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Backer v. Levy

February 10, 1936

BACKER ET AL.
v.
LEVY ET AL.



Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is an appeal from a decree dismissing the bill of complaint in that it stated no cause of action and that the court was without jurisdiction because of lack of diversity of citizenship. The decree was entered upon a motion by the defendant Levy to dismiss the bill for the foregoing reasons.

The complainants are citizens of the state of South Carolina and infants suing by their guardian ad litem. The individual defendants are all citizens of the state of New York, and each of the corporate defendants is a corporation organized under the laws of that state, having its principal place of business in the Southern District of New York.

The complaint alleges that George Backer died in 1921, leaving a will that was admitted to probate by the Surrogate of New York County wherein, after providing for the payment of debts and disposition of household effects, he left the residue of his estate in trust to pay the income to his widow Sarah Backer for life and provided that: "Upon the decease of my said beloved wife, I give, devise and bequeath the whole of my residuary estate, both real and personal, to my children living at the decease of my wife, and to the issue of any of them who may have died before her, in equal shares, per stirpes and not per capita."

There survived the testator his widow Sarah Backer and five children, among whom was William Backer, the father of the complainants, who died in 1932. He appointed, as the executors and trustees under his will, the defendants, his widow Sarah Backer, his son William Backer, since deceased, and Waldron P. Belknap and Samuel Levy, each of whom qualified on June 14, 1921.

The complaint alleges the following:

The defendant Levy had been for many years the testator's lawyer and business associate and from the inception of the administration of the estate assumed control thereof and managed it almost to the exclusion of the other executors and trustees. The business of the testator was the operation and ownership of large business and hotel buildings and other real estate, and in connection with such operations it was his custom to take title in the name of a corporation controlled by him or organized for that purpose. One of his largest operations was the erection of the Textile Building on Fifth avenue, New York, between Thirtieth and Thirty-First streets. In December, 1919, he contracted to purchase the ground for $2,300,000, and on December 26th caused the defendant Textile Building, Inc., to be organized with a capital of $500 consisting of 100 shares of the par value of $5 each. The entire cash capital of $500 was paid in by him, the capital stock belonged to the testator, and he, his wife, and secretary were the officers and directors. The expense of the building enterprise was approximately $4,800,000, consisting of the cost of the ground, $2,300,000 and of the building approximately $2,500,000. Upon completion the property was subject to a first mortgage of $3,500,000, and a second mortgage of $1,200,000, and all funds expended in the construction and financing over and above the amount of the mortgages were supplied by the testator and he was the sole owner of all the stock at the time of his death. After the testator's death, Levy, while acting as one of his executors, without right and in fraud of the rights of the estate and of the beneficiaries, including the complainants, appropriated to himself 20 of the 100 shares of the Textile Building, Inc., caused himself to be elected a director and president of the corporation and exercised complete control of its affairs.

In March, 1928, Levy caused the defendant Textile Properties, Inc., to be organized with a capital of $1,000,000 consisting of 10,000 shares of the par value of $100 each, became a director and treasurer thereof, and continued as such until October 22, 1934. On or about April 24, 1925, and while Levy was president and director of Textile Properties, Inc., Textile Building, Inc., transferred all of its assets (except approximately $60,000 in cash) to Textile Properties, Inc., and the latter company gave its entire capital stock consisting of 10,000 shares of $100 each in exchange for such assets. This stock was to be immediately distributed among the stockholders of Textile Properties, Inc. Levy, without consideration, in fraud of the Backer estate, and while acting as one of its executors, appropriated to himself 2,000 of the 10,000 shares of Textile Properties, Inc., which in law belonged to the estate.

Thereafter the capitalization of the Textile Properties, Inc., was increased to 100,000 shares of no par value, which resulted in an issue to Levy of 20,000 shares in place of the 2,000 shares which he already held. In November, 1928, the defendant Manhattan Properties, Inc., was organized, to which Textile Properties, Inc., transferred all its assets, except the Textile Building, in exchange for 66,000 shares of stock of Manhattan Properties, Inc., of the par value of $100 each. Levy became treasurer and a director of this company and fraudulently appropriated to himself 13,200 shares of the stock which in law belonged to the estate.

The complaint further alleges that Levy received dividends upon the stock of Textile Properties, Inc., which he had appropriated, amounting to $120,000, and upon the stock of Manhattan Properties, Inc., which he had appropriated, amounting to $16,500, though all the stock and the dividends belonged to the estate. On April 10, 1935, the defendants Sarah Backer and Waldron P. Belknap, as executors, demanded a return of the foregoing property of the estate, but Levy refused to comply with the demand.

The defendants Sarah Backer and Waldron P. Belknap had no part in the acts and misconduct of the defendant Levy and are made parties to the suit in order that complete and appropriate relief may be directed. No judgment is asked against them. The complaint prays that Levy individually and as executor and trustee account for the 20 shares of stock of Textile Building, Inc., 20,000 shares of stock of Textile Properties, Inc., and 13,200 shares of stock of Manhattan Properties, Inc., and dividends amounting to $136,500 with interest thereon, and that he be directed to restore the shares of stock and moneys to the estate, and that the defendant corporations be directed to issue in the name of the executors and trustees new certificates in place of those which stand upon their books in the name of Samuel Levy.

The court below dismissed the suit because complainants, though bringing it in the right of the executors and trustees, had failed to aver a demand upon the executors and trustees to bring suit and a refusal by them to sue, likewise because such executors and trustees were indispensable parties who had to be aligned with the complainants, and as so aligned would prevent the diversity of citizenship between complainants and defendants necessary to give the District Court jurisdiction. If the suit brought is in fact derivative, it cannot be doubted that the result reached by the court below would necessarily follow. The question, therefore, ...


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