Gause v. Commonwealth Trust Co.

Leventritt, J. This case presents for consideration four demurrers to as many separate defenses in the answer, and a fifth demurrer to a counterclaim. The complaint alleges substantially the following’ facts: On August 28, 1902, the plaintiff, who was then the owner of certain stocks and bonds of the United States Shipbuilding Oompany entered into an agreement in writing with the defendant whereby he agreed to and did put the stocks and bonds at the disposal of the defendant, giving it the exclusive right to sell them according to its judgment and discretion. The defendant agreed to undertake the sale, covenanting that it would be accomplished on or before August 25, 1903, and that the plaintiff would receive by that date for the stocks and bonds a stated price which after deducting ordinary brokerage expenses would amount to $404,630. The plaintiff at once placed the securities at the disposal of the defendant and refrained either personally or through agents from making any effort to sell them. The securities have — 49 — always been and now are at the defendant’s disposal, held at its request and subject to its order. The plaintiff is ready and willing to turn them over to the defendant and has made repeated tender. August 25, 1903, having come to pass, prior to the commencement of this action, without payment by the defendant, the plaintiff lays his damage in the sum of $404,630, for which he prays recovery. To this complaint the defendant interposes five separate defenses and a counterclaim. The plaintiff demurs to all with the exception of the defense pleading lack of authority in those assuming to execute the contract on behalf of the defendant. Before taking up the defenses and the counterclaim it is necessary briefly to examine the complaint, as the defendant invokes the rule that a demurrer searches the record to condemn the first defective pleading. Baxter v. McDonnell, 154 N. Y. 432, 436. The defect charged is that the complaint in assigning the breach does not negative the covenant declared on. As I read the complaint, however, the defect is nonexistent. The covenant is not a mere undertaking to sell certain securities and that a sale would be accomplished by a certain time, netting a certain amount, in which event an allegation of breach that this certain amount had not been paid would not follow or be governed by the covenant. Brown v. Stebbins, 4 Hill, 154. The covenant, as I take it, is that on or before a certain date the plaintiff should receive a certain sum of money, and the assigned breach is that that date has passed and the money has not been paid. I am of the opinion that the complaint states a cause of action. The first defense is that the agreement or contract sued on was ultra vires; that the defendant, a domestic corporation, organized under the Banking Law, being chapter 37 of the General Laws, had no right or power to enter into the contract set out in the complaint and that any acts done or. benefits claimed by the plaintiff are ineffectual and not binding on the defendant. To this defense the plaintiff demurs for insufficiency. I am of the opinion that the demurrer is well taken. The cautiously pleaded contract does not, so far as disclosed,' — 50 — appear to be illegal, immoral or against public policy, and though it be ultra vires in the strict sense of that term, that is to say beyond, the enumerated or reasonably implied powers of the corporation, the latter is estopped from pleading the defense because the contract has been fully executed by the plaintiff: Whatever may be the rule in other jurisdictions, it must he taken as settled in this State through a long line of decisions from Bissell v. M. S. & N. I. R. R. Co’s., 22 N. Y. 258, to Vought v. Eastern Building & Loan Assn. of Syracuse, 172 id. 508, that “ while a contract remains unexecuted upon both sides, a corporation is not estopped to say in its defense that it had not the power to'make the contract sought tó be enforced, yet when it becomes executed by the other party,, it is estopped from asserting its own wrong, and cannot be excused from payment upon the plea that the contract was beyond its power.” 172 N. Y. 518. “ It is now very well settled that a corporation cannot avail itself of the defense of ultra vires when the contract has been, in good faith, fully performed by the other party, and the corporation has had the full benefit of the performance and of the contract.” Whitney Arms Co. v. Barlow, 63 N. Y. 62, 70. The contract which the plaintiff has pleaded he certainly has fully executed. What the defendant sought to obtain under the contract it has secured. Whether or not it availecl itself of its privilege is, on the facts, no concern of the plaintiff. The plaintiff performed. He placed the stocks and bonds at the entire disposal of the defendant; he exercised no acts of ownership; he was ready to turn them over to the defendant on demand pursuant to his contract. He deprived himself of any opportunity to make other disposition of his holdings during the term. Even though the securities still remain in his hands as a result of the defendant’s default, yet nevertheless the contract in relation to these securities has been as fully executed by the plaintiff as it was in his power to do. Being fully executed, it becomes immaterial whether the contract was ultra vires or not under the authorities cited, unless in addition to being ultra vires, it was either mala in — 51 — sc, mala, prohibita or against declared public policy. It needs no argument to show that it was not mala in se; the contract involves no moral turpitude. Hor does the contract as pleaded violate public policy. It cannot be said to be a wagering contract which a corporation having banking or trust company powers should not be permitted in law to make. Is it mala prohibita? It is not mala prohibita in the sense now under discussion under section 10 of the General Corporation Law which declares that “ no corporation shall possess or exercise any corporate powers not given by law.” That is a mere general provision relating to ultra vires in its restricted — and correct — sense, violations of which may give the State a right to proceed against the corporation, or the stockholders and corporators the right to restrain the application of corporate funds to foreign purposes. It has no bearing on a suit brought by a private individual on an executed contract. But “ a corporation cannot enter into or bind itself by a contract which is. expressly prohibited by its charter or by statute, and in the application of this principle it is immaterial that the contract, except for the prohibition, would be lawful. Ho one is permitted to justify an act which the legislature within its constitutional power has declared shall not be performed.” Bath Gas Light Co. v. Claffy, 151 N. Y. 24, 30, 31. Is the contract mala prohibita in this sense? The defendant invokes section 159 of the Banking Law, supra, which provides as follows: “The capital of every such corporation shall be invested in bonds and mortgages on unencumbered real property in this State, worth at least double the amount loaned thereon, or in the stocks or bonds of this State or of the United States, or of any county or incorporated city of this State duly authorized by law to be issued. The moneys received by any such corporation in trust may be invested in its discretion in the securities of the same kind in which its capital is required to be invested, or in the stocks or bonds of any State of the United States, or in such real or personal securities as it may deem proper. No such corporation shall hold stock in any private corporation to an amount in excess of ten per cent of the capital of the corporation holding such stock.” The italicized portion is — 52 — the part of the statute particularly invoked by the defendant. I do not think this section makes the contract mala prohibita in the sense now under discussion. Its violation may give the same rights as violations under section 10 of the General Corporation Law, supra, but I do not take it to be that specific prohibition which renders a contract, executory or executed, unenforceable. See Taylor Priv. Corp. (5th ed.), § 301. But beyond this I am inclined to agree with the argument of the counsel for the plaintiff that nothing in the contract shows that the securities were intended by the parties to constitute part of the capital of the defendant, or that the defendant was intending, or that the plaintiff knew it was intending, to invest any trust funds in the stock of the United States Shipbuilding Company. Eurther it nowhere appears what the capital of the defendant is, or what the plaintiff knew about it.- On the pleaded facts I am unable to say that the contract was in violation of any such specific r. Atutory prohibition under the authorities, or that the plaintiff was properly chargeable with the knowledge of any such specific vice or defect in the contract. The demurrer to thi; defense should be sustained. The second defense which pleads lack of authority in those who engaged to execute the contract in ques+ton on behalf of the defendant is not attacked. The third and fourth defenses, to each of which demurrers are interposed, may be conveniently considered together. The gist of these defenses is that the defendant denies that the plaintiff was the lawful owner of the securities set out in the complaint by averring that they were fraudulently received by him and that he did not have and could not make a marketable title. Substantially these facts are set forth: The plaintiff was a director and a large or controlling stockholder in a Delaware corporation, the Harlan and Hollingsworth Company, and had full knowledge of its business, its contracts, its physical and financial condition. The entire stock and property of this company were sold to the United States Shipbuilding Company for a consideration consisting partly of — 53 — cash and partly of securities of the shipbuilding company. The amount of cash and securities received by the plaintiff is set out and it is then alleged that the plaintiff induced the payment of the cash and the issuance of the securities by false or fraudulent representations made or authorized by him to be made to the shipbuilding company. The alleged fraudulent representations are then set forth in detail and it is thereupon averred that the securities “ were fraudulently received by the plaintiff and he did not have and could not make a good or marketable title thereto.” The fourth separate defense alleges in addition that when the sale of the capital stock and property of the Harlan and Hollingsworth Company was made to the shipbuilding company, it was covenanted by the plaintiff that the former company should be free from debt, except current liabilities, and that its property should be free of liens except a certain stated amount which was to be paid out of surplus earnings. It is alleged that when the sale was consummated the company was not free from debt, that the stated liens had not been paid out of surplus earnings, there being none, and that by reason of the failure of the plaintiff to keep his covenants he did not have and could not make a good and marketable title to the securities he placed at the disposal of the defendant. It is difficult to see how the matter pleaded in either of these defenses is sufficient in law. So far as the sale of the Harlan and Hollingsworth stock and property was concerned, no contract relation existed between the plaintiff and the defendant. So far as alleged in these defenses no false representations Avere made to it; no covenants were entered into with it. The defenses necessarily rest solely on the allegations that by reason of the premises the plaintiff’s title to the securities set forth in the complaint was fraudulent, unmarketable and not good. But this is a mere conclusion of law and on the facts pleaded constitutes no defense. The plaintiff’s stocks, Avhether obtained fraudulently or not, were marketable. His title may have been a defeasible title, that is the shipbuilding company might have rescinded; but until that had been — 54 — done the plaintiff’s title was good so- far as the defendant was concerned. His title to the securities was not void but merely voidable at the election of the shipbuilding company. The defendant fails to show title in a third person or ouster during the period that it was called upon to perform its contract, or that it has been compelled to pay the true owner the value of the securities. The defenses rest solely on a contingent defeasibility of title which has not become actual. Under the authorities the matter pleaded does not constitute a, defense (McGiffin v. Baird, 62 N. Y. 329; O’Brien v. Jones, 91 id. 193; Akin v. Meeker, 78 Hun, 387) and each of the demurrers must be sustained. The fifth separate defense, repeating the allegations of the two previous defenses, alleges that when the contract in suit was executed the plaintiff represented that the preferred and common stocks of the shipbuilding company were full paid and nonassessable, when in fact and to his knowledge, on account of the misrepresentations and unkept covenants set forth in the prior defenses, the stocks were liable to further assessments in the hands of the holders. Waiving the defect in the plea of the false representations (Lefler v. Field, 52 N. Y. 621), I am of the opinion that it does not appear that the representation was false. The allegation that the stock is not full paid is not made as an allegation of fact but as a conclusion of law, deducible from the facts set out in the third and fourth defenses. It is averred that the stocks were not full paid and that the holder “was liable for further assessments * * * by reason of the allegations in the foregoing Third and Fourth defenses of the defendant.” Obviously if there is nothing in these defenses to show the representation false, i. e., that the stocks were not full paid, the fifth defense is bad. The third and fourth defenses state that the United States Shipbuilding Company is a Hew Jersey corporation but nowhere is the Hew Jersey statute set forth under which the stocks in question would be declared to be not fully paid and, therefore, assessable. Whether or not the stocks are subject to further assessment is determinable by the laws of the domicile of the corporation. These laws do not appear. On the trial an offer of proof of — 55 — the laws would be properly met by the objection that they had not been pleaded and the proof would, in the absence of amendment, have to be excluded. The point being now raised on demurrer must be held equally good. I am, therefore, of the opinion that this demurrer should be likewise sustained. I come now to the counterclaim. Here the defendant alleges that the plaintiff was a large or controlling stockholder and a director in the Harlan and Hollingsworth Company, with full knowledge of its business, property and financial condition. On June 17, 1902, the plaintiff, with the other stockholders of the Harlan and Hollingsworth Company, entered into an agreement “to sell to one Lewis Nixon or to one John W. Young or to some other person or to some firm or corporation ” all the property and capital stock of the Harlan and Hollingsworth Company for the consideration of $800,000 cash, $500,000 of the bonds, and $400,000 each of the preferred and common stocks of the United States Shipbuilding Company, the intention being to convey all the said property and capital stock to the United States Shipbuilding Company. Pursuant to that agreement, the property and capital stock of the Harlan and Hollingsworth Company were conveyed and assigned to the United States Shipbuilding Company, and the consideration paid to the stockholders of the Harlan and Hollingsworth Company, of which consideration the plaintiff received in cash $384,000 and $240,000 of the bonds, and $191,600 each of the preferred and common stock?, of the United States Shipbuilding Company. " In order to secure the payment of said sum of eight hundred thousand dollars to the stockholders of the Harlan and Hollingsworth. Company, the plaintiff made or authorized, or caused to he made to the defendant false representations ” as to the Harlan and Hollingsworth Company, being the same representations as are recited in the third separate defense. These representations were known by the plaintiff to be false, and made with intent to influence the defendant. The defendant believing them to be true and relying thereon “ and for the purpose of assisting the said Lewis Nixon or John W. Young and the said — 56 — United States Shipbuilding Company to carry out the agreement * * * paid to the plaintiff ” and the other stockholders of the Harlan and Hollingsworth Company “ the sum of eight hundred thousand dollars * * * which said sum * * * by reason of the false representations of the plaintiff hereinbefore recited has been wholly lost to the defendant:” The plaintiff claims that the counterclaim fails to state a cause of action and that even if it does, it is not within section 501 of the Code of Civil Procedure. While I am of the opinion that the latter objection is unsound (Siebrecht v. Siegel-Cooper Co., 38 App. Div. 549; Rothschild v. Mack, 115 N. Y. 1), I must hold that in its present form the counterclaim fails to state a cause of action. Eeduced to lowest terms the defendant alleges a consummated contract between the plaintiff and others and Hixon or others, by which the Harlan and Hollingsworth properties were to be sold. In order to induce the defendant to advance the cash part of the consideration for the plaintiff’s contract with Hixon or others, the plaintiff made false representations to the defendant which, relying thereon, paid out the cash to assist Hixon, or the others, with the result that the money was “ wholly lost.” The vice here is that it does not appear how the money was wholly lost. The plaintiff made no contract with the defendant.. The latter’s claim is purely for a tort. Being an action for tort—for deceit to be more specific—there must be facts from which the reasonable inference is deducible that the $800',000 was wholly lost to the defendant. Hothing in the facts shows this loss. The defendant may have ample security from Hixon or the others. The contract which is made to assist Hixon or the others may be still in force. The mere fact that advances were made to a third party on the plaintiff’s false representations does not per se establish loss in any amount to the defendant. What was the undertaking of the third party in return for the advances made to him? Did he not obligate himself to malee repayment to the defendant? If he did, has the debt matured, or has the security proved inadequate? What is — 57 — there on the face of the answer to show loss except the statement of a legal conclusion? A different question would be presented had there been a contract relation between the parties to this suit. But the defendant’s cause of action sounds solely in tort. While it may waive the tort and sue in assumpsit so as to make this a pleadable counterclaim, yet the foundation of its action against the plaintiff remains the deceit, and áb far as that cause of action is concerned, the defendant fails to show by proper facts that it has sustained damage or injury. I am, therefore, of the opinion that each demurrer is well taken, and that each should be sustained. Leave will be given to plead over on payment of costs. Demurrers sustained, leave to plead over on payment of costs.