Metropolitan Railway Co. v. Kneeland — 30 N.Y. St. Rep. 782

Majority

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The Metropolitan Railway Co., App’lt, v. Sylvester H. Kneeland et al., Resp’ts.^[1]

(Court of Appeals, Second Division,

Filed April 15, 1890.)

Headnote

1. Bills and notes— One fraudulently placing note in circulation LIABLE FOR A TORT.

A person who fraudulently places in circulation the negotiable instrument of another, whether made by him or by his apparent authority, and thereby renders him liable to pay the same to a bona fide purchaser, is. guilty of a tort, and in the absence of special circumstances diminishing its value, is presumptively liable to the injured party for the face value thereof.

2. Same—Corporations—Pleading.

Defendant Kneeland was the president of the plaintiff, a railroad corporation, with no active duties to perform and having no salary connected with his office. The directors met and passed a resolution giving him a salary of $25,000, and at a subsequent meeting authorized the president and treasurer to issue and negotiate notes of plaintiff to pay said salary, which was done, some of them held by certain of the directors and some passing into the hands of bona fide purchasers for value without notice. Demand had been made of plaintiff and suits threatened and brought,when this action was brought stating the facts, claiming fraud and asking that plaintiff have judgment for such sum as it would be liable to pay. The trial court sustained the demurrer of defendants to plaintiff’s complaint. Held, error; that such an action can be maintained upon an allegation of liability to pay without an allegation either of payment or of actual loss.

3. Same.

The action of defendants, as admitted on the record, was a violation of their duty as directors, a breach of trust and a fraud upon the plaintiff, and those who voted to issue the notes were liable.

Appeal from a .judgment of the general term of the supreme court, in the first judicial department, affirming a judgment entered upon a decision of the special term, sustaining a demurrer to the complaint.

Aside from certain facts alleged by way of inducement, the substantial allegations of the complaint are that from the 8th of November, 1882, until in August, 1884, the defendant, Kneeland, was a stockholder, director and the president of the plaintiff, a railroad corporation, organized under the laws of this state; that • as president he was not called upon to perform any duties connected with the active management or operation of the road, and there was no salary attached to his office by any resolution or action either of the stockholders or directors; that his predecessors in office had never received any salary, and that the plaintiff never agreed to pay him a salary as its president, or to pay him for his. services; that on the 5th of June, 1884, all of the defendants were directors of the plaintiff, and, with the exception of Mr. Gillett, attended a directors’ meeting at which the following resolution was unanimously adopted, viz.:

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“ Resolved, That S. H. Kneeland, the president of this company shall be paid a salary of $25,000 per annum from the time of his élection as such; ” that on the 18th of the same month at another meeting of the directors, all of the defendants being present except Duggin and Slayback, it was unanimously resolved that the president be and he is authorized to use the credit of the company by issuing and negotiating its notes, or otherwise, for paying the salary of the said president, said notes to be signed by the president and countersigned by the treasurer in the usual way and form and not to exceed the limit of the amount heretofore authorized; ” that prior to the adoption of the latter resolution, as well as subsequently, notes officially signed and countersigned by the president and treasurer, respectively, were issued to the amount, in the aggregate, of $43,950, and are now due and unpaid; that said notes were retained by said Kneeland and applied to his own use and while some of them are held by certain of the defendants, others were negotiated before maturity and passed into the hands of bona fide purchasers for value without notice; that payment of some of said notes has been demanded of the plaintiff and suits threatened thereon and actions have actually been brought against it upon two thereof; that said Kneeland was never entitled to demand or receive from the plaintiff any salary or compensation for services as such president and that the company was under no liability to him either for salary or compensation, as the defendants knew, or were bound to know as directors, and that their action in voting to pay him a salary, and in directing the issue of notes for that purpose, was illegal, a breach of trust and a violation of their duty as directors; that said notes are invalid in the hands af all persons except bona fide purchasers, without notice, before maturity and for a valuable and sufficient consideration; that the aforesaid action - of the defendants was a fraud upon the plaintiff and that, in consequence thereof, it has incurred a liability to pay such of said notes as have come into the hands of bona fide purchasers, without notice, for a good consideration and before maturity; that some of said notes were paid over by the said Kneeland to some of the defendants in payment of or to secure the payment ” of precedent indebtedness ■of said Kneeland to such defendants and that they are still under the control “ of the defendants or some of them,” and have not passed into the hands of bona fide purchasers.

The relief demanded is that “ an account be taken of said notes and that it be ascertained and determined which of said notes came into the hands of bona fidé purchasers * * '* and that this plaintiff have judgment against these defendants for * * * $43,950 with interest from June 5, 1884, or for such a sum as plaintiff is liable to pay to the holders of said notes.” There is also a prayer for general relief.

The defendants demurred to the complaint, Slayback, Duggin and Kneeland, separately, upon the ground that it does not state facts sufficient to constitute a cause of action; that two causes of action are improperly united and that there is a defect of parties, both plaintiff and defendant.

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Upon the trial an interlocutory judgment was entered sustaining the demurrer as to all of the defendants, with leave to amend in twenty days, but directing that the complaint should be dismissed unless the plaintiff should amend the same during said period. Upon the expiration of twenty days, the plaintiff having-omitted to amend, final judgment was entered dismissing the complaint with costs.

Edward S. Bapallo, for app’lt; Francis C. Barlow and Nelson S. Spencer, for resp’ts.

This is an action against the directors of a corporation for fraudulently issuing and negotiating promissory notes in its name, which, on reaching the hands of bona fide purchasers for value, became legal obligations against the company. The substantial question presented by the demurrer is whether such an action can be maintained upon an allegation of liability to pay without an allegation either of payment or of actual loss. In an action for the conversion of a promissory note by wrongfully negotiating it to a bona fide holder for' value, the maker need neither allege nor prove that he has paid it, but it is sufficient if he avers that he is legally liable to pay it. Decker v. Mathews, 12 N. Y., 313 . The gravamen of such an action, as was held in the case cited, is the wrongful act of the defendant in causing a note without value, except to a bona fide holder, to become valuable by the sale thereof to such a purchaser as could enforce it against the plaintiff.' It was also held in that case that a cause of action accrued to the maker as soon as he became liable upon the note through the transfer thereof, and that neither the right of action nor the measure of damages depended upon the fact of payment.

This case was relied upon by the court when it rendered judgment in Farnham v. Benedict, 107 N. Y., 159 ; 11 N. Y. State Rep., 450, where the defendant, being in possession, without title, of certain town bonds that had been fraudulently issued through his procurement, and which were void in fact, although apparently valid, sold them to bona fide purchasers and thus rendered them valid and binding upon the town so that it was compelled to pay them. It was held that he was liable to the town for the amount of the bonds, and Judge Rapallo speaking for the court said that immediately on the negotiation of the bonds a cause of action accrued in favor of the town, either in the nature of an action of trover for the face of the bonds, or as for money had and received, for the money realized by him on the sale, according to the rule laid down in Comstock v. Hier, 73 N. Y., 269 .

In Thayer v. Manley, 73 N. Y., 305 , the defendant by means of false and fraudulent representations induced the plaintiff to execute and deliver to him three negotiable promissory notes, but before any of them became due the plaintiff demanded them from the defendant who refused to deliver them. He still held the notes at the time of the trial, but one of them had become due after the commencement of the action. It was held that, as.

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thc defendant had it in his power, when the suit was commenced, to dispose of the notes to a bona fide holder in whose hands they would have been valid, and as the plaintiff was then entitled to-recover the damage which might accrue to him, this right was not impaired by the subsequent maturity of one of the notes before a transfer; that as the judgment and a satisfaction thereof would transfer title to the notes to defendant, plaintiff was entitled to recover the full value, but that to avoid circuity of action a provision should be incorporated in the judgment giving to defendant the right to cancel and return the notes as a satisfaction of the damages. It was also held that the measure of damages in such an action is the face of the note and interest, unless it should appear that it was of less value by reason of payment of the same, insolvency of the maker or some other lawful defense.

In Betz v. Daily, 3 N. Y. State Rep., 309, it was held that in an action by a partner against his copartner and certain third persons for fraudulently making notes in the name of the firm and negotiating them so that bona fide holders could compel the plaintiff to pay them, the cause of action was complete when the wrong was done and that payment of the notes was not essential to a recovery. Some of the notes were paid by the plaintiff after the commencement of the .action and before trial, but a verdict-for the amount of all the notes fraudulently negotiated was sustained. The court said: “ The plaintiff was not injured to the amount of money which he had paid out in taking up these fraudulent notes at the time of beginning the action. The injury to him was done when the notes were first negotiated.”

In The Town of Ontario v. Hill, 33 Hun, 250 , the defendants were held liable for wrongfully issuing the negotiable bonds of a town, some of which had fallen into the hands of innocent-holders for value. It was determined that the cause of action accrued immediately upon the passing of the bonds into the-hands of bona fide purchasers who could, enforce them against the town. “ In a legal sense,” it was said, “ the plaintiff had sustained damages by the action of the defendants when the bonds passed into the hands of persons who could enforce their payment against the town. The plaintiffs’ alleged right of action springs out of the defendants’ breach of duty as public officers, and is in the nature of an action on the case for consequential damages.” This case was subsequently reversed, but not on this point. 99 N. Y., 324 .

While the case presented by this appeal may not be a strict-action of conversion, it bears a close analogy to actions of that character when brought by the makers of negotiable promissory notes for the conversion thereof. What is the nature of the injury for which such an action lies ? It is not the loss of the material substance of the note, which is simply a piece of paper with a few words written thereon. Heither is it the loss of a contract, or of the evidence of a contract, that the maker could, enforce, because it is his own engagement in form, but not-

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even that in fact. The wrongful destruction of an article is ordinarily a conversion thereof, but the destruction of a note that had had no inception would not be a conversion as to the maker, unless it might be deemed a conversion of the material substance only, which is not now important. The injury consists in the negotiation of the note, so that, according to the law merchant, it becomes a valid and enforceable contract against the maker, or, as in Thayer v. Manley, supra, in retaining possession after demand made, so that the wrong-doer had the power to put it into lawful circulation. Wrongfully aiding in the negotiation of a note, or wrongfully making a note to be negotiated by others, would appear to be injuries of the same character.

What was the nature of the tortious act of which the defendants by their demurrer admit they were guilty? Those who voted for the resolution which in form authorized one of their number to issue and negotiate notes of the plaintiff, assumed to authorize and, by authorizing, caused some of the notes in question to be issued and negotiated. They had no power, express or implied, to pass that resolution, or its predecessor which provided a salary for the president. They could not thus give away the property of the corporation. They could not bind the stockholders by voting to appropriate the assets of the company to an illegal purpose. Butts v. Wood, 37 N. Y., 317 ; Coleman v. Second Ave. R. R. Co., 38 id., 201; Ogden v. Murray, 39 id., 202; Kelsey v. Sargent, 40 Hun, 150 ; Maux Ferry Gravel Road Co. v. Branegan, 40 Ind., 361 ; Holder v. La Fayette B. & M. R. R. Co., 71 Ill., 106 ; Loan Association v. Stonemetz, 29 Pa., 534 ; Kilpatrick v. Penrose Ferry Bridge Co., 49 id., 118.

Their action, as admitted on the record, was a violation of tlihir duty as directors, a breach of trust and a fraud upon the plaintiff. The result of their action was to cause notes to be made, purporting to be valid obligations of the plaintiff, although in fact void. While not the notes of the company, they appeared to be such, as they were issued by those having apparent authority. If nothing further had been done, however, the wrong would doubtless have been injuria absque clamno, but the defendants who .adopted the second resolution thereby authorized the negotiation of the notes and some of them were negotiated accordingly and reached the hands of bona fide holders for value. These notes, as is here admitted, the plaintiff has become liable to pay in consequence of the fraudulent conduct of those defendants. Thus the dead pieces of paper were, to this extent, given life and converted into contracts binding upon the company without its consent. In what respect do these wrongful acts differ from those which, in the cases cited, were held to authorize an action for conversion, or an action in the nature of conversion ? Do they differ in the character of the injury inflicted, or loss sustained ? Is there not in each the same presumption of damage springing from a liability wrongfully imposed? Were not all of these actions founded "upon the fact that the maker, real or apparent, of a negotiable instrument, had, through the wrongful acts of another, .become chargeable, so that he could be compelled to pay such

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instrument, which would not have ripened into a valid ooligation against him but for such wrongful act ?

We think that the cases relating to this subject rest upon the principle that a person who fraudulently places in circulation the negotiable instrument of another, whether made by him or by his apparent authority, and thereby renders him liable to pay the same to a bona fide purchaser, is guilty of a tort and, in the absence of special circumstances diminishing its value, is presumptively liable to the injured party for the face value thereof. As. the case under consideration fairly comes within this principle, it should be governed by it. The essential injury common to all cases of this character is the fraudulent imposition of liability. Hence there should be a common remedy, whether it is called an action in conversion or in the nature of conversion, or a special action on the case. These views lead to a reversal of the judgment as to. all of the defendants who voted for the resolution authorizing the president of the company to issue and negotiate its notes for the purpose of paying him a salary to which he was-not entitled. The defendants Slayback and Duggin, who demur separately, but through. the same attorneys and upon the same grounds as the other defendants, except Kneeland, did not vote for said resolution, although they voted for the resolution to pay the president a salary. This act, although wrongful, was harmless, so far as appears, until supplemented by further action in which they did not participate, and for which, upon the record as presented, they cannot be held responsible. The passage of the resolution for the payment of a salary, without specifying how it should be paid, did not bring the notes into existence nor put them into circulation. No cause of action was set forth, therefore, as to those defendants, who are not alleged to have had any connection with the act that resulted in making and negotiating the notes.

The judgment should be affirmed as to the defendants Slayback and Duggin, but, under the circumstances, without costs. As to-all the other defendants, the judgment should be reversed and the demurrer overruled, with costs, with leave to such defendants to-withdraw their demurrer and serve an answer within thirty days-upon payment of costs.

All concur, except Potter, J., not sitting.