Eastern Rug & Trading Co. v. Halaby

CHARLES F. CLAIBORNE, JUDGE. This is a suit on two promissory notes; the defense is a plea in compensation. The plaintiffs allege that they are owners of two promissory notes made hy the defendant Habib E. Halaby to the order of plaintiffs both dated New York and both payable at 212 Fifth Avenue, New York; one for $612.71 dated June 32th, 1914 payable six months after date, and the other for $266.25 dated November 12th, 1914 payable ten days after date, - all bearing six per cent per annum interest from date until paid, amounting in principal to $868.96. The defendant admits making the two notes and that plaintiffs are the owners of them, but pleads compensation. He alleges that -the plaintiffs, the Eastern Rug and Trading Company, are indebted to him in the sum of $750 for this: That some time prior to July 2d, 1914 the defendant^ brother, Najeeb E. Halaby, was adjudged ' a bankrupt by the United States District Court for the Northern District of Texas sitting in Dallas; that said bankrupt endeavored to effect a composition of 25 cents on the dollar with his creditors; that all of said creditors, with the exception of plaintiffs herein and H. S. Tavshaniian and S. Telfeyan, signified their intention to accept said composition; that the plaintiffs herein suggested thffc only on the condition that the defendant herein should pay over to them the sum of $750 on account of «exclaim against the bankrupt would they acquiesce in the composition, and that upon said payment it would induce Tavshaniian and Telfeyan to acquiesce also; that in order to further the interest of his bankrupt brother and his creditors and being convinced that the extortion proposed by the plaintiffs was the only way in which auch composition could be effect — 477 — ed and consummated, the defendant did^on July 2d, 1914 pay over to the plaintiffs herein the sum of $750, "with the understanding however, th8t said money would he returned to him in the event said composition should not he effeoted and consummated'1 ; defendant further alleged 11 that.in exacting and extorting from respondent the sum of $750 as a consideration for its action in approving the composition offered hy respondent's brother in the bankruptcy proceedings aforesaid and in inducing H. S. Tavshaniian and S. Telfeyan and Company also to approve said composition, the said Eastern Rug and Trading Company knowingly and fraudulently extorted money ffora respondent as a consideration for acting in the said bankruptcy proceedings, in direct contravention and violation of the provisions of the Act to establish a Uniform System of Bankruptcy throughout the United States, approved July 1st, 1898 and Amendments thereto approved February 5th, 1903, June 15th, 1906, and June 25th, Í910, respectively, and particularly section 29, subsction b, 5, thereof which prohibits such extortion and declares it to he a crime, punishable hy imprisonment of not mo're than two years , . . ; that said agreement under which he paid over to plaintiffs said sum -of $750, and the payment thereof were, as regards plaintiffs, prohibited hy law and therefore should he set aside and declared null and void ah initio, and ssid sum of $750, 'together with interest at the rate of six per cent per annum from July 2d, 1914 until paid, should he returned to respondent hy plaintiffs; in the event the Court should determine as a matter of law that said above described agreement and the payment of $750 thereunder were good, valid, and proper, then and in that event only respondent shows that he is entitled to receive back from plaintiffs ssid sum because of want of consideration then, previously, or thereafter accruing to- respondent for said payment, because of failure of said composition to be effected and' consummated’1; defendant therefore preyed that the agreement under which he paid the $750 be declared null and void, that he have judgment against the plaintiffs for $750, and that there be judgment in favor of plaintiffs and against respondent for only the difference between $868.96 and interest and $750 and interest. — 478 — The defendant swore to the truth of all the allegations of his answer. There was judgment for the plaintiffs as prayed for, and rejecting defendant's plea in compensation. From this judgment the defendant took a devolutive appeal Wm. E. (¡raster, President of plaintiff company, testified that the £-750 were paid to the plaintiffs for. account of themselves, Tavshaniian and Telfeyan to reimburse to them the expenses incurred by John B. Thorn, who had been sent by these three firms from New:York to Dallas and Dew Orleans to investigate the affairs of llajeeb Halaby and his transactions with his brother Habib, the iefendant herein; that "on or aoout September 26th, 1913 H. 3. and H. E. Halaby came to our store and IT. E. Halaby bought a lot of goods amounting to £8845.09 also $1034.78 of carpets and rugs. Part of which ware promptly shipped to him at Dallas, and it was found that these goods were immediately transshipped to Hew Orleans upon their arrival st Dallas by If. E. Halaby to his brother H. E. Halaby" -; there was no\ understanding at any time to the effect that this $750 was to be returned in case the composition did not go through, because it never occurred to any one, the creditors consenting, that the composition would not go through; the composition did not go through for the reason that the attorney f,or the bankrupt withdrew it and the deposit for the composition was not made; the amount paid to Mr. Thom was $584.41, telegrams $11.12, check to their attorneys C. M. Smithdeal §5.0 and T. S. Kingman £160.83 mating §806.36. Thomas L. Crawford, is Secretary and Treasurer of the plaintiff company; the creditors of If. E. Halaby amounted to §51323.01 and the amount of the three firms of plaintiff, Tavshaniian and Telfeyan amounted to $23201.63; there was no such understanding tho.t the §750-was to be paid back in ease the composition did not go through; the plaintiff» were creditors for $16904.60; they signed the composition; they got two dividends one of 10 and the other of 5%. John B. Thorn is salesman for plaintiffs; he-was in Dallas, Texas when H. E. Halaby was examined in regard to what be — 479 — came of all the rugs, -nd ha stated, that he had shipped some, of the:a to his ’orother in ITew Orleans; he vent to ITew Orleans to 7?Tr&n£4 find the brother, and visited Hah«fe; his expenses in the matter were $534.31 consisting of railroads, hotels and other incidentals from Hay 13th. when he left ITew York to June 13th. when he returned; he was sent by the three firms above mentioned. Ashód H. Tiryakian, manager for Tavshaniian, swears that the allegation that the $750 was exacted for any other purpose than to pay. expenses the three firms had incurred is altogether untrue; the $750 Was distinctly for the purpose of defraying the expenses that the three firms had incurred in sending their representative to Dallas to report upon the condition of the bankrupt's stock; the attorney for the other creditors was informed of the payment of this $750.00. Habib E. Halaby, the defendant, testified that the plain» tiffs herein were one of the creditors of his brother, ITajeeb Halaby^who had gone in bankruptcy in Dallas; he was trying to effect a composition with the creditors at 25 on the dollar; the majority of the creditors accepted the offer; the plaintiffs herein and Tavshaniian and Telfeyan held out; he saw than and "they said that they had sent one of their representatives to Dallas, and the representative has spent a considerable amount of monejr, amounting to about $750.00 and they feel that if they could get that $750', they will be inclined to accept our composition, or proposition, whatever it is"; he was his brother's representative in Hew York trying to effect the settlement; he "gave them this money with the distinct understanding, oral, of course, that in case this composition did not go through, or is not effected^that the money would be returned to me?" there was no receipt given; "I just simply trusted than, a gentlemanly agreement"; he thought the composition would go through and there was no necessity for a receipt; the composition fell through on the theory of the referee that if the bankruptcy was settled through the court, that the creditors would get more than 25 .per cent; Mr. Cramer, the President, is the name of the party with whom he agreed for a return of the $750; the three firma above mentioned initiated the proceedings against his brother; — 480 — "the §750 was to cover what they said were the expenses which they had seen put to in investigating and bringing the proceedings; Q,. "Didn't your brother turn over to you before he went into bankruptcy some of the goods that he bought from the Eastern Rug and Trading Co.? A. That is none of anybody's affairs. That Í3 a transaction between ’.ne and him. He owed me money and it don't belong to this case at all. ft, How long before your brother went into bankruptcy had these goods been turned over to you? A. I am not going to answer such questions, because this is outside of this case". the $868.96 represented the price of goods sold to him; plaintiffs voted for the composition. Plaintiffs' demand for the notes is admitted to be correct, and they are therefore entitled to a judgment for their amount. The only claim in dispute is defendant's plea in compensation. Section 29 of the Bankrupt Act of 1898, Sec. b# 5 provides: "A person shall be punished by imprisonment for a period not to exceed two years upon conviction of the offense of having knowingly and fraudulently . . . (5) extorted or attempted to extort any money or property from any person as a consideration for acting or forbearing to act in bankruptcy proceedings". The defendant is driven 'to this dilemna, either horn of which is destructive of his defense: If plaintiffs' testimony is true, and the payment to them had a valid cause, then defendant cannot recover the amount paid by him, because plaintiffs did what they bargained to do, and voted for the composition, and never agreed to returp the money in case the composition was not granted. The obligation 30 to vote was a sufficient consideration if it was legal; the defendant certainly thought so since he paid it. If on the other hadn the testimony of the defendant is a correct recital of the real transaction, then, as he alleges and testifies, he paid the plaintiffs a sum of money as a con — 481 — sideration for their committing an act denounced "ay ip» and punished as a crime. It did not require the fulminating sanction of Congress to stamp such a transaction -as- illegaltA. The equity Courts of the country hod so decided long before. 1 Story Equity § 378; and their conclusion had "been adopted hy the Supreme Court of our State, 6 N. S., 218; 1 La., 297; 1 R., 454; 5 R., 101; 110 La., 615. The original bargain was illegal and all stipulations connected with it, including the promise to refund, was equally illegal. 17 La., 128; 1 A., 178; 30 A., 207 (211); 13 C. J. 509 § 460; 2 Elliott on Contracts p. 352 § 1078. From such a contract no cause of action arises either to enforce it or to rescind it; but the law leaves the parties where they have placed themselves; and when they appeal to it, it answers: "Procul, 01 procul este profani, Conclamat vates totoque absistite luco".35 A., 1173. "The Temple of Justice of your country is the house of God, It should not be made a den of thieves".3N.S.46 (48). C. C., 1893 (1837): “An obligation . . with an unlawful cause can have no effect". C. C., 1895 (1889): "The cause is unlawful when it is forbidden by law &c.". C. C., 1892 (1886): "That is considered as morally impossible, which is forbidden by law, or contrary to morals. All contracts having such an object are void". C.jf?, 19: "Obligations contrary to Justice,good faith, or good morals, such as those by which a reward is promised to another to- commit a crime, give no\ right of action to either party to enforce the execution of the contract. But if the reward promised has been paid, no action can oe brought to obtain the repayment of the amount". The principle is variously expressed by the words:"liemo allegans turpitudinem suam'auditndus est" and "ex turpi causa — 482 — non oritur actio". In Schmidt vs Barker, 17 A., 261 (264), the Court said: "This court has often held that it will not lend its aid to settle disputes relative to contracts reprobated by law. It will notice their illegality ex officio and allow it without any plea.at any stage of the proceedings. Parties cannot oe heard who ask relief from a violation of law. The law leaves them where their conduct has placed them and "in pari causa turpitudinis melior est condi-tio possidentis". 3 N. S. 46; 17 La., 132; 5 R., 101; 12 R., 79; 1 A., 176; 6 A., 317; 7 A., 170; 10 A., 199; 12 A., 166, 249; 15 A., 519; 19 A., 498; 22 A., 105; 24 A., 278; 114 La., 822; 2 H. D., 1007 § 1; 6 Toull. § 126; 11 Baudry-Lac on Obligations Vol. 1 p. 323 § 316 C. Also Vol. 3, 2 de partie p. 1068 § 2839; on C. N., 1131; 3 Dalloz Codes Annotes on C. N., 1376, 1377 (C.C. 2301); p. 676 § 130; 33 Dalloz Rep. Leg. p. 1200 § 5489, p. 1206 § 5531; Pothier Oblig. p. 31 § 43; 3 Delvincourt p. 472 § 8; 10 Duranton p. 350 § 374; 4 Aubry & Rau p. 741 § 442 Bis; 1 Larombiere § 10 p. 307 on Art. 1133; 15 Am. & Eng. Inc. Law p. 963 § 5, p. 997 XXIV, 999 § 3; 1001 (C) St.Louis RRd.vsTerre Haute RRd., 145 U. S. 407; 197 U.S., 245 (295); 1 Story Equity § 298; 13 C. J., 492, 496 § 440; Elliott on Contracts p. 342 § 1066.9. In Higgins vs. Mc Crea, 116 U.S., 671, the Court said: "We do not see on what ground a party, who says in his pleading that the money which he seeks to recover .was paid out for the accomplishment of a purpose made an offense by the 1p^ and who testifies and insists to the end of his suit that the contract on which he-advanced his -noney. was illegal, criminal,end void,can recoyer it back in a court whose duty it is to give effect to the la^ Tfrich the party admits he intended to violate”. Affirmed in White vs. Barber, 123 U.S. 425. The J“ud3e of the District Court was evidently guided by these principles in 'refusing to listen to the defendant; and dis-ni-*sing his dennnd. We are of the opinion that his judgment was right and we affirm it. May 22d, 1919.