Quaid v. Ratkowsky

Shearn, J.: An action against the individual owner of practically all the shares of stock of a corporation to compel the payment of an unsatisfied judgment obtained against the corporation is on its face unusual. It is not without precedent, however, and under the circumstances existing in this case it is, upon what seems to me to be sound principle, maintainable. Upholding the right of action does not involve any departure from the well-settled rule that the mere fact that an individual owns practically all the shares of stock of a corporation does not subject him to any personal liability at law for the debts of the corporation. (Tilley v. Coykendall, 172 N. Y. 587; Buffalo Loan, T. & S. D. Co. v. Medina Gas Co., 162 id. 67; Werner v. Hearst, 177 id. 63.) It simply involves recognition of the principle that liability may be incurred, enforcible in equity, founded upon estoppel and upon the right of a court of equity to refuse to permit a mere corporate entity, found to be a sham, to be used as an instrument for fraud. The proved facts in the case, broadly summarized in the opinion of Mr. Justice Dowling, would support these findings: (1) That the realty company was a mere titleholder of the defendant’s property for defendant’s fraudulent purposes; (2) that defendant took and used the whole income from the properties whose nominal title was in the realty company, mingling it with his own funds, and operated and managed the properties as his private property; (3) that defendant held [430] himself out to the plaintiffs as the real owner of the corporation and as identical with it and assured plaintiffs that his private property stood behind it and thereby induced the plaintiffs to extend the bond and mortgage and accept his corporation as substituted lessee, and further to indulge him in payment of rent and interest by reducing the rent in reliance upon his personal guaranty of payment and his assurance that the obligation of the corporation and of himself were one and the same; (4) that plaintiffs never gave the corporation credit or faith but gave credit only to the defendant; (5) that defendant evaded a written guaranty but failed to repudiate or deny his obligation and acquiesced in the plaintiffs’ reliance upon it after its terms had been definitely stated and repeated to him in writing; (6) that defendant filed no annual corporate reports, kept no corporate minutes and ignored all corporate requirements for the protection of creditors; (7) that defendant fraudulently caused to be transferred to himself .all real properties of value still held in the name of the corporation in order to make the corporation judgment proof, and (8) that defendant concealed from the plaintiffs the transfers to himself and in large part moneys which he took from the properties. When the plaintiffs recovered judgment against the corporation upon the bond and for rent and taxes accrued upon the leasehold, the benefits of which leasehold the defendant had obtained and enjoyed solely upon the representation and agreement that he recognized the obligation as personal to himself and guaranteed its discharge, plaintiffs recovered judgment upon what was in fact the obligation of the defendant. This obligation was not enforcible against him at law because he did not personally assume payment of the bond. Neither was his guaranty enforcible at law, because of the Statute of Frauds. Plaintiffs had no remedy at law, and when they were remitted to the law side of the court this was tantamount to turning them out of court. True, this would not foreclose plaintiffs from following the property into the hands of the defendant and asking for an accounting, but this was a procedure, which the proof shows would have been in all probability unavailing, owing to the opportunity afforded the defendant for proving claims of his own against the alleged [431] corporation if the latter were regarded as carried on in good faith and not as a sham and a cloak for fraud. The question is, therefore, presented whether, under the peculiar facts of the case, power exists in a court of equity to enforce the obligation of the corporation as that of the defendant and compel him to perform specifically and discharge his obligation by paying the judgment obtained against the corporation, founded upon an obligation the validity of which the defendant is estopped from denying. We are dealing with a liability growing out of a lease of real property, where there has been performance on the part of the plaintiffs and an enjoyment of the property and acceptance of the benefits by the party sought to be charged. We have the clearly established agreement of the-defendant to be responsible for the bond and the rent. As we may not in law disregard the corporate entity, this agreement was in law one to answer for the debt of another, and, therefore, unenforcible at law because not in writing. “ The principle that a suit in equity may be maintained for the specific performance of an agreement, although an action at law could not be based upon it, is illustrated by cases of the transfer of possibility or expectancy of estates, assignments of things in action, contracts of married women, agreements invalid under the Statute of Frauds, agreements for the sale of land where the death of the vendor ensues before completion, agreements between a man and woman who afterwards marry, and verbal contracts which have been partially performed. In these and in many other cases, although an action at law could not be maintained, courts of equity hold such contracts as binding and decree their specific performance if free from objections which would generally prevent equitable relief,” (Winne v. Winne, 166 N. Y. 263, 271.) “ It has been a fundamental principle of the courts of equity from the beginning, in dealing with the statute, that it shall not be made a means of committing a fraud, especially as its expressed purpose was the prevention of a large class of frauds and perjuries. In particular the rule was early established that if plaintiff was induced by the actual fraud of defendant to dispense with a written memorandum of the contract, he may have specific performance notwithstanding the statute.” (36 Cyc. 642,) “ Where an [432] agreement has been verbally made which the statute requires to be in writing, and through the actual fraud of one party the execution of the written instrument is prevented, and the other party is induced to accept and rely upon the verbal agreement as valid and binding, a court of equity will not permit the fraudulent party to set up the Statute of Frauds as a defense, but will enforce the agreement against him, although it is merely verbal. Of course, there must be actual fraud as the distinguishing feature of the transaction — something more than the mere omission to put the contract into writing. The plaintiff must be induced through the deceit, false statements, or concealments of the other party to waive a written instrument, and to rely upon the parol undertaking. ” (Pom. Eq. Juris. [3d ed.] § 921. See, also, Young v. Overbaugh, 145 N. Y. 158; Messiah Home for Children v. Rogers, 212 id. 315.) In the case at bar we have evidence sufficient to sustain a finding of actual fraud; we have performance - on the part of the plaintiffs in reliance upon the defendant’s personal agreement, .and we have the defendant, after enjoying the possession of the property and its proceeds, seeking to evade responsibility by saying that his promise was not in writing. There is present every element of equitable estoppel, entitling the plaintiffs to go into equity and compel the defendant to perform his agreement by paying the debt of the corporation, guaranteed by him and now reduced to judgment. The same principle of estoppel may be availed of by the plaintiffs in equity to prevent the defendant from denying that the agreement and debt of the corporation were his own. While the courts of law strictly observe the fiction of corporate entity, there has been for years a growing indisposition to permit corporate entity to be employed either as an • instrumentality or as a cloak for fraud or for successful evasion of the law. (McCaskill Co. v. United States, 216 U. S. 504; Westinghouse Electric & Mfg. Co. v. Allis-Chalmers Co., 176 Fed. Rep. 362; Linn & Lane Timber Co. v. United States, 196 id. 593; United States v. Lehigh Valley R. R. Co., 220 U. S. 257, 274; Southern Pacific Terminal Co. v. Interstate Commerce Commission, 219 id. 498, 523; Searchlight Horn Co. v. American Graphophone Co., 240 Fed. Rep. 745; Goss & Co. v. Goss, No. 2, 147 App. Div, 698, 702; affd., 207 N. Y. 742; Garrigues Co. v. [433] International Agricultural Corp., 159 App. Div. 877; Matter of Watertown Paper Co., 169 Fed. Rep. 252.) Lord Westbury in McCormick v. Grogan (L. R. 4 H. L. 82, 97) said: “ The Court of Equity has, from a very early period, decided that even an Act of Parliament shall not be used as an instrument of fraud; and if in the machinery of perpetrating a fraud an Act of Parliament intervenes, the Court of Equity, it is true, does not set aside the Act of Parliament, but it fastens on the individual who gets a title under that Act, and imposes upon him a personal obligation, because he applies the Act as an instrument for accomphshing a fraud.” If then, in a case involving lands, the doctrine of equitable estoppel may be applied to breathe life into a contract void under the Statute of Frauds, upon the principle that not even an act of Parliament shall be used as an instrument of fraud, certainly a mere charter of incorporation cannot be availed of successfully for the purpose of accomphshing a fraud. The defendant, therefore, is not only estopped from denying the validity of his guaranty agreement but he is estopped from denying the truth of his representation to the plaintiffs of the substantial identity of the corporation and himself and that its obhgations were his obhgations. Therefore, on principle, it seems to me quite clear that this action was properly brought and is maintainable in equity and that it was error to send it to the law side of the court. If, in addition to principle, precedent is necessary, a case quite in point is Baltimore & Ohio Telegraph Co. v. Interstate Telegraph Co. (54 Fed. Rep. 50). The order appealed from should be reversed, with ten dollars costs and disbursements, and the action remitted to the Special Term for trial. Clarke, P. J., and Page, J., concurred; Dowling and Smith, JJ., dissented.