Whitwell v. Warner

The opinion of the court was delivered by Redfield, J. There are some grounds, upon which the plaintiffs seek to charge the defendants, which the court have not considered sound, and which it is not deemed important to report at much length. — 443 — 1. It is claimed, that the defendants are liable for the balance, which was due from the old partnership, which was professedly merged in the corporation. If this be so, it is confessedly contrary to the expectation of all parties concerned, for many years, during which time the members of the old firm, some of whom never became members of the corporation in any other sense than by having been members of the former partnership, continued to act in the faith of the merger of all their property and liabilities in the corporation, and of the utter extinction of the partnership and the final settlement of all its concerns. This was in fact known to the plaintiffs, or might have been ascertained upon the slightest inquiry; and, in addition, there is not the most remote ground of belief, that the plaintiffs have ever acted upon the faith of any such balance against the partnership still remaining unpaid. Their whole conduct, from the first to the last, gives a positive denial to the belief in the existence of any such liability on the part of the defendants, as partners, as is now claimed. The mere fact of the plaintiffs’ taking a judgment against the corporation for this very balance is, of itself, conclusive upon this point, and, in addition to all this, the corporation, subsequent to the transfer of this balance into the new account between themselves and the plaintiffs, have made large payments, to many times the amount of that balance; and many thousand dollars, too, of the amount which the plaintiffs have received, was realized out of a mortgage, which they had upon the property originally belonging to the partnership. Under these circumstances, to suffer the plaintiffs to go back and subdivide the elements of that judgment, and thereby to revive the extinct liability of a partnership long closed, having performed its office, could only be endured upon the ground, that the transfer and absorption of this balance of the old partnership debt had been effected by fraud, or misapprehension on the part of the plaintiffs. Nothing of that kind is shown in regard to this part of the case. But on the contrary it seems to us, that to allow the plaintiffs thus to revive the liability of the partnership, after its members had so been lulled into security by the acts of the plaintiffs, would be a virtual fraud upon them. 2. The second general ground, upon which the liability of the defendants is argued, is some supposed fraud in those stockholders, — 444 — who participated in the general assignment to Warner, for the benefit, mainly, of those who made the assignment. We have no doubt of the general proposition, that the stockholders and directors of a corporation may so conduct, as to become responsible for all the debts of the corporation. They may have originally contracted debts, in the name and upon the credit of the corporation, without any purpose of payment, or without any reasonable probability, that payment could be made by the corporation; or they may have diverted all the funds of the corporation to their own use; in either case evidencing a settled purpose of defrauding the creditors. But the argument, in the present case, is put mainly upon the ground, that the defendants have taken funds of the corporation in payment of their own debts, upon which they knew the plaintiffs held a special lien for the payment of their debt. This seems to us to be putting the case upon grounds more difficult to sustain, than the main ground upon which the plaintiffs rest their claim, and one far less sustained by the proof. This view of the case rests, for its corner stone, upon a proposition, which is of itself sufficient to entitle the plaintiffs to full relief, aside from any premeditated fraud on the part of the defendants. For if the plaintiffs had any subsisting lien upon the stock and goods of the corporation, they may pursue it, into whoseever hands the property comes. And it matters not how the property is passed, whether with or without knowledge of the plaintiffs’ lien. It is not, then, important, in this view of the case, whether the defendants, in making that assignment, acted fraudulently, or not, — that is, whether they entertained any preconceived design of defeating the plaintiffs’ lien, or were ignorant of it. or believed it to be invalid in law. We need not, then, expend time upon these points. But it does not occur to us, that there is any just ground for charging the defendants, with the exception of Cummings, perhaps, with any actual or constructive fraud. As to constructive fraud, it is not competent, certainly, to predicate this of the mere fact of a stockholder’s availing himself of his superior advantages, to obtain security for debts due to himself, to the exclusion of other debtors. The stockholder and the stranger, who are both creditors of a corporation, no doubt stand in very unequal positions. But it is an inequality which the law allows, and which is understood by those — 445 — who contract with corporations, and one which will always tend, more or less, to bring in doubt the credit of such bodies. But it is a subject, with which this court have nothing to do. Some modification of the law upon this subject has been attempted, I believe,— to what purpose time must determine. We are content to leave that subject as it is. And while we would, no doubt, guard the exercise of such a privilege, in the stockholders of a corporation, with some degree of severity, we must not forget, that all just rights are entitled to a fair consideration in a court of justice. We should not, then, watch the exercise of a right with so much strictness, as to declare its mere exercise to be a constructive fraud. And as to any express fraud in the present case, there seems to us to be no proof. We have found nothing in the case, which, upon a charitable construction, should cast suspicion upon the general conduct of the stockholders, in regard to the management of the concerns of the company, or in relation to this assignment in particular, unless, perhaps, the placing too much confidence in others, — which is not a common characteristic of dishonest men. They may have trusted too implicitly to Cummings, and, so far as they did, leaned somewhat upon a broken staff But it is by no means certain, that the stockholders in fact discovered his duplicity sooner than the plaintiffs, or, as the business was conducted, that they had more opportunity of detecting it. Both, we may fairly conclude, acted in perfect good faith. The ordinary mode of investigation, made by stockholders into the concerns of a corporation, would have discovered nothing to excite suspicion of the fairness of the conduct of the agent, until the final developement in April, 1837. Being then pressed to the wall, he disclosed the contract in favor of the plaintiffs, — which had, indeed, been made known to certain of the stockholders, and its fulfilment guaranteed by them, but had purposely been kept back from the knowledge of the most responsible of the stockholders, in order to induce them to make advances and incur liabilities on behalf" of the company; one, only, of this class of the stockholders had seen the rough draft of the contemplated contract in favor of the plaintiffs ; but knowing, we may presume, that the authority of the agent did not extend to the executing of such contracts, he might not have supposed he would attempt it. — 446 — Thus this agent was in fact dealing double, both with the plaintiffs and the responsible stockholders of the company, in order to promote his own purposes. And, having said so much in favor of the good faith of the defendants, we may add, that there is not the least possible doubt of the entire good faith of the plaintiffs. They intended to be made as safe as the circumstances would permit. They were themselves in doubt, whether the general agent of such a company had authority to execute such a contract, as they required. They judged, and correctly, we think, that it required the ratification of the directors, and they required, that such ratification should be had, but were told by Cummings, that it was required to be ratified by the stockholders. This was perhaps a mere excuse for delay. But finally the guaranty of a majority of the stockholders was sent to them. This they might deem sufficient to bind the company; for some doubt was entertained by this court, whether the consent of all the stockholders was not equivalent to a vote of the corporation; Wheelock v. Moulton, 15 Vt. 519; or they mighl have supposed the personal guaranty of the stockholders a sufficient indemnity against loss, or a sufficient assurance, that this contract would be ratified by the same stockholders. 3.’We come, then, to the only ground, upon which, it seems to us, the plaintiff can expect to prevail in this suit, — that is, the agency of Cummings, and by force of the contract which he had attempted to execute. This agency of Cummings may be viewed in two lights, — first, his innate authority, resulting from his appointment and the general scope of the business, which he was intrusted to execute; — second, any ratification of the contract, either express or implied, either by the company or their directors. n 1. In regard to the innate authority of such an agent, perhaps enough has already been said. It is indeed very extensive; but, as we have before intimated, it cannot extend to the creating of a lien upon the entire property of the company. The agent might almost as well make a general assignment for the benefit of creditors, and thus have it in his power to wind up the affairs of the company at pleasure. If the dtanpany had no other board of control but this agent, then he woulcMoubtless be expected to execute such contracts, as the course ofukisiness might require in the term of time, forming the ordinary between the stated meetings of the — 447 — stockholders. And as contracts of the kind here under consideration do not unfrequently become necessary to be executed, in order to carry forward the business of the company, such an agent, having the entire control of the business of the company, might be expected to execute them, without calling a special meeting of the company. But in the present case this agent had no such universal control confided to him. The company had a board of directors, consisting of Warner, Henry Hodges and Silas H. Hodges; and this agent was performing the daily routine of the business of the company under their supervision and control. If any thing, out of the common course of this daily routine, occurred, the board of directors would be expected to be consulted. If they were not to be so consulted, it would be difficult to define their duty, or to graduate, with any degree of precision, the scale of authority between the board of directors and the general agent. We think, then, that this contract, to be binding upon the company in the first instance, and in consequence of its execution merely, should have received the approval of the board of directors in their ordinary mode of action. 2. As to any ratification of the contract by the company, or the directors, that is susceptible of being viewed in two aspects, First, it may be inquired, whether the company expressly ratified this contract of their agent. This, as a corporation, they could only do by an express vote, or by the action of some agent, appointed by vote. There is no pretence of any express vote to that effect. And although there is some testimony in the case, tending very fully to es-' tablish the point of the express consent of all the directors, still we think such was not the fact. We think the state of the correspondence, and the effort made by Cummings to keep what concerned this contract from the Hodges, and the reason which he assigned for it, namely, that he wanted their aid in other ways, and their conduct, when fully informed of this contract on the nineteenth of April, 1837, their evident surprise, must give a counterpoise to all the direct evidence upon this point. There is, indeed, evidence to show, that the directors either did know that there was such a contract, or else, which is perhaps more probable, might have known it, if they had made thorough search into the manner, in which Cummings was conducting the business. But this they did not do. Evidently they had very great confidence — 448 — both in the skill and integrity of Cummings, and equal confidence in making most exorbitant profits from the manufacturing business. The plaintiffs, too, seem to have had much the same view upon all these points. This led them all into most extravagant, one might almost say absurd, confidence, both in regard to the manner of Cummings’ management and the final solvency of the concern. There does not seem to us to be any just ground for charging either the plaintiffs or the defendants, for whose benefit the assignment was made, with any intentional dishonesty. The history of the transaction is a melancholy one, well calculated to excite painful feelings in regard to the results of trade and speculation, both in a moral and economical point of view, and also as to the seductive influences of this mode of doing the most enormous amount of business, — upon mere credit, without one shadow of capital, or real pecuniary responsibility, in the corporation through whose agency the entire business was conducted. Most of the defendants, who took any active share in conducting the business of the corporation, have become beggarly poor and fled the country; the responsible stockholders, in the most favorable view, have become embarrassed and greatly reduced in their circumstances; while the plaintiffs, who seem to have been men of some substance in the outset, after being induced by the flattery, falsehood and fair promises of this agent (who knew all the airs of honest integrity so well, that he almost imposed .upon his own credulity, by believing himself honest and well meaning, while he was in fact dragging both the plaintiffs and the stockholders into inevitable, irrevocable ruin) to make advances and incur liabilities to an enormous amount, were deprived of every cent of that security, upon which they had mainly relied, by one sweeping vote of the stockholders, by which every penny of the available property of the corporation was transferred, from what the plaintiffs esteemed their own prior claim, to the pockets of the very stockholders, — who made the assignment in payment of just debts, to be sure. And to make the picture more truly severe towards the plaintiffs, they are apprised of it as merely a necessary expedient, to prevent loss by attachments, and as intended to be only temporary ; and at the same time the strongest assurance j are given of the entire solvency of the corporation, — which was, perhaps, believed by those who made it, at the time, — for men will it > — 449 — Heve almost any absurdity, under the intoxication of business speculation. And this results in the bankruptcy of the plaintiffs on the same day; — and, as the climax of these severe dealings towards the plaintiffs, to characterize it by no harsher name, a draft for $1000, accepted by them to put themselves in funds to meet their former acceptances, with the most solemn assurances on the part of Cummings, that every cent should be remitted to them, was, after the failure, made use of to swell the general assignment, for the benefit of other creditors. It is not wonderful, that even the elastic moral sense of the agent was so shocked by this last act of baseness towards the plaintiffs, as to compel him to cry out upon himself, and to attempt to cast the fault upon others, who were to be benefited by the treachery, and who might consent to the treason, — although there certainly is no proof in the case, to show that they ever coun-selled it. All this certainly would not justify us in concluding, that there was a preconceived purpose of defrauding the plaintiffs, by the stockholders. The failure of the corporation was no doubt wholly unexpected to them. It came upon them with a shock, amounting almost to consternation. And drowning men must be expected to cling to the most forlorn hopes, and to push the most desperate expedients j and that they seem, under such circumstances, a little regardless of the rights of others ought not to strike us with surprise, perhaps; the best of men, when pressed, will do things, and especially justify things, which, when less pushed by imminent peril of their own lives and hopes, would have appeared shocking to them. But we do think, that it ought not to surprise any one, that the plaintiffs should feel, that they have been severely dealt with in this affair, and that they ought to have some redress. And we think they are entitled to some redress. It seems to us absurd to say, that, while the entire business of this company was mainly carried along by means of advances and acceptances of the plaintiffs, and much of the very wool and cloth assigned had been purchased by funds primarily or ultimately furnished by them, and when these acceptances were given, or funds furnished, in faith of a contract made by the general agent of the company, that all wool so purchased, either with funds or acceptances of the plaintiffs, should be theirs through all the processes of its manufacture, it should, nevertheless, under all — 450 — these circumstances, be in the power of the company to adopt the act of the agent in borrowing the money, or procuring the acceptances, and in purchasing wool with funds so procured, but that they could reject the condition of this agency, by which the plaintiffs were secured, and which was the only ground, upon which the plaintiffs would have advanced the funds, or made the acceptances. To hold thus seems to us contrary to reason and to the settled doctrines of the law of agency. It is no doubt true, as we have before shown, that the agent had no innate authority to give a general mortgage upon the personal property of the company, to secure money borrowed; and if that were done by the directors, it could not avail the plaintiffs, as against other creditors, until a delivery of the property to the plaintiffs, or their agents; and this possession, thus acquired by the delivery, must be kept up by the plaintiffs. Still, if the plaintiffs furnished funds to the agent upon certain conditions, and the company claim to retain the funds, they thereby ratify the act of the agent in solido. They cannot subdivide it. They must either adopt it, or reject it, in toto.. It is not important in the present case to inquire, whether the act of the stockholders, in assigning property purchased by funds thus obtained by the agent, might not be considered a ratification of the contract made with the plaintiffs, to the full extent, — especially as this was done with a full knowledge of all the facts. This is not important, inasmuch as there was no change of possession made and kept up, which would enable the plaintiffs to maintain a lien upon property not purchased with their funds. But as to property which was purchased with their own funds, the title would never so vest in the company, as to defeat their lien for the price. West v. Bolton, 4 Vt. 558. Paris v. Vail, 18 Vt. 277. We are, then, only to consider the plaintiffs’ claim to a lien upon wool, yarn, or cloth, or other material, included in the assignment, which was purchased or paid for by funds or acceptances of the plaintiffs,— either in whole, or in part, to that extent. To this extent we think the plaintiffs are to be allowed to maintain their lien, upon two grounds; — First, that the company, by accepting of and appropriating the avails of the contract made by their agent with the plaintiffs, after they became aware of all the facts, have thereby — 451 — ratified the act of the agent in borrowing and using the money in their business; — Second, that if this were not to be considered a ratification of. the act of the agent, then the application of the funds by the agent to the business of the company was an unauthorized act, and, as such, a misapplication of the plaintiffs’ funds; and, under such circumstances, they may reclaim them, into whosesoever hands they have come. 1. The principle, that you cannot adopt the act of one professing to act as your agent, without taking it with all its conditions, cum onere, as the phrase is, is no new doctrine in the law of agency. It is as old as the common law, — not to go farther. It is found laid down in most of the elementary treatises upon the subject. It is the only rule upon the subject, which is consonant to reason. See Story on Agency, 245, § 250, citing Smith on Mercantile Law, 60; Wilson v. Poulter, 2 Str. 259; Billon v. Hyde, 2 Atk. 128; Smith v. Hodson, 4 T. R. 211; Hovill v. Park, 7 East 164; Cornwall v. Wilson, 1 Ves. 509; Ferguson v. Carrington, 9 B. & C. 59. 2. In regard to the other view of the case, which is substantially the ground upon which the argument is placed by the defendants, there is as little doubt, in my judgment. Suppose that Cummings did exceed his authority, in borrowing this money upon the security demanded, and that in that act he is to be treated as the plaintiffs’ agent. He is still but a special agent, and can bind them only to the extent of his express authority. He is entrusted with their funds, by the plaintiffs, with express directions not to put them to the company’s use, unless they give the plaintiffs such security, as that specified in. the contract. But he nevertheless does do it, contrary to his directions. This is the common case of misapplication of funds by the agent. In all such cases, the principal may have redress, by pursuing the funds into whosesoever hands, or whatsoever shape, they may have come. Mr. Justice Story, in his treatise on agency, page 225, says, “It will make no difference in law, as, indeed, it does not in reason, into whatever form, different from the original, the change may have been made, — whether it be into promissory notes, or other securities, or into merchandize, or into stock.” In all these cases, and a. great variety of others, the principal may reclaim the property. — 452 — To apply this to the present case. Had the money been on hand, borrowed upon a contract like the one given to the plaintiffs, the company, by applying the money to the use of the corporation in any way, would confirm the contract of their agent and make the security good. If they elected to repudiate the contract, the money became the property of the plaintiffs, and they might pursue it, in specie, — and so, also, whatever was purchased with it. If the product of the money had become mixed with the other goods of the company, it might be more difficult to identify the plaintiffs’ property, — but none the less their right to make the attempt to pursue it, so far as they can trace it; — “ For,” says Judge Story, ibidem, “ the product of the substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such; and the right only ceases, when the means of ascertainment fail.” And the fallacy in the defendants’ application of the rule of law, for which they contend, to the case, seems to lie in this, — that they will have it, that all the acts of their agent, which were beneficial to the company, are to be regarded as binding upon the plaintiffs, but that those, which exceeded the strict limits of his authority, although forming the consideration and motive for the other acts, may nevertheless be rejected. This is a sophism, which could hardly escape detection in any but interested minds. But, in rejecting the contract insólido, we only leave the defendants where they would have been, if the plaintiffs had never made any advances to their agent. And as it is morally certain, that they never would have made them, except upon the expectation of the security specified in the agent’s contract, and as that has been rejected by the company, few unsophistocated minds could fail to see and appreciate the justice of the conclusion, to which we come. It is certainly as favorable, as the defendants have any right to ask. The only doubt, which I have felt in regard to the subject, is, whether it is not more so. Had there been any valid change of possession, I should have felt, that the conduct of the company was fairly susceptible of such a construction, as to make it a confirmation of the act of the agent, to the full extent. But of that some doubt might exist. For the company intended, no doubt, to repudiate the act of the agent. It is, then, more consistent with the intention of the defendants, and, perhaps, with the absolute justice of the case, to per» — 453 — mit the plaintiffs, as far as practicable, to reclaim their own property. The reason and justice as well as the law of the case, to that extent, must be apparent to all, one would suppose, — even to the defendants themselves. It is, too, in analogy to the rule, which prevailed in the civil law, as to all sales. It is also in analogy to that rule, which prevails in this state as to conditional sales. Indeed, it is, in substance, the very case of a conditional sale. For it cannot be denied, that the case of the plaintiffs is as favorable, as if they had, instead of furnishing funds to buy wool, furnished the wool itself, upon condition that it was to remain theirs, during all the processes of manufacture, until paid for. That would then be the very case of Paris v. Vail, 18 Vt. 277, and Smith v. Atkins, 18 Vt. 461, and many others, which have been decided by this court. It is clearly that case, or else the funds have been misapplied, and the plaintiffs may recapture them. And, in which ever point of light it is viewed, it seems to us too clear from doubt to require farther illustration. Decree of the chancellor reversed, and the following mandate sent to the court of chancery. It is ordered and adjudged, that the decree of the chancellor be affirmed as to Atherton and Fullerton, with additional costs in this court, and reversed as to all other defendants, — the case to be remanded to the chancellor, with instructions to make those defendants, who participated in making the assignment, or who were among the preferred creditors, or who were sureties for the payment of debts, which were among the preferred debts, or who were in any respect, directly, or indirectly, benefited by the assignment, or who have in any way upheld the assignment, liable to an account, which shall be taken in proper form, of all wool, or cloth, or any of the product of wool in the process of manufacture, which wool, or cloth, or other product of wool, was included in said assignment, and which was purchased, or paid for, with funds furnished by the orators, either primarily, or ultimately, under the contract between Whitwell, Bond & Co. and the Green Mountain Woolen Manufacturing Company, on file in this case, whether in whole, or in part, to that extent, to be included in the account; and the orators to have a decree for all such sums, as may have been, or might, or — 454 — ought to have been, received by means of the disposition of such wool, or cloth, or the product of wool, so purchased or paid for by their funds, or for the restitution of the same, as to the chancellor shall seem just and equitable, against all the defendants retained, or such number of them as the chancellor may order and decree; and to make such decree in regard to costs, as he may deem just and equitable; — the object of the account being, to show, as far as practicable, the avails of the complainants’ funds, which were on hand at the time of the assignment, and to give them restitution of the same, or the avails thereof, or compensation against such defendants, as, in conformity to the above rule, and the equity of the case, ought to be made liable, — having regard to the equities of the complainants against all the defendants jointly, or any number of them, and to the equities subsisting, among the defendants themselves, so far as that can be regarded, without depriving the complainants of their just and reasonable security for any sum, which, under the foregoing order, they may ultimately recover.