Lonsdale v. Speyer (249 A.D. 133, 1936)

McAvoy, J.

The complaint which was held insufficient below alleges that plaintiffs were appointed trustees of the St. Louis-San Francisco Railway Company by the United States District Court for the Eastern District of Missouri, Eastern Division, on October 28, 1933, and since that time have been acting as such trustees; that by an order of the same court, dated June 14, 1935, they were authorized and directed as such trustees to prosecute this action.

That the St. Louis-San Francisco Railway Company (hereinafter referred to as “ the Frisco ”) was organized on August 24, 1916, in the State of Missouri, and operated lines of railroads in the State of Missouri and in other western States and in southern States from November 1,1916, until the appointment of a receiver for it and its property by the above-mentioned court.

That from August 24, 1916, until the appointment of a receiver, the Frisco had a place of business in New York, N. Y., where its board of directors and executive committee met and transacted business; that all the transactions and occurrences, hereinafter referred to, unless otherwise stated, took place in New York, N. Y.; that the partnership firm of Speyer & Co. and the partnership firm of J. & W. Seligman & Co. (hereinafter collectively referred to as “ the bankers ”), ever since the incorporation of the Frisco and during the life of its predecessor, St. Louis and San Francisco Railroad Company, were the bankers for said corporations and their “ confidential and trusted advisers, agents and guides in all their financial matters, stock and bond transactions, and in the matter of the acquisition and sale of stocks and bonds and in the issue and sale of securities. In every way, during the times hereinafter mentioned, they had and bore the closest confidential and trust relations to and with the Frisco and its predecessor corporation and dominated and controlled the determination and administration of all the financial affairs and financial policy of the Frisco and its predecessor corporation, including the matter of the acquisition of stocks and bonds and the creation of stock and bond issues and the disposition of the same.” The Frisco became and was the successor to and of the St. Louis and San Francisco Railroad Company (hereinafter referred to as “ the railroad ”), under and by virtue of its reorganization in 1916; that Speyer Co. and Seligman & Co., as reorganization managers and trustees of the Frisco, held in their hands in trust for the Frisco in excess of 50,000 shares of the common stock of the Frisco; that in pursuance of the conspiracy, the bankers sold 50,000 of the Frisco common stock to themselves for $4,762,500 and credited the amount to the Frisco in partial payment of the 183,333 shares of Rock Island common stock; that the price so credited was and was known and intended by the bankers to be less than the fair value of the 50,000 shares at that time, and this price was fixed upon by the bankers and Brown in order that the reorganization managers and trustees should make a profit for \themselves, which they did, at the expense of the Frisco.

That pursuant to the conspiracy, Speyer & Co. and Seligman & resold the 50,000 shares at a profit of about $346,105.06, and collected large sums in dividends on the stock after they acquired it.

That, in addition to the fraud perpetrated in the purchase of the 50,000 shares of Frisco common stock, it was agreed by Speyer & Co. and Seligman & Co. that one-half of any sum in excess of the par value obtained by them on the resale of the 50,000 shares should be paid or accounted for to themselves as trustees for the Frisco, but, although they resold the 50,000 shares for $108,605.06 in excess of the par value of the shares, they wrongfully concealed the fact from the Frisco and failed and still fail and refuse to account or pay over to the Frisco or plaintiffs the one-half of the amount in excess of the par value obtained by them on the resale.

That by causing the Frisco to acquire the 183,333 shares of Rock Island common, and in pursuance of the conspiracy, Speyer & Co. were enabled to become and became firmly entrenched as bankers for the Rock Island, and through such connection made large profits, and Brown became chairman of the executive committee/ of the Rock Island, with a salary of $50,000 per year.

That the transactions with reference to the acquisition of the Rock Island stock were perpetrated by means of a fraud upon the Frisco, and its stockholders and creditors, who were at all times ignorant of the facts constituting the fraud, and that such facts were not known until discovered by the plaintiffs as trustees as the result of proceedings instituted by them under the direction of the United States District Court in the year 1935, the Frisco being at all times under the domination and control of Speyer & Co., Seligman & Co., and Brown.

The prayer for relief asks a decree rescinding the transactions involving the acquisition of the 183,333 shares of Rock Island common stock by the Frisco; directing the defendants to pay to plaintiffs $10,506,090.40, plus interest at six per cent from January 26, 1926, less the amount of dividends received by the Frisco on the Rock Island stock and less the present value of the 183,333 shares of Rock Island stock. An accounting by the defendants is also asked for all profits and gains of every kind received by them or any of them from or because of, or growing out of the matters and things hereinbefore set forth, and for a full accounting by the defendants as trustees of and for the Frisco, etc.

Defendants constituting Speyer & Co. and defendant Brown moved for an order dismissing the complaint, under rule 106 of the Rules of Civil Practice, upon the ground that it did not state facts sufficient to constitute a cause of action.

The defendants constituting J. & W. Seligman & Co. moved for an order dismissing the complaint, or, in the alternative, for an order, pursuant to rule 102, directing that an amended complaint be served which does not attempt to state and improperly unite inconsistent causes of action or claims. As to this alternative motion no ruling was made in the order since the complaint was dismissed. We have, therefore, no appeal from either a denial or an ignoring of this demand for relief and cannot as an appellate court consider its merits.

The motions of the defendants to dismiss were granted, with leave to serve an amended complaint within twenty days after the service of copies of the orders, with notices of entry thereof. The court below, in its opinion, indicated that its conclusion was reached because the rescission action lacked an allegation whether the defendants sold the stock to the Frisco, or whether they Were merely agents of the Frisco in the purchase.

That there were no allegations of actual fraud in the transaction; that there was no showing of constructive fraud in the complaint; that there was an absence of allegations of fact showing the conspiracy and the fiduciary relationship; that there were no facts alleged showing domination and control.

That, in so far as an accounting was sought for the profits made on the Rock Island stock by the defendants, there was the same lack of allegations of fact to show the existence of a fiduciary relationship; that the claim for profits made on this stock is inconsistent with the claim for rescission of 183,333 shares transaction; that as to the accounting for profits made on the 50,000 shares of the Frisco stock, the complaint is defective, for the reason that no facts are alleged showing the trust relationship relied upon.

That as to the accounting for one-half of the excess of the par value of the 50,000 shares of Frisco, the complaint was defective in that the terms of the agreement and the parties thereto were not set forth; that there was no allegation that the said sum had not been “ accounted for to themselves as trustees;” that this claim is inconsistent with the preceding claim which seeks to recover all of the profits made on the sale of the 50,000 shares. The court below also said that there were no allegations from which it can be inferred that the benefits accruing to the bankers or to Brown in themselves constituted either a fraud upon the Frisco or a diversion of benefits which might have been secured for the Frisco itself.

In determining whether the words used in a pleading constitute allegations of fact or conclusions of fact and not conclusions of law, it is proper to ascertain the meaning of the words used by consulting dictionaries of recognized standing. (Kavanaugh v. Kavanaugh Knitting Co., 226 N. Y. 185, at p. 192.) The words “ confidential and trusted advisers, agents and guides ” are words in common use and are easily comprehended by any person of average intelligence who understands English. These words show that the bankers stood in a fiduciary relation to the Frisco. They are allegations of fact; not conclusions of law.

When a fiduciary uses his power, not for the benefit of the cestui que trust, whose interests alone he should protect, but uses it for his own personal advantage and profit or for the advantage and profit of a third person, that constitutes a fraud and such conduct is enough to charge him with a duty to account. Therefore, it was not necessary for plaintiffs to allege actual fraud in the transaction.

It was not necessary to allege that the Frisco might have secured those benefits for itself, because all profits and every advantage beyond his lawful compensation which come to a fiduciary are for the benefit of his cestui que trust.

There is no question that defendant Brown was a fiduciary of the Frisco.

The complaint states that Speyer & Co. and Brown, “ while occupying trust relationship to the Frisco, did secretly confederate and conspire together to use its funds and property and to manipulate its financial affairs for their own benefit.” This is a sufficient statement of fact, or conclusion of fact of a conspiracy, considering the complaint in its entirety. There are sufficient conclusions of fact that before the consummation of the transactions, Seligman & Co. knowingly became a party to the conspiracy, aided Speyer & Co. and Brown therein and took part of the profits which came out of said transactions. One who co-operates with a fiduciary in his breach of duty becomes fiable in every way as the fiduciary with whom he co-operates.

Even if Speyer & Co. and J. & W. Seligman & Co. had not been ' fiduciaries of the Frisco, and even if they had not been participants ini he conspiracy, they are liable with Brown because they knowingly co-operated with him in his breaches of duty as a director.

The words “ domination ” and “ control ” as used in the complaint constituted a statement of facts and the legal relationship in question arose from those facts. These words do not stand alone in the complaint. They are used in connection with facts and acts specifically stated and are in their nature really conclusions of fact.

The prayer for relief is no part of the cause of action. It does not matter that the plaintiffs have asked for the wrong relief, or that they may not be entitled to all the relief they seek or to any of it or that it is inconsistent with the cause of action stated. If the complaint states a cause of action the relief to be awarded must be left to the trial court for determination. A plaintiff may include in his complaint allegations of fact in the alternative in stating his cause of action, and upon the trial is entitled to obtain relief in accordance with his proof. In such a case a complaint is not subject to a motion to dismiss it for insufficiency.

Sufficient facts are alleged in the present complaint to set forth a good cause of action against all the respondents for rescission or an accounting for profits and losses.

The orders should be reversed, with twenty dollars costs and disbursements, and the motions denied, with leave to the defendants-respondents to answer within twenty days after service of order with notice of entry, upon payment of said costs.

Martin, P. J., O’Malley, Townley and Dore, JJ., concur.

Orders unanimously reversed, with twenty dollars costs and disbursements, and motions denied, with leave to the defendants-respondents to answer within twenty days after service of order upon payment of said costs.