author: Lehman, J.

text:
    The Midwood Sanatorium, Appellant, v. Fireman’s Fund Insurance Company of San Francisco, Respondent, Impleaded with Others.
    (Argued March 8, 1933;
    decided April 11, 1933.)

      Herman Mendes and George Lessall for appellant.
    The Appellate Division erred in dismissing the complaint. (Davis v. Grand Rapids Ins. Co., 15 Mise. Rep. 263; 157 N. Y. 685; Grand Rapids Fire Ins. Co. v. Finn, 60 Ohio St. 513; Wynkoop v. Niagara Fire Ins. Co., 91 N. Y. 478; Hewins v. London Assur. Corp., 184 Mass. 177; Larkin v. Glens Falls Ins. Co., 80 Minn. 527; Sergent v. Liverpool & L. & G. Ins. Co., 155 N. Y. 349.) The Appellate Division’s reversal of the judgment upon the ground that plaintiff is not entitled to a recovery as for a total loss was erroneous (Palatine Ins. Co. v. Nunn, 99 Miss. 493; Brady v. Northwestern Ins. Co., 11 Mich. 425; Larkin v. Glens Falls Ins. Co., 80 Minn. 527; Hewins v. London Assur. Corp., 184 Mass. 177; Manchester Fire Ins. Co. v. Feibelman, 118 Ala. 308; Melcher v. Ocean Accident & Guarantee Corp., 226 N. Y. 51; Faber v. City of New York, 213 N. Y. 411; Cannon v. Fargo, 222 N. Y. 321; Shuman v. Hall, 246 N. Y. 51; Zang v. Joline, 159 App. Div. 885.)

      Frederic C. Pitcher and Ruth I. Wilson for respondent.
    The Appellate Division rightly held, as matter of law, that plaintiff failed to prove a total loss by fire, because the order to discontinue the use of the building as a sanatorium was based on insufficient means of egress and not on any condition caused by the fire. (Pocahontas Tanning Co. v. Fidelity-Phenix Fire Ins. Co., 216 App. Div. 435; 243 N. Y. 644; Security Ins. Co. v. Rosenberg, 227 Ky. 314; Whitlatch v. Fidelity & Casualty Co., 149 N. Y. 45; Providence Washington Ins. Co. v. Board of Education, 49 W. Ya. 360; Bird v. St. PaulF. & M. Ins. Co., 224 N. Y. 47.) The Appellate Division correctly held as matter of law that plaintiff could not recover for a total loss because it failed to prove that it was prohibited from repairing the building. (Brady v. Nortlvwestern Ins. Co., 11 Mich. 425; Security Ins. Co. v. Rosenberg, 227 Ky. 321; Lux v. Milwaukee Mechanics Ins. Co., 322 Mo. 342.) The clause in the policy, “ but not exceeding the amount which it would cost to repair or replace the same with material of like kind and quality ” fixes the limit of the insurer’s liability. (McCready v. Hartford Fire Ins. Co., 61 App. Div. 583; Boskowitz v. Continental Ins. Co., 175 App. Div. 18; Providence Washington Ins. Co. v. Board of Education, 49 W. Ya. 360; Gouin v. Northwestern Nat. Ins. Co., 145 Wash. 199.) The Appellate Division rightly ruled that, as matter of law, there could be no recovery even for partial loss, because the demolition of the building, begun before proofs of loss were filed, deprived defendant of its optional right to repair the fire damage. (Astrich v. German-American Ins. Co., 128 Fed. Rep. 477; 131 Fed. Rep. 13; 198U. S. 583; Beals v. Homelns. Co., 36 N. Y. 522; Marble-stone Co. v. Phoenix Assur. Co., 169 Minn. 1; Oshkosh Match Works v. Manchester Fire Assur. Co., 92 Wis. 510; Hamilton v. Liverpool, L. & G. Ins. Co., 136 U. S. 242.) After defendant’s rights of inspection, appraisal and "repair had been cut off by the demoiltion of the building, defendant was not obliged to go through the futile formality of demanding these rights. (Woolner v. Hill, 93 N. Y. 576; Sokoloff v. National City Bank, 250 N. Y. 69; Drake v. Hodgson, 192 App. Div. 676; Hamilton v. Liverpool, L. &. G. Ins. Co., 136 U. S. 242; Marblestone
      v. Phoenix Assur. Co., 169 Minn. 1; Oshkosh Match Works v. Manchester Fire Assur. Co., 92 Wis. 510; Astrich v. Oerman-American Ins. Co., 128 Fed. Rep. 477; 131 Fed. Rep. 13; 198 IT. S. 583; Siegel v. Ohio Millers’ Mut. Fire Ins. Co., 29 Fed. Rep. [2d] 988; Johnson v. Hartford Fire Ins. Co., 94 Mise. Rep. 163.)
   Lehman, J.

The defendant Fireman’s Fund Insurance Company of San Francisco issued a policy of fire insurance on premises owned by the plaintiff and occupied by it as a sanitarium. The building covered by the policy is a frame structure erected within what is known as a fire district ” in the city of New York. Under the ordinances of the city of New York, existing frame buildings erected within such districts are legal, but any existing frame building which may be in need of structural repairs to an amount greater than fifty per cent of its value exclusive of the foundations shall not be repaired or rebuilt, but shall be taken down.” (Ch. 5, art. 5, § 93.)

The plaintiff’s building was damaged by fire on June 12, 1928. The damage was confined to the roof and upper part of the building. Estimates of the damage varied from $6,500 to $8,800. Before the proofs of loss were filed or any friendly agreement arrived at as to the amount of damage done by the fire, the plaintiff received a letter signed by the Superintendent of Buildings, which stated: Due to the fact that this building is a frame construction and having inadequate means of egress in the event of fire, you are hereby directed to have the building vacated and its use as a sanitarium discontinued.” Thereupon the plaintiff arranged to have the building demolished and a fireproof building constructed. Before the work was begun the defendant wrote to the plaintiff a letter which reads as follows in part: It is stated that you intend to tear down the present structure and rebuild on modern lines. May we suggest, assuming this to be true, that you defer this action until after the companies can exercise their rights to either repair the damage or have an appraisal. While we trust you do not contemplate this action, we beg to advise you that such a course on your part will be given such legal effect as it is fairly entitled to. * * * This is written without any admissions or waivers but simply to put you on notice of our view of the present status of the case, and to hope that we may reach a friendly agreement as to amount of value and loss.” Disregarding this letter, the plaintiff proceeded to demolish the building, and brought this action against the defendant, claiming that it is entitled to recover from the insurance company for the total loss or destruction or the building, and not merely the cost of repairing or replacing the damaged portions.

A fire which so damages a building that it cannot be repaired or rebuilt causes a loss to the owner of the entire value of the building, even though part of the building remains standing. That is as true in a case where the State prohibits rebuilding or repair as it is where physical conditions make such rebuilding or repair impossible. Where a policy insures an owner against all loss or damage caused by fire, but reserves to the insurer an option to rebuild instead of paying the loss caused by the fire, the insurance company cannot avail itself of its option if the law prevents rebuilding, nor can the owner’s loss or damage be measured by the cost of repairs which he is forbidden to make. In such circumstances it has been held that the insurer must pay the full amount of the loss actually caused to the owner. (Palatine Ins. Co. v. Nunn, 99 Miss. 493; Brady v. North Western Ins. Co., 11 Mich. 425; Hewins v. London Assur. Corp., 184 Mass. 177.) In this case the evidence shows that the damaged portion of the building could be repaired or replaced with material of like kind and quality without violation of any municipal ordinance of the city of New York, but that if such repairs or replacements were made, the owner would not be allowed to occupy the building as a sanitarium, and that the building could not profitably be used for any other purpose. The ordinances of the city of New York required a different form of construction and better means of egress for buildings used for the care of the sick; and though the city authorities had not previously objected to continued occupancy by the plaintiff of a building which did not comply with such requirements, they would not grant any permit for such occupancy after repairs necessitated by the fire were made. The Appellate Division has held that under such circumstances the owner has not suffered a total loss of the value of the building. Strong argument could be made in support of that conclusion, but it is unnecessary to decide such question, for by the terms of the policy the insurance company has agreed to pay loss and damage to the premises by fire “ but not exceeding the amount which it would cost to repair or replace the same with material of like kind and quality * * * without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair.” The owner accepted that limitation upon the liability assumed by the insurer. In no event can it be entitled to more than such cost. In all the cases cited above, the policies contained no such limitation on the liability assumed by the insured, except' one policy, among several, in Hewins v. London Assur. Corp. (supra), and there the court enforced that limitation. The defendant clearly cannot be held to any liability beyond that which it assumed.

The Appellate Division has gone further, and held that the defendant has been released even from that liability, because the plaintiff by premature demolition of the building deprived the defendant of its right at its option to take the property at its appraised value or to repair, rebuild or replace it with other of like kind and quality. In this the Appellate Division erred. The defendant, it is true, had an option to substitute, for its primary obligation to pay the loss or damage caused by fire, an obligation to take the property at its appraised value, or to repair the damage itself. (Ætna Ins. Co. v. Phelps, 27 Ill. 71.) It could not avail itself of its option without giving notice that it chose to do so. (2 Williston on Contracts, § 894.) It has given no such notice, and has not substituted either optional obligation in place of its primary obligation. The rule that a party to a contract cannot insist upon performance of a condition precedentwhere he has rendered such performance impossible or futile (2 Williston on Contracts, § 767) has no application here. Notice was necessary to make the option available as a right. The plaintiff has not made performance of that condition impossible. (Cf. Eliot Five Cents Sav. Bank v. Commercial Union Assur. Co., 142 Mass. 142.) If the defendant had chosen to give notice that it would exercise its option to substitute one of the optional obligations in place of the primary obligation, even after the plaintiff had rendered performance of such optional obligation impossible, then the defendant might have been in a position to say that it could no longer be called upon to perform its primary obligation to pay the loss or damage caused by fire, and could not be called upon to pay damages for failure to perform its substituted obligation because the plaintiff had rendered such performance impossible. It is not in a position to claim release from its primary obligation when it has failed to give the notice which was a condition precedent to any right to make such substitution. The plaintiff has not breached any covenant which constituted a condition precedent to liability on the part of the defendant, and the defendant has not chosen to avail itself, as it might have done by proper notice, of its right to substitute a secondary obligation for its primary obligation. The plaintiff may, therefore, enforce the defendant’s promise to pay the loss or damage caused by the fire to the extent not exceeding the amount which it would cost to repair or replace the damaged property with material of like kind and quality. (Davis v. Grand Rapids Fire Ins. Co., 15 Misc. Rep. 263; affd., 157 N. Y. 685.)

The judgment should be reversed, without costs, and a new trial granted.

Pound, Ch. J., Crane, Kellogg, O’Brien and Crouch, JJ., concur; Hubbs, J., not sitting.

Judgment reversed, etc.


source: Caselaw Access Project

license: Public Domain

text:
    Anton Schichowski, Respondent, v. August E. Hoffmann, Appellant.
    (Argued March 7, 1933;
    decided April 11, 1933.)

      Harry A. Bostrom, Wilson B. Brice and Forrest M. Anderson for appellant.
    The complaint does not state a cause of action. (Neubert v. Armstrong Water Co., 211 Penn. St. 582; Leslie v. Mahoning By. Co., 22 Penn. C. C. 300; Machen v. Machen & Mayer Electrical Mfg. Co., 237 Penn. St. 212; Matter of Journal Pub. Club, 30 Mise. Rep. 326; Greenberg v. Polansky, 140 App. Div. 326; Watertown Paper Co. v. Place, 51 App. Div. 633; Saal v. South Brooklyn By. Co., 122 App. Div. 364.) The trial court erred in refusing to dismiss the complaint and in refusing to direct a verdict for the defendant. (Greenberg v. Polansky, 140 App. Div. 326; Matter of Wegman’s Sons, 40 App. Div. 632; Watertown Paper Co. v. Place, 51 App. Div. 633; Neubert v. Armstrong Water Co., 211 Penn.' St. 582; Leslie v. Mahoning By. Co., 22 Penn. C. C. 300; Machen v. Machen & Mayer Electrical Mfg. Co., 237 Penn. St. 212; Matter of Journal Pub. Club, 30 Mise. Rep. 326.)

      Oscar S. Blinn for respondent.
    The complaint sets forth a cause of action. (Finley v. Atlantic Transport Co., 220 N. Y. 249; Kujek v. Goldman, 150 N. Y. 176; Hábeeb v. Daas, 111 Mise. Rep. 437; 196 App. Div. 974; Keller v. Butler, 246 N. Y. 249; Fulton v. Ingalls, 165 App. Div. 323; Williamson v. Cassa-Eguia, 226 App. Div. 195; Abounader v. Strohmeyer, 217 App. Div. 43; 243 N. Y. 458; Pitcher v. Lennon, 12 App. Div. 356; Brown v. Wittner, 43 App. Div. 135; McCrea v. McClenahan, 131 App. Div. 247; Israel v. Burke & Sons, 97 Mise. Rep. 371; Debobes v. Butterfly, 210 App. Div. 50.)
   Lehman, J.

In May, 1925, the plaintiff, while secretary of Merchants Collateral Corporation, a New York corporation, delivered the corporate hooks to the defendant, its president, in the city of Reading, Pennsylvania. He did this at the defendant’s direction. They were thereafter kept by the president in a safe in his office in the city of Heading. On the 19th of April, 1927, in an action brought by a third party against the defendant, an order in aid of an attachment against defendant’s property was made by a justice of the Supreme Court, directing the Merchants Collateral Corporation by the plaintiff, its secretary, to appear and attend at Special Term and submit to an examination under oath concerning the property of the defendant and his interest in the corporation, and further directing that the said corporation, by the plaintiff, its secretary, produce the corporate books referring to any of the matters included in the order of examination.

The plaintiff did not appear at the time set for the examination. He claims that he was never served with the order of examination. He was served thereafter with an order to show cause why he should not be adjudged guilty of contempt of court in having willfully disobeyed such order to appear and attend for examination. Though counsel appeared in his behalf, he was adjudged guilty. The order provided that he might purge himself of the contempt by appearing for examination and producing the books of the corporation on June 7th, and that upon proof of his failure to do so application might be made ex parte for a warrant of commitment.

The plaintiff appeared for examination at the time set. He could not produce the corporate books. He endeavored to induce the defendant to send them back, but though the defendant knew that plaintiff might be imprisoned if he failed to produce the books, the defendant did not return the books. On October 31st the plaintiff was arrested under a warrant of commitment. Even then the defendant delayed the return of the books, and until November 11th the plaintiff was unable to purge himself of his contempt and comply with the order for the production of the books. In this action he has recovered judgment for the damages sustained by his imprisonment.

The action is novel. The plaintiff has been imprisoned ■under an order of a court of competent jurisdiction, adjudicating that he willfully disobeyed an order of the court. The defendant did not initiate the proceedings, against the plaintiff and did not deceive the court. He was, in fact and in law, a stranger to these proceedings. Here, we can find no analogy to the cases where a defendant has been compelled to respond in damages for the malicious initiation of a prosecution, for malicious abuse of process, or for other wrong committed in the course of a judicial proceeding. To sustain the judgment, wrong and damage flowing from that wrong must be shown. Ancient rifles of law may be applied to novel conditions. The definition of a general right or duty may be defined in terms broad enough to cover new conditions as they arise; but there is no remedy for damage caused by the act of another except where that act constitutes an invasion of a legal right of the injured person, a breach of some duty owed to him.

Every domestic corporation is required to keep at its office in this State correct books of account and a stock book. The stock book must be open for inspection “ by any judgment creditor of the corporation; or by any person who shall have been a stockholder of record in such corporation for at least six months immediately preceding his demand.” For every day that a corporation neglects or refuses to keep or cause to be kept such books or to keep any stock book open for inspection it forfeits to the people the sum of fifty dollars, and if any officer or agent of any such corporation shall willfully neglect or refuse to make any proper entry in such book or books, or shall neglect or refuse to exhibit any such stock book * * * as provided in this section, the corporation and such officer or agent shall each forfeit and pay to the party injured a penalty of fifty dollars for every such neglect or refusal, and all damages resulting to him therefrom.” (Stock Corp. Law; Cons. Laws, ch. 59, § 10.)

Corporate officers who remove and keep the corporate books in a foreign jurisdiction violate a statutory duty and expose the corporation to the statutory penalty for such violation. They owe a continuing duty to the corporation to bring back the books so that violation of the statute may cease. The officer or officers who keep their books out of the State may also be liable to pay to a person having the right to inspect the books, the statutory penalty and the damages which flow from denial of the right of inspection. Perhaps, also, to persons having such right to inspect, the corporate officers may owe a continuing duty to restore the books to the corporate office. Here, neither the corporation nor a person entitled to inspect the books is asserting a right or complaining of the violation of a duty owed to him. The plaintiff claims damages against the defendant for the violation of an alleged duty owed to him as secretary of the corporation by its president to whom he delivered the books.

If the plaintiff was intrusted by the corporation with the custody of the books at the corporate office, then a refusal by the defendant to comply with plaintiff’s request to return the books would constitute a wrong to the corporation but not a personal wrong to the plaintiff and ordinarily would cause no personal damage to the plaintiff. Even, here, the order to produce the books was directed, not to the plaintiff personally, but to the corporation by the plaintiff, its secretary. If the plaintiff did not as corporate agent have control of the books and could not comply with the order, his failure to produce the books would not be a willful disobedience of a judicial decree and he could not, because of such failure, be punished for contempt. (Geller v. Flamount Realty Corp., 260 N. Y. 346.) It is said that nevertheless he was punished for such failure. Before he was adjudged in contempt he had opportunity to present the facts to the court. The subsequent order of the court may have been due to the failure of the plaintiff to present the situation properly or failure of the court to apprehend the consequences legally following from that situation. Certainly, until that time the defendant was not under any duty to foresee and to guard the plaintiff against the consequences of error on the part of the plaintiff or his attorney, or on the part of the court.

We are told that, even though that be true, after the plaintiff was adjudicated in contempt, the defendant came ■under the duty to assist the plaintiff to obey the order for the production of the books and thus to purge himself of the contempt. We assume that the defendant as president of the corporation should have assisted the corporation and its agents to obey any order of the court directed to the corporation, but even if that may be said to constitute a legal duty, it is a duty owed to the court or- to a party to the litigation before the court, whose right or remedy might otherwise be defeated, impaired, impeded or prejudiced. It is not a duty owed to another agent of the corporation, nor does it ripen into such a duty merely because, if he remains quiescent, such other agent may be subjected to imprisonment.

Our concepts of legal duties are not static in a changing world. They grow and change as new conditions arise; as life becomes more complex in its social relations; as the social conscience of the community imposes upon its members new obligations or frees them from old obligations. The field in which a man may with impunity cause damage to another for his own selfish ends has been restricted by statute and, at times, even by judicial ■ decision. The field in which a man may be held liable for failure to take affirmative action to avert from another damage which may arise from causes which he has not created has not been greatly enlarged. The plaintiff here was threatened with the consequence of acts which the court had adjudicated constituted a willful disobedience of its mandate. The court could reheve the plaintiff from these consequences if convinced that the plaintiff was using his utmost endeavors to comply with that mandate. The defendant, not having caused the court to act or refrain from acting, was not under a legal duty to come to the plaintiff’s aid. If the plaintiff did in fact willfully disobey the mandate of the court, he cannot shift the penalty to the defendant. A sense of loyalty to an associate or employee who was threatened with imprisonment because he had served the defendant too faithfully might well have impelled the defendant to come to the plaintiff’s assistance. The law imposed no such duty upon him.

The judgment of the Appellate Division and that of the Trial Term should be reversed and the complaint dismissed, with costs in all courts.

Pound, Ch. J., Crane, Kellogg, O’Brien and Crouch, JJ., concur; Hubbs, J., not sitting.

Judgments reversed, etc.


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

text:
    Fraw Realty Co., Inc., Appellant, v. Max N. Natanson et al., Respondents.

      (Argued January 23, 1933;
    decided April 11, 1933.)

      Eugene A. Sherpick, William Gilbert, James J. Regan and John W. Jordan for appellant.
    The judgment should be reversed and judgment directed for the plaintiff for the relief demanded in its complaint. (Natelson v. A. B. L, Holding Co., 260 N. Y. 233.)

      Samuel Seabury and Alexander Pfeiffer for respondents.
    In the absence of an estoppel, a creditor is entitled to collect bis claim only out of property belonging to his debtor. Consequently, in such a case, a debtor commits no wrong against his creditor by transferring into the name of its true owner, property theretofore standing in the name of the debtor but, in truth, never belonging to the debtor. (Siemon v. Austin, 33 Barb. 9; 29 N. Y. 598; Frank v. Linkop Realty Corp., 106 N. J. Eq. 567; Trenton Banking Co. v. Duncan, 86 N. Y. 221; Holden v. Burnham, 2 Hun, 678; Dunn v. Whalen, 21 N. Y. Supp. 869; Davis v. Graves, 29 Barb. 480; Foote v. Bryant, 47 N. Y. 544; Norton v. Mallory, 63 N. Y. 434; Robbins v. Robbins, 89 N. Y. 251; Purer v. Real Estate Corp., 108 N. J. Eq. 221; Kingsbury v. Christy, 21 Ariz. 559; Bicocchi v. Casey-Swasey Co., 91 Tex. 259.) All the properties, transfers of which are now attacked, were purchased by Normar, and held in the name of Malex, pursuant to an agreement between Normar and Malex that Normar would pay for the properties, manage them, and pay all the carrying and operating expenses; the real, beneficial and full equitable ownership thereof would be in Normar and Malex would convey to Normar whenever requested by Normar. In these circumstances, Normar was at all times the beneficial owner of the properties and, unless there was some estoppel in plaintiff’s favor which would make it inequitable for Malex to put the properties into the name of their true owner, there was not only no wrong to plaintiff in the transfers from Malex to Normar, but there would be a great wrong to Normar in subjecting its property to the payment of a debt of Malex. (Foreman v. Foreman, 251 N. Y. 237; Croker v. N. Y. Trust Co., 245 N. Y. 17; Kittredge v. Grannis, 244 N. Y. 168; Holden v. Burnham, 5 T. & C. 195; 63 N. Y. 74; Dunn v. Whalen, 21 N. Y. Supp. 869; Siemon v. Austin, 33 Barb. 9; 29 N. Y. 598; Lugar v. Lugar, 160 App. Div. 807;
      Ocean Nat. Bank v. Hodges, 9 Hun, 161; Frank v. lAnkop Realty Corp., 106 N. J. Eq. 567; Bicocchi v. Casey-Swasey Co., 91 Tex. 259; Kingsbury v. Christy, 21 Aziz. 559; Trenton Banking Co. v. Duncan, 86 N. Y. 221; Furer v. Real Estate Corp., 108 N. J. Eq. 221; Davis v. Graves, 29 Barb. 480; Foote v. Bryant, 47 N. Y. 544; Norton v. Mallory, 63 N. Y. 434; Robbins v. Robbins, 89 N. Y. 251.)
   Kellogg, J.

Max Natanson and his brother, Alexander Natanson, were the sole stockholders of the defendants Normar Real Estate Corporation and Malex Realty-Corporation, the former owning seventy-five per cent of the stock in each corporation and the latter twenty-five, per cent. Max was the president of each corporation, and Alexander was the treasurer. In February, 1928, the Natansons procured the purchase of a parcel of land from 875 West End Avenue Corporation. Normar corporation made a down payment of $89,000 for the property. Title was conveyed to Malex corporation, which- executed and delivered to West End Avenue corporation a bond for $83,833.30, the balance of the stipulated purchase price, together with a mortgage upon the parcel purchased to secure the payment of the bond. The bond and mortgage were subsequently transferred to the plaintiff. After the execution of these instruments, many other parcels of real estate were caused to be purchased. The down payments were in all cases made by Normar corporation; title was in all cases conveyed to Malex corporation; in all cases where purchase-money mortgages were given, Malex executed them. In May, 1929, Malex made default upon the bond and mortgage assigned to the plaintiff. Foreclosure, begun shortly thereafter, on May 26, 1930, resulted in a deficiency judgment of $86,752.69 in favor of the plaintiff against Malex. Meanwhile, in the months of October and November, 1929, Malex had conveyed to Normar, or its designees, all the real estate and other properties, conveyed to Malex after the execution by it of the mortgage held by the plaintiff, together with all other assets which it possessed. Learning of the fact, the plaintiff brought this action to set aside the conveyances so made, on the ground that they were made in fraud of creditors and particularly of the plaintiff. The defendants, the transferees, admit, as does Malex, that all the transfers were made without consideration paid therefor, and that the transfers stripped Malex of all its assets. The defense is that Normar was the real owner of the properties; that Malex held the legal title for its benefit; that the conveyances operated merely to convey to the true owner, or its designees, the naked legal title.

Admittedly there was never any writing between Nor-mar and Malex that the latter should hold title for the former; never any resolution to that effect adopted by either corporation. Admittedly, on the various occasions when the properties were purchased, there was not then any declaration, either written or oral, that Malex would hold title for the benefit of Normar. The Natansons testified that there was merely a general understanding or arrangement between the two, arrived at on some occasion not stated, that Normar would make the down payments upon all purchases, and that Malex would take title, for the benefit of Normar, delivering to the sellers all necessary purchase money bonds and mortgages. They say that Malex was “ to hold the record title to property ” for Normar; that Malex was to “ act as a dummy ” for Normar. The object to be achieved was that the Natansons might use “ the Malex for the purpose of the delivery of the purchase money bond and mortgage.” Granted the existence of the general understanding Malex would still have held legal title to the properties purchased, even though it had been intended that Malex should play the passive role of a so-called “ dummy ” for Normar. The legal title would have constituted a full and complete title, unless, by the words and conduct of the parties, some equitable estate, or trust had been raised. There could have been no express trust, for declarations of trust are ineffective to create such an estate unless the declarations are in writing. (Real Prop. Law; Cons. Laws, ch. 50, § 242.) There could have been no resulting trust, arising from the fact that Normar paid the purchase money and Malex took the title, for all such trusts have been abolished. (Real Prop. Law, § 94.) Unless, therefore, the facts were such, that a constructive trust would have been raised by a court of equity, Malex was the sole owner, in law and in equity, of all the properties conveyed.

The principle governing the erection by a court of equity of a constructive trust in cases of a similar character has been recently stated in Foreman v. Foreman (251 N. Y. 237, 240), to be as follows: “ The rule is now settled by repeated judgments of this court that the statute does not obstruct the recognition of a constructive trust affecting an interest in land where a confidential relation would, be abused if there were repudiation, without redress, of a trust orally declared.” As authority for the principle enunciated. the court cited Sinclair v. Purdy (235 N. Y. 245, 253); Gallagher v. Gallagher (135 App. Div. 457; 202 N. Y. 572); Leary v. Corvin (181 N. Y. 222, 229); Goldsmith v. Goldsmith (145 N. Y. 313); Wood v. Rabe (96 N. Y. 414). It also quoted the following statement from Sinclair v. Purdy (supra): “ It is not the promise only, nor the breach only, but unjust enrichment under cover of the relation of confidence, which puts the court in motion.” The confidential relation, referred to in Foreman v. Foreman and Sinclair v. Purdy, self-evidently is not the relationship which is newly created by the transaction involving the conveyance and the promise, for so to hold would mean that in every case a trust may be created by an oral declaration. Clearly the references are to a preexisting relationship of confidence such as that obtaining between husband and wife, father and son, brother and sister, or otherwise. This appears from the fact that in each of the cases cited by the court such a relationship existed, as well as from the language of the opinions written therein. Thus, in the leading case of Wood v. Rabe (supra), which involved the promise of a mother to take title to property in her name for the benefit of a son, if he performed an act requested by her, it was held that an enforceable trust arose. The court said: It was a transaction between parent and child, a relation which, if not fiduciary in the strict sense, was nevertheless one ordinarily involving the greatest confidence on one side, and the greatest influence on the other.” Again, it was said: It was on the part of the son the case of a confidence induced, not by the bare promise of another, but by the promise and the confidential relation conjoined. The confidence in fact, had its spring and origin in the relation, and that relation was a controlling ingredient moving his action ” (p. 426). In Goldsmith v. Goldsmith (supra) it was said: Upon the whole transaction, therefore, including the confidential relation of the parties and its nature as a family arrangement very much beyond a mere business relation, we think it was competent for a court of equity to impress upon the property and its proceeds an implied trust for the benefit of the children ” (p. 318).

We disclaim any purpose of holding that the requisite confidential relationship must be one found within the confines of a family. We conceive that it might exist between lawyer and client, doctor and patient, priest and parishioner, and many other sets of persons, between whom there are bonds of intimacy and trust. Suffice it to say that we find no such relationship existing between Normar corporation and Malex corporation. Surely, if a court of equity had refused to carry out the arrangement made between the two Natansons, no “unjust enrichment under cover of the relation of confidence ” could have resulted. On the contrary, recognition and enforcement of the arrangement, might have produced, rather than have prevented, an unjust enrichment. In that event, the Natansons personally would have escaped the payment of a pinchase money bond because shielded from liability by the two corporations; Normar would have escaped, although posing as the principal actor in the transaction, because it did not sign and seal the bond; Malex would have escaped payment because it had no property with which to pay. Thus, through the aid of a court of equity, the fruits of a contract of sale would have been secured to Normar, notwithstanding the fact that the promises to pay therefor had been repudiated or rendered worthless. It is not thinkable that a constructive trust would have been raised by the court to accomplish an end so unjust.

In Foreman v. Foreman (supra) the facts considered were these: A husband caused a conveyance of land for which he had paid, to be taken in the name of his wife, upon her promise to convey to him upon demand.- “ After the purchase had been made, he collected the rents and used them as his own. He paid the taxes, the insurance premiums, the interest on the mortgages, and the cost of improvements and repairs. The dominion that goes with ownership was continuously his.” In holding that the wife held in trust for the husband, it was said by the court: “ In its origin the trust was dependent for proof of its existence on nothing better than word of mouth. In the end, at her death, what was oral in its beginnings, had been confirmed by part performance, with the result that conduct as well as words had become the signs of its creation” (p. 241).

It is asserted here that Normar acted toward Malex as the husband acted toward the wife in the case cited; that it collected all the rents payable to Malex; that it used them as its own; that it paid all the costs of maintenance; that, as in the case cited, the existence of the trust, the proof of which originally rested merely in an understanding between the Natansons, was established by the subsequent conduct of the parties. There is a wide difference between the two cases. In the one an individual, the husband, exercised the dominion which goes with ownership; an individual, the wife, who was the legal owner acquiesced therein, thereby admitting the ownership of her husband. These persons had unlimited power to do as they pleased with their own. Here we are dealing with corporations having only those powers which their certificates of incorporation conferred. The certificates are not in' evidence, so that we cannot know that Malex was ever given power merely to hold for another the naked title to real estate. We must presume that Malex and Normar were authorized as separate legal entities to conduct business wholly on behalf of their respective stockholders and creditors, quite independently of one another; that the officers of each were trustees of the assets of each for the stockholders and creditors of each; that neither was authorized to obtrude itself into the affairs of the other; that neither could legally appropriate to itself the assets of the other. Yet, says Normar, we were the operating concern and Malex was merely our dummy.” True, Normar did treat Malex as if it were a mere shell, nothing more than a title holder or dummy ” for itself. Thus it seized for itself all the rentals payable to Malex, amounting in one year to more than $85,000. We cannot perceive, however, that the seizure was lawful, or other than an illegal diversion of funds. True, the Natansons were the sole stockholders in both corporations, but they were not the sole parties interested. Malex, at the time, was heavily indebted upon purchase money bonds, in the instance of this plaintiff upon a bond which finally produced a deficiency judgment for more than $80,000. Under the circumstances, surely Normar had no right to appropriate the rentals. Yet, upon that appropriation it builds its claim that Malex was its dummy, and that Malex, having permitted Normar so to treat it, thereby acknowledged that it held the properties acquired in trust for Normar. We were not aware that the use of the epithet dummy ” could have so magical an effect.

Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an ‘ alias ’ or a ' dummy.’ All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation.” (Per Cardozo, J., in Berkey v. Third Avenue Ry. Co., 244 N. Y. 84, 94, 95.) In that case a passenger was injured while stepping from a trolley car which the Forty-second Street Railway Corporation alone had the franchise to operate. The defendant, the Third Avenue Railway Company, owned all the stock of the Forty-second Street corporation, and otherwise acted, in some manner, to indicate that it, not the Forty-second Street corporation, was the real operator of the cars upon the latter’s line. In that case, further than as quoted, Cardozo, J., said: The logical consistency of a juridical conception will indeed be sacrificed at times when the sacrifice is essential to the end that some accepted public policy may be defended or upheld.” In Jenkins v. Moyse (254 N. Y. 319, 324) it was said by Lehman, J.: The corporate entity may be disregarded where it is used as a cloak or cover for fraud or illegality. For that there is ample authority.” In these and other cases the corporate form was sought to be disregarded in order that fraudulent acts might be set aside or genuine wrongdoers reached and punished. The effort here is of quite a contrary nature. Those who created a corporation seek, not to insist upon the reality of the corporate form, but to have it ignored, so that the character of a “ dummy ” or subsidiary for another corporation may be fastened upon it, to the end that the corporators may correspondingly profit. We cannot see that here to ignore the corporate form will promote some accepted public policy,” remove a cloak or cover for fraud,” or otherwise further the interests of justice.

In Jackson v. Hooper (76 N. J. Eq. 592) it was said by Dill, J., that the Courts of Chancery of the State of New Jersey would never tolerate the doctrine that by agreement or course of dealing ” corporations might become merely agencies or instrumentalities, or forms in the conduct of a copartnership or joint business;” that the law never contemplated that persons engaged in business as partners may incorporate with intent to obtain the advantages and immunities of a corporate form and then Proteus-like, become at will a copartnership or a corporation, as the exigencies or purposes of their joint enterprise may from time to time require;” that, on grounds of public policy the doctrine contended for cannot be tolerated as it renders nugatory and void the authority of the legislature — a co-ordinate branch of the government — established by the constitution in respect to the creation, supervision and winding up of corporations.” The case has been cited by this court in Brock v. Poor (216 N. Y. 387).

Upon facts almost identical with those found here we held in Natelson v. A. B. L. Holding Co. (260 N. Y. 233) that no trust arose to justify a conveyance from a corporation to its stockholders. That decision calls for a similar decision here.

The judgments should be reversed, and judgment directed for the plaintiff for the relief asked for in the complaint, with costs in all courts.

Lehman, J. (dissenting).

The plaintiff has recovered a deficiency judgment in a foreclosure action brought against the defendant Malex Realty Corporation. An execution issued on such judgment has been returned wholly unsatisfied. Malex Realty Corporation prior to the entry of said judgment had conveyed to the defendant Normar Real Estate Corporation several parcels of real property. In this action the plaintiff seeks to set aside these conveyances on the ground that they “ were made without consideration and with the purpose and intent of hindering, delaying and defrauding the plaintiff and the other creditors of the said Malex Realty Corporation and with intent to cheat and defraud the plaintiff and prevent it from realising upon and collecting the moneys owed to it by the defendant Malex Realty Corporation.” A judgment dismissing the complaint has been unanimously affirmed by the Appellate Division.

As Judge Kellogg points out in his opinion, Malex Realty Corporation had made no payments out of its own money or property for any of the real property which it has conveyed to the Normar Real Estate Corporation. Such payments were in all cases made by Normar Corporation. But where purchase money bonds and mortgages were given as part consideration, these mortgages were in all cases signed, sealed and delivered by Malex, and it is the only party which can be held liable upon these bonds. (Crowley v. Lewis, 239 N. Y. 264.)

Max Natanson and his brother, Alexander Natanson, were the sole stockholders, both of Malex Realty Corporation and of Normar Real Estate Corporation. They managed the affairs of both corporations. They are the only persons who could eventually derive profit from successful business transactions conducted by these corporations, but they would not be personally hable for losses sustained by the corporation. The corporate entity may be disregarded where it is used as a cloak or cover for fraud or illegality, but the stockholders may create or use the corporation for the purpose of hmiting their liability. Such use is not fraudulent or unlawful. Indeed, corporations are created and endowed by the State with an existence of their own largely for such use. They are not mere agencies or instrumentalities in the conduct of the copartnership or joint venture, and their stockholders may not in disregard of the corporate entity appropriate the property of the corporation on the claim that the title to such property was in the corporation merely as agent for them. We applied that rule in Natelson v. A. B. L. Holding Co. (260 N. Y. 233, 239.) It seems to me that it has no application here.

In that case the stockholders had furnished the corporation with the money which it used in its real estate ventures, and when the corporation was threatened with insolvency, the stockholders caused the corporation to transfer the property purchased with these funds to themselves. Though there was a finding that the corporation was organized by its stockholders for the purpose of holding, as their agent, the record title of real property purchased and paid for by them, we said: “ there is no evidence that it did act as agent beyond the insufficient fact that all the money used in its business over and above its capital of $5,000 was furnished by Lilienstern and Beringer [its stockholders] in proportion to their stock holdings,” and even those moneys were treated by the corporation as part of its general capital. Thus the claim of the stockholders that the real property purchased by the corporation was held by the corporation solely as their agent rested wholly upon the stockholders’ disregard of the corporate entity when it suited their interests to disregard it.

In the present case the stockholders created two separate corporations. They controlled both, but each corporation was an entity separate from its stockholders, and separate from any other corporation controlled by the same stockholders. Normar Real Estate Corporation did not use its moneys for the business of Malex Realty Corporation. It could not do so lawfully without a disregard of the corporate entity, which the law does not permit, and if it had attempted to do so its creditors might properly have insisted upon the rescission of the transaction. It was not even a stockholder of Malex. The moneys paid for the purchase of the real estate taken in the name of the Malex Realty Corporation were entered in Normar’s books. So, too, the properties purchased were entered in Normar’s books as Normar’s property. The rents when received were paid into Normar’s treasury and were reflected in Normar’s income tax reports. From the outset Malex held only the naked title to the property. As between it and Normar, Normar received all benefits accruing from the property. It may be that Malex was not endowed with corporate power to act as Normar’s agent. It did do so in fact, and its officers and stockholders so intended. So, too, the same individuals, who happened to be the sole officers and stockholders of Nor-mar, must, of course, have, intended when Normar made payments upon such purchases. It is said that this constituted a fraud on the creditors of Malex and especially upon this plaintiff who received the purchase-money bond of Malex when its property was conveyed to Malex. Doubtless Normar used Malex as its agent to take the title to the property in order that liability on purchase-money bonds might not be fastened upon it. It could have done so lawfully by using an individual instead of a corporation as its agent. (Crowley v. Lewis, supra.) We know that it is a common practice in real estate transactions to use dummies or agents for such purpose. Such practice, however common, is fraudulent if the financial solvency of the dummy or agent is misrepresented and from such misrepresentation an estoppel may arise. (Natelson v. A. B. L. Holding Co., supra.) Here there was no such misrepresentation, and it is not disputed that the plaintiff in accepting the bond of Malex did not rely upon the fact that Malex held the record title to other real property; nor does it appear that any other creditor extended credit to Malex upon an appearance of solvency of Malex, or relied upon information that Malex held title to a number of parcels of real property. The claim of Normar that the properties are held by Malex merely as its agent or dummy rests upon no disregard of the separate corporate entity of Malex. Indeed, the basis of that claim is that Malex is a separate entity whose position is the same as if it were an individual agent instead of a corporate entity.

If Malex had corporate power to hold real property as agent for another, then there could be no doubt that property so held would not belong to it but to its principal. (Cf. Bing v. People, 254 N. Y. 484.) If Malex did not have such corporate powers, then its act in taking such title would be ultra vires; that would not place this plaintiff in a better position than it is now, for the plaintiff is asserting that Malex should retain the benefit of its ultra vires act without being held to the promise upon which such benefit was obtained.

So far I have assumed that such promise was in fact made. In truth no such promise was expressly given by Malex either orally or in writing. It could hardly have been made orally by the officers acting for Malex to the officers acting for Normar, since the officers were identical, and men, whether acting as principals or agents, do not make oral promises to themselves. Words are used to convey intention from one person to the other. When a person acts in dual capacity no words are needed to convey intention. In such case intention is shown by acts rather than words, and words are used only for the purpose of creating evidence of intention. Here the acts of Malex and Normar are strong evidence of an intention which the triers of the fact have embodied in a finding which we may not disturb. When Malex conveyed the property held in its name to Normar, it was merely carrying out that intention. If the officers of the two corporations, though identical, had executed a written agreement that all property for which Normar furnished the cash consideration should be held by Malex, solely for the benefit of Normar, could it be doubted that the law would hold Malex to its promise? In that case a transfer of title by Malex to Normar would not have deprived the creditors of Malex of any right to have the property of Malex applied to the payment of the debts of Malex, for Malex would never have held more than naked title to the property. Now, unless we disregard the corporate entity, Malex has done exactly what fair dealing and ordinary honesty should have dictated it to do.

The only question that remains is whether in the absence of a written instrument, we are precluded from recognizing the existence of a trust. (Real Prop. Law, § 242.) If Normar were appearing as a suitor in this court, asking that Malex be compelled to convey to it the property to which Malex holds title, the courts would be powerless to act, unless repudiation of Normar’s claim to the property constitutes an abuse of a confidential relation between Malex and Normar, and would result in unjust enrichment of Malex under cover of such relation of confidence. That rule is well established by our decisions, but we have never attempted to limit or define the nature of the confidential relationship which may set a court of equity in motion. Perhaps no such definition can be formulated which would cover all cases. Ordinarily men do not trust their property to strangers without at least requiring some evidence that the stranger is holding for them. Where there is blind trust there is usually a prior existing relationship which explains the confidence; but wherever under cover of a relationship of confidence, however created, there has been enrichment of one party, a court of equity should interpose its powers to remedy the wrong. Myriad are the circumstances which may give rise to such relationship. The parties may be united by blood, family affection, close friendship or business relations. Reputation and standing in the community may provide the element of confidence which might otherwise not be found in previous personal relations. However the relationship may have arisen, where a party accepts property knowing that it is intrusted to bim because of the confidence which another places in him, there is a relationship of confidence, abuse of which should not be tolerated by a court of equity. Here Malex and Normar, though separate entities, had, as I have said, the same stockholders and officers. Identity of stock ownership and control of two corporations does not justify the diversion of the property of the one to the treasury of the other. It does necessarily create a relationship of confidence, because at all times those who direct the corporations must act with knowledge that they may not abuse their trust to either. It has not been abused here. The officers of Normar applied Normar’s money to the purchase of real estate, to be held for its benefit by Malex as its agent, and they did so with knowledge that Malex would not appropriate to itself the benefit derived from the ownership of the property it held for Normar. So long as they remained the officers of both corporations, it was impossible that one should abuse a trust placed in it by the other or enrich itself at the expense of the other. Without transfer of record title of the property to Normar; there would be unjust enrichment of Malex at the expense of Normar, and indirectly both of its stockholders and creditors. The plaintiff is asking that a court of equity should interpose its powers and declare fraudulent a conveyance which Malex was under a moral, if not legal, duty to make. Such duty must be recognized by the courts, unless we disregard the separate entity and hold that all that has been done is merely part of a scheme by which the stockholders of the two corporations sought to evade liability for their just debts. I find in the record no basis for such a holding.

The judgment should be affirmed, with costs.

Crane, O’Brien and Crouch, JJ., concur with Kellogg, J.; Lehman, J., dissents in opinion in which Pound, Ch. J., concurs; Hubbs, J., not voting.

Judgment accordingly.


author: O’Brien, J. Pound, Ch. J. (dissenting).

text:
    Florence Drake, Respondent, v. August Herrman, Defendant, and Inecto, Inc., Appellant.
    (Argued January 9, 1933;
    decided April 11, 1933.)

      Harold J. Hinman and Murray Hulbert for appellant.
    The review of the order is more than a review of discretion; it involves the issue of confiscation of property. (Park & Sons Co. v. Hartman, 153 Fed. Rep. 24; Forster v. Scott, 136 N. Y. 577; Tabor v. Hoffman, 118 N. Y. 30; Teilow v. Savournin, 15 Phila. 170; Moxie Nerve Food Co. v. Beach, 35 Fed. Rep. 465; Huessner v. Fischel & Marks, 281 Penn. St. 537; Karr v. Inedo, Inc., 247 N. Y. 360.) An examination as to the preparation and sale of defendant-appellant’s product, particularly as to the supervision by a pharmacist or druggist of the manufacture thereof, is improper and illegal. (People ex rel. Lewisohn v. O’Brien, 176 N. Y. 253.)

      Melvin Kleeblatt for respondent.
    The questions certified are improper in that the appeal is prematurely brought. (Heit & Weisenthal, Inc., v. Licht, 218 App. Div. 753; Niehoff v. Star Co., 134 App. Div. 473; Matter of Sayre, 70 App. Div. 329; Matter of Davies, 168 N. Y. 89.) The claim that the examination deprives the defendant-appellant of its property without due process of law is untenable. (People v. Adirondack Ry. Co., 160 N. Y. 225; Matter of Davies, 168 N. Y. 89; Meyer Bros., Inc., v. Higgins, 232 App. Div. 783; People v. Johnson, 185 N. Y. 219; Holden v. Hardy, 169 TJ. S. 366; Ives v. So. Buffalo Ry. Co., 201 N. Y. 271.) The propriety of and the need for the proposed examination is unquestionable. (.Herbage v. City of Utica, 109 N. Y. 81; Middleton v. B.oardman, 240 N. Y. 552; Brown v. Shyne, 242 N. Y. 176; Martin v. Herzog, 228 N. Y. 164.)
   O’Brien, J.

Defendant Inecto, Inc., manufactures by a secret formula a hair dye alleged in the complaint to be inherently dangerous and to have injured plaintiff by its application to her scalp, eye lashes and eyebrows. After joinder of issue plaintiff served notice upon defendant that its testimony before trial would be taken at a certain time and place. The notice specified that the matters, among others, upon which defendant would be examined relate to the chemicals, poisons, drugs and other ingredients and their percentages used in the product and also to its preparation particularly in respect to the supervision of its manufacture by a pharmacist or druggist. Upon affidavit by one of defendant’s officers an order to show cause why the notice of examination should not be vacated was issued. In an answering affidavit, plaintiff’s counsel conceded, if defendant would give testimony concerning ingredients and component parts, that production of the formula would not be necessary. The Special Term limited the scope of the examination but denied the motion to vacate and directed the examination to proceed. It incorporated in its order a ruling that disclosure of the secrets of preparation will not be required and that plaintiff will be held to her counsel’s concession as set forth in his answering affidavit. As we read the order, defendant must submit to examination in respect to such matters as relate to ingredients and their component parts but it is not obliged to divulge information respecting specific methods of preparing the formula, such as percentages or proportions or the process of compounding the ingredients. The Appellate Division affirmed the order and certified questions to this court.

Taking of testimony before trial is governed by sections 288, 289, 290 and 294 of the Civil Practice Act and, according to this statute, such testimony must be material and necessary. If facts are alleged from which an inference of materiality and necessity may be drawn, the disposition of a motion concerning the taking of testimony is ordinarily included within the discretionary power of the Supreme Court and we will not interfere. (Middleton v. Boardman, 240 N. Y. 552.) However, since the Appellate Division has allowed an appeal in this case and has certified questions of law for review, the presumption is that its determination was made upon the merits. (Matter of Davies, 168 N. Y. 89.)

Without proof of the presence of inherently dangerous and poisonous ingredients in this product, plaintiff’s cause of action, as alleged, must fail. (Karr v. Inecto, Inc., 247 N. Y. 360.) If evidence tending to support the allegations of the complaint can be obtained only by examination of defendant and if the motion papers tend in any reasonable degree to show such a fact, we cannot hold as matter of law that an examination is not necessary. However, giving to section 288 the liberal interpretation to which it is entitled, a burden is cast upon the party seeking the examination to produce some evidence that the proof required on the trial of such an action as this wherein the secrecy of property rights may be endangered, cannot otherwise be obtained. If other methods are available, examination of defendant is not necessary. We cannot find that this record contains anything reasonably leading to an inference that other sources are unavailable. Defendant argues in its brief that, if, in fact,- its product contains poisonous ingredients, such a fact can be ascertained by analysis and plaintiff does not challenge that assertion. On the oral argument in this court defendant’s counsel conceded that analysis will not wholly reveal the process of manufacture. If analysis will divulge all the ingredients but not the process of manufacture, plaintiff cannot be said to have a right, based upon necessity, to examine defendant respecting the presence of these ingredients.

This formula is property (Tabor v. Hoffman, 118 N. Y. 30, 34), and if the secret compound contains nothing except harmless ingredients and its alleged injurious effect upon plaintiff was due to her idiosyncrasy, then defendant’s property right is entitled to preservation. Generally, disclosure of legitimate trade secrets will not be required except to the extent that it appears to be indispensible for ascertainment of the truth. (4 Wigmore on Evidence [2d ed.], § 2212; Huessener v. Fishel & Marks Co., 281 Penn. St. 535.) There can, of course, be no legal sanction for the circulation of poison throughout the community and if this product does include inherently dangerous substances, the secrecy of its manufacture ought not to be protected. Examination before trial, notwithstanding the limitation in the order, may, however, and probably will have a tendency to disclose not only the ingredients, which may be entirely harmless to the normal person, but it may also uncover other facts which might lead to destruction of valuable property rights in defendant by their transfer, through such a publication, to trade rivals. On this record there is a total lack of evidence bearing upon any necessity for an examination and, therefore, the courts below were without discretionary power to order it.

We interpret the third certified question as concrete and referring to the propriety of the order as based on the record before us and not as an abstract question.

The order of the Appellate Division and that of the Special Term should be reversed with costs to appellant in all courts and the motion to vacate notice of examinar tion granted, with ten dollars costs. The third question certified should be answered in the negative. The other questions are not answered.

Pound, Ch. J. (dissenting).

The order is a discretionary one. The questions certified are general in their character and do not raise the question of the sufficiency of the moving papers in the pending case. The first two questions do not necessarily arise before the hearing. The last question certified “ will admit of one answer under one set of circumstances, and a different answer under another.” We have quite recently dismissed an appeal in a case where the generality of the question did not permit the answer " yes ” or no.” (McGowan v. Metropolitan Life Ins. Co., 259 N. Y. 454.) The same principle applies here.

The appeal should be dismissed.

Crane, Lehman, Kellogg and Hubbs, JJ., concur with O’Brien, J.; Pound, Ch. J. votes to dismiss in a memorandum in which Crouch, J., concurs.

Ordered accordingly.


author: Kellogg, J.

text:
    The Prudence Company, Inc., Appellant, v. Central Hanover Bank and Trust Company of New York, as Trustee, et al., Respondents.
    (Argued March 14, 1933;
    decided April 11, 1933.)

      Nathan L. Miller for appellant.
    Article 3 of the trust indenture provides in unequivocal terms that the value of mortgage securities constituting part of the pledged property shall, for the purpose of determining the plaintiff’s right to make withdrawals, be eighty-three and one-third per cent of the face amount of the principal thereof due and unpaid. (Nathan v. Equitable Trust Co., 250 N. Y. 250.) Where the words of an agreement are clear, consistent and unambiguous, there is no room for construction to give to them a meaning other than that which they plainly bear. (Matter of Loew’s Buffalo Theatres, Inc., 233 N. Y. 495; Schoonmaker v. Hoyt, 148 N. Y. 425; Cream of Wheat Co. v. Crist Co., 222 N. Y. 487; Gans v. Mna Ufe Ins. Co., 214 N. Y. 326; Houlihan v. Preferred Accident Ins. Co., 196 N. Y. 337; Dwight v. Germania Ufe Ins. Co., 103 N. Y. 341.)

      Albert Stickney and Hersey Egginton for Central Hanover Bank and Trust Company, respondent.
    The court should so construe the indenture as to effectuate its expressed purpose, which is to secure payment of the bonds. Impairment of some of the pledged collateral being admitted by the stipulation, a reappraisement of the mortgages now held in trust is required, in order to determine the market value of all the pledged collateral and its sufficiency to secure full payment of the bonds. Such reappraisement is a condition precedent to any exercise of the claimed right of withdrawal. (Booth v. Cleveland Rolling Mill Co., 74 N. Y. 15; Simon v. Etgen, 213 N. Y. 598; Wells v. Alexandre, 130 N. Y. 642; Jones
      v. Kent, 80 N. Y. 585; New England Iron Co. v. Gilbert El. Co., 91 N. Y. 153; People ex reí. N. Y. C. & H. R. R. Co. v. Walsh, 211 N. Y. 90.)

      Cornelius Furgueson, Jr., for Samuel W. Gumpertz, respondent.
   Kellogg, J.

The plaintiff, The Prudence Company, Inc., on May 1, 1926, executed and delivered a trust indenture to the Central Union Trust Company of New York, now the defendant Central Hanover Bank and Trust Company of New York, as trustee. The indenture prescribed the terms upon which bonds of the Prudence Company, in an aggregate principal sum not exceeding $15,000,000, might be issued. It made provision for the transfer by the Prudence Company to the trustee of divers securities to secure the payment of the bonds to be issued. Pursuant to the terms of the indenture, bonds of the Prudence Company, aggregating a total principal sum of $13,800,000, were issued and are now outstanding. The trustee now holds in trust, under the terms of the indenture, moneys, received from cash payments made upon the securities transferred or otherwise, amounting to the aggregate sum of $5,343,810.57. It likewise holds in trust divers bonds and mortgages, the aggregate principal of which is such, that, at an appraisal of eighty-three and one-third per cent of their face (the measure to be applied as claimed), they have a value, for the purposes of the indenture, of $9,345,741.39. If the measure applied is correct and exclusive, then the trustee holds cash and securities of the value, in the aggregate, of $14,689,551.96, with which to satisfy an indebtedness of $13,800,000, leaving an excess of the former over the latter of $889,551.96. This excess, the Prudence Company claims the right, under the terms of the indenture, to withdraw from the trustee, in the form of cash.

It is stated in article 3 of the trust indenture that the Pledged Property shall consist of any of the following.” There follows a statement of the securities receivable which divides and places them in six separate classes. Class A shall consist of bonds secured by mortgages which are first liens upon real property. Class B shall consist of Cash. Class C shall consist of United States Treasury certificates of indebtedness, bonds of the United States of America, bonds or corporate stock of the city of New York, bonds of the State of New York, certificates of deposit issued by any bank or trust company, bank acceptances made by any bank or trust company, promissory notes secured by bonds and stocks listed on any incorporated exchange. Class D shall consist of bonds of any State of the United States, or any municipality of any such State other than those mentioned in Class C, and bonds issued by any Federal land company, provided the same are approved by the trustee. Class E shall consist of bonds issued by the Prudence-Bonds Corporation (a corporation allied with the plaintiff Prudence Company Inc.), secured by a trust fund consisting of bonds secured by first mortgages and guaranteed by the company. Class F shall consist of securities other than those previously mentioned in which savings banks and trustees of the State of New York are permitted to invest. The securities actually turned over and now held are the bonds and mortgages classified under A, and bonds of the Prudence-Bonds Corporation, classified under E.

The bonds and mortgages constituting securities within Class A shall be acceptable and receivable by the trustee, provided only that they are accompanied by an appraisal of the real estate, made by two appraisers selected by the Prudence Company, which is approved in writing by the trustee. This appraisal must show “ that the aggregate ■unpaid principal sum due on the bonds, notes or evidences of indebtedness secured thereby shall not be more than seventy-five per cent of such appraised value.” The promissory notes coming within Class C may be received and accepted by the trustee, provided only that the unpaid principal sum due on such notes shall not at any time be in excess of eighty per cent of the market value of the stocks or bonds ” which secure them. Otherwise, the indenture, in describing the securities which the trustee may receive and accept, contains no stipulation or condition relating to the value of the securities.

From time to time securities may be withdrawn from the trust fund, and other securities may be substituted. Withdrawals, without substitution, may also be made. These withdrawals, however, are subject to the condition that through them “ the value (determined as in Article 3 hereof) of the Pledged Property shall not be less than the face amount of the bonds then issued and outstanding hereunder.” The indenture contains this clause: ‘'The value (determined as hereinabove provided in Article 3 hereof) of the Pledged Property shall at all times be equal to the face amount of the principal of all Bonds then issued and outstanding hereunder, and the Company shall from time to time make such additions to the Pledged Property so that the value (determined as herein-above provided in Article 3 hereof) of the Pledged Property shall not at any time be less than the face amount of the Bonds issued and outstanding hereunder.”

Thus it will be seen, that parity must be maintained between the value of the pledged property, as determined by article 3 of the indenture, and the face value of the bonds issued under the indenture, in order that withdrawals may be had, and the pledgor may fulfil its obligation. The eighty-three and one-third per cent provision, quoted in the next paragraph, which the pledgor claims exclusively to apply, is not the only measure of valuation provided for in article 3. There is also the provision, to which we have referred, that, before bonds and mortgages may be received and accepted by the trustee, an appraisal must establish that the principal sum of the bonds does not exceed seventy-five per cent of the value of the real estate mortgaged. That provision is as much a part of article 3 as is the eighty-three and one-third per cent provision, and, according to the express wording of the indenture, all the methods of valuation provided for in article 3 must be applied, to determine whether parity will be maintained. The conclusion would seem inescapable that the bonds secured by mortgages on real estate, which, for the purpose of acceptance, must disclose a figure of aggregate debt, exceeded by the figure representing the aggregate value of the real estate by twenty-five per cent, must continue to show the same ratio, or the value of the pledged property has been diminished. Surely a bond over-secured by twenty-five per cent of its face, which, through a fall in real estate price, becomes under-secured by twenty-five per cent, has no longer the same value. Nevertheless, the pledgor insists that there has been no depreciation, although the real estate securing the bonds no longer has a value twenty-five per cent in excess of their face, and that parity between the pledges and the debt will be maintained within the meaning of the indenture, notwithstanding the proposed withdrawals, because of the provisions of section 2 of article 3.

The section so relied upon in part reads as follows: “All of the Pledged Property hereinabove described shall, for the purpose of determining the amount of bonds to be delivered from time to time by the Trustee as hereinafter provided, and for the purpose of determining the right of the Company to withdrawals and substitutions as hereinafter provided, be valued at the market value thereof as of the time when such determination is, or is required to be made, except that the securities mentioned in subdivisions A, D, E and F above set forth shall, for such purpose, be valued at eighty-three and one-third percentum (83 1 /3%) of the face amount of the principal thereof due and unpaid.”

The argument of the pledgor is that the provisions governing the trustee in respect to receiving and accepting certain securities; namely, that the aggregate principal sum of bonds and mortgages must not be greater than seventy-five per cent of the value of the real estate, do not apply. It reasons that “ for the purpose of determining the amount of bonds to be delivered from time to time by the Trustee ” and for the purpose of determining the right of the company to withdrawals,” bonds and mortgages must be valued at the arbitrary figure of eighty-three and one-third per cent of the face amount of the principal due and unpaid. It matters not, as it contends, that the depreciation in value of the real estate and the stocks has been such that the bonds and the notes secured thereby may have become well-nigh worthless. On the other hand, the trustee argues that for the purpose of determining the amount of bonds to be issued, and for the purpose of determining the extent to which withdrawals may be permitted, there must first be a revaluation of the real estate so that the indebtedness based thereupon shall not be reckoned at more than seventy-five per cent thereof; that after this amount has been ascertained, then there must be applied the figure of eighty-three and one-third per cent in part to determine whether the pledged property is equal to the par value of the bonds which it is given to secure.

Manifestly the argument of the pledgor, if successful, would produce results quite unjust and unfair to the bondholders. Moreover, it places upon the terms of the indenture an interpretation which, in many respects, is unreasonable. Thus, it will be observed that the eighty-three and one-third per cent provision does not apply to properties belonging to Classes B and C. These properties must be valued at the market value thereof as of the time when such determination is or is required to be made.” The only property specified as belonging to Class B is “ Cash.” Certainly, an appraisal of the value of cash may never be had and can never be needed. Cash is the very thing which the pledgor promises to pay, and necessarily if he has in hand cash sufficient in amount to equal his debt, the pledged property is on a parity with the debt. Class C includes United States Treasury certificates of indebtedness ” which, of course, are themselves cash. It includes “ bank acceptances,” and promissory notes.” It can hardly be said that there is any market by which the value of such securities may be ascertained. Moreover, if notes must be revalued, why should not bonds and mortgages be? The indenture provides as to both that they may not be received into the trust if the principal thereof exceeds a prescribed percentage of the value of the property securing them. It, also, includes certificates of deposit issued by any bank or trust company.” If such certificates are not worth their face, certainly there is no market by which their value may be judged. This leaves as the other securities of the class, bonds of the United States of America, bonds or corporate stock of the city of New York, and bonds of the State of New York. Doubtless, these are bought and sold in the market. Yet instances can hardly be imagined wherein an actual valuation of bonds would be less needed than in this. Thus, the pledgor argues that a market valuation must be made only in the instance of properties which are necessarily worth their face, which have no market value, or which at all times have a market value so near their face that the need of an appraisal is scarcely apparent. On the other hand, according to the argument, no valuation whatever is required in the case of bonds and mortgages, municipal bonds and mortgages, or bonds of the Prudence-Bonds Corporation secured by mortgages, securities which of all the securities specified in the indenture are the most susceptible to fluctuations. In addition to this, the pledgor’s argument ignores the fact that for the purpose of withdrawals and the maintenance of parity between the pledged property and the indebtedness which it secures, the former must be valued as provided in article 3, one of the provisions of which requires that bonds and mortgages must not disclose a principal sum which is greater than seventy-five per cent of the value of the real estate which secures them. As it has been agreed that the real estate securing the bonds specified in Class A has not a value equal to seventy-five per cent of the debt secured, a case for withdrawal has not been made.

The judgment should be affirmed with costs.

Pound, Ch. J., Lehman, O’Brien and Crouch, JJ., concur; Crane and Hubbs, JJ., not voting.

Judgment affirmed.


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    C. Milton Foreman, Plaintiff, v. Louis Jacques Construction Co., Inc., et al., Defendants; The Peoples National Bank of Elizabeth, New Jersey, Appellant, and Contractors Trading Co., Inc., et al., Respondents.

      (Argued March 2, 1933;
    decided April 11, 1933.)

      Otto C. Sommerich and Saul I. Radin for appellant.
    Since the creditors’ agreement signed by all the defendants lienors, excepting the defendant Sprague Construction Company, provided for the repayment to the bank of its advances prior to any payment to the lienors who are parties to the agreement and the bank, pursuant to the agreement, released to the creditors’ committee the sum of $54,368.88, the lienors are estopped to deny the validity of the assignment, and the bank is entitled to prior payment. (.Rothschild v. Title Guarantee & Trust Co., 204 N. Y. 458.) The finding that the bank did not comply with section 16 of the Lien Law (Cons. Laws, ch. 33) requiring filing within ten days after date of the assignment, has no evidence to support it. A copy of the assignment was filed within ten days after the date thereof with the custodian of the records of the head of the department or bureau having charge of the public improvement and with the financial officer of the municipal corporation charged with the custody and disbursement by the corporation of the public funds. (.Albany B. S. Co. v. Eastern B. & S. Co., 235 N. Y. 432; Dwelle - Kaiser Co. v. County of Niagara, 103 Mise. Rep. 460; Montgomery Bros. & Co. v. Cole, Inc., 138 Mise. Rep. 53.) The sum of $37,703.36 having been advanced prior to the filing of any of the defendants’ liens, the assignment takes priority over defendants’ liens filed thereafter. (Arrow Iron Works, Inc., v. Greene, 260 N. Y. 330; Wood v. Galway & Co., 186 App. Div. 134; Paine v. City of New York, 190 App. Div. 681; Carroll Sand Co. v. Jones, 231 App. Div. 121; 256 N. Y. 99.)

      Stanley W. Schaefer for Finance Service Company, amicus curies.

    The arrangement which the court adjudged fraudulent and void as to creditors was entered into in perfect good faith and without any intent to hinder, delay or defraud creditors, nor is there any evidence in the record that it in fact resulted in any actual detriment to creditors. (Matter of Bernard & Katz, 38 Fed. Rep. [2d] 40.)

      Ernest W. Arlt for Contractors Trading Co., Inc., et al., respondents.
    The trial court properly upheld the right of the lienors to contest the validity of the assignment. (Edison Electric Illuminating Co. v. Frick Co., 221 N. Y. 1; Concord Construction Co. v. Plante, 63 Mise. Rep. 120; 137 App. Div. 243.) The assignment was not filed in accordance with section 16 of the Lien Law. (Glens Falls Portland Cement Co. v. Van Wirt Constr. Co., 228 N. Y. Supp. 389; 225 App. Div. 159; Steers Sand & Gravel Co. v. Village of Long Beach, 184 App. Div. 957; Albany Builders Supply Co. v. Eastern Bridge & Structural Co., 235 N. Y. 432; General Fireproofing Co. v. Keepsdry Construction Co., 173 App. Div. 528; 225 N. Y. 180; Edison Electric Illuminating Co. v. Frick Co., 221 N. Y. 1; Dwells-Kaiser Co. v. Frid, 233 App. Div. 427; 259 N. Y. 546.) The creditors’ agreement does not estop the lien creditors from attacking the assignment. (Kane Co. v. Kinney, 174 N. Y. 69; Gates Co. v. Stephens Construction Co., 220 N. Y. 38; Surdam Holding Corp. v. Wheeler, 250 N. Y. Supp. 17.)

      Joseph L. Lefkowitz and Lewis Nadel for Progressive Clay Company, respondent.
    Since the bank failed to file . the instrument executed and delivered to it by the contractor in accordance with section 16 of the Lien Law, it was properly held to be invalid. (Glens Falls Portland Cement Co. v. Van Wirt Constr. Co., 132 Mise. Rep. 95; Albany Builders Supply Co. v. Eastern Bridge & Structural Co., 235 N. Y. 432; Edison Electric Illuminating Co. v. Frick Co., 221N. Y. 1; General Fireproofing Co. v. Keeps-dry Construction Co., 173 App. Div. 528; Montgomery Bros. Co. v. Cole, 138 Mise. Rep. 53.) The alleged creditors’ agreement does not estop the defendants lienors from asserting their lien rights and attacking the validity of the assignment to the bank by the contractor. (Kane Co. v. Kinney, 174 N. Y. 69; Gates Co. v. Stephens Const. Co., 220 N. Y. 38; Black Co. v. Surdam Holding Corp., 140 Mise. Rep. 113.)

      Carl E. Peterson for Sprague Construction Co., Inc., respondent.
    The Sprague Construction Co., Inc., was employed by all the other parties to this appeal, who, by their committee, expressly agreed to pay for its work. Hence, no matter what disposition is made of the dispute between the other parties to the appeal, this respondent’s claim must be paid. (Paine v. City of New York, 190 App. Div. 681; 231 N. Y. 539.) The Sprague Construction Co., Inc., had a valid lien. (Paine v. City of New York, 190 App. Div. 681; 231 N. Y. 539.)
   Kellogg, J.

On November 7, 1927, the defendant the Village of Freeport, Long Island, and the defendant the Louis Jacques Construction Company, entered into a written contract whereby the latter,' for a stipulated price to be paid by the former, undertook to -construct a system of sewers to be laid within the limits of the village. On November 25,1927, the Jacques Construction Company made a written assignment of all moneys then due, or thereafter to grow due, under the terms of its contract with the village, to the defendant The Peoples National Bank of Elizabeth, New Jersey.

On June 22, 1928, the Jacques Company had so progressed with the work that under the terms of its contract with the village it had become entitled to payments aggregating $297,489.83. Of this sum $243,182.95 had actually been paid by the village to the Peoples National Bank, the assignee of the Jacques Company, through the medium -of checks drawn to the order of that company and by it indorsed to the Peoples National Bank, which had collected the same. This left the sum of $54,306.88; which had then been earned but was still unpaid.

Meanwhile, the Peoples National Bank had advanced to the Jacques Construction Company, to enable it to perform its contract or for other purposes, sums of money largely in excess of the sum of $243,182.95, which the bank had received under its assignment. This excess was such that on the date named the balance due to the Peoples National Bank, as found by the court, was the sum of $37,703.36.

At this time no mechanic’s liens had been filed against the moneys due or to become due under the Jacques contract with the village, except a lien on behalf of the plaintiff, C. Milton Foreman, and a hen on behalf of the defendant Contractors Trading Company, Inc., the two claims aggregating $15,381.69. No other creditors than these two lienors were then entitled to dispute the validity of the assignment to the bank. As against all others the assignment, whether properly filed or not, was entirely valid.

Even without a written assignment, a direction given by the Jacques Company to the village of Freeport that the sum of $54,306.88 be paid to the Peoples National Bank would have constituted a valid order which, except for the two lienors, would have been operative to entitle the bank, upon receipt of the moneys, to use them in the extinguishment of its then claim of $37,703.36. Except as its power was limited by the hens filed, the Jacques Company was entitled to do what it chose with its own and to make full payment to the Peoples National Bank, as a preferred creditor, with the moneys due to it. Deducting the aggregate amount for the security of which the two hens had been filed, there would have been left the sum of $38,925.19, or more than enough to satisfy the bank’s claim in full. To this extent at least the Jacques Company had the right to make, and the bank had the right to receive, a transfer of the moneys then due.

On June 22, 1928, the Jacques Company abandoned work under the contract. On that day an agreement was made by the creditors whereby a creditors committee was formed. Subsequently, acting pursuant to the agreement, the creditors’ committee completed the work. Meanwhile, the Peoples National Bank, on June 23, 1928, collected from the village of Freeport the sum then due of $54,306.88. This sum it turned over to the creditors’ committee for their use in completing the job. It also made a further advance of $17,564.22 to the creditors’ committee for the same purpose. At the completion of the job by the creditors’ committee there became due upon the contract, from the village of Freeport, the sum of $68,082.44. Meanwhile, liens amounting to more than $55,000 had been filed. It has been held that the creditors holding these hens are entitled to payment in preference to the Peoples National Bank, which claims a preference by virtue of the creditors’ agreement of June 22, 1928, to the extent of its unpaid claim of $37,703.36 as of June 22, 1928, and to the extent of its claim of $17,564.22, subsequently arising on account of advances to the creditors’ committee.

The creditors’ agreement of June 22, 1928, recites that it is made between the Peoples National Bank as party of the first part, the Louis Jacques Construction Company as party of the second part, the creditors of the said Louis Jacques Construction Company as parties of the third part, and other persons named, constituting a general committee of creditors, as party of the fourth part. It recites that the village of Freeport and the Jacques Construction Company entered into a contract for the construction of the sewers; that the latter company did assign to the Peoples National Bank the money due and to grow due thereon; that two liens had been filed, one on behalf of the Contractors Trading Company, Inc., and one on behalf of Milton Foreman, this plaintiff.

The parties name a creditors’ committee to complete the work. The creditors assign to the committee all their claims and agree to file no claims against moneys due or to become due under the contract and to take no legal steps to collect the same. The Contractors Trading Company agrees to release and satisfy its lien. This is done so that the sum of $54,000, then due from the village of Freeport, may be paid over to the Peoples National Bank for the purposes hereinafter mentioned.”

The creditors agree that its committee shall act in closing up the affairs of the Jacques Construction Company and for the collection and distribution of its assets on these conditions: (a) The Peoples National Bank shall become the depository of all funds due and to become due. (b) Out of the $54,000 now due, distribution shall be made as follows: First, for the payment of arrearages of payroll, amounting to approximately $23,000. Second, for the payment of payroll necessary for the completion of the work, amounting to the sum of $11,000. Third, “ For the payment to the party of the first part [The Peoples National Bank of Elizabeth, New Jersey] the amount of its indebtedness of approximately $53,000 and accrued interest, due from the party of the second part [The Jacques Construction Company] to the party of the first part.” (c) “ Out of any other moneys subsequently received ” by the Peoples National Bank “ on assignment ” or otherwise “ There shall be paid to the party of the first part the balance that may be due to it on its aforesaid indebtedness of approximately $53,000 due from the party of the second part to the party of the first part with accrued interest.” “ It being understood that out of any and all assets of the party of the second part there shall be applied first, a sufficient sum to pay the indebtedness due to the party of the first part [The Peoples National Bank] before there shall be any distribution to other creditors.” (d) The committee sha.11 “ withhold the sum of $13,700 or such other sum as may be found to be due by Court Judgment or otherwise from the party of the second part to Milton Foreman [the plaintiff] on account of a lien filed by said Milton Foreman.” (e) The committee shall pay to the other creditors pro rata the balance of the moneys, so far as necessary to extinguish their debts.

The lienors now claim that the creditors’ agreement was not binding upon those who signed it, for the reason that it was not to be given effect unless all the creditors of the Jacques Company executed the same. No such condition may be found in the agreement. It is true that one interested witness gave testimony to this effect. However, the court made no finding that the agreement was subject to any such condition. On the contrary, the court held that, in one respect, the agreement was operative although not signed by all the creditors. Thus, it found that the Globe Indemnity Company, which as surety had promised the faithful performance of the construction contract, by reason of the creditors’ agreement was discharged from all its obligations under the bond given by it.

The court found that all the defendant creditors, whose Hens were recognized by the court, entered into the agreement, except the defendant Sprague Construction Company, Inc., and the defendant Isaac Rouzee. These two defendants were not then creditors with or without Hens since the materials and labor furnished by them were supplied, after the making of the agreement, to the creditors’ committee. It also found that “ the said creditors’ committee acted with the consent of aU parties to this action except the plaintiff, Globe Indemnity Company and FideHty & Deposit Company of Maryland.” These exceptions are not important, for the two surety companies have been acquitted of HabiHty, and the plaintiff’s claim, for the payment of which in full the creditors’ agreement amply provided, has been fully paid.

The lienors also claim that the Peoples National Bank did not execute the agreement and, therefore, cannot take advantage thereof. A sufficient answer is the finding of the court that the Peoples National Bank of Elizabeth, New Jersey entered into the agreement. Moreover, even if the bank did not execute the agreement, it made all the payments therin provided for and performed all the obligations thereby imposed.

It is worthy of note that Mr. Arlt, representing all the lienors whose liens are involved upon this appeal, except the Progressive Clay Company, the Sprague Construction Company, Inc., and Isaac Bouzee, made to the court this significant statement: “ I want to say to the court that it was my understanding with Mr. Sommerich [attorney for the Peoples Bank] prior to the trial of this action that all of the defendant lienors who signed the agreement and who are clients of mine, agreed to subordinate their liens to the assignment of the Peoples National Bank, which is provided for in that agreement, and they signed the agreement realizing the full knowledge of their act in subordinating their claims to the bank, and they did so subordinate their claims at the signing of that agreement according to the terms and provisions of' the agreement, of course.”

We find, then, that on June 22, 1928, matters stood in this wise: The village of Freeport then owed to the Jacques Construction Company the sum' of $54,306.88, which was immediately payable. The Peoples Bank held an assignment of these moneys to secure a debt of $37,703.36. There were no outstanding liens, except two, and these secured claims aggregating not more than $15,381.69. Conceding that these liens had priority over the assignment, that instrument was sufficiently operative to entitle the Peoples Bank, after payment of the liens in full, to collect the balance of the sum then due, or $38,925.19, wherewith to extinguish its then claim of $37,703.36. Such being the situation, all the then lienors and creditors, now having an interest in the fund, agreed upon a plan of distribution of the moneys then and thereafter to become due. If the Peoples Bank, acting under its assignment, would collect and pay over to a creditors’ committee the $54,306.88 then due, and all subsequent moneys to become due, for the use of the committee in completing the work, it should be entitled to priority of payment over all lienors and creditors. To facilitate the collection, one of the two lienors agreed to cancel its hen, and provision was made to pay the other lienor in full. The Peoples Bank, on the strength of these stipulations, surrendered its rights, whereby it might have presently obtained payment in full of its then indebtedness, collected and paid over the sum of $54,306.88, and subsequently made collections of further sums, which it likewise paid over to the committee. Moreover, it advanced to the committee, for the purposes of completion, the additional sum of $17,564.22. If, for the reason that all the creditors had not signed the agreement, that instrument was not operative, then the creditors’ committee should not have received the moneys or, having received them, they should have at once returned them. Instead,' the creditors’ committee accepted the moneys and expended them on behalf of the creditors in completing the sewer construction contract. Not only did the creditors’ committee act as an agent for all the then creditors who now have an interest in the fund, but every such creditor, through its own officers or representatives, was itself a member of the committee. Having procured moneys by virtue of an agreement, acknowledging the validity of the assignment and the priority of the bank’s claims, present or future, over all claims by them made, they may not now be heard to say that the agreement was not operative, because not signed by other creditors now having no claims, so that the claims of the bank are subordinate to theirs. We hold that the Peoples National Bank of Elizabeth, New Jersey, must be paid the indebtedness due to it in priority to all the other claimants excepting the Sprague Construction Company and Isaac Rouzee.

The creditors’ committee, subsequently to the making of the creditors’ agreement, entered into a contract with the defendant Sprague Construction Company to do certain work in connection with the completion of the original contract for sewer construction. The contract recites that the Jacques Construction Company, “ had assigned its contract and all moneys due thereunder ” to the committee. It provides that the committee will pay the' Sprague Construction Company the amount due it five days after the completion of the work.” We think it was the intention of all the creditors who signed the agreement, all of whom had a representative upon the committee, that the moneys received or to be received from the original sewer contract, should constitute a fund, from which all contracts made for labor or materials furnished to the. committee should first. be satisfied. Surely the bank may not object on the ground that the creditors’ agreement provided for prior payments to it, since the Sprague Construction Company, Inc., was not a party thereto. Nor may it object that its assignment entitled it to prior payments, since it has been held that the assignment was never properly filed. Neither may the bank or any other party to the agreement make valid objection, since, if the Sprague Company is not entitled to payment from the fund, it is entitled to payment at the hands of the creditors with whom it contracted. Indeed, strictly speaking, this is not an action to procure distribution under the Lien Law (Cons. Laws, ch. 33). Rather is it an action to distribute according to the agreement of the parties and the equities of the case. Certainly it is equitable that the Sprague Company and Isaac Rouzee, who is in like situation, by whose efforts the final payments will have been secured, should first be paid. We hold that they are so entitled.

The judgment should be modified in accordance with this opinion, and as so modified affirmed, with costs to the appellant, payable out of the fund.

Pound, Ch. J., Crane, Lehman, O’Brien and Crouch, JJ., concur; Hubbs, J., not voting.

Judgment accordingly.