Supreme Court of New York
25 N.Y.S.2d 667 (1940)
Alleghany Corporation held $23,500,000 in unsecured bonds in Missouri Pacific. Alleghany purchased several properties, and in 1930 still owed over $10,000,000 on the purchase price. Alleghany was unable to borrow the money, and instead, on November 18, 1930, sold $10,000,000 in its Missouri Pacific bonds to banking firm J.P. Morgan & Co. for cash at par value, with an option for Alleghany to buy back the bonds within six months for the price at which they were sold to J.P. Morgan. Guaranty Trust Company (Trust Company) made a written commitment to J.P. Morgan to participate in the purchase, and Guaranty Company of New York (Guaranty Company), a subsidiary of Trust Company, agreed to take over the bonds upon expiration of the six month repurchase option, if Alleghany failed to exercise the option. The bonds had already been steadily declining in value in 1930. On November 5, 1930, when the board of directors of Trust Company approved the transaction, the bonds were selling at 102 7/8. On November 18, 1930, when the board of directors of Guaranty Company approved their commitment, the bonds were valued at 98 5/8. On April 16, 1931, when the six month repurchase option expired, the bonds were selling at 86 high and 81 low. Guaranty Company took them over from Trust Company at par and carried them on its books as an investment. Shareholders owning 36 out of 900,000 shares of stock in Trust Company (plaintiffs) have brought a derivative suit against the directors of Trust Company and Guaranty Company, and members of J.P. Morgan (defendants), seeking to impose liability for losses resulting from the transaction.
Rule of Law
Holding and Reasoning (Shientag, J.)
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