Huntington v. Attrill — 29 N.Y. St. Rep. 5

Majority

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Collis P. Huntington, Resp’t, v. Henry Y. Attrill et al. App’lts.^[1]

(Court of Appeals, Second Division,

Filed January 28, 1890.)

Headnote

1. Business corporations—Laws 1875, chap. 611, § 31—Certificate of

PAYMENT OF CAPITAL STOCK—LIABILITY OF DIRECTORS FOR FALSE REPORT.

The Rockaway Beach Improvement Company filed a certificate in 1880 by which they stated that the entire amount of capital, §700,000, was paid in, when in fact their entire capital consisted of 130 acres .of land, originally purchased for §80,000 of Attrill, subject to a mortgage of §73,000. Held, that its then value was the measure of the consideration which the company had the right to pay for it, and that defendants, with their associates, had the responsibility of seeing to it that the purchase price did not exceed the fair value.

%. Same.

3. Same.

It is not essential to the liabilty of the director under the statute that lie should have had knowledge of the. falsity of the report.

{Torhett v. Baton, 113 N, Y. 633 ; 33 N. Y. Stale Rep., 993, followed.)

-4. Same—Evidence of value.

Defendant offered evidence of value of this, based upon comparison with

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other sea-side property at different places, and it was excluded. Held, no error.

5. Same—Evidence—Books oe cobpobation.

The books of the company are competent as evidence so far as relate to any entries legitimately contained in them, and so far as they are relevant to the issues on trial.

6. Same—Authobity to endobse note.

In order to make one liable who endorses the company name upon a note, the jury must find either prior authority or subsequent ratification, and that can be evinced by general course of business as well as by resolution.

7. Same—“Eaib value.”

The fair value contemplated by the statute is that which the property had at the time of the sale, and which constituted the consideration upon which the subscription to the capital stock of the company was satisfied.

(Potteb, J., dissents.)

Appeal from judgment of the general term of the supreme court in the second judicial department, affirming judgment entered on verdict in favor of the plaintiff.

Coles Morris, for app’lt Attrill; Delos McCurdy, for app’lt Soutter; James C. Carter, for app’lts; W. W. MacFarland, for resp’t.

The action was brought to recover the amount of a debt alleged to be due the plaintiff from the Rockaway Beach Improvement Company, Limited, a corporation created pursuant to the provisions of the statute providing for the organization and regulation of certain business corporations. Laws of 1875, chap. 611. The defendants were directors of the company. And the alleged ground of the action is that a certificate signed by them, representing that the amount of the capital stock of the corporation, amounting to $700,000, was fully paid, was false within the meaning of the statute, which provides that “ if any certificate or report made, or public notice given, by the officers of any such corporation, shall be false in any material representation, all the officers who shall have signed the same shall be jointly and severally liable for all the debts of the corporation contracted while they are officers thereof.” Id., § 21. The certificate of. organization was filed with the secretary of state February 18, 1880, in which it was stated that the capital stock would be $700,000, divided into 7,000 shares of $100 each; that the principal business office would be at Rockaway Beach, H. Y.; and that the object for which the company was to be formed and the nature of its business were the purchase of lands and the building of a hotel thereon, together with bath houses, piers and a theatre and such other accessories as were usual or necessary for the completion and operation of the hotel business at a sea side watering jfiace. This to be done at Rockaway Beach in Queens county,

Books were opened, pursuant to the requisite license, for subscriptions to the capital stock of the company, the full amount was subscribed, and afterwards the defendant Attrill by deed, of date April 1, 1880, conveyed to the corporation about one hundred and twenty acres of land situated at Rockaway Beach in the town of Hempstead, county of Queens, subject to a mort

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gage of $72,000, the payment of which was assumed by the company. This deed was made and taken in payment of the full amount of the capital stock, no part of which was paid for in cash. The certificate, alleged by the plaintiff to have been false, was made by the defendants and other directors June 30th, and filed about July 1, 1880, in which they represented “that the ■amount of capital paid in, in full, is the sum of $700,000, being the full amount of the capital stock of the said company.” The value of the land conveyed by Attrill to the company was the subject of conflict of evidence given in behalf of the respective parties, and the conclusion was warranted that $700,000 was largely in excess of its value. The view of the trial court was, that although the value of the property may have been less than the amount of the capital stock, in payment for which it was taken by the company, that fact alone did not render the certificate false within the meaning of the statute or charge the defendants with liability, but it was dependent upon the further fact that they knew when the certificate was made that the value of the land so taken was materially less than the amount of the capital stock, and thus was involved the question of the good faith of the defendants, so far as it had relation to their understanding or belief of the equivalency or otherwise of such value and amount. As bearing upon that subject it appeared by evidence, in addition to the value, that in July, 1879, in contemplation of the organization of this company, and for the purposes before mentioned, the defendant purchased and took conveyance of one hundred and forty acres of land, of which that so conveyed to the company was a portion, for $80,000, of which he paid $8,000 and gave the mortgage above referred to, to secure the payment of the residue of the purchase money.

It was also contemplated that this land conveyed to the company should constitute in the outset all its property and assets, and that the means to carry forward the project in view should oe derived from the sale of bonds of the company secured by mortgage upon the land. It was to be the basis for the revenue to meet its financial requirements in the expensive enterprise in view. This did not necessarily furnish information that the property had less value than it was in the certificate represented to have, but the fact that the purpose was to so greatly burden it for resources would seem to have called attention to its ability in value to bear it. It evidently was known to the defendants that the value of the land, whatever it was, was speculative m so far that it was dependent upon its successful availability for an enterprise something like that upon which the movers in it were to ana did enter. It could not be said to have had either a market or intrinsic value of large amount, disconnected from a purpose to make such a use of it. It may be that expectation of success enabled the defendants to believe that it had the value which they so represented it had. It seems by what followed that such belief, if it existed, was unfounded. Ho later than in April, 1880, the company had incurred liabilities amounting to upwards of $400,000, which, on the 1st of July following, had increased to $994,000,

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without any means to pay them, and that in August, 1880, its property was taken into the custody of a receiver appointed by the court for that purpose. It is true that all this may have been consistent with a mere mistaken belief, or error in judgment of the defendants and those associated with them, and thus they might be relieved from the imputation of knowledge that the value certified was excessive, or that they purposely misrepresented it There were some circumstances which might be construed as tending to support that view. The property was situated on the beach, and was to be made easily accessible to the people of the cities of New York and Brooklyn by means of a then projected railroad, known as the New York, Woodhayen & Rockaway Beach railroad, which was afterwards constructed, running into it, which may have been supposed to make that location desirable as a seaside resort.

This seems to have been one of the leading considerations which gave inception to the enterprise. This railroad project was said to be under the control of one Smith, who was actively associated with defendant Attrill in the outset, and who became the manager of the business of the company. And the fact that Attrill advanced considerable money to start in progress improvements on the property was a circumstance bearing upon the question of his faith in the movement, although he expected reimbursement from the company of his advances. And the same may be said of the expenses he incurred in putting gas works on adjacent property, the practical availability of which is said to have been somewhat dependent upon the use to be made of gas for light upon the premises in question. His expectations, whatever they were, had importance upon the question so far only as they had a bearing upon his knowledge or belief as to the value of the property at the time of the sale of it to the company. Its then value was the measure of consideration which the company had the right to pay for it. These defendants were directors at the time of the sale and conveyance of the property to the company. They, with their associates, had the responsibility of seeing to it that the purchase price did not exceed the fair value. That was the command of the statute. Id., § 14. There are considerations of public concern which require the proper discharge of duty in that respect, so that the appearances given by reports and certificates filed pursuant to statutes, and representing the financial condition of corporations, may not delusively bring to them credit to the prejudice of those giving it.

The means of judging of the knowledge which the defendants had and upon which they acted, and the motive by which they were influenced, must be derived from the circumstances, treating those persons as men of ordinary discernment and sagacity. The officers, assuming the responsibility and charged with the duties of the management of the business of corporations, are not supposed to shut their eyes to that which is open to observation and legitimately subject to their inspection and control.

The defendant Attrill was familiar with the property. It had no known market value. The sum which constituted the consid

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oration of the sale to the company was in some sense arbitrary, governed perhaps by the amount which it was assumed the contemplated improvement would cost; and before the company was oaganized he, for some reason, desired to be relieved from his situation in relation to the property. He says this was because Smith, his associate in the enterprise, and who was to take half the profits of it, had become obnoxious to him. But the relation was continued, and Smith was made manager of the business of the company. The enterprise may have been treated wholly as one of speculation, resting on expectation and dependent upon its success. The amount for which the property was handed to the corporation was large in comparison with the sum for which it was purchased by the defendant, and was large in fact The circumstances, some of which have not been specifically referred to, were such as to furnish to Attrill information that the property conveyed by him to the company was not worth an amount equal to that of the capital stock, and having found that it was not worth that sum, the jury were warranted in finding that at the time of the conveyance to the company, and at the time he signed the certificate, he knew that such consideration was considerably in excess "of its then value. This was a question of fact upon the evidence which must here be deemed to have conclusively been determined in the court below. If such knowledge was essential to the liability of the defendants, it is not clear that the recovery against the defendant Soutter can be supported in view of the exception taken to the denial of the motion to dismiss the complaint as to him. He never had seen the property at the time the certificate was made, had taken no part in the matter until he became director, and, to make him such, he was presented by Attrill with fifty shares of the stock ;• and although he knew the object of the corporation, was fully advised of the contemplated enterprise, and understood what the consideration of the conveyance to the company was, and how it was paid, those facts were insufficient to charge him with actual knowledge that the consideration was in excess of the value of the property. The information which it appears he had was consistent with good faith so-far as it was dependent upon want of actual knowledge on his part in that respect Schenck v. Andrews, 57 N. Y., 133 ; Boynton v. Andrews, 63 id., 93; Douglass v. Ireland, 73 id., 100; Pier v. Hanmore, 86 id., 95; Bonnell v. Griswold, 89 id., 122.

The cases just cited had reference to certain provisions of a prior statute relating to corporations for manufacturing, etc., purposes, in which it was provided that “if any certificate or report made, or public notice given, by the officers of such company * * '* shall be false in any material representation, all the officers who shall have signed the same, knowing it to be false, shall be jointly and severally liable for all the debts of the company contracted while they are stockholders or officers thereof.” Laws 1848, chap. 40, § 15. It is seen that such provision is substantially like that first above mentioned, except the effect given to it by the use of the words “ knowing it to be false,” which were

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omitted in the latter. The construction of § 21 of the act of 1875, in view of the omission of those words, is not, since the case of Torbett v. Eaton, 113 N. Y., 623 ; 22 N. Y. State Rep., 992 ; affirming 49 Hun, 209 ; 17 N. Y. State Rep., 117, an open question. That action was brought by a creditor of the American Opera Company, Limited, incorporated under the act of 1875, against a director, charging that an annual report of the company subscribed by the defendant was false. The .question arose upon demurrer to the answer of the defendant alleging that he signed the report in good faith, having no knowledge or information that it was in -any respect untrue, and that he did not have any reason to believe it to be untrue in any respect; and that he exercised proper care and diligence before he signed the report to ascertain the facts set forth, and to which it related. The question whether knowledge of the falsity of the report was essential to the liability of the defendant was distinctly raised and the sole question presented. The demurrer was sustained upon the ground that such knowledge was not necessary, but that the fact that the report was untrue in any material representation was sufficient to support the -action to recover a debt due to the plaintiff from the company. And in affirming the judgment the court of appeals necessarily so held, although it does not appear that any written opinion was delivered by the court.

The opinion of the supreme court was delivered by Mr. Justice Daniels, considering distinctly and quite fully the question of the construction and effect of the provisions of the section upon which the right to maintain the present action depends. This view obviates the necessity for the consideration of some of the exceptions in the record, and has the effect, so far as that question is concerned, to dispense with any further consideration of the -suggestion before expressed as to the defendant Soutter.

Prior to 1853 a manufacturing corporation was not permitted to issue stock in payment for property purchased. That was then provided for, Laws 1853, chap. 333, which increased the facilities of creating corporations for the purposes mentioned in the act of 1848, and the several amendatory and supplementary acts extending its provisions; and under that provision there were opportunities to do what was done in this case, to purchase property and put it into a corporation as capital amounting to many times the sum paid for it as a means of a speculative enterprise, without personal liability for the debts of the company in the event it should fail of financial success, provided the projectors and promoters kept within the meaning of the law. That method of capitalizing a corporation is evidently more likely to result in financial embarrassment, and to work more prejudicially "to its creditors, than would that of issuing stock for cash only, and with that and such credit as the company may have and be at liberty to use in that behalf to purchase property for its purposes.

There is a question of public policy worthy of some legislative consideration, bearing upon the subject, when provisions are made for the creation of corporations and defining their powers.

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It may have been in view of the construction given to § 15 of the act of 1818 that the change from it in the provision of § 21 of the act of 1875 was made. It is evident that the word “false ” in the former statute was not treated as importing knowledge or bad faith. And, recognizing that fact, it is urged by the learned counsel for the defendants that the assumption should not be indulged that the same meaning which that word had in that statute was intended to be applied to it in the act of 1875, because it might in its consequences be seriously prejudicial to persons acting innocently and in good faith

But it may be observed that while liability within the provision in question is in some sense penal in character, it may have been intended for the protection of the creditors of corporations, created pursuant to that statute, so far as it might be done against the delusive appearances of financial condition, as represented by the official reports and certificates of those charged with the means of knowledge to make, and the duty of making them and placing them on file, where they may be subjected to inspection by the public. For that purpose at least the effect may be deemed salutary of a legislative provision which would be productive of appreciation of duty, and the faithful discharge of it by those representing business corporations in the exercise of their franchises. And it is not seen that the prudence requisite to protection against undue personal liability may not be exercised under the statute without serious prejudice to legitimate corporate enterprise.

The defendants offered evidence as of value of this based upon comparison with other sea-side property at different places, and exception was taken to its exclusion. It may be that such evidence would have furnished some guide for estimate of the value of the property, but might not. Such evidence would present collateral issues which might, and very likely would, involve a variety of considerations having relation to similarity or difference, and to advantages and disadvantages of the different properties in numerous respects as compared with that in question. It is quite well settled that evidence of that character is not admissible upon the question of value of property in controversy. Gouge v. Roberts, 53 N. Y., 619 . And the same may be said of the opinions of witnesses, which the defendants sought to introduce, founded solely upon their knowledge of transactions on ■other property along the coast, and not in the vicinity of that in question. It is contended that such a rule ought not to be applied to this case because the property was without a market value, and its value was dependent upon its advantages and capacity for development and improvement as a place of sea-side summer resort, on the plans adopted at other places, such as Long Branch, Elberon, Coney Island and Wave Crest, to which reference would likely be had by the parties who had in view like improvement upon the premises in question, and, therefore, the jury should be advised by evidence of the information which a purchaser would have on the subject, and of the facts which would or might influence him and his opinion of the value of the property for such

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purposes. The adoption of such a rule to the extent claimed would open a wide field of speculative inquiry. If, however, it could successfully be affirmed that the influences which would lead one man to an opinion would be the common judgment ■ of all prudent business men, there would be much force in the suggestion that the jury should by the evidence be furnished the opportunity to act upon such information, but since the reasons'ana influences which induce speculative enterprises may be somewhat peculiar to those who engage in them, and the views of comparative advantages widely differ in respect to feasibility and results, it seems to be less conservative and reliable, as a rule of evidence, to attempt to base values merely upon comparison with those of other property at other places, resulting from its use, profitable or unprofitable, or upon opinions which witnesses may have formed solely on the relation in value arising from such use and which they may assume it has to that which is the subject of controversy. The results to follow of development and use of the latter for similar purposes must be somewhat experimental and ■speculative. The conclusion is that thére was no error in the rejection of the evidence. The books of the company were competent as evidence so far as related to any entries legitimately contained in them, and so far as they were relevant to the issues on trial. Allen v. Coit, 6 Hill, 318 ; First National Bank v. Tisdale, 84 N. Y., 655 ; Blake v. Griswold, 103 id., 429; 4 N. Y. State Rep., 221.

It is not apparent that the liabilities of the company in April, June and the 1st of July, 1880, had any bearing upon the question of value of the property. Bxit upon the further issue, acquiescently tried, whether the defendants were chargeable "with scienter and acted in good faith in respect to value in making the representation contained in the certificate, assuming that the value-was less than the amount of the stock, tlxe evidence may have had some bearing, although slight. The entries may also have been competent as bearing upon the issue whether the debt in question was that of the compaxxy, inasmuch as that, in one view taken, may have been dependent upon the adoption by the company of the course of business as conducted by Smith, its manager. Further entries in the books of the company were also introduced in relation to the fund produced by the loan made of the plaintiff, which constituted the debt to recover which this action was-brought. This evidence was competent, not perhaps to establish the fact that the money was boirowed of him, that was proved by other evidence, but to show that the company had the benefit of' it, as bearing upon the disputed question whether it was the debt of the company. Smith, the manager of the company, to which position he was duly appointed, made the loan of $100,000, and gave the plaintiff his note for the amount payable to its order,, ■which note was endorsed by Smith, as such manager, in the name 'of the compaxiy, and as collateral secui’ity for its payment he delivered, with the note, mortgage bonds of the corporation. It was-contended that he had no authority to make the loan for the com-pany, or to endorse for it the note. There was no error in the

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reception of the evidence furnished by the books It appeared by evidence taken subject to exception that the property with improvements was afterwards sold at judicial sale for $175,000. This evidence was admissible on the question of value, although it may have been entitled to but little force in that direction. Campbell v. Woodworth, 20 N. Y., 499 ; Hoffman v. Conner, 76 id., 121.

It is deemed unnecessary to refer specifically to the evidence on the subject, but it was sufficient to permit the court to submit, as it did, to the jury the question whether the debt, to recover which this action was brought, was that of the company. In response to the request to charge that before a verdict could be found for the plaintiff the jury must be satisfied by affirmative proof that Smith was authorized to endorse the name of the company on the note, by prior resolution of the executive committee or by the board of directors, or by ratification by resolution or some equivalent act of such committee or board, the court charged, substantially, that the jury, to reach such result, must find either prior authority or subsequent ratification, and that it could be evidenced by general course of business as well as by resolution. There was no error in this charge, and the exception to the refusal to charge as requested was not well taken.

, The defendant’s counsel requested the court to charge “ that by the words[1] at its fair value,’ in § 14 of the act, is meant the fair value of such property for the uses and purposes of the company in the conduct of its legitimate business, and not the actual market value or the actual intrinsic value thereof at the time it is acquired by the company,” and complain of the modification made by the trial justice in response to the request that he knew of no value other than intrinsic or market value, and then proceeded to charge the jury to the effect that they had the right to consider, in determining the fair value of the property, its value for the use to which it was to be put, and the adaptability of it to any specific purpose, that they are constituent elements of intrinsic value, and although the value to be ascertained by the jury was that at the time of the sale and conveyance to the company, any peculiar advantages known or unknown, and even if known, would make it advantageous to a few only, properly enter into consideration and go to make up the value as of that time. There was no error in the modification or in the refusal to charge as requested. The fair value contemplated by the statute is that which the property had at the time of the sale and which constituted the consideration upon which the subscription to the capital stock of the company was satisfied. Then was the time the estimate of the value must, for that purpose, be deemed to have been made. It could not be dependent upon subsequent success or failure of the investment further than such result may have been legitimately within evidential contemplation at the time of the sale in .view of the uses for which it may have had available advantages within itself. This was fairly submitted by the court to the consideration of the jury.

The jury were properly not required to give the defendants the

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"benefit of all reasonable doubts, in the sense applicable to criminal cases, but were permitted to govern their action in reaching a result by a fair preponderance of evidence. People v. Briggs, 114 N. Y., 56 ; 22 N. Y. State Rep., 317.

Nor is any force, applicable to this case, seen in the contention of the learned counsel for the defendants that the statute giving’ the remedy for the relief sought, is in violation of the constitution. The corporate franchise is taken subject to the terms and conditions of the statute, and those who take the privileges to be derived from a corporation and undertake its management do so voluntarily. They assume the duties incident to it, and the statutory responsibilities which result from failure to observe and perform those duties.

No other question seems to require the expression of consideration.

The judgment should be affirmed.

All concur, except Potter, J., dissenting.