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Grobart v. Society for Establishing Useful Manufactures

Decided: April 25, 1949.


On appeal from the former Supreme Court.

For affirmance -- Chief Justice Vanderbilt, and Justices Case, Heher, Oliphant, Burling and Ackerson. For reversal -- None. The opinion of the court was delivered by Vanderbilt, C.J.


This is an appeal by the plaintiffs, Meyer Grobart, Samuel Grobart, Rose Rowitz and Yetta Teitelbaum, from a judgment entered on the pleadings in favor of the defendants, The Society for Establishing Useful Manufactures, in dissolution, and its surviving trustees, individually and as such trustees.

The Society was incorporated in 1791 by a special act of the Legislature, Paterson's Laws (1800) p. 104. By its charter it was given the right, among other things, to own real estate within the confines of the Town (now the City) of Paterson to a value of $4,000,000 and to hold it free from all local and county taxation. Over the years the Society acquired extensive holdings of land in Paterson and became as well one of the largest owners of water rights in the Passaic River. It constructed a dam on the river and also canals which conducted water from the river to lands it owned abutting these canals. A large portion of the lands owned by the Society were leased to various persons from time to time by perpetually renewable leases, which gave the lessees the right to take from the canals stipulated quantities of water to be used on the abutting land and then returned to the river. The plaintiffs are the lessees in several of these leases under which they were entitled to use certain quantities of water on the lands leased by them for operating mills owned by them.

Due to various factors, foremost of which apparently was the diminished flow of the Passaic River, the Society in the course of time became unable to fulfill its obligations to furnish to plaintiffs' mills the water which would flow through an aperture of 8 1/2 square feet, and consequently in 1925 the then owners of the plaintiffs' mills and the Society entered into an agreement whereby the Society agreed to furnish and the plaintiffs agreed to accept electricity in place of all the water except that which would flow through an aperture of one-half square foot. This agreement was continued from time to time and was in force in 1946, when the plaintiffs sold

their mills and leasehold estates with the appurtenant water rights to the City of Paterson.

The irrepealable provisions of the charter of the Society exempting the property of the Society from local taxation has for a long time been a source of friction and of litigation between the city and the Society; see Paterson v. Society, etc., 24 N.J.L. 385 (Sup. Ct. 1854); Society, etc., v. Paterson, 88 N.J.L. 123 (Sup. Ct. 1915); reversed in part, 89 N.J.L. 208 (E. & A. 1916); Society, etc., v. Thayer Martin, 116 N.J.L. 257 (Sup. Ct. 1936). At all events negotiations were had which culminated in a written offer by the Society to sell and convey its tangible property to the city, subject to all leases, grants, liens and easements (including the water rights of plaintiffs and others) for $450,000. This offer was accepted by the city. Among the terms of the offer was the provision that after the consummation of the sale the Society would be dissolved. The offer was further conditioned on (1) the enactment of valid legislation authorizing the city to acquire the property of the Society subject to easements and servitudes of the nature here involved, and (2) on the approval by the Court of Chancery of the terms of the sale. There were two reasons for insisting on the approval of the sale by the Court of Chancery: (1) all of the stock of the Society was held by the New Jersey General Security Company, which was then in dissolution, and (2) the property of the Society had been variously appraised at values between $400,000 and $1,500,000. In furtherance of the plan legislation was enacted in 1944 authorizing the purchase by municipalities of tax exempt property subject to "leases, mortgages, liens, encumbrances, covenants, easements, servitudes, agreements, liabilities and other claims, which may be settled, adjusted, performed, complied with, or discharged by the municipality." P.L. 1944, cs. 206 and 207; R.S. 40:60-25.7 to 40:60-25.17, R.S. 40:69-4.1 to 40:69-4.12.

Following the enactment of this legislation, the trustees in dissolution of the Security Company initiated proceedings in Chancery to obtain instructions with respect to the sale. The plaintiffs here, two of whom owned shares in the Security

Company, as well as other shareholders of the Security Company, filed objections to the sale, the plaintiffs claiming that because of their leases and grants it would be inequitable to approve such sale. The plaintiffs also sued out a writ of certiorari attacking the validity of ordinances of the city that had been adopted under the enabling legislation under the claim that the enabling legislation was invalid. While these two proceedings were pending, negotiations were had between the city and the plaintiffs which resulted in an agreement between them whereby the plaintiffs agreed to sell to the city all of their interests in the lands owned by the Society as well as all of the water rights appurtenant thereto. The consummation of this agreement, the consideration for which was $350,000.00, was conditioned upon the ultimate acquisition by the city of the property of the Society. Thereupon and in order that the sale by the Society of its property to the city might be effectuated, plaintiffs (1) withdrew their objections to the sale which they had filed in the Chancery proceedings and consented to a decree approving the sale, (2) procured a voluntary dismissal of the certiorari proceedings, and (3) so as to induce the other objecting stockholders to withdraw their objections and to consent to a decree approving the sale, agreed to buy the shares of the objecting stockholders and to pay one-half of the fees of counsel of these other stockholders, the Society agreeing to pay the other half.

Thereafter a consent decree to the sale was entered in the Chancery proceedings; the Society conveyed its property to the city under the agreement subject to the leases, easements and other agreements affecting the property, "including the rights existing in others to take water from the canals;" and the plaintiffs conveyed their property and water rights to the city pursuant to the terms of their agreement, receiving therefor the purchase price of $350,000. After the conveyance of its property, the Society dissolved. An order limiting creditors, as prescribed in R.S. 14:13-11, was obtained by the trustees in dissolution and, within the time therein limited, the plaintiffs filed their claim for $1,000,000 against the Society for damages allegedly arising out of the depreciation in

value of the property formerly owned by them and conveyed to Paterson, the alleged damages purportedly stemming from the conveyance by the Society to the city of its property which, it was said, left the plaintiffs in a position where they could not enforce their water rights against the city or the property conveyed by the Society to the city. ...

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