Metro. El. Ry. Co. v. Kneeland

• Decision Date: 15 April 1890
• Citation: 120 N.Y. 134,24 N.E. 381
• Parties: METROPOLITAN EL. RY. CO. v. KNEELAND et al.
• Court: New York Court of Appeals Court of Appeals

120 N.Y. 134

24 N.E. 381

METROPOLITAN EL. RY. CO.

v.KNEELAND et al.

Court of Appeals of New York,

Second Division.

April 15, 1890.

Appeal from supreme court, general term, first department.

Aside from certain facts alleged by way of inducement, the substantial allegations of the complaint are that from the 8th of November, 1882, until in August, 1884, the defendant Kneeland was a stockholder, director, and the president of the plaintiff, a railroad corporation, organized under the laws of this state; that as president he was not called upon to perform any duties connected with the active management or operation of the road, and there was no salary attached to his office by any resolution or action either of the stockholders or directors; that his predecessors in office had never received any salary, and that the plaintiff never agreed to pay him a salary as its president, or to pay him for his services; that on the 5th of June, 1884, all of the defendants were directors of the plaintiff, and, with the exception of Mr. Gillett, attended a directors' meeting at which the following resolution was unanimously adopted, viz.: ‘Resolved, that S. H. Kneeland, the president of this company, shall be paid a salary of $25,000 per annum from the time of his election as such;’ that on the 18th of the same month, at another meeting of the directors, all of the defendants being present except Duggin and Slayback, it was unanimously resolved ‘that the president be and he is authorized to use the credit of the company by issuing and negotiating its notes, or otherwise, for paying the salary of the said president, said notes to be signed by the president and countersigned by the treasurer in the usual way and form, and not to exceed the limit of the amount heretofore authorized;’ that prior to the adoption of the latter resolution, as well as subsequently, notes officially signed and countersigned by the president and treasurer, respectively, were issued to the amount, in the aggregate, of $43,950, and are now due and unpaid; that said notes were retained by said Kneeland, and applied to his own use, and, while some of them are held by certain of the defendants, others were negotiated before maturity, and passed into the hands of bona fide purchasers for value, without notice; that payment of some of said notes has been demanded of the plaintiff, and suits threatened thereon, and actions have actually been brought against it upon two thereof; that said Kneeland was never entitled to demand or receive from the plaintiff any salary or compensation for services as such president, and that the company was under no liability to him either for salary or compensation, as the defendants knew, or were bound to know as directors, and that their action in voting to pay him a salary, and in directing the issue of notes for that purpose, was illegal, a breach of trust, and a violation of their duty as directors; that said notes are invalid in the hands of all persons except bona fide purchasers, without notice, before naturity, and for a valuable and sufficient consideration; that the aforesaid action of the defendants was a fraud upon the plaintiff, and that, in consequence thereof, it has incurred a liability to pay such of said notes as have come into the hands of bona fide purchasers, without notice, for a good consideration, and before maturity; that some of said notes were ‘paid over by the said Kneeland to some of the defendants in payment of or to secure the payment’ of precedent indebtedness of said Kneeland to such defendants, and that they are still under the control ‘of the defendants or some of them,’ and have not passed into the hands of bona fide purchasers. The relief demanded is that ‘an account be taken of said notes, and that it be ascertained and determined which of said notes came into the hands of bona fide purchasers, * * * and that this plaintiff have judgment against these defendants for * * * $43,950, with interest from June 5, 1884, or for such a sum as plaintiff is liable to pay to the holders of said notes.’ There is also a prayer for general relief. The defendants demurred to the complaint,-Slayback, Duggin, and Kneeland, separately,-upon the ground that it does not state facts sufficient to constitute a cause of action; that two causes of action are improperly united; and that there is a defect of parties, both plaintiff and defendant. Upon the trial an interlocutory judgment was entered, sustaining the demurrer as to all of the defendants, with leave to amend in 20 days, but directing that the complaint should be dismissed unless the plaintiff should amend the same during said period. Upon the expiration of 20 days, the plaintiff having omitted to amend, final judgment was entered dismissing the complaint, with costs

Edward S. Rapallo, for appellant.

Francis C. Barlow and Nelson S. Spencer, for respondents.

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

This is an action against the directors of a corporation for fraudulently issuing and negotiating promissory notes in its name, which, on reaching the hands of bona fide purchasers for value, became legal obligations against the company. The substantial question presented by the demurrer is whether such an action can be maintained upon an allegation of liability to pay without an allegation either of payment or of actual loss. In an action for the conversion of a promissory note by wrongfully negotiating it to a bona fide holder for value, the maker need neither allege nor prove that he has paid it, but it is sufficient if he avers that he is legally liable to pay it. Decker v. Matthews, 12 N. Y. 313. The gravamen of such an action, as was held in the case cited, is the wrongful act of the defendant in causing a note without value, except to a bona fide holder, to become valuable by the sale thereof to such a purchaser as could enforce it against the plaintiff. It was also held in that case that a cause of action accrued to the maker as soon as he became liable upon the note through the transfer thereof, and that neither the right of action nor the measure of damages depended upon the fact of payment. This case was relied upon by the court when it rendered judgment in Farnham v. Benedict, 107 N. Y. 159, 13 N. E. Rep. 784, where the defendant, being in possession, without title, of certain town bonds that had been fraudulently issued through his procurement, and which were void in fact although apparently valid, sold them to bona fide purchasers, and thus rendered them valid and binding upon the town so that it was compelled to pay them. It was held that he was liable to the town for the amount of the bonds, and Judge RAPALLO, speaking for the court, said that immediately on the negotiation of the bonds a cause of action accrued in favor of the town, either in the nature of an...