Reed v. Hayt — 51 N.Y. Super. Ct. 121

Majority

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SAMUEL C. REED v. EZRA Z. HAYT.

Headnote

Pleading—denial coupled with affirmative allegations, effect of.—Wonjoinder—when will not prervent recovery.—Corporation, consideration for . transfer by it of stocls—trustee an interested party, effect of.—ratification of acts of—non-notice of trustees' meeting, effect of.—Contract—abandonment of—option.

The complaint averred the performance of alL conditions precedent; the answer denied all the allegations not thereby admitted. It then affirmatively alleged that plaintifi had not performed all the conditions precedent, and enumerated certain things which, it specifically alleged, showed that

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the conditions had not all been complied with.—Eeld, that the issue was confined to the particular breaches of conditions specifically referred to. Where the non-joinder of a party is not pleaded, and it does not appear that the right of the parties to the action cannot be definitely determined without the presence of such other party as a defendant.—Held, that such non-joinder should not prevent a recovery.

Decided December 8, 1884.

Where a precedent debt was due by the corporation to the transferee,—Held, a sufficient consideration to support the validity of a transfer by the corporation of its own stock. Further held, that although the resolution authorizing the transfer was passed at a trustees’ meeting, the presence at which of the transferee as a trustee, constituted a quorum, yet it may be ratified by the company and stockholders.

Where one who, forthwith on the passage of such resolution, becomes the president of the company, and who (under a certain agreement made by him for, among other things, the purchase of stock of said company), was to become the owner of the stock transferred under the resolution, and did in part performance of the agreement, receive some shares of another kind as to which there was no dispute,—after learning the facts respecting the passage of said resolution took the benefit of an extension of time of performance of the agreement, neither the company nor the other stockholders having in the meantime assailed the issuing of the stock. Held, a ratification by him, and that the possibility that some • other stockholder might disaffirm was no defense to an action against him for the purchase money tof the stock held by the plaintiff under such resolution.—Further held, that non-notice of such trustees’ meeting to all trustees, under the above circumstances, and the additional one that the transaction had been executed, did not constitute a defense.

The giving a vendee an option to take such of the property sold as remained undelivered under the contract of sale, upon payment to a designated company of the purchase money agreed to be paid therefor by the contract of sale, and the giving, at the vendee’s request, an option to a third person to take the property so undelivered, and other property for a certain sum which was to be applied to the vendee’s indebtedness under the contract of sale,—Held, not an abandonment of the contract of sale, the option never having been exercised, and the evidence showing that it was not the intention of the parties that they should annul such contract.

Before Sedgwick, Ch. J., Van Vorst and Freedman, JJ.

Motion by plaintiff, for judgment upon a verdict, directed for plaintiff, subject to the opinion of the general term. ■

The facts sufficiently appear in the opinion.

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E. L. Fancher,

attorney, and of counsel for plaintiff, argued :—I. The defense as to an alleged indebtedness of the company to Stearns wholly failed. No such indebtedness existed until after the execution of the contract sued on, and then it arose on an obligation created by the defendant.

II. It is absurd to claim that the sealed contract of the defendant was waived or abrogated. Giving to the defendant an extension of time to pay the $35,000 did not waive or abrogate the contract to pay. Nor did the consent of plaintiff, called an option,” by which, at the request of defendant, Mr. Grannis had an option to take the stock, on making payment for it to the trust company, have such effect. As matter of law, the transactions or indorsements mentioned did not abrogate or dissolve the specialty on which this action is brought. The indorsements are not in terms to that effect, and they are not instruments of equal solemnity—not being sealed (Clough v. Murray, 3 Rob. 16 ). And there was no intention to waive the sealed contract. There was nothing in the papers indorsed on the envelopes giving to the plaintiff any new remedy or right of action in case the options there mentioned were not accepted. There was no discharge of the defendant’s covenant thereby, nor any intention to discharge it manifested.

III. The plaintiff had lawful title to the stock and patents transferred by him ; and the defendant, on payment as required by his contract, will have good title thereto. It is not proper to inquire into the validity of that stock, or its transfer, in this action. Neither the company, nor its stockholders, so far as appears, have taken any steps to impeach the plaintiff’s ownership of the stock which he deposited in the Central Trust Company, and they are not parties to this action. Any objection to the validity of the stock, or the plaintiff’s title to it, founded on the fiduciary relation of the plaintiff to the company and its stockholders, could be waived or not, as they thought best; but any such repudiation of the

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validity of the trustees’ action must be made at the instance of the corporation or of its stockholders. It cannot be questioned collaterally (Risley v. Indianapolis B. & W. R. R., 62 N. Y. 248 ; Barnes v. Brown, 80 Ib. 536 ; Greaves v. Gouge, 69 Ib. 154).

G. C. Horne, attorney, and J. R. Dos Passos, of counsel for defendant,

argued:—I. Objections to the plaintiff’s recovery arising out of his own case, (a.) This case comes before the court on a motion of the plaintiff for a judgment under section 1185 of the Code. It is, therefore, to be treated precisely as an original action and it is incumbent upon the plaintiff to show that he has a good cause of action against the defendant upon some legal ground. This action is brought upon a sealed tripartite agreement between Samuel C. Reed, party of the first part, the plaintiff in this action; the United States Ice and Refrigerating Company of the City of New York, of the second part; and Ezra A. Hayt, the defendant, of the third park. The United States Ice and Refrigerating Company of the City of New York is not a party to this suit, and it accordingly follows that there is a fundamental defect in the action of the plaintiff, in seeking to enforce a contract' against one of the joint contractors without the presence of the other contracting party. The basis of the plaintiff’s claim is upon this sealed instrument, and according to his theory that forms the sole ground of his action. This omission to introduce the third party into this suit, is more than a mere defect of parties which is remedied by the failure of the defendant to interpose a demurrer or to set up the defect in his answer. (6.) Another defect in the plaintiff’s case is to be found in the fact that he did not tender the stock to the defendant, or produce the same upon the trial, and show a willingness on his part to deliver the same, (c.) The plaintiff’s case is also defective in not showing the performance by him of one of the conditions precedent which he assumed under the contract, viz., to deposit the

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resignations of three of the directors in the Trust Company. (d.) Finally, the plaintiff did not show any damage.

II. But irrespective of these propositions, the evidence discloses several distinct and perfect answers to the plaintiffs right to recover, (a.) The plaintiff was not the owner of 1,622 of the 4,550 shares which he engaged and contracted to sell to the defendant. Those shares were the property of the company and were transferred to plaintiff pursuant to a resolution passed at a meeting at which the plaintiff was present, he voting for it. At the time this resolution was passed there were five directors of the company three of whom (the plaintiff being one of the three) were present at the meeting. Three trustees constituted-a quorum, and without the presence of Reed, and his participation in the meeting at which the stock was voted to himself, there could have been no quorum, and no legal meeting of the company. The plaintiff was disqualified from acting, because he could not deal with himself, and without himself there was no quorum of the directors, and they had no authority to pass the resolution (Butts v. Wood, 37 N. Y. 317 ). Moreover, the meeting itself was illegal, because no notice of the meeting was given to Mr. Randall, one of the directors, and he knew nothing whatever of the issue of the stock until his attention was called to it by the defendant in this case. Under the by-laws of the company it is provided as follows : “ Section 4. Special meetings of the board may be held at any time on the call of the president or one of the trustees, due notice being given by the secretary.” The meetings of a joint stock corporation must be called by a personal notice to all the members, unless some other provision is made in the charter or in a by-law, and a vote passed at a meeting not so called is not binding (Angell and Ames Corps. § 493, 10th Ed. ; Wiggin v. Free Will Baptist Church, 8 Met. 301 ; Rex v. Feversham, 8 T. R. 356; Rex v. May, 5 Burr. 2682 ; Rex v. Langhorne, 6 Nev. & M. 203 ; Smyth v. Darley, 2 H. L. Cas. 803; Stow v. Wise, 7 Conn. 219 ; Field Corporations, § 224, 234; State ex rel. Reeves v.

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Ferguson, 2 Vroom, 107 ; People ex rel. Swinbourne v. Albany Medical College, 26 Hun, 348 ; 89 N. Y. 635 ; Morawetz on Corps. §§ 267, 356).

The answer of the counsel of the plaintiff to this proposition, is that this transaction cannot be inquired into collaterally, and this view was indorsed by the learned trial judge in this language : “ The question can only be raised where the corporation is a party. They are bound to make their election, and not having elected to declare the transaction void, it is too late for them to do it now.” We submit that this constitutes no answer whatever in law to the proposition. The defendant in this action did not discover the illegality of this issue of stock until May, 1881. If the defendant had accepted the stock from the plaintiff, he could not have procured its transfer; he would have held something, that in his hands would have had in law no value whatever. The company could set up the illegality of the stock; the doctrine of estoppel could not be applied, and would not arise because the defendant knew that the stock was illegal, and he could not say that he was a bona fide holder of it.

Kent v. Quicksilver Mining Co., 78 N. Y. 150 ; Risby v. Indianapolis B. & N. R. R., 62 Ib. 248 ; Barnes v. Brown, 80 Ib. 536 ; Greaves v. Gorge, 69 Ib. 159 ; have no analogy to the present case.

(6) Under the covenants in the contracts if it appear that the company was indebted to any one during the existence of the contract and before the stock was delivered, there was no obligation on the part of the defendant to carry out the contract. The evidence discloses that the company was indebted to one Oscar H. Stearns. The liability of the company and its indebtedness dated back to July 29, 1879.' (c) The contract was abandoned by mutual agreement of the parties. A new and distinct contract was entered into between the plaintiff and the de^ fendant, to which the Eefrigerating Company was not a party. This contract is evidenced by the following writing. “ Sealed package containing securities between

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Samuel 0. Reed and E. A. Hayt, this package containing three certificates of stock of the U. S. Ice and Refrigerator Co. of the city of New York is to he delivered to Mr. E. A. Hayt on or before the 7th day of June, 1881, on the payment to the Central Trust Co. of $25,000. Should this payment not be made on said day, then this package to be returned to the said Samuel C. Reed on the day following ; the said sum of $25,000 to be placed to the credit of said Samuel C. Reed on the books of said Trust Company.” The plaintiff treated the original contract as at an end because on the same day that the defendant’s option to take the stock expired, viz. : June 7, 1881, the plaintiff made a contract for the sale of the stock to another party, a Mr. Grannis, and when the defendant went to the Trust Company to see if the original package was there, he found it was not there, but an envelope was there giving Mr. Grannis an option to take the stock, and that option had not then expired.

III. Assuming that there is a liability on the part of the defendant for breach of the contract, what is the measure of damage ? The rule is laid down by the commission of appeals in Dunstan v. McAndrew ( 44 N. Y 72 ). See also Hayden v. Demets ( 53 N. Y. 426 ). In the present case the plaintiff elected to keep the property. There was no tender of the stock on the trial or at any other time previous to the beginning of the action, and it is perfectly manifest that the plaintiff used and regarded the stock as his own. He was accordingly bound to prove that he had sustained damage at the time of the breach, to wit, on June 7, 1881.

By the Court.

The propositions which have been argued, must of necessity be confined to the issues raised by the answer. The complaint averred, that the plaintiff had performed all conditions precedent of defendants, liability. The answer denied each and every allegation in the complaint not herein admitted. This is left by itself, might have made an issue as to each condi

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tion precedent in the contract. Such was not its intention, for the answer proceeds, “that the plaintiff has not duly performed all the conditions of said agreement on his part, but on the contrary, although said agreements contained” conditions, etc., and then it enumerates certain things, which it specifically alleges show that the conditions had not all been performed. The issue is thus confined to the particular breaches of condition specifically referred to. These matters will have further attention in considering the reasons, urged by the learned counsel for defendant, for setting aside the verdict.

In the absence of an allegation in the answer that the corporation should have been made a defendant, the plaintiff should not be prevented from recovering as it does not appear, that without the corporation as a defendant, the rights of the present parties cannot be definitely determined.

A tender of the shares was not necessary, as the contract provided that they should be placed with the Trust Company, and that while there the defendant should pay, as provided.

The answer does not defend on the ground that the plaintiff had not deposited the resignations of their directors, as required by the contract. It has already been shown in what manner, the defendant pleaded the breaches of conditions. The answer makes no reference to this subject. But the testimony shows that plaintiff performed in this respect.

The counsel for defendant relies on the correctness of the following propositions maintained by him : 1st that the plaintiff was not the owner of 1,622 of the 4,550 shares which he contracted to sell to the defendant, and 2nd that these 1,622 shares, were not full paid and unassessable shares.

The contract provided that “the party hereto of the first part,” that is, the plaintiff, “is the owner of the 4,550 shares of the said stock, full paid and unassessable as aforesaid.”

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The defence in the answer, as to this subject matter is, that “the plaintiff was not, and never was the owner in good faith of about 1,622 shares of the said stock, so deposited by him, and could not lawfully transfer the same to the defendant, so as to create an absolute and unimpeachable title thereto in this defendant, for the reason that said shares of stock were the property of the said company, and had been at a meeting of the board of directors of said company, held without notice to all of said directors, at which meeting were present only the plaintiff and two others of said company, unlawfully voted to the plaintiff, without consideration therefor, and thereupon transferred to him, in fraud of the rights of said company and of the stockholders therein.”

The proof that certificates for such shares had been issued to the plaintiff, made it necessary for the defendant to show that the facts existed which would invalidate the-shares in the hands of the defendant. He proved the following facts : about a year before making the contract in question, there was held a special meeting of the board of' directors. Three directors, hicluding the plaintiff, were present. The following resolution was adopted : that, whereas, the president (the present plaintiff) had filled that office since the organization of the company in January-1869, without the receipt of any salary, and had also advanced to the company considerable sums of money which have not been repaid him, resolved that all the shares of stock now remaining in the treasury, as well as all that may now be due to it, held as collateral, be and hereby is-, donated and given to the said Eeed, the same to be in full, payment for such services and such advances as aforesaid. The certificate for the 1,622 shares was thereupon issued to the plaintiff, he himself signing the certificate as president. There was no proof that the shares held as collateral amounted to any particular sum, or that any such shares had been issued to the plaintiff. It was proved that one of the five directors had not received notice of the intended meeting. The plaintiff testified that he had given one to

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a boy, to be delivered to that director. He further testified that before the meeting, he had advanced in money to the corporation $20,000 ; that he had received ho compensation for his services as president and had never claimed any ; and that the offer of compensation was made by the other directors present at the meeting.

The answer, it will have been noticed, does not rest a defense upon the stock not being full • paid and being “ unassessable.” Such a defense would imply,, that the plaintiff might be the owner, although hable to respond to creditors, on certain conditions. The defense is, that the corporation was the owner of the shares, and the plaintiff was not the owner, because the transaction by which they were issued was void, or might be avoided as against the defendant, who took with notice of the facts ; for the reasons, 1st, there was no consideration for the transfer ; 2d, it was invalid, because the plaintiff, being a trustee of the company, could not make a quorum, Avhen Avithout him there would be no quorum competent to transact business in the interest of himself personally; 3d, the meeting was invalid for want of notice to all the trustees.

, The first position is against the fact. The consideration was the satisfaction of a debt due by the company to the plaintiff. In Barnes v. Brown ( 80 N. Y. 521 ), the plaintiff took broader ground than is occupied by the plaintiff' here, and alleged, that the stock which had been transferred to him “was not full-paid stock, but the certificates were unlawfully issued Avithout any consideration, for the purpose of making up stock to be delivered under the contract.” The action was for damages for the fraud in delivering to him the stock under a contract which called for full paid capital stock. The complaint did not allege that the company had not issued or transferred the shares, or that the defendants were not the owners thereof. . The case has some bearing upon this appeal, because it referred to the consideration for which the company issued the certificates of shares.

. The court in the opinion, says that the plaintiff proved,

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by the minutes of the company, that the shares were issued by the defendants ostensibly for moneys advanced and services rendered. Thereupon, the plaintiff offered to prove that the stock was issued without any valid consideration of payment and for the purpose of making up stock to be delivered to the plaintiff under the contract in action. It there said, “the obligation to bind the plaintiff for such stock could not be discharged by delivering to him worthless spurious stock, wrongfully issued by the company, without any consideration received therefor. It is not claimed and could not be claimed, that the corporation or its directors, could create any valid stock by issuing the same, without any consideration.” “ The proof thus offered was very material, and if received would have gone far towards completing the proof requisite to sustain the action.” The court did not hold that the proof given of the minutes showed that issuing of stock for moneys advanced was no consideration, but did hold that that the plaintiff was entitled to show that in fact, there was no consideration ; in other words, that the consideration appearing on the minutes did not exist in fact. In the present case, there was no dispute that the plaintiff had made the advances as testified by him, and took the shares in satisfaction of that demand. The fact of the advance and that good faith, were not denied, it seems to me, make the issuing of the shares the equivalent of a money subscription, offset as it might be, by the amount due to the plaintiff. There was intrinsically no fraud upon the company, stockholders or creditors, for each of these were placed in a better relation to their interests in the property of the company by the plaintiff relinquishing his place of preference or creditor, for a right to share, after payment of debts. The first position should be held not to be valid.

As to the second position, its merits rest upon the fact that the plaintiff, as a trustee, could not act for the company, in a transaction in which he received a benefit. This however, is to be limited by further saying that his beneficiaries could, if they thought it to their interest, ratify his act, or

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at their option, avoid it. The company was a party to the agreement in this case and would be held to have ratified the issuing of the certificate of the shares, if it were not that their execution of the agreement was made by the plaintiff himself. The company, as appears by the plaintiff’s testimony, forthwith went into the control of other persons, the plaintiff resigning, and the defendant taking the office of president. There were no avoidance of the issuing of the shares, and the assent and tacit ratification by the company was guided by the defendant himself. The other beneficiaries were stockholders. None of these have in fact, assailed the issuing of the certificate. Whether they might do so in a proper action, should be considered in view of the fact that the defendant was to become a stockholder, upon performance of the agreement. He did, upon part performance, receive some of the shares of another kind, as to which there was no dispute. At the end of nine months from the making of the contract, he learned the facts of the issuing of the stock, and after that he took the benefit of an extension of time of performance, for such substantially, was the option that will be hereafter refered to, until the 7th of June. The plaintiff’s position in the mean time., was that he could not enforce his claims against the company for the advances. This made it necessary for the defendant as stockholder, to avoid at once the action of his trustee, the plaintiff, unless he wished to affirm the validity of the shares. No steps were taken towards disaffirmance, and he consequently, in effect, affirmed. If he did not disaffirm, there is no reason for supporting a defense that some other stockholder might therefore disaffirm. Such a possibility cannot be entertained in favor of the defendant, in view of his own acts.

Similar considerations apply to the third position, that the meeting of directors was invalid for want of notice to them. Beside the mere resolution at the meeting, the transaction had been executed, the plaintiff had received the certificate and had satisfied his demand against the

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company. This executed transaction could not be opened by any one, except through the action of a court of equitable jurisdiction, and it would require that the plaintiff be placed in his original position. So far as the proof of the defendant discloses, every one interested had countenanced or ratified the plaintiff dealing with the stock as owner, with a knowledge of the facts, and the action referred to would not he.

Another defense was, that before the time for the delivery of the shares in question, the company had become indebted to Mr. Stearns, in the sum of $3,000. If this indebtedness was within the intention of the agreement, it was to be provided for by being paid out of the $25,000, which the defendant was to pay, and perhaps the defendant might have, in that account, reduced the recovery directed below. This was not requested by him.

There are many phrases in the contract which refer to the matter of the company’s indebtedness. It is impracticable to state them all. I will have to be content with giving my opinion, that, in view of the whole contract, it" did not intend that the indebtedness of the company it referred to, should be a debt contracted by the company, after the defendant had become its president, according to the purposes of the contract.

Another defense was, that the contract was abandoned by mutual consent and agreement of the parties. There was no express agreement of that kind. The facts that were relevant to the defense, were that after a breach by defendant, the plaintiff at defendant’s request gave in writing, an option to defendant to take the shares undelivered under the contract, upon payment to the Central Trust Company, of the money that the defendant had promised to pay by the contract. Also, at the request of defendant, the plaintiff had given a third person an option to take these shares and another 1,000 shares, upon payment of a sum, which was to be applied to the defendant’s indebtedness under the present contract. Neither of these options was carried out. The evidence showed that it was

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not the intention of the parties, that the giving of the options should annul the present contract, but that, if money should be paid upon them, that money should go in liquidation of the amount due upon the contract, which it was intended should be kept alive. In fact, the option given to the defendant was nothing more than an extension of time, for the purpose of his performing the contract.

The last position to be noticed is, that the true measure of damage was the difference between the market value of the stock and the price named in the agreement. This implies that the plaintiff upon breach of the contract, had taken the stock and appropriated it to himself, and did not hold it, for the defendant. The facts do not show such an implication. The testimony did not prove that the plaintiff held the. stock otherwise than for the defendant.

Motion for-judgment for plaintiff in the amount of the verdict, granted with costs.

Van Vobst and Freedman, JJ., concurred.

Cases cited

Dustan v. McAndrew 44 N. Y 72 N.Y. Comm'n App. 1870-12-28 p. 127
Hayden v. Demets 53 N. Y. 426 N.Y. 1873-09-23 p. 127