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Cass v. Realty Securities Co.

Supreme Court of New York, Appellate Division

December 29, 1911


Page 97

APPEAL by the defendants, the Realty Securities Company and others, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 6th day of June, 1911, overruling the appellants' demurrers to the complaint and granting the plaintiffs' motion for judgment on the pleadings.


Grenville Clark [Elihu Root, Jr., and Alfred C. Intemann with him on the brief], for the appellants.

Walter H. Bond, for the respondents.


The plaintiffs, claiming to own bonds issued by the Realty Securities Company which were secured by a junior lien upon certain real estate, complain that defendants, other than the Title Guarantee and Trust Company, have diverted a part of the net proceeds of the sale of the mortgaged property to the payment of the general creditors of the securities company, and threaten so to devote what remains of said net proceeds. Their claim is that their lien attached to the net proceeds,

Page 98

after satisfaction of the prior liens, and that their right thereto was superior to that of the general creditors. The relief sought is that a receiver be appointed of the assets of the securities company; that an accounting be had of the management, application and disposition by the individual defendants (who are directors of the securities company), and particularly in regard to the proceeds of the sale of mortgaged property; that the said defendants be required to pay to the receiver any moneys or the value of any property which they have wrongfully, illegally and improperly paid out or transferred or lost or wasted; that the securities company and the individual defendants be enjoined from paying out any moneys of the company for any purpose, except under the order of the court; and that the assets of the company be collected and marshaled.

The amount said to be due upon the whole issue of bonds, and which plaintiffs seek to recover, is for unpaid interest and much exceeds in amount the net proceeds of the sale of the mortgaged property, which is stated at $33,000, of which $20,000 has been paid to general creditors and $13,000 is still in possession of the securities company. The plaintiffs' contention is that their lien upon the property was transferred and attached to the net proceeds of the sale of the mortgaged premises; that their right thereto was superior to that of the general creditors, and hence that the appropriation of any part of it to the payment of the claims of general creditors was unlawful. The demurrer, besides other grounds, challenges the complaint for general insufficiency and for misjoinder of causes of action. I think that there can be no doubt that the plaintiffs have attempted to set forth at least two causes of action. If so, the complaint is obnoxious to the demurrer whether either or both have been well pleaded. There is a cause of action against the securities company to recover the $13,000, part of the proceeds of sale of the mortgaged property still remaining in its hands. To this action the individual directors are not proper parties. There is also a cause of action attempted to be set out against the individual directors to recover moneys or properties said to have been lost, disposed of or wasted in consequence by their wrong. These two causes of action rest upon wholly different principles and must be sustained

Page 99

by quite different facts. They are incapable of joinder in one complaint. It may also be, as claimed by appellants, that there are two causes of action united against the company, one legal and one equitable, but it is sufficient for present purposes to treat the complaint as containing only the two causes of action above mentioned.

So far as concerns the individual directors the complaint does not, in my opinion, state a cause of action. The directors as individuals owed no duty directly to the plaintiffs. The plaintiffs' contract was with the securities company, and its claim is against that company; consequently whatever right it may have to proceed directly against the directors is a derivative one, and must be prosecuted in the right of the company. In other words, they cannot obtain any relief which the company could not obtain if it sued. Plaintiffs have not, I think, qualified to sue the directors because they have not yet exhausted the remedies against the company, but, passing that point, it seems clear that no action will lie in right of the company because it does not appear that the company has suffered from anything which the directors have done. They have simply paid one class of creditors, instead of another. Furthermore it is not alleged that the individual directors, even if they have paid general creditors with moneys upon which plaintiffs had an equitable lien, have been guilty of anything more than an honest mistake. It is well settled that directors are not liable for mere errors of judgment if they act without corrupt intent. ( People v. Equitable Life Assurance Society, 124 A.D. 731, and cases there cited.) And this is equally true whether the mistake of judgment refers to the law or the facts. It was so held in Seymour v. Spring Forest Cemetery Assn. (4 A.D. 359; affd. on opinion below, 157 N.Y. 697), wherein the claim against the directors was quite similar to that embraced in this complaint, to wit, that the directors had failed to apply to the proper purpose certain funds of the association. I do not overlook the fact that the complaint charges the directors with having entered into a scheme or plot to injure and defraud the securities company and its bondholders, and also contains other general charges of fraud and mismanagement. All these, however, are merely the conclusions of the

Page 100

pleader and are of no moment except as supported by specification of wrongful acts, and when we look for the specification we find nothing more than an allegation that the directors have paid or caused to be paid a part of the proceeds of the mortgaged property to the general creditors of the company, instead of reserving it for plaintiffs. I am, therefore, clearly of the opinion that the complaint attempts to set up two causes of action which cannot properly be joined, ...

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