Farnham v. Benedict

This case comes up on the findings of the referee. The. evidence is not contained in the case.

The cause of action claimed on the part of the plaintiff to have been established by the facts found, is, in substance, that in the month of September, 1875, the defendant having in his possession, without title, certain bonds of the town of Attica, which purported to have been issued pursuant to the town bonding acts, to aid in the construction of a proposed railroad pretended to have been incorporated under the name of the Attica and Arcade Railroad Company, sold and delivered such bonds to certain persons who purchased them in good faith, and paid to the defendant the full par value thereof in money, upon his assurance and believing that they were in all respects lawful and valid, and a legal indebtedness of the town of Attica. That until the bonds were then placed by the defendant in the hands of Iona fide holders they were

The grounds upon which the bonds are claimed to have been void, except in the hands of bona fide holders, are, first, that the pretended organization of the Attica and Arcade Bail-road Company was fraudulent and void; seeondby, that even if the company had ever been legally organized its corporate existence had ceased before the sale by him of the bonds, and the stock of said corporation, which had been issued to the town as the consideration for the bonds, had thus become

The facts relating to the pretended organization of the railroad company are found by the referee to have been as follows: On the 24th of February, 1870, the defendant and other citizens of the county of Wyoming met and subscribed written articles of association, stating that in piu-suance of the general railroad law of 1850; they formed a company for constructing and operating a railroad from the village of Attica-to the village of Arcade, in Wyoming county, to be named the “ Attica and Arcade Eaihoad Company.” That the length of the road, as near as could be stated, was to be twenty-five miles, and the capital stock $250,000, to be divided into 2,500 shares of $100 each. The articles then set out the names of the defendant and twelve other persons as the directors for the first year. At the same time the defendant and others subscribed for 241 shares of stock amounting to $24,100, and thereupon the defendant and two others of those named as directors, made' and swore to the affidavit required by the second section of the general railroad act, viz.: that the amount of stock required by said second section had been subscribed and ten per cent in good faith paid thereon in cash to the directors named in the articles. The articles of association, with such affidavits annexed, were filed in the office of the Secretary of State, on the 28th of February, 1870.

The affidavit was false in every particular. The act required that before the articles should be filed at least $1,000 of stock for every mile of railroad proposed to be made should be subscribed, and ten per cent paid thereon, in good faith and in cash, to the directors named in the articles, and that an affidavit of these facts should be indorsed on or annexed to the articles; whereas in point of fact, at the time the affidavit was sworn to only $24,100 of stock had been subscribed, the length of the proposed road being twenty-five miles, and no part of the amount subscribed had been paid in cash, or ever has been paid.

The referee also finds that the falsity of the affidavit was well known to the defendant at the time he swore to it; that-

At the request of the plaintiff the referee also found that the defendant attended the meeting at which the articles of association were signed and took a leading part in conducting the same and in procuring subscriptions for stock and was cognizant of the proceedings to organize said company and advised as to the requirements of law to effect such organizar tion and advised that the ten per cent required by law to bé paid in cash could be paid in checks; that at the time said articles of association were signed and subscriptions made, it was not intended by the defendant and others controlling said meeting and procuring said subscriptions, that the sums subscribed should be paid, but it was intended and expected, and so publicly stated by the defendant, that after the articles should be filed in the office of the secretary of state, proceedings would be taken by the taxpayers of the towns through which the railroad was to be constructed, to bond those several towns to raise the necessary amount of money to construct the road, and that after the filing of the articles on the 28th of February, 1870, and before any contract had been made for the construction of the proposed railroad, the defendant, then being vice-president and acting president of said pretended corporation, and well knowing the facts before stated, procured

The second ground upon which it is claimed that the bonds had become voidable after their issue and before their sale, is that, as found by the referee, the pretended railroad corporation did not, within five years after its articles of association were filed and recorded in the office of the Secretary of State, begin the construction of its road, or expend thereon ten per cent of its capital.

It appears from the findings that the articles were filed and recorded February 28, 1870. The proceedings for bonding the town were instituted under chapter 907, of the Laws of 1869. The petition, signed by a majority of the taxpayers, was dated June 9, 1873, the defendant appearing as attorney for the petitioners. A referee was appointed August 12, 1873, and judgment entered October 29, 1873, appointing three commissioners with power to execute bonds of the town of Attica, to the amount of $20,000, and invest the same or the proceeds in the stock of the Attica and Arcade Railroad Company. By virtue of that judgment the commissioners, in March, 1874, made and delivered to the Attica and Arcade Railroad Company town bonds to the amount of $20,000 in

Assuming these bonds to have been legally issued in the first instance, it is claimed that they ceased to be valid in the hands of the company or its officers, on the 28th of February, 1875, by reason of the termination of the corporate existence of the company. Tet they were not sold by the defendant until about September 1,1875, at which time they were transferred by him to bona fide holders, and the town thus made hable thereon, as was decided by the United States Circuit Court.

The question of the validity of the bonds at the time they were issued, in the hands of any but a bona fide holder, will first, be considered.

The general railroad act requires as a condition precedent to the formation of a railroad corporation, that at least $1,000 for every mile of railroad proposed to be constructed shall be subscribed and ten per cent paid thereon in good faith and in cash, and provides in terms that the articles of association shah not be filed and recorded until those conditions have been complied with, nor until the affidavit required has been annexed to the articles, and that on comfilicmce with those conditions the subscribers and ah persons who shah become stockholders shah be a corporation. It cannot be questioned that in the absence of such compliance the mere filing of articles of association would not constitute a corporation de jwe, nor can it be doubted that the proceedings by which the company purported to organize as a corpoporation were a gross fraud upon the railroad act and would be adjudged void in any proceeding in which they came directly in question. Neither can it be disputed upon the facts found that the defendant was a party to such fraud. The bonding act of 1869 (Laws of 1869, chap. 907), under which the bonds in question purport to have been issued, is entitled “ An act to amend an act to authorize the formation of railroad corporations and to regulate the same, passed April 2, 1850, so as to permit municipal corporations to aid in the

The learned referee in his opinion says that, so far as the case shows, the petitioners here were as well acquainted with the facts relating to the organization of the Attica and Arcade Railroad Company, and its financial condition at the time they signed the petition, as the defendant; and that, so far as any claim for damages against the defendant in this action is concerned, unless some fraudulent act of the defendant induced the petitioners to sign, the defendant would not be liable any more than if he had asked an individual to subscribe for the stock; and that mere knowledge of the fact that the company had not been legally organized, unaccompanied by any fraudulent representation, would not be sufficient, although he concedes that if a town or an individual should be induced by false or fraudulent representations to subscribe for stock and part with his or its money, an action would undoubtedly lie for the fraud, but that such was not the case here. It seems to me that the reasoning of the learned referee is fallacious. In the first place there is nothing to show that the taxpayers who signed the petition to bond

I think that if the holders of the bonds had not been furnished by the acts of the defendant with the shield which has thus been thrown around bona fide holders of town bonds, the town would have had a good defense to the bonds in any court on both of the grounds now taken by the counsel for the plaintiff. The pretended railroad corporation was a mere sham, apparently gotten up for the express purpose of obtaining an issue of town bonds without putting up the cash, which the statute required as a guaranty of the bona fides of the proposed undertaking, and as a security to those dealing with or lending their credit to the corporation to be formed; and it is inconceivable that any court of justice would allow bonds obtained by such a fraud to be enforced against the

I think that the second ground upon which the bonds are claimed to have become invalid before they were negotiated by the defendant is also well taken.

Assuming that the Attica and Arcade Railroad Company ever had legal existence as a corporation, and that the bonds were lawfully issued and delivered to it, still they were issued for the purpose of aiding in the construction of the proposed railroad, and in consideration of stock of the company issued to the town in payment for the bonds. The company instead of using the bonds to aid in the construction of the road, and thus giving value to the stock which it had issued to the town in payment, laid by for years after the bonds were issued and did not begin the construction of the road within the five years prescribed by the statute, and by this default caused its corporate powers and franchises to cease and terminate, thus losing the power to construct the road or to acquire the right of way, and depriving the stock which it had issued to the town of any value.

The act of 1867 (Chap. 775) provides that if any corporation formed under the general railroad law of 1850, shall not within five years after its articles of association are filed and recorded in the office of the Secretary of State, begin the construction of its road and expend thereon ten per cent on the amount of its capital, or shall not finish its road and put it in operation in ten years from the time of filing its articles of association as aforesaid, its corporate existence and powers shall cease.

It was decided by this court in the Matter of the B. W. & N. R. Co. ( 72 N. Y., 245 ), that these provisions of the statute executed themselves, and that when a company omitted to begin the construction and expend the prescribed ten per cent of its capital within the five years, it ceased to exist and became extinct without any judicial procedure to declare or complete the forfeiture of its corporate powers; that the legal existence .of a corporation authorized to construct a railroad

It is claimed in the respondent’s brief that the act of 1875 (Laws of 1875, chap. 598) passed June 18, 1875 (after the forfeiture and before the negotiation of the bonds by the defendant) cured this forfeiture, but it is very clear that that act has no application to this case. The act of 1867 declared two defaults, either of which would terminate the existence of the company: (1st.) The failure to begin the construction and expend ten per cent of the capital within five years; and (2d), the failure to complete the construction within ten years. It was only to the second default that the act of 1875 applied. It relieved companies that for any cause had been unable to construct their road within the time limited, by providing that the time for the eomrpleUon of the road should be extended for a further term of two years beyond the time theretofore limited, and that failure theretofore to construct the road should not cause a forfeiture of the corporate powers. Corporations that had been unable to complete their roads stood on a very different footing from those that had omitted for five years even to begin the construction. These were not either within the letter or the equity of the act, and it is evident that those whose rights had become extinct by reason of their omission to begin the construction were not intended to be resurrected, as the concluding sentence of the act declares that nothing therein contained shall have the effect to revive any corporation whose corporate power has been forfeited for any cause.

It thus appears that in September, 1875, when the defendant transferred the bonds to bona fide holders, assuring them that they were valid obligations, the pretended corporation, if it had ever had any existence, had become extinct; the stock which had been issued to the town had become worthless; the

I think the conclusion is irresistible that in the hands of the defendant, or of the fraudulent and defunct organization for which he claims to have been acting, the town had a valid defense to the bonds; that the defendant well knew this, and all the facts, and could have been restrained by injunction from transferring the bonds to bona fide holders, and could have been compelled to surrender the bonds to the town. Ho such injunction, however, was obtained, nor does it appear that the town or the taxpayers, had any cause to apprehend that the defendant would so transfer the bonds. He made the transfer to bona fide purchasers and received the proceeds, and the town was by this act, according- to the decision of the United States Circuit Court, and the law as declared by the federal courts, made liable to pay the bonds, and was compelled to pay them, and the question now before us is whether the town has any redress against the defendant. It seems to us that on the principles enunciated in Comstock v. Hier ( 73 N. Y. 269 and eases there cited), the facts found do show a liability on the part of the defendant to the town.

In Comstock v. Hier it appears that the plaintiff had indorsed a promissory note made by the firm of Jaycox & Green, payable to the order of the plaintiff, for the accommodation of the makers; and under an agreement between the plaintiff and the makers that it should be used only for the purpose of taking up a prior note indorsed in like manner; but the makers, instead of using the note as agreed, transferred it to the defendants as collateral security for an antecedent debt, the defendants parting with no value on receipt thereof. The defendants transferred the note before maturity to a bona fide holder for value, and thus deprived the plaintiff of the defense which he would otherwise have had to an action on his indorsement. The holder

‘On these grounds a decision in favor of the defendants rendered by the Supreme Court was reversed. That case seems to me decisive of the present one. At the time the defendant sold the bonds (September, 1875) the actual title to them was not in the so-called railroad company nor in the defendant. The so called company had never acquired the legal power to receive or hold them; but if it had ever acquired such power it had become extinct by the termination

So in the present case the bonds were of no value in the hands either of the pretended company or of the defendant; and immediately upon their being negotiated by the defendant a cause of action accrued against him, either in the nature of an action of trover for the face of the bonds, or, as held in Hier v. Comstock, for money had and received for the amount realized from the sale, he having obtained the money on the habihty of the town thus created by him. I can see no way of avoiding this conclusion without overruling the two cases last cited. Whether anything transpired after the

The learned referee finds that the defendant accounted to the alleged railroad company for the proceeds of the bonds. It is not even found, nor does it appear, that he paid over the proceeds, or expended them for the use of the pretended company, but simply that he accounted, which may mean that he rendered an account aclmowledging the receipt, but hiay have still retained the fund or applied it to his own use. But suppose he had actually paid over the proceeds of the bonds to some person as the representative of the pretended corporation, the case would not be changed. In the first place there never was such a corporation, bnt only a combination of persons organized for the very purpose of subjecting the town to this liability; and he was a leading member of this combination, and the party through whose perjury it had attempted to clothe itself with the character of a corporation; and if he had handed over the proceeds to one of his associates in that combination, he could not thereby have discharged himself. Secondly. If the fraud in the organization could be held to have been so far successful as to clothe this combination with corporate powers, those powers had become extinct by the terms of the statute, before the defendant sold the bonds and received the proceeds; and the town itself had no power to advance money to it and create a charge upon the taxpayers, or to make itself liable for advances made to it by others.

The main reliance of the learned referee, outside of his conclusion that the defendant was not liable, on the ground of fraud, for the part taken by him in organizing the pretended company and procuring the issue of the town bonds, was upon chapter 577 of the Laws of 1880, passed June 22, 1880, which, in his opinion, conferred upon the Attica and Arcade Railroad Company a valid title to the bonds, and the legal right to enforce them, so far as the validity of that organization could confer that right, and cured all defects in that organization; and also relieved the company of all for

If I'am right in the conclusion that in September, 1875, a right of action had accrued in favor of the town, against the defendant, for the proceeds then received by him on the sale of the bonds to bond fide holders, it is difficult to see how that right of action could be taken away by an act of the legislature passed in 1880, especially when the act cited, even if constitutional in other respects, does not purport, even, to have that retroactive effect.

Section 1 of that act purports to. release the Attica and Arcade Railroad Company from the forfeiture of its charter by reason of its failure to begin the construction of its road and expend thereon ten per cent of its capital within five years after the articles of association were filed and recorded in the office of the Secretary of State, and also by reason of its failure to finish said road and put it in operation within ten years from the time of its so filing and recording its articles of association. Section 2 declares that said company shall possess all the powers and rights it would have possessed in case all its acts and proceedings had been in conformity with the provisions of the general railroad act of 1850, and the acts amending the same, and section 3 authorizes said company to construct its road with a three-foot gauge. It contains no provision purporting to legalize any town bonds previously issued in aid of the construction of the road, nor discharging any person from any liability incurred in con-, nection with any such bonds. It speaks wholly in respect to the future and purports only to vest the company with the powers which it would have had if it had been duly incorpo rated and had not forfeited its charter, and legalizes none of its past acts. But this statute is clearly violative of section 18, article 3 of the constitution, which took effect January 1, 1875, and prohibits the legislature passing any local or private bill granting to any corporation, association or individual the right to lay down railroad tracks. In one point of view the

The court at General Term, in reviewing the decision of the referee, do not undertake to sustain by any reasoning his ruling that the bonds were valid, but assuming that they were void while in the hands of the company, and that the stock for which they were exchanged was worthless, and that the bonds were therefore without consideration, and that the commissioners might have been restrained from disposing of them, and also that, after their issue, the company and the defendant as its officer and agent might have been restrained from negotiating them, yet holds that the defendant, having received them as the president of the company, for its use, and having sold them for the company at par for cash, and accounted to the company therefor, the only authority he had over the bonds and the only duty he was under in respect to them was as the officer or agent of the company, and there was no ground upon which he was responsible to the town for his agency in selling the bonds after they had been delivered to the company by the commissioners.

This position has been, in my judgment, already answered by the cases referred to. In the case of Comstock v. Hier, the defendants received the note indorsed by the plaintiff, not from him but from the payees, and it could have been said that they owed no duty to the plaintiff in respect thereto. In that case it did not even appear that the defendants knew of

All the facts of the case considered together show that the sale of these bonds, which was the act which created a liability on the part of the town, was but the consummation of the fraudulent scheme to bond the town without putting up the money required for the legal organization of a railroad corporation, to which scheme the defendant was, at least, a party, if not the prime mover in it.

I have discussed every point made, either in the opinions of the referee or of the court or in the brief of counsel, in support of the defense. In my judgment none of these points are tenable and the dismissal of the complaint cannot be sustained.

At the conclusion of the findings of the referee, there is a finding that after the transactions hereinbefore detailed and in the year 1880, a company was organized under the name of the

The judgment entered upon the report of the referee, and the affirmance of that judgment by the General Term should be reversed, and a new trial ordered, with costs to abide the event.

Earl, Daneorth, and Peckham, JJ., concur; Eug-er, Ch. J., Andrews and Finch, JJ., do not vote.

Judgment reversed.