MacDonnell v. Buffalo Loan, Trust & Safe Deposit Co.

• Citation: 193 N.Y. 92,85 N.E. 801
• Parties: MACDONNELL v. BUFFALO LOAN, TRUST & SAFE DEPOSIT CO.
• Decision Date: 06 October 1908
• Court: New York Court of Appeals

193 N.Y. 92

85 N.E. 801

MACDONNELL

v.BUFFALO LOAN, TRUST & SAFE DEPOSIT CO.

Court of Appeals of New York.

Oct. 6, 1908.

Appeal from Supreme Court, Appellate Division, First Department.

Action for the conversion of bonds by Robert E. MacDonnell, as receiver, etc., against the Buffalo Loan, Trust & Safe Deposit Company. From a judgment of the Appellate Division (119 App. Div. 245,104 N. Y. Supp. 625), affirming a judgment of the Special Term for plaintiff, defendant appeals. Affirmed.

The plaintiff has recovered damages against the defendant for the alleged conversion of 10 bonds, which were each of the par value of $1,000. The judgment appealed from represents their face value, with interest. On the 15th day of September, 1886, the board of directors of the Medina Gaslight Company adopted a resolution authorizing the corporation to borrow $10,000 upon its 10 bonds to be issued. These bonds were to be negotiated by the president for the benefit of the corporation, and the proceeds thereof were to be used ‘for the purpose of defraying its existing indebtedness, and for its other lawful purposes.’ A mortgage was duly executed to secure these bonds, and delivered to the defendant as trustee. On the 21st day of September, 1886, before the mortgage was recorded, Stranahan, the secretary of the Medina Gaslight Company, pledged these bonds to the defendant, as security for personal loans which it had made, and was to make, to him. This was done without the knowledge or consent of the Medina Gaslight Company, and with full knowledge, on the part of the defendant, that the bonds were authorized only for corporate purposes, and were to be negotiated only by the president of the gas company, while they were in fact being used and negotiated by Stranahan, its secretary, for his personal ends. None of the moneys loaned by the defendant to Stranahan were applied by the latter to any of the purposes recited in the resolution under which the mortgage was executed and the bonds were issued. In 1890 Stranahan became indebted to the German-American Bank of Buffalo. That bank commenced an action against Stranahan, and caused an attachment to be issued upon the 10 bonds executed by the Medina Gaslight Company, then in the possession of the defendant. That action was discontinued, and the attachment withdrawn. On the same day the German-American Bank paid to the defendant the amount of Stranahan's indebtedness to it, and took over as security the 10 bonds, together with other collateral which had been pledged to the defendant by Stranahan. At the time of this transaction between the German-American Bank and the defendant the former had no knowledge or notice that there was any irregularity in the issuance or negotiation of the bonds, except such notice as might arise from the fact that all of the coupons which fell due from March 15, 1887, to and including September 15, 1890, were attached to the bonds, and apparently unpaid. This was the situation in April, 1891, when the Medina Gaslight Company and the Medina Electric Company became consolidated under the name of the Medina Gas & Electric Light Company. In 1893 the defendant, at the request of the German-American Bank, brought an action to foreclose the mortgage given to secure the 10 bonds above mentioned. In that action the Medina Gas & Electric Light Company litigated the validity of the issuance and negotiation of the bonds, and it was held that Stranahan had wrongfully used them to secure the payment of his own debt, without the knowledge or authority of the Medina Gaslight Company, and with full knowledge on the part of the defendant, but that they were valid securities in the hands of the German-American Bank, because it was a bona fide purchaser for value. Upon that decision a decree of foreclosure and sale was entered, which was subsequently affirmed, both in the Appellate Division and in this court. On the 26th day of August, 1895, the Medina Gas & Electric Light Company demanded of the defendant the bonds and coupons thus converted, or their equivalent in cash, and this demand was not complied with. At that time the bonds had no quotable value, and the real estate and plant of the gas and electric company was found to be worth upwards of $20,000. On the 7th of June, 1900, there was a sale of the property of that company, under the decree of foreclosure above mentioned, and it was purchased by one Andrew L. Fennessy for the sum of $14,450. In the decree and notice of sale under which Fennessy made his purchase the real estate comprising the plant of the Medina Gas & Electric Light Company was described by metes and bounds, and this was followed by a clause, also contained in the mortgage, authorizing the sheriff to sell and convey ‘All and singular the other real estate, lands, tenements and hereditaments of the said Medina Gaslight Company, whether the same then were or should thereafter be acquired by the said Medina Gaslight Company; and all and singular the scales tools, machinery, fixtures, implements and appliances of every nature and description; and all brands, stamps, trade-marks and other articles of personal property which then were or should thereafter be acquired by the said Medina Gaslight Company, and after default should be made in the conditions of said mortgage, all and singular the materials manufactured, unmanufactured, or in process of manufacture; bills receivable, debts, demands, dues, choses in action, accounts and all other property real, personal or mixed which had been acquired or might thereafter be acquired by the said Medina Gaslight Company, with all and singular its rights, privileges and franchises; and all and singular the estate, right, interest, property, possession, claims and demands whatsoever, as well in equity as in law of the said Medina Gaslight Company in or to the same and every part and parcel thereof with the appurtenances.’ On the 10th day of July, 1900, Fennessy assigned to one Henry Koons all the rights which he had acquired under his purchase in the foreclosure proceedings, and by virtue of this assignment Koons attempted, in February, 1902, to release the defendant from the claim which the Medina Gas & Electric Light Company, as successor in interest of the Medina Gaslight Company, had against this defendant on account of the alleged conversion of the bonds and coupons referred to. Upon these facts, and others which are referred to in the opinion, the Supreme Court at Special Term decided that the plaintiff was entitled to recover, and the judgment entered upon that decision has been affirmed at the Appellate Division.

Haight and Willard Bartlett, JJ., dissenting.

Edward W. Hatch, for appellant.

Louis Marshall, for respondent.

WERNER, J. (after stating the facts as above).

The legal conclusion that the defendant converted the bonds in suit is based upon findings of fact which are amply supported by the evidence. All of the learned justices of the Appellate Division who sat in the case agreed that there had been a conversion of the bonds, but differed as to the time when it was effected. Four of the justices were of the opinion that the conversion took place when the defendant transferred the bonds to the German-American Bank on December 27, 1890, and one of them thought that the conversion was consummated when Stranahan pledged the bonds to the defendant, on September 21, 1886. Thus there is unanimity of opinion as to the fact of the conversion, but a difference of views as to the time when it took place, and the importance of this divergence lies in the fact that, if the bonds were converted in September, 1886, the six-year statute of limitations had expired before this action was commenced, in September, 1895; but, if the conversion was not committed until December, [193 N.Y. 101]1890, the defense of the statute of limitations interposed by the defendant is of no avail. The plaintiff asserts that there was no conversion until the 26th day of August, 1895, when his predecessor in title made a demand upon the defendant for the return of the bonds or the payment of their value, and this is upon the theory that the defendant's original possession of the bonds was lawful, so that no cause of action for conversion could have arisen until after a demand by the plaintiff and a refusal by the defendant. We think the plaintiff's contention is not tenable. The rule that one who comes lawfully into possession of property cannot be charged with conversion thereof, until after a demand and refusal, is too well established to justify extended discussion. Goodwin v. Wertheimer, 99 N. Y. 149, 1 N. E. 404;Converse v. Sickles, 146 N. Y. 200, 40 N. E. 777,48 Am. St. Rep. 790;Castle v. Corn Exchange Bank, 148 N. Y. 122, 42 N. E. 518;Tompkins v. Fonda Glove Lining Co., 188 N. Y. 261, 80 N. E. 933. But it has no application in a case where the lawful custodian of property commits an overt and positive act of conversion by an unlawful sale or disposition of the same. Pease v. Smith, 61 N. Y. 480. So long as the defendant was in possession of the bonds, under circumstances which might have made that possession lawful or unlawful at its will, a demand and refusal were necessary to put it in the wrong, but when it assumed to transfer the bonds to the German-American Bank, it committed an act which was in hostility to the right and title of the plaintiff. This was a distinct and unequivocal conversion. It was a wrongful taking, which at once created a cause of action in favor of the owner of the bonds. No demand was necessary. The sole object of a demand is to convert an otherwise lawful possession into an unlawful one. In such a case the refusal furnishes the only evidence of a conversion. We think that the majority of the justices of the Appellate Division were clearly right in holding that the defendant converted the bonds on the 27th day of December, 1890, and not on September 21, 1886, as contended for by the...