New Britain National Bank v. A. B. Cleveland Co.

The court having rendered a decision which does not state separately the facts found, we are required to review all questions of fact and of law and award to either party such judgment as such party may be entitled to. (Code Civ. Proc. § 1022.)

That this or some other action by the company was necessary is evident from its condition at that time. A few days prior to the execution of the mortgage the president had disappeared, leaving the company’s affairs in confusion. Thereafter suits were commenced on the company’s obligations, and in addition it was threatened with other suits involving damages to a large amount, which were based on alleged fraudulent practices of the president for which the persons injured claimed that the company was liable. Notwithstanding tlie fact that these latter claims were never enforced, the stockholders were alarmed and steps were taken to place the company’s property in such a position as to afford security for the legitimate creditors. With this end in view, it was proposed that all the legitimate creditors should pool their claims, including expenses of litigation, and should be paid pro rata out of the proceeds of the company’s property which should be set aside for this purpose. To carry out this plau, the mortgage assailed was made, and an agreement, signed by all the creditors save one, was entered into, under which the property was to be turned over to the three persons named as trustees under the conditions already referred to. With others, the signature of the plaintiff was made by its president “ subject to the approval of the boai-d of directors.” Under this arrangement, the property was turned over to the trustees, who entered upon their duties; and among the creditors presenting claims was the plaintiff,

An examination of the books of the company prior to the making of the agreement exhibited the company as solvent, its affairs showing assets all told of about $557,000, and liabilities of $425,000, leaving a surplus of $132,000; and that all the parties from such examination believed the company solvent, we think, is evident, although it appears that at that time at least $31,000 of its paper had gone to protest. Subsequent to the execution of the mortgage an effort was made to realize on the assets, and a further examination was made into the affairs of the company by the trustees, and there then developed a situation entirely different from what had been expected or shown at the time the mortgage was made. Many of the hills receivable which were included in the statement of the assets were found to be uncollectible, and, according to one of the witnesses, the losses which the company sustained in an attempt to realize on the assets amounted to about $200,000. This, in addition to the inability of the trustees or officers to carry on the business profitably, necessitated a change in the original plan, and a new one was proposed by a circular letter of November 1, 1889, which, as it was not accepted by the creditors or acted upon, need not be further referred to.

Thereafter, and on February 28, 1890, the trustees sold to two persons the entire plant, property and business of the company for the sum of $100,000, for the purpose of transferring and conveying the same to the Cleveland Seed Company of New Jersey, which prior to that time had been organized. The trustees, in their letter to the creditors under date of February 15, 1890, giving the reasons that induced the sale, after stating that the liens on the seed in their hands, which were about to be foreclosed, amounted to $115,000, and referring to the necessity of prompt action in order that the largest amount might be realized from the stock, say: “ To this

The only other facts necessary to be referred to are that the plaintiff commenced two actions on promissory notes held by it, one on or about the 18th day of April, 1889, in which judgment was rendered on August 7, 1889, and in the second action it recovered a judgment in the Supreme Court on the 5th of October, 1894; the summons in this action now before the court'bearing date December 9, 1892, and having been tried in November, 1894.

The validity of the mortgage made to the trustees and of the sale by them to the Cleveland Seed Company is assailed upon the ground of fraud and illegality, the plaintiff contending (1) that the mortgage is void on its face; (2) that it is void because executed in violation of chapter 394 of the Laws of 1888, which prevents a corporation from issuing bonds or mortgaging its real estate for any other than the legitimate purposes of its business; (3) that it is void within the meaning of the Revised Statutes (1 R. S., part 1, tit. 4, chap. 18, § 4, p. 603), in that it was made by the A. B. Cleveland Company (Limited) in contemplation and with knowledge of its insolvency; (4) that such transfer, being in fact a termination of the regular business of the corporation, and so accepted by the transferees, is illegal as against the creditors of the corporation.

With respect to the first ground, that the mortgage is void on its face, most of the vices assigned to the mortgage are disposed of by the case of Brackett v. Harvey ( 91 N. Y. 214 ), wherein will be found a discussion and disposition favorable to the defendants of the questionable provisions in the present mortgage, except one which we will discuss in connection with the second ground of illegality assigned — that the mortgage is one made with a purpose foreign to the lawful business and objects of the corporation.

The mortgage itself recites, and it is so made to appear, that the issuing of the bonds as originally intended, and the making of the mortgage to secure them, were acts done in order to secure certain debts and obligations incurred in and about conducting and operating the busi

It will be noticed that by the terms of the mortgage here involved not only the real estate but the personal property — which constituted the great bulk of the assets of this corporation — was transferred to the trustees as collateral security for the payment of the bonds. Eor this we can find no warrant or authority in law; and

Upon this ground we think the plaintiff should fail, it appearing by fair preponderance of the evidence (if we might not be justified in saying it was uncontradicted) that at the time the mortgage was executed the officers and trustees and creditors, who participated in the plan, all believed that the company was solvent and able to pay its debts. The fact that subsequently, upon the attempt to realize upon the assets, and by a further examination, this belief was shown to be erroneous, does not color with illegality an act which, when done, was perfectly legal. It is true that certain notes of the company had gone to protest and “ the refusal of a corporation to pay its debts, notes or obligations at maturity is generally a suggestion of insolvency; but whether such refusal results from the disability of the corporation to meet its obligations, or is based on other reasons, will ordinarily be best known to the officers and stockholders.” (Throop v. The H. L. Co., 125 N. Y. 530 .) Here there was sufficient to justify all those in interest in believing that the failure to meet the company’s obligations at maturity Was not clue to lack of assets, but to the bad management and. misconduct of the president, who, after getting possession of certain of its moneys, had absconded, leaving the affairs of the company in utter confusion. The mere fact, therefore, that obligations were due and unpaid is not conclusive upon the question of insolvency or the question as to whether or not the mortgage, when made in that condition of the company, was one executed in contemplation of insolvency. “ The statute makes the question depend upon what was passing in the minds of the officers of the company when the mortgage was executed.” (Paulding v. The Chrome Steel Co., 91 N. Y. 334 , 341.) The act “ must be in anticipation or in view of that condition. In

It is true that the plaintiff’s assent was, to some extent qualified, because, although signed by its president, there was a statement that it was subject to the approval of the board of directors. It is’ not claimed that the board of directors ever repudiated the action of the president, and although the matter, as already stated, was discussed, the board, as such, remained passive, and there is no question but that the bank and its officers had knowledge respecting tlm making of the mortgage and that the president had assented thereto. Knowing full well that other creditors were likewise interested, and it appearing that others subsequently signed the agreement to which the plaintiff’s name was attached, it seems to us it was plaintiff’s duty, if it intended to repudiate the agreement, to have done so promptly and before the rights of others had intervened. Although it be conceded that this mortgage is voidable, we think it was capable of confirmation either by assent at the time or by subsequent ratification, and it is difficult to predicate fraud of acts which are done with the assent and full knowledge of the person who subsequently assails ’them. (Bump on Fraudulent Conveyances, 46 4; Phillips v. Wooster, 46 N. Y. 415 .) Here the plaintiff has slept on its rights for at least three years subsequent to the making of the mortgage, and during all that period, with full knowledge of what was going on, it stood by while the trustees, whose

With regard to the claim that this mortgage was in contravention of chapter 394 of the Laws of 1888, all that need be said is that even though the amount of bonds issued was more than the corporation could lawfully issue, this would not render the instrument void, but, a’s shown from the wording of the statute, would render the directors liable for such overissue at the instance of any holder of the bonds, and in this action the plaintiff is not suing as a bondholder.

It may be that, in addition to an action by a bondholder, any creditor or stockholder could jirovent the issue of an amount of bonds in excess of that allowed by statute, and if such amount were issued could set the transaction aside, provided he had not assented to the same or was not estopped in some other way. The language of the statute is : “ But the amount of such bonds and such mortgages outstanding at any one time shall not exceed one-lialf of the value of the corporate property of such corporation. Any issue -:<• -x- -x- beyond the amount * " * shall render every director voting the same personally liable to any holder of such bonds or such mortgages for any damage caused by such overissue to such holder.” The fact of an overissue of bonds would not, in the light of decisions, render such action absolutely void, so that at no time and under no circumstances could it he recognized, but under the authorities we think it would be voidable in favor of those who, as we have shown, could question the corporate action.

In Kent v. Quicksilver Mining Co. ( 78 N. Y. 159 , 185)it is said:

So with respect to the issue of bonds here ; there was no express prohibition in the statute making on overissue of bond's void, the

The case from which we have quoted (Kent v. Q. M. Co.) has been approved in many'" subsequent cases. Thus, Martin v. N. F. P. Mfg. Co. ( 122 N. Y. 165 ) is authority for the proposition that “ if the officers or trustees of a manufacturing corporation do an unauthorized act, or incur indebtedness, which would not create a corporate liability, the stockholders may subsequently ratify, and so, validate the transaction.” In that case the question was as to the validity of a mortgage given to secure notes which it was claimed were issued without authority, and which were subsequently ratified by the stockholders. It was therein said: “ The stockholders are the equitable owners of the corporate property, and if the officers or trustees do an unauthorized act or incur indebtedness which would not create a corporate liability, the stockholders may subsequently ratify the acts and validate, the originally unauthorized transaction.” (Id. 172.) In Skinner v. Smith ( 134 N. Y. 240 , 241), which was an action by a trustee of a manufacturing corporation to set aside certain transfers of its property alleged to have been made or authorized by the trustees as such to themselves individually, Mr. Justice Eollett, quoting with approval the case of Kent v. Quicksilver Mining Co. (supra;), says: “ A contract entered into by a corporation by the authority or direction of its trustees, with themselves, and for their benefit, or a transfer of its property by the authority of the trustees to themselves, may be set aside, in case it injures any public interest, or the private interest of any sharehelder or creditor, even though the contract or transfer was executed in good faith by the trustees. But this rule is not broad enough to condemn as void on the ground of public policy all contracts and transfers executed by a purely private business corporation, with or to its trustees, in good faith, in case no public or private interest is harmed thereby. Such contracts are not void, but voidable, at the election of those who are affected by the fraud.” And Morawetz in his work on Private Corporations, in speaking of the effect of general statutory prohibitions against the unauthorized exercise

With respect to the transaction here complained of, it was made, not only with the assent of all the stockholders, but with the assent of all the creditors save one; and as those who participated were the persons entitled to all the corporate property, and as the purpose sought to be effected was to secure this to them, no right of any third person was invaded or affected; nor should the court, after the transaction has gone through various stages so that the mortgage

Eor these reasons we tnink that the issue of an amount of bonds in excess of that allowed by statute should not be declared void at the instance of this plaintiff.

As to the remaining ground, that the mortgage was a transfer by the corporation of all its property and assets, thus virtually effecting a termination of its regular business, and, for this reason, illegal, it is only necessary to say that this was not the intention of any of the parties. The whole plan, as shown by the agreement and the provisions of the mortgage, was to continue tlie business of the corporation, which it was thought could be profitably done, and realize for the creditors the full amount of their claims. There was no intention of preventing it from carrying on the business for which it was incorporated. On the contrary, the intention was just the opposite, and the fact that in this all were disappointed is no reason for nullifying the mortgage.

Notwithstanding the claim, therefore, made by plaintiff that a great wrong has been perpetrated upon it by the defendants, we think, as already stated, that, having remained silent, knowing of

The judgment should be affirmed, with costs.

Van Brunt, P. J., concurred in result.

(dissenting) :

January 26, 1885, the A. B. Cleveland Company (Limited) was incorporated under chapter 611 of the Laws of 1875 (the Business Corporation Act) with a capital of $65,000, divided into shares of $100 each. The stock was all issued for realty and personalty, no cash being paid in. By chapter 394 of the Laws of 1888, section 13 of the act of 1S75 was amended so as to read as follows:

“Sec. 13. It shall be lawful for all such corporations to borrow money for the legitimate purposes of such corporation, and for such purpose to issue bonds with or without coupons attached thereto, or to mortgage any real estate which it may have or possess and bearing interest not exceeding six per centum per annum ; but the amount of such bonds and such mortgages outstanding at any one time shall not exceed one-lialf of the value of the corporate property of such corporation. Any issue of such bonds and such mortgages beyond the amount herein specified shall render every director voting the same personally liable to any holder of such bonds or such mortgages for any damage caused by such overissue to such holder. No such mortgage or mortgages shall be issued however without first having obtained the written assent of its stockholders owning more than two-thirds of the stock of said corporation.”

By this section a business corporation is authorized to mortgage its “ real estate ” for an amount not exceeding one-half of the value of its corporate property. April 17, 1889, the president and treasurer of the corporation assumed to execute a mortgage to Conrad N. Jordan, Horace K. Tlmrber and Peter W. Gallaudet upon all of the property of the corporation, real and personal, to secure the payment of $425,000, represented by 425 bonds of $1,000 each, and thereafter it immediately discontinued its business. Twelve days

I think the judgment should be reversed and a new trial granted, with'costs to the appellant to abide'the event.

Judgment affirmed, with costs.