155 N.E. 102 | NY | 1926
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 12th, 1920, and payable December 1st, 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 fifty-five thousand 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 *213 trust from George F. Underwood and Jennie A., his wife, dated July 28th, 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. One million dollars 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 first 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 the 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 28th, 1901, until his death on or about August 6th, 1923, and was from October 24th, 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 benefit 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," *214 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 28th, 1920, and recorded. They even recite that the deed of trust is "recorded in Somerset [Maine] Registry of Deeds, Vol. 363, Page 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 *215 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 buying parties," 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.R. Co.,
Undoubtedly it has frequently been held that a director or officer of a corporation must account to the corporation for profits received in disregard of duty owed to the corporation. (McClure v. Law,
Different question arises where the agent sells to his principal at a profit property which the agent might have retained for himself or sold to a stranger. If the contract of purchase is rescinded the principal has no title to the property or right to retain it. If the principal fails to return the property he may not claim that the contract was made without authority. A corporation may not repudiate the obligations of a contract made with a director and at the same time retain its benefits. If contract with the director was valid the corporation must pay the agreed price; if invalid the corporation must rescind or repudiate the contract in its entirety. A director who may sell or retain the property at his will may also determine the price which will induce him to sell to the corporation. Profit made is the fruit of his ownership, and not of his agency. (Burland v. Earle, *218
1902 A.C. 83; Matter of Lady Forrest [Murchison] Gold Mine,Ltd., 1901, 1 Ch. 582.) The agent or director may, therefore, not be called upon to account for such profits. If the contract which fixed the amount of the seller's profits is not rescinded or void, the fact that the profits are so large that they might be called "exorbitant" is ordinarily immaterial. In similar situation like result has generally been reached by the courts of this country. (See Kilbourn v. Sunderland,
Underwood had owned some of the land sold for some years. There is no claim that in buying these lands he acted as agent for the corporation or that the corporation had any interest therein, legal or equitable. Part of the land he purchased in the year 1919. The defendants allege that he purchased this part with knowledge that "International Paper Company contemplated and was considering the purchase of the tracts." If that knowledge induced the purchase by Underwood of land; if he acquired it with intent to divert into his own coffers prospective benefit which the corporation expected to acquire; if he bought for himself when duty to the corporation required him to act only for it, then the corporation might insist that his title so acquired was held for its benefit. (Robinson v. Jewett,
All the allegations of the first counterclaim are realleged in the second counterclaim. Other allegations, presumably *220 intended as a cause of action based on fraudulent representations, are also pleaded. On their face they are insufficient for such purpose. There is not even an allegation of what representations were actually made. The second counterclaim contains allegations constituting the same cause of action as the first but adds nothing thereto.
The plaintiff also urges that the cause of action pleaded is not "on contract" and does not arise out of the "contract or transaction set forth as the foundation of the plaintiff's claim or connected with the subject of the action," and, therefore, may not be pleaded as a counterclaim. (Civil Practice Act, section 266.) That contention finds support in the decision in VulcanMetals Co. v. Simmons Mfg. Co. (248 Fed. Rep. 853). We reach opposite conclusion. The action is founded upon notes given as the consideration for the purchase of land. If the allegations contained in the counterclaim can be established the plaintiff may be compelled to return part of the purchase price represented by the notes in suit because of wrong committed in exacting them as stipulated price of the land. Under such circumstances a construction of the statute which would preclude the defendants from establishing their rights in an action upon the notes seems to us too narrow.
The order of the Appellate Division should be affirmed, with costs, and the certified questions answered in the affirmative.
HISCOCK, Ch. J., CARDOZO, POUND, McLAUGHLIN, CRANE and ANDREWS, JJ., concur.
Order affirmed, etc. *221