
    Justus N. Williams, Appellant, v. Reno R. Billington and Others, Respondents.
    First Department,
    May 3, 1912.
    Equity — agreement to exchange stock for bonds in new corporation — fraud—failure of consideration—rescission and restoration — adequate remedy at law—accounting.
    A stockholder in a domestic corporation, desiring to convert his stock into cash, was fraudulently induced by the attorney for the corporation to enter into an agreement to transfer his stock to a new corporation in exchange for its bonds which the attorney represented could be readily converted into cash. The new corporation was illegally and fraudulently organized; its bonds were worthless and the attorney received possession of the plant and business of the old corporation.
    The stockholder on discovering the fraud brought a suit in equity against the attorney, offering to return the bonds and praying that the agreement under which he transferred his stock be canceled and the stock be returned to him and that the defendant account for the property of the old corporation which came into his possession.
    Held, that the facts alleged show that plaintiff was induced to make the agreement and to part with his stock by fraud, and that there was a complete failure of consideration;
    That one remedy open to the plaintiff was rescission and restoration and an accounting which requires the aid of a court of equity, and that he cannot be deprived of that remedy on the theory that he may have an adequate remedy at law;
    That since the suit was brought by the plaintiff in his own right and not in the right of the corporation, in so far as he prays for an accounting, relief should be denied.
    Dowling, J., dissented.
    
      Appeal by the plaintiff, Justus N. Williams, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on the 5th day of December, 1911, upon the decision of the court, rendered after a trial at the New York Special Term, dismissing the complaint and dissolving a temporary injunction and vacating an order which appointed a receiver, and also requiring the receiver - to turn over the- property he held, and providing for his discharge and the cancellation of his bond.
    
      N. J. O’Connell, for the appellant.
    
      W. M. K. Olcott [Harry K. Jacobs with him on the brief], for the respondents.
   Laughlin, J.:

The cause was regularly brought to trial at Special Term, and after counsel for plaintiff opened, on motion of counsel for defendants the complaint was dismissed on the theory, as shown by the remarks of the learned trial justice, that plaintiff had an adequate remedy at law.

It is quite clear that the pleader has attempted to set forth a cause of action for equitable relief only, and no claim appears to have been made upon the trial that on the facts pleaded the plaintiff would be entitled in any event to recover at law, for no request to transfer the cause to the. jury calendar was made. The appeal, therefore, presents only the single question as to whether proof of the facts pleaded would entitle plaintiff to any equitable relief.

The plaintiff alleges that he owned 250 shares of the total issue of 330 shares of the capital stock of the New York Central Storage Company, a domestic corporation, which he desired to convert into cash; that defendant Billington was an attorney and counselor at law and the attorney for said corporation, and owmed 30 shares of its capital stock; that Billington fraudulently induced him to enter into a formal agreement in writing to transfer his 250 shares of said stock to the defendant Stade, who was acting for Billington; that this agreement was made on the understanding that Billington was to organize the Mount Morris Storage Company as a domestic corporation, with a view to having it take over said stock in exchange for its bonds, which were to be a first lien on all of its assets and were to be issued to plaintiff, and which Billington represented to plaintiff could be readily converted into cash; that Billington thereafter filed in the office of the clerk of the county of New York a certificate of incorporation of said Mount Morris Storage Company, and thereupon bonds of said company were issued and delivered to plaintiff in exchange for his stock; that the Mount Morris Storage Company knew of the existence. of the agreement between the plaintiff and Stade and all of its provisions, and all the facts and circumstances concerning the transactions in question; that the incorporators of said Mount Morris Storage Company were and are fictitious, and that no subscriptions to its stock have been paid as required by law, and that it has no assets other than the said stock transferred to it'by the plaintiff, and that its directors merely represent the defendant Billington without any other interest in the company;' that the bonds which plaintiff received are both illegal and worthless and were issued in violation of law, for the reason that $500 had not been paid into the treasury of the company and they were not issued for money, property or work done, but solely for the plaintiff’s said stock; that through said transfer of stock to said fictitious corporation defendant Billington has taken possession and control of the New York Central Storage Company’s office, plant and •business, and has appropriated the same to his individual use, in accordance with a plan fraudulently conceived by him in advance by which he induced the plaintiff to execute and per- • form said agreément, in form with Stade, by fraudulent representations with respect to the organization of the new company and the bonds to be issued by it, upon which fraudulent representations the plaintiff relied, and that both the Mount Morris Storage Company and the defendant Stade knew of the deception thus practiced on the plaintiff. .

The complaint further shows that the plaintiff is ready and willing to return the bonds, and that defendant Smith is made a party merely on account of his ownership of the other fifty shares of the outstanding stock of the New York Central Storage Company. The relief demanded is in effect that the agreement under which the plaintiff transferred his stock be canceled and the transfer be declared void and the stock returned to plaintiff, and that defendants account for said stock and all the property of the New York Central Storage Company which came into their, or either of their, hands in the premises, and that the equities of all the parties to the action be adjusted.

I am of opinion that these facts sufficiently show that plaintiff was induced to make the agreement and to part with his stock by fraud,, and that there was a complete failure of consideration. It is fairly to be inferred from the facts alleged that the plaintiff made the agreement believing that the corporation would not be organized and commence business in violation of law before its capital had been paid in (Business Corp. Law [Consol. Laws, chap. 4; Laws of 19Ó9, chap. 12], § 3), and that he accepted the bonds believing that the corporation had been duly organized, and that the bonds had been lawfully issued and were a first lien on the assets of a valid corporation. If so, manifestly, on discovering that he had been fraudulently imposed upon, one remedy open to him was rescission and restoration and an accounting which requires the aid of a court of equity, and he. cannot be deprived of that remedy on the theory that he may have an adequate remedy at law. It may well be that it would not be competent for a domestic corporation to obligate itself to the extent contemplated by the agreement under which the stock and bonds were to be exchanged, but that does not affect the plaintiff’s right to rescind the contract on the facts alleged. The plaintiff brings this action in his own right and not in the right of the New York Central Storage Company, and in so far as he prays for an accounting, which could only be had by that company, he will of course be afforded no relief in this action.

It follows, therefore, that the judgment; should be' reversed and a new trial granted, with costs to appellant to abide the event.

Ingraham, ¡P. J., Scott and Miller, JJ., concurred; Dowling, J., dissented.

Judgment reversed, new trial ordered, costs to appellant to abide event.  