New York Law Review

Tag: 1918

  • E. Fougera & Co. v. City of New York, 224 N.Y. 269 (1918): Limits on Municipal Power to Regulate Existing Inventory

    E. Fougera & Co. v. City of New York, 224 N.Y. 269 (1918)

    A municipal board of health, acting under a general grant of power, cannot prohibit the sale of existing stores of merchandise, particularly when dealers are unable to comply with the new regulations due to circumstances beyond their control.

    Summary

    E. Fougera & Co. challenged the validity of sections of New York City’s Sanitary Code that required the registration of ingredients in patent medicines. Fougera, an importer, possessed a large inventory of medicines with unknown ingredients, as foreign manufacturers guarded these as secrets. The New York Court of Appeals held that while the city had the power to regulate the sale of medicines for public health, it exceeded its delegated authority by effectively banning the sale of Fougera’s existing inventory, especially since compliance was impossible. This case clarifies the limitations on municipal regulatory power when applied retroactively to existing merchandise.

    Facts

    E. Fougera & Co. imported and sold patent medicines, some exclusively in the U.S. They had a significant stock of drugs when New York City’s Board of Health enacted sections 116 and 117 of the Sanitary Code. These sections mandated the registration of all ingredients in patent medicines sold within the city. Fougera did not know the ingredients of some of their imported medicines and could not obtain this information from the foreign manufacturers. The ordinance effectively prohibited the sale of Fougera’s existing inventory of these medicines.

    Procedural History

    Fougera initiated a legal challenge to the enforcement of sections 116 and 117 of the Sanitary Code. The case was submitted on an agreed statement of facts. The lower court ruled in favor of Fougera, permanently enjoining the enforcement of the challenged sections. The City of New York appealed this decision to the New York Court of Appeals.

    Issue(s)

    Whether the New York City Board of Health, under a general grant of power, could enact an ordinance that effectively prohibits the sale of a company’s existing inventory of patent medicines when the company is unable to comply with the ordinance’s requirements due to circumstances beyond its control.

    Holding

    No, because the Board of Health exceeded its delegated powers by enacting an ordinance that effectively prohibited the sale of existing merchandise when the dealer was unable to comply with its requirements. The ordinance, in its application to merchandise previously acquired, failed to protect the rights of dealers unable to comply.

    Court’s Reasoning

    The Court of Appeals, in an opinion by Judge Cardozo, acknowledged the city’s police power to regulate for public health and safety. However, the court emphasized that the Board of Health’s power was derived from a general grant of authority, not a specific legislative mandate to destroy existing property rights. The court distinguished between the power to regulate and the power to destroy, stating, “But the power to regulate is not always equivalent to the power to destroy… Authority more specific must be found before a great mass of property, commonly reputed useful, may be declared contraband altogether, and excluded from the field of commerce.”

    The court noted that the ordinance did not exempt existing stores of merchandise in the hands of dealers who could not comply with its requirements. Because Fougera could not ascertain the ingredients of its existing stock, the ordinance amounted to “an absolute prohibition” on the sale of that stock. The Court emphasized the lack of warning to Fougera, noting that the company “has bought drugs which from their long years of use may fairly be presumed to be legitimate articles of commerce. Without warning and without fault, its right of property has been forfeited.”

    The court found the defect in the ordinance too deeply ingrained to sever the valid portions from the invalid. Therefore, the entire ordinance was deemed unenforceable against Fougera’s existing inventory. The court explicitly stated that the holding was based on the Board of Health exceeding its delegated powers, implying a legislative enactment specifically authorizing such a prohibition might be treated differently.

  • Kavanaugh v. Gould, 223 N.Y. 103 (1918): Director Liability for Neglect of Duty

    Kavanaugh v. Gould, 223 N.Y. 103 (1918)

    Directors of financial institutions owe a duty of care to the institution, requiring them to exercise the same degree of care and prudence that men prompted by self-interest generally exercise in their own affairs; failure to exercise such care can result in liability for losses sustained by the company.

    Summary

    This case addresses the liability of a director, George Gould, for losses sustained by the Commonwealth Trust Company due to his alleged neglect of duties. Gould was a director for a short period and never attended meetings or acquainted himself with the company’s business. The court reversed the lower courts’ decision in favor of Gould, holding that the trial court failed to make necessary findings on whether Gould was negligent and whether his neglect caused the losses. The Court of Appeals emphasized that directors cannot use their position as a mere honor without responsibility and must be involved in the general affairs of the company.

    Facts

    The Commonwealth Trust Company was established in March 1902. George Gould became a director on April 3, 1902, and resigned on October 29, 1902. During this time, the trust company experienced substantial losses due to mismanagement, largely stemming from its heavy investment in the United States Shipbuilding Company. Gould never attended any director meetings nor familiarized himself with the trust company’s business practices.

    Procedural History

    The case initially addressed the sufficiency of the complaint in prior appeals (181 N.Y. 121 and 191 N.Y. 522). Following trial, the lower courts ruled in favor of the defendant, Gould. The plaintiff appealed, arguing the trial court failed to make findings on the core issues of Gould’s negligence and causation of losses. The New York Court of Appeals reversed the Appellate Division’s judgment and ordered a new trial, finding that the trial court’s failure to make findings on the key issues constituted a mistrial.

    Issue(s)

    Whether the trial court erred by failing to make findings on (1) whether Gould was negligent in his duties as a director, and (2) whether such negligence caused the losses sustained by the Commonwealth Trust Company.

    Holding

    Yes, because the trial court failed to determine the key issues of the director’s neglect and the losses attributable to that neglect; therefore, a mistrial occurred, warranting a new trial. The court stated, “A judgment must be based upon facts found, not facts refused.”

    Court’s Reasoning

    The court reasoned that directors of financial institutions have a duty to exercise the same level of care and prudence that men prompted by self-interest would exercise in their own affairs. The court cited precedent such as Hun v. Cary, 82 N.Y. 65. Directors must be knowledgeable about the general affairs, business policies, investments, and resource allocation of the institution. The court highlighted several questionable transactions, including speculation in the company’s own stock, improper loans to entities connected to the company’s president, and excessive loans related to the United States Shipbuilding Company. The Court emphasized that “[n]o custom or practice can make a directorship a mere position of honor void of responsibility, or cause a name to become a substitute for care and attention.” The court determined that there was evidence from which a finding of Gould’s neglect and the resulting losses could be made. The absence of findings on these issues by the trial court necessitated a new trial. The court noted that a refusal to find a fact requested is not equivalent to an affirmative finding to the contrary. The court emphasized that there was evidence suggesting Gould should have been aware of the company’s affairs and the president’s actions, and whether he should have acted to prevent further risky loans was a question of fact for the trial court. The Court indicated that the core question was “whether, as a director, he should have known, by the July 22d meeting, something of the company’s affairs and the transactions and methods of its president, and whether, upon the evidence and under the conditions above stated, he should have, in the exercise of reasonable care, done something to prevent the continuance of such methods and further loans on shipbuilding bonds without a check or supervision.”

  • People ex rel. Loeser v. Board of Education, 224 N.Y. 474 (1918): Proper Procedure Required to Terminate Probationary Employment

    People ex rel. Loeser v. Board of Education, 224 N.Y. 474 (1918)

    A probationary employee is entitled to permanent employment if they are retained beyond their probationary period without proper notice of unsatisfactory performance from the appropriate appointing authority.

    Summary

    Loeser, a probationary clerk for the Board of Education, was effectively retained beyond his probationary period without proper notice of unsatisfactory performance. Although a committee recommended his termination, the Board of Education, which held the power of appointment and removal, did not ratify this decision until after the probationary period ended. The court held that because the Board’s ratification occurred after the probationary term, Loeser’s right to the position had vested, and he was entitled to reinstatement. The case underscores the importance of adhering to procedural requirements for terminating probationary employment and clarifies that retention without proper notice equates to a permanent appointment.

    Facts

    The Board of Education appointed Loeser as a clerk for a probationary period.
    The Board’s bylaws authorized a committee on supplies to appoint clerks, subject to Board confirmation.
    The bylaws also empowered the committee to conduct trials of clerks and report its conclusions to the Board.
    The committee recommended Loeser’s termination, but the Board did not ratify this decision until after his probationary period ended.
    Loeser was subsequently removed from his position.

    Procedural History

    Loeser sought reinstatement to his position.
    The Special Term ruled in favor of Loeser.
    The Appellate Division reversed the Special Term’s decision.
    The New York Court of Appeals reviewed the Appellate Division’s decision.

    Issue(s)

    Whether the probationary period for which the relator was appointed could be terminated under the rules of the municipal civil service commission only by notice from the appointing officer that his conduct or capacity was unsatisfactory to the officer, and for that reason he could not be retained in his position?

    Holding

    Yes, because the Board of Education’s bylaws required the Board, not merely a committee, to make the determination regarding termination of employment. The board of education by its by-laws jealously retained in its own hands the power of removal as well as the power of appointment. The notice necessary to terminate the relator’s employment at the end of the probationary period was not complete until ratified by the board of education.

    Court’s Reasoning

    The Court of Appeals emphasized that the Board of Education, not the committee on supplies, was the appointing officer with the power of removal. The court highlighted that the Board’s bylaws retained the power of removal and appointment. Retention in service without proper notice is equivalent to a permanent appointment. The court reasoned that the Board’s resolution to terminate Loeser after his probationary period expired was ineffective because his rights to the position had already vested.

    “The resolution that the board adopted on June 23, after the probationary period had expired, could not take effect retrospectively, because in the meantime the rights of the relator to the position had become fixed and determined.” The court cited the principle that ratification is ineffective when the rights of a third person have intervened between the act and its ratification, citing Pickering v. Lomax, 145 U. S. 310; Cook v. Tullis, 85 U. S. [18 Wall.] 332; Catholic F. M. Society v. Oussani, 215 N. Y. 1.

    This case is significant because it underscores the importance of strict adherence to procedural requirements in employment matters, particularly when dealing with probationary employees. It emphasizes that the power to terminate employment rests with the designated appointing authority, and any action taken by a subordinate body must be properly ratified before the probationary period expires. This case informs legal reasoning by emphasizing that rights vest when procedures aren’t followed, preventing retroactive action that would strip a person of those rights.