Opinion
08-17-1934
LANE et al. v. BOGERT et al.
Arthur T. Vanderbilt, of Newark, for the motion. William Harris, of Newark, opposed.
Syllabus hy the Court.
1. When a bill of complaint as a whole is sufficiently informative to apprise defendants of the nature of the case charged against them, a motion to dismiss the bill for lack of particularity will not prevail.
2. The test of sufficiency as to the degree of certainty with which averments of a bill of complaint must be made, must, to a considerable extent, depend upon the circumstances of the particular case.
3. On a motion to dismiss a bill of complaint as lacking in particularity, if it is not clear whether the bill is objectionable on that account, and the nature of the action is such that a broad inquiry into the facts should be made, the court may deny the motion and proceed to final hearing.
4. When, as in the case sub judice, a bill of complaint shows a systematic violation over a long period of time of the duties and obligations cast by law and equity upon officers and directors of a corporation, there is a prima facie presumption that such course of dereliction and misconduct was known to all of such officers and directors.
5. For any willful breach of trust by officers and trustees of a financial institution such as the company in behalf of which the complainants herein sue, or for misapplication of the corporate funds, or for any gross neglect of, or inattention to, their official duties, such officers and directors are liable; and if the corporation be insolvent and its affairs are in the hands of receivers or trustees, such receivers or trustees may maintain an action against the officers and directors chargeable with dereliction, delinquencies, misconduct, and wrongdoing.
6. Notwithstanding deaths of defendants pendente lite, the estates of such defendants may be held liable for such wrongful acts of such decedents as charged in the bill of complaint, if substantiated by adequate proofs upon final hearing of the cause.
7. Directors of a corporation such as in the case sub judice cannot intrust the entire affairs of the corporation to an executive committee, and, when disaster to innocent and helpless cestuis que trustent ensues, stifle all complaints of their neglects and maladministration by merely disavowing same.
Suit by Merritt Lane and others against J. Calvin Bogert and others. On notice of motion to strike out bill of complaint as against defendant James Cowden Meyers.
Motion denied.
Arthur T. Vanderbilt, of Newark, for the motion.
William Harris, of Newark, opposed.
FALLON, Advisory Master.
The matter sub judice was argued before me as Vice Chancellor on April 17, 1933. After my retirement as Vice Chancellor the consideration and determination of divers motions to dismiss the bill of complaint and for bills of particulars in the above stated cause were referred to me as Advisory Master. My consideration of the motion made in behalf of defendant James Cowden Meyers to strike the bill of complaint as against said defendant actuates me in determining that said motion should be denied, and I will advise an order accordingly. The reasons assigned in the notice of motion aforesaid are insufficient to effect the contemplated purpose. The claim that complainants have an adequate remedy at law is untenable. The claim that complainants have no standing to maintain their suit and that the Court of Chancery was without jurisdiction to adjudge the Fidelity Title & Mortgage Guaranty Company insolvent and appoint complainants as trustees (Docket 88, p. 204) is not only untenable, but cannot be urged collaterally as attempted herein. The defendant Meyers and his codefendants had ample opportunity to question the jurisdiction of the court and the legality of said adjudication and appointment in orderly judicial procedure if either of them considered themselves aggrieved by said decree. The various reasons set out in the notice of motion sub judice are insufficient to warrant the striking of the bill of complaint when the nature of the cause, the fiduciary offices held by the defendants named in the bill, the duties and the responsibilities which such defendants owed to one another and to the Fidelity Title & Mortgage Guaranty Company of Ridgewood incident to and arising out of their fiduciary relation with each other and with said company and cestuis que trustents for whom said company, and the defendant Meyers and his codefendants were acting in a fiduciary capacity, and the fact that the defendant Meyers together with his codefendants were chargeable in law and equity with knowledge of the manner in which the business affairs of the companywere transacted, and the acts of commission and omission of said defendant and his codefendants with respect thereto as alleged in the bill of complaint, are duly considered. While some of the allegations contained in the bill of complaint are not precise, it must be assumed that the defendant Meyers and his codefendants if honestly and faithfully performing (he duties devolving upon them, and if faithful to the trusts confided to them in their fiduciary capacities, had knowledge of the activities of said company and of the manner in which its business was conducted during the time said defendant Meyers and his codefendants were associated with said company in their official and fiduciary capacity.
The bill of complaint as a whole is sufficiently informative to apprise the defendants of the nature of the case charged against them and which they are required to meet and answer.
It is well-known rule of equity pleading that the test of sufficiency as to the degree of certainty with which averments of a bill of complaint must be made, must, to a considerable extent, depend upon the circumstances of the particular case. It appears to me that the allegations of the bill of complaint sub judice are as informative and substantial as the rules of pleading reasonably require in a case such as stated in said bill. I consider it will suffice for me to say that, taken as a whole, a case of negligence, mismanagement, maladministration, breach of trust, malfeasance, misfeasance, nonfeasance, waste and dissipation of moneys and property committed to the care of said defendants in a fiduciary relationship tantamount to trusteeship, and other matters of wrongdoing charged in bill of complaint, all of which alleged to have resulted in great damage to said company and its mortgage participation certificate holders, bondholders, and stockholders, are so manifested in and by said bill of complaint that the defendants named therein should be able to meet such allegations by admission, by denial, or by pleading lack of knowledge or information sufficient to form a belief as to the facts therein stated. Although the bill of complaint is somewhat loosely framed in some respects, it contains, in substance, when taken as a whole, a statement of violation of duties, breaches of trust, transgressions, delinquencies, and acts of commission and omission chargeable and charged against the defendants, which they ought to be able to meet by answer admitting, denying, or pleading lack of knowledge or information sufficient to form a belief as to the facts therein stated. Taken as a whole I regard the bill of complaint as stating an equitable cause of action against all of the defendants named therein. See Williams v. McKay, 40 N. J. Eq. 189, 53 Am. Rep. 775; Id., 40 N. J. Eq. 25, 18 A. 824; Williams v. McDonald, 42 N. J. Eq. 392, 7 A. 866; Roseville Trust Co. v. Mott, 85 N. J. Eq. 297, 96 A. 402; La Monte v. Lurich, 86 N. J. Eq. 26,100 A. 1031; Citizens' Loan Ass'n of Newark v. Lyon, 29 N. J. Eq. 110, affirmed 30 N. J. Eq. 340; Four Corners B. & L. Ass'n of Newark v. Schwarzwaelder, 88 N. J. Eq. 212, 101 A. 564; Custis v. Serrill, 303 Pa. 267, 154 A. 487.
In the Custis Case, supra, at p. 489 of 154 A. it was held: "Where a motion to dismiss a bill for insufficient pleadings is made and it is not clear whether they are objectionable on that account, but, because of the nature of the action, a broad inquiry into the facts should be made, the court should refuse to dismiss the bill in such doubtful cases and proceed to a full hearing." See, also, Griffin v. Sitgreaves, *81 Pa. 578, in Williams v. McKay, 40 N. J. Eq. 189, pp. 203, 204, 53 Am. Rep. 775, Chief Justice Beasley said: "It is only after answers and evidence, and on the final hearing, that the connection of the several defendants with the transactions in question, and the measure of the responsibility of each defendant, can be ascertained and established."
When, as in the case sub judice, the bill shows a systematic violation, over a long period of time, of duties and obligations cast by law upon officers and directors of a corporation such as the Fidelity, etc., Company, there is a prima facie presumption that such course of dereliction and misconduct was known to all of such officers and directors. In the instant case it is quite manifest prima facie that the relation between the directors of the aforesaid company and mortgage participation certificate holders, bondholders, and others with whom said company dealt, is similar to that of trustee and cestui que trust. Hun v. Cary, 82 N. Y. 65, 37 Am. Rep. 546, cited in Williams v. McKay, 40 N. J. Eq. at page 198, 53 Am. Rep. 775.
It is a well-known rule of law that for any willful breach of trust by officers and directors of a financial institution such as the company in behalf of which the complainants herein sue, or misapplication of the corporate funds, or for any gross neglect of, or inattention to, their official duties, such officers and directors are liable; and if the corporation beinsolvent and its affairs are in the hands of receivers or trustees, such receivers or trustees may maintain an action against the officers and directors chargeable with dereliction, delinquencies, misconduct, and wrongdoing.
It has been brought to my attention since the matter sub judice was argued that several of the defendants herein named have died since this suit was commenced. Notwithstanding such deaths the estates of such deceased defendants may be held liable for such wrongful acts of the decedents as charged in the bill of complaint if substantiated by adequate proofs upon the final hearing of the cause. See Dodd v. Wilkinson, 41 N. J. Eq. 566, at bottom of page 581, 7 A. 337. The bill of complaint herein avers that the directors of the Fidelity, etc., Company who are mentioned in paragraphs 8 and 9 of said bill were dominated by defendant Cornelius Doremus who was the president of said company, and that his power of domination and control of said defendants as directors aforesaid was effected by means of the formation of an executive committee to which said defendants, as the board of directors of said company, delegated and transferred or purported to delegate and transfer authority vested in them as such board of directors, in total disregard of their legal and fiduciary obligations to said company and its cestuis que trustents. That the aforesaid directors were fiduciaries of the corporation is unquestionable. Paragraph 17 of the bill avers quite specifically in numerous clauses and subdivisions particulars of transgressions, misconduct, breaches of trust, maladministration, and acts of commission and omission charged against the defendants, and particularly circumvention and circumlocution alleged to have been resorted to by the defendants as trustees aforesaid perfidious to the trust confided to them as directors aforesaid, whereby great losses were suffered by said company and its cestuis que trustents through the use of "dummy" mortgages, and by means of other reprehensible and dishonest practices unnecessary to be particularized herein for the purpose of my determination of the motion sub judice.
A reference thereto and to other paragraphs of the bill will readily manifest the perfidy, palpable violation of fiduciary duties and responsibilities, and unlawful practices resorted to by the defendants as directors of said company, and by appraisers of real estate appointed by said defendants or the appointment of whom was sanctioned by them, whose activities the defendants were obliged to be ever watchful of, but which obligation they flagrantly violated, disregarded, and neglected, and by an executive committee appointed by said defendants or the appointment of which was sanctioned by them, the activities of which the defendants were obliged to be ever watchful of, but which obligation they flagrantly violated, disregarded, and neglected. The business management of a corporation is confided to its directors and they must act for and in behalf of the corporation; they cannot abrogate their independent judgment. Jackson v. Hooper, 76 N. J. Eq. 592, 75 A. 568, 27 L. R. A. (N. S.) 658. In Williams v. McKay, 46 N. J. Eq. 25, at page 39, 18 A. 824, 829, the court used language which may—when all the facts are adduced at final hearing herein—appropriately be used in the case set up in the bill of complaint herein, with respect to the relationship between Mr. Doremus, president of the Fidelity, etc., Company, and the directors of said company: "The atmosphere was one of apathetic disregard of personal obligation, and abject submission to the will of the president of the bank." It is charged in clause 6 of paragraph 17 of the bill of complaint that the defendants, as officers and trustees aforesaid, by reason of the divers acts charged against them in said bill, caused losses to mortgage participation certificate holders and bondholders in a sum upwards of $1,000,000. The last sentence of subdivision (b) of said clause and paragraph charges that by reason of the acts of the defendants as set out in said subdivision the defendants are liable to complainants Merritt Lane, John Milton, and Henry H. Parmalee, as trustees of the Fidelity Title & Mortgage Guaranty Company of Ridgewood, in the sum of $400,000, which is said to be loss of capital of the company, for which they are responsible to complainant Frank H. Smith, as trustee for mortgage participation certificate holders and bondholders in said bill mentioned, for such loss as the trust estate committed to said trustee suffers by defendants' acts as charged against them. Subdivisions (1) (2) (3) of clause 6 of paragraph 17 of the bill of complaint allege unlawful payment of dividends by the defendants from the funds of the company, and for which they are asked to respond in damages to the complainants. It is a well-known rule of equity pleading that if one or more of the allegations of a bill of complaint are well pleaded and set forth an equitable cause of action the bill as a whole cannot be stricken. Furthermore, a motion to strike, under present practice, is tantamount to a demurrer under the old practice, and necessarily admits the truth of the factsstated in the bill, so far as well pleaded. It of course does not admit conclusions of law drawn therefrom, although they are alleged in the bill. Brooms Maxims (7th Ed.) 169. The quotation of Chief Justice Beasley, in Williams v. McKay, 40 N. J. Eq. 189, 53 Am. Rep. 775, and his observations as to the gist of the bill of complaint in said case, is in my opinion substantially analogous and applicable to the averments of the bill of complaint Herein, and particularly to the averments in paragraph 16 and 17 of said bill: "And I entirely repudiate the notion that this board of managers could leave the entire affairs of this bank to certain committeemen and, then, when disaster to the innocent and helpless cestuis que trustent ensued, stifle all complaints of their neglects, by saying, We did not do these things, and we know nothing about them. Plainly, such was not the opinion of Lord Hardwicke, when, in the case of Charitable Corporation v. Sutton, 2 Atk. 400, he said: 'Committeemen are most properly agents to those who employ them in the trust, and who empower them to superintend and direct the affairs of the corporation. If some persons are guilty of gross negligence, and leave the management entirely to others, they may be guilty by this means of the breaches of trust that are committed by others.' As matters are now present before this court, I think these defendants must be charged with knowledge of the systematic doing of these illegal acts. And in the next place, in my opinion, the same inference must obtain, for present purposes, with respect to that long series of improper and illegal loans alleged to have been secured by mortgages on property of insufficient value. Many of these instances show a gross neglect of duty by the officers of the bank, and constitute very flagrant violations of the requirements of the charter. It may be that these transactions were kept by the committeemen engaged in them from the knowledge of the other managers, but as the facts now appear, there can be no such inference in their exoneration. The misconduct in question was manifested in frequent, glaring instances, and it is not easy to imagine how they, or some of them, failed to be discovered by these boards of managers on the supposition which, in their favor, the law will make, that they exercised their office in this respect with a reasonable degree of vigilance. 'The neglectful acts in question cannot be regarded by the court as isolated instances, for they run through the whole period of the life of this institution, and thus evince a systematic and habitual disregard of the directions of the company's charter, and a very striking indifference with regard to the security of the money held in trust by them." The Chief Justice then, pages 202, 203 of 40 N. J. Eq., quotes remarks of Lord Hatherly, in another case cited Land Credit Co. of Ireland v. Lord Fermoy, L. R. (5 Chan. App.) 763: "I am exceedingly reluctant * * * in any way to exonerate directors from performing their duties, and I quite agree that it is their duty to be awake, and that their being asleep would not exempt them from the consequences of not attending to the business of the company. * * * A committee was appointed, called the executive committee, and that the functions of the directors were transferred to this committee, so far as regarded proposals for business and for loans and other matters. The committee from time to time reported to the directors, and the directors had a right to ask proper questions, and to decide thereon according to their discretion; and the directors must be tried as any other trustees accused of neglecting their duties." The Chief Justice stated, page 203 of 40 N. J. Eq.: "Resorting to these principles as properly applicable to the situation of affairs as made apparent on the face of this bill, it does not seem reasonable to declare that the defendants in the present case are not sufficiently inculpated to require them to answer, for it is the rational conclusion that unless they were, according to the expression of the English chancellor, 'asleep,' they must have become aware of these long-continued infractions of duty on the part of their committees. In both these respects, that is, on the subjects of these illegal loans on mere personal security and on scanty real estate, an answer is due from these officers." The Chief Justice further stated, pages 203, 204 of 40 N. J. Eq.: "To declare that the complainant, in a case of this nature, must in limine show the mode and time of the participation of each individual officer in the particular instances of misconduct specified, would be, in point of fact, to declare that the complainant was not entitled to a practicable remedy. It is only after answers and evidence, and on the final hearing, that the connection of the several defendants with the transactions in question, and the measure of the responsibility of each defendant, can be ascertained and established."
CAMPBELL, Chancellor.
An order will be made in conformity with the advice contained in the conclusions of Advisory Master Fallon, which are hereby adopted as the opinion of the court.