Flynn v. Brooklyn City Railroad (158 N.Y. 493, 1899)

Vann, J.

For the purpose of this appeal such facts as could properly have been proved under the allegations of the complaint, when supported by reasonable implication and fair intendment, must be accepted as true, and, in connection with the admissions made upon the opening, must be treated as the facts of the case upon which the rights of the parties depend. (Marie v. Garrison, 83 N. Y. 14; Kley v. Healy, 127 N. Y. 555 ; Sage v. Culver, 147 N. Y. 241, 245.) The question of primary importance is whether those facts constitute a cause of action against the defendants upon the merits, although due regard must be paid to any technical deficiencies that may exist.

The case presented upon the merits is that of a stockholder in a successful, dividend-paying corporation, with large assets and good prospects, who was compelled by the vote of the directors and the other stockholders, induced by fraud, to surrender a part of his interest in the corporate assets represented by his stock, without any real consideration. The stock owned by the plaintiff made him the equitable owner of - an undivided fractional part of the entire assets of the company. (Burrall v. Bushwick R. R. Co., 75 N. Y. 211, 216; Jermain v. Lake Shore & M. S. R. Co., 91 N. Y. 483, 492.)

By the lease he was forced to part w,ith one-tenth of his interest without a corresponding advantage. The lessor company in which he was interested transferred all its rights and property to an irresponsible lessee, with inadequate security, for the privilege of buying back a part only of that property and paying a premium therefor. Leaving out of view for the present the security furnished, and we have the lessor parting with all it had for the right to buy back nine-tenths ■ thereof and pay over $4,000,000 for the bargain. The stockholders got nothing except a part of their own property and paid heavily for the privilege. They parted with property of immense value for stock in a traction company with no assets and without a dollar of paid-up capital, and in addition were: compelled to pay $15 for every share given them. The syndicate on the other hand paid nothing for their shares of the par value of $3,000,000, except $15 a share, which every stock- - holder of the lessor had to pay, in addition to parting with his interest in a paying corporation with $30,000,000 worth of property. The profits of the syndicate in the transaction itself were over $2,000,000, and its prospective profits were nearly $500,000 a year. A solvent and powerful lessor gave every thing it had to an insolvent and weak lessee, and received in payment a part of its own property, paying a premium even for that right. There was no substance to any of the three companies except what was furnished by the lesáor, and the scheme, in effect, was to divide up its property and donate a part of it to the syndicate. There was no exchange of properties, but simply a division of the substantial property owned by the lessor. The lessee contributed nothing and the syndicate contributed nothing, except as it paid $15 a share for the stock of the traction company, the same as the stockholders of the lessor were compelled to do. The scheme did not involve a consolidation of two valuable properties, which, by uniting, would be able to earn more at less expense, but it involved a surrender by the lessor of part of its own with nothing to speak of in return. The little railroad, with nominal assets, swallowed the big railroad with assets exceeding $30,000,000, and the traction company, with no assets whatever, swallowed both, and it is claimed that this scheme is not fraudulent as to a protesting stockholder of the road making the sacrifice. Rone of the three corporations involved had anything to lose except the lessor. One of them had nothing whatever, and another had so little that it is not worth mentioning in comparison with the splendid property successfully managed and paying a great profit that belonged to the lessor. The sham traction company, with no assets whatever, and the dummy lessee, with but trifling assets, had no substance except what they sucked as parasites from the lessor. The traction company got its first assets in the $15 a share paid for its stock by the stockholders of the lessor, and the traction company’s promoters got $3,000,000 for $450,000.

But, it is said, the stockholders of the lessor get ten per cent dividends guaranteed and secured for all time in place of the eight per cent they had before. What do they get it out of ? Their own property, capable as we must assume of paying fifteen per cent instead of ten. Row we come to the only value furnished by the syndicate, and that is security for the payment of the ten per cent dividends by the deposit of $4,000,000. How long will that last under unsuccessful or dishonest management by trustees incompetent or willing to wreck in order to make money ? Security is furnished for less than five years’ rental on a lease for nine hundred and ninety-nine years. While the amount of the security seems large in one sense, in fact it is small when the magnitude of the risk is considered. The syndicate received over two and one-half millions of dollars for furnishing a guaranty that a road capable of earning and paying dividends of fifteen per cent would pay dividends of ten per cent. Moreover, the syndicate did not furnish any security whatever except in form, for the substance came from the stockholders of the lessor through their subscriptions to the capital stock of the traction company. The guaranty fund was four millions of dollars, but the subscriptions of the stockholders to the stock of the traction company was more than four millions