Ray v. Marine Midland Grace Trust Co.

• Decision Date: 15 July 1974
• Citation: 35 N.Y.2d 147,359 N.Y.S.2d 28,316 N.E.2d 320
• Court: New York Court of Appeals Court of Appeals
• Parties: , 316 N.E.2d 320, 73 A.L.R.3d 871 David RAY, on behalf of himself and All other holders of Sinking Fund Debentures of Webb & Knapp, Inc., Respondent, v. MARINE MIDLAND GRACE TRUST COMPANY, Appellant.

Page 28

359 N.Y.S.2d 28

35 N.Y.2d 147, 316 N.E.2d 320, 73

A.L.R.3d 871

David RAY, on behalf of himself and All other holders of Sinking Fund Debentures of Webb & Knapp, Inc., Respondent, v. MARINE MIDLAND GRACE TRUST COMPANY, Appellant.

Court of Appeals of New York.

July 15, 1974.

James H. Carter, Jr., and John W. Dickey, New York City, for appellant.

Mortimer A. Shapiro, Stanley Nemser and Norman S. Nemser, New York City, for respondent.

BREITEL, Chief Judge.

Plaintiff Ray, purporting to represent himself and certain of the owners of certain Webb & Knapp, Inc. debentures, has brought a class action against the indenture trustee, appellant Marine Midland Grace Trust Company. Ray alleges breach of trust, gross negligence, and conflict of interest by Marine Midland in failing to protect to their loss the rights of owners of Webb & Knapp 5% Sinking Fund Debentures, who acquired them prior to May 7, 1965 and still own or sold them at a loss after June 1, 1961. The only issue on this appeal by the trustee is whether the class action is maintainable. Both courts below have allowed the class action.

There should be an affirmance. Where, as here, there are predominant, common issues of breach of duty and neglect by an indenture trustee, CPLR 1005, Consol.Laws, c. 8 would authorize a class action to be brought on behalf of all debenture holders. Such a conclusion is warranted both by the broad language of CPLR 1005 and by underlying considerations of public policy. The failure to act, if that be so, by the trustee at a critical juncture in Webb & Knapp's troubled affairs will be the decisive and most complex issue in any individual debenture holder's suit and might best be resolved in a single action. Moreover, the interest of the individual members of the class in the litigation is not speculative or contrived, but very real.

The facts, so far as they relate to the class action issue, may be briefly summarized. In 1954 Webb & Knapp, a well-known, wideranging, real estate enterprise, issued and publicly offered 5% Sinking Fund Debentures in the principal amount of $8,607,600, in the acquisition of a large office building in Manhattan. By the terms of the trust indenture, interest was payable at the rate of 5% Per annum, payable seminannually until maturity on June 1, 1974. Each year, on June 1, 5% Of the total principal amount was to be redeemed. Marine Midland was named indenture trustee to enforce certain covenants in the indenture and to exercise certain rights on behalf of debenture holders in the event of default.

After issuing the debentures in 1954 Webb & Knapp engaged in a series of unprofitable land development and hotel construction projects. In 1965, Webb & Knapp joined in a petition for reorganization under chapter X of the Bankruptcy Act (U.S. Code, tit. 11, § 501 et seq.). Financial statements at that time showed assets of $21,558,621 and liabilities of $60,036,164 of which almost $30,000,000 were 'secured liabilities'. Apparently, nothing would remain for the debenture holders.

Plaintiff Ray has held debentures continuously since 1956. Since 1963, he has sold $99,000 in principal amount and now holds $13,000 in principal amount of the debentures. The total principal amount outstanding is $4,298,200. Ray's allegations of negligence and breach of trust by Marine Midland, detailed in the complaint, are based on its failure to act affirmatively to protect debenture holders at an appropriate time prior to chapter X proceedings, resulting in the market value of the debentures declining from 89% To 7%.

CPLR 1005 (subd. (a)) which governs the availability of a class action provides 'Where the question is one of a common or general interest of many persons or where the persons who might be made parties are very numerous and it may be impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.' The language is broad, and intentionally so, allowing for judicial decisional elaboration. Certainly the provision, dating back to the Field Code of Procedure of 1848, as amended in 1849 (L.1849, ch. 438; see former Code Civ.Pro., § 448 and former Civ.Prac.Act, § 195, predecessors of CPLR 1005), was intended to be as broad as the class action remedy fashioned and available in equity (see Hansberry v. Lee, 311 U.S. 32, 41, 61 S.Ct. 115, 85 L.Ed. 22; Blume, The 'Common Questions' Principle In The Code Provision For Respresentative Suits, 30 Mich.L.Rev. 878--879; Weinstein, Revision of Procedure; Some Problems in Class Actions, 9 Buffalo L.Rev. 433, 454--455). It is generally accepted that the language of the Field Code provision adopted in 1849 was a paraphrase of the discussion in Mr. Justice Story's classic treatise on 'Equity Pleading' (see, Blume, The 'Common Questions' Principle In The Code Provision For Representative Suits, Loc. cit., 9 Buffalo L.Rev. 433). The decisional history supports the evident purpose of judicial elaboration and the use of the remedy as doctrines of equity broadened.

In the many cases decided over the years, there has been a continuing development and deinition of the appropriate sphere of class actions, consonant with the development of remedies and substantive rights in equity, sometimes more restrictive and at other times more expansive depending upon correct attitudes. Thus, it has been repeatedly held that separate wrongs to separate persons, even if committed by similar means and pursuant to a single plan, do not alone create a common interest to sustain a class action (Gaynor v. Rockefeller, 15 N.Y.2d 120, 256 N.Y.S.2d 584, 204 N.E.2d 627; Society Milion Athena v. National Bank of Greece, 281 N.Y. 282, 292--293, 22 N.E.2d 374, 376--377; Brenner v. Title Guar. & Trust Co., 276 N.Y. 230, 11 N.E.2d 890). Simply because all depositors of a bank had allegedly been defrauded by the bank did not, without more, allow for a class action against the bank on behalf of all depositors (Society Milion Athena v. National Bank of Greece, Supra). Five persons were not permitted to maintain a class action on behalf of 50,000 members of a club seeking to recover all membership dues because of an alleged misrepresentation in recruiting the members (Onofrio v. Playboy Club of N.Y., 15 N.Y.2d 740, 257 N.Y.S.2d 171, 205 N.E.2d 308, revg. on dissenting opn. at Appellate Division, 20 A.D.2d 3, 6, 244 N.Y.S.2d 485 488). And in the Gaynor case, it was held that all Negro citizens of New York State were not a proper class for an action alleging discrimination in membership by construction unions working on public projects. (For an interesting, critical survey of the history of class action doctrine in New York, see Comment, Symposium on Class Actions, 68 Northwestern Univ.L.Rev. 991, 1108--1121.)

Of course, there was no difficulty in finding a sufficient and pragmatic tie of common interest where all members of the purported class were potential claimants to a limited fund for recovery of their several claims (see, e.g., Tyndall v. Pinelawn Cemetery, 198 N.Y. 217, 91 N.E. 591; Guffanti v. National Sur. Co., 196 N.Y. 452, 90 N.E. 174). Class actions were also sustained, without difficulty, where the relief sought was common to all members of the class, so that the relief sought by one would satisfy all. That would be the case, for example, in an action for an injunction or for declaratory relief (see, e.g., Kovarsky v. Brooklyn Union Gas Co., 279 N.Y. 304, 18 N.E.2d 287). Since the courts, in applying the broad provisions of section 1005 have had the least difficulty in sustaining class actions in the areas last mentioned, they have been the principal ones brought under the statute and its predecessors (see Eighteenth Annual Report of N.Y. Judicial Council, 1952, pp. 230--233).

But these instances, involving a common fund or a common form of relief, by no means mark the outer limits of class actions. CPLR 1005, as noted earlier, was drafter in broad and flexible language. Moreover, the very device of the class action was a flexible remedy of equity, which perforce should be applied progressively as equity still develops (see, generally, for a discussion of the availability of equity to prevent multiplicity of suits, 1 Pomeroy Equity Jurisprudence (5th ed., 1941), §§ 243--244). It would be anomalous to regard the statute, progressive in concept, as intended to restrict the scope of equity or to freeze its development. It has, therefore, always remained for the courts to give meaning to the remedy, based on substantive and developing equitable considerations.

Most recently, those associations growing out of trust, partnership, or joint venture have been said to be most likely sufficient to sustain class actions (see Hall v. Coburn Corp. of Amer., 26 N.Y.2d 396, 402, 311 N.Y.S.2d 281, 284, 259 N.E.2d 720, 722, and cases cited). In Lichtyger v. Franchard Corp., 18 N.Y.2d 528, 277 N.Y.S.2d 377, 223 N.E.2d 869, it was said that a class action for damages could be brought on behalf of all limited partners in a real estate syndicate against the two general partners. The plaintiff alleged a breach of fiduciary duty resulting in diminished return on investment to the limited partners. The wrongs, or series of wrongs, alleged were common to all limited partners. Although there were many limited partners, each had a significant financial interest at stake, even though individual actions might not have been feasible. Most important, the individual recoveries would be different in amount, and some of the limited partners were satisfied with the arrangements charged as wrongs (p. 533, 277 N.Y.S.2d p. 380, 223 N.E.2d p. 871).

The Lichtyger case reflects that case-by-case approach in applying the board language of CPLR 1005. No rigid rule has been applied to bar class actions. Instead there has been consideration of the nature and strength of the tie among members of the class. As Judge Fuld wrote in the Lichtyger case, 'To be sure, many of these cases...