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Metropolitan Concert Co. v. Abbey

52 N.Y. Super. Ct. 97 20 Jones & S. 97 Court N.Y. Super. Ct. Decision date 1885-05-18 English

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THE METROPOLITAN CONCERT Co. (limited), Appellant, v. HENRY E. ABBEY and EDWARD G. GILMORE, Respondents.

Headnote

Res adjudícala—when judgment is not.—■ Corporation oi'gamized under chapter 611, laws 1875—leases by.— Ultra vires—imperative necessity—burden of proof of.
When a question is not in- issue on the pleadings, and would not have been available as a defense if it had been in issue, a judgment in the action against the defendant will not be res adjudicata on that question in a subsequent action when it is in issue and is available as a defense.
Thus where an action was brought by a corporation lessor against the lessee for the rent reserved by the lease, which fell due during the lessee’s actual occupancy, and the question of the invalidity of the lease was not in issue on the pleadings, and judgment went against defendant, Held, in a subsequent action to recover rent for a period ensuing the lessee’s abandoning the occupancy, in which the invalidity of the lease was raised on the pleadings, that the former judgment was not res adjudicata on the question of the validity of the lease, since it was not in issue in the first action, and even if it had been pleaded therein, it would not have been available as a defense thereto, whereas in the second action, the invalidity was pleaded, and such invalidity constituted a defense.
The power to sell and convey, given by § 2, chapter 611 of the laws of 1875, to corporations organized under it, does not include a power to lease, therefore—as by § 3 of Part I. R. S., chap. 18, title 3, no corporation can possess or exercise any corporate power except such as shall be necessary to the powers granted—-the making of a lease by such a corporation, of all its property, unless it be by reason of imperative necessity, is ultra vires, and the lease is void. In such a case, it rests on the corporation to show the imperative necessity.
In the case at bar, plaintiff corporation, being the lessee of certain premises, made a sublease to defendant. Held, that in absence of proof by plaintiff that the premises could not be disposed of except by way of lease, the sublease was void. Held further, the business of plaintiff being to give musical entertainments, and the sublease being of the only property it possessed, and it not having given any musical entertainments or performed any legitimate corporate act for some years, that evidence as to reasons for ceasing to give entertainments was immaterial and irrelevant.
Before Sedgwick, Oh. J., Truax and O’Gorman, JJ„
Decided May 18, 1885.
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Appeals from two judgments entered on the report of a referee, dismissing the plaintiff’s complaints.
The facts appear in the opinion.
Davenport & Leeds, attorneys, and John 8. Davenport, ■of counsel for appellant, argued:
I. The power to sublet is necessary to the exercise of the business power of the corporation. A business corporation must, of necessity, do a vast variety of acts, any one of which, if done by it repeatedly, and as a business, would be in violation of its charter and in excess of its powers. If a man were charged with the conduct of carrying on a concert business, with the general statement that he had all the authority necessary to carry on that business and no other, and he were to hire a hall at a rent which proved ruinous for that business, he could not excuse himself from a charge of willful neglect if he stopped the business, left the hall idle and simply wasted the capital in paying the rent, instead of subletting the hall and hiring a cheaper one, on the ground that his principal had given him no authority to do such an act; and no more could these directors, if they had not sublet. The ruling that the sublease in this case is ultra vires, produces substantially the above result. It says to the directors, you had no power to do anything but pay the rent, if you could not sell the lease, and yet you had power to do anything -necessary to carry on the business. There is nothing in the facts, in the statute, or in any decision cited, to mark an isolated act of subletting an unnecessary hall as distinct from any other of the thousand and one unclassified acts which any business corporation may find it necessary to do. For example^: the corporation might employ a musical director fdr’five years, and finding him too high-priced, agree to sublet him to some one who would pay the major part of his salary. Would it not be absurd to say that such an act was not necessary to the “exercise of the power to carry on its business ?”
II. The presumption is that the corporation was acting
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legally. Assuming that .subletting has nothing mysterious about it to distinguish it from any other of the innumerable acts which a business corporation may be able to do, this judgment can only be sustained on the theory that when a corporation does one of those acts, it is presumptively violating the law. If this is correct, the position of a director in such a corporation is such that no responsible man could accept it. He must, every day, do a vast number of things under the general power of what is necessary. He must, because it would be negligence not to. But he must also take the risk of their being necessary, and must always be ready with sufficient evidence of the environment of the act, or be held guilty of a breach of trust.- He is put, also, in the position, utterly unknown to our law in all other cases, of being required to act, and yet on the one hand without the protection of the usual presumption that a man acts legally, and on the other of having the existence of facts presumed in order to charge him with illegality ; namely, if the directors sublet the hall, which hall, as found by the referee, was not necessary to the general business of the corporation, the law will presume that they could have sold the lease, or that they could have gone on and done business profitably in the hall; that they could have profitably and properly exercised their powers under that specific lease. The proposition that the law will accept such violent presumptions of fact, and on those presumptions call upon a man to prove himself not guilty, is astounding. On the other hand, the presumption that an act which might be necessary under certain circumstances, if done, was done in good faith, and under such circumstances as not to be illegal, is a mere refusal to presume that the directors committed a breach of trust. There is no authority to the contrary, and we cite several directly in point (Farmers’ L. & T. Co. v. Clowes, 3 N. Y. 470 ; Chatauqua Co. Bank v. Risley, 49 Ib. 381 ; De Groff v. Am. Lin. Thread Co., 21 Ib. 124 ; Farmers’ Loan & Trust Co. v. Curtis, 7 Ib. 466).
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III. The permission to sell is not a prohibition to lease. The statute says, “ may sell and convey.” Further on it says, with regard to property taken for a debt, “ must sell within three years unless allowed a longer time by the court.” Clearly the mandatory character of the second provision indicates the purely permissive character of the first; otherwise, there is no reason for it. Therefore the statute cannot be construed to mean that a corporation must immediately sell unutilized property, and cannot be permitted to lease it if the best judgment requires it. If it does, then such a corporation must always sell its property, with notice to the buyer that it cannot hold it for a better market without great loss, because it may not lease it.
IV. The referee presumes the lease unnecessary, and refuses to allow evidence against the presumption. The referee excluded the question, “ Can you state any reason for the company’s ceasing to give entertainments in this particular hall ?” If the burden is with the plaintiff to show the facts justifying this special act, that question is clearly calculated to call out a fact showing it. The answer might have been, “ the hall is expensive, or ill adapted,” or “we determined to go elsewhere to another city.” Thus we are neither allowed to presume that the act is right, nor to take up the burden of showing that it is not wrong. Certainly, we must be allowed one or the other of these rights, or else the court must hold that under no circumstances whatever can a business corporation sublet property which it has hired by. mistake, if the judgment is to stand.
V. Statutes like this have been repeatedly construed with liberality rather than hamper such corporations (Brown v. The Winisimet Co., 11 Allen, 326 ; Simpson v. The Westminster P. H. Co., H. L. C. 712 ; Barry v. The Merchants’ Ex., 1 Sandf. Ch. 280 ; Matter Howe, 1 Paige, 214 ; Old Colony R. R. v. Evans, 6 Gray, 25 ; Carpenter v. The B. H. G. M. Co., 65 N. Y. 48 ). The referee dismisses these cases with the remark that it appeared there
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that they were only “ temporary.” We submit this is a mistake. No case is cited forbidding a sub-lease under any or all circumstances.
VII. The question of ultra vires, depending thus upon the fact whether the lease was necessary to the carrying of the plaintiff’s business, it is res adjudicata in the two actions where rent was recovered, for it appears by the findings that in one of those actions the defendants abandoned the possession of the premises before they put in their answer, and being out of possession, they were not prevented from pleading the defense of ultra vires. The issue of the validity of the lease was tendered to them on all grounds, and failing to take issue when they might have done so, they are precluded from questioning the validity of that judgment, and setting up any defense which calls in question the correctness of its conclusions. We find the rule as to former adjudication stated in the following cases (Mallory v. Horan, 49 N. Y. 11 ; Tuska v. O’Brien, 68 Ib. 446 ; White v. Merritt, 7 Ib. 352). A failure to set up a defense does not prevent its adjudication inferentially (Davis v. Talcott, 12 N. Y. 184 ). Further, even if they had not been out of possession, they still could have surrendered possession before pleading, so that their neglect to set up the defense was, in either case, voluntary.
George L. Rives, attorney, and of counsel for respondent Abbey; A. J. Dittenhoefer, attorney, and of counsel for respondent Gilman, argued:
I. The defendants are not concluded' by the judgments in actions 1 and 2 (Duchess of Kingston’s Case, 2 Smith's L. C. 784 ; Packet Co. v. Sickles, 9 Wall. 592 ; Aurora City v. West, 7 Wall. 106 ; Vaughan v. O’Brien, 39 How. Pr. 519 ; Palmer v. Hussey, 87 N. Y. 303 ; Dawley v. Brown, 79 Ib. 390 ; Masten v. Olcott, 22 Hun, 587 ; Goucher v. Clayton, 11 Jur. N. S. 107 ; Russell v. Place, 94 U. S. 606 ; Mason’s Executors v. Alston, 9 N. Y. 28 ; Campbell v. Butts, 3 Ib. 173; Davis v. Talcott, 12 Ib. 184 ; Campbell v. Consalus,
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25 Ib. 613 ; Burdick v. Post, 12 Barb. 168 ; 6 N. Y. 522 ; Ferguson v. Mass. Mutual Life Ins. Co., 22 Hun, 320 ; Schwinger v. Raymond, 83 N. Y. 192 ; Cromwell v. County of Sac, 94 U. S. 351 ; Hewlett v. Tarte, 10 C. B. [N. S.] 813 ; Stowell v. Chamberlain, 60 N. Y. 272 ; Van Alstyne v. I. P. & C. R. R. Co., 34 Barb. 28 ; Weed v. Burt, 78 N. Y. 191 ; Perry v. Dickinson, 85 Ib. 354). The cases of Ballenjie v. Cragin, 31 Barb. 534 ; Blair v. Bartlett, 75 N. Y. 150 ; Newton v. Hook, 48 Ib. 676 ; Embury v. Conner, 3 Ib. 511, 522 ; Jordan v. Van Eppes, 85 Ib. 427 ; Tysen v. Tompkins, 10 Daly, 244 , commented on.
The plaintiff’s counsel on the trial attempted to make a distinction, which does not seem to be based on any reported case, between defenses which do and defenses which do not involve the validity, of a contract. This theory appears to rest upon an entire misconception of the law of res adjudicata, and is distinctly contrary to the cases of Gfoucher v. Clayton, and Cromwell v. County of Sac, and has been repudiated by this court in Hughes v. Alexander ( 5 Duer, 488 ).
II. The agreement of September 27, 1881, is ultra vires of the plaintiff corporation. It was so under its charter powers (Chap. 611, laws 1875, § 2, subd. 6 ; Ashbury Co. v. Riche, 7 H. L. 653; Thomas v. Railroad Co., 101 U. S. 71 ; Russell v. Topping, 5 McLean, 194 ; Pacific R. R. Co. v. Seeley, 5 Mo. 212 ). It is true that it has been frequently held that where a corporation possesses land or other property, and does not need the whole of such property in its business at any particular time, it may temporarily lease the property thus unemployed. It is in all such cases essential that the use so made should be merely temporary and strictly incidental to the principal business of the company (Brown v. Winimisset Co., 11 Allen, 326 ; Forrest v. Manchester, &c. Ry. Co., 30 Beav. 40 ; Simpson v. W. P. Hotel Co., 8 H. L. Cas. 712). This rule would apply to the case at bar if the lease in question had been of one room in the building or of the restaurant.
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The agreement was ultra vires under general rules of laws (Thomas v. Railroad Company, 101 U. S. 71 ; Black v. Del. & R. Canal Co., 22 N. J. Eq. 130 ; Atlantic & Pacific Co. v. Union Pac. Co., 1 McCrary Rep. 641; N. Y. Firemen’s Co. v. Ely, 5 Conn. 573 ; 1 Potter, Law Cor. 111, n. ; Ashbury R. R. Co. v. Riche, 7 H. L. 653 ; E. A. R. Co. v. E. C. R. Co., 11 C. B. 775 ; Pierce v. Madison & Ind. Co., 21 How. U. S. 441 ; Bank of Augusta v. Earl, 13 Pet. 519 ; Perrin v. Ches. Co., 9 How. U. S. 172 ; Hoagland v. Hannibal Co., 39 Mo. 441 ; Susquehanna & Penn. Co., 8 Gill & J. 248 ; Sumner v. Marcy, 3 Woodb. & Min. 105 ; Russell v. Topping, 5 McLean, 134 ; South Yorkshire Co. v. Great Southern Co., 9 Exch. 55 ; Bateman v. Ashton-under Lynn, 3 H. & N. 323 ; Norwich v. Norwalk Co., 4 El. & Bl. 397; Hawk v. Eastern Co., 1 De G. F. & J. 737; New Orleans Co. v. Ocean Co., 26 Am. R. 90; Pacific R. R. Co. v. Seeley, 45 Mo. 212 ; Copeland v. Citizens’ Gaslight Co., 61 Barb. 60 ; Adriance v. Rome, 52 Ib. 399 ; Brady v. Mayor, 16 How. 432 ; Frothingham v. McArdle, 6 Hun, 366 ; Taylor v. Earle, 8 Ib. 1; York Co. v. Winans, 17 How. [U. S.] 30 ; Abbot v. American Hard Rubber Co., 33 Barb. 578 ).
Under section 1785 of the Code, which is simply a re-enactment of previous statutes, an action to procure a judgment dissolving a corporation and forfeiting its corporate rights and franchises may be maintained “where the corporation has suspended its ordinary and lawful business for at least one year.” Now, surely this company had no power to grant a lease of this hall for three years and do nothing during that period but collect the rent (Conro v. Port Henry Iron Company, 12 Barb. 27 ; Copeland v. Citizens’ Gas Light Company, 61 Barb. 60 ).
ITT. These actions being for the recovery of rent for the unexecuted portion of the term, ultra vires is a defense (Green’s Brice’s Ultra Vires, 607 ; Thomas v. Railroad Co., 707 U. S. 71 ). In Woodruff v. Erie Railway Co. ( 25 Hun, 246 ; S. C., reversed, 93 N. Y. 609 ), the court of appeals held that defendants having had the use of the
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property during the whole of the time for which rent was demanded, was. estopped, at least so far as the contract had been executed, from setting up the defense of ultra vires; the court relying on the analogy of a tenant not being permitted to dispute the title of his landlord. To the same effect are Dinsmore v. A. & P. R. R. Co., 46 How. Pr. 193 ; President of Union Bridge Co. v. T. & L. R. R. Co., 7 Lans. 240 ; U. P. R. R. Co. v. W. U. Tel. Co., 1 McCrary, 551 . As above stated, the court of appeals, in Woodruff v. Erie Railroad Co., suggest the analogy of the rule forbidding the tenant to dispute his landlord’s title. But that rule is certainly consistent with the position we assume, for it is well settled that the estoppel lasts only so long as the possession continues (Jackson v. Spear, 7 Wend. 400 ; Tompkins v. Snow, 63 Barb. 525 : Prevot v. Lawrence, 51 N. Y. 219 ; Territt v. Cowenhoven, 79 Ib. 400 ; Sedgwick & Wait’s Trial Title to Land, § 352).
It seems to be well settled that when a tenant goes into possession under a lease void under the statute of frauds, he may move out, and cannot be held for rent, except for the time while he was in possession (Thomas v. Nelson, 69 N. Y. 118 ; Smith v. Genet, N. Y. Daily Reg. Nov. 10, 1884; Prial v. Entwistle, 10 Daly, 398 ).
The foregoing cases not only establish the rule that the defendants can set up the defense of ultra vires in an action for the rent during the period while they were out of possession ; but they also settle it as the rule that the defendants cannot interpose that defense to an action brought to recover rent for the period while they were in possession. In other words,, that the defense of ultra vires is available in actions 4 and 6, but not in actions 1 and 2 (Woodruff v. Erie Railway Co., 93 N. Y. 609 ).

These actions are two of a series of actions brought by the plaintiff - company against the defendants to recover rent for premises situ

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ated at the corner of Broadway and Forty-first street, in this city, known at the time, as the “ Metropolitan Concert Hall.”

Of these actions, two, numbered for convenience sake, 1 and 3, were brought to recover rent which accrued for the use and occupation of the premises by defendants, prior to January 31, 1882, under a lease made by the plaintiff to them on September 26, 1881. These two actions were tried, inquests taken, and judgments duly entered for the plaintiff, which judgments were sustained by the general term of this court and finally by the court of appeals, and were paid by the defendants, with interest and costs.

The two actions now at bar, numbered á and 6, were brought to recover rent claimed by plaintiff to be due it by defendants under the covenants of the said lease, for periods subsequent to January 31, 1882, during which periods the defendants did not use or occupy the premises, but had previously vacated and abandoned them. These actions were referred to a referee to hear and determine, who made his report, dismissing the complaints in both actions, and from the judgments entered on this report, appeals are taken.

There are but two material questions which need now to be discussed. The first question is whether the validity of the lease from the plaintiff company to the defendants was adjudicated, in the affirmative, in the first' actions, 1 and 3, so that defendants are now estopped from denying its validity. The second question is whether the referee, assuming that that question as to the validity of the lease was open for discussion, erred in holding as he did, that the lease was invalid.

The question of the validity of the lease was not adjudicated in the two first actions. It was not in issue in the pleadings, and if it had been pleaded by .the defendants, and in issue, it would not have been of any avail as a defense in those actions. Those actions were brought to recover rent for the use and occupation of the prem

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ises, during periods when the premises were m fact used and occupied by defendants, in execution of the contract of lease, and defendants were therefore estopped from questioning the power of the lessor to make the lease (Whitney Arms Co. v. Barlow, 63 N. Y. 62 ).

As to the second question, the referee held that neither by the law of its incorporation, nor by the general law of this state affecting business corporations, was any power vested in the plaintiff to lease the premises ; and that it did not appear that the lease was merely temporary and incident to the general business of the plaintiff, and on that ground he dismissed the complaints. He bases his opinion on section 2, subd. 6, chapter 611, laws of 18Í5, under which the plaintiff corporation was organized, by which it was empowered “to purchase, hold and possess so much real and personal estate as shall be necessary for the transaction of its business, and to sell and convey the same when not required for the uses of the corporation ;” and, also, on section 3 of 1 R. S. chap. IS, title 3, which provides, that in addition to the powers expressly given, “no corporation shall possess or exercise any corporate powers except such as shall be necessary to the exercise of the powers so enumerated and given.” The referee held that these provisions were exclusive, and operated as a prohibition of the exercise of other and distinct powers, of which he held the power to lease would be one.

The facts are briefly these : The plaintiff corporation was not the owner in fee of the premises leased by it to the defendants, but only the lessee, paying a ground rent therefor of $15,400 per annum, together with taxes, assessments, and water rents. The right of the plaintiff corporation to take and hold the premises under this lease was not questioned. The lease itself was not produced at the trial, and it did not appear for what term it was to continue. The plaintiff company occupied the premises as a concert hall, down to September, 1881, and have not given any concerts or musical entertainments there since

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October 31, 1881. On September 26, 1881, it executed a lease to the defendants, which is in evidence, whereby it leased the premises to them for a period of two months, commencing on October 1,-1881, at a rent of $2,500 per month, payable in advance, with a provision in the lease that the defendants should be entitled to an option, to be determined on or before November 1, 1881, of a further lease for the period of one year, commencing on December then next, at a rent of $600 per week, payable in advance, defendants to have a further option at the expiration of that period, for a further lease of two years at a weekly rent of $750 per week, payable in advance, thus giving to defendants the right to occupy and use the premises for a term of three years. The defendants entered into possession of the premises on October 1,1881, and made various alterations therein, to render them suitable to operatic or dramatic performances. The name was changed from “Metropolitan Concert Hall ” to the “ Casino.” Defendants, exercised the option to extend the lease for one year from December 1, 1881, at the rate of $600 per week, and occupied the premises until January 31, 1882, and have paid rent for the same. On that day, they vacated and abandoned the premises, and the present actions are brought to recover rent accruing, under the covenants of the lease to them for seven months subsequent to January 31, 1882.

Plaintiff did not own or possess any real or chattel property other than these premises, and, since making the lease to the defendants, plaintiff has practically ceased to perform any of the corporate functions provided for in its charter, and if it had been in its power, under the provisions of the lease to it, to sell the premises, or its interest therein as lessee, it would have been justified under the charter in doing so.

The lease to the plaintiff not having been produced, it cannot be presumed that it contained any provision prohibiting the sale of the lease, or requiring the consent of the lessor to such sale, or that any special reason

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existed, requiring the- execution of a sub-lease to the defendants in order to relieve the plaintiff from the continued payment of the annual rent provided for in that lease.

The referee held, that the possession of the premises was not a necessary incident to the continuing of the plaintiff’s business as provided for in its charter.

There is no evidence that the lease by plaintiff to defendants was necessary in order to carry out any corporate purpose, or for the execution of any corporate powers, or even to save the corporation from any pecuniary loss ; and it cannot be successfully contended that the plaintiff had, under the terms of their charter, any legal . power to lease the premises merely for the purpose of gain or profit to the corporation therefrom.

Unless then, the power to “ sell and convey ” clearly included a power to lease, the plaintiff’s lease of the premises was, at least in the absence of all proof of imperative necessity for the act, ultra vires and void.

The cases cited on the part of the plaintiff (Simpson v. Westminster, &c., H. L. 712, and Featherston Hough v. Lee Moore, H. L. 1 Eq. 318, 329), do not seem to me to apply to the case at bar. The facts in these cases showed necessity, justifying leases by the corporation, and it does not appear that there were provisions in their charters prohibiting their action.

If there were, in fact, any imperative necessity for plaintiff executing this sub-lease to the defendants, the burden of proving the existence of such necessity was on the plaintiff.

It is contended, on the part of the plaintiff, that the referee erred in excluding testimony as to the plaintiff’s reasons for ceasing to give entertainments in these premises. It is not apparent how any answer to that question could tend to relieve plaintiff from the difficulty of its case. In the face of the fact, that the plaintiff company had no other property, real or personal,—that it had not, since' October 1, 1881, given any musical entertain

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ments anywhere, or, as far as appears, performed any legitimate act; and that its lease to the defendants of the only property the plaintiff possessed rendered its performance of any corporate act impossible—no evidence as to the reasons for ceasing to give entertainments in the premises in question could be material or relevant.

I am of opinion, that in the absence of sufficient proof, that unless by way of lease the plaintiff could not have disposed of the premises in question, the lease made by it to the defendants is illegal and void, and that as far as the plaintiff’s claims for rent in the present actions are concerned, the defendants cannot be held hable to pay rent thereunder.

The judgments should be affirmed, with costs.

Truax, J., concurred.

Cases cited

Statutes and regulations cited