Hyperlawhypertext legal database Pittsburg Carbon Co. v. McMillin 23 Abb. N. Cas. 298

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Pittsburg Carbon Co. v. McMillin

23 Abb. N. Cas. 298 Court N. Y. Supreme Court, Fifth Department, General Term;[3] English

Delivered by Macomber, J.

Contents

Majority

p. 298
PITTSBURG CARBON CO. v. McMILLIN.
N. Y. Supreme Court, Fifth Department, General Term;[3]
June, 1889.

Headnote

1. Corporations ; combinations ; receiver enforcing contracts of member.], A receiver of the assets of a “trust ” or combination of corporations, represents creditors as well as the members of the combination; and can, for the benefit of innocent creditors, enforce contracts made by the illegal combination or its members in the course of the business for which the combination was formed.[2]
2. Estoppel; corporation, when not permitted to set up its own illegal' agreement.] A member of such illegal combination, who carries-on business under it with third persons, is estopped from claiming that the receiver cannot enforce debts when due to the combination because of its being illegal.
Appeal from a judgment of the Erie Special Term in favor of the defendant.
In March, 1887, the Pittsburg Carbon Co. and eight other carbon companies and makers, united in an agreement
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appointing one Hawks, the trustee, lessee and exclusive manager of all their works, and Hawks was succeeded in that position by one Danglar.[3]
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Before this combination, known as The United Carbon ■Companies, was formed, the Pittsburg Carbon Company had a contract to supply the Brush Electric Light Company •of Buffalo with carbon. After the combination was formed,
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the Pittsburg Company, under the management of the trustee, continued to carry out the supply contract, and the trustee, at their request, made out bills for the supplies in terms payable to himself as trustee or agent.
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It afterward withdrew from the combination and sent bills for subsequent supplies in its own name.
Two of the companies in the combination thereafter brought suit in Ohio against the others and had a receiver
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appointed, of all the property, etc., growing out of the contracts made by the companies with their manager and trustee, and of all the assets of the trusteeship.
The receiver and the Pittsburg Company, each sued the Brush Company for the price of the supplies, and the Brush Company was allowed to pay the sum into court, and be discharged, leaving the receiver of the trust and the Pittsburg Company to interplead.
The defendant succeeded below and the plaintiff now appeals to the general term.
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C. C. Crosser, for the appellant.
I. The trust contract was null and void and could not in any way be satisfied. Hor can it be the foundation of a valid contract. The-original vice of an unlawful purpose tainted every part of the trust contract, including the assignment of the claim against the Brush Electric Light Company and all invoices,, inventories, bills and notifications made by the parties thereto about the business of the trust—all were null and void. The claim to said sum of $1,080 never in any sense became an asset of said trust or trustee (Bishop on Contract (enlarged ed.) 471, 473, 613, 614; Story's Eq. Jur. 306 3 Am. and Eng. Encyc. of Law, 872, and cases cited).
II. The court erred in so far as it found that the receiver is entitled to enforce rights against the appellant on behalf of creditors of said trust which the trustee could not enforce-on account of his complicity in the illegal contract. The receiver takes no better title than the trustee (Curtis v. Leavitt, 15 N. Y. 9 -46, 47; Alexander v. Relfe, 74 Mo. 495 , 516; Beach on Receivers, 433 ; High on Receivers, §315).
III. The court erred in its conclusion of law that the-plaintiff was estopped from setting up the invalidity of the-contract of March 1,1887, as against the defendant, receiver. 1. There can be no estoppel against asserting the invalidity of an illegal contract (Greenhood on Public Policy Rule,. 126; Herman, on Estoppel, § 543; 2 Kents Com. 463). 2.. The facts found do not invoke the extraordinary remedy of estoppel. The essential elements of estoppel are not found (Andrews v. Ætna Life Ins. Co., 85 N. Y. 334 , 344; Hamlin v. Sears, 82 Id. 327-33 ; Merrill v. Tobin, 30 Fed. Rep. 738 -743; Edmundson v. Thompson, 31 L. J. Ex. 207 Herman, on Estoppel ; Monks v. Belden, 80 Mo. 639 ; Sulphine v. Dunbar, 55 Miss. 255 ; Graves v. Blondell, 70 Me. 190 , 194). 3. So far as the receiver claims title through the trust contract and trusteeship, he cannot invoke the aid of the court to enforce such claims or plead estoppel. 4. If
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the creditors have any claim which does not flow through the trustee, the receiver is not the “ real party in interest to prosecute such claim. 5. The creditors will be subrogated to the rights of the trustees, their rights to be subject to the equities subsisting between the trustee and the plaintiff (Lewin on Trusts and Trustees, 639).
IY. The appellant’s right to recover this fund antedates the trust contract and accrues independent thereof. The respondent to succeed must plant himself squarely upon the trust contract and secure the aid of the court to enforce the same. This is beside the purpose of equity (Keene v. Kent, 4 N. Y. State Rep. 431; Story’s Eq § 769).
Y. The contract upon its face shows that it is a mere executory contract, and the court has held it illegal and void. It follows that the judgment of the court is inconsistent in this: that it holds that the court will make itself the instrument by which to enforce this illegal executory, void contract, at the instance of the parties to it. The pretense upon which it is sought to sustain this ruling is that the receiver represents the creditors; but there is nothing in the record to show that any creditor sought the appointment of the receiver or is represented by the receiver. The bald fact appears by the record that the receiver is simply the instrument by which the aid of a court of equity in this State is invoked to enforce and carry out a void, illegal executory contract. If this can; be done, upon any such pretense, for every practical purpose-such contracts are not void or illegal. On the contrary, &. creditor dealing with the creature of such a contract is as-much bound to know whom and what he represents as is a. person dealing with an agent.
Ansley Wilcox (Allen, Movins db Wilcox, attorneys), for the respondent.
The question to be considered is-; whether the appellant can set up the illegality of its own. contract as against the receiver who represents not only itself and the other parties to the contract, but bonafidee
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creditors, who had dealt with the trust or combination and had given credit to it in the ordinary course of business. We assert that it cannot do so. The receiver or any statutory assignee of an insolvent corporation, association or individual, represents primarily the creditors of the insolvent, as well as the insolvent itself, and its stockholders or the parties who may be interested after its debts are paid. For this reason he is allowed to disaffirm the illegal acts of the insolvent and recover its assets wherever creditors might do so ; and in general he unites in himself all the rights of creditors and of the parties interested in the insolvent estate. This is expressly provided for in chapter 314 of the Laws of 1858, and the practice is regulated by rules 78 and 79 of the ■ General Fules of Practice. Illustrations of this doctrine may be found in the cases of Attorney-General v. Guardian .Mut. Life Ins. Co., 77 N. Y. 272 ,275 ; Talmage v. Pell, 7 N. Y. 328 , 346, 347 ; Farmers’, etc. Bk. v. Jenks, 7 Metc. 592 ; Honegger v. Wettstein, 47 Super. Ct. (J. & S.) 125, 136, 137; Litchfield Bk. v. Church, 29 Conn. 137 , 150. It is, therefore, obvious that the receiver of the United Carbon Companies is the proper person to prosecute this claim and to collect it for the benefit of all the creditors of the insolvent combination. It seemed to be admitted upon the argument in the court below that the parties to such a combination as this, if illegal, could not set up the illegality of their own acts to defeat the claim of a bona fide creditor in a suit brought by such a creditor directly against them ; and that any one of the fifteen or more creditors whom this receiver represents could bring a suit directly against the Pittsburg Carbon Company and recover his debt from that company. If so, it follows inevitably that the receiver of the insolvent combination can step in and maintain a right as against the parties to the combination to collect its assets for' the benefit of such creditors. The creation of such a receivership is expressly designed to avoid the complications and wastefulness of a multiplicity of individual suits and to unite the
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a-ights of all parties in one person, so that they can be •administered economically and equitably by a single court.
We cannot see upon what ground it can be claimed that '■the plaintiff can take advantage of the illegality of its own •acts to defeat the rights of creditors, whether in a suit ‘brought directly by them, or by a receiver as their representative. The principle is so elementary as to be embodied in a maxim that 16 no man should (or can) take advantage of his -own wrong ” (Broom's Legal Maxims, p. 279 and 288, and ■cases cited ; Litchfield Bank v. Church, 29 Conn. 137 ,150). If we attempt to analyze the combination which was effected by the separate contracts made by Mr. Hawks with these ••several carbon makers, it bears certain resemblances to a partnership. Looked at in this light, it is obvious that the members of a partnership cannot set up as against a creditor who had dealt with the partnership in good faith, the fact that the partnership was formed for an illegal purpose, in order to defeat their own liability for a just debt (1 Lindley on Partnership (Eng. ed.), 201, 205 ; Metcalfe on Contracts, 116 ; Adams v. Creditors, 14 La. 454 , 461; Kinsman v. Parkhurst, 18 How. U. S. 289, 293). Treating the contract between the Pittsburg Carbon Company and Hawks as an agency for the management of its business by him, which might be void as between the parties because contemplating an illegal purpose, it is obvious that the principal could not set up the illegality of such a contract as against an innocent -creditor who had contracted with the agent in good faith, so as to defeat its liability for a just debt (Murray, Receiver, v. Vanderbilt, 39 Barb. 140 , 152; Wharton on Agency, §§ 474, 542, also §§ 25, 26, 249, 250, 320). A corporation cannot set up any illegality in its incorporation to defeat the ■claim of creditors (Morawetz on Corporations, §§750 etseq / Phoenix Warehousing Company v. Badger, 67 N. Y. 294 ; Eaton v. Aspinwall, 19 Id. 119 ; Mead v. Keeler, 24 Barb. 20 ). These principles appear to be decisive of the question involved in this appeal. The precise question does not seem to have arisen in any of the cases involving the legality of
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so-called “ trusts ” or combinations, alleged to be illegal ob the ground that they are formed to prevent competition and restrain trade, whether, when such a combination becomes-insolvent, the parties to it can set up the illegality of their own acts to defeat the rights of creditors. Apparently no-one ever made such a claim before. But there is nothing novel in the principle involved, and it can be disposed of on familiar grounds of equitable estoppel. The very definition of an equitable estoppel, as stated in the leading text books, seems sufficient to dispose of the question. Prof.. Pomeroy (Equity Jurisprudence, § 804) says : “ Equitableestoppel is the effect of the voluntary conduct of a party whereby he is absolutely precluded, both at law and in. equity, from asserting rights which might perhaps have otherwise existed, either of property, or contract, or of remedy, as against another person who has in good faith relied upon such conduct, and has been led thereby to change-his position for the worse, and who on his part acquires some corresponding right either of property, of contract, or of remedy.” In all the cases which we have found where the illegality of so-called “ trusts,” or combinations in restraint of trade, has been asserted, the question has arisen between the parties to the unlawful contract directly. It has arisen either in the shape of a suit to restrain a breach of the contract, or of a suit for damages on account of its breach, or in a suit for an account of the profits, or in some such manner. In these cases between the parties, courts have gone to great lengths in holding that where such contracts are involved, no rights can be predicated upon them, and that the law will leave the parties who are in pari delicto where-it finds them. Even in such cases, however, where the-unlawful agreement has been executed, and new rights liavesprung up which do not necessarily involve the enforcement of the unlawful agreement itself, courts have refused to allow the parties to defeat such rights by going back to the unlawful agreement, even as between themselves (Keene v. Kent, 7 State Rep. 229, 232 ; Brooks v. Martin, 2 Wall...
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70, 81, etc.; Marsh v. Russell, 66 N. Y. 288 , 294 ; Wann v. Kelly, 5 Fed. Rep. 584 ; W. U. Tel. Co. v. Union P. R. R. Co., 3 Fed. Rep. 423 ; Cent. Trust Co. v. Ohio Cent. R. R. Co., 23 Fed. Rep. 306 ). No case has been cited which gives any support to the proposition that the parties to an illegal contract can set up the illegality of their own acts to defeat the rights of innocent creditors. ■Such creditors are not in pari delicto with the contractors. To allow the latter to use such a defense would be to make their own wrong-doing a shield for them and a sword for those who have innocently trusted them.

This appeal presents questions arising -upon exceptions only, and not upon the case.

Prior to the first day of March, 1887, the plaintiff had a ■contract for supplying the Brush Electric Light Company of Buffalo with certain electric light carbons, as they should be required. In the month of March, 1887, the plaintiff, ■together with eight other companies manufacturing electric light carbons, entered into an agreement by which the business of the nine companies should be exclusively managed -and directed by one Edward C. Hawks. Between the 30th day of April, 1887, and the 27th day of June, 1887, the plaintiff furnished to the Brush Electric Light Company, -electric light carbons, in several installments, at a contract ■price of $1,080, which sum, at the time of the beginning of the action, was unpaid. Hawks was subsequently superseded as the manager of this trust or combination, by one D. A. Danglar, of Cleveland, Ohio. From this time to the appointment of the defendant as receiver, the combination or ■organization of said nine companies was known as the United ■Carbon Companies. In the month of June, 1887, the plaintiff notified the Brush . Electric Light Company of Buffalo that it should no longer continue its combination or ■relation with the other companies after the first day of July ■of that year, and subsequently claimed that the Brush Electric Light Company of Buffalo should pay directly to the

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plaintiff, and not to the trustee or agent of the several combined companies, the amount owing by it for the electric light carbons.

Payment not being made this action was brought. The defendant, McMillin, was appointed receiver of the United Carbon Companies by a court of competent jurisdiction in the State of Ohio, upon the ground that, as an organization or combination, it was insolvent, owing a large number of' debts. Such receiver also brought an action against the-Brush Electric Light Company to recover for the same cause of action stated above, whereupon the two actions were consolidated and the receiver made the defendant in place of the Brush Electric Light Company, upon the latter depositing the amount claimed against it by the present parties to-this action.

The principal argument advanced by the counsel for the .appellant, is based upon the proposition that inasmuch, as the original combination or trust of the nine manufacturing companies was an illegal combination, no action by the-receiver of such combination can be maintained to enforce any liability to it. It seems to us, however, that the plaintiff is not in a position which will enable it to assert, successfully, the invalidity of the original illegal contract, and thus-prevent the payment to the receiver of such combination of the debts justly due to it. The receiver represents, primarily, the creditors of the insolvent combination as well as. the combination itself, together with the stockholders and parties who may be interested in the payment of the debts.. He is empowered to recover the assets of the combination wherever they are to be found. In him are united all the-rights of the creditors and of the parties interested in the-combination. This combination or trust, so called, was a combination of several incorporated companies or co-partnerships, and was itself a co-partnership composed of' such companies.

Though its general purpose was unlawful under the* common law. as administered alike in Ohio and Hew York,.

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yet the court is not powerless, when set in motion, to interpose its hand and save whatever property there may be in the co-partnership for the protection of innocent creditors.

The plaintiff cannot take advantage of its own participation in this wrong and deny its liability to any of the creditors, to which the combination, if it had been a lawful body, would have been liable. Each company, composing the trust or consolidated co-partnership, was separately liable to all creditors of the trust for the payment of-its just debts. Any one of the creditors represented by this receiver could have maintained an action against this plaintiff, or against any other member of the concern as a co-partner, to recover whatever indebtedness the co-partnership owed to him. The creditors of the trust are not in any sense i/n pari delicto with the several contracting companies.

Under these circumstances the receiver stands in a light much more favorable than the combined co-partnership of which he was appointed receiver, for the simple reason that he is charged with the duty of distributing the assets among the lawful creditors of the concern.

The judgment should be affirmed with costs.

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