Benjamin N. Cardozo

“ We find it immaterial that the defendants or some of them may be liable to creditors in common-law actions to recover damages for false representations as to the value of the assets. That is not the basis of the suit before us now. Moreover, the question is not here whether restitution of illicit profits as the outcome of this suit may be proved to mitigate the damages in actions by other plaintiffs, if any such there are. As we have striven to make clear, the receiver does not claim to have succeeded to the rights of bondholders or noteholders to recover damages for deceit. ”

“ Furlaud and Kingston, having made themselves parties to a scheme whereby Duquesne was to be despoiled and its creditors were to be defrauded, became accountable, we think, for everything that came to them as a result of the conspiracy in excess of the consideration furnished on their side. They were not trustees as to the bonds and notes, and lawful owners of the shares, but trustees as to all; the transaction being a unit, infected with a common vice. Everything of profit arising out of the abused relation must now be yielded up. ”

“ If and when the defendants shall restore to the receiver the moneys taken unto themselves, it will be time enough to consider problems as to the marshalling of assets between creditors who were such at the commission of the wrong and those of later date. No attempt is made to forecast the answer now. The principles that govern the distribution of assets conveyed in fraud of creditors, present or prospective, and after such conveyance reclaimed by a receiver, are adequate to work out justice, however great the complications. ”

“ It seems clear that a suit by the receiver must be in the right of the corporation, and that the most he can claim is what the corporation could claim; namely, a derivative right of suit based upon fraud perpetrated upon innocent shareholders who were such at the time of the consummation of the scheme. ”

“ The promoters paid themselves an exorbitant price in bonds, notes, stock, and cash for property which they turned over to the corporation they had promoted. The bonds and notes thus acquired they sold in the open market and as principals. If in such sale they misrepresented the value of the security, they are liable to those whom they deceived. ”

“ In such circumstances the shares, like the bonds and notes, must contribute what they can. The certificates, were they on hand, might be turned into the treasury of the company for sale, if they still had any value. The shares having been sold to others and the certificates being no longer subject to the mandate of the court, the trust that attached to them has been transferred to the proceeds, which, when paid to the receiver, will be used like other assets in reduction of the debts. ”

“ Nowhere is it held that delinquent fiduciaries who have nullified the statute may keep the profits for themselves when creditors will be injured unless the profits are returned. At times and for certain purposes the consent of shareholders may give validity to acts that would otherwise be voidable, if the only interests affected are those of the shareholders consenting. It can never be operative to the prejudice of others where consent is in derogation of the public policy of the state or the prohibition of a statute. ”

“ It is not in concord with realities. There is no occasion to consider whether the corporation itself at the instance of new shareholders would be permitted to disaffirm the fraud and maintain a suit in equity for appropriate relief. We put that question by. Enough that the receiver has the requisite capacity. A court of equity has taken hold of the assets of this company, intangible assets as well as tangible, for administration as a trust in accordance with equitable principles. ”

“ Furlaud could safely go ahead and exercise the options, for, at the pace subscriptions were coming in, the proceeds of the bonds would pay for all the gas lands and leave a handsome margin over. Even so, there was need of ingenuity to work out a plan that would synchronize the two transactions, the cashing of the subscriptions, and the payment for the lands. The cash would not be paid on the subscriptions till the bonds with the deed of trust were ready for delivery, and delivery was impossible until Duquesne, the mortgagor, had title to the fields. ”

“ The constitutional provision is not self-executing. [3] There is nothing in the law of Pennsylvania justifyign a suit by a receiver in circumstances such as here disclosed to recover for the corporation's alleged illicit profits; and the Supreme Court of the commonwealth has clearly indicated that such a bill will not lie by the corporation to recover for promoters' profits or alleged fraud in issuing stock at an overvaluation for property where, as here, all the stockholders approved the transaction. ”

“ We are told that the action may be maintained by the petitioner in virtue of the fact that the transaction was forbidden by a provision of the Constitution of Pennsylvania, and a statute passed to implement it, voiding all fictitious increases of capital stock or indebtedness of corporations and forbidding the issuance of stocks or bonds except for work and labor done or money or property actually received. ”

“ An examination of the pleadings and the facts found leads me to the conclusion that the receiver of the corporation is without standing to recover from the promoters.
The bill recites in somewhat different sequence the facts which are set out in the opinion of the court. It does not state that the properties were not worth the amount in bonds, stocks, and cash which the Duquesne Corporation paid for them. It fails to allege any fraudulent misrepresentation on the part of the respondents to purchasers of bonds or stock of the corporation. The allegation is made that Furlaud & Co., Inc. ”

“ Any amount recovered by the receiver in this action will go into the corporate treasury and be distributed therefrom to the creditors of the corporation. It appears from the record that the bondholders have brought a foreclosure suit upon their mortgage. They will in that action first avail themselves of the security pledged under the mortgage. They will become general creditors as to any amount by which their security is deficient. ”

“ Furlaud was known as an investment banking house, and was interested in the issue and sale of corporate securities. Particularly it was interested in a project for the formation of a Company that would own and operate gas fields in Western Pennsylvania. Reuter, representing Furlaud, took options from the owners of nine separate tracts. These options, which at first were gratuitous, were acquired in the name of a subsidiary, Kingston. Engineers were then employed to examine the fields and appraise their value. ”

“ The decree of the District Court is modified by increasing the recovery against the defendants Maxime H. Furlaud and the Kingston Corporation in the sum of $850,000, with interest from June 6, 1930, when the shares of stock were sold, and by the award of judgment against the Byron Corporation in the sum of $425,000, with interest from June 6, 1930, and against the Chaucer Corporation for the same amount. ”

“ Even after this is done, reparation will be incomplete. Restitution of the profits will not make up, without more, for the inadequacy of the overvalued land to return to the lienors their principal and interest. ”

“ On April 7 Duquesne agreed with Kingston to take over the gas fields covered by the options as soon as Kingston got the title. The consideration was to be cash in the sum of $3,015,000 (which was $565,100 more than Kingston was expected to pay to the grantors) ; bonds of the par value of $1,300, 000, part of the forthcoming issue; and 535,000 shares of no-par stock. On the same day there was an agreement between Duquesne and Furlaud whereby Furlaud agreed to take all the forthcoming mortgage notes ($1,000,000) at a price of 88 per cent.; and $2,700,000 mortgage bonds at a price of 90 per cent. ”

“ With the options still outstanding Furlaud formed a syndicate of bankers to market the securities. The syndicate published an advertisement in a newspaper inviting subscriptions by the public to an issue of bonds and notes. There were to be $4,000,000 6 per cent. mortgage bonds (to be sold at 97 1/2 per cent.) , and $1,000,000 6 1/2 per cent. mortgage notes (to be sold at 98 per cent.) ”