A. C. Nellis Co. v. Nellis

This is an appeal by plaintiff from a judgment dismissing the complaint before the conclusion of the plaintiff’s testimony.

The plaintiff is a, corporation under the act of 1848 for carrying on the seed business; capital, $50,000, divided into 2,000 shares, twenty-five dollars each. The defendant originally had 1,200 shares. The buildings were destroyed by fire in June, 1886, and about $25,000 was received in cash from the insurance before the annual meeting in July, 1886.

There was evidence that prior to this meeting the deféndant had agreed to make one Howland and one Dunning trustees, and to make Howland treasurer at a salary of $7,000; that Howland was to lend money to defendant, “ and fix it in such a way that it would not be visible on the books and still appear to be all legal.” At this meeting defendant stated that he had been obliged to raise money, and had sold some stock to Howland and Dunning, on condition that they should be made trustees. This was

At a meeting of the trustees in New York, July 23, 1886, defendant was president and was elected president; Howland treasurer. It was voted: “ There being a larger cash balance in the bank than will be required to be used for a long time, resolved, that the treasurer be authorized to loan such surplus as in his judgment is to the advantage of the company, taking good and sufficient security for the amount loaned.”

Howland, as treasurer, gave defendant checks of the company as follows: July 24, $2,000; July 28, $1,000; August 4, $3,000; August 19, $1,150. These checks were drawn to order of cash. The stub was marked “ on account of loan; ” the name of the borrower not given. On the books the amounts are charged to cash for bills receivable ; for whom is not stated.

July 24, 1886, defendant made his note to plaintiff’s order for $6,000, stating that there was deposited as collateral 1,000 shares of the stock of the company. August 19, 1886, he gave another similar note for $1,150, reciting the deposit as collateral of 200 ishares of the same. This is all the stock defendant had ever held. There are other circumstances tending to characterize the transactions as fraudulent. This pretended loan to defendant was plainly not authorized by the vote of the board. This was not a loan on good and sufficient security; and defendant must have known this, as is evidenced by the concealment of the transaction and other proof.

In April, 1889, some of the stockholders, having heard of these transactions, had an interview with defendant in which he admitted the transactions and produced the notes from an iron box in the safe, which was locked, and to which he only had a key.

In June, 1889, a meeting of the trustees was held, at which defendant and Howland were present. It was “Resolved, that the treasurer of this company be directed to call the loan made to A. C. Nellis and solicit cash offers for the hypothecated stock and report to the next meeting.” Pursuant thereto the stock was sold at auction and brought about $520, which went into the treasury.

This action is brought to recover the money received by defendant on the ground that it was unlawfully converted. The learned justice dismissed the complaint on the ground that by foreclosing and selling the hypothecated stock the plaintiff had satisfied the loan and could not now claim that the transaction was illegal.

The defendant claims, as we understand, that if the plaintiff would recover against the defendant for the wrongful taking of its money, it must first surrender to him the security which he gave for the money thus wrongfully taken ; that when one under the pretence of borrowing obtains by fraud money from another and pledges security therefor, the lender cannot keep the security and enforce it and recover for the fraud.

We do not know whether the defendant would insist that if no

There can be little doubt that this money was wrongfully taken. The statute forbids a loan to a stockholder. Section 14, chapter 40, Laws of 1848. The fact that there is by that section a special liability of the officers to creditors does not take away the prohibition. And the facts of this case are sufficient to satisfy a jury that the transaction was a fraudulent conversion. Ihdeed this was not denied in the nonsuit.

It is not disputed that the trustees who voted at the meeting of June, 1889, knew then of the original transaction and knew that the stock was by defendant attached to his notes as collateral thereto. And the question is whether selling that stock estops the company from treating defendant’s acts as a conversion.

It is plain that a board of trustees cannot ratify an act they could not lawfully do in the first instance. The statute says: “ Ho loan of money shall be made by any such company to any stockholder therein.” The principal object of that provision is to prevent a reducing of the capital, under cover of loans to stockholders. It is intended for the protection of creditors. How if Howland, the treasurer, was forbidden to make these loans to defendant, so were the trustees. But that which they are by the statute forbidden to do, they cannot ratify after it has been done. If any authority is needed for this, see Peterson v. Mayor, 17 N. Y., 449 ; Brady v. Mayor, 20 id., 312.

Whether under the decision in Billings v. Trask, 30 Hun, 315 , this transaction with defendant was a loan, so that the officers would be liable to creditors, we need not inquire. In that case there was plainly no loan.

But the defendant urges that the plaintiff by selling the stock has ratified the contract, in spite of the statutory prohibition. He cites the familiar doctrine, stated with numerous authorities in Baird v. Mayor, 96 N. Y., at 599, etc., “ The law not only requires-a disaffirmance of the contract at the earliest practical moment after the discovery of the cheat, but a return of all that has been received under it and a restoration of the other party to the condition in which he stood before the contract was made. To retain any part of that which has been received under the contract is incompatible with its rescission.” This doctrine was there applied to executory contracts for the sale of personal property. And the question related to the rescission of the contract, not to a case where the transaction was the fraudulent obtaining of property from the plaintiff. The defendant here took plaintiff’s money. Whether he took it lawfully or unlawfully, in either case it was his duty to repay it. And it was right for him to secure that repayment, whether he was a mere borrower or a fraudulent converter of plaintiff’s property. Perhaps the obligation was even stronger m the latter case. Why then should not the plaintiff avail itself of these securities, whatever was the nattire -of the transaction.

But whatever might be the effect of a judgment upon the notes or even of a suit commenced thereon, Conrow v. Little, 115 N. Y., 387 ; 26 St. Rep., 527 , neither exists in this case. The plaintiff has only enforced these securities in order to collect what the defendant ought to pay it; what he ought to pay the plaintiff if he legally borrowed the money, and what he ought to pay it if he unlawfully took it.

Let us suppose that defendant had taken an amount of cash in bills from the drawer of the company, and had left in place thereof certain securities. Might not plaintiff have sold those securities and then sued defendant in tort to recover the balance ? And might it not have done this if he had pinned his promissory nóte to such securities ?

We see no injustice in the view we have taken. The defendant has had the plaintiff’s money and ought to restore it. It seems to us that there was evidence on which it might be found that he took it unlawfully. The sale of his securities has in no way injured him; and has in no way affected his position towards the plaintiff. So far as the avails have gone, his liability is reduced. His unlawful act, however, remains, and for it he should answer. The remedy which the plaintiff took in selling this stock is not inconsistent with the position that he unlawfully and fraudulently took its money. There is no election of a remedy inconsistent with this action, unless it be held that one who takes money unlawfully cannot give security for its return.

Judgment reversed, new trial granted, costs to abide event

I concur with the presiding justice. It might have been found as a fact that the defendant had for a short time the practical control of the corporation, and did then abuse his temporary power by converting'its funds to his own use under the guise of a loan, coldrably secured by inadequate collaterals. The corporation subsequently did try to mitigate its loss by selling these collaterals. But this was no ratification of the transaction. An individual, competent to contract, may be beguiled and cheated, and subsequently ratify the voidable contract he was thus induced to make. But in this case when the defendant took the money he did not beguile or deceive the corporation; he effaced

(dissenting).—If this action were prosecuted between individuals competent on both sides to contract, the transactions upon which this action was brought would not amount to a conversion of these funds, and an action for conversion of the sale would not be sustained, and a complaint sounding in tort would be properly dismissed. Allen v. Allen, 52 Hun, 398 ; 24 St. Rep., 477 . Same case affirmed. In that case it was held that in a complaint sounding in tort, the tortious act must be proved to entitle the plaintiff to recover, and that proof of a breach of contract was not sufficient to justify a recovery, and the complaint was dismissed by the trial judge, and that determination was sustained on appeal. But it is insisted that the transaction in this case was tortious from the beginning; that the plaintiff by its trustees had no power through its treasurer to make such contract as was made with the defendant and that they were alike incapacitated from ratifying such a contract after it was made, and that the defendant is not therefore protected from the charge of a wrongful conversion by the contract and by the giving of his note with the collaterals, and that the adoption of that act by the plaintiff by receiving the interest paid, and the payments on the principal, and finally by the foreclosure of the lien on the stock pledged as collateral to this advancement to the defendant, did not estop or preclude them from treating the contract as absolutely void and as if it had never been made, and holding the defendant-liable as for a wrongful taking and conversion of this money.

This contention is based on the provisions of § 14, of chap. 40, of the Laws of 1848, which provides as follows: “Nothing but money shall be considered as payment of any capital stock, and no loan shall be made by any such company to any stockholder therein, and if any such loan shall be made to a stockholder, the officers who shall make it or who shall assent thereto shall be-jointly and severally liable to the extent of such loan and interest for all debts of the company contracted before the repayment of the sum so loaned.”

While the statute prohibits the stockholders and officers of this company, which was organized under the provisions of the chapter above referred to, from loaning its funds, it does not in express terms declare that such loan shall be void,but it imposes upon a stockholder or officer taking part in such unauthorized loan a liability for all of the debts of the corporation contracted before such loan is paid. This is in effect a recognition of the validity of the loan, and imposing a penalty for the illegal act upon the officers or stockholders making such loan.

The-act itself furnishes a-remedy for its violation, by giving to

If the statute made the transaction void, then there could be no-loan in fact or in law, and that part of § 14 which provides a-remedy in case of a loan in violation of its provisions would in all cases be wholly inoperative, because in no case could there be a, loan to a stockholder, as the void act would not be a loan. In Billings, Receiver, v. Trask and Robinson, 30 Hun, 314 , it was held that the provisions of this section applied only to cases where there was a loan in law or in fact in violation of its provisions, and the court says: “It is clear that to establish a right of action under the statute on behalf of a creditor, it is necessary to show that the transaction out of which it is claimed to have arisen was both in law and in fact a loan of money,’ and what is meant by those words is an actual loan of money in such a form as to create an indebtedness to be at some time repaid, so that a liability for payment by the borrower is created.”

This reasoning of the court clearly establishes the legal proposition, that a binding contract can be made between the company and the stockholder, to whom a loan is made; and if such a contract can be made, then the borrower in this case got the money under a contract, and his possession of it was not a conversion and an action cannot be maintained against him for a wrongful conversion. It is quite true that this manner of loaning the plaintiff’s money is condemned by the statute, and the parties who participated in it are subject to the liabilities imposed by the statute, and become personally liable to the creditor, but there seems to be no authority for holding that the contract for the loan was so far void as to the plaintiff that an action for the conversion of these funds may be maintained by it on the ground that the loan conferred no title in the borrower, and at the same time valid as a loan of money for the purpose of making the parties personally liable for all debts of the company contracted before the repayment of the money loaned.

But it is insisted by the defendant that the plaintiff by its present board of trustees ratified this act of its treasurer and the defendant by accepting 'the stock hypothecated as security, and foreclosing its lien upon the same, and retaining and appropriating to its own use the proceeds thereof. To this proposition the plaintiff makes answer, that the-trustees of a corporation can no more ratify an illegal act of its officers, than it can perform the original illegal act The contention of both parties upon this subject may under certain conditions be sound in the abstract; but not when applied to the same state of facts. We have seen that the loan to a stockholder did not render the act absolutely void. It being in violation of law, it might have been avoidable if the company had moved promptly, and tendered back the collaterals- and notes, and demanded the return of the money, but as no such course was pursued it is not necessary to determine that question here; but the plaintiff elected to retain the notes and collaterals and realize on the securities held as collaterals, after full knowledge of the illegal acts of the defendant and the treasurer of the

“ A corporation may become bound and estopped otherwise than under a corporate seal, and their undertakings and admissions may be evidenced otherwise than by records, resolutions, by-laws, ordinances, or other written documents. Technical as well as equitable estoppel apply to corporations as well as to individuals. The ratification of a contract by a corporation may be inferred by facts attending the transactions, and where persons assuming to act as agents of a corporation, but without legal authority, make a contract, and the corporation receive the benefits of it, and use the property acquired under it, such acts will ratify the contract and render the corporation liable thereon." Herman's Law of Estoppel, § 555, p. 522.

It is true that where the illegal act complained of affects third persons not parties to the act, and who are injuriously affected thereby, a subsequent ratification of the parties to the original illegal act will not bind such third persons so injured. Brady v. The Mayor of N. Y., 20 N. Y., 319 . But this case does not, we think, go to the extent of holding that a private corporation can by adopting and appropriating to its own use the fruits of an illegal contract, with full knowledge of the facts, treat the contract as valid for the purpose of retaining the benefits to be derived from it, and at the same time repudiate it as to the .other contracting party so as to hold him responsible for the wrongful conversion of the property received by him under the contract, which the other contracting party seeks to affirm as to itself and repudiate as to him. I have found no case where the directors or trustees of a private corporation have been permitted to affirm an illegal contract, so as to retain the benefits of it to the corporation and at the same time repudiate it as to the other contracting party, and hold him liable for the conversion of the property received by him under it If we would hold this transaction to be a contract between the plaintiff and defendant, the rule is elementary that even if it may have been fraudulent it cannot be rescinded, and the consideration recovered back by the party defrauded, until the party seeking to rescind restores, or offers to restore, all he received under it.

In Cobb v. Hatfield, 46 N. Y., 533 , 537, the rule is very distinctly laid down, that to retain any part of what has been received upon a contract is incompatible with its rescission, and to the same effect is Masson v. Bovet, 1 Denio, 69 , and in Gould v. Cayuga County Bank, 86 N. Y., 75 , 79, the court says: “ One who seeks to rescind a compromise of a disputed claim upon the ground of fraud must promptly, upon the discovery of the fraud, restore, or offer to restore, to the other party whatever he has received by virtue of it, if any, in full; the tender must be without

We are referred by the plaintiff to Thomson v. Sanders, 118 N. Y., 252 ; 28 St. Rep., 924 , as an authority that restoration was not necessary to entitle a plaintiff to recover, but that was an action for damages for fraud, and not an action for a wrongful conversion, and as we think stands upon a different principle. On the whole case I think the learned trial judge was right in holding that this action in the form in which it was prosecuted cannot, under the facts proved on this trial, be maintained; and that the nonsuit was properly granted.

Judgment reversed, and new trial granted, costs to abide event.