author: Garrison, Y. C.

text:
    Harriet Hoagland et al. v. The Supreme Council Royal Arcanum et al.
    [Decided September 28th, 1905.]
    1. Where, in, a suit in equity to obtain relief for which there is an adequate remedy at law, defendant does not demur, but answers without claiming the benefit of a demurrer, it is left to the discretion of the court to retain or reject jurisdiction.
    2. If in such a suit the suggestion of an adequate remedy at law was not made until after the evidence was all in and after a long time had been taken in which to file briefs, it is proper to retain jurisdiction where complainants are subject to limitation of time within which to bring actions.
    3. Where an applicant for membership in a mutual benefit association was notified by a printed statement, handed him by the investigating committee, that he was ineligible if either of his parents had died of consumption, after which he untruthfully answered in the negative questions as to whether any of his near relatives had died of that disease, and made a false answer as to the cause of the death of his mother, who- had in fact died of consumption, such statements, whether regarded as representations oi; warranties, rendered the certificate void.

      Heard on bill, answers, replications and proofs in open court.
    This is a bill filed by Harriet Hoagland and Mary J. Walmsley against the Supreme Council of the Royal Arcanum and Henry M. T. Beekman, as trustee for Harriet Hoagland, Martin Hoagland, Ellen B. Walmsley and Mary J. Cook.
    Harriet Hoagland was the maternal grandmother of John Edward Walmsley. Mary J. Walmsley was his paternal grandmother.
    A benefit certificate for $3,000 was issued by the Supreme Council of the Royal Arcanum, under its seal, to John Edward Walmsley, on the 9th day of May, 1899. In this certificate the beneficiary named was Edward Walmsley, the father óf John Edward Walmsley. Edward Walmsley died on the 6th day of August, 1899. John Edward Walmsley, the insured, died on the 5th of October, 1900, of phthisis pulmonalis, or consumption-of the lungs. Just before his death, and on the 17th of September, 1900, he filled out a form for change of beneficiary. He surrendered and returned his benefit certificate and directed that a new one be issued to himself, payable to the following-named beneficiaries: Henry M. T. Beekman, trustee for Harriet Hoagland, grandmother, one-quarter; Martin Hoagland, uncle, one-quarter; Ellen B. Walmsley, stepmother, one-quarter; Mary Jane Cook, aunt, one-quarter.
    This request for change of beneficiary was somewhat delayed in reaching the proper officers of the Supreme Council of the Royal Arcanum, and when it did reach them was not approved 'because it designated as one of the beneficiaries the stepmother of the insured, and such stepmother was not one who might be named excepting as a dependent, and the rules of the order required proof of dependency.
    The member died with this question still unsettled.
    The bill alleges that the Supreme Council of the Royal Arcanum has kept the benefit certificate ,and refuses to surrender it; that the complainants are entitled to the amount agreed to be paid by the terms of the certificate because the change of beneficiaries was not effected in accordance with the requirements of the defendant order, and it is provided that where a named beneficiary predeceases the member, and no proper change of beneficiary has been made, payment shall be made to certain ascertained and defined persons, and that they are such persons.
    The bill therefore prays that a decree shall be made determining who arc the proper beneficiaries of John E. Walmsley to whom payment of the amount of'the benefit certificate should he made.
    The answer of Henry M. T. Beekman, trustee, in the main admits all of the allegations of the bill, excepting with respect to the charge that no proper change of beneficiaries was effected.
    The answer of the Supreme Council of the Royal Arcanum admits the issuance of the certificate, the death of the insured, the receipt of proofs of death, and also that the request for change of beneficiary was received, but alleges that the same was not in accordance with the requirements as set forth in 'the laws of the order, and that it was therefore not effective. It denies, however, that it owes the money named in the certificate to anyone, because it alleges that certain statements made by the member in the application were untrue, were material, and were warranted to.be true, and that by reason of such untrue statements the insurance or indemnity is null and void, and no recovery can be had by anyone in virtue thereof.
    It further alleges that a period of three years, limited in the certificate within which suit should be brought, had elapsed before the beginning of this suit, and concludes as follows, after summarizing the various defences:
    “Therefore this defendant, further answering to said bill of complaint, does not and cannot concede to either these complainants, or to the-other defendants in this action, any rights whatever as to the fund which is claimed from the defendant society by reason of the issue of the said-certificate ; but that it hereby tenders and makes offer of its constitution and by-laws, which it will put in evidence, so that in case this honorable court shall reach such point in considering the matters presented to it, as-to' determine the rights of .beneficiaries therein, it may do -so in .accordance with such constitution and laws.”

      Mr. Henry Traphagen, for the complainants.

      Mr. Henry M. T. Beekman, for H. M. T. Beekman; trustee.

      Mr. W. Holt Apgar, for Supreme Council Royal Arcanum.
   Garrison, Y. C.

The first question requiring consideration is whether this court should determine the issues raised in this suit.

There is no equitable question involved.

The sole thing sought is a recovery by certain persons of a sum of money alleged to be due from an insurer.

The sole ground on which it could be suggested that a court of equity could obtain jurisdiction is the retention by the defendant corporation of the instrument evidencing the contract out of which the rights in this case grow and upon which the complainants* rights must be founded.

It will be observed that there is no affidavit of loss, destruction or detention in the possession of the defendant of this instrument. Had the defendant corporation demurred to the bill, I am clear that the demurrer must have been sustained. Fonb. Eq. (4th Am. ed.) book 1 p. 32 ch. 1 § 3; Story Eq. Jur. (13th ed.) 95.

I am further of opinion that if, at the commencement of the trial of the case in open court, the defendant, notwithstanding that it had not demurred, and had not in its answer claimed benefit as if it had demurred, had made a motion to dismiss the bill because there was an adequate remedy at law, the court would have granted it. The defendant, however, not only did not pursue this course, but by its pleading practically submitted itself to the jurisdiction of the court, as will be seen from the excerpt from the answer quoted in the preceding part of this opinion.

It is a very ancient head of equity jurisdiction to entertain suits upon sealed instruments which have been lost or destroyed, or which have come into the possession of the defendant, who retains the same. Fonb. Eq., supra; Sm. Eq. Man. (1st Am. ed., 9th London ed.) 39 et seq.; Dun. Ch. Pr. & Pl. (6th Am. ed.) *552, 545; Story Eq. Jur. (13th ed.) 89 et seq.; Pom. Eq. Jur. (3d ed.) 77 § 71; Reeves v. Morgan, 48 N. J. Eq. (3 Dick.) 428 (Vice-Chancellor Pitney, 1891).

While there may be, and I think is, a serious question whether a suit of this nature would be entertained by a court of equity under the facts stated in the bill, if the defendant corporation seasonably called attention to the adequacy of the legal remedy, I do not stop to consider or decide this question, because I think that the defendant, by not demurring, by answering without claiming the benefit of demurrer, and by tendering itself ready to litigate the subject in the court of chancery, at least leaves it discretionary with this court to retain or reject jurisdiction.

Since the defendant did not suggest that there was an adequate remedy at law until after the evidence was all in, and after counsel had taken a long time in which to file their briefs, and in its written brief for the first time raises the question, I conclude that the discretion of the court should be exercised in favor of jurisdiction. Mertens v. Schlemme, 68 N. J. Eq. 544 and cases cited (at ¶. 549).

1 think it would be unfair to complainants, who are subject to limitations of time within which to bring actions, to refuse to retain jurisdiction at the stage of the case when the objection, in this case was made.

In my view, the primary question is whether anyone is entitled to recover the amount of the benefit certificate issued to John Edward Walmsley.

If the determination was that the defendant corporation was liable to pay the amount of said certificate, then qirestions of interest and importance would arise with respect to the persons to whom they were liable. Since I have reached the conclusion that there is no liability on this certificate, I do not find it necessary to investigate the questions as to who would be entitled to the money if it were due. •

John Edward-Walmsley made written application for membership in the Royal Arcanum at a branch located in Jersey City on the 18th day of April, 1899. In his signed application for membership he stated that he was born on the 31st day of May, 18?7, and was between twenty-one and twenty-two years of age, and in said application it was further stated by the applicant :

“I do hereby warrant the truthfulness of the statements in this application, and consent and agree that any untrue or fraudulent statements,' or any concealment of facts therein, * * * shall forfeit the rights of myself and my beneficiaries, heirs and all other persons claiming under my benefit certificate issued hereon, or from my membership in the order, to all benefits and privileges therein.”

In pursuance of the custom and the rules of the order, an investigating. committee was then constituted, at least one of whom met the applicant and either read to him or gave to him to read certain extracts from the rules governing medical examinations. Among such extracts were the following:

“If consumption is found to have occurred, or to be at present existing in the family, the applicant is to be regarded as not eligible, and must be rejected under the following circumstances: If in both parents, not eligible until forty years of age; if in one parent, not eligible until thirty years of age; if in any two members of the family, among the parents, brothers or sisters, not eligible until thirty-five years of age.”

At the same time a printed question was handed the applicant, as follows:

“Has there been a case of. consumption among your parents, brothers or sisters, or other near relatives ? If yes, give particulars.” To which the applicant gave the written answer “No.”

Thereupon the' applicant, in the presence of a member of the investigating committee, who witnessed his signature, signed the paper, which concludes with the following:

“Q. Having read the foregoing extract from the roles governing medical examinations, do you still desire to undergo a medical examination? “A. Xes.”

In the medical examination, among the questions and answers appear the following, under the head of “Family Record of Applicant:”

“Mother, age 34. Cause of death, pneumonia. How long sick, 8 days. Previous health, good.
“Q. Have any of your near relatives, including uncles and aunts, been afflicted with consumption, raising of blood, rheumatism, gout, insanity, or with pulmonary, scrofulous, cancerous or any hereditary disease, or have any of them every attempted suicide?
“A. No.
“Q. Have you named every such case?
“A. Yes.”

The applicant signed his name to this statement, and immediately above his signature appears this declaration:

“I hereby warrant the truthfulness of all the answers and statements given to the above questions.”

The benefit certificate itself, bearing date, as heretofore stated, on the 9th day of May, 1899, contains the following language, which is pertinent to this inquiry: That it is issued

“upon condition that the statements made by him in his application for membership in said council, and the statements certified by him to the medical examiner, both of which are filed in the supreme secretary’s office, be made a part of this contract.”

As a matter of fact, the mother of the applicant died of phthisis, or consumption of the lungs, in the year 1888. The corporate defendant proved this, but the complainants insist that they must go further and prove that the insured had knowledge of the cause of his mother’s death, and had knowledge that •she had consumption.

Whether the statements thus made part of the contract are to be construed as warranties or as representations is not, in my view, of any moment in the case in hand. By incorporating them by reference into the contract, the insurer has complied with one of the necessities of making such statements warranties. American, Popular Life Insurance Co. v. Day, 39 N. J. Law (10 Vr.) 89 (Court of Errors and Appeals, 1876) ; Bac. Ben. Soc. 249 § 194 et seq.

But whether the insurer was successful in thus making such statements warranties was left open by our court of errors and appeals in passing->upon a similar contract. Lippincott v. Royal Arcanum, 64 N. J. Law (35 Vr.) 311 (Court of Errors and Appeals, 1899).

The court of appeals of New York has held that the statements thus incorporated into this contract are warranties. Foley v. Royal Arcanum, 151 N. Y. 196.

If warranties, they must he true, whether they concern material matters or not. If not warranties, but representations, they must concern a material matter to have the effect of avoiding the contract if untrue.

The tendency of modern decisions is to give but little weight to the characterization by the parties of the statements. Even though they be literally warranties within the terms of the contract, the court deals with them in view of the spirit and purpose thereof. Dimick v. Metropolitan Life Insurance Co., 69 N. J. Law (40 Vr.) 393 (Court of Errors and Appeals, 1903).

Construing the contract in this way, the court refuses to avoid the policy because of the untruth of an immaterial statement, but if it finds that the statement was material, and was an inducing cause of the insurer making the contract, then it requires good faith in the applicant if the subject-matter be one of which he cannot have absolute knowledge, and,absolute knowledge if the subject-matter be one concerning which he either has or assumes to have such.

There are certain matters concerning which the insurer requires an absolute assurance before entering into the contract. Without seeking to define or classify these matters, one of them certainly is the vital question of the presence of a fatal hereditary taint in the family of the applicant.

Whatever may be held with respect to an answer negativing the presence of such an hereditary taint in the living members of the famity, concerning which it might be successfully contended that the applicant could not know, it certainly must be held that where the mother of the applicant died of the disease inquired about, the applicant must be held either to have had knowledge thereof, or to take the responsibility of correctly giving the cause of death and the presence or absence of the disease inquired about.

The modern rules of construction of insurance contracts are well summarized in a case in Alabama, quoted with approval by-Bacon (at p. 263 § 203). Alabama Gold Life Insurance Co. v. Johnston, 80 Ala. 467; 2 South. Rep. 128.

“1. That the answers of the assured were not absolute warranties, but in the nature of representations; or, if warranties, they are so modified by other parts of the contract as to be warranties only of an honest belief of their truth.
“2. That any untrue statement or suppression of fact, material to the risk assured, will vitiate the policy, and thus bar a recovery, whether intentional or within the knowledge of the assured or not.
“3. If immaterial, such statement, to avoid the policy, must have been untrue within the knowledge of the assured; that is, he must either have known it, or have been negligently ignorant of it.”

Bacon says (at p. 319 § 230):

“The age of the parents of the applicant at the time of their death,, the diseases of which they died, and facts relating to the relatives and family of the applicant, are all material and must be truly stated. Answers to these questions assume knowledge, as in a case' where the assured, in his application, answered ‘No’ to the question whether either of his parents, brothers or sisters had ever had pulmonary, scrofulous or other, constitutional or hereditary diseases, in which it was held that the answer assumed his knowledge of the fact, and in an ‘action on the policy the beneficiary was precluded from alleging the want of knowledge on the part of the insured as an excuse for not answering correctly.”

An application of these principles to the facts of the case in hand leads inevitably to the conclnsion that this contract must-be avoided.

This applicant, before he was examined, was informed by a printed extract from the rules of the order that if there had been a case of consumption among his parents he was not eligible to membership at his then age. He replied that there was not consumption among his parents, and stated that, having knowledge of the above rule, he desired to undergo the medical examination.

In the course of this medical examination he stated that his mother died of pneumonia, when as a fact she died of phthisis pulmonalis, or consumption of the lungs. In reply to a question as to whether there had been consumption among his near relatives he answered “No.”

I am entirely clear that where an applicant, who has been thus warned with respect to matters which the insurer, deemed vital, and in the court’s view had a right to deem vital, to the making of the contract, and in the face of this warning assumes knowledge and negatives the existence of such an hereditary disease in his parents, the contract must be avoided if, as a fact, such disease existed in the parents.

However righteous it may be to construe contracts of this description in the most liberal way, so as to give effect to what the courts find to have been the real intent of the parties, such liberality in favor of the insured must never lead the court to disregard the rights of the insurer with respect to so vital a matter as the one dealt with in this case.

I therefore hold that because of the incorrect statements by the applicant concerning the cause of his mother’s death and of the absence of consumption in his parents, this insurance contract is void and no recovery can be had thereon.

I will advise a decree dismissing the bill.


source: Caselaw Access Project

author: Gaeeison, V. C.

license: Public Domain

text:
    Adam H. Groel v. United Electric Company of New Jersey et al.
    [Decided October 2d, 1905.]
    3. The proper office of a plea in equity is to reduce the case to a single point, and if the defendant intends to traverse the facts of thq bill, and to set úp a different state of facts, covering the entire subject-matter at issue, it cannot bo done by a plea, but should properly be by answer.
    2. Where a stockholder sets up that approximately $20,000,000 of stock as a secret profit was made by the promoter out of the incorporation of the company of which, complainant is a stockholder, and he sues the promoter and joins his company, which has refused to bring the suit, and the corporation files a plea that it deems it inexpedient to bring the suit, the only point raised thereby is whether the directors may pi’ohibit a stockholder from bringing such suit if in the judgment of the board it is inexpedient; but the facts set up in the bill are not traversed by the plea.
    3. A stockholder of a corporation is entitled to sue on its behalf, joining the cox-poration as a defendant, to recover secret profits made by promoters, the corporation, after demand, having wrongfully refused to sue.
    4. Qumre. Whether, in a suit by a stockholder for the benefit of the corporation, the lattex-, instead of being made a defendant, should not be joined as a complainant; and if it desires to raise the question of the right of the stockholder to bring the suit, whether it should not do so by petition?
    The complainant is a stockholder of the United Electric Company of New Jersey, and snes for himself and all other, stockholders of said company.
    The bill charges that the United Electric Company was incorporated on the 4th day of March, 1899, with an authorized capita] stock of $20,000,000; that said company was organized and promoted by the United Gas Improvement Company of Pennsylvania, the other defendant in this suit; that the incorporators were the agents of the United Gas Improvement Company, and were subsequently made directors of the defendant company; that simultaneously with the incorporation of the United Electric Company, the United Gas Improvement Company, through the Fidelity Trust Company, of Newark, New Jersey, as its agent, made an offer to the holders of the capital stock of a large number of corporations in New Jersey engaged in furnishing electric light, heat and power; that said offer was to purchase from such holders their stock in such subsidiary companies by paying them in bonds of the United Electric Company out of an authorized issue of $20,000,000 of such bonds, -the terms of the exchange varying with respect to the stock of the different subsidiary companies; that the complainant was a holder of stock of the People’s Light and Powfer Company, and the offer made to his company was to pay to each holder of $1,000 of such stock $1,750 in such bonds, provided he would pay, in addition, $200 in cash.

      The United Gas Improvement Company also agreed to guarantee the payment of the interest upon the bonds for a period of five years, and to turn into the treasury of the United Electric Company the cash payment just mentioned.
    Further, in said offer, it was stated that the United Gas Improvement Company owned the control of the stock of the United Electric Company, and that it agreed to sell to the stockholders of the People’s company, who availed themselves of said offer, stock in the United Electric Company to the amount of twenty-five per cent., at par, of their holdings of People’s stock, to he paid for by such stockholders at the rate of $30 per share.
    That said offer to sell their stock in the subsidiary companies was accepted by substantially all of the holders in said companies, and many of such also availed themselves of the offer to purchase stock of the United Electric Company at $30 per share, and paid their money; that among those doing so was the complainant.
    That after this the United Gas Improvement Company caused its agent, the Fidelity Trust Company, to deliver to the United Electric Company all the shares of the capital stock of the subsidiary companies which had been deposited with it, and the cash received by it on account of the bonds, and caused the United Electric Company, through its dummy directors, who were agents of the United Gas Improvement Company, to issue and deliver to the United Gas Improvement Company $20,000,000 of its bonds and $20,000,000 of its stock, nominally in exchange for and payment of the capital stock of such subsidiary companies, and for the money paid by the stockholders of such subsidiary companies on account of the bonds of the United Electric Company, and thereupon the Fidelity Trust Company delivered the bonds to the holders of the stock of the subsidiary companies in pursuance of the agreement, hut-the United Gas Improvement Company kept for itself the entire capital stock of the United Electric Company, or the proceeds of so much of the same as had not been purchased and paid for by the stockholders of the subsidiary companies; that this was done without giving any consideration for the same to the United Electric Company, and without disclosing to the stockholders of the subsidiary companies who had subscribed for the stock of the United Electric Company the profit thus made by the United Gas Improvement Company.
    That the complainant was in ignorance of tire fraud thus charged until just-before the filing of the bill; that he addressed a communication to the president and directors of the United Electric Company requesting the company to bring an action for the recovery of the unlawful and secret profits alleged to have been made by the United Gas Improvement Company, and that the board of directors of the United Electric Company passed a resolution to the effect that they did not deem it advi-sable to bring such a suit, and that the decision of the directors not to bring the said suit was unwarranted, unjustifiable and in disregard of their duty, and was not made in the interest of the United' Electric Company, but in the interest of the United Gas Improvement Company.
    To this bill the United Electric Company files a plea, in which it admits that there was a demand in writing made upon the president and directors as set forth in the bill; that said demand wras laid before the directors at a meeting held on the 22d of September, 1903; that a committee of four of its members was appointed to examine the matter and report thereon; that said committee did examine, heard the counsel for the complainant, and on the 29th day of September, 1903, made a report to the board of directors, a copy of which report is attached to and forms part of the plea; that the directors, upon receiving the report and being satisfied that it was correct, decided that it was inexpedient to begin or prosecute the proposed suit, and adopted a resolution, a copy of which is attached to and forms part of the plea, whereby it was determined, for the reasons stated in said report and recited in the preamble to said resolution, that no suit should be brought by this defendant, or on its behalf, against the United Gas Improvement Company upon the alleged claim against the United Gas Improvement Company mentioned in the demand served by the complainant.
    With this plea there was filed a supporting answer, in which it is denied that the decision of the directors not to bring the suit was unwarranted, unjustifiable and in disregard of their duty, as charged in the bill; but, on the contrary, that such decision was rendered in good faith, and, in the judgment of the directors, was for the best interest of the defendant.

      Mr. Edwin Q. Adams, with whom was Mr. Nathan Bijur (of the New York bar), for the complainant.

      Mr. Frank Bergen, for the defendants.
   Gaeeison, V. C.

From the above statement of the contents of the pleadings, it will appear that the following excerpts from the brief of counsel for the defendants correctly define the issue: ■

“The bill in this .case was filed to compel the United Gas Improvemént Company to account to the United Electric Company of New Jersey for the profits alleged to have been made by the gas company secretly in the promotion of the electric company. The gas company and the electric company are named in the bill as defendants, but it is obvious that the gas company is the only defendant against which a decree can be made. The electric company was made a party as required by the practice in cases where a stockholder is permitted- to bring suit to enforce a claim which the company should have prosecuted voluntarily. * * *
“The electric company filed the plea for the reasons stated therein, and in the schedules thereto annexed, and insists that as it thinks the bringing of such a suit is inexpedient, all things considered, it has a right to prohibit any stockholder from doing so who differs with the judgment of its board of. directors on that subject.”

Passing the question of whether a defendant, circumstanced as this one is, should be permitted to raise this issue in this way (a subject to be adverted to later), I will deal with the issue as made by the present pleadings.

The true rule to be applied by the court in cases upon bill and plea was, I believe, correctly stated in the case of Groel v. United Electric Company of New Jersey, 69 N. J. Eq. 407, as follows: “It needs no citation of authority to establish the principle that,- in a hearing upon a bill and plea, the court takes the uncontradicted parts of the bill and the allegations of the plea as verities, and decides, according to the right, upon the case thus presented.”

Applying that rule to the case in hand, we have a bill setting forth a cause of action against a promoter for profits secretly obtained by him, to which bill a plea is filed, which does not deny the facts as pleaded in the bill and does not set up another state of facts different from those pleaded in the bill, but alleges that the corporation from which the profit was obtained has determined by its board of directors, acting in good faith, that it is not expedient for it to bring a suit for the recovery of the money.

I think it sufficiently appears, both from the citation from the defendant’s brief and from an examination of the pleadings, that the plea amounts to no more than this. It certainly does not plead any facts in denial of the charges of the bill, and it certainly does not set forth any different state of facts. It does refer to a report made by a committee of the board of directors to the directors, but it does not plead that the statements of facts set forth in that report are true.

In my view, if the complainant had filed a replication to this plea and issue had been joined upon the facts, the defendant, to succeed, would not have been required to have done more than to have proven the truth of its allegations that its directors met, appointed a committee, which committee heard counsel for the complainant in this action, and made a report, and that such report was received by the directors, and that believing that such report was correct (whatever meaning may be given to the word “correct”), adopted a resolution that in their view it was in-inexpedient to bring such a suit.

If the defendant had really sought to put in issue the truth of the facts set forth in the bill, or had sought to plead that there were certain facts not pleaded in the bill which defeated the complainant’s recovery, it should have framed its pleadings accordingly, and by appropriate allegations raised those issues. If it had intended to plead that the statements of fact contained in the report of the committee were facts, and that they defeated complainant’s recovery, it should have pleaded such facts.

But I think it is entirely clear that' if the defendant intended to traverse the facts of the bill, and to set'up a different state of facts covering, as it would in,this case, practically the entire subject-matter at issue, it could not properly do so by plea. Such a defence should properly be made by answer; if put into a plea, the court would, at most, only permit the plea to stand as an answer. .

The proper office of a plea is to reduce the cause to a single point. Dan. Ch. Pr. (6th Am. ed.) *603.

If the plea in this case is to be construed as a direct traverse of the facts constituting the complainant’s cause of action, and an allegation of other facts which defeat complainant’s recovery, together with an allegation of good faith on the part of the directors in deciding that it was inexpedient to bring the suit, then, in my judgment, it sets up a defence, which should be by answer, and not by plea.

To properly determine the issues presented by the plea construed as suggested, it would be necessary to determine the whole merits o£ the controversy—that is, whether or not the promoter did make a profit; whether it was secret; the relations of the parties at the time of the promotion, and their subsequent relations'—and numerous other questions which ought not to be settled upon a plea.

If, however, the plea is treated as I think it should be, namely, as reducing the case, to a single point, I think that point can lie clearly defined. In fact, it has been clearly defined by the counsel for the defendant.

A stockholder sets up that approximately $20,000,000 of stock as a secret profit was made by the promoter out of the incorporation of the company of which he is a stockholder. He sues the promoter and joins his corporation, which has refused to bring the suit, to recover the $20,000,000 of stock. His corporation .responds that it deems it inexpedient to bring the suit. The single point is whether a board of directors may prohibit a stockholder from bringing a suit in behalf of the corporation to recover moneys secretly made by a promoter out of the incorporation of the company, if, in the judgment of the board, it is inexpedient to bring such a suit.

There can be no question that promoters are liable to the corporation for profits secretly made by them in its' promotion, and that such liability arises in cases where future allottees of stock are concerned. Knoop v. Bohmrich, 49 N. J. Eq. (4 Dick.) 82 (Vice-Chancellor Van Fleet, 1891); Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. (7 Dick.) 219 (Vice-Chancellor Green, 1893); Loudenslager v. Woodbury Heights Land Co., 58 N. J. Eq. (13 Dick.) 556 (Court of Errors and Appeals, 1899), affirming the principle established in the court of chancery in Woodbury Heights Land Co. v. Loudenslager, 55 N. J. Eq. (10 Dick.) 78 (Vice-Chancellor Pitney, 1896).

There can be likewise no question that where the corporation refuses to bring a suit stockholders may sue in its behalf, joining it as a defendant.

It is true that courts will not interfere, as a rule, with the management of corporations by the directors thereof when they are acting within their powers and in good faith. But whether the directors are acting in good faith and as honest, diligent trustees, or not, will be inquired into by the courts at the instance of stockholders in cases like the present.

“A stockholder has no standing in the court to prosecute such an action except on the refusal of the directors, either actual or presumptive, to prosecute. But such refusal of the directors to prosecute must be an unjustifiable refusal.” Willoughby v. Chicago Junction Railways Co., 50 N. J. Eq. (5 Dick.) at p. 667 (Vice-Chancellor Green, 1892).

In discussing those cases in which no application need be made, our court of errors and appeals has held that the suit may be maintained without any application where the interest or bias of the directors makes it certain that, if it was made, it would be denied. Appleton v. American Malting Co., 65 N. J. Eq. (20 Dick.) at p. 377 (Court of Errors and Appeals, 1903).

In the case of Kessler v. Ensley Company, 129 Fed. Rep. 397 (at p. 400), the court said: “Of necessitjq then, the governing bod}r, in every inira vires matter, has a discretion to determine what action to take on the stockholder’s request to sue, and when the stockholder comes into court the first question it must determine is whether that discretion has been properly or improperly exercised.”

The supreme court of the United States reviewed the previous decisions concerning this matter, and announced the true rule in the ease of Corbus v. Alaska Treadwell Gold Mining Co., 187 U. S. 455 L. Ed. 256:

“This court will examine the bill in its entirety and determine whether, under all the circumstances, the plaintiff has made such a showing of wrong on the part of the corporation or its officers and injury to himself as will justify the suit.” And it likewise quoted with approval the following language: “The circumstances of each case must determine the jurisdiction of a court of equity to give the relief sought.”

Viewing this case in the light of the principles which must be applied to it, and of the authorities which have been quoted, can it 'be said that the directors have shown justification for refusing to bring a suit to recover approximately $20,000,000 of stock improperly obtained by a promoter ?

Would it not clearly be held by any coiirt to be a breach of trust for directors to neglect or refuse to recover, or seek to recover, such an amount of stock improperly obtained from it by a promoter?

It is perfectly cleat that if the complainant sets forth a good cause of action, and there is a right in the corporation to recover $20,000,000 of stock from the promoter, it is a clear breach of trust on the part of the directors not to proceed to recover the same.

For them to reply that it is by them deemed inexpedient to do so is only to emphasize the breach of trust they are committing by not doing so.

I am aware that counsel for the defendant argues that their unwillingness to bring the suit, and that which in their judgment makes it inexpedient to bring the suit, proceeds from their view that the suit cannot succeed. I think I have sufficiently expressed my idea that this issue is not present before me for determination. If, on the face of the bill, it appears that the complainant cannot succeed, then demurrer is the proper remedy. If the bill, however, does set up a good cause of action, then, as I have already pointed out, the plea does not set up any other facts excepting the passage by the directors of a resolution refusing to bring the suit because iii their judgment inexpedient.

There was much argument before me upon issues which I do not find in the case, the defendant contending that it had sufficiently shown that the suit ought not to be -brought because it could not be successful, and the complainant replying that the statements in the report of the committee, as incorporated into the plea, show clearly that there is a cause of action, and that the defendant has not, on the merits, shown any reason why the suit should not be brought. I do not stop to consider these questions for the reasons given. I find that the complainant sets out a cause of action, and that the defendant replies by plea that it deems it inexpedient to bring a suit for this cause of action, and that the complainant, its stockholder, is precluded by reason of this fact.

I find that the principle to be applied is that the stockholder may appeal to the discretion of the court in this respect, and upon considering the whole case, I do not think it appears that the defendant was justified in refusing to bring the suit, with the result that the complainant may proceed, and the plea must be overruled.

Adverting now to the question suggested at the commencement of this opinion, I have grave doubt whether a defendant, circumstanced as this one is, should be permitted to raise the issue of the right of the complainant to bring the suit in behalf of the corporation by filing a plea or answer denying that right.

By reference to the early cases upon the subject of suits of this character it appears that the corporation is only made a defendant because it would not be complainant, and that the suit is entirely for its benefit, and that it is required to be made a party so that the subject-matter may be res adjudicada as to it. Robinson v. Smith, 3 Paige Ch. 222; Davenport v. Dows, 18 Wall. 626; 21 L. Ed. 938; Hawes v. Oakland, 104 U. S. 450; 26 L. Ed. 827.

The corporation thus made a defendant may, I think, property be termed the “formal defendant,” while the other defendant, from whom a recovery is really sought, may properly be termed the “actual defendant.”

The actual defendant may always question the light of the complainant to bring a suit against such actual defendant on behalf of the corporation of which such complainant is a stockholder. The authorities hold that it is a matter of discretion in the court whether to permit a suit to be brought by a stockholder on behalf of his corporation, and that the court will exercise its discretion, having in view the circumstances of the parties, their relationship to each other and to the cause of action, the refusal to sue, &c.

The real meritorious question in each case, however, is between the formal defendant and the actual defendant, although 'the machinery for bringing the case into court is set in motion by the complainant.

The formal defendant should have the right to object to and to question the power of the complainant to bring a suit in its behalf, but I do not think that the form in which it should raise this objection should be by plea or answer or demurrer.

In the English practice the corporation in whose behalf the suit is brought is made a party complainant. If the corporation thus made a party complainant objects by petition, it is eliminated as a complainant and is made a defendant. Duckett v. Gover, 6 Ch. Div. 82, 85 (Master of Rolls Jessel, 1877); Wilson v. American Palace Car Co., 64 N. J. Eq. (19 Dick.) 536 (Vice-Chancellor Emery, 1903).

If we should adopt a practice by which the formal defendant should raise its objection by a petition setting forth such facts as it thought relevant, and giving the reasons why it thought the complaining stockholder should not be permitted to prosecute a suit in its behalf, the court could, upon such an issue, properly determine the only question that ever should be permitted to be litigated between the formal defendant and the complainant without in any way interfering with the real, meritorious issue •against the actual defendant.

I will advise an order overruling the plea.


text:
    Thomas P. McKenna v. Richard F. Corcoran and Joseph A. Duffy.
    [Decided June 26th, 1905.
    Filed October 20th, 1905.]
    Where separate judgments are recovered against the maker and endorser of a promissory note and the latter, who is surety, pays the judgment against himself, the payment does not operate as a satisfaction, of the judgment against the principal, but the surety is entitled to have the creditor assign the other judgment to him, on paying the costs incurred in its recovery.
    Heard on bill, answers and proofs in open court.
    This is a bill filed by Thomas P. McKenna against Richard E. Corcoran and Joseph A. Duffy.
    The purpose of the bill is to obtain, on behalf of the complainant, subrogation as against Duffy of the rights of Corcoran, who is the owner of a judgment against Duffy. There is also a prayer in the bill that Duffy be decreed to pay to the complainant the amount of the judgment now owned by Corcoran, which the complainant claims he is entitled to by right of subrogation.

      Messrs. Collins & Corbin, for the complainant.

      Mr. Charles J. Roe, for the defendants.
   Garrison, Y. C.

The facts are that in January of 1903 Duffy and McKenna, who were each lawyers, and each residents of Long Branch, Hew Jersey, entered into an agreement by which McKenna leased a dwelling-house at Long Branch to Duffy for $600 a year, Duffy to install in the house a steam-heating apparatus.

The terms of letting are expressed in a letter dated January 3d, 1902, from Duffy to McKenna, and there is no other evidence respecting the contract excepting the oral evidence, and in this McKenna’s testimony is in accord with the statements contained in Duffy’s letter, and Duffy’s oral testimony conflicts with what he wrote in the letter.

I find the fact to be as above stated.

Duffy entered into possession of the property about February 2d, 1902, and the steam heat was installed, and about the 17th of Februarjf, 1902, McKenna requested Duffy to pay some part of the rent. Duffy stated his inability to do this, and as a result of this interview Duffy gave a note for $600 to McKenna, at three months, dated the 17th of February, 1902.

The undoubted purpose of this transaction was to enable Mc-Kenna to realize $600 by getting the note discounted, and to enable Duffy to pay off the rent in small installments by pajdng on account of the note as it fell due on its first due-day and -at the subsequerit renewals thereof which they intended to make.

When the note fell due on the 18th of May, 1902, it was renewed, and it was again renewed when it fell due on the 18th of August, 1902. When it fell due on the 18th of October, 1902, it was not renewed, but was protested, and on the 16th of June, 1903, the Citizens National Bank of Long Branch, at which institution the note had been discounted, obtained a judgment against Duffy for the amount.of the note, with interest and costs.

Subsequently this judgment was -purchased by and an assignment was made to Richard F. Corcoran.

On the 7th of June, 1904, judgment was entered by Corcoran against McKenna on the same note.

On the 3d of September, 1904, McKenna paid this last-named judgment to the sheriff and demanded of Corcoran, through Corcoran’s attorney, Mr. Roe, an assignment of the judgment of June 16th, 1903, of the bank against Joseph A. Duffy, claiming that since he had paid the judgment against himself, founded upon a note of which Duffy was the maker, it was a security to which he was entitled to subrogation upon payment of the debt to Corcoran.

Corcoran consented to deliver the note, but refused to assign the .judgment, his reason for the refusal to assign being that Mr. Duffy claimed that he was not primarily responsible on the note, and that therefore Corcoran should not assign the judgment to McKenna.

In my ojfinion, where one who is a surety pays the debt, he is - entitled to all of the securities that the creditor has, and that it is not proper for the creditor to withhold any such securities upon any pretext as to the responsibility or liability of those under obligation to pay such securities, but he must, upon receiving payment, transfer them.

The defendants, however, insist that since the judgment in each of the cases was for the same cause of action (namely, a promissory note signed by Duffy and endorsed by McKenna) that the payment by McKenna of the judgment a'gainst himself satisfied the judgment that had been recovered against Duffy.

This was the early English rule (Sheld. Subr. (2d ed.) 203 § 135), but it has been changed in England by statute, and in most of the states of the United States. Sheld. Subr. 205 § 136 et seq.

In Kew Jersey the statute regulates the proceedings on execution upon a joint judgment against principal and surety in such a way as to protect the surety, and gives to a surety who pays the judgment the benefit thereof against the principal. 2 Gen. Stat. p. 2588 § 36; P. L. l903 p. 543 § 35; Brown v. White, 29 N. J. Law (5 Dutch.) 514 (Court of Errors and Appeals, 1861, reversing Supreme Court, 29 N. J. Law (5 Dutch. ) 307; Durand v. Trusdell, 44 N. J. Law (15 Vr.) 597 (Supreme Court, 1882); Delaware, Lackawanna and Western Railroad Co. v. Oxford Iron Co., 38 N. J. Eq. (11 Stew.) 151 (Vice-Chancellor Van Fleet, 1884).

In tl^e case of Brown v. White, supra, the court of errors and appeals held that where one of several defendants pays to the plaintiff a sum of money in satisfaction of a judgment, and procures an assignment of the judgment to himself, this pajment does not operate as a satisfaction of the judgment, as to any of the defendants, except the one paying the money, unless it appears that the pajment was intended as a satisfaction of the judgment as to all of them.

Applying this principle to the case in hand, I am clear that the payment by McKenna of the judgment against himself was not intended as, and must not be held to be, a satisfaction of tire judgment against Duffy; that the judgment against Duffy was a security in the hands of the creditor for a debt originally due by Duffy as principal and McKenna as surety, and that upon payment to the creditor by the surety, the latter is entitled to the assignment of the collateral, namely, the judgment against Duffy.

There is a small balance of costs incurred by Corcoran in obtaining the judgment against Duffy, and this balance, of course, must be paid to him by the complainant before he is called upon to assign to the complainant.

I will advise a decree in accordance with the views herein expressed, the terms of the decree to be settled upon notice.


author: Gajreison, Y. C.

text:
    Board of Trustees of Schools for Industrial Education in the City of Hoboken v. The Mayor and Common Council of the City of Hoboken and The Trustees of the Free Public Library of the City of Hoboken.
    [Decided November 8th, 1905.]
    Certain donors offered to contribute funds for the erection of a free city public library building, provided that accommodations therein be provided for the city’s industrial education department, and that the city would, raise the balance of the funds necessary to erect the building. This offer was accepted by a resolution of the city council, and thereafter the site was purchased by the donors and conveyed to the city by a plain bargain and sale deed containing no restrictions.—Held, (1) that the city took title, under such deed, on the trusts contained in the offer and acceptance; and (2) that a bill to regulate the use of such a building is within the jurisdiction of equity to establish and enforce a charitable use.

      Heard upon bill, answers, replication and proofs in open court.'

      Messrs. Black cG Drayton, for tbe complainants.

      Mr. James F. Minium, for tbe defendants. ,
   Gajreison, Y. C.

This is a bill filed by the board of trustees of schools for industrial education in the city of Hoboken against the mayor and common council of the city of Hoboken and the trustees of the free public library of the city of Hoboken.

The city is, of course, a municipal corporation created by the legislature, and the other parties are each public' corporations of this state created and existing under appropriate legislation.

The subject-matter of dispute is the regulation of the use of a building which was erected under the following circumstances: On the 26th day of March, 1895, the following letter was sent and received:

“Hoboken, N. J., March 26th, 1895.
“Etkoard Russ, Esq., Ohairman on Sites, Free Public ‘Librm-y:
“Dear Sir—On behalf of my mother, Mrs. Martha Stevens, and my sister-in-law, Mrs. John Stevens, and myself, I beg to acquaint you with the fact that we are willing to donate to the city of Hoboken, in land and cash, a sum not exceeding $26,000 towards the erection of a free public library building by the free public library trustees of the city of Hoboken, providing that accommodations at the same time be given for the proper accommodation of the industrial education department of the city of Hoboken, and providing that the city of Hoboken will raise the balance of the amount necessary to erect such buildings as may meet our approval for the above object, and providing that this offer must be accepted before the 1st day of July of this year. And that the deed of conveyance shall contain such restrictions as will insure the accomplishment of the above-named objects. The site of said building to be selected by the library trustees.
“Tours respectfully,
“Richard Stevens.”

Thereupon the city took action as follows:

Oity council received a report, dated April 24th, 1895, as follows :

'‘To the Honorable the Mayor and Council of the city of Hoboken:
“Gentlemen—Tour special committee appointed at the request of the board of trustees of the free public library to confer with the members of the said board in regard to the communication of Mrs. Martha Stevens, Mrs. John Stevens and Mr. Bichard Stevens to the board of trustees of the free public library, offering to donate land or cash to the value of $26,000 for the purpose of erecting a free public library building and school for manual training, would respectfully report that they have had a conference with the donors, committee of the board of trustees of the free public library and a committee of the board of the manual training school of industrial education, and would recommend the adoption of the following:
“Resolved, That the generous and public-spirited offer of Mrs. Martha Stevens, Mrs. John Stevens and Mr. Bichard Stevens be accepted under the conditions and restrictions mentioned in their communication dated March 26th, 1895, and presented to this council March 27th, 1895.
“J. H. Timken,
“Edw. Omterman,
“A. Stttrken,
“Committee.”

and passed the resolution just quoted.

Thereafter a site was selected by the library trustees and the land was purchased by Mrs. Stevens, and by a deed dated the 7th of January, 1896, was conveyed to the mayor and council of the city of Hoboken. This deed is a plain bargain and sale deed, with no provisions or restrictions. Under these circumstances I find that the city took this title upon the trusts expressed in the writings above quoted.

Plans were then prepared under the joint supervision of the library trustees and the school trustees, and those plans were submitted to the donors and were by them approved. These plans provided for a building which, although under the one roof, should practically contain two separate structures, one for -the use of the library and one for the use of the industrial school.

The entrance to the library part of the building is upon one street and that to the industrial school is upon another street.

The various rooms on the plans have the purposes for which they are intended indicated by appropriate language, most of the rooms intended for the use of the school being marked “classroom” and those for the use of the library being marked “stack-room,” or similar descriptive terms.

There is one room upon the top' floor of the building which is marked “assembly-room.”

There is no contention before me in this suit as to the use of any other rooms than the one in the basement marked on the plans “classroom,” and the room on the top floor marked “assembly-room.”

The donors paid $17,719.40 for the land and paid over the balance in cash. The remainder of the cost was raised upon bonds issued under legislative authority.

The building was built according to the plans and has since been occupied by the library trustees in their portion and by the industrial school trustees in their portion.

Neither body has had occasion to use the “assembly-room,” excepting at the dedicatory exercises, and upon that occasion they joined in its use.

The room marked “classroom” in the basement has not been put to practical use by either party until just before the beginning of this suit, the library trustees having used it as a storeroom.

The school trustees now need this room for their school purposes. Their right to use this room is disputed by the library trustees. Each side asserts the right to use the “assembly-room,” and the right of each is denied by the other.

On the 12th of November, 1903, a deed was executed by the proper officers of the city of Hoboken conveying the title to this property to the trustees of the free public library.

This deed was based upon a resolution authorizing it, passed by the city council, which resolution was, upon certiorari, set aside by the supreme court.

The opinion of the court will be found in Keuffel v. Mayor, &c., of Hoboken, 71 N. J. Law (42 Vr.) 518.

I am of opinion that this bill should be considered as a bill to establish and enforce a charitable use, which, of course, is a well-recognized head of equity jurisprudence.

“The primitive and inherent powers of a court of equity in this domain are sui generis and of a very extensive character * * * in full vigor in the hands of the chancellor of this state. Chief-Justice Beasley in Hesketh y. Murphy, 36 N. J. Eq. (9 Stew.) 307 (Court of Errors and Appeals, 1882).

No special technical words are necessary to establish a charitable use or trust.

If the words of donation specify some definite purpose which is regarded by the law as charitable, or for some general purpose which the law regards as charitable, that is sufficient. 5 Am. & Eng. Encycl. L. (2d ed.) 912 et seq.

This donation was clearly a gift for charitable uses.

A library has been held to be the proper subject of a charitable use. Brown v. Pancoast, 34 N. J. Eq. (7 Stew.) 321 (Chancellor Runyon, 1881); George v. Braddock, 45 N. J. Eq. (18 Stew.) 757 (Court of Errors and Appeals).

As have schools. Stevens v. Shippen, 28 N. J. Eq. (1 Stew.) 487; Green v. Blackwell, 35 Atl. Rep. 375; Hyde’s Executors v. Hyde, 64 N. J. Eq. (19 Dick.) 9.

Municipal corporations and public corporations are held to have power to take property for charitable uses, unless disenabled by positive legislation. Dill. Mun. Corp. (4th ed.) 661 et seq. §§ 566 (436) et seq.; 5 Am. & Eng. Encycl. L. (2d ed.) 922.

Neither the municipal corporation nor the two public corporations involved in this suit are so disenabled by any legislative or constitutional prohibition brought to my attention or within my knowledge.

I therefore conclude that by the donation, its acceptance, and • the subsequent acts of the parties, a charitable use was created, and the building erected is for the use of the free public library and the industrial school, in accordance with the intention of all of the parties as indicated upon the plans.

It only remains, then, to determine the terms, limitations or conditions of the trust.

In this case these are readily ascertainable from the written papers expressing the trust, and the joint and mutual actions of the parties.

The building was intended to be used jointly in its separable parts' by the free public library and the industrial school, and with, respect to every part of the building, excepting the “assembly-room,” its intended use was indicated in advance, and was-agreed upon by all the parties in interest.

With respect to the “assembly-room,” I find that it was intended to be used by each of the two corporate occupants of the building as their necessities required; that neither has an exclusive right, but each has a right.

The “classroom” in the basement was undoubtedly intended for the school, and to the extent, at least, that it is required for school purposes is within the exclusive control of the school trustees.

I will advise a decree to define and enforce the charitable trust in accordance with the above-expressed views.


author: Garrison, V. 0.

text:
    John C. Farr, Jr., v. Theresa Hauenstein and Louis C. Hauenstein.
    [Decided November 16th, 1905.]
    Money used by a husband in paying taxes, interest on mortgage and other encumbrances on the property of his wife—Held, under the evidence, his money, and not entrusted to him by another for that purpose, so that his creditors have a lien on such property to the extent of payments made.

      Mr. Leon Abbett, for the complainant.

      Mr. James F. Minium, for the defendants.
   Garrison, V. 0.

The issues made by the pleadings in .this suit were determined on the 29th day of June, 1905, and the views of the court concerning the same will be found reported in 69 N. J. Eq. 740. It was decided that “with respect to the expenditures made by the husband of his own money in the payment of taxes, interest on the mortgage, and other encumbrances on this property * * * the complainant, as a creditor, has a right to have a charge against the property for such sums.”

The case was referred to a master to ascertain the moneys of the husband expended to pay taxes, interest on mortgage, &c., on this property. The master took the testimony and has returned the same.

The master did not definitely report with respect to the ownership of the moneys found by him to have been paid by Louis C. Hauenstein, the husband, on account of the interest, taxes, &c., due upon the property.

A further order was then made referring the cause back to the master for a definite finding upon this point. The master was unable to make such definite finding because the testimony before him was mainly with respect to the fact of payment, while the testimony which had been previously taken before the court concerned the source of the moneys. The master property did not consider the testimony which had been taken before the court, and was not able, from the testimony taken before him, to definitely report upon the ownership of the moneys.

The matter was then brought before the court for final determination upon an application to settle the decree upon the pleadings and proofs, including the proofs taken before the master.

Erom such proofs I find* the facts to be that since the date of the judgment, Louis C. Hauenstein, Sr., has paid interest on the mortgage upon the property in question aggregating $1,475, and taxes and assessments upon the same property, within the same period, aggregating $697.29.

The amount due upon the judgment held by the complainant is $1,292.22, with interest thereon from the 7th day of August. 1890.

In the testimony of the defendant, Louis C. Hauenstein, it clearly appears that he obtained the money to make these payments either from his own funds—that is to say, money earned by himself—or from moneys borrowed by him from his son Louis. This is corroborated by the testimony of his son Louis, who testifies that he helped his father out by loaning him money, and that he advanced money to his father.

The moneys which Louis C. Hauenstein, Sr., the husband, paid on account of his wife’s property for taxes and interest were either his own moneys, earned by himself, or were moneys borrowed by him. He seeks to create the impression that these moneys were either moneys of a partnership composed of himself and his son Louis, or were moneys of his son Louis, Jr., directly contributed by his son, through him as a mere agent, for the purpose of paying these liens or encumbrances against the property the title to which was in the name of Theresa Hauenstein.

With respect to the alleged partnership between the father and son, the proofs show that while the father carried on business under the name of Louis C. Hauenstein & Company, it was, as he termed it, a mere family arrangement, there being no shares, and was, I think it clearly appears, a mere guise under which the father did business. The son’s testimony is that his father wanted to start in the business, and he set him up in it. He clearly states that he was not to get any salary or draw anything from the business, and while, as between him and his father, he may have some rights as a partner, it nowhere appears that the moneys which were used to pay the taxes and the interest were moneys of this alleged partnership. In fact, the son directly testifies that he has advanced his father, by way of loan, money in the neighborhood of $1,700, and negatives any idea that he was himself paying any taxes or other items through his father as an agent.

I therefore reach the conclusion that the moneys which Louis C. Hauenstein, Sr., paid for interest on the mortgage, and for taxes and assessments upon the property, were his moneys, and that, to the extent of the aggregate of such payments, the complainant has a lien against the property standing in the name of Theresa Hauenstein, and that unless, within thirty days after the service upon the defendants of a copy of the decree made in this suit, they pay to the complainant the amount specified in said decree, the property in question may be sold to raise and pay the said sum.


text:
    Edward Perlberg v. Samuel C. Smith, trading as S. C. Smith & Co.
    [Decided December 4th, 1905.]
    1. No rights are acquired by the filing of a label in the United States patent office, as against any person doing business in the same state, since ■congress has no power to legislate with respect to trade marks, so far as concerns commerce within the boundaries of a state.
    2. Where the owner of a shoe store marked all of the shoes he sold ■“Eagle Shoes,” though they were procured from various sources, so that the name did not indicate any particular brand or make of shoes, he is not entitled to protection in the use of the name.
    3. One who procured from a manufacturer shoes marked “Eagle Shoes” •could not be enjoined from selling them by one who had previously built up a business in the sale of shoes, and who marked all his shoes “Eagle Shoes,” where the name had formerly been used by various manufacturers, and where the person sought to be enjoined did not attempt in any way to deceive the public into the belief that they were buying the shoes offered for sale by the other person.
    Heard -upon bill, answer, replication and proofs in open court.
    This is a bill filed by Edward Perlberg against Samuel C. Smith to restrain the latter from selling shoes under the name •of “Eagle Shoes.”
    The bill sets out that the complainant is a shoe dealer in Jersey City, with a place of business at No. 2 Newark avenue, in said city, and that the defendant is a shoe dealer, with •a place of business- at No. 90 Newark avenue, in said city; that the complainant some seven years ago adopted a label to be placed upon shoes sold by him, and upon the 12th of October, 1901, filed in the office of the department of the interior, in the patent office, a copy of said label, and received from said office letters-patent therefor; that he had used said trade mark for a long time prior to obtaining said letters-patent, and is still using the same; that the public have placed great confidence in said trade mark, and that, by reason of the confidence of the public in the said style and make of the shoes sold by him and marked in accordance with the said letters-patent, he has built up a lucrative and prosperous business, and that the style, make, comfort and durability of said shoes have been recognized by the public; that he is the sole possessor and owner of said trade mark, and is the sole and exclusive agent for the sale of the said Eagle "shoes, “and that Samuel Smith represents to the public that he has for sale shoes known as Eagle shoes,” which shoes complainant charges are inferior to the shoes sold by him.
    The complainant further charges that Smith is using the same labels as complainant, and that, by reason of the acts of the defendant, complainant is irreparably damaged and should be protected by the injunction of this court.
    The answer of the defendant need not be further referred to than to state that it denies all of the material allegations of the complainant and puts him to proof with respect to his right to relief.

      Mr. J. Merritt Lane, for the complainant.

      Mr. Charles C. Kelly and Mr. Charles J. Loe, for the defendant.
   Garrison, V. 0.

The proofs, so far as they are pertinent to the decision, show that Edward Perlberg, in the year 1898, opened a shoe store at No. 2 Newark avenue, in Jersey City. He had not been in the shoe business prior to that time. His name did not appear upon any sign, and the sign that he adopted had upon it the words “The Eagle Shoe Store.” Upon.the windows of his store he had painted the representation of an eagle with outstretched wings, bearing in its claw a shoe. This picture, with the addition of a streamer proceeding from the beak of the eagle, upon which were the words “Eagle Shoes,” constituted the label adopted by the complainant and subsequently filed by him in the patent office.

The proofs are indefinite as to whether he ever placed this ' complete label upon any of the goods sold by him, but if he did, its use was early discontinued, and no part of his present claim rests upon the use by him of this label.

He advertised very extensively in the local newspapers and by handbills, always referring to his store as “The Eagle Shoe Store,” and always calling attention to the shoes that he sold under the name of “Eagle Shoes.”

There is abundant proof that shoe stores in many other places had adopted the name “Eagle Shoe Store” long prior to the time that the same was adopted by the complainant for his store. The proofs are also perfectly clear that the word “eagle,” in connection with shoes, has been at various times and in various places, by manufacturers and local dealers, used to designate shoes sold by them, and that it was so used long prior to the time that Perlberg went into the shoe business. In some instances the words “Eagle Shoes” were placed upon the shoe when made by the manufacturer, and in others they were placed thereon by the local dealer himself. Those that'were marked by the manufacturer were sold either directly to the retailers or were sold to jobbers and by them sold to retailers, or were sold at auction to whomsoever would buy.

The defendant, Smith, for at least eighteen years has been in the shoe business in Jersey City, his store now being at No. 90 Newark avenue, in said city. This is near where Perlberg opened his store. Just prior to the filing of the bill in this cause it is proven that Smith placed placards upon the outside of his store announcing a sale of “Eagle Shoes,” with the prices stated. The shoos thus advertised were made by Taylor, a manufacturer, who had marked them “Eagle Shoes,” and were sold to Smith through a jobber named Young. They had upon the sole a representation of an eagle and the name “Eagle Shoes,” together with the price. They also had upon the back strap the name “Eagle Shoes,” with the price.

The complainant alleges that Smith’s reason for advertising the sale of “Eagle Shoes” was to revenge himself upon Perlberg because of a real or fancied grievance that he had against Perl-berg with respect to the agency for the sale of shoes named “Queen Quality Shoes.” ■ I believe Smith displayed the placards announcing the sale of the Eagle shoes he had to catch some of the custom attracted by Perlberg’s advertising. Smith testifies, and it is not disputed, that for more than eleven years, on and off, he had sold different shoes from different sources of manufacture which, in one way or another, were designated as “Eagle Shoes”—that is to sa3r, either on the carton in which the shoes-were contained, or on the back strap of the shoes, or on the sole thereof, they were marked or designated as “Eagle Shoes.”

The bill was evidently framed upon the theory that the complainant had a technical trade mark or label, and that this right was infringed by the defendant.

The trade mark or label claimed in the bill by the complainant was that which he filed in the patent office, and which has been heretofore described. The undisputed proofs show that the complainant, if he ever placed this trade mark upon shoes sold by him, long since abandoned the use of the same, and contented himself with placing the words “Eagle Shoes” upon the back strap of each of the shoes sold by him.

There was not the slightest attempt on the part of the complainant to prove that he was the “sole and exclusive agent for the sale of said ‘Eagle Shoes,’ ” as he pleaded in his bill that he was, or that, as a fact, there was any proprietary shoe called “Eagle Shoe” sold by him as agent.

There is no pretence in the proofs of showing that the defendant in any way simulated the label claimed by the complainant. There is ample proof that other dealers in shoes, prior to the adoption by the complainant of the aforesaid label, had adopted similar .labels for shoes, using almost the same design and the same words.

The complainant obtained no rights which he may enforce in this suit by virtue of filing his label in the patent office. It has been settled by the supreme court of the United States that there is no power in the congress to legislate with respect to trademarks, so far, at least, as concerns commerce within the boundaries of a state. United States v. Steffens, 100 U. S. 82; 25 L. Ed. 550.

The complainant, at the argument, very properly abandoned the issue based upon the claim of any exclusive right, and did not claim that he had a technical trade mark which had been infringed. He shifted his ground to a charge of unfair competition. There is a very grave question whether the complainant, by abandoning so much, has not abandoned all. Whatever his rights might be as the owner of a technical trade mark, or as the user of a mark adopted by him which another would not, to his damage, be permitted to simulate, there is a very serious question as to whether he may proceed against another who is not charged with simulating the design or mark of the complainant, but is merely charged with using words which appeared in the complainant’s trade mark, but which were equally open to use by the complainant and the defendant. Corbin v. Gould, 133 U. S. 308; 33 L. Ed. 611.

But I do not desire to rest my determination upon this sole point, and I therefore pass to the consideration of the charge of unfair competition.

Stripped of extraneous matter, the complainant’s contention urged upon the court was that for seven years he had called .all the shoes sold in his store “Eagle Shoes,” and had marked upon the back straps of each of such shoes the words “Eagle Shoes;” that he had spent large sums of money in advertising the shoes sold by him, referring to such shoes in his advertisements as “Eagle Shoes;” that his place of business was close to that of the defendant, and that the defendant displayed placards announcing the sale of “Eagle Shoes,” and that this was unfair competition as against the complainant.

Care must be taken in these cases not to extend the meaning of the word “unfair” to cover that which may be unethical but is not illegal. It may be unethical for one trader to take advantage of the advertising of his neighbor, but his so doing would in many instances be entirely legal. If one dealer advertises extensively and'at great expense the sale of a staple article, •or of any article which he has not the exclusive right to vend, his neighbor may undoubtedly endeavor to cause the customers attracted to the neighborhood by the advertising to purchase the same or a similar article at his store instead of at the store of the advertiser.

What conduct on the part of a defendant will be held to constitute unfair competition is the subject-matter of discussion in cuses too numerous for useful citation, but the principle applied in each case is extremely simple. As Lord-Chancellor Halsbury said in the House of Lords, in the case of Reddaway v. Barnham, 1896, A. C. 199 (at p. 204) ; 25 Eng. Rul. Gas. (at p. 197) : “For myself I believe the principle of law may be very plainly stated, and that is that nobody has any right to represent his goods as the goods of somebody else.”

If the complainant has a technical trade mark, the deciding of the case is greatly simplified, because the' use by another of this trade mark will, of itself, be sufficient for the determination that the one simulating it is defrauding the complainant. If, however, the complainant has not a technical trade mark, the difficulty in determining his right to relief is not with respect to the principle of law to be applied, but to the question of fact involved.

'While courts often say that the first user of a-word, phrase or design, such as is the proper subject of a trade mark, has a property right thereto, I incline to the view that this is an inaccurate use of terms-. As is pointed out by Lord Herschell, in the case just cited (at p. 209) (25 Eng. Rul. Cas. 202), although some of the rights of property attach to such a use, the same principles are applied and the same rights enforced where the user has no exclusive right and no property right in the mark or name. The whole doctrine rests upon the prevention of fraud. The advantage of not misusing the word “property,” in connection with the right of the user of a trade mark or trade name, is that the proper conception of the basis of the right, administered in favor of the complainant, reconciles the decisions respecting the subject-matter.

The principle is universal in these cases that one may- not palm off his goods as the goods of another, and this irrespective of whether that other has a technical trade mark, is using his own name, or is using words to which he has no exclusive right whatever, providing he is using the name or mark to denote the origin or ownership of the named or marked goods.

There is, of course, a distinction to he observed with respect to wholesalers and retailers.

• The exact point of inquiry in the case in hand is whether the complainant so used the words “Eagle Shoes” that he is entitled to protection, and whether the defendant Smith will be prevented by injunction from selling from his store shoes named “Eagle Shoes.”

The proofs are full and clear that the complainant marked all of the shoes that he sold “Eagle Shoes.” He obtained these shoes from manufacturers, from jobbers and at auction sales. His shoes, therefore, were the product of many different manufactories. The stamp “Eagle Shoes” upon the shoes sold by Perlberg meant nothing saving the fact that they had been previously purchased by Perlberg and were marked at the time of their sale by him “Eagle Shoes.” It did not in any way indicate the origin or source of production, or even, as the proofs show, any element of selection on the part of Perlberg.

• It did not denote kind, brand or make. Perlberg’s own testimony shows that he purchased shoes at auction at cheap prices and resold them as “Eagle Shoes;” that they were sold cheap at auction because they had been unsalable in the regular course of trade. ■

A fundamental principle is that the kind of trade mark or trade name that will be protected is only such as implies origin or ownership. Lawrence Manufacturing Co. v. Tennessee Manufacturing Co., 138 U. S. 537; 34 L. Ed. 997, with note; Columbia Mill Co. v. Alcorn, 150 U. S. 460; 37 L. Ed. 1144.

1 do not mean to imply that a trade mark will only be protected if placed upon an article manufactured by the user of the, mark, because this is not the law. One who causes goods to be manufactured for him, or who selects goods manufactured by others, and places his trade mark thereon, is entitled to protection with respect thereto, but I firmly hold the conviction that in each instance where the user is protected he must show that there is a particular thing upon which he has placed the mark so that the appearance of the mark connotes that thing. If this is not so, then the whole basis of the law of trade marks is without solid foundation upon which to rest. If the appearance of the mark upon the thing is not a guaranty that it is the thing, marked.to differentiate it and distinguish it from other similar things sold by other dealers, then the trade mark is deceptive and worthless. If, without regard to the source of manufacture or to any distinction of kind, brand or make, this trade mark of a retailer is placed indiscriminately upon every article of any given species, it can serve no other purpose than to show that the article is sold by that person, and if a man is to be protected at all in this respect he must lay a basis for such protection by adopting an arbitrarjr, fanciful designation, of which he is the first user, and so obtain a technical trade mark.

I do not decide, because it is not necessary, whether there could be such a thing as a technical trade mark which did not denote kind, brand or make, but merely did denote the fact that it was sold by a certain retailer.

If Perlberg, by adopting the words “Eagle Shoes” to denote the shoes sold by him, sought to convey the impression to the public that he was retailing a particular kind, brand or make of shoes under the name of “Eagle Shoe,” then he was conveying a falso impression, and upon familiar principles will not be protected wjtli respect thereto. This undoubtedly was his intention, and in his bill in this suit he pleads that “he was the sole and exclusive agent for the sale of the said Eagle shoes.” If such was not his intention, then I am at a loss to conceive of any principle upon which he may prevent another from making use of the term “Eagle Shoes.” He has, as has been before pointed out, no exclusive right to the words “Eagle Shoes.” He cannot successfully put forward any claim to prevent anyone else from using those words. The utmost right which he may claim would bo to prevent another from using those words in such a way as to palm off the goods of that other as 'the goods of Perl-berg. This he may do if he shows the court that lie has used those words in connection with goods in such a way as to identify the name and the goods; that' is, that he used the name to denote a particular kind, brand or make of shoes. This he has not done, because the proofs demonstrate that he applied the name indifferently and indiscriminately to all kinds of shoes, from every source, irrespective of their origin, kind, brand or make, and that the term was meaningless save to the extent that it meant the shoes sold in his store.

Of course, if.it were charged that the defendant so befogged the public by simulating the signs of the complainant’s store, or changing the appearance of the exterior of his store to make it resemble the complainant’s store, that people did not know into which store they were going, there would be some ground for action.

In the case of Van Horn v. Coogan, 52 N. J. Eq. (7 Dick.) 380 (Vice-Chancellor Van Fleet, 1894); affirmed, Id. 588, there will be found an instance of this kind. There the defendant placed out in front of his store a number, which was not the number of his store, but was the number of the complainant’s store. The case just referred to contains, as nearly as does any other cited by the complainant, the most favorable application of the principles of law which the complainant invokes. In that case a dealer in stoves in Newark purchased from a manufacturer a particular kind of stove and caused it to be named “Portland.” He was the only dealer in Newark to whom the manufacturer thereof would sell this kind of stove. The defendant placed the number of the complainant’s store outside the door of his own store and changed the name of a stove that he had been selling theretofore under another name to the name “Portland,” and sought to sell that stove to the public under that name. He was restrained upon the ground that the proofs were adequate that he was endeavoring, to pahn off his article as the article of the complainant.

If we apply the principle of that case to the case in hand it will at once be seen how variant is the result. The defendant in the case at bar did not in any way endeavor to deceive the public with respect to the stores of himself and the complainant. He did not change the name upon any of the shoes in his store. The shoes which Smith was selling as “Eagle Shoes” were so marked, by the manufacturer, without any procurement by Smith, and were sold by the manufacturer or his agent to anyone in the open market. They had upon the sole a picture of an eagle and the words “Eagle Shoes,” with the price, and they also had, upon the back strap, the words “Eagle Shoes,” with the price. Any dealer in Jersey City or elsewhere throughout the entire world could have purchased these shoes from the jobber or, I presume, directly from the manufacturer.

No one, certainly, in buying these shoes from Smith, could have been deceived into the belief that he was buying them from Perlberg. Could the purchaser be deceived into the belief that he was buying from Smith the same thing which Perlberg was selling under the same name? The answer to this is no, be-^ cause Perlberg was not selling any particular kind, brand or make of shoes under that name. Pie was selling every kind, brand or make under that name. So that we come back to the principle previously stated, that unless the name adopted is used to indicate origin or source of manufacture, or in some way to designate that the particular thing upon which it is placed is of a certain kind, brand.or make, the one using it is.in no position to restrain others from using the same name upon similar articles.

1 do not think it necessary to indulge in numerous citations for so familiar a principle. If a complainant is shown to be deceiving the public he cannot receive protection. Manhattan Medicine Co. v. Wood, 108 U. S. 218; 27 L. Ed. 706; Stirling Silk Manufacturing Co. v. Sterling Silk Co., 59 N. J. Eq.(14 Dick.) 394 (Vice-Chancellor Emery, 1900); Koehler v. Sanders, 122 N. Y. 65; 9 L. R. A. 576; Leather Cloth Co. v. American Leather Cloth Co., 11 H. L. C. 523; 11 Eng. Rep. 1435; Prince Manufacturing Co. v. Prince’s Metallic Paint Co., 135 N. Y. 24; 27 L. Ed. 942, and note, in which many cases are cited; S. C., 17 L. R. A. 129, and note.

The basis of the complainant’s claim in this case must be that he had so used the term in controversy as to build up a trade in the thing to which the name was applied. Since he utterly fails to show that there was any particular thing to which this name was applied he is without redress.

I will advise a decree dismissing the bill, with costs.


author: Gabbisoy, Y. C.

text:
    Annie H. B. Howe v. The City of Orange.
    [Decided January 18th, 1906.]
    Where a city having a claim for water rents in arrear against a previous owner of a house at the time he sold it shut o£E the water by virtue of right so to do conferred by 1 Gen. Stat. p. SJ¡9 (P. L. 1S76 p. 971 § 10), the purchaser is not entitled to injunction to restrain the city from keeping the water shut off until the arrearages are paid.
    On demurrer to bill.

      Mr. William A. Lord, for the demurrant.

      Mr. William Read Howe, for the complainant. _
   Gabbisoy, Y. C.

This is a bill filed by Annie H. B. Howe, charging that she is the owner of a house-in the city of Orange;- that the city of Orange owns and maintains a system of public water-supply for the benefit of the inhabitants, and that on Saturday, May 6th, 1905, the complainant was notified by the clerk of the water department of the city of Orange that water would not be supplied to the premises until a bill of $201.39 for water previously supplied thereto had been paid; that subsequently the water was turned on, but she was again notified that the supply would be discontinued and the water shut oft unless the said arrears were paid.

She charges that irreparable damage will come to her if the water is shut off from her premises.

To this bill a demurrer is interposed by the defendant.

The sole question, as I view it, is whether the city, under the legislation in existence in this state, has the authority- to shut oft the water from these premises, and whether a court of equity should restrain it from so doing.

Under section 10 of'the act of 1876 (.1 Gen. 8tat. ¶. 6J¡9) it is provided that “in case prompt payment of any water rent” or rents shall not be made when the same become due, the

“water shall be shut off from such building, place or premises, and shall not. be again supplied to said building, place or premises until such arrears, with interest thereon, shall be fully.paid.”

By section 1 of the act of 1885 (1 Gen. Stat. p. 665) it is provided that

“in any city of this state wherein water works are owned by the city and controlled by the city authorities, the municipal department of the city government having charge of such water works * * * shall have full power and authority, in case of the neglect or refusal of any person or corporation to promptly pay for the use or rents of water heretofore or hereafter furnished by such city or any municipal department thereof, in or upon any building, place or premises, to shut off the supply of water from such building, place or premises, * * ® and in case the supply of water shall be shut off from any building, place or premises for nonpayment of water rent or water rents, the said city or such municipal department aforesaid shall not be compelled again to supply said building, place or premises * * * until said arrears, with interest and penalties, if required, shall be fully paid and satisfied.”

Counsel for the complainant does not in any way attack the constitutionality of the legislative provisions relating to this subject.

The act of.1876 above referred to (1 Gen. Stat. p. 649 § 10) makes the water rents a lien upon the premises-until the same shall be paid and satisfied.

The bill in this case does not in any way dispute the claim, which it sets out, of the city for the arrears of rent.

The gravamen of the bill is that because the water for which these water rents are in arrears was furnished to the building while.it belonged to a previous owner, the city has not the right to shut off the water from the premises because of the non-payment of the arrears. I am unable to perceive any reason why this should be held to be the law. If the legislation be constitutional—and it is not suggested that it is not so—it undoubtedly vests in the municipal authorities the right to shut off the water from premises when the water rents for water furnished to such premises are in arrears. Under the pleadings in this suit there are arrears against these premises for water previously furnished. There would seem to be no reason why the city should' not be permitted to pursue the statutory procedure with respect thereto.

It cannot be said that irreparable injury will ensue to the complainant if the city is permitted to shut off the water, because, by paying the water rents in arrears, the water will be furnished. If this complainant wants the water, and is compelled to pay the back rents to obtain it, and should not'in law have been compelled so to do, the cases hold that she may recover back from the city the amounts of money thus wrongfully extorted from her. Westlake v. St. Louis, 77 Mo. 47; 46 Am. Rep. 4; St. Louis Brewing Association v. St. Louis, 140 Mo. 419; 37 S. W. Rep. 525; 41 S. W. Rep. 911; Panton v. Duluth Gas and Water Co., 50 Minn. 175; 52 N. W. Rep. 527; Penn Iron Co. v. Lancaster, 17 Lan. L. Rev. 161; affirmed, 15 Pa. Sup. Ct. Rep. 556. The only case cited by counsel for the complainant is Hudson Trust and Savings Institution v. Carr-Curran Paper Mills Co., 58 N. J. Eq. (13 Dick.) 59 (Vice-Chancellor Pitney, 1899). In that ease the vice-chancellor held that the lien of the city, under the act of 1876, for water rents was not prior to the lien of a mortgage previously given. I do not find in that case any decision militating against the right of the city to shut off the water from the premises where arrears for wafer previously furnished are existing.

In other jurisdictions similar legislation to that in this state , upon this subject has received consideration, and the courts have held that the city or the water company has the power to shut off the water, and will not be restrained with respect thereto.

It is held that the premises to which the water is furnished are liable; that indulgence with respect to the time of shutting the water off will not be held to operate against the right to do so, and that the fact that the title has changed hands since the furnishing of the water is immaterial. Girard Life Insurance Co. v. Philadelphia, 88 Pa. St. 393; Appeal of Brumm, 12 Atl. Rep. 855; Atlanta v. Burton, 90 Ga. 486; 16 S. E. Rep. 214.

I will advise a decree sfistaining the demurrer in this cause, with costs.