Ward v. City Trust Co. of New York

• Decision Date: 14 April 1908
• Citation: 84 N.E. 585,192 N.Y. 61
• Parties: WARD v. CITY TRUST CO. OF NEW YORK et al.
• Court: New York Court of Appeals Court of Appeals

192 N.Y. 61

84 N.E. 585

WARD

v.CITY TRUST CO. OF NEW YORK et al.

Court of Appeals of New York.

April 14, 1908.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Charles M. R. Ward against the City Trust Company of New York, impleded with the Hartman Manufacturing Company. From a judgment of the Appellate Division (117 App. Div. 130,102 N. Y. Supp. p. 50) affirming a judgment on the report of a referee dismissing the complaint, plaintiff appeals. Reversed, and new trial ordered.

Haight and Gray, JJ., dissenting.

Thomas Thacher, for appellant.

Morgan J. O'Brien, for respondent.

VANN, J.

In March, 1901, Frank A. Umsted, but recently a salesman in the employ of the Hartman Manufacturing Company, a Pennsylvania corporation, and William L. Kiefer, a lawyer, borrowed $125,000 of the defendant the City Trust Company, a New York corporation, in their own names, and for their own benefit. They had previously arranged to purchase the entire capital stock of the Hartman Company of the face value of $250,000 for $110,000, and they used enough of the proceeds of the loan to pay for such stock, which they pledged as collateral to their promissory note given to secure the loan. The trust company knew that the bulk of the money was to be used to pay for the stock, although it believed that the purchase price was much larger. The interest reserved was at the rate of 14 per cent. a year, and a commission of over $5,000 was paid in addition. As a condition of the loan, which was procured by misrepresentation and fraud on the part of Umsted and Kiefer, Chapman, a director, and Plummer, a representative of the trust company, were elected directors of the Hartman Company to look after the interests of the former until the loan should be paid. At the same time Umsted was elected president and Kiefer secretary and treasurer. No part of the proceeds of the loan was turned over to the Hartman Company, or used for its benefit, nor was any representation made that it was procured, or was to be used in its behalf. The period of credit was six months, and about 60 days before it expired Umsted and Kiefer applied to the trust company for another loan, which was refused, but consent was given to the payment of the note before maturity. Thereupon Umsted, on the 2d of August, 1901, falsely representing that the loan from the City Trust Company for $125,000 ‘had been made for the Hartman Company,’ procured a loan for the latter from the Hanover Bank for $200,000, which was secured by the promissory note of the Hartman Company, indorsed by Umsted and Kiefer, and the certificates of all the stock of the Hartman Company were pledged as collateral. In paying over the proceeds of that loan the Hanover Bank delivered to Umsted, at his request, to enable him to pay the loan to the trust company and redeem the certificates of stock, its check for $125,000, payable to the order of the Hartman Manufacturing Company, and placed the balance of $75,000 to the credit of that company on its books. Umsted indorsed the check in the name of the Hartman Manufacturing Company by himself as president and general manager, and delivered it to the City Trust Company in payment of the note made by himself and Kiefer. The Hartman Company received no consideration for the use made by Umsted of said check. The note as well as the certificates of stock pledged as collateral thereto were surrendered to Umsted. The money lent was out of the possession of the trust company only from March 27th until August 2d, so that the interest actually received was at the rate of more than 20 per cent. per annum. At the time of this transaction Umsted, as president of the Hartman Company, had been authorized by a resolution of the board of directors ‘to take charge of all the property and business of the company’ and to make and sign ‘all checks, notes, contracts, and other obligations of the corporation.’ After adopting said resolution the directors held no further mettings until after all rights involved in this action had become fixed and unchangeable. Umsted transacted all the business of the company. There was no by-law of the Hartman Company, nor any resolution of its board of directors, authorizing the use of its money or assets to pay other than corporate obligations, or ratifying the use made of said check. Between three and four months after the check had been so used the Hartman Company failed, and all its property, except its alleged right to recover from the City Trust Company said sum of $125,000, was sold at the instance of a reorganization committee composed of creditors, and the proceeds, amounting to $238,000, applied proportionately upon its debts, leaving still unpaid the sum of $371,140.29. The remaining claims of the various creditors were assigned to the plaintiff, who recovered judgment against the Hartman Company for the amount thereof, and an execution issued thereon was returned unsatisfied. Said judgment is wholly unpaid. Of that indebtedness the sum of $226,840.62 was in existence on the 2d of August, 1901, and prior to the date of the withdrawal from the assets of the Hartman Manufacturing Company of said sum of $125,000 used to pay the debt of Umsted and Kiefer to the City Trust Company for that amount. That withdrawal made the Hartman Company insolvent, and the object of this action was to recover from the trust company the sum thus misappropriated.

The referee before whom the action was tried, after finding the foregoing facts in substance, further found that the trust company acted in good faith, with no intent to hinder, delay, or defraud the creditors of the Hartman Company; that the form of the cashier's check was notice to the trust company that the money represented thereby was the property of the Hartman Company; that the trust company, knowing that Umsted and Kiefer owned all the capital stock of the Hartman Company, and believing that they were authorized to dispose of said check, made no inquiry as to the authority of Umsted as president and general manager to use the same in payment of the individual debt of himself and Kiefer, or as to the financial condition of the Hartman Company, or whether the effect of the withdrawal of $125,000 from its assets would make it insolvent; that if reasonable inquiry had been made it would have disclosed the said resolution of the board of directors; that no meeting of the board had since been held, and that Umsted, after the passage thereof, had had the exclusive control of the business of the company. It was also found that the law of Pennsylvania is the same as the law of New York in the respect that the amount of the assets of a corporation over and above its liabilities are in equity a trust fund held by the corporation for the benefit of creditors; that so far as the rights of creditors are concerned in this case there is no difference between the law of New York and the law of Pennsylvania; and that by the law of the latter state the directors of an insolvent corporation may authorize a sale of all or any of its assets without authority from the stockholders thereof. The referee found as conclusions of law that the trust company was a bona fide holder for value of said check for $125,000; that it obtained a good title hereto as against the Hartman Company and its creditors; and that the plaintiff is not estopped to maintain this action by the use made by the reorganization committee of the certificates of capital stock of the Hartman Company. The complaint was dismissed on the merits, with costs.

Upon appeal to the Appellate Division the judgment was affirmed by a divided vote upon the opinion of the referee, which, together with the dissenting opinion of Mr. Justice Scott, concurred in by Mr. Justice McLaughlin, may be found reported in 117 App. Div. 130,102 N. Y. Supp. 50. Reference is made to these opinions for a more detailed statement of the facts, which were fully found and clearly stated.

The main question presented for decision is whether the facts found, when all are considered together, support the conclusions of law. The form of the check in question was notice to the trust company that Umsted was using the property of the corporation of which he was president to pay the personal debt of himself and Kiefer in apparent violation of its rights. Rochester & Charlotte Turnpike Road Company v. Paviour, 164 N. Y. 281, 58 N. E. 114,52 L. R. A. 790;Gerard v. McCormick, 130 N. Y. 261, 29 N. E. 115,14 L. R. A. 234;Hathaway v. County of Delaware, 185 N. Y. 368, 372,78 N. E. 153,113 Am. St. Rep. 909. The effect of such notice was to put the trust company upon inquiry to see whether it was about to accept money from one to whom it did not belong in payment of its own claim. The presumption arising from the face of the check was that it belonged to the Hartman Company, and that its president had no right to use it to pay his personal debt. The purpose of the law in exacting inquiry under such circumstances is to see whether the apparent situation is the actual situation, or, in other words, to learn whether facts exist to rebut the presumption. The object is not to discover negative facts, or such as would not arouse suspicion, but positive facts which would allay the suspicion already aroused. If, for instance, reasonable inquiry had been made by the trust company, and the result had tended to show that the check really belonged to Umsted and Kiefer and not to the Hartman Company, or that Umsted was authorized by that company to use it as he proposed, then, even if the fact were otherwise, such inquiry would have tended to rebut the presumption of illegal use, and to protect the title of the trust company. The law goes further than this in order to promote the transfer of commercial paper, for it is settled that if no inquiry is in fact made to dispel the presumption, but reasonable inquiry would have led to the discovery of facts which would have dispelled...