Farnham v. Benedict — 11 N.Y. St. Rep. 450

Majority

p. 450

Reuben H. Farnham, as Supervisor of the Town of Attica, App’lt, v. Charles B. Benedict, Resp’t.^[1]

(Court of Appeals,

Filed October 18, 1887.)

Headnote

1. Town Bonds—Laws 1869, chap. 907—Liability op peeson who sells BONDS FBAUDULENTLY ISSUED.

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 act (Laws 1869, chap. 907), to aid in the construction of a proposed railroad, pretended to have been incorporated, sold and delivered such bonds to certain persons who purchased them in good faith and paid 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 said town. Until the bonds were thus placed by defendant

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in the hands of bona fide holders they were absolutely void and did not constitute any indebtedness, and could not have been enforced against said town. The transfer, as above, enabled the said bona fide holders to recover judgment thereon against the town, which it. was obliged to pay. At the time of so negotiating said bonds and receiving the proceeds the defendant knew the facts which rendered the said bonds void, except in the hands of bona fide holders, and knew that they could not be enforced by liim or any other person until thus placed in the hands of bona fide holders. The defendant became possessed of said bonds, as an officer of said pretended railroad corporat on. Held, that the defendant was liable to the said town for the amount it had to pay the said bona fide holders of said bonds

3. Same—Railroad corporation—Formation op under general act— What necessary.

The general railroad act requires, as a condition precedent to the formation of a railroad company, 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 that the articles of association shall 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 compliance with those conditions the subscribers and all persons who shall become stockholders shall be a corporation. Held, that in the absence of such compliance the mere filing of articles of association would not constitute a corporation de jure.

S Same—There must be a railroad corporation—Laws 1869, chap. 907.

The existence of a railroad corporation having power to issue stock or bonds to be given to the municipal corporation and to construct the road to be aided, lies at the foundation of the power to issue municipal bonds under Laws 1869, chapter 907.

' 4. Same—Laws 1867, chap. 775, executes itselp.

Laws 1867, chapter 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 construction of its road, etc., its corporate existence and powers shall cease .Held, that these provisions of the siatute execute themselves without •any judicial procedure. Following Matter of B. W. and N. B. B. Co. 72 N.Y . 245 .

3. Same—Laws 1880, chap. 577, unconstitutional—Constitution, art. 3. §18

The act for the relief of said railroad, Laws of 1880, chapter, 577, is unconstitutional, as it violates article 3, section 18, of the constitution, which prohibits the legislature passing any local or private bill granting to any corporation, association or individual the right to lay down railroad tracks Said act was an attempt to create a new corporation under the guise of reviving and re-habiliating a defunct corporate body. Following Matter of B. W. and JY. H II Co., 75 N Y„ 335, 339.

Appeal from a judgment of the supreme court, general term, fifth department, affirming a judgment in favor of the defendant entered upon the report of a referee.

D. W. Thayer, for app’lt; W. F. Cogswell, for resp’t.

—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 plaintiff to have been established by the facts found, is, in substance, that in month of September, 18Y5, the defendant having in his possession, without title, certain bonds of the town of

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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 bona fide holders they were absolutely void and did not constitute any indebtedness, and could not have been enforced against said town, but that by transferring them to bona fide holders for value he rendered them valid and binding upon the town, and enabled such holders to recover judgment thereon against the town, which, in an action brought by one of such bondholders it was decided by the circuit court of the United States that they could do and that the town was thus obliged to pay and did pay the full amount of said bonds to such bona fide holders. That at the time of so negotiating said bonds and receiving the proceeds the defendant knew the facts which rendered the bonds void, except in the hands of bona fide holders, and knew that they could not have been enforced by him, or the railroad company, or any other person until he thus placed them in the hands of bona fide holders. That he had been actively instrumental in the organization of the pretended railroad company and knew it to be a sham organization, formed without compliance with the requirements of the general railroad law, and gotten up fraudulently for the purpose of being used to initiate proceedings for the issue of town bonds, such organization having been based upon a false affidavit knowingly made by the defendant, That he had instigated and as an attorney of the supreme court, had conducted the subsequent proceedings for bonding the town, and had obtained possession of the bonds from the railroad commissioners in the character of vice-president of the pretended railroad corporation and had sold them to bona fide holders and received the proceeds, on his assurance that they were valid securities and had thus rendered the town liable .thereon.

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 Railroad Company was fraudulent and void.

Secondly. 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

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the bonds, had thus become absolutely worthless and the consideration had thus wholly failed.

The facts relating to the pretended organization of the railroad 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 pursuance 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 66Attica and Arcade Bailroad 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 affidavit annexed were filed in the office of the secretary of state on the 28th of February, 1870.

The affidavit was false in every particular. Thé 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 endorsed 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 road being twenty-five miles, and no 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 fie swore to it; that the pretended payments were made by the delivery to a person named as treasurer of said company of the checks, and, in two or more instances, the promissory notes of the subscribers for ten per cent of their subscriptions; that at the time the said checks and promissory notes were so given and received in payment of said ten per cent, it was publicly stated that they could be used and was so stated by the defendant; that the larger proportion of persons who gave such checks had. no account or funds at the bankers upon whom thechecks were drawn, and gave the

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checks with the understanding that the same were not to be presented for payment, or paid; that they have not been paid, nor anything realized thereon by the company, and that none of the subscribers to the said articles of association have ever paid anything upon their subscriptions for stock.

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 organization, and advised that the ten per cent required by law to be 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 such 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 tax payers 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 of 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 petitions to be signed by tax payers of the town of Attica to be presented to the supreme court with his name indorsed thereon as attorney for the petitioners, and caused such petition to be presented to said court, and controlled said proceedings which resulted in the bonding of the town; and that he testified before the referee appointed therein, among other things, that the said company had been regularly organized and officers and directors elected, and that he procured two persons named to be appointed railroad commissioners of said town.

. That he afterwards, about September 1, 1875, sold $6,600 of said bonds to bona fide purchasers at par and interest accrued, and received the money therefor, but the referee found that such sale was made for the company, and that the defendant accounted to the company therefor. He also found that said purchasers bought said bonds in good faith and upon the assurance of the defendant that they were good and valid debts against said town and were legal and valid securities.

The second ground, upon which it is claimed that the

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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, nor 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 payment of their subscription in behalf of the town for 220 shares of the stock of the company.

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. Yet 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 liable 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-company, 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 shall 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 compliance with those conditions the subscribers and all persons who shall become stockholders shall 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 jure, nor can it be doubted that the proceedings by which the company purported to organize as a corporation, were a gross fraud upon the railroad act,

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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 sáme, passed April 2, 1850, so as to permit municipal corporations to aid in the construction of railroads,” and provides for creating bonds and investing the same or the proceeds thereof in the stock or bonds of such railroad company in this state as may be named in the petition of a majority of the taxpayers. The existence of a railroad corporation having power to issue stock or bonds to be given to the municipal corporation and to construct the road to be aided, therefore, lies at the foundation of the power to issue municipal bonds. It cannot be pretended that authority could be obtained under that act to issue town bonds to any unincorporated set of individuals who should undertake to style themselves a railroad company, nor that the mere filing of pretended articles of association, in the office of the secretary of state without compliance with any of the other requirements of the general railroad law, would constitute those whose names were attached to such articles a corporation. Articles filed, with an intentionally false affidavit of such compliance, would have no more actual validity than if the names of the subscribers had been forged.

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 the 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 and 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 case there is nothing to show that the taxpayers who signed the petition to bond the town.

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had any knowledge of the fraudulent character of the pretended organization or of the falsity of the affidavit annexed to the articles of association and no such fact is found; nor is there anything but mere surmise to lead to the conclusion that they had such knowledge. All that appears is, that to the articles of association publicly filed and referred to in the petition, was attached the affidavit of the defendant and two other persons, and all that the petitioners could be presumed to have known is that the law required such an affidavit. But supposing that the petitioners had known that the affidavit was false, that knowledge would not be material to this case. By procuring the town to be bonded the petitioners imposed a burden not merely on their own property, but also on that of the taxpayers who did not sign the petition or approve the scheme and who were at liberty to contest the validity of the bonds until the defendant, by wrongfully transferring them to bona fide"holders, with knowledge of their actual invalidity and on his assurance to the purchasers that they were valid securities, deprived the town and taxpayers who had not consented to the bonding, of the power to avail themselves of the defense, according to the doctrine held by the United States courts in respect to bona fide holders of town bonds. It was for that wrong that this action was brought.

I think that if the holders of the bonds had not been furnished by the acts of the defendant with the shield which had 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 guarantee of the bona fides of the proposed undertaking, and as a security to those dealing with or lending their credit to the corporation to he formed, and it is inconceivable that any court of justice would allow bonds, obtained by such a fraud, to be enforced against the town by the very persons composing this fraudulent organization, and who had paid no value for the bonds.

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 Bailroad Company ever had legal existence as a corporation, and that the bonds were lawfully issued and delivered, still they were issued for the purpose of aiding in the construction of the proposed railroad and in consideration of the stock of the

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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 (chapter 775) provides that if ány 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 or 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 B. W. and N. R. R. 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 lay at the-foundation of the right to take property for its use (as I contend it lays at the foundation of the power of a town to issue bonds to aid in the construction of a railroad), and that any person whose lands were sought to be appropriated to the use of a railroad company could assert this extinction of its corporate rights.

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 to be false, 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 completion of the road should be extended for a further term of two years beyond the time theretofore limited, and thát

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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 company had lost all power to construct the road, and the purpose for which the bonds had been issued had wholly failed. Who can contend that under these circumstances the bonds in the hands of the sham and defunct corporation, or of those who had been its pretended officers, could have been enforced against the town?

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 an injunction from transferring the bonds to bona fide holders, and could have been compelled to surrender the bonds to the town. No 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 disclosed by the federal courts, made hable to pay the bonds and was compelled to pay them, and the question now before us is whether the town had any redress against the defendant.

It seems to us that on the principles enunciated in Comstock v. Hier ( 73 N. Y., 269 ) and cases there cited, the facts found do show a liability on the part of the defendant to the town.

In Comstock v. Hier, it appeared that the plaintiff had indorsed a promissory note made by the firm of Jay, Cox & 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

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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 fiole 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 accordingly recovered judgment against the plaintiff as indorser, which judgment the plaintiff paid and then brought his action against the defendant. The makers had become bankrupt. This court decided that the plaintiff was entitled to maintain the action. Several propositions were adjudged :

First. That on these facts the plaintiff would have had a perfect defense to an action by the present defendants against him as indorser of the note, it having been diverted from the purpose for which the indorsement had been made, and they not being bona fide holders for value.

Second. That the defendants had no better title to the note and indorsement than Jay, Cox & Green had, and that the plaintiff could have reclaimed it and in equity prevented its negotiation.

Third. That the defendants had no right to secure to themselves the full benefit of the defendant’s indorsement, and all the advantages of bona fide indorsers for value by negotiating the note to an innocent transferee for value before maturity.

Fourth. That having no legal title as against the plaintiff to the note and indorsement, they had no right to transfer it, and the sale of it by them was a conversion; that the defendants could not fortify their title by a sale of the note, and the title to the proceeds was the same as to the property before the sale.

Fifth. That the plaintiff was the actual owner of the note, it never having been lawfully transferred, and the defendants could not have resisted an action by the plaintiff for its surrender to him; that he had an election of remedies, trover for the conversion of the note or an action for money had and received for the proceeds of the discount, and that the complaint contained the necessary averments to sustain ah action in either form.

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,

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but if they had ever acquired such power, it had become extinct by the termination of its alleged corporate existence and of its power to use them for the purpose for which they had been made. The town was under no legal obligation to pay them, while they were in the hands of the defendant, but might be subjected to such a liability by their being transferred to a bona fide holder for value, and could, therefore, have enjoined their negotiation by the defendant and compelled-their surrender. In this respect the case is also similar to that of Thayer v. Manley ( 73 N. Y., 305 ), and Decker v. Matthews ( 12 N. Y., 313 ). In the last named case, the plaintiff had made his own note payable to the order of J., and endorsed by him. The note was made and indorsed for the accommodation for J. & Co., and for the purpose of being discounted by them at the Manhattan Bank, and the proceeds applied to the payment of other notes previously made and indorsed by the same parties. The bank refused the discount, and the purpose for -which, the note had been made thus failed, and J. & C. put it in their safe, from which it was taken by the defendant Matthews, and by him discounted at another bank, without the consent of any of the parties. It was held that the plaintiff was entitled to recover against Matthews; that the note was of no value when Matthews took it from the safe, but by the act of passing it to a bona fide holder it became valuable, and the plaintiff became liable to pay it, and his cause of action accrued immediately upon his becoming liable upon the note and before payment, and that he was entitled to recover against Matthews the face of the note for which he had thus been made liable.

So, in the present case, the bonds were of no value in the hands 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 liability 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 sale of the bonds to relieve the defendant from the liability he had thus fixed upon himself will now be considered.

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 acknowledging the

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receipt, but may 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, but 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 á 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 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 Laws of 1880, passed June 22, 1880, which in his opinion conferred upon the Attica and Arcade R. R. Co. 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 m that organization, and also relieve the company of all forfeitures by reason of its failure to comply with the requirements of law relating to the construction of railroads by companies formed under the general act. If I am right in the conclusion that in September, 1815, 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 bonds to bona 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

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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 guage. 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 connection 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 incorporated 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 in 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 our point of view, the company had never had any previous legal existence, not having complied with the provisions of the general railroad law for its organization, but passing this point and assuming that it had had such existence, such corporate existence had become extinct by the expiration of the limitation in section 47 of the general act as amended by chapter 575 of the Laws of 1867. It had been extinct for more than five years before the passage of the act of 1880, and that act was an attempt to create a new corporation under the guise of reviving and rehabiliating a defunct corporate body. It was, therefore, void and inoperative for any purpose. This precise point was expressly adjudicated in the Matter of B., W. and N. R. R. Co. ( 75 N. Y., 335 , 339).

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 which they were exchanged for 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, 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

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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 endorsed 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 any infirmity in the note or endorsement, or that in transferring it to a bona fide holder, they were doing any wrong to the plaintiff, or imposing any liability upon him which he had not already incurred, yet it was held that, as by such transfer they subjected the defendant to liability, they were responsible to him for the proceeds of the transfer or for the amount for which they had subjected the defendant to liability. In that respect the present case is stronger against the defendant than Comstock v. Hier, for here he had full knowledge that the town was not liable upon the bonds, and that by negotiating them he rendered it liable and deprived it of its defenses. But the other facts in the case also preclude his assuming the position of an innocent agent dealing for a responsible principal on whom the liability should rest. In fact he had no principal. There was no existing corporation that could be held responsible for his acts. His assumed principal was a mere combination of individuals who, by his own fraudulent acts, had clothed themselves with the name of a corporation; even this pretended body had become extinct before the sale. If the the defendant was not liable no one was. In such a case a party cannot claim protection under any principle of the law of agency.

All of 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 Tonawanda valley Railroad Company, and that the Attica and Arcade Railroad Company transferred its assets and franchises to that company, and that in the

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same year the majority of the railroad commissioners of the town of Attica exchanged $11,800 of new bonds of the town of Attica for that amount of bonds made and delivered to the Attica and Arcade Railroad Company and also received for the said town of Attica $20,000 of the stock of the Tonawanda Valley Railroad Company. The precise bearing of these facts does not appear, the testimony not being contained in the case, and the finding not having been explained in the briefs of counsel, but it has been suggested that in some way the town of Attica by these transactions may have saved itself, in whole or in part, from the loss sustained by the acts of the defendant. If on a new trial it should be made to appear that the loss of the town has been reduced in any such way, the defendant should have the benefit of such reduction in mitigation of the damages for which he is liable.

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, Danforth and Peckham, JJ., concur; Ruger, Ch. J., Andrews and Finch, JJ., not voting.