A. C. Nellis Co. v. Nellis

Learned, P. J. This is an appeal by plaintiff from a judgment dismissing the complaint before the conclusion of the plaintiff’s testimony. The plaintiff is a corporation, under the act of 1848, for carrying on the seed business; capital, $50,000, divided into 2,000 shares, $25 each. The defendant originally had 1,200 shares. The buildings were destroyed by fire in June, 1886, and about $23,000 was received in cash from the insurance before the annual meeting in July, 1886. There was evidence that prior to this meeting the defendant had agreed to make one Howland and one Dunning trustees, and to make Howland treasurer, ata salary of $7,000; that Howland was to lend money to defendant, “and fix it in such a way that it .would not be visible on the books, and still appear to be all legal. ” At this meeting defendant stated that he had been obliged to raise money, and had sold some stock to Howland and Dunning, on condition that they should be made trustees. This was done. The business was moved to New York, and from that time defendant was the active manager, or, as the trustees, said, “he was the company in effect.” At a meeting of the trustees in New York, July 23, 1886, defendant was president, and was elected president; Howland, treasurer. It was voted: “There being a larger cash balance in the bank than ■will be required to be used fora long time, resolved that the treasurer be authorized to loan such surplus as in his judgment is to the advantage of the company, taking good and sufficient security for the amount loaned.” How-land, as treasurer, gave defendant checks of the company as. follows: July 24tb, $2,000; July 28th, $1,000; August 4th, $3,000; August 19th, $1,150. Theseehecks weredrawn lo order of cash. Thestub was marked, “Onaecount of loan;” the name of the borrower not given. Onthe books the amounts are' charged to “cash for bills receivable;” for whom is not stated. July 24, 1886, defendant made his note to plaintiff’s order for $6,000, stating that there was deposited as collateral 1,000 shares of the stock of the company. August 19, 1886, he. gave another similar note, for $1,150, reciting the deposit as collateral of 200 shares of the same. This is all the stock defendant had ever held. There are other circumstances tending to characterize the •transactions as fraudulent. This pretended loan to defendant was plainly not authorized by the vote of the board. This was not a loan of good and sufficient security, and defendant must have known this, as is evidenced by the concealment of the transaction and other proof. In April, 1889, some of the stockholders, having heard of these transactions, had an interview with ■defendant, in which he admitted the transactions, and produced the notes from an iron box in the safe, which was locked, and to which he only had a key. In June, 1889, a meeting of the trustees was held, at which defendant and Howland were present. It was “resolved, that the treasurer of this ■company be directed to call the loan made to A. C. Nellis, and solicit cash offers for the hypothecated stock, and report to the next meeting.” Pursuant .thereto the stock was sold at auction, and brought about $520, which went into the treasury. This action is brought to recover the money received by ■defendant, on the ground that it was unlawfully converted. The learned justice dismissed the complaint on the ground that by foreclosing and selling [547] the hypothecated stock the plaintiff had satisfied the loan, and could not now claim that the transaction was illegal. The defendant -claims, as we understand, that, if the plaintiff would recover against the defendant for the wrongful taking of its money, it must first surrender to him the security which he gave for the money thus wrongfully taken; that when one under the pretense of borrowing obtains by fraud money from another, and pledges security therefor, the lender cannot keep the security and enforce it and recover for the fraud. We do not know whether the defendant would insist that, if no security had been given, and if he had afterwards made a payment on his note, the reception of the money so paid would have prevented a recovery for the fraud. If a thief steals money, and afterwards returns a part, does the acceptance of that part prevent a suit for the conversion? There can be little doubt that this money was wrongfully taken. The statute forbids a loan to a stockholder. Section 14, c. 40, Laws 1848. The fact that there is by that section a special liability of the officers to creditors does not take away the prohibition. And the facts •of this case are sufficient to satisfy a jury that the transaction was a'fraudulent conversion. Indeed, this was not denied in the nonsuit. It is not disputed that the -trustees who voted at the meeting of June, 1889, knew then •of the original transaction, and knew that the stock was by defendant attached to his -notes as collateral thereto; and the question is whether selling that stock estops the company from treating defendant’s acts as a conversion. It is plain that a board of trustees cannot ratify an act which they could not lawfully do in the first instance. The statute says: “Ho loan of money shall be made by any such company to any stockholder therein.” The principal object of that provision is to prevent a reducing of the capital under cover of loans to stockholders. It is intended for the protection of creditors. How, if Howland, the treasurer, was forbidden to make these loans to defendant, so were the trustees. But that which they are by the statute forbidden to do, they cannot ratify after it has been done. If any authority is needed for this, see Peterson v. Mayor, 17 N. Y. 449; Brady v. Mayor, 20 N. Y. 312. Whether, under the decision in Billings v. Trask, 30 Hun, 315, this transaction with defendant was a loan, so that the officers would be liable to creditors, we need not inquire. In that ease there was plainly no loan. But the defendant urges that the plaintiff, by selling the stock, has ratified the contract, in spite of the statutory prohibition. He cites the familiar doctrine stated, with numerous authorities, in Baird v. Mayor, etc., 96 N. Y., at 598. “The law not only requires a disaffirmance of the contract at the earliest practical moment after the discovery of the cheat, but a return of all that has been received under it, and a restoration of the other party to the condition in which he stood before the contract was made. To retain any part of that which has been received under the contract is incompatible with its rescission. ” This doctrine was there applied to executory contracts for the sale of personal property, and the question related to the rescission of the contract, not to a case where the transaction was the fraudulent obtaining of property from the plaintiff. The defendant here took plaintiff’s money. Whether he took it lawfully or unlawfully, in either case it was his duty to repay it; and it was right for him to secure that repayment, whether he was a mere borrower or a fraudulent converter of plaintiff’s property. Perhaps the obligation was even stronger in the latter case. Why, then, should not the plaintiff avail itself of these securities, whatever was the nature of the transaction? It is true, as held in Terry v. Munger, 121 N. Y. 161, 24 N. E. Rep. 272, that where personal property has been converted, if the owner sues for the value on an implied contract to pay for the goods and recover judgment, he treats the title as having passed to the defendants, and therefore he cannot, in another action, recover damages for the conversion. The taking of money is not entirely analogous with the taking of chattels. There was no specific money taken in [548] this case; and no question could arise as to the title to specific property. Even, if plaintiff had recovered on defendant’s notes, it could not be considered, as in the case referred to, “as having in effect sold this very property;” that is to say, a recovery on the notes would not, in effect, be a sale of the money taken by defendant. It would be a decision that the money had been either borrowed or unlawfully taken. But, whatever might be the effect of a judgment upon the notes, or even of a suit commenced thereon, (Conrow v. Little, 115 N. Y. 387, 22 N. E. Rep. 346,) neither exists in this case. The plaintiff has only enforced these securities in order to collect what the defendant ought to pay it,—what lie ought to pay the plaintiff if he legally borrowed the money, and what he ought to pay it if he unlawfully took it. Let us suppose that defendant had taken an amount of cash in bills from the drawer of the company, and had left in place thereof certain securities. Might not plaintiff have sold those securities, and then sued defendant in tort to recover the balance? And might it not have done this if he had pinned his promissory note to such securities? We see no injustice in the view we have taken. The defendant-has had the plaintiff’s money, and ought to restore it. It seems to us that there was evidence on which it might be found that he took it unlawfully. The sale of his securities has in no way injured him, and has in no way affected his position towards the plaintiff. So far as the avails have gone, his liability is reduced. His unlawful act, however, remains, and for it he should answer. The remedy which the plaintiff took in selling this stock is not inconsistent with the position that he unlawfully and fraudulently took its money. There is no election of a remedy inconsistent with his action, unless it be held that one who takes money unlawfully cannot give security for its return. Judgment reversed, new trial granted, costs to abide event.