Northrop v. Bushnell

Foster, J.' The plaintiff is the assignee and trustee of the i State Fire Insurance Company, now insolvent, the estate of' which is in settlement in the court of probate for the district of New Haven, under our statutes in such case provided. From the finding in the court below it appears that on or ab.out the 20tli of Jannary, 1859, the defendant subscribed for ten shares of the capital stock of said company, and gave his note for the amount, $1,000, being the note described, in the declaration, which was dated back to December 31st, 1858. Payments to the amount of $695 are acknowledged to have been made on this note, and this suit is brought, to recover the balance. The defence is rested mainly on two grounds: first, that fraud and false representations as to the condition of the company and the value of the stock induced the defendant to subscribe, and to give this note, but no obligation was imposed, the stock being worthless, and the note wholly without consideration. Second, that prior to the appointment of the plaintiff as trustee of said company, the defendant compromised, settled, and paid all claims of said company against him, as set forth in the declaration. The history of this company, so far as it is detailed in •’ the record before us, is anything but creditable to those who controlled its affairs. It was incorporated with a capital of $150,000, by a resolution of the General Assembly passed in 1855, conferring the usual powers and privileges, with the provisions usually incident to such acts of incorporation. How it affected its organization does not distinctly appear, but it seems that it must have been in some mode not pointed out by its charter. Nearly fifty thousand dollars—$17,500—of its capital stock were made up of indorsed notes, the makers and indorsers of which could not always be found, and if found were not worth finding—it was worthless paper. The remaining $100,000 of the capital stock were made up of notes, purporting to be secured by mortgages on real estate in the Adirondacks, and other romantic regions in the state of New York. These notes proved to be worse than simply worthless, for the foreclosure sales of the real estate fell — 509 — short of paying the costs and expenses incurred in the legal proceedings. In 1857 the capital stock of the company was increased to $200,000. The $50,000 required to make up this amount was made a preferred stock. Of this the defendant took $2,000, and gave his note with security therefor, renewing it from time to time till January, 1861. In 1859 the certificates for the $17,500 of the stock for which indorsed notes had been given were cancelled, and the stock re-issued, and it was for ten shares of this stock for which the defendant subscribed, and gave the note now in suit. We think the strictures of the defendant’s counsel upon the operations of this company, and upon its officers who held it out to the public as having a fully paid-up capital of $200,-000, well secured, and most of it loaned on real estate security of more than double the value of the amount secured, severe as those strictures were, are fully deserved. That the originators and prime managers of this speculation, for it was nothing else, were in an adjacent state, does indeed appear; but still it is a reproach to our community, a stain upon the character of our state, that such things should be. Soon after the defendant made his subscription to these ten shares of stock, and gave the note now in question, to wit, on the 2d of February, 1859, he was elected a director of the company. The record states this to have been done without his knowledge or consent. That it was so done is a fact, so far as we can discover, of no legal importance or significance. Neither previous knowledge nor previous consent was necessary to the validity of the appointment. What part he took, or whether he took any, in the direction of the company, the record does not disclose. It appears, however, that in February, 1860, he was re-elected a director, and no mention is made of any subsequent election. Early in 1861 the company was in trouble on account of losses; they issued no new policies after May 27th of that year, and for aught that appears the defendant was a member of the last board of directors ever elected. At all events he must be considered as chargeable with the duties and responsibilities of a director for two years, as his election and re-election cover that period of time. — 510 — In view of all these facts, shall false representations as to the condition of this company, and the value of the stock subscribed for by this defendant in January, 1859, for which this note was given, now avail him as a defence to this- action?' We say no, decidedly. We certainly are not disposed to enforce a contract obtained by fraud and falsehood; to hold a party to the payment of a note so procured, for a worthless consideration; but, as we regard this case, it would be a fraud on the creditors of this company, a fraud on the public, to permit such a defence to be successful. This defendant had some means of ascertaining the condition of this company when he became a subscriber to its preferred stock in 1857. In January, 1859, he subscribed for ten shares, parcel of the $■47,500 oi the original capital stock, which had been taken by men of straw, and palmed off upon the public as solid capital. The original certificates of this stock were then cancelled, and the stock re-issued. Soon after the defendant became a director of the company. Then, •if never before, he had abundant means of ascertaining the real condition of the company. Had he done so, and learned, what his counsel now asserts to be true, that there was no soundness in it, his course would have been a plain and easy one. He should have promptly resigned his office of director, stigmatized the fraud practised on him as it deserved, repudiated the contract into which he had been entrapped, tendered back his certificate of stock, and demanded his note and the securities pledged for its payment. Had the company refused to comply with this demand, and shown the boldness, not to say the impudence, to sue his note, we think his defence would have been most ample. Instead of this course, the defendant allowed his name to go before the public as one of the directors of this company, and so to continue for two years or more. Meantimé the company issued numerous policies to individuals, who paid their money, trusting to the ability of the company to indemnify them to the amount paid for in case of loss ; the name of the defendant as a director being, not improbably, one of the prominent causes of obtaining for the company the public trust and confidence. „ • — 511 — It is too late now to make this defence. If the defendant neglected to make any examination into the affairs of this company, and knew nothing of its condition, after some four years of opportunity to do so, and after being for two years a director of the company, it is but just, under the circumstances, that he should suffer the consequences of that neglect. The question is not now between him and the company alone, it is between him and the creditors of the company, represented here by the plaintiff as trustee. However guilty the company may be, these creditors are innocent. They trusted the company, reposed faith in it, and were warranted in doing so, for there was the name of- the defendant as a director, and they might have taken that as a guarantee of its responsibility and integrity. The plainest principles of justice and sound policy forbid the defendant from setting up, to defeat this action, the fraud practised on him which he could easily have found out and exposed years ago, and so have saved these creditors from becoming victims of a fraud perpetrated, in part at least, under the sanction of his name. It certainly does not appear, nor have we any idea, that the defendant was knowingly a party to any fraud practised by this company. We think it very clear that he was not. Still, it is better that h,e should bear the consequences of his own inattention or negligence, which he might have averted or remedied, rather than impose those consequences on others, fully as innocent as himself, who were powerless either to avert or remedy them. These creditors must still he sufferers, for it may safely be taken for granted that this company will not have the means to pay its debts, while the defendant is merely held to pay an obligation voluntarily assumed. The remaining ground of defence we regard also as insufficient. ’ It appears that the defendant had from time to time made payments on this note, which, with a payment made in September, 1861, amounted to the sum of $695. The secretary of the company then agreed that said payments should he a discharge of the defendant’s liability, and this action of the secretary was reported to and approved by the directors of the company. — 512 — That payment of part of a debt is no consideration for the discharge of the whole debt, is well established law; bnt where there is a controversy between the parties as to the amount due, it is equally well established that payment and acceptance of a portion of the demand claimed, in settlement of the whole, is a discharge of the whole claim. The defendant denied his liability on this note, and made payments with a view to avoid litigation, and obtain possession of his collaterals which had been lodged as security for its payment. Proceedings to put the company into involuntary bankruptcy were commenced in June, 1861, but the petitions were withdrawn and proceedings stayed on the 10th of September, 1861. Between this and the 2d of November, 1861, this arrangement for a settlement was effected. On this last mentioned date the company made a voluntary assignment in the court of probate for the benefit of their creditors. This note was given for a portion of the capital stock of this company. When tins agreement to discharge the defendant from further liability was entered into, the company was no doubt insolvent. At all events it was not in a condition to tell a debtor to write four-score, when the debt was a hundred. We adopt the reasoning of Judge Church, and the law as laid down in the case of Mann v. Cooke, 20 Conn., 188, considering it strictly applicable. “ If the corporation had the power by such a stipulation as this, or by any other, to preclude themselves from a remedy to enforce payment of the fall amount subscribed for, it does not follow that the creditors of the company can be precluded by any such condition. * * * It would pervert some of the great ends of its being, and the objects of its charter, if it had legal power to dispose of its stock upon any terms which should defeat the public interests, and defraud its own creditors.” The creditors in that case were represented by a receiver; in this by a trustee. The claim that this company was not properly organized, and has no legal existence, has not been much pressed. It cannot be available in this stage of the case, with the general issue only pleaded, and with the fact found that the defendant — 513 — gave tlie note to the corporation as such. West Winsted Bank v. Ford, 27 Conn., 282. The Superior Court is advised to render judgment for the plaintif, to recover the amount unpaid on said note, with interest. In this opinion the other judges concurred.