Accounting of Parascandola v. National Surety Co.

164 N.E. 242, 249 N.Y. 335, 62 A.L.R. 551, 1928 N.Y. LEXIS 812

• Court: New York Court of Appeals
• Decided: November 20, 1928
• Status: Published

Opinions

Crane, J.

The case of General Rubber Co. v. Benedict (215 N. Y. 18) is authority for the principle applied by the courts below. Frank Auditore occupied two positions of trust; one as an officer and director of the Auditore Contracting Co., Inc., and the other as administrator with the will annexed of the estate of his brother Joseph Auditore.

For the misappropriations of the corporate funds by Frank, he has been held liable to the corporation in a suit brought in its behalf by a stockholder. The judgment has not been paid. The estate of Joseph Auditore owned fifty per cent of the stock. This was held in trust for the estate by Frank Auditore as administrator. As such he owed to the estate an active duty to use diligence and care to preserve its value and prevent its loss. By wrongfully talcing all the assets of the corporation and applying them to his own use, he violated this trust and destroyed or lowered the value of this stock or the assets of the estate. For the damage done he and his surety should be held liable. The damage is the reduced value of the stock due to Frank’s misappropriations while administrator. The judgment recovered by the corporation is no bar to this proceeding. The remedies are not inconsistent; they are applied to different duties and relationships. The money taken or used by Frank is not a dividend of the corporation received by him as administrator, nor do we have to ignore the corporation or the corporate form. The action by the corporation stands. If its judgment had been paid, no harm would have been done the assets of the estate. It has not been paid and the stock has become valueless. The loss of value is due to the act of the one chosen to sustain its worth. The trustee is liable for the loss in value which he has occasioned. Of course if the liabilities of the corporation exceeded its assets there could be no damage done. The value depends upon the financial condition of the corporation as of the time of Frank’s appointment as administrator and his misappropriations.

If we take as illustration an extreme case, we will at once, I think, see clearly the application of this principle. A president of a corporation-is made administrator of an estate owning ninety per cent of the stock. The stock is worth par. The president steals all the assets of the corporation and the stock becomes valueless. The corporation can sue him for his misappropriations, but if he be insolvent, the stock remains valueless. He owed a duty to the estate as a trustee of its assets. Has he betrayed that trust? The shares of stock which he held as administrator have value because of the proportional interest in the capital of the company. The administrator has stolen and misappropriated that capital. His deed has caused an actual loss to the estate by rendering the stock valueless. Can it be that the only breach of duty was that which he owed the corporation as an officer and that this absorbs and swallows up the duty which he owed the estate? His bond as administrator was given for the faithful performance of his duties as administrator. He has failed in his duty as administrator; his theft has caused a loss. This illustration probably is unnecessary, for it states the exact facts of this case. The findings are that Frank Auditore, as administrator of his brother’s estate, held fifty per cent of the stock of the Auditore Contracting Co., Inc. He was also an officer and director of the corporation owning the other half of the stock. He took all the assets rendering the stock valueless as he became insolvent. The judgment recovered against him by the company requiring him to put back the assets was unenforceable as Frank Auditore has no property. Body execution has been issued against him and he has spent six months in jail. Under these circumstances, is the estate which he represents powerless? Has he faithfully performed his duties as administrator? The only answer that can possibly be given is that he has not. The surety company undertook by its bond to be liable for his faithless performance. His breach of duty as an officer of the corporation does not expunge or obliterate his breach of duty as administrator.

This is a much clearer case for the application of this principle than General Rubber Co. v. Benedict (supra). There the defendant was a director of a New Jersey company which owned all the stock of a subsidiary known as the Brazilian company. The general manager of the Brazilian company, one named Hutter, took the assets of the Brazilian company and misapplied them to such an extent as to reduce the value of the stock of the Brazilian company held by the New Jersey company. The defalcations and misappropriations of the general manager injured the stock held by a third party. The defendant; was not a director of the Brazilian company, but he was a director of the owner. He knew of the defalcations. He was in a position to prevent them, but instead of preventing them acquiesced in them. ' Unlike the Auditore case, he did not himself steal the money, but he knew that it was being misapplied. His silence and acquiescence would not have created any liability, but for one thing. He was in a position where he was called upon to act. He was a director in the company which owned the stock and as such director was a trustee of its property with a duty to protect it and a duty to speak. This court said that his failure to be vigilant or informative made him liable to the owner of the stock for the loss occasioned in the depreciation of that stock traceable to his breach of trust. The Brazilian company of course had an action against Hutter as general manager to recover the funds taken by him. If Benedict, the defendant in the case, had stolen the money instead of Hutter, the fact that the Brazilian company would have had a cause of action against him, whether officer or stranger, to recover the moneys taken, would in no way have barred the independent cause of action for a breach of duty which Benedict owed as a director of the New Jersey company which owned the stock. The amount collected in the action by the Brazilian company of course would have reduced the loss or the damage, but would not have affected the rights and remedies.

The Appellate Division has remitted the proceeding to the Surrogate to ascertain the claims of the creditors of the corporation. We are of the opinion that the rehearing should not be limited but that the Surrogate should ascertain the value of the stock and its depreciation due to the illegal acts of the administrator, i. e., the damage done to the value of the stock. This may require the examination of many items of assets and liabilities. The value of the stock is to be determined as in any other case. The Surrogate is not dealing with the corporation but with the value of its stock at specified times.

We notice that' two or more of the items for which . Frank Auditore and his bonding company have been held liable refer to alleged misappropriations of corporate funds prior to August 18, 1920, the date of the letters of administration. The surcharges as they may be called in two instances go back to June of 1920. This gives rise to a different question. These misappropriations occurred before Frank Auditore became administrator. The bonding company is only hable for his acts as administrator. Was there any duty which the administrator owed regarding the funds misappropriated by him before he became administrator?

Debts due the estate were to be collected. The administrator and his bondsman would be hable for any neglect in gathering in the assets of the estate. If the administrator himself owed money to the estate it would be his duty to pay it. If he could have paid the amount of his indebtedness, but delayed doing so until he was insolvent, the bondsman might be hable for this loss dependent upon the circumstances. Here, however, we have through the misappropriations of Frank Auditore prior to his appointment as administrator claims due from him to the corporation, the Auditore Contracting Co., Inc. What duty did he owe to the estate regarding his indebtedness to the corporation? Permit me to answer it by using an illustration. Suppose Frank Auditore, as administrator, had in his possession stock representing nearly all the capital in the corporation. The stock was worth par. The administrator had knowledge that an officer of the corporation had taken and misappropriated all of the capital of the company and had put it as cash in his own bank account. This rendered the stock valueless. Would the administrator having these facts before him owe any duty to the estate even though the misappropriation of the president happened before the appointment of the administrator? Having the stock in his possession, the administrator could have brought action in the name of the corporation to have recovered this money from the president. (Niles v. N. Y. Central & Hudson River R. R. Co., 176 N. Y. 119.) The corporation could have sued or upon its failure or refusal so to do, the administrator representing the stock could have brought the action. Would he have been guilty of negligence and carelessness in failing to compel the corporation to bring the action or in bringing the action himself, if he knew by so doing the money could be restored to the corporation? To put this proposition I think is to answer it. Of course if the president in my supposed case were insolvent or became insolvent before the administrator in the exercise of reasonable diligence could act, he would be guilty of no breach of duty in failing to pursue the fund.

This is the situation which confronts us as to these items of which I am speaking. ' Only it so happens that the administrator and the president of the corporation misappropriating the funds are one and the same person. At the time Frank Auditore was appointed administrator it was his duty to return to the corporation the moneys he had wrongfully taken. It was his duty to demand of the corporation to take action to recover those moneys, and if the corporation refused to act to bring action in the name of the corporation. If he were solvent and could have paid back the moneys, then his failure to so act would result in a loss to the estate by depreciating by just so much the value of the shares. If, on the other hand, he become insolvent within the time that an ordinarily prudent administrator would have acted under like circumstances, then he as administrator would not be hable to the estate for failure to pay back the money to the corporation or for failure to commence the appro priate proceedings to collect it. In other words, as to acts happening before Frank Auditore was appointed administrator, whether these be his own acts or the acts of third parties, he and his bondsman are only liable for negligence, the failure to pursue that diligence which reasonably prudent and careful men would use. But as to the things which happened after he was appointed administrator, he is- here held hable not for negligence or carelessness, but for his own acts of misappropriation, for the larcenies which he committed, resulting in loss to the estate. As to both items, whether those before his appointment as administrator or those afterwards, the basis of the liability, if any, is the breach of trust. The breach, however, is determined by a different measure; the one by negligence, the other by misappropriation. The one includes the element of solvency and ability to collect, the other has in it no such consideration; the administrator and his bondsman are liable for the misappropriations irrespective of the solvency of the administrator.

The perplexity has here arisen by reason of the administrator being a director and officer of a corporation, and also an administrator of an estate interested in that corporation. He holds dual trust positions. The matter is simplified when we separate these capacities and consider what would be the administrator’s duty if a third party officer of the corporation had stolen the funds.

The courts below have had the main principle in mind and attempted to apply it. The Surrogate sought to approach the matter by considering the moneys taken by Frank Auditore from the corporation in the nature of dividends of the corporation which he held in trust for the estate. The Appellate Division sustaining the Surrogate in part thought that the corporate entity of the Auditore Contracting Co., Inc., might be ignored, and remitted the matter to the Surrogate to take proof of the debts of the corporation as bearing upon the value of the stock. We think the whole matter should be remitted to the Surrogate for a rehearing.

The order of the Appellate Division should, therefore, be modified in accordance with this opinion and the matter remitted to the Surrogate’s Court for further proceedings in accordance with the decision of this court.

As explained or qualified in opinion the questions certified should be answered: No. 1, “ No; ” Nos. 4, 6, 7, 8, “ Yes.” Questions Nos. 2, 3 and 5, not answered.