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Heckscher v. Edenborn

Supreme Court of New York, Appellate Division

March 12, 1909


Appeal from Trial Term, Suffolk County.

Action by August Heckscher against William Edenborn. From a judgment for plaintiff entered on the decision of the court without a jury, defendant appeals. Reversed.

[115 N.Y.S. 674] Frederic B. Jennings (Charles MacVeagh and Allen Wardwell, on the brief), for appellant.

Henry Wellman (Timothy M. Griffing and Edward S. Seidman, on the brief), for respondent.



This is an action at law, tried by the court, a jury having been waived, to recover, as moneys had and received, the amounts paid by the plaintiff and his assignors for certain stock in the Sheffield Coal & Iron Company in pursuance of their subscriptions to a syndicate agreement which they claim to have rescinded. The learned trial court has made 96 findings of fact and 20 conclusions of law sustaining the plaintiff's contention, and awarding judgment for the full amount claimed. The defendant excepts to certain of the findings of fact and to all of the conclusions of law, and urges upon this appeal that the judgment be reversed.

We are of the opinion that notwithstanding the heroic affirmations of plaintiff's counsel, and his many suggestions of what an honest man should do and say under given circumstances, this judgment is not right, and that it should not be affirmed. We do not believe the evidence in this case warrants the conclusion that there was constructive fraud on the part of the defendant, much less that there is evidence to support the conclusion that he was guilty of any actual fraud. The complaint sets out various causes of action, one upon a claim of the plaintiff and the others on assigned claims, substantially the same facts appearing in each case, so far as it is necessary to the consideration of the questions involved on this appeal. The theory of the complaint is that the defendant in this action, as the agent of the plaintiff and his assignors, purchased certain shares of stock, constituting a majority, of the United States Iron Company, which stock belonged to the defendant, without disclosing such ownership to the plaintiffs, and that they, upon the discovery of this fact, returned to him the stock issued to them for their subscriptions to the syndicate fund, and demanded the return of their money, thus rescinding the contract under which they had paid their money, and being entitled to recover the same in an action at law. There is no doubt of the rule of law invoked, but there is in our opinion no ground for its application to the facts in this case, and we are persuaded that the learned trial court has fallen into error in holding that the burden of proof was upon the defendant to show that he had not been guilty of constructive fraud. This seems to us clear from the complaint, which, in so far as it is not denied, must be accepted for the purposes of the action as true. This is certainly the rule as it applies to the plaintiff. He cannot be heard to dispute the facts alleged in his complaint; and if we read that document aright, in connection with the contract between the parties, which is made a part of the complaint, we are unable to understand how the defendant could be called upon to answer in damages in this action, or in any other, without showing that he had been guilty of some actual fraud, which must always be proved, and can never be presumed. The right to rescind a contract undoubtedly exists where an agent has purchased property of himself for his principal without disclosing the facts; and if the syndicate had seen fit to rescind that part of the [115 N.Y.S. 675] transaction which dealt with the property of the defendant Edenborn, or had brought an action to recover any profit he might have made in the transaction, or if the plaintiff, on the refusal of the syndicate to act, had come into a court of equity for relief from so much of the transaction as is above suggested, there might be great force in the proposition. But the plaintiff has not limited himself to the acts in relation to the property of the defendant, Edenborn. He has attempted to rescind the original syndicate contract, and to impose upon the defendant all the losses of the syndicate, without attempting to show that any of these losses resulted from the purchase of the property of the defendant. Indeed, the plaintiff admitted on cross-examination that he made no claim that Edenborn had turned in any property to the Sheffield Coal & Iron Company (the representative of the original syndicate) at a valuation that was not true, or at a valuation that was greater than he paid for it; so that we have a case where business men entered into an agreement to organize a syndicate involving $2,500,000, expressly authorizing the purchase of a particular property at $1,000,000, and then permitting a few of the members of this syndicate to repudiate the whole transaction because subsequently the three syndicate managers carried out the purpose of the syndicate and purchased the stock of the United States Iron Company, not at $1.000.000, but at the rate of $70 per share, or $30 per share less than they were authorized to pay, and this without showing that the syndicate losses were due in any measure to the fact of such purchase. That is, assuming that Edenborn alone acted (that the two other syndicate managers were mere dummies as alleged in the complaint), the constructive fraud in purchasing property in which he was interested is permitted to relate back and to vitiate the original contract, which was made as between man and man, and in which Edenborn was not the agent or fiduciary of any living being, and without showing that it had anything to do with the losses which appear to have been made by the Sheffield Coal & Iron Company, and which furnishes the reason for the attempted repudiation of the contract. But there is not a scintilla of evidence (the allegation being denied) that the other two syndicate managers were Edenborn's dummies; for all that appears in the evidence they were men entirely capable and worthy of trust, and the law always presumes that men have done their duty until something is shown to overcome that presumption. It cannot be doubted that an agent has a right to deal with his own property for his principal if the latter is made aware of the facts and does not object, and, as the principal has a right to ratify the acts of his agent after knowing the facts, he has a clear right to waive that knowledge of the facts in advance, and he has a right to stipulate that the agent may deal with his own property for the principal. Matter of Pet. of N.Y. L. & W. R. R. Co., 98 N.Y. 447, 453, and authorities there cited; Sentenis v. Ladew, 140 N.Y. 463, 466, 35 N.E. 650,37 Am.St.Rep. 569; Mayor of New York v. M. R. Co., 143 N.Y. 1, 26, 37 N.E. 494, and authorities there cited. In the Sentenis Case, supra, it was said:

" A party may waive a rule of law or a statute, or even a constitutional provision enacted for his benefit or protection, where it is exclusively a matter [115 N.Y.S. 676] of private right, and no considerations of public policy or morals are involved, and, having once done so, he cannot subsequently invoke its protection."

See People v. Bloom, 193 N.Y. 1, 85 N.E. 824.

In the light of these rules, let us examine this contract, that we may discover if there be any ground for this recovery. The contract in its first paragraph recites:

" Agreement, dated April 15th, 1902, by and between August Mann, Wm. Edenborn and J. C. Walker (hereinafter called the ‘ Syndicate managers'), parties of the first part, and the subscribers hereto, severally, parties of the second part, of whom each is hereinafter termed a subscriber, and all of whom, together with the said parties of the first part, constitute the syndicate."

And then it continues as follows:

" Whereas, an opportunity is afforded to acquire for a cash consideration the ownership, control and possession of the United States Iron Company of New Jersey, at par, said company being capitalized at one million ($1,000,000), and being the owner of valuable iron ore mines in operation and ore properties located in the states of Alabama and Tennessee, aggregating a tonnage sufficient to insure an ore supply for two or more blast furnaces for a long period; and a further opportunity presenting itself to acquire by cash purchase a valuable coal property situated on the border line between the states of Kentucky and Virginia, which property, being owned by the various parties, can be secured at reasonable prices; also other property."

Here we have in the very first clause, relating to the purposes of the syndicate, a statement that there is an opportunity to purchase a certain definitely pointed out property, involving an expenditure of $1,000,000, or two-fifths of the entire capital of the proposed syndicate, and there is not a word of evidence in the entire case that any one ever asked any questions of the defendant as to the ownership of this property, or that he ever evaded telling any one all about it, while there is evidence that he talked with some of the plaintiff's assignors, as well as with the plaintiff himself, while they were together as a committee of reorganization of a certain railroad property, in reference to his interest in this very property, and a fair reading of Edenborn's correspondence leads irresistibly to the conclusion that he was writing to men who were acquainted with his affairs, and whom he assumed to be in possession of the fact that he was interested in the United States Iron Company. It is entirely unreasonable to suppose that men subscribing from $10,000 to $50,000 to a syndicate aggregating $2,500,000, and being informed that two-fifths of the sum was to be expended in the purchase of the United States Iron Company, would not make some inquiries in reference to the property, if it was not already within their general knowledge; and the fact that the property was distinctly pointed out, and that there is not a particle of evidence to show that Edenborn ever attempted in any manner to cover up anything in relation to it, negatives the suggestion of fraud of any character in the transaction during the time that the syndicate was in the course of formation. If Edenborn had been attempting to do something underhanded, if he had been attempting to unload his property to the syndicate under cover, he could easily have transferred his stock in the United States Iron Company to a dummy, and thus have covered [115 N.Y.S. 677] the matter. But he frankly proclaimed the purpose of purchasing this particular iron company and of bringing into the scheme other properties, thus putting every one on notice of just what was contemplated, and, if there was any one who wanted to know who owned the United States Iron Company stock, it could have been found out easily enough, and there is not the slightest reason to believe that Edenborn himself would not have told any one who had had the curiosity to inquire. It should be borne in mind that in the formation of this syndicate Edenborn was not the agent of any one. He was not occupying in any sense a fiduciary relation. He was simply proposing to the men to whom the subscription paper was presented to join with him in the purchase of the United States Iron Company and other properties, with a view to making money out of the ...

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