Costello v. Costello

152 A.D. 280, 137 N.Y.S. 132, 1912 N.Y. App. Div. LEXIS 8528

Opinions

Judgment affirmed, with costs.

All concurred; McLennan, P. J., and Foote, J., upon the opinion of Clinton, Réferee, and 'Kruse, J., upon the ground that the decree of the Surrogate’s Court is a bar to the maintenance of action. Robson, J., concurring in result; except Spring, J., who dissented in an opinion.

The following is the opinion of the referee:

Clinton, Referee:

This action is brought to set aside a sale of trust property made by former trustees under the will of Patrick H. Costello, deceased, and to compel an accounting thereof. The facts are substantially as follows:

Patrick H. Costello died December 11, 1890, leaving a last will and testament in and by which among other things he. gave one-half of his residuary estate to Alfred Costello and Patrick C. Costello, in trust, to pay the rents and profits to his son, John H. Costello, during his life, and at his death to divide the funds amongst such children of John H. Costello as might survive him. He appointed Alfred Costello, Patrick C. Costello and John H. Costello executors. Almost the entire property of the testator consisted of his interest in various partnerships in which he and the persons named as executors were interested. One of the partnerships, Alfred Costello & Co., was engaged in tanning hides, which were bought and when tanned sold by the principal one of the other partnerships, P. C. Costello & Co." By the terms of the will the executors were permitted, without liability on their part, to allow the testator’s interest to remain in the partnerships, and this they. did. The will was admitted to probate in Oneida county, and Alfred Costello and Patrick 0. Costello qualified and entered upon the discharge of their duties as executors. In September, 1891, on the petition of the last-named executors, an accounting was had before the surrogate of that county, the proceedings being in all respects regular and all parties being duly cited, the infants, children of John H. Costello, being represented by a guardian, who made certain objections to the account as filed by the executors. Full proofs were given before the surrogate, and in July, 1892, a decree was made by him settling the account and fixing the amount of the residuary estate.

In 1893 a combination of all the tanning interests within a very large district of the United States, including that in which the tanning plant and timber lands of Alfred Costello & Co. were situated, was projected. At this time the leather business was not in a prosperous condition, and had the combination been formed without the surviving partners in said firms becoming a party thereto their business would have stood practically alone and would have had to compete at a great disadvantage with a powerful trust. They, therefore, in good faith and with a view to the interests of all concerned, concluded that the safety of the business required them to join said combination and to sell the property of the firms to it, the combination to be represented by. a corporation. The trustees under the will contended by counsel that they could not properly sell the trust interest because, in substance, to do so would be to make an investment in the stock of the corporation and such investment was not warranted in law. Accordingly they sold the trust interest (which still consisted of interests in the said partnerships) conditionally to John H. Costello, the condition being that the transfer should take effect only in case the corporation were formed and the partnerships’ assets sold to it. The amount for which the property was sold to John H. Costello was $174,708.26, being very nearly the value of the trust estate as fixed by the decree of the surrogate. The trustees took John H. Costello’s note for this amount, payable on demand, retaining as security all the stock of the proposed corporation, the United States Leather Company. It is not seriously contended that this sale was fraudulent or that it was not made in good faith. Under the arrangements with the United States Leather Company the assets of the partnerships were valued at certain fixed rates for which preferred stock was to be issued and it was agreed that an amount of common stock equal to the preferred stock that might be issued should be paid for the good will of the partnerships. It is quite apparent upon the evidence that the rates of the valuation of the property conveyed were arbitrary and that there was little or no consideration for the issuing of the common stock. There is evidence in the case that the preferred and common stock at various times during the year succeeding the sale were upon the market and had fluctuating market values which, for preferred stock in that year reached par. The sale to the United States Leather Company was completed in the spring of 1893.

In September, 1897, an accounting of the executors and trustees was had before the surrogate of Oneida county, the proceedings being in all' respects regular and all parties interested being represented, the infants appearing by their special guardian. The result of this accounting was a decree settling accounts and fixing the amount of the trust estate at $173,980.97, the decree ordering (as requested by the trustees) that .upon the .trustees paying over that amount, and delivering all books, papers and other property of the trust into the hands of Charles S. Symonds, who was appointed as their successor, their resignations be accepted and they be discharged from all liability. It appears that upon this • accounting evidence was given respecting the sale to the United States Leather Company and the transfer of the trust interest to John B. Costello; that the surrogate found the facts in relation thereto, finding, among other things, that the assets and property of the three firms had been put therein at their, fall value and the testator’s interest appraised at its full value and, further, that the amount for which the trust interest was sold to John H. Costello, $174,708.26, was the full value thereof.

Upon both of the accountings mentioned thé value of the entire estate, including that of the trust estate, was ascertained from the accounts and the books of the partnerships, which accounts have been kept in all respects upon the system and in the manner assented to by the testator during his life, that is* in the manner in which they were accustomed to be kept before the testator’s death, and there was evidence before the surrogate that such valuations represented the fair value of the entire, and of the trust estate and there is evidence in the case before me that this method of ascertaining such values gave the fair value of the testator’s interest in said partnerships.

In 1893, after the sale to John H. Costello, the surviving partners sold certain personal property which was not included in the sale to the United States Leather Company, for $12,000, and in 1897 they sold mineral rights in the lands of Alfred Costello & Co. for $17,594.70. The interest which the trust estate would have had in these sums but for the sale to John H. Costello was not included in the inventory of the executors nor in any of the accountings specifically, but in the accounting of 1891 all the personal property was included at fair values and the lands of Alfred Costello & Co. were included at a value of about $7 per acre greater than their actual value; so that the failure to include the interest which the trust estate would have had in these sums in the accountings did not in fact affect the true value of the trust estate as accounted for and determined by the surrogate, nor the true value thereof as fixed for the purpose of sale to John H. Costello.

No appeal was ever taken from either of said decrees, and the time to appeal expired before the commencement of this action.

The trustees paid the $173,980.97 to the said substituted trustee, Charles S. Symonds, partly in money and partly by assignment and deliveries of securities belonging to the trust, and in all respects complied with the last-mentioned decree of the surrogate. After such payment, and on proof thereof, the said trustees were finally discharged by the surrogate. The total amount of stock of the leather company turned over to the surviving partners in payment for the property of the partnerships was $3,150,400, at par, of preferred stock, and a like amount of common stock ostensibly for the good will; and of this stock at par, or the proceeds thereof, an amount largely in excess or $174,708.26 would have become a part of the corpus of the trust fund if the trust interest had not been sold to John H. Costello. It is claimed by the plaintiff and by the other beneficiaries, sons of John H. Costello, that a very much larger amount would have thus been realized for the trust estate, and that, therefore, equitably, the former executors and trustees should be held to account for the difference between what the substituted trustee has received and that amount. It cannot be ascertained from the proofs what the amount realized for the trust by sale of the stock of the leather company would have amounted to. The gist of the claim of the plaintiff and of said defendants is that the sale to John H. Costello, neither in law nor in equity, could relieve them from liability to account for a loss thus incurred; and while not claiming intentional fraud on the part of the executors and trustees, it is argued that the same was constructively fraudulent.

On the part of the defendant trustees and executors and John H. Costello, it is claimed that the decrees of the surro-' gate are final and that they cannot be disturbed through this action in equity; and, further, that there is still a remedy in the Surrogate’s Court of Oneida county by petition to open the accounts and the decrees of the surrogate, and that, therefore* equity, will not assume jurisdiction, also that the Statute of Limitations is a bar.

Assuming that the plaintiff had made up a cause of action entitling him to relief on the ground of constructive fraud, I am of the. opinion that the Statute of Limitations is no bar to the maintenance of this action by the plaintiff and no bar to the granting of relief to the defendant, Thomas'Costello. The plaintiff and that defendant were minors when this action was commenced, and under section 396 of the Code the statutory limitation of the túne for commencing the action would be extended for a period not exceeding one year after they arrived at majority. But it is different in the case of John H. Costello, Jr., who was more than twenty-two years of age at the time of the commencement of the action, and more .than ten years had elapsed before that time, from the performance of the acts upon which the cause of action.could be predicated, those acts having been performed in 1893 and prior thereto, the action having been begun in 1909.

It is quite clear that the decrees of the surrogate are a bar to this action. In the accounting* of 1901 the surrogate of Oneida county necessarily determined the actual value of the trust estate at that time, subject to modifications which might change the amount as the business of the partnerships proceeded; and upon the accounting in 1897 the surrogate again necessarily determined, not only the value of the trust estate, hut the propriety and validity of the sale to John H. Costello. Upon hoth these accountings the.plaintiff, John H. Costello, Jr., and Thomas Costello were duly represented by guardians ad litem, and it is quite clear that they are bound by the decrees as fully as though they had been of full age and had appeared upon the accountings. In the absence of any evidence clearly showing that some fraud upon, the court was committed upon the accountings, or one of them, which would have changed the decision of the surrogate in 1897 a court of equity will not disturb the decrees; there is an entire absence of such evidence. The main facts were before the surrogate and the account, proceedings and decree of 1897 do not show a concealment of any material facts disclosed on the trial of this action that can be said to be of such a nature as to amount to a fraud upon the court, or as to have induced the surrogate to hold that the sale to John H. Costello was either fraudulent in fact or that it resulted in the creation of a trust by construction. The surrogate had before him the fact that the property of the partnerships had been sold for stock of the United States Leather Company, and that to carry out that sale the trust interest had been sold to John H. Costello for the reason that the trustees could not lawfully take the stock. The general nature of the transaction, both as to the sale to' John and the sale to the leather-company was presented, and the same arguments as to the propriety of the sale to John which are made to-day naturally would arise upon the evidence before him, except the subsequent acquiring of a fixed value of the stock of the leather-company, something that then lay in the future, and something that was, at that time, wholly uncertain. It cannot be said that had the surrogate been informed of the amount of stock taken which would represent the trust interest, he either would or should have come to a conclusion. different from that set forth in the decree. A court of equity will not interfere with the decree of a competent court upon the ground of fraud, unless the evidence is very clear that, by fraudulent devices the court rendering the judgment was misled and brought to a conclusion that it otherwise would not have arrived at; the facts proven before me do not show any such state of affairs.

But there is another objection to a recovery in this action that seems to me to be insuperable. It is well-settled law that the intervention of a court of equity to enforce equitable rights in contravention of a legal determination of the rights of the parties by a court of competent jurisdiction cannot be had where the court that has given the judgment has full power to open its judgment and properly adjust the rights of the parties. This power the Surrogate’s Court of Oneida county undoubtedly-has. Subdivision 6 of section 2481 of the Code of Civil Procedure gives the surrogate the power “ to open, vacate, modify, or set aside, or to enter, as of a former time, a decree or order of his court; or to grant a new trial or a hew hearing for fraud, * , * * or other sufficient cause.” The decisions in this State are to the effect that this power is as full and ample as that of the Supreme Court and that it is not subject to any limitation such as that placed upon the exercise of similar powers by the court last named or by the Statute of Limitations.' If application were made to the surrogate he would have full power to take the same evidence that has been given in this case and to decide thereon whether proper cause for vacating the decree of 1897 had been made out. It is quite plain under all the authorities that a court of equity will not exercise its extraordinary powers in such a case.

I am also of the opinion that a case of constructive fraud has not been made out. The contention of the plaintiff presents two aspects; in one the taking of the title by John H. Costello is claimed to be constructively fraudulent, and in the other aspect the act of the trustees in selling to John is claimed to be a constructive fraud. The sale to John was made in 1893 under circumstances which, in my opinion, fully justify it, because any prudent man would then have said that a sale to the United States Leather Company was, under all the circumstances, wise, and that, further, he would have said that such legal proceedings as might be necessary to consummate such a sale were wise, provided the facts then known to all the parties did not indicate that a wrong would be committed to any one interested in the property. This was exactly the state of affairs when the transfer to John was made. The leather business was in bad condition generally; the valuable property of Alfred Costello & Co. in a few years would cease to be worth much of anything by reason of the using up of the bark necessary for tanning; the competition of the trust, which was to acquire the property of pretty nearly all' the tanneries in the district in which the Alfred Costello plant was situated, would, leave Alfred Costello & Co. and P. C. Costello & Co. to fight, almost single handed, an immense aggregation of capital; everything tended to show that a sale upon proper terms was imperative; the price offered for the property was to be paid in stock and the future value of this stock was an unknown quantity, but the prices were put so high that it was justifiable to presume that the actual value of the property would eventually be obtained; it was necessary to give good title to all the property, and the executors and the trustees could not legally take the trust stock. Indeed it was entirely uncertain whether the stock would in law be paid up and whether, if taken by the executors or trustees, they would not be assuming a liability for debts of the corporation to the extent of the amount of stock taken. These-facts would naturally have led a fair-minded man to consummate the sale to the leather company, and, for that purpose, to ascertain the fair value of the trust interest and dispose of it for that value to some person who could convey to the leather company and assume all the risks and liability of taking stock therein. This was done unless it can be said that the executors and trustees were chargeable with knowledge that in the near future the amount of stock which would represent the value of the trust interest (according to the valuations made on the sale to the leather company) would be in cash much greater than the actual value of that interest, and this the evidence does not show. John H. Costello bought taking-the risk of the purchase and binding himself to pay the full amount of $174,708.26, and his purchase made him, as matter of law, the owner of that interest; personally he was under no equitable or legal obligation to the remaindermen; he was not a life tenant or a trustee, and in the absence of actual fraud- on his part he could not be made constructively a trustee; I may add that the evidence, does not show that.by the-purchase he realized any considerable amount from the stock of the leather company over and above the amount the trust estate would have received from that stock if he had taken it in trust for himself and the remaindermen. As to the executors and trustees there is no serious claim of actual fraudulent intent, and, therefore, no ground for charging them as trustees constructively; they have not been guilty of actual fraud; they were not the recipients of any benefit from the sale to John H. Costello and they have submitted the entire transaction to the Surrogate’s Court to an extent which, if they did not go into all the details, certainly called the attention of the court and the guardian of the infants to the main ■facts and enabled them to acquire full knowledge of all details that might have a bearing upon the propriety of the sale to John and to the leather company.

I conclude, therefore, that a cause of action has not been made out upon the merits, and, further, that had the proofs before the surrogate covered all the details of the transaction with the leather company as they existed in 1897, he would have been fully justified in disposing" of the matter upon the . accounting before him as he did.

My final conclusion, therefore, is that the action should be dismissed.