author: Van Syckel, J.

text:
    The United States Steel Corporation et al., defendants and appellants, v. J. Aspinwall Hodge et al., complainants and respondents.
    [Filed February 18th, 1903.]
    1. At a meeting of the stockholders of a corporation, owners of shares are under no disability to vote because they are also directors of the corporation. They do not vote in their fiduciary capacity, but like other stockholders, in the right of the shares held by them.
    2. At a duly-convened meeting of stockholders they may lawfully enter into or authorize a contract between the company and a third party, in which directors are personally interested, if it is done by them with notice of such interest.
    3. The general doctrine is well established in this state that facts known, which are sufficient to put a party upon inquiry, are sufficient to charge him with all such knowledge as he would have acquired- by a proper inquiry in the ordinary course of business.
    4. The rule that directors cannot lawfully enter into a contract, in the benefit of which even one of their number participates without the knowledge and consent of the stockholders, is the settled law of this state.
    5. Such a contract is voidable at the option of the corporation, but is not void per se. When the facts are disclosed to the stockholders it may be subsequently ratified by°them.

      6. When the by-laws of a corporation, adopted by the stockholders in pursuance of authority given by the act of incorporation, provide that a majority vote at a stockholders’ meeting shall be binding on the corporation, every shareholder will be bound by all acts and proceedings within the scope of the power and authority conferred by the charter, which shall be approved or sanctioned by the vote' of a majority of such shareholders duly taken and ascertained according to law.
    7. The act of incorporation of the United States Steel Corporation requires the corporation to pay to the preferred shareholders a yearly dividend at the rate of seven per cent, per annum, in quarterly payments. By the terms of the act of 1902 said corporation cannot take advantage of its provisions, unless it shall have continuously declared and paid dividends at the rate of seven per cent, on the preferred stock, for the period of at least one year next preceding a meeting called to avail itself of the act. The meeting was held May 19th, 1902; a dividend of one and three-quarters per cent, was declared and paid for the quarter ending July 1st, 1901; a like dividend for each of the quarters ending October 1st, 1901; January 1st, 1902, and April 1st, 1902.—Held, that this was a compliance with the act of 1902.
    On appeal from an order of the court of chancery advised by Vice-Chancellor Emery, whose opinion is reported in 19 Dick. Ch. Rep. 90.

      Mr. Robert II. McCarter, Mr. Aben I. Films (of New York), Mr. Joseph M. Proslcauer (of New York), Mr. Alan PL. Strong, Mr. Franlc Bergen and Mr. Edward B. Whitney (of New York), for the complainants and respondents.

      Mr. Chandes L. Corbin, Mr. Richard V. Lindabury, Mr. Francis Lynde Stetson (of New York), Mr. William D. Guthrie (of New York), for the defendants and appellants.
   The opinion of the court was delivered by

Van Syckel, J.

The subject-matter of this appeal is an order granted by the court of chancery, at the instance of the complainants, restraining the defendants from executing, issuing, delivering or receiving any bond or mortgage, under certain resolutions of the stockholders of the United States Steel Corporation, passed May 19th, 1902, providing for the reduction of $200,000,000 of its preferred stock and the retirement thereof out of bonds or the proceeds of bonds.

Three of the complainants in the bill as originally filed voluntarily withdrew from the suit.

The remaining complainants are Hodge, Smith and Curtis.

Hodge owns one hundred shares, acquired by him before the contract in question was made.-

Smith owns two hundred shares, acquired since that time from a holder who assented to the contract.

Curtis, so far as appears, owns no stock.

The vice-chancellor properly held that' the case must be considered as based wholly upon the rights of Hodge as a shareholder.

The steel corporation was organized under the General Corporation act of this state (Revision of 1896) on the 25th day of February, 1901, and the certificate of incorporation was filed on that day.

On the 1st day of April, 1901, an amended certificate of incorporation was filed, which provided, among other things, for an authorized capital of $1,100,000,000, of which $550,000,000 was to be preferred stock, divided into five million five hundred thousand shares of the par value of $100 each, and a like number of shares of common stock, of the par value of $100 each.

As required by section 18 of the General Corporation act, the amended certificate of incorporation stated that

. “The holders of the preferred stock shall be entitled to receive when and as declared from the surplus or net profits of the corporation, yearly dividends, at the rate of seven per centum per annum, and no more, payable’ quarterly on dates to be fixed by the by-laws.”

The by-laws of the company provide as follows:

“Article V.
“Sec. 5. The dates for the declaration of dividends upon the preferred, and upon the common stock of the company, shall be the days by these by-laws fixed for the regular monthly meetings of the board of directors in the months of April, July, October and January in each year, on which days the board of directors shall declare what, if any, dividends shall be declared upon the preferred stock and the common stock or either of such stocks. The dividends on the preferred stock shall be payable quarterly on the sixth Wednesday next after the several dates of the declaration thereof.”

The board of directors of said corporation, having resolved that it would be advisable to decrease the capital stock of the corporation to the extent of two million shares, and to retire them by means of an issue of bonds, called a meeting of the stockholders to be held on the 19th of May, 1902, in pursuance of, and as required by, section 27 of the General Corporation law and by the act of 1902, for the purpose of voting upon the. proposed plan for the purchase and retirement of that amount of preferred stock and the issue of five per cent, bonds.

Prior to the notice of this meeting the directors had entered into a tentative contract with Messrs. J. P. Morgan & Company, bankers, under date of April 1st, 1902, by which said bankers agreed with the steel corporation that $100,000,000 face value of the new bonds would be taken and paid for, of which $80,000,000 would be paid for by a like amount of preferred stock taken at par, and $20,000,000 would be paid in cash.

To guarantee the performance of this contract a syndicate was formed by J. P. Morgan & Company, the members of which actually deposited with that firm $80,000,000 of preferred stock to be used in performance of the contract.

The effect and purport of this agreement is that the bankers agreed to buy from the steel corporation at least $100,000,000 of. five per cent, bonds, and to pay therefor $20,000,000 in cash and $80,000,000 in preferred stock, at par, with an option to purchase the remaining bonds if the stockholders did not do so; and in consideration of this undertaking the bankers were to receive a commission of four per cent, on $100,000,000, and, contingently, a commission of four per cent, on any additional amount that might be taken at par by the stockholders or the bankers.

This contract with the bankers was to be subject to the approval of the stockholders.

At the stockholders’ meeting on the 19th of May, 1902, duly convened, the resolution to retire the preferred stock and the resolution to adopt the .bankers’ contract were separate and distinct, and were voted upon and passed as separate and distinct resolutions.

The shareholders could have adopted the first and rejected the latter.

There was in attendance at the meeting, in person or by proxy, over seventy-three per cent, of the outstanding preferred stock, and over seventy-eight per cent, of the outstanding common stock. More than ninety-nine and eighty-three hundredths per cent, of the stockholders at such meeting, present either in person or by proxy, voted in favor of both resolutions, and only seventeen hundredths of one per cent, voted against them.

The by-laws of the corporation contained the following provision :

“The board of directors, in its discretion, may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or ratified by the vote of the holders of a majority of the capital stock of the company which is represented in person or by proxy at such meeting (provided, that a lawful quorum of stockholders be there represented in person or by proxy) shall be as valid and as binding upon the corporation and upon all the stockholders, as though it had been approved or ratified by every stockholder of the corporation.”

This by-law cannot amplify the powers of the corporation or operate to validate any act ultra vires the corporation, but it enabled the stockholders, by a majority vote, to ratify any contract which the entire body of stockholders or the corporation might lawfully make.

Both resolutions, therefore, received more than the vote required by the twenty-seventh section of the Corporation act and by the by-law of the company.

If all the shareholders had intended to convert their preferred shares into five per cent, bonds, they would, of course, have voted for the conversion resolution and have rejected the bankers’ contract. In a scheme involving such an enormous amount of capital and affecting thousands of shareholders, it could not reasonably have been supposed that all would prefer to accept the five per cent, bonds, and it was therefore the exercise of a prudent foresight that prompted them, in order to assure the successful execution of the plan, to -secure the co-operation of bankers who could command millions of capital.

When the subject-matter of this litigation was before this court at the June Term, 1902, in the case of Berger v. United States Steel Corporation, it was expressly declared—

(1) That the act concerning corporations, as revised in 1896, authorizes corporations formed under it to retire shares of its preferred stock, purchased with bonds or the proceeds of bonds issued for that purpose, the. provisions of sections 27 and 29 being complied with.

(2) The planner in which a duly-authorized plan is to be carried through is part of the business of the corporation, and, in the absence of fraud or bad faith, is not the subject of judicial control to any greater extent than other business of the corporation. . The court cannot substitute its judgment for that of the directors and majority stockholders and say that a less expensive plan could be successfully adopted.

These questions, therefore, are not open to controversy in this ease, in so far as the cost or wisdom of the plan is concerned.

There is an entire absence in the case of anything to show a taint of fraud or an attempt to conceal from the shareholders any fact which should have influenced their action.

That the entire proceeding was conducted with good faith, without concealment and with fairness to both parties is evinced by the fact that during all the litigation which has ensued, under the promotion of a shareowner who did not attend the meeting, not one of the vast number of shareholders who were present in person or by proxy, comprising men of great business capacity, interested to the extent of millions of dollars in the conversion plan, has questioned its propriety or expressed a desire, so far as appears, to recede from it.

The contract with the bankers was submitted to the stockholders without comment, and, as stated in the 'resolutions, of which a copy was tendered to the stockholders, “was not finally to become or to be operative until after approval thereof by the stockholders in special meeting assembled.”

The- first reason to be considered, upon which the complainants rely to maintain their injunction, is that the action of the directors in passing the resolutions for the plan of conversion and approving the bankers’ contract, was fraudulent and void, because fifteen or more of the twenty-four members of the board of directors were interested in the syndicate which was formed to assist in carrying out the bankers’ contract and to share its profits, and that the plan was never properly and legally ratified by the two-thirds vote of the stockholders required by the Corporation act, inasmuch as the votes upon the stock held or controlled by the bankers’ firm and members of the syndicate must be counted to make up the necessary two-thirds, and without these votes the requisite number did not approve the reduction of stock.

The insistment that the votes of members of the syndicate, who were also directors of the company, cannot be lawfully counted in order to constitute a two-thirds vote in favor of the resolution to reduce the amount of preferred stock, is without any foundation in reason or in law.

They voted upon that resolution not as directors, not in their fiduciary capacity, but solely in the right of the shares of stock held by them. A most valuable privilege, which attaches to the ownership of stock in a corporation, is the right to vote upon it at any meeting of stockholders. As to that resolution, considered by itself, as stockholders, they owed no greater duty to their co-stockholders than those stockholders owed to them.

Like other stockholders, they had a right to be influenced by what they conceived to be for their own interest, and -they cannot lawfully be denied that right; nor can it be limited or circumscribed by the fact that they occupied the position of directors in the company.

With respect to the bankers’ contract a very different rule applies.'

The rule that directors cannot lawfully enter into a contract, in the benefit of which even one of their number participates without the knowledge and consent of the stockholders, is so firmly entrenched in our jurisprudence that it is not open to debate.

It is emphasized and enforced in the following, among many other cases: Staats v. Bergen, 2 C. E. Gr. 554; Winans v. Crane, 7 Vr. 394; Stroud v. Consumers Water Co., 27 Vr. 422; Gardner v. Butler, 3 Stew. Eq. 702; Guild v. Parker, 14 Vr. 430; Stewart v. Lehigh Valley Railroad Co., 9 Vr. 505; Traction Co. v. Board of Works, 27 Vr. 431.

The rule is imbedded in our jurisprudence, and it cannot be too strongly stated or too rigorously applied. But in the cases cited the contract was made by the trustee without the knowledge or consent of the ceslui que trust and without subsequent ratification or adoption by which the vice in it could be cured.

The object of the rule is to prevent directors from secretly using their fiduciary position for their own emolument, and not to impair the right of stockholders to enter into any lawful engagement with a full disclosure of the facts.

In Stewart v. Lehigh Valley Railroad Co., supra, Mr. Justice Dixon, in delivering the opinion of this court, says: “After an examination of all the cases cited, as also such others as I have found, and a careful consideration of the principle, and the results of regarding and disregarding it, I have come to the conviction that the true legal rule is that such a contract is not void, but voidable, to be avoided at the option of the cestui que trust, exercised within a reasonable time; I can see no further safe modification or relaxation of the principle than this.”

It is a settled rule of corporation law that the personal interest of directors renders a transaction voidable at the option of the stockholders, and not void per se.

Under the declaration of this court in the case last cited the shareholders may, within a reasonable time after the disclosure to them of the interest of a director, elect to avoid the contract; but if an unreasonable time is allowed to elapse without exercising such option, during which the position of directors become so changed that it would be inequitable to vacate'the engagement, equity would refuse to interpose.

A fortiori, when the contract is entered into' by the stockholders with the directors, or when the stockholders expressly authorize the directors to enter into a contract, when the stockholders have notice of the directors’ interest, the agreement will be unassailable in the absence of actual fraud or want of power in the corporation.

In this case not only the bankers’ contract made with J. P. Morgan & Company and approved by a two-thirds vote of the shareholders, with knowledge that J. P. Morgan was one of the directors of the steel corporation, a fact which they may be presumed to have known, but also in the circular letter accompanying the call of the stockholders’ meeting to be held on the 19th of May, it was expressly stated as follows:

“To further the success of the plan there has been formed a syndicate, including some directors, which will receive four-fifths of the four percent. compensation to be paid under the contract with Messrs. J. P. Morgan & Company, mentioned in the notice of stockholders’ meeting.”

The deliverance of this court with respect to the sufficiency of notice in Gale v. Morris, 3 Stew. Eq. 285, is as follows: “If the party notified make reasonable investigation, he obtains actual knowledge of these facts', if he chose not to malee it, he is charged constructively with knowledge of them. The rule merely prohibits him from taking advantage of his own imprudence to the detriment of another. But as to the matters that lie within the notice the principle assumes another form. It charges the party with knowledge of those matters so far as reasonable inquiry has not dissipated their credibility. If he is unwilling to act upon the facts as the notice presents them, then the law demands that he shall make proper examination, and upon the result of that examination he may safely stand. Williamson v. Brown, 15 N. Y. 354. But if he prefer not to examine, it must be because he is satisfied to act as if.the matters disclosed in the notice were true, and he cannot afterwards complain if his rights are made to rest upon them so far as they are true. The information given by the notice is equivalent to that obtained by inquiry.”

In Hazlett v. Stephany, 10 Dick. Ch. Rep. 68, Vice-Chancellor Pitney said: “Eor these reasons I think that the facts above stated, which were clearly within defendant’s knowledge, were sufficient to put him upon inquiry. The general doctrine that facts which are sufficient to put a party upon inquiry are sufficient to charge him with all such knowledge as he would have acquired by a proper inquiry, in the ordinary course of business, is, as I take it, thoroughly established in this state. It was so held in the court of appeals in the case just cited (6 C. E. Gr. 463), and that case followed Hoy v. Bramhall, 4 C. E. Gr. 563, in the same court. The doctrine of these cases has always been followed in Hew Jersey.”

The cases in England are to- the like effect. Phosphate of Lime Co. v. Green, 7 C. P. 43; May v. Chapman, 16 Mees. & W. 355.

The stockholders of the company are therefore chargeable with express notice that some directors were interested in the bankers’ contract, and by reasonable inquiry at the meeting of May 19th they could have ascertained the names and number of such directors.

They signified by their votes that they 'approved the contract with such full, knowledge.

In Durfee v. Old Colony Railroad Co., 5 Allen 230, Chief-Justice Bigelow says: “It may be stated as an indisputable proposition, that every person who becomes a member of a corporation aggregate by purchasing and holding shares agrees by necessary implication that he will be bound by all acts and proceedings within the scope of the powers and authority conferred by the charter, which shall be adopted or sanctioned by the vote of the majority of the shareholders of the corporation, duly taken and ascertained according to law. This is the unavoidable result of the fundamental principle that the majority of the stockholders can regulate and control the lawful exercise of the powers conferred on a corporation by its charter.”

In the case of the steel corporation the right of the majority does not rest upon implication. In the by-laws adopted by the stockholders, in pursuance of authority given by the act of incorporation, such power is expressly given to the majority.

■ In Leavenworth v. Chicago Railway Co., 134 U. S. 688, it was held that tire action of the stockholders validated the contract where nine out of thirteen directors were personally interested.

In the cases of Nye v. Storer, 168 Mass. 53, and Bjorngaard v. Goodhue County Bank, 49 Minn. 483, a like infirmity in contracts was held to be eliminated by the vote of a- majority of stockholders.

The like view is expressed by the court of appeals of Maryland in Shaw v. Davis, 78 Md. 308, as follows: “It may be stated as the result of all the authorities, that whenever any action of either directors or stockholders is relied on in a suit by a minority stockholder for the purpose of invoking the interposition of a court of equit3r, if the act complained of be neither ultra vires, fraudulent or illegal, the court will refuse its intervention because powerless to grant it, and will leave all such matters to> be disposed of by the majority of the stockholders in such manner as their interest may dictate, and their action will be binding on all, whether approved of by the minority or not.”

The healing effect of the ratification by stockholders upon a voidable contract entered into by directors is fully recognized in Grant v. United Kingdom Railway Co., 40 Ch. Div. 135.

In the case sui judice, the contract was in effect made between the stockholders themselves and J.' P. Morgan & Company, and1 it cannot be successfully assailed without maintaining that stockholders are without capacity to make a valid contract with the directors of their company.

It would be manifestly contrary to fair dealing and good faith to permit stockholders to invite directors to enter into an engagement, and after the directors had put themselves in a position in which the contract could be enforced against them, to permit the stockholders to deprive them of the benefits of it.

In my investigation no case has been found which will justify such a result.

In the proper application of a legal rule, it cannot be necessary in order to do justice to one party to do manifest injustice to the other. Such inequity would condemn the application of the rule, not the rule itself.

On the ground which has been discussed, upon the facts presented, the complainant’s case is without support in law. He made no inquiry, did not attend the meeting, and now attempts to deprive the two-thirds of the stockholders who did attend the May meeting of the benefit of a contract which they then approved, and which, as has been held in the Berger Case, the corporation had power to make.

As was declared in that case (citing Ellerman v. Chicago Junction Co., 4 Dick. Ch. Rep. 217), individual stockholders cannot question, in judicial proceedings, corporate acts of directors, if the same are within the powers of the corporation and iii furtherance of its purposes; are not unlawful or against good morals, axe clone in good faith and in the exercise of an honest judgment.

Much less can a shareholder challenge like action taken by a majority of his co-stockholders.

The remaining grounds upon which the complainant rests his •claim to relief relate to the act of 1902.

That act, as this court adjudged in the Berger Case, is a restraining act, and required a due observance of its provisions by the steel company as a condition precedent to the right to enter into the conversion scheme.

The first alleged infirmity relied upon by the complainant is that dividends were not made in conformity with the requirement of the act of 1902, which is a supplement to the General Corporation act.

The language of the act with respect to this condition is:

“Every corporation organized under this act * * * that shall have issued preferred stock entitling the holders thereof to receive dividends at a rate exceeding five per centum per annum, and that shall have continuously declared and paid dividends at such rate, on such preferred stock, for the period of at least one jrear next preceding the meeting.”

The amended certificate of incorporation of the company provided that

“the holders of the preferred stock shall be entitled to receive, when and as declared, yearly dividends at the rate of seven per cent, per annum, payable quarterly on dates to be fixed by the by-laws.”

It is admitted that a dividend of one and three-quarters per cent, was declared by the company for the three months beginning on the 1st of April, 1901, and ending on the 1st of July, 1901; that a like dividend was declared for the three months beginning July 1st, 1901, and ending October 1st, 1901; that a like dividend was declared for the three months beginning October 1st, 1901, and ending January 1st, 1902, and that a like dividend was declared for the three months beginning January 1st, 1902, and ending April 1st, 1902, all of which dividends were paid by the company to the stockholders within the time fixed by the by-laws and before the meeting of May 19th, 1902.

This provision, in the act of 1902 was drafted in contemplation of the eighteenth section of the Corporation act of 1896, giving power to1 create preferred stock and prescribing that

“the holders thereof shall be entitled to receive and the corporation shall be bound to pay thereon a fixed yearly dividend, to be expressed in the certificate, not exceeding eight per centum, payable quarterly, half yearly or yearly, before any dividends shall be set apart or paid on the common stock, and such dividends may be made cumulative.”

The dividends on the preferred stock were, by the amended certificate of incorporation of the steel company and the by-laws, made payable quarterly, were cumulative and to be paid before any dividend was paid on the common stock.

A dividend on the preferred stock might have been passed, and it was therefore intended by the act of 1902 to require, in compliance with section 18, that before its provisions could be taken advantage of the company must have paid a dividend at the rate of seven per cent, for the full year next preceding the meeting to retire the preferred stock, and it was a compliance with that section/ whether the dividend was paid quarterly, half-yearly or at the end of the year. The dividend required by the eighteenth section is a yearly dividend of seven per cent., and it was paid in four quarterly payments.

The vice-chancellor held, in construing this legislation, that if the dividend had been paid annually there must have been two dividends of seven per cent, each, covering two previous years, to make the payment continuous; that if the dividends were paid half-yearly there must have been three pa3'ments of three and a half per cent, each, covering eighteen months, in order to make the payment continuous; that if paid quarterly, as in this case, there must have been five payments of one and three-quarters per cent, each, covering fifteen months, to satisfy the statute, and so, if the .dividends had been paid monthly, there must have been thirteen dividends, covering a period of thirteen months.

The mere statement of this view is destructive of it.

Thus interpreted the law would provide no fixed, determinate, uniform time during which dividends must be paid, but would leave it optional with the corporation to get the benefit of the law by making dividends so payable that a period either of two years or only thirteen months need be covered. As to a corporation making dividends payable annually one rule would prevail, while to a corporation paying quarterly a different rule would apply.

The very essence of a law is that it is uniform and universal within the territory to which it relates; it must apply in the same way to every one; it cannot be varied at the will of the corporation.

The construction adopted in the court below is clearly erroneous, and gives a meaning to the word “continuous” which is wholly unwarranted.

It of course must not be given its strictest meaning, which would require a never-ceasing payment of dividends, like the continuous flow of water.

Applied to dividends it means “during one year,” which is equivalent to the words of the act, “for the period of at least-one year.”

The act does not prescribe that seven per cent, dividends shall have been continuously declared and paid for the period of at least one year next preceding the meeting, but that dividends at the rate of seven per cent, shall be paid.

The force of the word “continuously” evidently is that dividends at the rate of seven per cent, must be paid for a continuous period of one year, so that where dividends are paid quarterly, a quarterly dividend cannot be passed without losing the benefit of the act.

The payment of dividends is to be for the period of one year, the dividends are to be paid out of surplus over and above the amount of the capital stock and outstanding indebtedness, and are to be made for the “period.” When a dividend is made, it is made as a dividend for the period of three months then previously elapsed; a dividend for a future period has not been known in the business history of corporations.

When a dividend is paid, it is paid for the period then elapsed.

' In this case a dividend at the rate of seven per cent, was paid for the first quarter, and a like dividend for the second, third and fourth quarters of the year next preceding the meeting of the stockholders.

If that was not a payment continuously at the rate of seven per cent, for one year next preceding the meeting, for what year was it a continuous payment ?

The meaning of the draftsman of this provision may be further elucidated by dropping out of it the words, “for the period of at least one year next preceding the meeting.”

The act will then read: “A corporation that shall have continuously declared and paid dividends at the rate of seven per cent, on such preferred stock.”

This language is ambiguous; it might be construed to mean a corporation that had paid three consecutive dividends at the rate of seven per cent.; that would be a continuous payment.

It might also be held to mean a corporation that had continuously declared and paid dividends during the entire period of its corporate existence.

To exclude this uncertainty the words were added, “for the period of at least one year next preceding the meeting.”

The dividend was required to extend over the entire preceding year, and the failure to pay the dividend for any one of the quarters would break the continuity and require the company thereafter to make four consecutive quarterly dividends of one and three-quarters per cent, each to make the act of 1902 available.

The cases as to publications in newspapers, cited and relied on by the vice-chancellor as his only authority, are not in point.

Our laws require publication of notice of sale “at least four weeks successively, once a week, next preceding the time of sale.” It has been uniformly and properly held to require a publication for four full weeks, once a week, and that the publication must begin four weeks next before the day of sale, and that four full weeks must elapse between the first publication and the day of sale. The statute requires that there shall be four weeks’ notice of sale, and if sale can be made after four weekly publications, it might be made after the expiration of only twenty-two days.

A publication has no relation to a previously elapsed period; it is a publication only on the very day it is made, while a dividend relates to and is for a time previously run. All that the act of 1902 requires with respect to payment of dividends is that the provision of. section 18 of the General Corporation law shall be complied with.

The other objections urged as to the want of conformity by the defendant corporation with the requirements of the act of 1902 have been duly considered and are deemed to be without merit.

There is no ground presented by the case, or agitated in the briefs of counsel, which will justify the interposition of a court of equity to arrest the proposed action of the defendants.

The decree below should be reversed and the injunction dissolved, with costs in this court and in the court below.

For reversal—The Chief-Justice, Van Syckel, Garrison, Port, Garretson, Hendrickson, Pitney, Bogert, Voorhees, Vroom—10.

For affirmance—Hone.


source: Caselaw Access Project

author: Magie, Chancellor.

license: Public Domain

text:
    William J. Magie, Chancellor.
    Henry C. Pitney, John P. Emery, Alfred Peed, Frederic W. Stevens, Martin P. Grey and Eugene Stevenson, Vice-Chancellors.
    Grand Lodge, Ancient Order of United Workmen of New Jersey, v. Mary A. Gaddis et al.
    [Filed July 14th, 1903.]
    1. The constitution and laws of a beneficial society contained a provision that its members agreed to submit their grievances, in the first instance, to an internal tribunal of the society, and that having so agreed they cannot, against the protest of the society, maintain a civil action against it until the condition precedent of submission to such tribunal has been, in legal contemplation,- complied with. To a bill of interpleader by the complainant society, one of the defendants pleaded in bar that complainant’s constitution provided for a board of arbitration to first pass on conflicting claims, but failed to allege that such a method of adjudication had been demanded before the commencement of this suit. — Held, that under such circumstances the plea was defective.
    2. Whether an association of this sort may not waive the provisions for an adjudication under its charter or may not in any case seek an injunction against threatened actions at law, queers.

    On plea of Mary A. Gaddis.

      Mr. Walter A. Barrows, for the complainant.

      Mr. Henry J. Melosh, for Mary A. Gaddis.
   Magie, Chancellor.

The complainant’s bill seeks a decree of interpleader. It sets forth that it is a fraternal benefit society, located and doing business in this state, under the provisions of the act entitled “An act regulating fraternal and beneficiary societies, orders or associations,’’ approved March 11th, 1893 (P. L. of 1893 p. 232); that on November 25th, 1881, one James Dickson was duly admitted to its membership,. and continued therein until his death, on December 26th, 1902. It charges that, pursuant to its laws, James Dickson, on his admission, designated as his beneficiaries, to receive out of the beneficiary fund, “$2,000 to Annie Dickson in trust for children bearing relationship of wife and children;’’ that a beneficiary certificate was issued by complainant to said James Dickson in favor of said beneficiaries; that about December 3d, 1898, James Dickson, asserting that the certificate issued to him had been lost, made application, in a form prescribed by complainant’s laws, for another certificate to be issued in duplicate of that lost; that complainant issued to him another certificate, intending it to be a duplicate, but the officer who issued it inserted therein as beneficiary the name “Mary Agnes Dickson, bearing the relationship of daughter," and such certificate was delivered to James Dickson, and remained in his possession until his death; that the mistake therein was not discovered until after his death, and that while the laws of complainant permit the member to change his beneficiary, no application for such a change was made by James Dickson, but that his only application was for a duplicate certificate of that which had been lost.

It further charges that, at the death of James Dickson, he left him surviving his widow, Annie Dickson, and six children, one of whom is Mary Agnes Dickson, who is the defendant now called Mary A. Gaddis; that Mary A. Gaddis claims from the complainant the payment of $2,000, under the second certificate above mentioned, and threatens to bring an action at law against complainant for it; and that the widow and the other children also claim from the complainant the $2,000, under the provisions of the first certificate, and they threaten to bring an action at law against complainant therefor.

The complainant acknowledges its liability for the payment of said sum, and expresses its willingness to pay the same to the person or persons lawfully entitled thereto, and offers to pay the same into court.

The complainant asks an injunction restraining the respective defendants from proceeding against it in actions at law.

To this bill no defence has been interposed by any defendant except Mary A. Gaddis. As to all the other defendants a decree pro confesso could now be taken, and they may be considered as submitting to the jurisdiction of this court.

The defendant Mary A. Gaddis has interposed a plea to the jurisdiction of this court, and thereby asserts that, by the constitution and laws of the complainant, there is a board of arbitration to hear and determine all controverted questions as to distribution and disbursement of the beneficiary fund of the complainant, in which board is vested jurisdiction to hear and determine all controversies as to complainant’s liability on claims for benefits and as to who are the beneficiaries-when conflicting claims are set up; that, by the express terms of the 1-aws in this respect, the rights of all parties to such controversies shall be determined, in the first instance, in that tribunal, without' recourse to the courts of law, and that, before this court 'can obtain jurisdiction in the case presented by the bill, complainant must comply with the provisions oí its own laws and procure adjudication from its own tribunal.

The plea was filed May 11th, 1903. The complainant did not reply or take issue upon it. On notice of defendant’s counsel argument upon the plea was brought on without objection from the complainant’s counsel.

It is settled law in this state that the members ,of beneficiary associations may agree to submit their grievances, in the first instance, to an internal tribunal of their society, and that, having so agreed, they cannot, against the protest of said society, maintain a civil action against it until the condition precedent of submission to such tribunal has been, in legal contemplation, complied with. Ocean Castle v. Smith, 29 Vr. 545; S. C., 30 Vr. 198; Boxbury Lodge v. Hocking, 31 Vr. 439; Societa v. Cenni, 33 Vr. 652.

A plea is a special answer, showing or relying upon one or more things as a cause why the suit should be either dismissed, delayed or barred. The question is whether the facts set up in this plea bar this court from taking cognizance, of the case made by the bill.

Without determining whether an association of this sort may not waive the provision for an adjudication in the court constituted by its laws, or whether it may not seek an injunction against threatened actions at law, I have reached the conclusion that the plea is otherwise defective. It asserts the existence of a tribunal having jurisdiction over conflicting claims to this fund, made by the pleader on one side and. the other defendants on the other side. It fails to assert that -either she or the other defendants have demanded an adjudication from that tribunal, or have initiated any contest upon which the tribunal could act. In the case of such conflicting claims, such an adjudication must be sought by'the claimants, and the tribunal is without power to-initiate a proceeding, or bring in the contending parties by its own motion. Under these circumstances, the complainant, having the money in hand, and being-ready to pay it, may well resort to the only tribunal which can protect it from threatened actions at law, and may, in that mode, require the contending parties to-submit their respective claims to judicial arbitrament.

The plea must therefore be overruled.


text:
    Howard W. Hayes and Simon S. Ott, executors of George W. Tewksbury, deceased, v. The United States Phonograph Company et al.
    [Filed May 26th, 1903.]
    1. A bill seeking relief against a judgment at law on the ground that the complainants had a valid legal defence to that action, which they were prevented from presenting because the evidence on which such defence could be made was not discovered until after the trial and judgment, must not only show the relevancy or materiality of such evidence, but must also show that proper diligence had been used in the preparation for such trial, or that no diligence would have discovered such evidence, and it is demurrable if it fails to make such averments.
    2. Since the passage of the amendment to the Practice act, which permits application for a new trial at law after the term (Gen. Stat. p. B5S9), a court of equity will decline to exercise its jurisdiction in respect to new trials, when the relief sought may be obtained by an application to the court of law.
    On demurrer to bill.

      Mr. Edward Q. Keasbey, for the demurrants.

      Mr. Joseph L. Mwnn, for the complainants.
   Magie, Chancellor.

The United States Phonograph Company and J. Stogdell Stokes, two of the defendants, demurred to the bill in this cause.

The prayer of the bill is that the said company and Charles H. Burr, Eobert C. Banes and J. Stogdell Stokes may be decreed to refund and pay back to the complainants as executors of George W. Tewksbury, deceased, the amount (with interest) of a judgment recovered against complainants as such executors, and paid by them.

The facts upon which this prayer is predicated are stated in the hill as follows: that the complainants are the executors of George E. Tewksbury, deceased, -holding letters testamentary from the surrogate of the county of Essex, in which the testator died; that an action was brought against them, as executors, for the recovery of money alleged to be due from the testator to the United States Phonograph Company; that the action was brought in the circuit court of Essex county and came to trial before that court upon the plea of the general issue interposed by complainants; that the trial resulted in a verdict in favor of the company for $2,197.05, upon which verdict a judgment was entered and the amount of the judgment was afterwards paid to the said company by the complainants; that the complainants have since learned that, at the time tire action was brought, the sum above mentioned was no longer due from the testator or his estate, but had been assumed and agreed to be paid by one Challenger; that said Challenger had, before the .institution of said suit, executed and delivered to said company his written obligation to pay said sum, and assigned to said company certain collateral se^ curities for its payment, which obligation and securities said company had accepted in settlement and satisfaction of its claim, and that complainants had no knowledge or information, at the time of the trial, as to the assumption of the debt by Challenger or of the acceptance by the company of the obligation and security given by Challenger to the company. The bill charges that the obligation of Challenger, with the collateral security, was in the possession of the company at the time of the pending of the suit and its trial, and was known to the officers of the company, wh.o concealed the same from the complainants.

The specific relief prayed for in the bill is a decree for the refunding of the money paid by complainants upon a judgment obtained against complainants and yet remaining upon the record of the court in which it was rendered. While that judgment remains open and unreversed, it presents an absolute bar against the recovery by complainants, in an action at law, of the money which they have paid thereon. An appeal to a court of equity for relief against a judgment voluntarily paid must be supported by charges of facts justifying such relief.

In the case made by the bill, it is not sought to interfere with the judgment in question, because complainants had an equitable defence which could not be interposed in the action at law. The ground of interference claimed is that complainants, being defendants in the action in which the judgment was rendered, had a valid legal defence on the merits, which they were prevented from maintaining by fraud, mistake or accident, there having been no negligence or laches in respect to such defence. 3 Pom. Eq. Jur. § 1364.

When such a ease for interference is made out, and the judgment has not been paid, relief is granted by enjoining the enforcement of the judgment until the plaintiff has consented to a new trial or a new trial will be otherwise had. 2 Pom. Eq. Jur. § 836; Cairo and Fulton Railroad Co. v. Titus, 5 Stew. Eq. 397.

When such a case for interference with the judgment has been made out, and the judgment has been enforced, equity will require repayment or restoration of money or property inequitably received upon the judgment. Williamson v. Johnson, 1 Halst. Ch. 537; Herbert v. Herbert, 2 Dick. Ch. Rep. 17; S. C., 4 Dick. Ch. Rep. 70. In the case last cited, a plaintiff in attachment who had purchased lands under a sale made upon his judgment in the attachment proceedings,-was decreed to reconvey the lands, upon proof that the judgment had been inequitably obtained. The court of errors, on appeal, affirmed the decree,' with the addition that the plaintiff in attachment should be forever enjoined from enforcing his judgment unless he should, within a specific time, open the same and let in the defendant to defend the suit. Herbert v. Herbert, 4 Dick. Ch. Rep. 565.

Whether upon such a bill the appropriate decree would enjoin the enforcement of the judgment or require restoration of something obtained by its enforcement is immaterial, to the present inquiry. For the bill, in either aspect, is a bill for a new trial on the ground of newly-discovered evidence. It is well settled that such a bill must disclose the character of the evidence alleged to have been discovered, so as to show its relevancy and materiality, and that it should further make known that there had been proper diligence used in the preparation for the trial of which complaint is made, or that no diligence would have succeeded in bringing the evidence to -light in time. Failure in these particulars is held by the court of errors to render such a bill demurrable. Hannon v. Maxwell, 4 Stew. Eq. 318.

It may be open to question whether this bill discloses evidence material to the defence of the action at law. There was admittedly an obligation of the testator to the company. The bill does not assert that it was released, but only that another obligation was substituted therefor; whether a case of novation is stated is doubtful. Ad. Cont. 372.

But there is no attempt made in the bill to show that complainants used such diligence as was required of them to discover evidence for the trial at law, or any diligence at all. On the face of the charges of the bill it would seem that due diligence would have disclosed the present alleged defence. But if that is not a justifiable inference, the rules of equity pleading at least require a statement of the diligence in fact used. For this fault the demurrer must be sustained.

The bill is also faulty in another respect.

Bills of this character are not entertained by a court of equity if relief on the case made can be obtained by resort to the court of law. When courts of law refused to consider applications for new trials, courts of equity exercised jurisdiction in relieving against judgments which had been obtained when relevant material evidence had not been produced in defence, because the defendant, although diligent in preparation, had not discovered it. But as courts of law came to listen to applications for new trials on the ground of newly-discovered evidence, courts of equity withdrew from the exercise of the jurisdiction. Hannon v. Maxwell, ubi supra. While the jurisdiction of the courts of law in allowing new trials was restricted to applications made during the term at which the judgment had been entered, courts of equity exercised their jurisdiction to afford relief in such cases when the newly-discovered evidence had come to light too late to permit an application to the law court. As the legislature has extended the jurisdiction of the law courts to grant new trials after the expiration of the terms, this court has further withdrawn from the exercise of its jurisdiction in that regard. Wolcott v. Jackson, 7 Dick. Ch. Rep. 387; Gen. Stat. p. 2589 § 328.

There are statements in the bill to the effect that the defendant company has voluntarily dissolved, and the other defendants are made parties as being the stockholders and officers of the company at its dissolution. These statements led to some question whether there was not an equity shown which might require the bill to be held in this court, notwithstanding the extended jurisdiction of the law courts. Eor, if the newly-discovered evidence proves sufficient to defeat the action and require restoration of the amount paid, this court might conveniently follow the assets into the hands of the defendants. But on examination of the Corporation act of 1896 I find that if the judgment be opened, and upon a new trial a verdict and judgment pass for the defendant in the action, an action will lie against the directors, in the name of the corporation, or in their own names, for debts owing by the corporation, and they are made jointly and severally responsible therefor to the amount of moneys of the corporation which came to their hands.

Eor both reasons the demurrer must be sustained.


text:
    Daniel B. Challender v. Lucretia M. Challender.
    [Filed June 30th, 1903.]
    Inquiry is not shown to be within the purview of the fifty-third rule ■of this court, by the filing of solicitor’s affidavit that he has inquired of the complainant or petitioner, who furnished the description subsequently •delivered to the sheriff.

      In divorce. Application for reference to a special master in a proceeding where the defendant has not appeared.
   Magie, Chancellor.

This case, like several others which have been submitted to me to direct a reference, presents an instance of misinterpretation of the fifty-third rule. The rule provides that

“in all suits for divorce, the solicitor of the complainant or petitioner, before delivering to the sheriff the subpoena or citation, shall make diligent inquiry as to the defendant, pursuant to the provisions of rule 50 ^ if,” &c.

The solicitor’s affidavit filed in this case shows only an inquiry of the petitioner, who furnished the description required to be-delivered to the sheriff, with the subpoena or citation, by a subsequent provision of said rule 53, when the defendant is found to be within this state.

The purpose of the rule was to exact an independent investigation as to defendant’s whereabouts, and a description of his or her person, before issuance of citation, in order to aid the sheriff in identifying the person to be served, and to guard against erroneous or collusive service within this state, and unnecessary resort to substituted service upon defendants as absent or non-resident, when proper inquiry would have discovered them to be resident. Unhappily, the administration of divorce jurisdiction has furnished instances that teach the necessity of such investigation. The solicitor and the serving officer, when unacquainted with the defendant, his person and his residence, may be wholly without fault, but it is in these instances that the-mischief is done.

I cannot regard inquiry of the petitioner only, and a hearsay recital of what the petitioner replies, as proof of a “diligent”' inquiry, having regard to the scope and purpose of the rule. Diligence will at least suggest that the solicitor should require the affidavit of the petitioner as to the accuracy of the description, and particularly that the source of petitioner’s knowledge as to the present residence of the defendant should be set forth. From the facts thus verified the solicitor may perceive what basis exists for the assumed knowledge, and if it does not satisfy a legal mind as a means of identifying the party proposed to be served with the defendant in the bill or petition, the inquiry would not justify the service. The solicitor must then feel obliged to resort at once to that rigid inquiry which, after order of publication, is invariably exacted under rule 59, for he would not be justified in concluding that the residence of the defendant was certainly known. In any event, the court is put in possession of the oath of the party' who furnishes the information, his means of knowledge, and the propriety of proceeding upon a service made in conformity thereto.


author: Mague, Chancellor.

text:
    William Pennington et al., executors of Jacob S. Rogers, deceased, v. The Metropolitan Museum of Art et al.
    [Filed July 14th, 1903.]
    1. By the will of Jacob S. Rogers, deceased, testator created a trust fund, consisting of both real and personal estate, and provided that the income therefrom should be applied, (1) to the payment of all taxes and assessments and other impositions upon the trust fund; (2) to pay to-each of two infants $500 annually-, as long as he should live; (3) to use and apply the remainder in improvements upon the' real estate in the trust, and (4) any balance of the income not so used was to go to the Metropolitan Museum of Art in the city of New York. The trustees were empowered to lease the real estate in the trust for terms not exceeding fifteen years. Upon the death of the longest liver of the two-infants, it is provided that the whole trust fund shall go to the Metropolitan Museum.
    2. The Metropolitan Museum, having applied to the trustees of the fund for immediate possession of the real estate - in the trust, undertaking to thereafter relieve the trustees from the payment of any taxes, assessments or impositions thereon, the trustees filed their bill for instructions and directions respecting their conduct in the management of the trust.

      3. By tlie proofs it appears that the present income of the whole fund is insufficient to discharge the annual taxes now imposed on the real estate in the fund, and that there is no reason to anticipate that the income will hereafter become sufficient to pay the taxes, assessments .and other impositions thereon.' — Held, (1) that if testator did not anticipate and provide for the case of the income being exhausted in the payment of the impositions upon the real estate, and if, by a change of the scheme for the management of the trust, the benefit intended for the infant beneficiaries and the residuary beneficiary may be carried out, with the ■consent of the latter, this court has power to direct and instruct the trustees to so change the scheme of the trust as to effectuate the testator’s intention; (2) that the power to direct such change of scheme is ■.grounded on the necessity of such a change to effectuate testator’s intention, which, under the present circumstances, cannot be carried out; (3) that the court will not refrain from exercising its power in that regard because two of the beneficiaries are infants, or because objections are made in behalf of one of the infants, if it is convinced that such ■change is for the benefit of the infants, and their interests can be effectually secured to them.

      4. The trust in question was created and its scheme of management prescribed by the first codicil of testator’s will, the terms of which justify the inference that testator contemplated that the income from the trust fund would suffice to pay the taxes, assessments and other impositions, .and also the annual sums to the infant beneficiaries. By a subsequent codicil, testator provided that if at any time the income should not be sufficient to discharge the taxes and assessments, the deficiency should be paid by the residuary beneficiary, out of the income from other property bequeathed to it by the will. — -Held, (4) that by the true construction of this provision, the testator therein provided for the case of assessments for municipal improvements imposed casually and from time to time, and which at times might, when added to the annual taxes, exhaust the income of the fund, and did not have in contemplation or provide for the case of annual taxes exhausting the income and constantly depriving the infant beneficiaries of the benefit intended for them.
    On bill for relief respecting the trust arising under the will and codicils of Jacob S. Rogers, deceased, and for instructions and directions to the trustees thereof.
    The following extracts from said will and codeils show the trust in question:
    WiLL OF JACOB S. ROGERS.

      “Sixteenth. All the rest, residue and remainder of my estate real and personal of every nature and kind and wherever situate, I give, devise and bequeath to my brother Columbus B. Rogers and my friend Asabel S. Levy my Executors hereinafter named and appointed. To have and to hoicl unto them their successors and assigns forever, with full power to-receive the rents, issues and profits thereof, In Trust nevertheless to sell and convey and convert the said real and personal estate into money, or available securities, and I order and direct them to sell convey and convert the same into money or available securities, as soon as it can be done,, having in view the best interest of the estate, and thereupon, without delay, to pay over the proceeds thereof, arid the rents, income, issues and profits thereof to The Metropolitan Museum of Art in the City of New York, a corporation constituted and created by Chapter 197 of the laws-of 1870 of the State of New York, for the use and purpose of forming an Endowment Fund for the said Museum, or of adding to and enlarging the Endowment Fund of said Corporation, if such a fund now exists, or shall-be in existence at the time of my death; the income only of the fund hereby created, or intended so to be, to be used for the purchase of rare and desirable art objects and in the purchase of books for the library of said Museum, and for such purposes exclusively, the principal of said, fund is not to be used, diminished or impaired for any purpose whatever.”'
    FIRST CODICIL.

      “Second. I except and exclude from the rest, residue and remainder of' mj' real and personal estate given and devised by my said will and testament all my real estate in the City of New York and in the State of New Jersey, and also all of the stock of the Paterson and Hudson River Rail-• road Company and of the Paterson and Ramapo Railroad Company which I may own or be entitled to at the time of my death. And I give, devise, and bequeath the same to Asahel S. Levy and'Jenkins Van Schaick, both of the City of New York for and during the lives of Thomas B. Bradford and of Theodore B. Rogers, Jr., grandsons of my deceased brother Theodore Rogers, and for and during the life of the longest liver of said Thomas B. Bradford and Theodore B. Rogers, Jr., In Trust nevertheless to collect and receive the rents, income, issues, dividends, interest and profits thereof and to apply and pay the same as follows

      “1st. To the payment of all taxes, assessments, insurances, alterations, . repairs and other charges which may be or come against said real and personal estate, or which may be necessary for the proper care and preservation thereof.

      “2nd. To apply to the use of each of the said persons above named viz.: Thomas B. Bradford and Theodore B. Rogers Jr. Five Hundred dollars annually so long as he may live.

      “3rd. The remainder of said rent and income if any, shall be used and ■ applied to the improvement and permanent benefit of the real estate given. and devised in trust by this codicil.

      “Jfth. If there shall still remain a balance of said rent and income, I give and bequeath the same to The Metropolitan Museum of Art in the City of New York, for the purpose of forming or increasing an Endowment Fund of said Corporation, as I have in said will and testament provided.
    “My executors and trustees shall have and I hereby give them power to - lease and let the said real estate for terms of not more than fifteen years at any one letting or leasing, and for such rents and Upon such terms, covenants, agreements and conditions as to them may seem just and proper.”

      “Fourth. Upon the death of the longest liver of said two named persons viz. Thomas B. Bradford and Theodore B. Rogers Jr. I order and direct the said Trustees to sell and convert into money all of said real estate devised in trust in this codicil, and I give and bequeath the proceeds arising from'said sale and conversion, and the two above mentioned Railroad stocks, 'together with any accumulations of the income from said properties, to the Metropolitan Museum of Art in the City of New York, in my said will and testament mentioned, for the same uses and purposes and subject to the same conditions and limitations which are contained in the sixteenth and seventeenth clauses of my said will and testament, and as are therein prescribed and applied to the gift devise and bequest of the rest, residue and remainder of my real and personal estate, and the provisions X have made in the event of the failure or invalidity of the devise and bequest of said rest, residue and remainder or any part thereof, and the disposition to be made of the same, shall apply to and include my said real estate and the two stocks above mentioned and hereby excluded from and taken out of said rest, residue and remainder and hereby intended to be devised and bequeathed.
    If however, at the time this instrument shall go into effect, the said Metropolitan Museum of Art in the City of New York, shall be authorized to take the land in question by devise, a sale of said real estate shall not be necessary, but the same shall upon the expiration of the trust term hereby created, vest in possession in said Corporation to which in that event I give and devise the same, and it shall not be necessary to sell and convert the remainder of the rest, residue-and remainder of my real estate into money as provided in my said will if at the time of my death the said Metropolitan Museum of Art shall be authorized to take it by devise, and in that event X give and devise the same to that corporation absolutely.”
    SECOND CODICIL.

      “TMrd. If at any time it shall happen that the income from the real and personal estate given and devised in trust by the second clause or paragraph of the said first codicil to my said last will and testament shall be insufficient to pay and discharge the taxes and assessments -which are or may be levied and imposed upon said real and personal estate such deficiency shall be made up and paid and supplied out of the income of the estate real and personal given, devised and bequeathed to the Metropolitan Museum of Art by my said last will and testament, or out of the income from the fund which may arise from the sale and conversion of said real and personal estate ordered and directed by said last will and testament.”

      FOURTH CODICIL.
    “As Thomas B. Bradford mentioned in a former codicil as one of the parties during whose life a certain Trust is to last has since died; I hereby nominate and appoint to take his place in ail things William Du Pont, grandson of my deceased brother Theodore Rogers. And I hereby declare William Pennington, Theodore B. Rogers and Judge John S. Barkalow are the executors and trustees of and under my said last will and testament and the codicils thereto.”

      Mr. John R. Beam and Mr. John W. Griggs, for the complainants.

      Mr. George Holmes (with whom was Mr. Robert Be Forest and Mr. Robert Thorne, of the New York bar), for the Metropolitan Museum of Art.

      Mr. Alan II. Strong, for William Du Pont, Jr., and William Du Pont, his' guardian ad litem.

   Mague, Chancellor.

Complainants are the executors of Jacob S. Eogers, deceased, and hold, as trustees, the personal and real property withdrawn and excluded from the residuary disposition made by the sixteenth clause of the will of the testator, and created a trust fund by the provisions of the second clause of the first codicil to said will. Their bill seeks specific relief respecting the disposition and management of the trust fund, and it contains a prayer for general relief.

The defendants are the Metropolitan Museum of Art, a corporation of the city of New York; Theodore B. Eogers, Jr.; William Du Pont, Jr., and William Du Pont, guardian of Wib liam Du Pont, Jr.

The Metropolitan Museum of Art has filed an answer, admitting the charges of the bill, and join in one of the prayers for specific relief contained therein.

An answer to the bill bjr the defendant Theodore B. Eogers, ■Jr., who is an infant, has been filed by Theodore B. Eogers, his guardian, submitting to the direction of the court, and praying for protection of the infant’s interest.

An answer has also been filed by William Du Pont, Jr., who is an infant, by William Du Pont, his guardian ad lilem, and by said William Du Pont as general guardian of said infant.

By that answer no contest is presented in respect to the facts charged in the bill, but it is submitted thereby that no such specific relief as is prayed for in the bill can be decreed, except on consent of said infant, which consent is thereby expressly refused.

The cause has been brought to hearing upon the bill, answers and proofs.

The proofs establish the following facts:

The stocks of the Paterson and Hudson River Railroad Company, and of the Paterson and Ramapo Railroad Company, which are included in the trust fund in question, are producing an annual income of $13,676. The real estate in the city of New York included in the trust is, in part, unimproved, producing no income; the remaining part is a lot with a building, which has been unoccupied for several years past, and which needs considerable repairs to enable a rental to be obtained for it. The taxes imposed on that property for the year 1902 were $6,021.49. In the opinion of a witness the two tracts are worth $362,000. The real estate in the State of New Jersey in the trust, among other things, includes land in the city of Paterson, viz., a considerable tract of unimproved land and the late residence of the testator. All the real estate in the city of Paterson was assessed for taxes, for the year 1902, at a valuation of $412,790.40. One of the executors testified that he and his co-executors consider this valuation to be excessive, and have appealed therefrom to the state board of taxation. The witness, however, admits that the lands in that city have a valuation of over $200,000. The annual taxes imposed on that property, at the valuation of the taxing office for the year 1902, were $10,310.76. There are, besides, large assessments upon that property, imposed for street improvements (to an amount not disclosed by the proofs), which have not been paid. The same witness expresses an opinion that the whole Paterson real estate cannot be made to yield an annual income of more than $600. There is also included in the trust in question some land situated at, and in the vicinity of, Pompton, New Jersey. The same witness expresses the opinion that that property cannot be made to produce more than-$400 a year. What annual taxes are imposed thereon is not disclosed by the proofs.

From the facts established by the proofs the following inferences may be fairly drawn: (1) That the present income of the trust is now insufficient to discharge the annual taxes imposed upon the property and directed to be first paid out of the income, by the first subdivision of the second clause of the first codicil; (2) that there is no reasonable probability that in the future the fund will produce sufficient income to discharge such annual impositions, because there will be no income to apply to improvements, under the third subdivision of the second clause of the codicil, and therefore no increase produced from the fund, and because the limitation of the power to rent the property to fifteen-year terms will prevent the unimproved land being let upon building leases, which might increase the income.

It results that, at present, the fund can produce nothing to satisfy the annual payments directed to be made to the two infants, and there is no reasonable ’likelihood that it will be able to make such payments in the future. The deficiency required to be met by the Metropolitan Museum of Art, under the third clause of the second codicil, now exists, and is likely to continue to exist and to be increased by the increase of taxation, and especially by assessments for municipal improvements in Paterson. If the trustees could be relieved from the burdens arising from the requirement to pay the impositions on the real estate included in the trust, the income from the stocks included therein would not only suffice to pay the annual legacies to the infants, but would leave a large surplus.

The contention made by the guardian ad litem of the infant Du Pont, one of the beneficiaries under the trust, ought to be first considered. That contention is that notwithstanding the trustees are unable, in the present condition of the trust fund, to make any payment upon the annual legacy to that infant, and that the fund is so limited by the terms of the trust that there is no reasonable probability — indeed no possibility — that any such payment can be made hereafter, yet none of the relief sought by this bill can be granted without the consent of that infant. As the infant is not sui juris, he is, of course, incapable of giving a consent upon which the action of the court in making a decree under this bill could be supported. The guardian ad litem has no power either to give or to withhold such a consent. But a court of equity is not hampered in the administration of relief in a proper case by the inability of an infant to give consent to its action. Thus, where an infant, if adult, would be bound to make an election, the court may defer the question of election until he becomes of age, if it can be done ■without prejudice to the rights of other parties, but will ordinarily make inquiry whether it is to the infant’s interest to elect, and what election should, be made, and will thereon make an election in the infant’s behalf. Pom. Eq. Jur. § 509; Streatfield v. Streatfield, 1 White & T. Lead. Cas. 397 and notes.

If in the case before us consent is.necessary and can be given by the court in the infant’s behalf, it would seem to be inequitable to stay the hand of the court until this infant becomes of age, because the long delay will not only injure the infant objecting, but the other infant beneficiary who submits himself to the judgment of the court, and would also operate injuriously upon the residuary beneficiary.

Upon the pleadings and proofs, I deem it my duty to determine (1) whether this court is possessed of power to grant the specific relief praj^ed for, or any part of it, or any germane relief under the prayer of the bill; and (2) whether, if the court possess such power, it should refrain from exercising it because of the infancy of two of the beneficiaries under this trust.

Before addressing myself to these inquiries, it is proper to state that the interests of the infant beneficiaries are not correctly called annuities. An annuity arises upon the grant of a yearly sum, with the payment of which the grantor has charged himself and would have been liable at the common law to a writ of annuity. Co. Litt. 144b. Here is no bequest of an annual sum, .under which the executors might be required to set aside a fund sufficient to'raise such sum. The infants’ interests are created and fixed by the terms of the trust. They are not entitled to a fixed annual sum at all events, but only to an annual sum if the income of the fund in each year permits. Therefore, if in any year-the income does not suffice to pay the whole or any part of the annual sum, the trustees are'without power to make up the deficiency out of the subsequent income. Nor can there be the least pretence that the annual sums are charged upon the principal of the trust fund. Baker v. Baker, 6 H. L. C. 616; Wharton v. Masterson, L. R. App. Cas. (1895) 186. Continued deficiency of income to pay the annual sums will therefore result in a total loss to the infants of the benefit which testator intended them to receive.

If the interests of the infants under this trust were strictly annuities, the case would fall within the line of English cases in which the court of chancery has required the annuity to be secured, and after security given, has disposed'of the residue. Thus in Slanning v. Style, 3 P. Wms. 335, upon a will bequeathing an annuity to testator’s wife and charging it upon the personal estate, Lord Talbot decreed the executors to bring into court sufficient of the bonds and securities of the estate to answer the annuity. In re Parry, L. R. 42 Ch. Div. 570, North, J., upon a will bequeathing annuities and then bequeathing' the residue of testator’s property, after payment .of the annuities, held that while the annuitant would not be entitled to have the estate converted and a sum sufficient to answer the annuities invested, they were entitled to have the annuities sufficiently secured, and he decreed that such security should be given by a first mortgage on certain real estate of the testator which was part of the residue, and when so secured, that the rest of the income of the estate should be divided among the residuary legatees.

A like doctrine has been applied in a well-considered case in New Hampshire. Healey v. Tappan, 45 N. H. 243.

With respect to annuities so secured, the court of chancery has, when the income has proved to be insufficient to satisfy "the annual payment, required the deficiency to be made up from the subsequent income or even from the principal. May v. Bennett, 1 Russ. 370; Boyd v. Buckle, 10 Sim. 595; Booth v. Coulton, L. R. 5 Ch. App. 684; Baker v. Baker, ubi supra.

But the case under consideration is distinguished from those cases because, as before stated, the infants are not annuitants. Their interest is confined to a share of the income to be paid annually, if the income extends so far. If the income does not suffice for any annual payment, the deficiency does not fall upon any subsequent income or the principal of the fund. The residuary legatee is therefore in no respect concerned in that deficiency. It cannot be required to give security that the income shall be sufficient, and is under no liability if the income never becomes sufficient.

The solution of the problem presented in this case must be found in the application of other principles.

Complainants are trustees of a fund of great value. They exhibit and prove a situation in which the fund does not now serve the evident purpose of its creator, in respect, at least, to' his infant beneficiaries. They show that there is no reasonable probability that the situation will improve in the future. It is not too much to say that, in view of the possible and probable increase of municipal impositions, by way of taxes and assessments, there is no reasonable expectation of an improved situation. Under such circumstances they apply to this court for directions as to their duty. They invoke the action of the court under its well-settled jurisdiction to construe wills and trusts, and to aid executors and trustees by instructions and directions where necessary and proper.

The trustees bring this matter to the attention of the court upon the demand of the residuary legatee, the ultimate beneficiary of testator’s bounty under the trust. If complainants yield- to this demand, it is evident they will themselves be liable to a charge of a breach of trust. For it is impossible to deny that the course of action requested by the defendant the Metropolitan Museum of Art is not in accord with the apparent intent of the testator expressed in the language set out in the prefatory statement. That language clearly, indicates that testator’s intent was that the whole fund, real and personal, should be kept intact in the trust as long as the longest liver of the two infants should survive. What this defendant seeks is that, notwithstanding this intent, the real estate may now, at once, be released from the trust and given to it in immediate possession. As it must be conceded that the defendant has, under the terms of the trust, a present vested interest in the whole fund, this course will only accelerate the purpose intended, and put the residuary beneficiary in a possession to which it must ultimately come. But it must also be conceded that this course will alter the scheme of the trust as devised by the testator.

It is not easy to determine what motive actuated the testator to include in this trust both real and personal property, which must have been of great value at the time he executed the will and codicil, and which is now worth over half a million dollars, and also to include therein real estate which is unimproved and in a condition which, under the terms of the trust, precludes the possibility of improvement, and of any income therefrom. It is clear that his sole purpose could not have been to secure the annual payment of the comparatively paltry sums given to the two infants. His purpose must have had a broader scope. In my judgment he contemplated that the income from the personal estate and such of the real estate as produced 'income would always be sufficient to satisfy the primary charges imposed thereon by the first subdivision of the second clause of'the first codicil and the annual sums to the two infants directed to be paid by the second subdivision of the saipe codicil, and that his motive maj^ be inferred to have been to keep the unimproved and non-income-producing real estate in the trust until its termination, when the ultimate beneficiary would receive it,' with the benefit of what has been called the unearned increment.

The residuary beneficiary supports its demand upon the trustees upon the doctrine of a line of cases in the English court of chancery. That doctrine is that, when an interest under a will is vested in one who is, or becomes, sui juris, the court will, upon his demand, put him in immediate possession thereof, notwithstanding the testator postponed his possession to a later period, if it clearly appears that no other person is interested in the property-which will be affected thereby. This' doctrine seems firmly' established in those courts, the leading case of Saunders v. Vautier, Craig & P. 243, in which it was first enunciated, having been repeatedly followed and approved. Gosling v. Gosling, 1 Johns. Ch. 265; In re Colson’s Will, Kay 133; Coventry v. Coventry, 2 Drewry & S. 470; Josselyn v. Josselyn, 9 Sim. 63; Rocke v. Rocke, 9 Bevan 66; In re Jacobs’ Will, 29 Bevan 402; Wharton v. Masterson, ubi supra.

If the relief sought for in this case depended upon the application of the doctrine of those cases, I should find serious difficulty in granting it. The infant beneficiaries have an interest in the trust fund during their joint lives, and the survivor of them has such an interest as long as he shall survive. If, under the circumstances disclosed, the interest of the infant beneficiaries may be ignored, the doctrine seems to me, at present, to be in opposition to the rule requiring courts to carry out and effectuate the expressed will of the testator. ' The doctrine was frankly and forcibly stated by Vice-Chancellor Page-Wood, in Gosling v. Gosling, ubi supra, thus: “That the court of chancery does not hesitate to strike out of a will any direction that 'a beneficiary shall not enjoy an interest thereunder until a later period, when the beneficiary has a vested interest, and has become sui juris, and demands immediate possession.” This, it seems to me, is substituting the will of the beneficiary for the will of the testator.

It cannot, however, be open to doubt that a court of equity, in dealing with trusts, has a right tó break in upon and thwart the expressed will of the creator of the trust in some cases. A notable example of such a case is when the trustee, to whom the creator of the trust has expressly given power of manágement and control, becomes incompetent, or is misconducting himself, to the peril of the trust and those interested therein, this court has never hesitated to remove such a trustee and to substitute its own appointee. The reason for such action is evidently necessity, and its purpose is to carry out the expressed intention of the creator of the trust, which intention is imperiled if his appointment of a trustee cannot be revoked for good reasons, and a trustee substituted by the decree of the court.

If trustees disclose a situation of their trust in which a slavish adherence to the terms of the trust will operate' to wholly prevent the benefits intended by its creator, and they seek instructions and directions as to their duty, I think that instruction and directions for a course of conduct which,' though differing from that prescribed- by the terms of the trust, will actually carry out the intent of the creator, may well be grounded upon and sustained by the necessity of the case. The benefits intended for-the beneficiaries are the main subjects of consideration. The modes in which those benefits may be attained are incidental, and necessity may require a change of ^mode to produce the intended effect. The power of the court may well be exercised in a case of evident necessity. How far it may extend on other grounds need not be considered.

It is not improper to add that I should find extreme difficulty in applying even the doctrine of necessity to a case where the creator of the trust has plainly disclosed an intent to limit the benefit he intended, by an adherence to a course of conduct expressly mapped out, in the management of the trust. In the present case, if we assume that the testator contemplated a situation such as now confronts the trustees, and made express provision for it, how could it be maintained that any necessity existed requiring the court to direct the trustees to take another course of conduct on the mere ground .that it would be more beneficial than that course which the testator prescribed?.

I have examined carefully all the cases cited in argument or which have been discovered by me on the subject of the power of a court of equity to deal with trusts under circumstances such as are presented in this case. I have found none more satisfactory in reasoning and conclusions than those decided in the State of Illinois. In a well-considered case, arising upon a trust created by deed, tire court held (the opinion being delivered by Chief-Justice Catón) that in an emergency which had not been considered by the creator of the trust, and which, if anticipated, would have been provided for, a court of equity might take the place of the creator of the trust and do what he would have done. This power was placed upon the ground of a necessity- to Garry out the intent of the trust, when, by unforeseen circumstances,, it was not answering the purpose of its creation. Curtiss v. Brown, 29 Ill. 201. Afterward the same court held that the power of a court of equity to break in upon the terms of a trust or to change the terms and conditions imposed by its creator, exists only in extreme cases, as when not to exercise the power the property held in trust- may be lost or wholly fail to answer the purposes of the trust. Voris v. Sloan, 68 Ill. 588. The same court, with more questionable propriety, upheld the jurisdiction of a court of equity to sell lands in which a life tenant or remainderman hgd respective interests, and to invest the proceeds, when it was made to appear that unless a court of equity interfered, the property would be lost to both the life tenant and the remainderman, although- no trust was involved in that case. Gaven v. Curtin, 171 Ill. 640. Later the court, while admitting the power of a court of equity to interfere with a trust when the preservation of the subject-matter of the trust or other like necessity required interference, limited the power to such cases of necessity, and refused to direct a change of trust property merely to increase income or to subserve the interest of persons entitled to the income. Johns v. Johns, 172 Ill. 472.

Eecurring to the will and its codicils for the purpose of determining w.hat was the intent of the testator in respect to this trust and its management, it is plainly apparent that his purpose was to benefit two classes of persons, viz., (1) the two infant beneficiaries who were each to receive $500 in each year if the income of the fund should be sufficient therefor; and (2) the Metropolitan Museum of Art, to which the whole fund is to go at the death of the- survivor of the two infants. Looking at the provisions of the will and the first codicil, the}' entirely justify the inference that the testator contemplated and expected that the income from the fund would suffice not only to discharge the payments required by the first subdivision of the second clause of that codicil, but also to pay the annual sums to the infant beneficiaries under the second subdivision thereof, and that there might be a remainder to be applied by the trustees to the improvement of the property under the third subdivision thereof, and even a balance to be paid to the Metropolitan Museum of Art under the fourth subdivision thereof. Considering the great value of the real and personal property which the testator impressed with this trust, there is another plain inference to be drawn, as before suggested, viz., that testator’s intent was that the ultimate beneficiary should receive the whole fund at the death of the surviving infant with such enhanced value as it might then have.

But there are provisions contained in the third clause of the second codicil which have a bearing upon what was in the contemplation of the testator when he made the final scheme for this trust, and which have given me much • difficulty. By that •clause it is provided that if at any time the income of the trust ■ fund should be insufficient to “discharge taxes and assessments” upon the real and personal estate in the fund, the deficiency shall be paid out of the income receivable by the Metropolitan museum under the other provisions of testator’s will. Do the provisions •of this third codicil justify and require the inference that the testator contemplated that at some future time the income from the trust fund would become constantly insufficient to discharge the annual taxes, and that he intended that, in such event, the Metropolitan museum should thereafter pay the deficiency for the life of the surviving beneficiary? It will be perceived that if such intent must be. inferred it produces an alteration of the scheme of the trust previously prescribed. That scheme contemplated and provided for yearly benefits to the infant beneficiaries. The suggested alteration would, when the income proved constantly insufficient to pay'the annual-taxes, wholly deprive them of any benefit. The original provision provided for pos•sible benefits to the Metropolitan museum out of the income. The alteration, when the annual taxes.constantly exceed the income, would impose a burden on that beneficiary to continue for an indefinite period, during which it would have no use of the trust fund or any part of it.

An alteration so completely destructive of the whole scheme •of the trust ought not to be adopted upon any -construction of the second codicil unless that construction is necessary. If the language of the third clause is reasonably capable of a construction which will be in conformity with the previous scheme, 1 think it should be adopted. It is difficult to conceive that the testator, if he intended so radical a change in'the scheme of the trust, would not have expressed it in some more explicit language. If he had said that the ultimate beneficiary should make up the deficiency in the taxes and assessments imposed on the trust fund whenever the income of the fund should thereafter become insufficient therefor, such an intent might perhaps be found. But in providing for the making up of such deficiency he used the words “at any time,” which may refer to a single time or' single times, and do not suggest the idea of constant and continued deficiency, and, in my judgment, give a clue to the meaning of the testator. Taxes, as is well known, are imposed upon valuations not often changed, although when changed, usually increased. But assessments are imposed by reason of benefits conferred by municipal improvements which are not constant, -but casual. Now there is included in this trust a large tract of unimproved real estate in the growing city of Paterson. It must have been in the contemplation of testator that municipal improvements would be made which would occasion assessments to be imposed from time to time upon that property; which assessments, when added to the ordinary yearly taxes, would exhaust the income of the fund. In my judgment the intent of the testator, discoverable from this clause, when applied to the subject-matter of the trust, was to provide for such casual and intermittent impositions, and that it did not extend to or contemplate the situation with which the trustees are confronted, when the income is insufficient to discharge the ordinary annual taxes, and there is no reasonable ground to-suppose it will ever become sufficient for that purpose.

Having reached the conclusion, upon the proofs, that the trustees cannot, under the present circumstances-, or any circumstances that can be anticipated, so manage the trust fund as to carry out the plain intentions of the testator, and being of opinion that the circumstances were not within the contemplation of testator, or the subject of any direction in the scheme of the trust as devised by him, I am led to the further conclusion that a case of necessity is presented, requiring the-intervention of this court and directions for a change in the management of the-trust fund, if, by such change, the manifest intention of the testator can be practically carried into effect.,

Nor do I think this court should refrain from intervening in-'' the management of the trust fund because two of the beneficiaries are infants. Under the situation in which the trust is, it is obvious that the provision made for their benefit will be wholly unavailable to them. If, by the intervention of this court and a direction for a change in the management of the trust, the benefit intended for them may be made available and indubitably secured to them, an additional reason for the intervention of the court is disclosed. I entertain no doubt of my power to determine whether such a change would be for their benefit, and, finding it to be for their benefit, to direct such a change.

The trust fund under consideration is so large that it cannot be difficult to formulate some scheme for its management which, with the assent and concurrence of the residuary beneficiary, the-Metropolitan museum, will practically carry out testator’s intentions. But I do not think the matter is so presented that I can now determine what is a proper or judicious scheme. The Metropolitan museum, by its answer, offers that, if it is permitted to come at once into possession Of the real estate included in the-fund, freed from the trust, it will accept the same, and relieve the trust fund from any liability'for the taxes and assessments, &c., imposed and to be imposed thereon, which now burden and exhaust the income. This would leave in the trust the railroad' stocks, now producing an income many times exceeding the annual sums payable to the infant beneficiaries. So long as the dividends from those stocks are paid the infants’ interests will be protected. On being reminded at the argument -that railroad stocks are not securities in which trust funds may be properly invested, the counsel for the Metropolitan museum offered to-give additional security, to be approved by this court, for the-complete and adequate protection of the income therefrom, so as to perpetually assure its sufficiency to pay the annual sums-due the infants during their respective lives. Such a security ought, of course, to be of a kind which trust funds may be-invested in. Some suggestion was made that security might be-given upon some, part of the real estate of which the Metropolitan museum seeks the present possession.. But if this suggestion be pursued, it is obvious that the material for the formulation of a proper scheme is not.before me. The question would involve-the consideration of what real estate should be thus mortgaged, ..and the right of the Metropolitan museum to execute such a .mortgage.

Under these circumstances, I think the cause should be referred to a master to consider and report a scheme for the management ■ of the trust fund upon the lines of the above opinion, so that, upon the coming in and approval of his report, a decree may be .made in conformity thereto.


text:
    Anna E. Alward, petitioner, v. Lewis O. Alward.
    [Filed September 29th, 1903.]
    When a husband leaves his wife without indicating at the time, by ■word or act, that he intended to desert her, such intent may be established by proof justifying the inference that he thereafter remained alive and free and able to return to her.
    On petition for divorce.

      Mr. James J. Bergen, for the petitioner.
   Magie, Chancellor.

In this cause, which was undefended, the master to whom the matter was referred reported that petitioner’s proofs made out •the willful and continued desertion charged in the petition.

Upon examination of the proofs it appeared that defendant, .at the time of the alleged desertion, was living with petitioner and was employed by a railroad company. On that morning he left the place of residence as if to go to his work, and did not indicate by any word or act that he did not intend to return. He did not take with him or remove any of his clothes or belong- - ings. From that time he remained absent and without communicating with his wife, the petitioner.

In the ease of Sweeny v. Sweeny, 17 Dick. Ch. Rep. 357, the evidence disclosed that the husband, who was charged with desertion, had left his wife under similar circumstances, and had remained away for the statutory period. A divorce was refused, on the ground that such evidence was insufficient to establish willful and obstinate desertion in the absence of proof from which it could be found or inferred that the husband remained alive and was free and able to return to his'wife if he desired to ■ do so.

In the ease in hand the evidence clearly shows that petitioner,upon the failure of defendant to return on the day he left, immediately set on foot a search for him. The search was made by' her and friends of .both parties. It was apparently made in • good faith, and it was continued and persisted in for a reasonable time. It included an examination of places in which his body would be likely to be found if he had met with accident' in his dangerous employment, or if he had taken his own life. It also included places where he had been accustomed to resort. A careful review of the evidence satisfies me that it justifies the-inference that defendant remained alive. If that inference be-adopted, the evidence showing that he was last seen in a locality in this state not far from his residence, in his ordinary condition ■ of health, justifies the further inference that he was free and able to return to his wife if he desired to do so. His continued and unexplained absence thereafter brings the case within the-doctrine laid down in Sergent v. Sergent, 6 Stew. Eq. 204; S. C., 9 Stew. Eq. 644, to the effect that a husband who had left his wife without any word or act indicating intent -to desert • her, was-shown to have entertained that intent, by proof that he-was alive and able to return to her if'he chose; but that he hadi continuously remained away from her.

The master’s report will be affirmed, and a decree made.