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Connolly v. Bell

Supreme Court of New York, Appellate Division

June 7, 1955


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[Copyrighted Material Omitted]

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[141 N.Y.S.2d 756] A. Donald MacKinnon, New York City, of counsel (Rebecca M. Cutler, New York City, and Michael F. Orr, Brooklyn, with him on the brief; Milbank, Tweed, Hope & Hadley, New York City, attorneys), for plaintiffs-appellants.

Frederick W. R. Pride, New York City, of counsel (Donald J. Nugent, New York City, and Robert M. Lane, New York City, with him on the brief; Dwight, Royall, Harris, Koegel & Caskey, New York City, attorneys), for defendants-respondents.


CALLAHAN, Justice.

Plaintiffs moved for summary judgment in the Supreme Court, New York County, in an action on a judgment previously rendered in the State of New Jersey. The primary issue is whether the New Jersey judgment is entitled to full faith and credit in New York. U.S.Constitution, Art. IV, § 1; 28 U.S.C. § 1738.

The New Jersey action was instituted in December, 1948, by the Governor and Attorney General of the State of New Jersey to set aside the acquisition of two toll bridges across the Delaware River by the Burlington County Bridge Commission in October, 1948. The facts in the action are set forth in the opinion of the Supreme Court of New Jersey, see Driscoll v. Burlington-Bristol Bridge Co., 8 N.J. 433, 86 A.2d 201. Summarized, the claim was that certain defendants, pursuant to a fraudulent scheme, formed a syndicate to acquire the stock of two corporations, which owned the bridges, and then sold the stock at a large profit to a county bridge commission created by the Burlington County Freeholders at the instigation of the defendants. The funds with which the commission paid for the stock were obtained by issuance of the commission's bridge revenue bonds. These were to be purchased by a syndicate, of which some of the sellers of the stock were also members. Under federal and state statutes, pursuant to which the beidges had been erected,

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provision had been made for condemnation or purchase by the state at a price fixed according to statutory formual based on a percentage over cost. It was estimated that the price to be paid in condemnation would [141 N.Y.S.2d 757] have been $5,000,000, whereas the sum paid by the bridge commission was $12,400,000. One of the consequences of the sale to the commission was the termination of the state's right to acquire the bridges by condemnation.

The original complaint in the New Jersey action originally sought rescission of the entire transaction, the appointment of a receiver, and such other relief as the court might deem just and equitable.

Subsequently, the complaint was amended to add, among other things, a cause of action for money damages against individual members of the selling syndicate. The damages asserted were the $7,400,000 represented by the difference between the cost of condemnation and the sum paid. Certain of the defendants filed counterclaims and cross-claims for the purpose of having the bonds declared valid and to compel the commission to perform its obligations with respect thereto.

During the course of trial in the New Jersey action, the plaintiffs therein elected to proceed solely on the theory of rescission and waived their cause of action against members of the selling syndicate for the $7,400,000 damages. The case then proceeded as if the pleadings were in their original form.

The trial court found that the bridge commissioners were derelict in the performance of their public duties. It found that the contracts, except the contract for sale of the bonds, were against public policy and void. The trial court also found that the various holders of bonds had either participated in or had knowledge of the illegality of the transaction so as to prevent their being holders in due course. It directed entry of judgment in rescission for surrender of the bridge to the corporations formerly owning them and return of the purchase price. See Driscoll v. Burlington-Bristol Bridge Co., 10 N.J.Super. 545, 77 A.2d 255.

While the Supreme Court of New Jersey on appeal concurred in the findings of the trial court as to fraud in the acquisition of the bridges by the bridge commission, it determined against a full rescission as appropriate relief in the circumstances. This was:

'because of the fact that it would substantially prejudice the rights of the holders in due course of the bonds of the bridge commission. These bonds as issued are a lien on the revenues of the two bridges. So long as these bridges remain in the hands of the bridge commission they and their revenues are tax-exempt, but if the bridges were restored

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to private ownership it would be beyond the power of the court to prevent property taxes and income taxes from diverting funds in substantial amounts which would otherwise be payable to the bondholders. It is obvious, therefore, that a present rescission on any terms which we could impose would be inequitable to the bondholders, depriving them of protection to which [141 N.Y.S.2d 758] they are entitled as holders in due course.' See 8 N.J. at pages 497-498, 86 A.2d at page 232.

The Supreme Court of New Jersey further stated that the most equitable and practical relief was to leave title to the bridges in the bridge commission, subject to the supervision of the court. It noted that the plaintiffs during trial had elected to proceed on the theory of rescission alone and had waived any claim against the defendants for $7,400,000 in damages. The court then stated, 8 N.J. at pages 499-500, 86 A.2d at page 233:

'This waiver was relied upon by the defendants in determining what witnesses to call in their defense and accordingly is binding on us as well as on the court below and prevents any assessment of damages based on the amended complaint against the selling syndicate. This waiver does not preclude us, however, from requiring the members of the selling syndicate over whom the court acquired jurisdiction to disgorge the profits which they received from this illegal transaction. Where rescission is prayed for and is warranted by the facts, but cannot be decreed because of the intervening equities of innocent third parties such as the bondholders here, under general principles of equity the court may require the wrongdoers to account for their profits so that as nearly as may be the parties will be protected and equity done (citing cases). Moreover, where as here the wrongdoers have conspired together to reap a profit out of a fraudulent transaction they are jointly and severally liable and it is not necessary even that they all be before the court in order to grant complete relief (citing cases). The members of the selling syndicate must make restitution of that which they have received, for otherwise they will be injustly enriched by their fraud at the expense of the public. They and their nominees are therefore liable ...

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