Fraw Realty Co. v. Natanson

Max Natanson and his brother, Alexander Natanson, were the sole stockholders of the defendants Normar Real Estate Corporation and Malex Realty Corporation, the former owning seventy-five per cent of the stock in each corporation and the latter twenty-five per cent. Max was the president of each corporation, and Alexander was the treasurer. In February, 1928, the Natansons procured the purchase of a parcel of land from 875 West End Avenue Corporation. Normar corporation made a down payment of $89,000 for the property. Title was conveyed to Malex corporation, which executed and delivered to West End Avenue corporation a bond for $83,833.30, the balance of the stipulated purchase price, together with a mortgage upon the parcel purchased to secure the payment of the bond. The bond and mortgage were subsequently transferred to the plaintiff. After the execution of these instruments, many other parcels of real estate were caused to be purchased. The down payments were in all cases made by Normar corporation; title was in all cases conveyed to Malex corporation; in all cases where purchase-money mortgages were given, Malex executed them. In May, 1929, Malex made default upon the bond and mortgage assigned to the plaintiff. Foreclosure, begun shortly thereafter, on May 26, 1930, resulted in a deficiency judgment of $86,752.69 in favor of the plaintiff against Malex. Meanwhile, in the months of October and November, 1929, Malex had conveyed to Normar, or its designees, all the real estate and other properties, conveyed to Malex after the execution by it of the mortgage held by the plaintiff, together with all other assets which it possessed. Learning of the fact, the plaintiff brought this action to set aside the conveyances so made, on the ground that they were made in fraud of creditors and particularly of the plaintiff. The defendants, the transferees, admit, as does Malex, that all the transfers were made without consideration paid therefor, and that the transfers stripped Malex of all its assets. The defense is that Normar was the real owner of the properties; that Malex held the legal title for its benefit; that the conveyances operated merely to convey to the true owner, or its designees, the naked legal title.

Admittedly there was never any writing between Normar and Malex that the latter should hold title for the former; never any resolution to that effect adopted by either corporation. Admittedly, on the various occasions when the properties were purchased, there was not then any declaration, either written or oral, that Malex would hold title for the benefit of Normar. The Natansons testified that there was merely a general understanding or arrangement between the two, arrived at on some occasion not stated, that Normar would make the down payments upon all purchases, and that Malex would take title, for the benefit of Normar, delivering to the sellers all necessary purchase money bonds and mortgages. They say that Malex was "to hold the record title to property" for Normar; that Malex was to "act as a dummy" for Normar. The object to be achieved was that the Natansons might use "the Malex for the purpose of the delivery of the purchase money bond and mortgage." Granted the existence of the general understanding Malex would still have held legal title to the properties purchased, even though it had been intended that Malex should play the passive role of a so-called "dummy" for Normar. The legal title would have constituted a full and complete title, unless, by the words and conduct of the parties, some equitable estate, or trust had been raised. There could have been no express trust, for declarations of trust are ineffective to create such an estate unless the declarations are in writing. (Real Prop. Law; Cons. Laws, ch. 50, § 242.) There could have been no resulting trust, arising from the fact that Normar paid the purchase money and Malex took the title, for all such trusts have been abolished. (Real Property Law, § 94.) Unless, therefore, the facts were such, that a constructive trust would have been raised by a court of equity, Malex was the sole owner, in law and in equity, of all the properties conveyed.

The principle governing the erection by a court of equity of a constructive trust in cases of a similar character has been recently stated in Foreman v. Foreman (251 N.Y. 237, 240), to be as follows: "The rule is now settled by repeated judgments of this court that the statute does not obstruct the recognition of a constructive trust affecting an interest in land where a confidential relation would be abused if there were repudiation, without redress, of a trust orally declared." As authority for the principle enunciated the court cited Sinclair v. Purdy (235 N.Y. 245, 253); Gallagher v. Gallagher (135 App. Div. 457; 202 N.Y. 572); Leary v. Corvin (181 N.Y. 222, 229);Goldsmith v. Goldsmith (145 N.Y. 313); Wood v. Rabe (96 N.Y. 414). It also quoted the following statement from Sinclair v. Purdy (supra): "It is not the promise only, nor the breach only, but unjust enrichment under cover of the relation of confidence, which puts the court in motion." The confidential relation, referred to in Foreman v. Foreman and Sinclair v.Purdy, self-evidently is not the relationship which is newly created by the transaction involving the conveyance and the promise, for so to hold would mean that in every case a trust may be created by an oral declaration. Clearly the references are to a preexisting relationship of confidence such as that obtaining between husband and wife, father and son, brother and sister, or otherwise. This appears from the fact that in each of the cases cited by the court such a relationship existed, as well as from the language of the opinions written therein. Thus, in the leading case of Wood v. Rabe (supra), which involved the promise of a mother to take title to property in her name for the benefit of a son, if he performed an act requested by her, it was held that an enforceable trust arose. The court said: "It was a transaction between parent and child, a relation which, if not fiduciary in the strict sense, was nevertheless one ordinarily involving the greatest confidence on one side, and the greatest influence on the other." Again, it was said: "It was on the part of the son the case of a confidence induced, not by the bare promise of another, but by the promise and the confidential relation conjoined. The confidence in fact, had its spring and origin in the relation, and that relation was a controlling ingredient moving his action" (p. 426). In Goldsmith v.Goldsmith (supra) it was said: "Upon the whole transaction, therefore, including the confidential relation of the parties and its nature as a family arrangement very much beyond a mere business relation, we think it was competent for a court of equity to impress upon the property and its proceeds an implied trust for the benefit of the children" (p. 318).

We disclaim any purpose of holding that the requisite confidential relationship must be one found within the confines of a family. We conceive that it might exist between lawyer and client, doctor and patient, priest and parishioner, and many other sets of persons, between whom there are bonds of intimacy and trust. Suffice it to say that we find no such relationship existing between Normar corporation and Malex corporation. Surely, if a court of equity had refused to carry out the arrangement made between the two Natansons, no "unjust enrichment under cover of the relation of confidence" could have resulted. On the contrary, recognition and enforcement of the arrangement, might have produced, rather than have prevented, an unjust enrichment. In that event, the Natansons personally would have escaped the payment of a purchase money bond because shielded from liability by the two corporations; Normar would have escaped, although posing as the principal actor in the transaction, because it did not sign and seal the bond; Malex would have escaped payment because it had no property with which to pay. Thus, through the aid of a court of equity, the fruits of a contract of sale would have been secured to Normar, notwithstanding the fact that the promises to pay therefor had been repudiated or rendered worthless. It is not thinkable that a constructive trust would have been raised by the court to accomplish an end so unjust.

In Foreman v. Foreman (supra) the facts considered were these: A husband caused a conveyance of land for which he had paid, to be taken in the name of his wife, upon her promise to convey to him upon demand. "After the purchase had been made, he collected the rents and used them as his own. He paid the taxes, the insurance premiums, the interest on the mortgages, and the cost of improvements and repairs. The dominion that goes with ownership was continuously his." In holding that the wife held in trust for the husband, it was said by the court: "In its origin the trust was dependent for proof of its existence on nothing better than word of mouth. In the end, at her death, what was oral in its beginnings, had been confirmed by part performance, with the result that conduct as well as words had become the signs of its creation" (p. 241).

It is asserted here that Normar acted toward Malex as the husband acted toward the wife in the case cited; that it collected all the rents payable to Malex; that it used them as its own; that it paid all the costs of maintenance; that, as in the case cited, the existence of the trust, the proof of which originally rested merely in an understanding between the Natansons, was established by the subsequent conduct of the parties. There is a wide difference between the two cases. In the one an individual, the husband, exercised the dominion which goes with ownership; an individual, the wife, who was the legal owner acquiesced therein, thereby admitting the ownership of her husband. These persons had unlimited power to do as they pleased with their own. Here we are dealing with corporations having only those powers which their certificates of incorporation conferred. The certificates are not in evidence, so that we cannot know that Malex was ever given power merely to hold for another the naked title to real estate. We must presume that Malex and Normar were authorized as separate legal entities to conduct business wholly on behalf of their respective stockholders and creditors, quite independently of one another; that the officers of each were trustees of the assets of each for the stockholders and creditors of each; that neither was authorized to obtrude itself into the affairs of the other; that neither could legally appropriate to itself the assets of the other. Yet, says Normar, we were the operating concern and Malex was merely our "dummy." True, Normar did treat Malex as if it were a mere shell, nothing more than a title holder or "dummy" for itself. Thus it seized for itself all the rentals payable to Malex, amounting in one year to more than $85,000. We cannot perceive, however, that the seizure was lawful, or other than an illegal diversion of funds. True, the Natansons were the sole stockholders in both corporations, but they were not the sole parties interested. Malex, at the time, was heavily indebted upon purchase money bonds, in the instance of this plaintiff upon a bond which finally produced a deficiency judgment for more than $80,000. Under the circumstances, surely Normar had no right to appropriate the rentals. Yet, upon that appropriation it builds its claim that Malex was its dummy, and that Malex, having permitted Normar so to treat it, thereby acknowledged that it held the properties acquired in trust for Normar. We were not aware that the use of the epithet "dummy" could have so magical an effect.

"Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an ``alias' or a ``dummy.' All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation." (Per CARDOZO, J., in Berkey v. Third Avenue Ry. Co., 244 N.Y. 84, 94, 95.) In that case a passenger was injured while stepping from a trolley car which the Forty-second Street Railway Corporation alone had the franchise to operate. The defendant, the Third Avenue Railway Company, owned all the stock of the Forty-second Street corporation, and otherwise acted, in some manner, to indicate that it, not the Forty-second Street corporation, was the real operator of the cars upon the latter's line. In that case, further than as quoted, CARDOZO, J., said: "The logical consistency of a juridical conception will indeed be sacrificed at times when the sacrifice is essential to the end that some accepted public policy may be defended or upheld." InJenkins v. Moyse (254 N.Y. 319, 324) it was said by LEHMAN, J.: "The corporate entity may be disregarded where it is used as a cloak or cover for fraud or illegality. For that there is ample authority." In these and other cases the corporate form was sought to be disregarded in order that fraudulent acts might be set aside or genuine wrongdoers reached and punished. The effort here is of quite a contrary nature. Those who created a corporation seek, not to insist upon the reality of the corporate form, but to have it ignored, so that the character of a "dummy" or subsidiary for another corporation may be fastened upon it, to the end that the corporators may correspondingly profit. We cannot see that here to ignore the corporate form will promote "some accepted public policy," remove a "cloak or cover for fraud," or otherwise further the interests of justice.

In Jackson v. Hooper (76 N.J. Eq. 592) it was said by DILL, J., that the Courts of Chancery of the State of New Jersey would never tolerate the doctrine that by "agreement or course of dealing" corporations might become merely "agencies or instrumentalities, or forms in the conduct of a copartnership or joint business;" that the law never contemplated that persons engaged in business as partners may incorporate "with intent to obtain the advantages and immunities of a corporate form and then Proteus-like, become at will a copartnership or a corporation, as the exigencies or purposes of their joint enterprise may from time to time require;" that, on grounds of public policy "the doctrine contended for cannot be tolerated as it renders nugatory and void the authority of the legislature — a co-ordinate branch of the government — established by the constitution in respect to the creation, supervision and winding up of corporations." The case has been cited by this court in Brock v. Poor (216 N.Y. 387).

Upon facts almost identical with those found here we held inNatelson v. A.B.L. Holding Co. (260 N.Y. 233) that no trust arose to justify a conveyance from a corporation to its stockholders. That decision calls for a similar decision here.

The judgments should be reversed, and judgment directed for the plaintiff for the relief asked for in the complaint, with costs in all courts.