Nevitt v. First National Bank of Albany — 71 N.Y. St. Rep. 376

Majority

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Henry C. Nevitt, as Temporary Receiver, etc., App’lt, v. First National Bank of Albany, Resp’t.

(Supreme Court, General Term, Third Department,

Filed December 3, 1895.)

Headnote

1. Judgment—Fraud—Vacation.

„ A judgment, even though based on a fraudulent cause of action, cannot, be attacked collaterally, in the absence of proof of fraud in its procurement.

8 Corporations—Receivers—Fraudulent conveyances.

Where, in an action by the receiver of an insolvent corporation to recover property alleged to have been received by a bank, in fraud of the-creditors of the corporation, it appears that its president, who was also a director of the bank, executes to the bank notes of the corporation for tile-debts of a partnership of which such president was a member, and deposits the property as collateral security, and the other officers of the corporation, are ignorant of the transaction, and on hearing of it, refuse to ratify it, the receiver is entitled to recover, though the bank has obtained a judgment against the corporation on the notes.

3. Same—Estoppel.

In such case, the receiver is not estopped from assailing transfers of the-corporate property made by officers in fraud of the rights of creditors.

Appeal from a judgment dismissing the complaint on the merits.

Waldegrave Harlock (Edwin Countryman, of counsel), for app’lt;

John M. Bailey (J. Newton Fiero, of counsel), for resp’t.

This action was brought by the appellant, as temporary receiver of the George C. Treadwell Company, a-corporation' organized under the laws of the state of ¡New Jersey, to set aside a judgment rendered upon the report of a referee in an action wherein the respondent was plaintiff, and the George C. Treadwell Company defendant, for. the amount of four several promissory notes purporting to have been made by the George G. Treadwell Company, and discounted by said bank, and also for the same amount claimed to have been loaned and advanced by

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the said hank to the George 0. Treadwell Company, on the ground that such judgment was obtained collusively by fraudulent connivance between said bank and one George H. Treadwell, assuming to act on behalf of the George C. Treadwell Company, as its president. The record discloses that George H. Treadwell was a member of the firm composed of himself and Henry Treadwell, known as Treadwell & Co., and, as such firm, became indebted to the First National Bank in the sum of $20,000, evidenced hy four promisssory notes of $5,000 each, signed by said company, and indorsed by George H. Treadwell; and that, after the making of said notes, George H. Treadwell deposited with the bank, collateral to the same, $20,000 preferred stock and $20,000 common stock of the George C. Treadwell Company, also other collaterals, consisting of merchandise and stocks of various corporations, aggregating $17,000; that George H. Tread-well was, at the time of the making and indorsing of these notes and depositing the collaterals, a stockholder and director in the First National Bank; that the notes held by the bank were made and dated in the fall of 1892, and, remaining unpaid, the bank, by its officers, in May, 1893, requested payment of the notes held by it against Treadwell & Co.; that several letters urging payment to the members of the firm of Treadwell & Co. were written by the bank, and in August, 1893, at a meeting of the directors of the bank, at which George H. Treadwell was present as one of the number, negotiations were opened for the substitution of the notes of the Georrge C. Treadwell Company for the notes held by the bank against Treadwell & Co.; that a committee of the directors of the bank was authorized by it to carry on and perfect negotiations for payment of the Treadwell Company’s notes, and-, in the progress of the negotiation, it was first agreed that the bank would take individual notes of George H. Treadwell in substitution for and payment of the Treadwell & Co.’s notes, hut, before such agreement was consummated, the committee declined to carry out that arrangement, and insisted upon George H. Tread-well’s giving to said bank the notes of the George C. Treadwell Company, and indorsed by himself, as additional security, giving and pledging to the bank collaterals, consisting of personal property; that, after some hesitation, George H. Treadwell accepted such proposition, and, in carrying out the same, executed notes of the George C. Treadwell Company to the amount of $20,000, signing the same as president of that company, and took, of the stock and merchandise of the- George C. Treadwell Company, goods inventoried at the price of $26,000, depositing them in the Albany Safe-Deposit Company, of which he was at the time president, and taking a receipt of the deposit company in his own name, which he transferred to the bank as collateral to the payment of the George C. Treadwell Company’s note; that thereupon the cashier of the bank, acting for the bank, requested him

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pany of $20,000 of said bank upon the notes of the said George, 0. Treadwell Company, and that such application .should- be made on paper with the letter head of the George O. Treadwell Company; that pursuant to that request, George H. Treadwell procured a letter sheet with the letter head of the George C. Treadwell Company, and wrote an application for a loan, as requested by the bank officer, and delivered it, together with the receipt of the deposit company, assigned to the bank, as collateral to the $20,000 note. This $20,000 was represented by four separate notes, of $5,000 each, in the ordinary form ..of a promissory note; and, in addition, each note pledged the stock of goods which had been deposited in the Albany Safe-Deposit Company, to which we have before referred. The case shows that this transaction was without the authority or consent of the George C. Treadwell Company; that by the by-laws of 'that company, a copy of which was in the possession of the First National' Bank, it was provided that the treasurer “shall; together, with the president or secretary, accept and indorse drafts and .sign and indorse promissory notes for the purpose of the company.” Upon the deposit of these notes, the cashier gave Georgó H. Treadwell figures showing the amount due upon the notes of the Treadwell Company, which, at that time, was $20,163.66; and a draft was thereupon drawn on the National Commercial Bank of Albany, in which the George C. Treadwell Company kept its account, payable to the order of George H. Treadwell, and by him presented to the National Commercial Bank', which, was certified, and by him returned to the Commercial Bank, in payment of the amount of Treadwell & Co.’s notes. George IT. Treadwell thereupon requested the delivery to him of the notes.so paid, which was refused by the National Bank, upon the ground, in substance, that he had no authority for signing the notes and executing the collateral from the George C. Treadwell Company, and he was required by the bank to have those acts df his ratified by the George C. Treadwell Company, before the notes of Treadwell & Company could be surrendered.

The case shows that George H. Treadwell, subsequent to this transaction, endeavored to procure the ratification of the George C. Treadwell Company of his acts, and the signature of the treasurer of that company to the notes which he had given; but the company refused to ratify, and the treasurer refused to sign the notes, and, for his violation of the by-laws in attempting -.to execute the notes, he was subsequently removed from the office as president of the George C. Treadwell Company by-the directors of that company. Failing to procure such ratification and signature, . an action was brought by the respondent against the George O. Treadwell Company on the four notes executed by George H. Treadwell to the bank, as president of the George C. Treadwell Company. The summons in that action was served on Curtis Treadwell, a son of George H. Treadwell, acting as

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to apply for a loan in the name of the George 0. Treadwell Corn-secretary of the George C. Treadwell Company, but does not appear to have been served on George H. Treadwell or the president of the company. Curtis C. Treadwell, as such secretary, employed counsel to defend that action, and a defense was interposed of a general denial, and the issue was immediately referred by stipulation to a referree to hear and determine; and a speedy trial was had thereon, upon which trial the referee reported in favor of the bank for the amount of the notes and interest, and on that report judgment was entered. This action is brought, in part, to set aside that judgment.

The learned trial judge in this case, as we think, correctly held that there was not sufficient evidence of a fraudulent conspiracy between the bank and the persons representing the George 0. Treadwell Company in the action tried before the referee to authorize the setting aside of that judgment in this collateral action.

While it is quite clear that, by chapter 314 of the Laws of 1858, a receiver, acting for creditors of an insolvent corporation, may maintain an action to set aside a judgment fraudulently obtained, in fraud of the rights of creditors of such insolvent corporation, yet it may well be doubted whether there was sufficient proof of such fraudulent conspiracy in prosecuting and maintaining the action as would justify the setting aside of the judgment obtained by the bank against the George 0. Treadwell Company, on the ground of fraudulent conspiracy in the prosecution of that action.

Section 2 of the act above referred to provides as follows:

“That every person who shall, in fraud of the rights of creditors and others, have received, taken, or in any manner interfered with, the estate, property or effects of any * * * insolvent corporation, * * * shall be liable in the proper action, to the executors, administrators, receivers, or other trustees of such estate or property, for the same, or the value of any property or effects so received or taken, and for all damages caused by such acts to any such trust estate.”

This section is, doubtless, broad enough to authorize an action by a receiver to set aside a judgment obtained against the corporation which he represents by the fraudulent collusion between an officer of a corporation and a person or corporation prosecuting such action, provided the conspiracy to prosecute and maintain the action is clearly proved. But, in the case at bar, the proof, as appears from the evidence of the attorney who defended the action tried before the referee, as well as the, other proof in that action, fails to show any conspiracy; but, so far" as appears from the records and the proof, the action was defended in good faith by the attorney, and to the best of his ability, with the testimony at that time available and attainable by him. Had the case on that trial disclosed fully the facts as they appear on this, it is quite difficult to see how the plaintiff in that action could have

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recovered; but this court cannot, in this collateral action, review the proceedings of that court upon the merits. The judgment in that case, as was said by the learned trial judge in the case, imports absolute verity, and cannot be set aside in this action, except for fraud or fraudulent conspiracy in obtaining it. Yor can this, court, on this appeal, review the correctness of the judgment in the trial before the referee as to the merits of the action tried by him. That could ouly be done by a direct proceeding on an appeal from that judgment.

The fraud for which a judgment will be set aside must be in the procurement of the judgment. Judgments are impeachable only for those frauds which are extrinsic to the merits. Ereem. Judgm. § 489. To vacate a judgment there must be fraud in obtaining it. A judgment will not be vacated as a means for the court to review or revise its own final judgment, or to correct any error of law into which it may have fallen. Black, Judgm. § 329. Error or mistake in a judgment is not ground for setting it aside by action. Story, Eq. Jur. § 1572; Dobson v. Pearce, 12 N. Y. 165 .

The doctrine governing the powers of the court of equity is well stated by Earls, J., in Ward v. Town of Southfield, 102 N. Y. 292 , where the learned judge says:

“Courts of equity have general jurisdiction to grant relief against fraud, and to set aside all deeds, contracts, or other instruments obtained by fraudulent practices; and the jurisdiction of the court to grant such relief extends not only to voluntary contracts inter partes, but also to judgments and decrees of courts; but solemn judgments of a court should not lightly be interfered with. It is for the interests of the public, as well as of individuals, that there should be an end of litigation; and where parties have been lawfully brought into court, having jurisdiction of their persons and the subject of litigation, have had an opportunity to prosecute their claims and to defend their rights, and judgment has been regularly pronounced, while such judgment is not vacated or reversed, it concludes the parties thereto; and a matter thus litigated and adjudicated cannot again bn brought into question. Such are the general rules, which should not easily be evaded.”

Tested by these rales, we think the trial judge in the case at bar was right in refusing to set aside and vacate the judgment sought to be set aside in this action.

But this action is not prosecuted for the sole and only purpose of setting aside this judgment. The complaint also alleges that, at the time of the making and delivering of the notes on which that judgment was obtained, the goods and other securities and property of the George 0. Treadwell Company were fraudulently transferred by George H. Treadwell to the defendant, and fraudulently received and retained by it, and also prays for an injunction restraining the defendant, from disnosing of the same,

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and asks judgment that the defendant deliver them to the plaintiff, or account for and pay over to the plaintiff the proceeds and value of the same. At the conclusion of the evidence offered in this case, the plaintiff’s counsel asked the court to hold and decide that this transfer of property was not affected by the judgment, hut was independent of the same, and was fraudulent and void, as against the receiver who represented the creditors of the George C. Treadwell Company. The court refused so to hold and decide, on the ground that the judgment has absolute vbrity in the eyes of the law, and that the bank shows title in the judgment, and, until the judgment is set aside, the title of the bank is superior to that of the receiver. In this ruling we think the learned trial court erred. It will be born in mind that the action prosecuted by the bank against the George 0. Treadwell Company was an action at law on the notes to recover money had and received, and was in no sense a proceeding in rem against, or to recover title to, the property of the George C. Treadwell Company, alleged to have been fraudulently transferred by George H. Treadwell to the bank as collateral security on these notes. The judgment did not therefore affect the title of the defendant to the property so assigned, and the same was not and is not claimed or held by the defendant under or by virtue of any lien created by such judgment. And the case discloses that the defendant never undertook to assert title to the property so assigned to it as collateral under any power or authority conferred by that judgment. If, therefore, the original transaction between George H. Treadwell, as president of the George C. Tread-well Company, in transferring the property of the company to this bank in payment of his own individual debt or the debt of Treadwell & Co., was fraudulent as against the George C. Tread-well Company, or its creditors, then the defendant got no valid .title which it can assert as against the receiver of the George 0. Treadwell Company, who represents the claims, not only of the George C. Treadwell Company, but of the creditors of that eompany._

It is insisted by the learned counsel for the defendant that the receiver who took title of the George C. Treadwell Company, by virtue of his receivership, took it subject to all the disabilities that existed against the George 0. Treadwell Company, and that as that company had, through its president, transferred its property to the defendant, the plaintiff is estopped from assailing the transfer. This would undoubtedly be true if George H. Tread-well was in court seeking to set aside that transfer. He would be in pari delicto with the defendant, and would be estopped from alleging his own fraudulent act as a ground of relief. But the rule is quite otherwise where the receiver who'represents not only the George 0. Treadwell Company, but creditors of that company, is assailing that transfer.

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By the express provisions of section 2 of chapter 314 of the Laws of 1858, it is provided, as we have seen:

“That every person who shall, in fraud of the rights of creditors and others, have received, taken, on in any manner interfered with, the estate, property, or affects of any * * * insolvent corporation, * * * shall be liable in the proper action to the executors, administrators, receivers or other trusees of such estate or property, for the same, or the value of any property or effects so received or taken, and for all damages caused by such acts to any such trust estate.”

And the learned counsel for the defendant concedes:

“That this act, chapter 314, above referred to, authorizes a receiver of a corporation to disaffirm, and treat as void, and resist, all acts done, transfers and agreements made, in fraud of the rights of any creditor interested in the property belonging to such corporation.”

It will hardly be denied that, upon the evidence in this case,— the action of George H. Treadwell in giving the notes of the George 0. Treadwell Company, without authority, to the bank, and the bank receiving them with the knowledge of such want of authority, as appears by the conduct of the bank in refusing to deliver the old notes until such authority was given, and the new notes signed by the treasurer of the George 0. Treadwell Company, and being in possession of the by-laws of the George 0. Treadwell Company, which expressly provide that the president of that company cannot alone make a valid note,—such transaction can be upheld as fraudulent against the creditors of the George 0. Treadwell Company, especially as the proceeds of that note never went upon the books or into the assets of the George 0. Treadwell Company, and were solely used in payment of the note of Treadwell & Co., upon which the George 0. Treadwell Company was in no way liable. Such a transaction, if it could be upheld against the creditors of the George 0. Treadwell Company, would justify the president of any corporation, with the knowledge and consent of his personal creditors, to appropriate the property of the corporation to the payment of the individual debts of the president, and, if upheld, would put the creditors of the corporation of which he was the president at defiance. The bare statement of such a proposition would seem to carry upon its face the evidence of its fraudulent and illegal character.

There is another badsce of fraud which appears in the transaction between George H. Treadwell, acting as-president of the George C. Treadwell Company, and this- bank, and that is that at the time of this transfer of property to the bank as collateral, and. at the time of making these notes, and having them discounted for his own benefit, to furnish means to pay his own indebtedness to the bank of which he was director, he was acting in a double capacity,— as a director of the bank, negotiating with himself, as the president of the George 0. Treadwell Company, to pay his

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debt to the bank of which he was a stockholder and director, with the property of the George 0. Tréadwell Company. It would seem to require no citation of authority, although authorities are abundant, to prove that no such transaction could be upheld as against the creditors of the George C. Treadwell Company.

I am therefore clearly of the opinion, upon the evidence in this case, that the plaintiff was entitled to judgment declaring the transfer of these collaterals void as against the creditors of the George C. Treadwell Company, and that the plaintiff should have had judgment for the recovery of the possession of such merchandise and collateral, or an accounting for their value, and a recovery for the same.

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

PUTNAM. J., concurs in result; HERRICK, J., not acting.