Sneath v. Lehsten

• Court: New Jersey Supreme Court
• Writing for the Court: PERSKIE, J.
• Citation: Sneath v. Lehsten, 120 N.J.Eq. 327, 185 A. 55 (N.J. 1936)
• Decision Date: 14 May 1936
• Docket Number: No. 53.,53.
• Parties: IRENE A. SNEATH, complainant-respondent, v. ERICH LEHSTEN et al., defendants-appellants

185 A. 55

SNEATH

v. LEHSTEN et al.

No. 53.

Court of Errors and Appeals of New Jersey.

May 14, 1936.

Appeal from Court of Chancery.

Suit by Irene A. Sneath against Erich Lehsten and others, wherein Thomas R. Armstrong and Joseph W. Marini, substituted trustees, filed a petition. From an adverse order, defendants appeal.

Modified and affirmed.

In the interest of clarity as to the parties and issues involved, a prefatory statement of the factual situation is advisable. Irene A. Sneath is the holder of guaranteed first mortgage certificates, in the amount of $57,000, of the Cliffside Park Title & Guarantee Trust Company, a banking corporation of New Jersey. This corporation, for the sake of brevity, shall hereafter be referred to as "trust company."

These certificates were part of two issues, totalling $1, 181,360. These issues were based on two agreements (January 18, 1927, and July 12, 1928), between the "trust company" and Erich C. Lehsten, Ahrend Nagel, and Theodore Vogt, named as trustees therein.

On January 21, 1935, Irene A. Sneath filed a bill in chancery for herself and in behalf of all other holders of like certificates who desired to become parties thereto and who contributed to the expense thereof, for the removal of the trustees named in the two agreements aforesaid, the appointment of substituted trustees, and general equitable relief. It will serve no particular purpose to restate, even in most general fashion, the charges upon which the relief was based; they are not involved on this appeal. Suffice it to mark the fact the relief sought was granted. The trustees were removed, and Messrs. Thomas R. Armstrong and Joseph W. Marini were appointed, first, as temporary trustees (February 1, 1935), and, finally, as permanent trustees (July 1, 1935).

At the time of the appointment of the substituted trustees, and for some time prior thereto, there was, and still is, an organized group who hold certificates of the trust company. They organized on or about November 15, 1934, and are called "Certificate Holders Protective Committee of Investors in Guaranteed First Mortgage Certificates of Cliffside Park Title and Guarantee Trust Company." This group, also for the sake of brevity, shall hereafter be referred to as the "Committee." The members of that "Committee" were defendants below as representatives and in lieu of all certificate holders, and are the appellants in this cause.

Notwithstanding the appointment of the substituted trustees and the failure of the bank, this "Committee" did, on April 22, 1935, in accordance with the wishes of that group, enter into a "Deposit Agreement" (Schedule A annexed to the petition) with the United National Bank of Cliffside Park. This agreement is comprehensive and gives the "Committee" very broad powers. It is sufficient for present purposes, without setting out the detailed provisions thereof, to observe that the "Committee" was given plenary power "to prepare and adopt any plan looking to a reorganization of the affairs or purchase of all assets in the hands of the Trustees and likewise to prepare, receive, consider and adopt any other plan or plans which may be substituted in the interest of certificate holders. * * *"

On September 16, 1935, the substituted trustees filed a petition in this cause. The Vice Chancellor made an order thereon. From this order the "Committee" appeals. The allegations of the petition, in substance, set forth the essence of the "Deposit Agreement" and charged that it did not protect the interest of certificate holders; "that the members of the committee are vested with title to the certificates deposited, and with absolute discretion in the incurring of obligations and expenses; that said Committee is unbounded, and accountable to no one; that the members of said Committee * * * are liable only for the wilful misconduct and not for mistake of judgment, errors, omissions, torts or negligence of employees; that any losses sustained by the Committee or its members, other than those arising through wilful misconduct, are chargeable upon depositors and a lien upon certificates so deposited."

The trustees further charged, inter alia, in the words of the learned Vice Chancellor, that the "Committee" and its agents "have wilfully and intentionally and falsely represented to the certificate holders, that petitioners would receive eight per cent of the assets of the trust estate from this court as fees, and that there would be nothing left for certificate holders if petitioners continued the administration of the estate; and that such certificate holders who failed to deposit their certificates with the committee, would not receive the same consideration as those who did deposit their certificates; and that unless a deposit was made, a certificate holder would lose the money which he had invested in his certificates; that certificate holders who had in fact not deposited their certificates had done so; that petitioners were spending certificate holders' money, and that certificate holders were being mulcted by petitioners; that unless petitioners were removed as trustees, the entire estate would be dissipated; that petitioners are in possession of funds belonging to certificate holders which could be distributed to certificate holders upon the removal of petitioners; and that petitioners were not independent trustees, but were in fact, under the control and directions of other interest adverse to those of certificate holders."

Petitioners further charged "that their good faith and honesty have been impugned by the aforesaid representations; that as trustees and officers of this Court, petitioners believe they are charged with the duty of protecting the said trust estate and the interest of its beneficiaries; that in discharge of their said duties, petitioners believe it is encumbent upon them to bring these facts to the attention of this honorable Court, so that proper and adequate steps may be taken to conserve said estate and prevent the possibility of injury thereto; petitioners further charge that the methods employed by said Committee and the members and agents thereof, and the soliciting of said Deposit Agreement, tend to destroy the confidence of certificate holders and the public in the integrity of this honorable Court, and of petitioners, and call for investigation and examination."

The petition concluded with this prayer: "Petitioners therefore pray that this honorable Court investigate and examine the method employed by said Committee, its members, agents, servants and employees in soliciting certificate holders to assent to said Deposit Agreement; that the merits of said Deposit Agreement and the protection afforded thereby to certificate holders be scrutinized and investigated; that the said Committee, its members, agents, servants and employees be restrained and enjoined from soliciting for its deposits under said Deposit Agreement, until the further order of this Court."

On the return of the rule to show cause, allowed on the petition of the trustees, the members of the "Committee" met all material facts, set forth in the petition and affidavits, by a full, explicit, and circumstantial denial, under oath. In addition to a categorical denial of the acts of alleged wrongdoing on their part, they also denied that they had employed or authorized any one to obtain signatures to their "Deposit Agreement." It appears that they sent a copy of the proposed agreement to each certificate holder and attached a letter thereto in which it was stated, among other things: "* * * It is urgently requested that you read this Agreement thoroughly and, if necessary, secure the advice of your attorney in connection therewith, to the end that if you deem it advisable, you deposit your certificates with the United National Bank of Cliff side Park. * * *" Their affidavits went farther. They disclosed their activities in the premises, in detail, from the very beginning. They disclosed especially that on January 14, 1935, the "Committee" was given power of attorney by some 96 certificate holders to take any proceeding in law or in equity they deemed fit and advisable in connection with their certificates; that these certificates totalled in amount $318,000; that, although the members of the "Committee" held certificates totalling $11,000 only, nevertheless, by September 13, 1935, they had procured and had on deposit with the' United National Bank, their depository, certificates totalling $603,480; that the members of the "Committee" worked hard, without compensation, and financed all expenditures incident to their undertaking in the premises; that they were making every effort to conserve the property for the benefit—as they saw it—of their certificate holders, who, as stated, were materially and substantially so concerned.

At this posture of the proofs the Vice Chancellor made the following order (recitals omitted) :

"It is on this 26th day of September, 1935, ordered that this matter be referred to William F. Burke, one of the Masters of this Court, to ascertain and report upon the matters contained in said petition; to investigate and examine the methods employed by said Committee, its members, agents, servants and employees, in soliciting the deposit of certificates under said Deposit Agreement; to examine and investigate the merits of said Deposit Agreement, and the protection afforded thereby to the holders of certificates, and the financial interest and qualifications of the members of said Committee, and that said Master report thereon with all convenient speed."

"It is further ordered that William B. Robinson, William Volz, Theodore Riel, Valentine Reinzer, Katherine O. Berls, Edward J. Flynn, Margaret P. Flynn, and Lola Kingsley, members of said Certificate Holders' Protective Committee as aforesaid, their agents, servants and employees, be and they are hereby, each and every one of them, restrained and enjoined from soliciting...