author: Crane, J. Lehman, J. (dissenting).

text:
    Herbert Small, Suing on Behalf of Himself and Others, Appellant and Respondent, v. Francis De C. Sullivan et al., Respondents and Appellants.
    Pleading — corporation — directors —■ attack upon affirmative defense enables questioning of sufficiency of complaint — action by bondholder against directors of corporation for fraudulently converting corporate funds to their own use — allegations sufficiently setting forth cause of action — compliance with forms of law will not prevent a recovery for fraud — defense that trust agreement contained a “ no recourse ” clause insufficient — statement in . defense that defendants acted in good faith adds nothing to denial.
    1. An attack upon an affirmative defense enables the defendant to question the sufficiency of the complaint.
    2. A complaint in an action against directors of a corporation by a bondholder, on behalf of himself and others similarly situated, which alleges that the trust mortgage issued by the corporation and which was security for their bonds has been foreclosed, resulting in a large deficiency, by reason of which the amount due the plaintiff and others has not been paid in full, and which further alleges that at a time when the capital stock of the corporation was heavily impaired, but it still possessed substantial assets, the defendants consolidated the corporation with another that had but nominal assets and fixed the capital of the new corporation at a figure which showed a surplus of about two million dollars which they proceeded to distribute amongst themselves as a dividend upon stock held by them in the new company and that the defendants knew all the facts and consolidated the two companies for the purpose of wrongfully and fraudulently taking assets which should have been applied upon outstanding bonds and distributing them among themselves, states a cause of action.

      (Argued May 4, 1927;
    decided May 31, 1927.)
    3. A contention that the consolidation was made under the Business Corporations Law (Cons. Laws, eh. 4, § 7) and was authorized by that statute and as the forms of the statute have been complied with, the law will not look beyond these to the cause, reason or effect of the consolidation, cannot be sustained. Compliance with forms of law does not amount to absolution for fraud and a court of equity will look beyond the forms to the actual facts and compel restitution.
    4. A defense that by a clause in the trust agreement, referred to in the bonds, it is provided that no recourse shall be had upon any bonds against any incorporator, stockholder, officer or director of the company or any successor corporation, is insufficient and should be stricken out. The clause did not relate to future fraudulent acts of the directors. They could not willfully and fraudulently destroy or convert the property held as security for these bonds, whether it was pledged to the trustee or was the general assets of the corporation, and then plead that they were protected by an agreement that they should not be hable for their acts.
    5. Nor does the statement in the defense that the defendants acted in good faith add anything to their denial. The plaintiff must prove bad faith, amounting to fraud, intentional acts done for the purpose alleged in the complaint. The defendants by the general denial have met these allegations and can prove their good faith or lack of knowledge or absence of any other element which the plaintiff must prove to establish fraud.

      Small v. Sullivan, 218 App. Div. 612, modified.
    Cross-appeals, by permission, from orders of the Appellate Division of the Supreme Court in the first judicial department, entered December 17, 1926, which modified and affirmed as modified orders of Special Term striking certain defenses from the answer. The following questions were certified:

      “ 1. Is the defense in the various answers based upon the ‘ no recourse ’ clause in the trust deed sufficient in law upon the face thereof?
    “ 2. Are the second, third, fourth, fifth, sixth, seventh and eighth defenses contained in the answer of the defendant Sullivan et al., sufficient in law?
    “ 3. Are the second, third,' fourth, fifth, sixth, seventh, eighth and ninth defenses contained in the answer of the defendants Eleanor Robson Belmont and Morgan Belmont, as executors, etc., of August Belmont, deceased, sufficient in law?

      “ 4. Are the first, second, fourth, fifth, sixth, seventh, eighth, ninth, eleventh and twelfth defenses contained in the answer of defendant Central Union Trust Company of New York et al., sufficient in law?

      “ 5. Are the second, third, fourth, fifth, sixth, seventh, eighth, ninth, tenth and eleventh defenses contained in the answer of the defendant Farmers Loan and Trust Company as surviving executor of the estate of Edward R. Bacon, deceased, sufficient in law? ”

      Gustavus A. Rogers, Abraham Benedict and Eugene W. Small for plaintiff, appellant and respondent.
    The “ no recourse ” provision in the deed of trust is not a defense. (Swancoat v. Remsen, 78 Fed. Rep. 592; 3 Williston on Contracts, §§ 1750, 1751; Matter of Oxford Bldg. & Invest. Soc., Ltd., L. R. 34 Ch. D. 502; Babbitt v. Read, 215 Fed. Rep. 395; 236 Fed. Rep. 42; Marfield v. Cincinnati D. & T. T. Co., 111 Ohio St. 139; Grady v. Graham, 64 Wash. 436; Industrial & General Trust, Ltd., v. Tod, 180 N. Y. 215; MacDonnell v. L. T. & S. D. Co., 193 N. Y. 92; Greene v. Walton, 59 Hun, 102.) Where an illegal act, necessarily fraudulent, is perpetrated, allegations of good faith and lack of fraud state no defense. (Bartlett v. Drew, 57 N. Y. 587; Hurd v. N. Y., etc., Steam Laundry Co., 167 N. Y. 89; Darcy v. Brooklyn & N. Y. Ferry Co., 127 App. Div. 167; 196 N. Y. 99; Trotter v. Lisman, 209 N. Y. 174; Hutchinson v. Stadler, 85 App. Div. 424; Cottrell v. Albany Card & Paper Co., 142 App. Div. 148; Northern Pacific Ry. v. Boyd, 228 U. S. 482; Kansas City So. Ry. v. Guardian Trust Co., 240 U. S. 166; Clark v. Bankers Trust Co., 99 Misc. Rep. 300; Osgood v. Laytin, 37 How. Pr. 63; 3 Keyes, 521.) The complaint is sufficient. (Jones v. Missouri-Edison Electric

      Co., 144 Fed. Rep. 765; 199 Fed. Rep. 64; 203 Fed. Rep. 945; Theis v. Durr, 125 Wis. 651; Schwab v. Potter Co., 194 N. Y. 409; Kavanaugh v. Kavanaugh Knitting Co., 226 N. Y. 185; McCaskill Co. v. U. S., 216 U. S. 504; Goss & Co. v. Goss, 147 App. Div. 698; 207 N. Y. 742; Peterson v. East River Land Co., 224 N. Y. 674; Matter of Utica Nat. Brewing Co., 154 N. Y. 268.)

      De Lancey Nicoll and J. Tufton Mason for W. Leon Pepperman et al., defendants, respondents and appellants.
    The complaint is insufficient. It states no cause of action. (Baxter v. McDonnell, 154 N. Y. 432; 155 N. Y. 83; Title Guarantee & Trust Co. v. City of N. Y., 205 N. Y. 496; Manson v. Curtis, 223 N. Y. 313; Ansorge v. Kane, 244 N. Y. 395; Schieffelin v. Hylan, 125 Misc. Rep. 264; People v. Equitable Life Assurance Society, 124 App. Div. 714; Schmid v. Neuberger, 174 App. Div. 670; Paper Co. v. Prankard, 204 App. Div. 83; Nauss v. Nauss Brothers Co., 195 App. Div. 318; Cass v. Realty Securities Co., 148 App. Div. 96; 206 N. Y. 649; Bankers Trust Co. v. Dietz Co., 157 App. Div. 586.) The question “ Is the defense based upon the ' no recourse ’ clause in the trust deed sufficient in law upon the face thereof? ” should be answered in the affirmative. (Babbitt v. Read., 215 Fed. Rep. 395; 236 Fed. Rep. 42; Marfield v. Cincinnati D. & T. T. Co., 111 Ohio St. 139; Carnahan v. Campbell, 158 Ind. 226; Bush v. Robinson, 95 Ky. 492; Fidelity Trust Co. v. Washington-Oregon Corp., 217 Fed. Rep. 588; Grady v. Graham, 116 Pac. Rep. 1098; Kohn v. Sacramento Electric Co., 168 Cal. 1; Callanan v. Windsor, 78 Iowa, 193; Basshor v. Forbes, 36 Ind. 154; Brown v. Eastern Slate Co., 134 Mass. 590; French v. Leschemaker, 24 Cal. 518.)

      Martin A. Schenck and Joseph S. Auerbach for Eleanor Robson Belmont et al., as executors of August Belmont, deceased, defendants, respondents and appellants.
    The complaint fails to set forth facts sufficient to constitute a cause of action and should be dismissed. (Baxter v. McDonnell, 154 N. Y. 432; Title Guarantee & Trust Co. v. City of N. Y., 205 N. Y. 496; O’Reilly v. City of Kingston, 114 N. Y. 439; Wood v. Amory, 105 N. Y. 278; Knapp v. City of Brooklyn, 97 N. Y. 520; Moss v. Geddes, 28 Misc. Rep. 291; Marshall v. Thompson Feature Service, 216 App. Div. 428; Knowles v. City of New York, 176 N. Y. 430; Matter of Interborough Corp., 277 Fed. Rep. 455; Hoadley v. Hoadley, 244 N. Y. 424; Campbell v. City of New York, 244 N. Y. 317; Messersmith v. American Fed. Co., 232 N. Y. 161; People v. Noblett, 244 N. Y. 355; Auburn & Cato Plank Road Co. v. Douglas, 9 N. Y. 444; Morris v. Tuthill, 72 N. Y. 575; Kiff v. Youmans, 86 N. Y. 324; Carroll Building Corp. v. Greenburg Plumbing Supplies, Inc., 216 App. Div. 268; Shadford v. Detroit, Y. & A. A. Ry., 89 N. W. Rep. 960; Leavenworth County v. Chicago, Rock Island & Pacific R. R. Co., 134 U. S. 688; Oregon-Washington R. R. & N. Co. v. Wilkinson, 188 Fed. Rep. 363; Atchison, Topeka & Sante Fe R. R. Co. v. Board of Commissioners, 51 Kans. 617; Rice v. National Bank of Commonwealth, 126 Mass. 303; Terhune v. Potts, 47 N. J. Law, 218.) The first affirmative defense, based upon the “ no recourse ” clause of the trust agreement, is a good defense. (Hotchkiss v. City of Binghamton, 211 N. Y. 279; Matter of Cooper, 93 N. Y. 507; Monowitz v. Bracken-ridge, 186 N. Y. Supp. 686; 195 App. Div. 929; Babbitt v. Read, 215 Fed. Rep. 395; 236 Fed. Rep. 42; Brown v. Eastern Slate Co., 134 Mass. 590; Carnahan v. Campbell, 158 Ind. 226; Marfield v. Traction Co., 111 Ohio St. 139; Crosthwaite v. Moline Plow Co., 298 Fed. Rep. 466; United States v. Stanford, 70 Fed. Rep. 346; 161 U. S. 412; Fidelity Trust Co. v. Washington-Oregon Corp., 217 Fed. Rep. 588; Basshor & Co. v. Forbes, 36 Md. 154.)

      M’Cready Sykes and William A. W. Stewart for Francis De C. Sullivan, defendant, respondent and appellant.

      William R. Carlisle and Allen Wardwell for Central Union Trust Company of New York et al., defendants, respondents and appellants.

      Edward M. Cameron, Jr., and George S. Mittendorf for Farmers’ Loan and Trust Company, as executor of Edward R. Bacon, deceased, defendant, respondent and appellant.
   Crane, J.

These appeals come here upon seven questions certified by the Appellate Division relating to the sufficiency of the defenses set up in the answers. The main argument, however, has centered about the sufficiency of the complaint which apparently was passed over by counsel in the courts below. The Appellate Division in its opinion says: “ As defendants have decided to reserve for the present all questions as to the sufficiency of the complaint, we assume that it states a cause of action of the general character indicated above.” However, under the rule that an attack upon an affirmative defense enables the defendant to question the sufficiency of the complaint (Baxter v. McDonnell, 154 N. Y. 432; Manson v. Curtis, 223 N. Y. 313, 319), the defendants in this court have raised this question and we must dispose of it before dealing with the answers.

The complaint alleges a cause of action against directors of the Interborough-Metropolitan Company and the Interborough Consolidated Corporation for fraudulently converting the funds of the corporations to their own use and advantage, and to the injury of the plaintiff, a bondholder, and others similarly situated. The InterboroughMetropolitan Company was a domestic corporation with an authorized capital of $155,000,000. At the times herein mentioned there was issued and outstanding $45,740,000 of preferred, and $93,262,192 of common stock. It had issued and outstanding $67,825,000 of bonds payable August 1, 1956, bearing interest from April 1, 1906. The Metropolitan Company was a holding company having large blocks of stock in the Interborough Rapid Transit Company, the Metropolitan Street Railway Company and the Metropolitan Securities Company. The latter two companies proved a loss. The Inter-borough Rapid Transit Company paid dividends, and the Interborough-Metropolitan Company received the dividends on its stock which it applied to the payment of the interest on its outstanding bonds. These bonds were issued under a trust agreement entered into on or about March 5, 1906, between the company and the Windsor Trust Company, a domestic corporation, as trustee. So far as the allegations in this complaint are concerned, the Metropolitan Company held one class of securities which were valuable and paid an income. This was the stock of the Interborough Rapid Transit Company. The dividends from this stock were sufficient to pay the interest on the bonds, and to accumulate each year a substantial amount to meet the principal of the bonds when due.

The capital of the Interborough-Metropolitan Company had become impaired to the extent of $80,000,000. Its capital stock, both common and preferred, amounted to $139,200,192 which plus the property received on the sale of the bonds made a total value of its property, or supposed property, of $206,827,192. The complaint alleges that its net assets were $52,559,948.54. To arrive at the net assets, it must, of course, be assumed that funds were set aside to pay the bonds. Therefore, adding this figure of $67,825,000 to the net assets, makes a total of $120,384,397.54, all the assets which the corporation had to offset its capital stock and bonded indebtedness. This left over $86,000,000 impairment of its capital, if we take the statements and allegations in the complaint. The complaint alleges that prior to the consolidation hereafter mentioned, the InterboroughMetropolitan Company had suffered an impairment of its capital to an extent upwards of $80,000,000.

This was the condition which confronted the directors of the Interborough-Metropolitan Company. As a holding company it had sustained large losses through its ownership of the stock of the Metropolitan Street Railway Company and the Metropolitan Securities Company. It held the paying stock of the Interborough Rapid Transit Company, and this asset according to the allegations in the complaint was necessary to meet the interest and the principal on its trusteed bonds.

Under these circumstances, the directors were also faced with two provisions of law with which they are presumed to have been familiar. Section 28 of the Stock Corporation Law (Laws of 1909, chap. 61; Cons. Laws, ch. 59) provided: “The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation, nor divide, withdraw or in any way pay to the stockholders or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law.” The directors of the Interborough Company had not declared dividends on its preferred stock for over seven years.

The capital stock of a corporation is intended as a fund for the ultimate security and payment of all its creditors, both present and future. A corporation has no right to declare dividends with a substantially impaired capital. The term “ capital stock,” in these provisions prohibiting the directors of a corporation from making dividends except from surplus profits of a corporation, or from dividing, withdrawing or in any way paying to the stockholders any part of the capital stock of the company, means the property of the corporation contributed by the stockholders or otherwise obtained to the extent required by its charter. The object of the provision was to prevent a withdrawal of the property which would reduce the value of its assets below the sum limited for its capital in its charter. When the property of the corporation exceeds that limit, the excess is surplus, which may be divided among the stockholders. (Williams v. Western Union Telegraph Co., 93 N. Y. 162; Cottrell v. Albany Card & Paper Mfg. Co., 142 App. Div. 148.)

The complaint alleges the impairment of the capital stock of the Interborough-Metropolitan Company; the compliance of the directors with the law in refusing to pay dividends while the capital was impaired, and it then further alleges the facts which show how the directors got around these provisions of the law for the purpose of paying dividends to themselves instead of keeping the income as security for the bond creditors.

There was a domestic company, so the complaint alleges, known as the Financing and Holding Corporation, not engaged in business, with assets of $550 in cash. The directors determined to consolidate the InterboroughMetropolitan Company of $139,000,000 outstanding capital stock with this company under the name of the Interborough Consolidated Corporation. The consolidation was made, the new company having an authorized capital of $50,403,634.60. Consolidation was carried out under the forms prescribed by section 7 of the Business Corporations Law (Cons. Laws, ch. 4), which now provides and then provided that any two or more corporations organized under the laws of this State for the purpose of carrying on any kind of business of the same or of a similar nature may consolidate into a single corporation. The amount of the capital stock which must be fixed according to the agreement of consolidation is not to be larger in amount than the fair aggregate value of the property franchises and rights of such corporations. This consolidation statute did not' provide the minimum below which the capital stock of the consolidated company could not be placed. The companies and the directors of the companies fixed on this figure of $50,000,000 which was not more than the net assets received from the two companies, which amounted to $52,559,397.54 from the InterboroughMetropolitan Company, and $550 apparently in cash from the Finance and Holding Corporation. This consolidated company, therefore, had about $2,000,000 more assets than capital stock — a surplus. This consolidation amounted in effect to a reduction in the capital stock of the Interborough-Metropolitan Company. The reduction could not be accomplished directly, for it was prohibited by section 62 of the Stock Corporation Law (Laws of 1909, chap. 61), which at that time read as follows: “Any domestic corporation may increase or reduce its capital stock in the manner herein provided, but not above the maximum or below the minimum, if any, prescribed by general law governing corporations formed for similar purposes * * * If reduced, the amount of its debts and liabilities shall not exceed the amount of its reduced capital.” According to the figures above given, the debts and liabilities of the Interborough-Metropolitan Company did exceed the amount of the proposed reduced capital, and no reduction, such as proposed, could be made. However, the directors brought about a reduction under the consolidation statute which they now strongly urge was done in accordance with law, the terms of the statute, and, therefore, perfectly legal. As stated above, the new company, the Interborough Consolidated Corporation, with the same directors as those of the InterboroughMetropolitan Company and a few added who knew all the facts, received all the assets of the InterboroughMetropolitan Company, and also assumed under the law its debts and obligations. There was still outstanding and due from this new company, under the guidance, control and direction of the same directors the $67,000,000 bonds for which apparently the only security was the trust mortgage and the stock of the Interborough Rapid Transit Company, now turned over to the ownership of the consolidated company. What does the complaint allege that these directors did? Through the mere filing of papers these same men who had ceased to be directors of the Interborough-Metropolitan Company had now become directors of the same property under a new name, the Interborough Consolidated Company, handling the same assets and charged with a duty to provide for the payment of the same debts. The complaint alleges that they immediately divided up this alleged surplus of $2,000,000 assets among themselves, took the income from the dividends on the Interborough Rapid Transit stock and diverted it from security for the bonds and interest, and distributed it among themselves as stockholders, in the form of dividends upon stock of the new Interborough Consolidated Corporation. The complaint alleges that these directors both of the Interborough-Metropolitan Company and the Inter-borough Consolidated Corporation who are parties to this action, knew all the facts and consolidated these companies for the very purpose of wrongfully and fraudulently taking the assets of the Interborough-Metropolitan Company which should have been applied upon its outstanding bonds and distributing it among themselves in the form of dividends of the Interborough Consolidated Corporation.

It is now said that if all the allegations in the complaint are true, yet the consolidation being authorized by the Business Corporations Law, prevents a recovery; that as the forms of the statute have been complied with, the law will not look beyond these to the cause, reason or even the effect of the consolidation; that by reason of these forms, directors may do indirectly what they cannot do directly; that the addition to the capital assets of $550 works such a transformation that- the directors of a corporation charged with a duty of preserving its assets and income for the benefit of its creditors may divide these assets and income among themselves under the guise of dividends to the exclusion of the creditors. There are a few facts in the transaction which cannot be disputed; some tMngs were not transformed; they stand out as the main facts to be considered. The assets did not change; they were the same before, both in kind and in amount, as they were after consolidation; the directors did not change except by the addition of a few others who knew the facts. The only thing apparently which has changed under these allegations has been a corporate charter, and the alleged shifting of the duties and responsibilities of the directors.

I know of no forms of law, statutory or otherwise, which may not be used for the accomplishment of a fraud or for the illegal purposes of wrongly obtaining money, if people so desire to use them, and I know of no form of law or statute which will prevent a court of equity from seeking out the fraud, looking beyond the forms to the actual facts and compelling restitution. Compliance with forms of law does not amount to absolution for fraud. All of these corporation statutes have their legitimate purposes, but they cannot be used as a blind to pay dividends when there are no actual profits out of which to pay them.

What I have said here, of course must not be misunderstood. We are dealing merely with the allegations of the complaint and for the purpose of argument and discussion, assume them to be true in order to answer the defenses made to them. It must never be assumed by anybody who reads this opinion that we have said that such are' the facts or that the allegations are true, or that our words even carry such an intimation. We are dealing merely with pleadings, and pleadings are not proof. Wé are passing upon allegations which, if sufficient to make out a cause of action, still remain to be established by competent proof.

The complaint further alleges the reasons why this action is brought by the plaintiff as a bondholder. The trust mortgage which was security for these bonds was foreclosed by the trustee, resulting in a large deficiency. The plaintiff received his proportionate part of the amount realized, but he and the other bondholders have not been paid in full. The Interborough Consolidated Corporation on or about March 28, 1919, was adjudicated a bankrupt and the plaintiff and the other bondholders received their proportionate part of the bankrupt’s estate. All the estate of the bankrupt has been disposed of by the trustee. The liability of these directors of the Interborough-Metropolitan Company for their fraud would not constitute an asset of the Interborough Consolidated Corporation, at least it would not prevent the bondholders from pursuing the directors for their misfeasance as directors of the Metropolitan company.

We, therefore, think that the allegations of the complaint set forth a cause of action, and we now proceed to answer the certified questions. We agree with the disposition made by the Appellate Division of all of the defenses with the exception of one; the first question certified which relates to the second defense contained in the answer of the defendant Sullivan and others. In the answer this is designated as the first affirmative defense, but there seems to be no dispute among counsel or in the briefs that this first question relates to this so-called “ no recourse defense.” The answer sets forth that the bonds described in the complaint and held by the plaintiff were a part of a series of bonds issued by the Interborough-Metropolitan Company to the aggregate amount of $67,825,000, and secured by a certain collateral trust indenture under which there were pledged and placed in the possession of the trusteed securities, the value of which was largely in excess of the aggregate par amount of the bonds. The bonds, by appropriate words, referred to the trust agreement, which trust agreement contained this clause:

“No recourse under or upon any obligation, covenant or agreement of this indenture, or of any purchase money bond or coupon, or because of the creation of any indebtedness hereby secured, shall be had against any incorporator, stockholder, officer or director of the Company or any successor corporation, either directly or through the Company, by the enforcement of any assessment or by any legal or equitable proceeding by virtue of any statute or otherwise. This indenture and the purchase money bonds are solely corporate obligations, and no personal liability whatever shall attach to or be incurred by the incorporators, stockholders, officers or directors of the Company, or any successor corporation, or any of them, because of the incurring of the indebtedness hereby authorized, or under or by reason of any of the obligations, covenants or agreements contained in this indenture, or in any of the purchase money bonds or coupons, and any and all personal liability either at common law or in equity, or by statute or constitution, of every such stockholder, officer or director, is released and waived as a condition of and as part of the consideration for. the execution of this indenture and the issue of the purchase money bonds.”

The defendant further alleged in this defense that the consolidation with the Financing and Holding Company on June 1, 1915, was made in strict conformity with the statute, and that the defendants acted in good faith and without fraud in respect to said consolidation; that if there was any mistake, it was a mistake of law upon the part of these defendants.

The Appellate Division were of the opinion that this set forth a good defense. We take a contrary view. Without attempting to state the meaning and extent of this “ no recourse clause,” we are confident of one thing, that it did not and could not cover the future fraudulent acts of the directors. The complaint as we have indicated alleges a consolidation conceived and executed in fraud, and for the willful and intentional purpose of procuring the assets and income of the corporations. The consolidation was long after the making of the trust agreement. The directors could not willfully and fraudulently destroy or convert the property held as security for these bonds, whether it was pledged to the trustee or was the general assets of the corporation, and then plead that they were protected by an agreement that they should not be liable for their acts. The agreement did not relate to such future acts.

Neither does the statement in the defense that the defendants acted in good faith add anything to their denial. The plaintiff must prove bad faith, amounting to fraud, intentional acts done for the purpose alleged in the complaint, as heretofore stated. The defendants by the general denial have met these allegations and can prove their good faith or lack of knowledge or absence of anjr other element which the plaintiff must prove to establish fraud. We, therefore, think that this answer is insufficient and should have been stricken out.

The orders of the Appellate Division and of the Special Term as thus modified should be affirmed, with costs to the plaintiff in all courts, and the questions certified answered in the negative.

Lehman, J. (dissenting).

The complaint shows that during the years 1912, 1913, 1914 and 1915 the Inter-borough-Metropolitan Company received from dividends on stock of the Interborough Rapid Transit Company held by it an amount of money far in excess of the sum required for the payment of interest on the bonds of the Interborough-Metropohtan Company, and that the surplus was accumulating in its treasury. It had assets of more than $52,000,000 in value over and above its debts and obligations. It can hardly be said, therefore, that further accumulation of income in its treasury was reasonably required for the protection of its creditors. It had outstanding almost $50,000,000 par value of preferred stock. The corporation might not distribute as dividends the income which was accumulating in its treasury, for that was forbidden by section 28 of the Stock Corporation Law (Cons. Laws, ch. 59) as long as its capital was impaired by losses previously suffered, to an amount of over $80,000,000. The corporation was, therefore, bound to allow its surplus income to accumulate in its treasury or to find some means by which it might surmount the obstacle in the way of its distribution among the stockholders.

The creditors of the corporation had no lien upon the moneys which were accumulating, or upon the capital of the corporation. The doctrine that ■ the capital of a solvent corporation constitutes a trust fund for the payment of its creditors has been assailed by judicial and extra-judicial writers. (See Thompson on Corporations [2d ed.], section 3418.) “ The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to an account for fraud or sometimes even mere mismanagement in respect thereto; but as between itself and its creditors the corporation is simply a debtor, and does not hold its property in trust, or subject to a lien in their favor, in any other sense than does an individual debtor.” (Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371.) Doubtless for some purposes the trust fund doctrine will still be applied. (Trotter v. Lisman, 209 N. Y. 174.) It has never been applied so as to limit the right of the directors of the corporation to deal with the property of the corporation, while solvent, in any manner not forbidden by law nor in fraud of its creditors.

The trust fund doctrine need not, however, be invoked in order to furnish a creditor with a remedy for unlawful or fraudulent diversion of the assets of the corporation. So long as the capital stock of the corporation remained impaired by losses previously sustained, the corporation had no surplus profits which it could distribute as dividends. Declaration of dividends under such circumstances would constitute an unlawful diversion of the corporate property for which the law would furnish redress to those injured. The Stock Corporation Law, however, provided that a corporation might reduce its capital. If the capital was reduced, then the corporation might lawfully distribute any surplus over the reduced capitalization. In other words, the law did not absolutely prohibit the distribution of the moneys then in the treasury of the corporation or the moneys which might thereafter be paid into the treasury; distribution was unlawful only so long as the capital stock of the corporation was larger than its assets. (Strong v. Brooklyn Cross-Town R. R. Co., 93 N. Y. 426.) In this case, however, as Judge Crane has pointed out, the corporation could not by reason of its outstanding bonds avail itself of the method provided by the Stock Corporation Law in the form it then existed for reduction of its capital stock.

The Business Corporations Law offered another method by which similar results might be achieved. Two or more corporations may merge their identity into a consolidated corporation (Sec. 7). The bondholders might not complain at lawful consolidation, for the deed of trust expressly permitted it. The capital stock of the new corporation which comes into existence through the merger need bear no relation to the capital stock of the original corporations. The directors entered into a consolidation agreement with the Financing and Holding Corporation which had assets of only $550 in cash, and the capital stock of the new corporation was fixed at a figure within the net value of its assets. The new corporation could declare dividends out of surplus profits as long as its own capital stock remained unimpaired.

It is not claimed that by the attempted consolidation a new corporation did not come into existence in which the identity of the old corporations was lost. It is not claimed that such new corporation might not ordinarily declare dividends out of surplus profits above its own capitalizar tion, but it is said that in this case the consolidation was only a form or subterfuge intended to accomplish an unlawful result, viz., the distribution of income received by a corporation while its capital was impaired. Undoubtedly the inference is clear that the consolidation of a corporation having net assets of $52,000,000 with a corporation with assets of $550 was only a form used to accomplish the distribution of corporate assets otherwise forbidden. It does not follow that the subsequent distribution was unlawful. It is true that the time has passed when the courts will permit an unlawful result to be achieved, even by means which are not themselves illegal. The law may not be circumvented by subterfuges and the courts will look behind the form to determine whether an act is inherently unlawful. Distinction must nevertheless be drawn between cases where a result is itself wrongful and unlawful regardless of the means by which it is accomplished, and cases where the wrong or illegality is inherent only in the means by which the result is attained. In the latter cases there is no evasion of the law where -legal means are substituted for those which are prohibited.

Here there was no fraud on creditors or other inherent wrong in distribution of income by a corporation having net assets of $52,000,000 above its debts and obligations. Distribution in the form of dividends would, however, be illegal so long as the capital of the corporation was impaired by losses previously sustained. In contemplation of law such distribution would be made out of capital. On the other hand, as soon as the corporation’s capital was no longer impaired, the distribution would become lawful. As the law now stands, a corporation situated as the Interborough-Metropolitan Company was in 1915, might lawfully reduce its capital to $50,000,000 or less and distribute its surplus. (Sections 36, 37 and 38 of the Stock Corporation Law.) As the law stood in 1915, a corporation so situated might not do so. It might, however, merge its identity in a new corporation with smaller capital and thereby achieve the same result. Then the new corporation might lawfully declare dividends so long as such dividends did not result in impairment of the new capital. That was the course taken by the directors of the Interborough-Metropolitan Company in this case. True, the consolidation was made only because the machinery provided at that time for reduction of capital of a corporation which maintained its separate identity could not be used. It was not, however, unlawful at that time to achieve by the use of a more cumbersome method the result which to-day- might lawfully be accomplished more directly.

For these reasons I think that the complaint fails to allege facts sufficient to constitute a cause of action against any of the defendants, and the judgment should be reversed.

Cardozo, Ch. J., Pound, Andrews, Kellogg and O'Brien, JJ., concur with Crane, J.; Lehman, J., dissents in opinion.

Ordered accordingly.


source: Caselaw Access Project

author: Lehman, J.

license: Public Domain

text:
    Raymond F. Kilthau, Respondent, v. International Mercantile Marine Company, Appellant.
    Carriers — freight •— limitation of liability for damage invalid unless based upon choice of rates or other benefit to the shipper — where carrier had in effect but one rate, limitation of liability to invoice value invalid — shipper entitled to recovery based on value of goods at destination — limitation to invoice value arbitrary.
    1. A carrier may limit its liability for damages caused even by its own negligence if the parties agree that recovery shall be limited to an agreed valuation which forms the basis of the charges fixed by the carrier, or where limitation is the consideration for other benefit to the shipper, but limitation imposed without choice of rates between limited and unlimited liability is not valid, and, in the absence of other special consideration moving to the shipper for a limitation of liability for negligence on the part of the carrier, such limitation is without effect.

      (Argued May 5, 1927;
    decided May 31, 1927.)
    I 2. In an action to recover for damage to freight in transportation, for which defendant had in effect only one rate, which had been paid, a limitation in the bill of lading fixing the measure of recovery “ in no ease higher than invoice value ” is invalid, and plaintiff is entitled to recover damages determined by the value of the goods at the point of destination.
    3. A contention that such limitation is not invalid unless it is arbitrary, and that here the limitation is based upon an actual valuation of goods shipped as stated in the bill of lading and is, therefore, not arbitrary though that valuation is different from market value at point of destimation, cannot be sustained. Where the parties by their contract have not changed the measure of damages, except to provide that liability may not exceed a sum fixed or ascertainable upon a different basis from that which is used to determine the actual damages, it cannot be said that such limitation is not in real sense an arbitrary limitation.

      Kilthau v. International Mercantile Marine Co., 217 App. Div. 22, affirmed.
    Appeal, by permission, from a judgment of the Appellate Division of the Supreme Court in the second judicial department, entered May 11, 1926 in favor of plaintiff, upon the submission of a controversy under section 546 of the Civil Practice Act.

      Ray Rood Allen and Harrington Putnam for appellant.
    The Appellate Division erred in holding that a choice of rates is essential to the validity of the invoice value clause. (McCoy & Parkhurst v. Erie & Western Transportation Co., 42 Md. 498; The Hadji, 18 Fed. Rep. 459; 20 Fed. Rep. 875; Pearse v. Quebec Steamship Co., 24 Fed. Rep. 285; The Aline, 25 Fed. Rep. 562; Chicago, Rock Island & Pacific Ry. Co. v. Harmon, 17 Ill. App. 640; Anchor Line v. Jackson, 9 Fed. Rep. [2d] 543; The Asuarca, 13 Fed. Rep. [2d] 222; The Oneida, 128 Fed. Rep. 687; U. S. Willow Furniture Co. v. La Compagnie Generale Transatlantique, 271 Fed. Rep. 184; Coleman v. N. Y., N. H. & H. R. R. Co., 215 Mass. 45; Grubbs v. Atlantic Coast Line R. R., 101 S. C. 210.)

      Neil P. Cullom and James E. Freehill for respondent.
    The limitation of liability contained in the bill of lading is void, because against public policy and without consideration, in that no choice of rates was given. (St Johns N. F. Shipping Corp. v. S. S. Companhia Geral Commercial Do Rio de Janeiro, 263 U. S. 119; Single v. Snyder, 160 Fed. Rep. 627; Gulf v. Hume, 27 S. W. Rep. 110.)
   Lehman, J.

The defendant carrier received in San Francisco several thousand bags of flour consigned to New York. The plaintiff is the owner of the flour through purchase of the bills of lading. The flour was stowed in a cargo space in defendant’s steamer Kroonland. Part of the flour was found on delivery in New York to be tainted with the odor of said shingles, and was thereby damaged.” The defendant does not dispute liability for such damage. The controversy concerns the measure of its liability. The parties have submitted the controversy upon agreed facts.

The plaintiff was entitled to receive the flour in New York in good condition. He received it in damaged condition. It is not questioned that in the absence of stipulation in the bill of lading fixing other measure of recovery, the plaintiff should recover damages computed on the basis of market value of the flour at destination. (St Johns N.F. Shipping Corp. v. Companhia Geral, etc., 263 U. S. 119, and cases there cited.) In the present case the bill of lading does contain such stipulation. It provides that The freight on the cargo carried hereunder is regulated in consideration of all the terms of this contract and is based purely on the value of the cargo. Unless a greater value shall be declared and written in the bill of lading as a basis for adjustment of freight and freight paid thereon accordingly, the value of general cargo does not exceed $100 per package, and of household goods or personal effects does not exceed $5 per 100 lbs., and in computing any liability of the carrier, no value shall be placed thereon higher than $100 per package of general cargo or $5 per 100 lbs. of household goods or personal effects (but in no case higher than invoice value) or the proportionate part of such value in case of any partial loss or damage.” According to the statement of agreed facts the plaintiff’s damages computed on the basis of market value at destination amount to $1,802.08,” while plaintiff’s damages computed on the basis of invoice value in accordance with tho terms of the bill of lading hereinbefore set forth amounts to $832.58. The Appellate Division upon the submission of the controversy has given judgment for the plaintiff for damages suffered, computed on the basis of the market value of the flour at destination, and has held that the clause of the bill of lading providing for lesser damages may in this case be given no effect. We are in accord with its conclusion.

The clause of the bill of lading now under consideration provides for limitation of damages to $100 per package unless greater value is declared. The defendant offered shippers of commodities of greater value than $100 per package, two different rates of freight] a lower one based on the bill of lading valuation and a higher ad valorem rate applicable if the shipment is declared to be of a value higher than the bill of lading valuation.” Here the value of the flour was much less than $100 per package. For shipments of goods of value less than $100 per package, the defendant had in effect only one rate, applying to shipments between San Francisco and New York, namely, 30 cents per hundredweight, the rate paid in this case. The limitation of value, for the purpose of fixing damages, to $100 per package was inconsequential here, sinco the goods were in fact worth less than that sum. Higher rates for carriage, if paid, were intended as consideration for assumption of gréater risk. No alternative rate was made for restriction of liability below the limit of value of $100 per package. The recital in the bill of lading that the freight is based partly on the value of the cargo may be given no other effect. We are concerned upon this appeal only with the question whether in such circumstances a restriction of recovery to the invoice value of the goods, though actual damage suffered is determined by the value of the goods at the point of destination, is enforcible.

The rule is well established, at least in this State, that a carrier may limit its liability for damages caused even by its own negligence if the parties agree that recovery shall be limited to an agreed valuation which forms the basis of the charges fixed by the carrier, or where limitation is the consideration for other benefit to the shipper. (Boyle v. Bush Terminal R. R. Co., 210 N. Y. 389; Tewes v. North German Lloyd Steamship Co., 186 N. Y. 151.) Here the agreement that liabilities shall not exceed the invoice value of the goods did not result in a reduction of charges to the shipper. Limitation imposed without choice of rates between limited and unlimited liability is not valid. (Union Pacific R. R. Co. v. Burke, 255 U. S. 317.) At least in the absence of other special consideration moving to the shipper for a hmitation of liability for negligence on the part of the carrier, such limitation is without effect.

Here the effect of the valuation clause is solely to limit liability. If market value at place of destination should prove less than the invoice value, the shipper could not under its terms recover larger damages. It provides no new measure of damages of which either party may claim the benefit; it leaves the usual measure of damages unaffected, except that the damages so measured may not exceed the invoice value or its proportionate part in case of partial loss or damage.

It is urged, however, that such hmitation is not invalid unless it is arbitrary, and that here the limitation is based upon an actual valuation of goods shipped as stated in the bill of lading and is, therefore, not arbitrary though that valuation is different from market value at point of destination. Undoubtedly in some cases the courts have based decisions refusing to enforce a clause of limitation to a stipulated valuation on the ground that the valuation was “ arbitrary.” If the parties here had agreed that such invoice value should be the basis for fixing damages in all cases, it might perhaps be said that the valuation and consequent limitation was not arbitrary and should be enforced. Where, however, the parties by their contract have not changed the measure of damages, except to provide that liability may not exceed a sum fixed or ascertainable upon a different basis from that which is used to determine the actual damages, it seems impossible to say that such limitation is not in real sense an arbitrary limitation. The valuation used as a basis for limitation of liability bears no relation to the valuation used as a basis for the determination of damages. An agreement for such limitation should be founded upon special consideration or choice.

We recognize that in a considerable number of cases in the United States District and Circuit Courts, clauses which are in many respects similar to the clause under consideration by us have been held valid and enforcible. We need not consider those cases where the parties provided not merely for a limitation of liability, but for a new measure of damages, or have stipulated a valuation of goods shipped for the purpose of adjusting any loss that might arise thereafter. Such cases present, as we have already pointed out, a different question, and are governed by other considerations. There remain, however, a number of cases where the clauses provide only for a limitation of liability based on invoice value.

The fine of Federal cases which have reached the conclusion that such clauses are enforcible begin with The Hadji (18 Fed. Rep. 459; affd., 20 Fed. Rep. 875) and Hearse v. Quebec Steamship Co. (24 Fed. Rep. 285). In both those cases the courts construed the clause as creating a basis for the measure of damages and not merely a maximum limit of damages. Based upon that construction, the court in those cases held that the agreement was valid and enforcible. In The Styria (101 Fed. Rep. 728) the court pointed out that the construction placed upon this clause in these earlier cases was erroneous, and discarded it. Apparently, however, the court did not consider whether under the correct construction a different conclusion as to its validity was not dictated. It merely assumed validity of the limitation so created. Similar assumption seems to have been made in The Aline (25 Fed. Rep. 562) and U. S. Lace Curtain Mills v. Oceanic Steam Navigation Co. (145 Fed. Rep. 701) and U. S. Willow Furniture Co. v. La Compagnie Generale Transatlantique (271 Fed. Rep. 184). In other cases the validity of the limitation was apparently either conceded or not regarded as in controversy. (Phoenix Insurance Co. v. Erie Transportation Co., 117 U. S. 312; Anchor Line v. Jackson, 9 Fed. Rep. [2d] 543; The Bencleuch, 10 Fed. Rep. [2d] 49; The Ellerdale, 10 Fed. Rep. [2d] 53.)

In no case cited has any court given effect after reasoned consideration to a clause which provided for invoice value merely as a maximum limit of liability where no special consideration moved to the shipper for such limitation. In the case of Union Pacific R. R. Co. v. Burke (255 U. S. 317) the court stated: To allow the contention of the petitioner, would permit carriers to contract for partial exemption from the results of their own negligence without giving the shippers any compensating privilege.” We hold that such contract for partial exemption is invalid whether created by limitation of liability to " invoice value ” or by similar limitation to any other value different from the value which forms the basis for determination of actual damages.

The judgment should be affirmed, with costs.

Cardozo, Ch. J., Pound, Crane, Andrews, Kellogg and O’Brien, JJ., concur.

Judgment affirmed, etc.


text:
    International Union Bank, Appellant, v. National Surety Company, Respondent.
    (Submitted May 10, 1927;
    decided May 31, 1927.)
    Insurance — banks and banking — forgery — policy insuring bank against loss through payment of forged checks — bank may recover for loss through paying to depositor checks drawn by him on other banks under assumed names.
    A bank insured against loss through the payment of forged checks may recover on its policy the loss arising by its paying to one of its depositors the amount of two cheeks drawn by him to his own order on two other banks where he had had accounts under different names and signed by him with the names by which he was known at those banks. The credit was not given wholly to the depositor but upon the faith of instruments purporting .to be those of third parties. Through the assumption by the depositor of other names, the plaintiff bank was led to believe that the checks were what they purported to be: instruments drawn by one person in favor of another. The instruments were falsely made, for they purported to bind persons other than the person who made them. They were, therefore, forgeries under the common law and under the statutes of this State.

      International Union Bank v. National Surety Co., 217 App. Div. 102, reversed.
    Appeal, by permission, from a judgment, entered July 15, 1926, upon an order of the Appellate Division of the Supreme Court in the first judicial department, reversing a determination of the Appellate Term which affirmed a judgment of the Municipal Court of the City of New York in favor of plaintiff and directing judgment in favor of defendants.

      Arthur Moritz and Morris Hillquit for appellant.
    The checks upon the faith of which the plaintiff established a credit to “ George D. Wagner ” were forged checks within the popular acceptance of the term, the definitions of common law and the meaning and intent of the defendant’s bond. (People v. Filkin, 83 App. Div. 589; 176 N. Y. 548; Marden v. Dorthy, 160 N. Y. 39; People v. Shanley, 132 App. Div. 821; Matter of Cross, 43 Fed. Rep. 420; People v. Cady, 6 Hill, 491; Commonwealth v. Costello, 120 Mass. 370; State of Oregon v. Wheeler, 20 Ore. 192; Brown v. People, 8 Hun, 562; 72 N. Y. 571; United States v. Turner, 7 Pet. 132.) Even if the definition of forgery in the Penal Law be applied to the clause in the defendant’s bond sued upon, the facts herein make out a complete case of statutory forgery. (Nat. Surety Co. v. Nat. City Bank of Brooklyn, 184 App. Div. 771; People v. Brown, 118 App. Div. 793; 189 N. Y. 528; People v. Warner, 104 Mich. 337; State of Oregon v. Wheeler, 20 Ore. 192; People v. Jones, 106 N. Y. 523; Shipman v. Bank of the State of New York, 126. N. Y. 318.)

      Sidney J. Loeb for respondent.
    The checks which were deposited with the plaintiff were not forged and, therefore, gave rise to no liability on defendant’s bond, which applied only to forgeries. (Hartford v. Greenwich Bank, 157 App. Div. 448; 215 N. Y. 726; Holub-Dusha Co. v. Germania Bank, 164 App. Div. 279; Nat. Surety Co. v. Nat. City Bank, 184 App. Div. 771; Strang v. Westchester County Nat. Bank, 235 N. Y. 68; De Witt v. Walton, 9 N. Y. 574; David v. Williamsburgh City Fire Ins. Co., 83 N. Y. 265; Anderson v. Dundee State Bank, 66 Hun, 613; Graves v. Bank, 17 N. Y. 205; Rosenthal v. American Bonding Co., 207 N. Y. 162.)
   Lehman, J.

The defendant issued to the plaintiff bank a policy of insurance against any loss through the payment, whether received over the counter or through the clearing house, or by mail, of forged or raised checks or (genuine) checks bearing forged indorsements or the establishment of any credit to any customer on the faith of such checks.” Thereafter one George D. Wagner opened an account with the plaintiff bank. On the 11th day of February he had a credit balance of three hundred and fifty dollars. On that day he presented to the plaintiff bank two checks for four hundred dollars each. They were drawn to his order and were indorsed by him. One, drawn on the Chatham & Phenix Bank, purported to be made by one Charles G. Weber; the second, drawn on the Yorkville Bank, purported to be made by one Charles F. Viets. In fact these checks were made and signed by George D. Wagner, to whose order they were drawn. The plaintiff bank believed these checks to be genuine and established a credit for the amount of the said checks in favor of George D. Wagner, and George D. Wagner thereafter drew from his account the sum of $800. The checks upon the faith of which the credit was established were duly presented to the banks upon which they were drawn. The check drawn on the Chatham & Phenix National Bank was returned because the drawer had no account in that bank;-the other check was returned unpaid because the drawer had not sufficient funds in his account to meet the check. George D. Wagner has refused to repay to the plaintiff bank the money he drew under the credit established on the faith of the two unpaid checks. For the consequent loss, the plaintiff claims in this action indemnity under the defendant’s policy of insurance.

There is no dispute between the parties as to the circumstances under which the loss to the plaintiff occurred. Many of the facts were expressly stipulated. The sole question is whether the checks upon the faith of which credit in favor of the depositor was established were “ forged ” checks or checks bearing forged ” indorsements, within the meaning of the policy of insurance. Only for loss suffered through such checks did the defendant agree to provide insurance. Here it appears that one man established accounts in three different banks under three different names. At the plaintiff bank he was known as George D. Wagner; at the Chatham & Phenix Bank he was known as Charles D. Weber; at the Yorkville Bank he was known as Charles F. Viets. The checks drawn on the three banks were signed by the same man and in the same handwriting. In each case the signature was the same as that on file with the bank upon which the check was drawn. Doubtless in each case the bank would have paid the check upon presentment if there had been sufficient funds in the account of the man known to the bank by the name signed to the check. As between the signer of the checks and the bank upon which the checks were drawn, the checks were unquestionably effective as authority to the bank to pay out moneys in the account of the signer. To that extent they were genuine instruments binding the signer, and for that reason the Appellate Division has held that the plaintiff’s loss is not covered by the policy of insurance. We do not agree with that conclusion.

We assume, though we do not now decide, that the word “ forged ” as used in the policy bears a meaning no broader than it does in the criminal law of the State. Under the express provisions of the Penal Law of the State, the term “ forged ” includes false making, counterfeiting and the alteration, erasure, or obliteration of a genuine instrument, in whole or in part, the false making or counterfeiting of the signature * * etc. In the present case we find the depositor, known to the plaintiff bank as George D. Wagner, presenting to that bank, for the purpose of obtaining credit, a paper which purports to be a complete negotiable instrument or check drawn by a third party in favor of the depositor as payee. In fact the paper had, until it was indorsed by the payee and delivered to the bank, no legal inception, for until that time there had been no delivery by the drawer. The bank might accept the paper for what it purported to be; an instrument binding two men, the maker and the payee. It might and did give the payee credit upon the faith of an instrument which on its face constituted an obligation of a third party. Any person may ordinarily assume any name he desires, but it has never been held that he may with impunity do so in order to defraud others through mistake of identity. Any person may ordinarily sign an instrument under an assumed name, but it has never been held that he may with impunity sign an instrument under an assumed name in order to deceive a person into the belief that the instrument has been signed by some other person. Here the depositor signed an instrument under one name and at the same time he indorsed it in another name. One or both names are assumed, and assumed for the purpose of deceit. Though the paper so signed and indorsed may have the effect of a valid order to pay out of any account standing in the name signed thereto, the paper is not what it purports to be — a complete instrument drawn by one person to the order of another and indorsed by the payee. The act of signing, indorsing and delivering the instrument by one person under pretense that there were two separate identities represented by two separate persons was to that extent a “ false making ” of the instrument.

Throughout the sections of the Penal Law of this State defining the crime of forgery in its various degrees may be found at least by implication the legislative intent that the crime of forgery includes the subscription or indorsement of an instrument, by any name fictitious or genuine, under the pretense that such subscription or indorsement is the act of another person of the same name, or of a person not in existence ” (section 883) or “ purporting to be the act of another.” (Penal Lavtf, section 887, subdivision 2.) The meaning of the statutory provisions becomes clearer when they are read in the light of definitions of common-law forgery and the decisions of the courts in this and other jurisdictions.

In such decisions the courts have swept away distinctions based upon the right of a person to the use of the name, genuine or fictitious, signed by him. They have held that the test of forgery is whether a person has falsely and with purpose to defraud made a writing which purports to be the act of another. It would be difficult perhaps by a single definition of the crime of forgery to include all possible cases. Forgery, speaking in general terms, is the false making or material alteration of or addition to a written instrument for the purpose of deceit and fraud. It may be the making of a false writing purporting to be that of another.” (Commonwealth v. Baldwin, 77 Mass. 197.) “ The falsity of the instrument consists in its purporting to be the note of some party other than the one actually making the signature. The falsity of the act consists in the intent that it shall pass and be received as the note of some other party.” (Commonwealth v. Foster, 114 Mass. 311. See, also, Adkins v. State, 41 Tex. Cr. 577; Edwards v. State, 53 Tex. Cr. 50; Barron v. State, 12 Ga. App. 342; People v. Bendit, 111 Cal. 274; State v. Wheeler, 20 Oregon, 192; State v. Young, 46 N. H. 266; Goucher v. State, 113 Neb. 352; Rex v. Francis, Russell & Ryan, 209 [1811]; Rex v. Whiley, Russell & Ryan, 89 [1805]; King v. Parles & Brown, 2 Leach C. C. 775.)

In this State it has been repeatedly held that one may commit forgery by the use of one’s own name, if that name is used with intent to deceive. (People’s Trust Co. v. Smith, 215 N. Y. 488; People v. Peacock, 6 Cow. 72; Graves v. American Exchange Bank, 17 N. Y. 205; Third National Bank v. Merchants National Bank, 76 Hun, 475.) It is said that these cases have no application to the case under consideration because here the checks, though signed under assumed names, purported to be and were in fact the act of the person known by such name to the banks upon which the checks were drawn. If the purpose of the check had been only to withdraw moneys from the drawer’s account in such bank, there would have been no forgery. They would for such purpose have been the act of the person whose act they purported to be. Even though the name which was signed might originally; have been assumed with other fraudulent purpose, the''instrument would still not be false or forged if in fact it was made by the person who purported and was understood to be the maker. (See Hartford v. Greenwich Bank, 157 App. Div. 448; affd., 215 N. Y. 726, on opinion below; Strang v. Westchester County National Bank, 235 N. Y. 68.) In Dunn’s Case (1 Leach C. C. 59) it was said and again repeated in Queen v. Martin (5 Q. B. D. 34) that “ In all forgeries the instrument supposed to be forged must be a false instrument in itself; and that if a person give a note entirely as his own, his subscribing it by a fictitious name will not make it a forgery, the credit there toeing wholly given to himself, without any regard to the name, or any relation to a third person” (italics are ours). Here the check was made by the plaintiff’s depositor not as his own but as the act of a third party. Credit was not given wholly to himself but upon the faith of an instrument purporting to be that of a third party. Through the assumption by the depositor of two names, the plaintiff bank was led to believe that the check was what it purported to be: an instrument drawn by one person in favor of another. The instrument was falsely made, for it purported to bind a person other than the person who made it. It was, therefore, a forgery under the common law and under the statutes of this State.

The judgment of the Appellate Division should, therefore, be reversed and the determination of the Appellate Term affirmed, with costs in this court and in the Appellate Division.

Cardozo, Ch. J., Pound, Crane, Andrews, Kellogg and O’Brien, JJ., concur.

Judgment accordingly.


author: Per Curiam.

text:
    In the Matter of Cheney Brothers, Appellant, against Joroco Dresses, Inc., Respondent.
    (Argued May 3, 1927;
    decided May 31, 1927.)
    Arbitration — academic question as to whether arbitration could be compelled to determine question of fraud.
    Where upon application for an order to proceed to arbitration it appears that all disputes between the parties arise from valid contracts entered into by them and are arbitrable under the terms thereof and no fraud has been shown, the question whether arbitration could be compelled to determine an issue as to the procurement of a contract by fraud is not presented and will not be determined.

      Matter of Cheney Brothers v. Joroco Dresses, Inc., 218 App. Div. 652, reversed.
    Appeal from an order of the Appellate Division of the Supreme Court in the first judicial department, entered December 31, 1926, which reversed an order of Special Term granting a motion to compel the respondent herein to proceed to arbitration and denied said motion.

      Robert P. Levis for appellant.
    The agreement to arbitrate contained in the contracts between Cheney Brothers and Joroco Dresses, Inc., is enforcible. (Matter of Silk Importing Co., 200 App. Div. 786; 234 N. Y. 513; Matter of Kelley, 240 N. Y. 74; Matter of Wenger v. Propper Silk Hosiery Mills, 239 N. Y. 199.)

      Maurice Deiches, Edward J. Flynn and Elwood G. Fellstein for respondent.
    Cheney Brothers never intended to carry out their agreement. (Adams v. Gillig, 199 N. Y. 314; Ritzwoller v. Lurie, 225 N. Y. 464; Deyo v. Hudson, 225 N. Y. 602; Adams v. Clark, 239 N. Y. 403.)

      Edwin L. Garvin, Charles Burlingham, Kenneth Dayton and Julius Henry Cohen, amici curice.

    A respondent t,o a petition for an order directing arbitration to proceed, who denies the making of the contract, should set forth in his answer facts prima fade establishing his defense. Failing this, he is not entitled to a trial of the issue. (Abdun-Nur v. Arbeed, 198 App. Div. 795; Hart v. Page Manufacturing Co., 187 App. Div. 296; Makepeace v. Dilltown Smokeless Coal Co., 179 App. Div. 662; Calmon Asbestos & R. Works v. Asbestund-Gummiewerke, 141 App. Div. 198; Brass v. Rathbone, 153 N. Y. 435; Gambrill Manufacturing Co. v. American Foreign Banking Corp., 194 App. Div. 425; Golub v. Baruchim, 203 App. Div. 620; Boyle v. Semenoff, 201 App. Div. 426; O’Meara Co. v. National Park Bank, 239 N. Y. 386; General Investment Co. v. Interborough Rapid Transit Co., 235 N. Y. 133; Dwan v. Massarene, 199 App. Div. 872; Dolgoff v. Schnitzer, 209 App. Div. 511.)
   Per Curiam.

The restrictions upon customers, forbidding their using the Cheney Brothers name in resales, promised to be imposed by the petitioner, according to the uncontradicted proof, had reference to 40-inch printed radium cloth and none other. In all contracts made by the petitioner for the sale of such fabrics the restrictions promised were invariably imposed. No restrictions, as to resales of 36-inch printed Bivulay or 40-inch printed satin crepe, were imposed in the contracts made for the sales thereof. It is undisputed, however, that 40-inch printed radium cloth is a wholly different fabric from 36-. inch printed Bivulay, or 40-inch printed satin crepe. Therefore, there is no proof that the petitioner made promises as to restrictions which it did not keep or intended from the outset not to keep. No fraud in procuring the contracts with respondent, therefore, was shown. It is undisputed that the contracts were made. Therefore, all disputes between the parties arise from valid contracts entered into by them. They are, therefore, arbitrable under the terms of the contracts. The question whether arbitration could be compelled to determine an issue made as to the procurement of a contract by fraud is, therefore, not before us and will not now be determined.

The order of the Appellate Division should be reversed and that of the Special Term affirmed, with costs in the Appellate Division and in this court.

Cardozo, Ch. J., Pound, Crane, Andrews, Lehman Kellogg and O’Brien, JJ., concur.

Ordered accordingly.


author: Pound, J.

text:
    Courteen Seed Company, Appellant, v. Hong Kong and Shanghai Banking Corporation, Respondent.
    (Argued May 16, 1927;
    decided June 7, 1927.)
    Banks and banking — bills, notes and checks — negotiable instruments — negligent use of words — agreement by bank to value credit established by letter of credit in favor of plaintiff’s agent — bank guilty of no breach of duty to plaintiff in buying draft of agent after expiry date of letter — sending of erroneous cablegram that it had “ drawn under credit ” — • bank not liable to plaintiff for loss occasioned by its acceptance, on strength of cablegram, of shipment of goods.
    1. A bank, which has agreed to value through its branch bank in a foreign country a credit in favor of plaintiff’s agent, established by a letter of credit issued by another bank, is guilty of no breach of duty to plaintiff in buying from the agent, after the expiration of the letter of credit, a draft purporting on its face to be drawn thereon. In doing so it does not act as agent of the drawee but at its own risk and owes no duty to the drawee or its customer.
    2. A contention that defendant is liable to plaintiff because its branch bank negligently and erroneously replied to a cablegram directing it to reduce credit that it had already “ drawn under credit ” and that thereby plaintiff was induced to accept a shipment of goods and reimburse the drawee bank which paid the draft on its arrival with the shipping documents, whereby it was subject to heavy loss, cannot be sustained. Defendant owed no duty of diligence to plaintiff and had no knowledge and could not anticipate that it would accept the shipment merely on the strength of the cablegram. (Glanzer v. Shepard, 233 N. Y. 236; International Products Co. v. Erie B. B. Co., 244 N. Y. 331, distinguished.)

      Courteen Seed Co. v. Hong Kong & Shanghai Banking Corp., 216 App. Div. 495, affirmed.

      Appeal from a judgment, entered June 9, 1926, upon an order of the Appellate Division of the Supreme Court in the first judicial department, reversing a judgment in favor of plaintiff entered upon a verdict directed by the court and directing a dismissal of the complaint.

      Charles F. Fawsett, A. L. Humes, M. E. Harby and Milward W. Martin for appellant.
    The defendant violated its duty, and obligation to the plaintiff by sending the untrue cablegram and failing to correct it. (Glanzer v. Shepard, 233 N. Y. 236; Isham v. Post, 141 N. Y. 100; Bown Bros., Inc., v. Merchants Bank, 243 N. Y. 366; Crane v. Bennett, 177 N. Y. 106; Smith v. Frank, 25 N. Y. Super. Ct. 626; Loewer v. Harris, 57 Fed. Rep. 368.)

      Henry de Forest Baldwin, Franklin Grady and Sherman Baldwin for respondent.
    The defendant bank was not the agent of the plaintiff. There was no privity of contract between the plaintiff and the defendant. There was no fiduciary relationship between the plaintiff and the defendant. The defendant was under no duty toward the plaintiff. (St. Nicholas Bank v. State Nat. Bank, 128 N. Y. 26; Isler v. Nat. Park Bank, 239 N. Y. 462; Gilpin v. Columbia Nat. Bank, 220 N. Y. 406; Kronman & Co. v. Public Nat. Bank, 218 App. Div. 624; Bank of Taiwan, Ltd., v. Union National Bank of Phila., 1 Fed. Rep. [2d] 65; Second Nat. Bank of Hoboken v. Columbia Trust Co., 288 Fed. Rep. 17; Williams Ice Cream Co., Inc., v. Chase Nat. Bank, 210 App. Div. 179; Frey & Son, Inc., v. Sherburne Co., 193 App. Div. 849; Imbrie v. Nagase & Co., Ltd., No. 2, 196 App. Div. 380; Amer. Steel Co. v. Irving Nat. Bank, 266 Fed. Rep. 41; Birckhead v. Brown, 5 Hill, 634; 2 Den. 375.)
   Pound, J.

Plaintiff sues to recover more than $300,000 damages through loss on the sale of alfalfa seed which it purchased at Vladivostok in Siberian Russia for resale to customers. Union Trust Company of Chicago had issued a documentary letter of credit in favor of plaintiff’s agent in Siberia, Adolph Heiman, for $600,000 and defendant had undertaken the business of valuing the credit at its branch bank in "Vladivostok. The written letter of credit had an expiry date of February 1, 1920. By its terms shipments must be completed and drafts drawn on or before February 1st, 1920.” The defendant after that date purchased a draft from Heiman, drawn on the Union Trust Company, purporting on its face to be drawn under the letter of credit, for $600,000 payable in New York, to pay for seed shipped after the expiry date. The seed arrived in Portland, Oregon, and was accepted by plaintiff in ignorance of the date of the draft and of shipment. Defendant had meanwhile sent the draft to the Union Trust Company for payment. Union Trust Company had paid the defendant and plaintiff had paid the Union Trust Company. The court below properly held that, so far as liability on contract was concerned, defendant was guilty of no breach of duty to plaintiff in buying the draft after the letter of credit had expired. When a bank buys a draft relating to a letter of credit it does not act as the agent of the drawee. The transaction is at its own risk. It owes no duty to the drawee or to the drawee’s customer. It buys commercial paper relying on the credit of the drawer and the security that is offered. No contractual relation exists between the drawee’s customer and the purchasing bank. Therefore, no breach of contract arises out of the purchase of a draft after the expiry date of the letter of credit. The governing principles in relation to letters of credit in this connection are adequately set forth in the opinion of McAvoy, J., below (216 App. Div. 495) and need not be repeated.

Appellant argues in this court that the respondent should be held hable for careless words. The facts on which it relies to sustain this theory are as follows: On January 28 the Union Trust Company at the request of appellant sent a telegram to respondent’s New York office directing it to cable the Vladivostok branch that in case letter of credit was not used within the time specified, February 1st, the credit be reduced to $300,000 and extended to and until February 10. On January 30 respondent’s New York office cabled its Vladivostok office accordingly. This cable did not arrive at respondent’s Vladivostok office until the afternoon of February 12, after the Adolph Heiman draft for $600,000 had been purchased. On receipt thereof the Vladivostok office sent a cable to the New York office as follows: Re your wire 30th January received 12th February too late have drawn under credit.” This statement was made negligently in reliance upon a preliminary cabled letter of credit which had no expiry date but which was followed by a confirmatory written letter of credit having an expiry date which respondent negligently overlooked. This cable reached defendant’s New York office on February 24. A copy thereof by wire, confirmed the next day by a letter, was sent to the Union Trust Company which communicated the same to respondent. The ship Waban arrived in Portland on February 25, with the alfalfa shipment on board. The draft and shipping documents which showed on their face that the draft had been drawn and seed shipped after February 1 had not arrived. Respondent, without waiting the arrival of the shipping documents, took the seed although it was informed that the bill of lading was issued February 9. The draft and shipping documents arrived thereafter and the draft was paid by the Union Trust Company and it was reimbursed by the appellant. When appellant discovered that the draft was drawn and shipment made contrary to the stipulations of the letter of credit it was too late to reject the shipment.

Appellant contends that it did not want the seed when it arrived and that it accepted the shipment solely because it was misled by respondent’s untrue telegram; that the worth of the seed resulting from a careful resale deducted from the total cost of the seed including expenses left a net loss of $319,339.03; that respondent’s action in sending the untrue telegram was the direct cause of the loss.

The court has had to deal recently with cases involving liability for information negligently given. They all rest on the principle that negligent words are not actionable unless they are uttered directly, with knowledge or notice that they will be acted on, to one to whom the speaker is bound by some relation of duty, arising out of public calling, contract or otherwise, to act with care if he acts at all. Thus in Glanzer v. Shepard (233 N. Y. 236) defendants were engaged in business as public weighers. They were requested by sellers of merchandise to weigh and make return of the weight thereof and furnish the buyers with a copy of the return. The merchandise was accepted and paid for on the faith of the certificates. The buyers afterwards found that through the negligence of the weighers the actual weight was less than the weight certified in the return. The defendants were held liable to the buyers for the amount they overpaid. Cardozo, J., said: The defendants, acting, not casually nor as mere servants, but in the pursuit of an independent calling, weighed and certified at the order of one with the very end and aim of shaping the conduct of another. Diligence was owing, not only to him who ordered, but to him also who relied.”

In International Products Co. v. Erie R. R. Co. (244 N. Y. 331) the rule of liability for negligent words was stated by Andrews, J., as follows: “ Liability in such cases arises only where there is a duty, if one speaks at all, to give the correct information. And that involves many considerations. There must be knowledge or its equivalent that the information is desired for a serious purpose; that he to whom it is given intends to rely and act upon it; that if false or erroneous he will because of it be injured in person or property. Finally the relationship of the parties, arising out of contract or otherwise, must be such that in morals and good conscience the one has the right to rely upon the other for information, and the other giving the information owes a duty to give it with care.” It was applied when a warehouseman negligently gave wrong information to the owner of goods as to the place of storage, knowing the inquiry was made for ¡¡the purpose of having insurance placed thereon. (See, also, Bush Terminal Co. v. Globe & Rutgers F. Ins. Co., 182 App. Div. 748; affd., 228 N. Y. 575; 12 Cornell Law Quarterly, 539.)

Here respondent owed no duty of diligence to appellant. Appellant made no inquiry of respondent as to the exact date on which the draft had been purchased and shipment made. The information that respondent gave the Union Trust Company was that the letter of credit had been drawn upon. It ran all the risk of its negligent act in buying the draft after the expiry date. It might anticipate that if it so bought the draft the Union Trust Company would refuse to honor it. It could scarcely anticipate that appellant would, without verifying the date of shipment, accept the alfalfa seed merely on the strength of the telegram. Respondent did not have knowledge or its equivalent that such would be the result of the misinformation, or that the seed would arrive before the draft and accompanying documents. It did not deal with appellant, had no relations with it and was under no duty of care to it. When it notified the Union Trust Company that the draft had been bought under the letter of credit it was justified in assuming that if the information was inaccurate the draft would not be paid on presentation —■ nothing more. The action of the appellant in accepting the shipment was an indirect or collateral result or consequence of the ■untrue telegram, but no liability was created thereby under any rule thus far adopted by this court.

The judgment should be affirmed with costs.

Cardozo, Ch. J., Crane, Andrews, Lehman, Kellogg and O’Brien, JJ., concur.

Judgment affirmed, etc.


author: Kellogg, J.

text:
    Francis A. Cundill, Appellant, v. John B. Lewis, Respondent.
    (Argued May 19, 1927;
    decided June 7, 1927.)
    Contract — sale — warehousemen — inference that warehouseman, without surrender of non-negotiable warehouse receipt, promised to hold stored goods for purchaser not drawn from mere acceptance of check for storage charges — action to recover for failure of seller to deliver goods — plaintiff entitled to direction of verdict — inadequacy of charge immaterial.
    1. An inference that a warehouse company has promised, without indorsement and surrender of a non-negotiable warehouse receipt, to hold stored goods on behalf of plaintiff, who had purchased the goods from the owner, will not be drawn from the mere fact that it accepted a check from plaintiff for a month’s storage charges, where it had never been informed of the purchase or that plaintiff held a delivery order from the owner.
    2. In an action, therefore, to recover from the seller the value of the goods on the ground that when plaintiff presented the delivery order the goods could not be found in the warehouse and he, therefore, never received the same, it must be held, as matter of law, that the warehouse company never acknowledged that it held the goods on behalf of plaintiff within the meaning of subdivision 3 of section 124 of the Personal Property Law (Cons. Laws, eh. 41) requiring such an acknowledgment to fulfill the seller’s obligation to deliver goods in the possession of a third party, and, where it appeared that defendant never made delivery, plaintiff was entitled to direction of a verdict in his favor. Inadequacy in the charge, therefore, was immaterial and did not justify reversal of a judgment entered upon a verdict for plaintiff.

      Cundill v. Lewis, 219 App. Div. 742, reversed.
    Appeal from an order of the Appellate Division of the Supreme Court in the second judicial department, entered January 28,1927, reversing a judgment in favor of plaintiff entered upon a verdict and granting a new trial.

      James Madison Blackwell for appellant.
    As a matter of law, there was no evidence on the trial of an acknowledgment by the bailee to the purchaser, pursuant to subdivision 3 of section 124 of the Personal Property Law. (Edwards v. Meadows, 71 Ala. 42; Barney v. Brown, 2 Vt. 374; Weiss v. Housman, 204 App. Div. 152; 236 N. Y. 620; Robinson v. All Light Sales Co., Inc., 202 N. Y. Supp. 260; Borrenco Importing Co. v. Sperber, 205 App. Div. 417.)

      Frederick G. Rita for respondent.
    The court’s charge failed to adequately present the case to the jury. (Alden v. Knights of Maccabees, 178 N. Y. 536.)
   Kellogg, J.

The plaintiff and the defendant, on the 14th day of March, 1925, entered into a contract whereby the defendant agreed to sell and the plaintiff, under the name of Francis A. Cundid & Co., agreed to buy “ 39 cases of 100 lbs. each of Japanese Refined Camphor in 2p2 pound slabs, at 70 cents per pound, ex store, Brooklyn, N. Y. buyer to have the benefit of unexpired insurance and storage, terms net cash in five days.” The camphor was at the time stored in a storehouse of the S. & S. Storage Warehouse Company located on Maspeth avenue, Brooklyn. On the day that the contract was made the defendant dedvered to the plaintiff a warehouse delivery order reading as fodows: “ S. & S. Storage Warehouse, 1085 Grand Street, Brooklyn, N. Y. please deliver to Francis A. Cunddl & Co. thirty-nine (39) cases Camphor Slabs 2| lbs. W /R. #4297, Marks R C Numbers made in Japan C /101 /150. (Free storage expires March 17th, 1925.) ” The camphor had originady been stored at the warehouse of the S. & S. Storage Warehouse Company at 1085 Grand street. The defendant held a warehouse receipt from the company which stated that the camphor had been “ received on storage 1085 Grand St. for account of John D. Lewis.” The receipt named six different warehouses belonging to the company of which the Maspeth avenue warehouse was one. The camphor, in November, 1924, had been removed from the Grand street warehouse to the Maspeth avenue warehouse. On the 21st day of March, 1925, the plaintiff paid to the defendant the sum of $2,730 which was the sum due the defendant for the camphor at the rate per pound named in the contract. As shown by the delivery order given to the plaintiff the storage charges on the camphor had been paid to March 17th, 1925, on which date the free storage conceded to plaintiff expired. On the 24th day of March, 1925, the plaintiff, or some one in his office, called the warehouse company on the telephone and asked what the charges were from the time of the unexpired storage to date. An officer of the company replied that the storage charges to April 17th would be $1.95. On the same date the plaintiff wrote the warehouse inclosing a check for $1.95 and saying, “ We are enclosing herewith our check for $1.95 to cover storage for one month on 39 cases of camphor in your warehouse.” The evidence showed that the 39 cases of camphor were in storage at the Maspeth avenue warehouse on March 25th, 1925. It likewise showed that the camphor had disappeared, through theft or otherwise, from the warehouse prior to March 27th, 1925. On this date the plaintiff presented his delivery order and demanded the camphor. The camphor was not delivered to him and he has never received actual possession of the same. He brought this action to recover the value of the camphor on March 27th, the day when he made demand therefor, alleging in his complaint that the defendant had broken his contract to sell and deliver the camphor. All of the foregoing facts are undisputed. The case was submitted to a jury which returned a verdict for the plaintiff of $3,315. That sum represented the value of the camphor on March 27th, 1925, plus interest. The judgment entered upon the verdict was reversed by the Appellate Division, which, in a brief per curiam, said: Judgment reversed upon the law and the facts, and new trial granted, costs to abide the event. The question at issue on the trial was whether the third party in whose custody the goods were, had acknowledged to the buyer that it held the goods on the buyer’s behalf. (Pers. Prop. Law, § 124, subd. 3.) That issue was not adequately presented to the jury by the charge of the court, and, therefore, in the interests of justice, we think a new trial should be granted.” (219 App. Div. 742). The plaintiff thereupon appealed, specifying in his notice of appeal that “ the said plaintiff hereby stipulates that if the said order be affirmed upon appeal, judgment absolute shall be rendered against him.”

It is provided in section 124, subdivision 3, of the Personal Property Law (Cons. Laws, ch. 41) as follows: “ Where the goods at the time of sale are in the possession of a third person, the seller has not fulfilled his obligation to deliver to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on the buyer’s behalf.” The subdivision applies to this case, for at the time of the sale the camphor was in the possession of a third person, the S. & S. Storage Warehouse Co., Inc. Did that company ever acknowledge to the plaintiff buyer that it held the camphor on his behalf? The receipt issued by the warehouse company certified that the camphor was held “for account of John D. Lewis.” It was a non-negotiable receipt. (General Business Law [Cons. Laws, ch. 20], section 92.) The words “ Non Negotiable ” plainly appeared upon its face, as required by law. (Id., section 93.) Under these words appeared the following: “ The above goods will not be delivered without proper endorsement and surrender of the receipt.” A promise to hold the camphor on behalf of the plaintiff, who held no receipt and could surrender none, would have pledged the warehouse company to a violation of its express promise given to the depositor of the camphor. Moreover, the warehouse company would not have been legally justified in delivering the camphor to any person other than the depositor or one having written authority from him. (Id., sections 96,97.) The warehouse company was wholly ignorant of the fact that the plaintiff had a delivery order from the depositor. The plaintiff had never informed it that he had bought the camphor, that he was the owner thereof, or that he held a delivery order from the depositor. In the absence of such information, the making of a promise to hold the camphor on the plaintiff’s behalf would have indicated a willingness on its part to violate the law. In default of facts, strongly persuasive to that end, we should not infer that the warehouse company/ intending to violate its agreement and the law, made such a promise. Under the circumstances, such an inference could not properly be drawn from the mere fact that the warehouse company accepted a check from the plaintiff for a month’s storage of the camphor. It may have thought that he was paying the debt of the defendant for storage. It may have purposed to hold the camphor for him on condition that he presented to it its warehouse receipt, properly indorsed, for surrender. In neither event could its act of accepting the check be construed as an unqualified acknowledgment that it held the camphor on the plaintiff’s behalf. Therefore, we think that the warehouse company, as a matter of law, never acknowledged that it held the camphor on his behalf; that the defendant never delivered the camphor to him; that the plaintiff was entitled to a direction of a verdict in his favor for the sum found to be his due by the jury. In this view, if the charge of the trial judge was inadquate, its inadequacy was immaterial and the reversal was not justified.

The order of the Appellate Division should be reversed and the judgment of the Trial Term affirmed, with costs in the Appellate Division and this court.

Cardozo, Ch. J., Pound, Crane, Andrews, Lehman and O’Brien, JJ., concur.

Ordered accordingly.