properly exact for the property.

[1][2][3] Undoubtedly it...