57 N.Y. 518, Knowlton v. Congress & E. Spring Co.

Citation57 N.Y. 518
Case DateSeptember 01, 1874
CourtNew York Court of Appeals

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57 N.Y. 518




New York Court of Appeal

September 1, 1874

Argued May 6, 1874.

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W. A. Beach for the appellant. Assuming that the scheme for increasing the capital stock was illegal, plaintiff could not recover. (Gillett v. Phillips, 3 Kern., 114, 119; Howson v. Hancock, 8 T. R., 575; Burt v. Place, 6 Cow., 431.) The courts will not interfere to relieve a participant in an illegal transaction. (Schermerhorn v. Talman, 14 N.Y. 94, 102, 126, 141; Tracy v. Talmage, Id., 162, 181; Curtis v. Leavitt, 15 Id., 9; Oneida Bk. v. Ontario Bk., 21 Id., 490, 496; Nellis v. Clark, 4 Hill, 429; Smith v. Hubbs, 1 Fairf., 71.) The additional stock authorized by the stockholders' meeting

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was valid, and all the corporate proceedings were regular and legal. (Laws 1848, chap. 40, § § 20, 22; 3 Edm. Stat. at Large, 737; Leavitt v. Palmer, 3 Comst., 9; Curtis v. Leavitt, 15 N.Y. 96; Otter v. Brev. Pet. Co., 50 Barb., 247.) The provision of law making subscribers liable for the full amount of the par value of their stock is for the benefit of creditors, and no one but a creditor can raise the question. (Mann v. Pentz, 3 Comst., 415, 422; Swan v. Howard, 3 Edw. Ch., 287, 289.) Plaintiff having signed the subscription paper himself and induced others to do so, is estopped from questioning its validity. (Slee v. Bloom, 19 J. R., 456, 460.)

H. M. Ruggles for the respondent. The scheme for increasing the capital stock of the company was unlawful. (Laws of 1848, chap. 40, § § 10, 11, 12, 14, 20, 21, 22.) Plaintiff was not in pari delicto. (Tracy v. Talmage, 14 N.Y. 216, and cases cited.) The contract was ultra vires and the corporation was the more guilty party. (12 Wall., 355; 44 N.Y. 92.) The contract was executory. (2 Bl. Com., 443; 2 Steph. Com., 113; Story on Con., § 18.) Plaintiff having rescinded it by refusing to make further payments, the question, as to the degree of culpability or the relations of the parties, is immaterial. (2 Pars. on Con. [ 1st ed.], 252; Chitty on Con. [ 11th Am. ed.], 944; Walker v. Chapman, Lofft, 345; Lowry v. Bourdien, Doug., 471; Ins. Co. v. Kip, 8 Cow., 20; Perkins v. Savage, 15 Wend., 414; Merritt v. Millard, 4 Keyes, 213; Sar. Co. Bk. v. King, 44 N.Y. 92; Skinner v. Henderson, 10 Mo., 207; Adams Ex. Co. v. Reno, 48 Id., 268; Thomas v. City of Richmond, 12 Wall., 355.)

LOTT, Ch. C.

The plaintiff does not, in his complaint, state the specific grounds on which he demands the relief sought by him. He alleges the increase of the capital stock of the defendant; that he paid the first installment of a subscription for and on account of such increase, by C. Sheehan, to the benefit of which he became entitled; and that the defendant thereafter declared the stock to be forfeited by reason

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of the non-payment of the subsequent installments called for. He does not make any allegation or claim that any of those proceedings were irregular or illegal, or that he made any statement or communication to the defendant why those installments were not paid. He, after making the statements above referred to, sets forth the resolution passed at a meeting of the stockholders for the reduction of the capital stock to its original amount, and conferring authority on the trustees to make an adjustment with the owners or holders of the increased stock, for retiring the same, on such terms and conditions as the trustees should deem for the interest of the company, and then states that provision was made for the issue of coupon bonds to discharge the outstanding receipts for payments made toward the increase of the capital. He does not make any allegation impeaching or questioning that action, but alleges that such bonds were never tendered to or demanded by him; that he had, before the commencement of this action, demanded repayment of the money paid by him on Sheehan's subscription, which it refused to make, and he thereupon demanded judgment therefor.

It is not alleged or indicated in the complaint that he had made any claim previous to the adoption of that resolution for such repayment, or that he at any time offered to surrender or cancel the subscription agreement, or to release or in any manner waive or relinquish his right to the stock subscribed for, or the benefit of such subscription, by Sheehan, or that he asked relief specifically on the ground that the said agreement, or any of the proceedings for the increase or the reduction of the capital of the defendant was illegal or unauthorized. His claim to relief, on the contrary, appears to be based on their validity.

The report of the referee, substantially, finds the facts to be as stated in the complaint, and also shows that the plaintiff actively participated as a stockholder and trustee in the proceedings for the increase of the capital, and prepared the subscription agreement to accomplish that object. He, upon those facts, reached the general conclusion that the plaintiff

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was entitled to recover, without any specification of the grounds for such recovery; and he does not find, as a fact, that there was a non-compliance with the requirements of the law, necessary to effect the increase or reduction of the capital stock of the defendant, or to authorize the forfeiture of the plaintiff's stock; nor is it indicated by any statement in his report that the relief is granted because the subscription agreement was fraudulent, illegal or invalid, for any cause whatever. It appears, however, from the opinion given by him, on the denial of a motion for the dismissal of the complaint, when the plaintiff rested his case, that he considered any plan or scheme by which the actual amount of the capital of a company, incorporated under the act passed February 17, 1848, entitled, "An act to authorize the formation of corporations for manufacturing, mining, mechanical or chemical purposes" (being the act as subsequently extended in its objects, under which the defendant was incorporated), is made less than the nominal amount thereof, whether as originally fixed or subsequently increased, violates the spirit and policy of the law, if not the express provisions thereof applicable to the subject, from its tendency, when carried out, to deceive the public and prejudice the stockholders not assenting to it; and he came to the conclusion, upon facts then disclosed in the case, that the scheme for the increase of the capital stock of the defendant was constructively fraudulent as to the public and as to all stockholders not assenting thereto, and therefore illegal. He then concluded that the plaintiff, virtually, receded from the contract, by refusing to pay calls; that it was then still executory, and that the plaintiff might repudiate it and maintain an action for the money paid under it. Those views were adopted by him in his opinion, given on rendering his final report and decision; and he therein further states that the evidence fails to establish an actual intent on the part of the defendant to defraud; and he also exonerates the plaintiff from intentional fraud in his action in the advancement of the scheme.

No opinion appears to have been given by the General Term

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on the affirmance of the judgment entered on the report of the referee. I will, therefore, assume that they adopted that of the referee; and will, in my consideration of the case, first examine it on the assumption that the scheme for the increase of the capital stock and the subscription agreement were, as correctly decided by the referee, illegal, for the reasons stated by him, and hereinbefore referred to.

It is a well settled principle, that where money is paid by one of two parties to the other on an illegal contract, in a case where they may be considered asparticeps criminis, and in pari delicto, an action cannot be maintained after the contract is executed to recover the money back again, for in pari delicto potior est conditio defendantis. This is conceded by the counsel of both parties, but it is claimed on behalf of the plaintiff that he was not in pari delicto with the defendant. I do not agree with him. It may be conceded that the parties were not equally chargeable with the violation of the law, or alike culpable; but the plaintiff was the most in fault. He was, until a short time before the forfeiture of his new stock, a trustee and vice-president of the defendant, and an active participant and agent in the origin and consummation of the unlawful scheme, in the preparation of the subscription agreement, and in procuring signatures thereto, and nothing appears to have been done for the purpose of carrying out those objects without his approbation and consent. The defendant is an artificial body, acting only as moved by its trustees or corporators and stockholders, having no will or capacity to act except through their action and instrumentality; and, although it is liable for all the legal consequences of its transactions, done under their direction and authority, it appears to be a perversion of every rule and principle in determining the relative culpability or fault of parties, to say that a corporation thus acting and impelled to such action is more culpable than a living, intelligent trustee, who was a party moving and active in causing the action to be had; and, in this connection, I will add, that the proposition or point of the plaintiff's counsel, that "the contract was ultra vires,"

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and, therefore, the corporation was the more guilty party, is not sound. No living or artificial body is authorized to do...

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