Preston v. Loughran — 65 N.Y. Sup. Ct. 210

Majority

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GEORGE C. PRESTON, as Receiver of the ULSTER COUNTY AGRICULTURAL SOCIETY, Respondent, v. ROBERT LOUGHRAN, Appellant.

Headnote

Á corporation organized under chapter 425 of 1855, and chapter 394 of 1867 —power to mortgage its property to a director — enforcement of a mortgage foreclosure judgment against property in the hands of a receiver.

A corporation, organized under chapter 425 of the Laws of 1855, and chapter 394 of the Laws of 1867, has power to mortgage its property when authorized by a vote and by the consent of two-thirds of the stockholders.

The director of such a corporation is not prohibited from loaning money to it, and . receiving from it security, in the form of a mortgage upon its property, for the repayment of the amount loaned, and under a foreclosure of such mortgage he may purchase in and obtain title to the property mortgaged.

While a party having a judgment, which is a lien upon property in the hands of a receiver, will not be permitted to take the property out of the possession of the •. receiver and sell it under an execution issued upon such judgment, yet a plaintiff, who has obtained a judgment of foreclosure of a mortgage, is differently situated and may sell the mortgaged property thereunder.

A judgment, in an action brought by the attorney-general to dissolve a corporation on the ground that it has suspended its business for more than a year, provided that “nothing in this decree contained shall be deemed in any way to prejudice the legal rights of Charles Burhans under the mortgage held by him, and under the decree of foreclosure and sale heretofore made in an action brought by said Charles Burhans to foreclose said mortgage; * * * nor shall it be necessary for the said Charles Burhans or the said'Robert Loughran to bring said receiver as a party into their respective actions; nor shall this decree operate as a stay in either of said actions of said Charles Burhans and Robert Loughran.”

Held,, that this provision of the decree was a permission, if any was needed, to Burhans to sell the mortgaged premises under his decree of foreclosure of the mortgage. J

Appeal by tbe defendant Robert Lougbran from a .judgment of tbe Supreme Court, entered in tbe office of tbe clerk of tbe county of Ulster on tbe 9tb day of May, 1890, in favor of tbe plaintiff, for tbe recovery of certain real property described in said judgment, and for the sum of $300 for tbe rents and income thereof, and for tbe costs and disbursements in tbe action, after a trial at tbe Ulster Circuit before tbe court without a jury.

Tbe judgment decreed that George C. Preston, receiver of the Ulster County Agricultural Society, recover of Robert Lougbran,

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the defendant herein, the possession of the property and real estate described in the complaint.

F. L. Westbrook, for the appellant.

Charles A. Fowler, for the respondent.

This, is an action of ejectment tried before the court without a jury. The property in question on or prior to June 6, 1874, belonged to the Ulster County Agricultural Society, a corporation organized under chapter 425, Laws of 1855, and the special provision of chapter 394, Laws of 1867.

On that day a meeting’ of the stockholders was held, and by a two-thirds vote it was resolved to mortgage the property to the amount of $1,300, to pay existing debts. Such bond and mortgage to be executed by the president, secretary and treasurer of the .society, or a majority of them. A written consent of the same date, signed by two-thirds of the stockholders, to the same effect was proved on the trial. The directors had voted to the same effect October 4, 1873.

Pursuant to authority herein given, a bond and mortgage, dated the 15th day of June, 1874, was executed, as authorized by said vote, by the president, secretary and treasurer, to Robert Loughran, the defendant, to secure $1,300, payable in one year with interest. On the 13th day of July, 1887, Loughran assigned the bond and mortgage to Charles Burlians, the object of the assignment being to have the mortgage foreclosed. On the 10th day of August, 18S7, Burhans commenced an action of foreclosure on the bond and mortgage against said society and other defendants.

The summons and complaint were duly served on the society by delivery to the president, and were duly served on tho other defendants. The usual proeceedings were taken on default, and a judgment of foreclosure and sale was granted October 8, 1887.

On the 4th day of November, 1887, the referee advertised, and on the 30th of June, 1888, sold the premises to defendant for $1,600. His report was made, dated July 2,1888, and was confirmed July 21, 1888. The referee’s deed was executed and delivered to defendant, dated June 30, 1888.

This is an abstract of defendant’s title. On the 15th of September,

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1887, an action was commenced by tbe People against tbe Ulster County Agricultural Society to have tbe corporation dissolved on tbe ground that it had suspended its business for many years. No defense was made; and on October 8,1887, a judgment was entered dissolving tbe corporation and appointing tbe plaintiff a receiver of tbe property. Under tbis judgment tbe receiver took possession of tbe books of tbe corporation. Tbis judgment, wbicb it will be seen was granted tbe same day witb tbe aforesaid judgment, contained tbe following provisions:

“ Nothing in tbis decree contained shall be deemed in any way to prejudice tbe legal rights of Charles Burhans, under tbe mortgage held by him, and under tbe decree of foreclosure and sale heretofore made in an action brought by said Charles Burhans to foreclose said mortgage.”

“Nor shall it be necessary for tbe said Charles Burhans, or tbe said Robert Lougbran, to bring said receiver as a party to their respective actions, nor shall tbis decree operate as a stay in either of said actions of said Charles Burhans and Robert Loughran.”

On November 2, 1887, upon affidavits of Preston, tbe above plaintiff, and of bis attorney, notice was given to tbe attorney of Burhans, of a motion for an order opening tbe foreclosure decree and allowing Preston, as receiver, to be let in to defend in tbe interest of all creditors and stockholders, and a stay of proceedings in tbe foreclosure action for twenty days was granted to enable Preston to make tbe motion. A reference was bad to take evidence in said motion, and tbe motion was finally beard June 16, 1888, and was denied, witb costs and disbursements to be paid out of tbe proceeds of tbe sale.

Tbis, however, was without prejudice to Preston, receiver, to bring an action to recover for alleged claims asked to be set up as to tbe cause of action recovered by plaintiff in tbe foreclosure action. Tbis order was made by tbe consent of Preston’s attorneys. A reference to tbe affidavit of Preston shows what tbe claims are on wbicb be was thus allowed to sue Lougbran. His affidavit alleges that Lougbran was an officer of tbe society; bad been in receipt of all tbe income and bad never accounted therefor. Of course, if true, tbis might show a counter-claim for moneys received which would have been available against tbe foreclosure.

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And, as the court denied the right to come in and defend, it very properly declared that the decision should not prejudice his right to bring an action himself on these claims. Of course, the present action is not brought under that provision. For Loughran then had no title to the land, and ejectment against him was not contemplated in the order. It was also declared that the question of the validity of the mortgage was not passed upon.

This is ' an abstract of plaintiffs title to the land; that is, the plaintiff makes four claims:

First. That the society had no power to mortgage.

Second. That the complaint in the foreclosure avers an assignment to Burhans of the mortgage, but does not aver an assignment of the bond.

Third. That Loughran, being an officer of the company, could not buy for himself.

Fourth. That, after the appointment of plaintiff as receiver, the sale under the foreclosure was absolutely void.

The learned court held with the plaintiff on the third and fourth points.-

The complaint in the foreclosure action was sufficient. The mere omission of the words “bond and” did not make the complaint invalid. It would hardly be demurrable; the meaning was plain. The assignment of the mortgage with the bond was on record July 29, 1887. The reference was to compute what was due on the bond and mortgage, and the referee reported accordingly, referring to the record of the assignment. The judgment was valid.

Next, as to the power of the society to execute the mortgage.

The general act, chapter 425, Laws of 1855, does not provide for stock companies. The payment of ten dollars makes one a life member, and the payment of fifty cents annually a so-called stockholder. But there is no capital stock. The power to sell land is to be obtained on application to the court after a vote at an annual meeting following a notice published for three months previous. But the society in question was 'organized into a stock company (chap. 394, Laws of 1867) with shares of twenty-five dollars each. And section 6 provides that, by authority of a vote of two-thirds, the officers might sell and dispose of the property of the society in the manner directed by such vote and distribute the same after payment of debts.

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Tlie section of the general act providing for 'an application to the court was, as to this society, superseded by this provision. And, inasmuch as the society had become a stock corporation, it was proper, unless some restriction appeared, that it should have control of its property, to sell aud dispose of the same.

“ Corporations, unless restrained by their charters, have the power to mortgage their property to secure borrowed money or their debts.” (Carpenter v. Black Hawk Mining Company, 65 N. Y., 43 , 48.) “ By the common law the power to alien and mortgage lands in the course of its business, inhered in corporations capable of acquiring and holding them, as in natural persons, as an incident of ownership.” (Rochester Savings Bank v. Averell, 96 N. Y., 467 , 472.)

Whatever, then, may be the powers of societies organized under the general act, this society has no restriction placed upon its power to dispose of its property except the requirement of a vote of two-thirds. It owed debts and it borrowed the money in question to pay them.

In this case there was a vote of the directors, and subsequently, on due notice of the object, a two-thirds vote of the stockholders, and finally a written consent of two-thirds of the stockholders. We think that the society had the power to mortgage, and the proceedings therefor were regular. If there were any irregularity in those proceedings the society had the opportunity to set it up when it was sued in foreclosure, and no such defense was set up.

The next question is whether, on the sale under the foreclosure," Loughran could lawfully purchase on his own account. It might also be argued by the plaintiff, on the same general principle, that the mortgage could not properly have been made to Loughran. But the rule is decided adversely to the plaintiff in Twin-Lick Oil Company v. Marbury ( 91 U. S., 587 , 589, 590). The director of a corporation is not exactly in the position of a trustee having the title to property held in trust for another. He has no title to the property of the corporation ; the title is in the company itself. It is true he is in a position where he must manage the affairs of the corporation for its good. But he is not absolutely excluded from the right of dealing with it. He can loan money to it and become its creditor, and he can receive by the act of the corporation security for his debt.

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If he has a mortgage security he may foreclose the mortgage, and it follows, almost of necessity, that if he can foreclose he may pror. tect himself by bidding at the sale. Of course, if he takes any: undue advantage, another question arises. But when his acts are fair and open they are not invalid. In the present case more than six months elapsed between the advertising and the sale., During-this time the present plaintiff was carrying on his motion to open the judgment. He had abundant notice of the intended sale and could have- bid for the property had he chosen to do so. There is no pretense that there was any actual fraud or unfairness in the purchase by defendant.

In the case of Hoyle v. Plattsburgh and Montreal Railroad Company ( 54 N. Y., 314 ), the Commission of Appeals stated, in the-course of - its opinion, that a director of a railroad company could not become a purchaser- of property of the corporation, except subject to the right of the corporation to elect to disaffirm the sale and have a resale. But it was not said that the sale was void, only, that the: corporation might ask for a resale if they believed the property would sell for more. And it was further stated that where-the director himself was the judgment-creditor, he had a clear right to sell the property of the corporation, and it was not decided that-he might not then purchase in his own right.

Nor was it proved in this case that Loughran assigned toBurhans only for the purpose of foreclosure. Loughran had a subsequent judgment against the society, and was advised by counsel that for-that reason he would better assign his mortgage. The foreclosure, sale was then for his benefit as creditor.

In such a case he must plainly have a right to protect his interest, both under the mortgage and under the judgment, by bidding. Otherwise the property might be sacrificed. And he must have a right to bid for himself.

If the mortgagor, the society, should think that the property sold for too little, they might move for a resale. And perhaps, on such a motion, the court would consider the fact that the purchaser was an officer in the company. But the sale would be valid and could only be set aside in equity. (Harrington v. Erie County Savings Bank, 101 N. Y., 257 .)

There remains to be considered the fourth question, whether a

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valid sale could be made after the appointment of a receiver. The cases on which the learned court relied as establishing the negative are Wiswall v. Sampson (55 U. S. [14 How.], 52), and Walling v. Miller ( 108 N. Y., 173 ). Both of these were cases of a sale under the ordinary execution against property. To understand what the Court of Appeals decided we must quote a few words. There had been a levy under execution on property as personal. Two days afterwards a receiver was appointed. Afterwards a sale was made under the execution, and under that sale plaintiff claimed title. Still later the receiver sold and the purchaser took the property. The purchaser under the execution sale sued the receiver and the purchaser at his sale. The court said : “ The lien of the execution was not destroyed by the appointment of a receiver, but the rights and interests of all parties in the property were thereafter to be adjusted by the court which appointed the receiver, and the property could not be taken out of the possession of the receiver and sold upon the execution without leave of the court.”

“ Persons having liens upon the property had no right to interfere with its possession by the receiver, and without any application or adjudication of the court sell and dispose of it and thus dissipate it and deprive the court of jurisdiction to administer it.”

Now, the first thing to notice is that these remarks apply to executions on judgments. In the case of such executions there is no action of the court directing a sale of specific property. They are issued by the party on his own motion without any special authority of the court. A decree of foreclosure is very different. In that the court itself on hearing the facts of the case orders that the property be sold by a person appointed by the court. The judgment of the court that the property be sold is as authoritative as the judgment of the same court that a receiver be appointed. The mortgaged property is not sold “ without leave of the court,” but is sold by direction of the court. It is not sold “ without any application or adjudication of the court,” but is sold by the adjudication of the court. The plaintiff does not deprive the court of jurisdiction to administer, but administers under the judgment of the court.

We think, therefore, that a judgment of the court directing the sale of specific property and the sale thereunder do not come within

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the condemnation applied by the court to ordinary executions issued by the party without special authority.

Suppose, for instance, that a mere judgment-creditor asked leave of the court to issue an execution, when a receiver had been appointed, and that the court granted leave, would not the sale be regular and valid ? Now, when the court itself orders a sale of specific property by a person appointed by itself, is not that sale valid ?

But the present case goes farther.. The judgment appointing the receiver expressly refers to the judgment of foreclosure made the same day, and declares that the judgment shall not in any way prejudice the legal rights of Burhans under his decree of foreclosure and sale, and that it shall not be necessary to bring in Burhans as a party, and the decree shall not operate as a stay in the action of Burhans. What does this mean but a permission, if permission was needed, to Burhans to go on with his sale ? Iiis legal rights were to sell, and these rights are not prejudiced. The decree is not to operate as a stay. Then he may lawfully go forward. It would be unjust, after declaring that his rights are not prejudiced, and his proceedings are not stayed, when Burhans goes on in the faith of this provision and sells the property, then to hold that the sale was- void; void, because made without the leave of the court. Such a construction is a fraud on Burhans. He was most emphatically told in the judgment which appointed the receiver that his own judgment in foreclosure was not stayed or prejudiced. And when the referee sells, as that foreclosure judgment directed, the court is asked to say that the act was an improper interference without leave of the court, and the sale was void.

Further still, the receiver afterwards obtained a temporary stay for the purpose of making his motion to open the judgment of foreclosure. The motion was made and denied. The temporary stay ceased with the denial of the motion (if not before). And again the court, by its order putting an end to the stay, allowed the foreclosure sale to go on. And yet the receiver says that the sale was “ without leave of the court.” If the court then thought that it was best to have the receiver sell, why did not the learned justice, who denied the receiver’s motion, stay the proceedings in the foreclosure action on the grounds now urged by the receiver %

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Both Burhans and the receiver were before tbe court on that motion, and if the present position of tbe receiver on tbis point was good, it might have been urged then. Or tbe court might have been asked, in its discretion, further to stay tbe proceedings in tbe foreclosure until tbe receiver could advertise and sell. Instead of that Burhans went on in good faith; and after tbe sale bad been-made and confirmed tbe purchaser has to meet tbe expense and trouble of tbis ejectment action. Another circumstance confirms this view. When tbe motion made by the receiver to- open tbe foreclosure judgment was denied, an order was made by tbe consent of his attorneys. That order directed that tbe. motion costs of Burhans and tbe fees of tbe referee who bad taken evidence on tbe motion should be paid out of tbe proceeds of the mortgage sale, and they were so paid. ■ /.

Now, here is again a recognition by tbe court, and a consent by tbe receiver’s attorneys, that the property should be sold under foreclosure ; and that tbe costs and disbursements which tbe receiver had caused, and for which, as tbe defeated party, be would ordinarily be liable, should be paid from tbe avails of that sale.

Tbe judgment should be reversed and a new trial granted, costs to abide tbe event.

Landón, J., concurred; Mayham, J., not acting.

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