author: Conford, P. J. A. D.

text:
    ROXBURY STATE BANK, A BANKING CORPORATION OF NEW JERSEY, PLAINTIFF-RESPONDENT AND CROSS-APPELLANT, v. THE CLARENDON, ROBERT S. DOUGLAS, LEONARD A. CODELLA, THE TOWN OF HACKETTSTOWN, AND O. DAVID FISCHER, AS RECEIVER OF THE CLARENDON, DEFENDANTS-RESPONDENTS, AND WILLIAMS PUTZ, EVELYN PUTZ, ERNEST PUTZ AND LOTTIE PUTZ, DEFENDANTS-APPELLANTS.
    Sujjerior Court of New Jersey-Appellate Division
    Argued June 3, 1974
    Decided July 8, 1974.

      Before Judges Coneord, Handler and Meanor.

      Mr. Richard B. Thomas, Jr. argued the cause for defendants-appellants Putz (Messrs. Schenck, Price, Smith & King, attorneys).

      Mr. Steven S. Radin argued the cause for plaintiff-respondent and cross-appellant Roxbury State Bank (Messrs. Sills, Beck, Cummis, Radin & Tischman, attorneys; Mr. Thomas J. Demski, on the brief).

      Mr. Abraham Natovitz argued the cause for defendant-respondent O. David Fischer, receiver of The Clarendon.
   The opinion of the court was delivered by

Conford, P. J. A. D.

These are appeals by the foreclosing plaintiff bank and the holders of a second mortgage on real property and equipment of The Clarendon, a corporation engaged in the hotel and restaurant business in Hackettstown, and since September 1971 in statutory receivership, from a judgment of the Chancery Division in the mortgage foreclosure action. The judgment adjudicates the $160,000 first mortgage held by- the bank a valid and prior lien only to the extent of $79,122.24; and the second mortgage of about $196,000 held by the Putz family to be totally unenforceable against the property. The opinion of the trial court is reported as Roxbury State Bank v. Clarendon, 123 N. J. Super. 400 (Ch. Div. 1973). It is fairly comprehensive of the pertinent facts, and we refer thereto for the background of this case, subject to such comments and qualifications as appear hereinafter.

Basically, the litigation springs from two coordinated transactions encompassing the sale of the hotel and restaurant business by Ernest Putz and Willie Putz (and their wives) to Codélla and Douglas, and the partial financing of that transaction by plaintiff bank, in November 1970. The Putzes sold their shares in the corporation, turning over to the corporation at the same time a plenary liquor license and a parking lot held by them personally, to Codella and Douglas for a base price of $300,000. This was adjusted at closing to about $250,000. Title to the shares was taken by the purchasers in their dummy corporation, Hook Mountain Industries (Hook Mountain). The Putzes received about $50,000 in cash and took back the second mortgage executed by The Clarendon, mentioned above, securing a Hook Mountain note for the balance of the price. Codella and Douglas put no money into the deal. The transaction was conditioned upon and made possible by a $160,000 10% note and mortgage executed by The Clarendon to the bank. The giving of that mortgage loan was contingent on the discharge out of the proceeds of the loan of two outstanding loans with the bank of Douglas-owned corporations amounting to some $34,000. About $45,000 in outstanding Clarendon loan obligations was also satisfied from the mortgage loan proceeds. At closing, the bank deducted a 5% fee of $8,000 from the mortgage proceeds for granting the loan.

The trial court held the Putz second mortgage void on the ground that a corporation has no power to mortgage its assets to finance the sale of its stock by a shareholder, as against a statutory receiver. 123 N. J. Super. at 409. It found that The Clarendon had received no consideration for the mortgage to the Putzes. It also held the bank mortgage invalid to the extent that the proceeds thereof were used as a down-payment on the stock sale ($50,000) and to pay off the prior debts to the bank of the Douglas corporations, as well as to the extent of a proportionate share of the loan fee. The mortgage lien was allowed as to the balance.

It is important in this case to note the fact that all commercial creditors of The Clarendon were paid off by the Putzes shortly after the closing of the stock and mortgage transactions. Thus, none of the obligations to creditors as of the time of the institution of the receivership was existent when the mortgages in question were executed.

I

The Putzes asserted a crossclaim against the hank for fraudulent concealment from them of the use of part of the mortgage loan proceeds to discharge the prior loans of the Douglas corporations. On this premise they sought a subordination of the bank mortgage to their own or its nullification. They contended that they sold to Hook Mountain on the expectation that The Clarendon would net $60,000 for working capital from the bank loan proceeds, and that the bank concealed the fact that this sum would not be available because some of it was used to discharge the prior loans.

The trial court opinion, although noting the facts on which the claim was based (123 N. J. Super. at 406), failed to determine the issue, and the Putzes press it on the appeal. We conclude it is without merit. We assume, without deciding the fact issue, that the Putzes never saw the commitment letter from the bank dated October 9, 1970 mentioning the arrangement concerning the prior loans, Ibid., as testified to by them and contradicted by testimony of Codella. The letter from the bank to Mr. Schuman, attorney for the Putzes, was a true statement of the facts Schuman had inquired about, according to Mr. O’Neil, the bank representative, and Schuman was not produced as a witness to testify to any contrary version. O’Neil testified that Schuman simply inquired whether the bank had committed itself for a mortgage loan to Codella and Douglas and asked for a confirmatory writing, which he gave. The stipulation of the bank commitment to Codella and Douglas, that the borrowers were to pay off from the proceeds of the loan the prior obligations of Douglas’ companies, was not a term of the note and mortgage to the bank, and O’Neil had no obligation to the Putzes to volunteer it. The latter were represented by independent counsel, and it was incumbent on him or them to inquire about the intended disbursement of the loan proceeds if that was material to the Putzes’ deal with the purchasers of the stock.

Moreover, we are convinced that the $34,000 disbursement from the loan proceeds in discharge of the debts of the Douglas companies would not, if disclosed, have affected the decision of the Putzes to sell out. Ernest Putz had retired from active conduct of the business several years previously. Willie Putz had become seriously ill and testified he had made up his mind he was “going to get out of the place before 1 get killed in the place.” Thus the Putzes were intent on selling, and were absolutely dependent fox consummation of the sale on the bank lending Codella and Douglas the wherewithal for the down-payment and discharge of the prior Clarendon obligations.

Accordingly, we find neither fraud on the part of the bank in relation to the Putzes nor any material reliance by the latter on the facts allegedly concealed in the letter from the bank to Sehuman.

II

The invalidation of the Putzes’ mortgage and the partial invalidation of the bank mortgage below were determined without reference to the New Jersey Business Corporation Act, enacted by the Legislature in 1968, N. J. S. A. 14A:1-1 al seq.j effective January 1, 1969 (N. J. S. A. 14A:16-4), and generally referred to herein as the 1968 Revision. The appellants cited N. J. S. A. 14A:3-3 (empowering a corporation to give a guaranty not in furtherance of corporate purposes) to the trial court, but on appeal they cite and rely on several other provisions of the 1968 Revision as well. The bank represents to ns that it also cited to the trial court the insolvency provisions of the act (N. J. S. A. 14A:11 — 10, 11) and argued they were not operative to impair its lien. In any case, we have concluded that the interests of justice as well as of the sound development of the law in this area require us to consider the issues herein in the light of that Revision, it having been effective as of the date of the transactions here involved. The court has heard argument and received supplemental briefs from the parties on these added issues.

A predominant object of the 1968 Revision was to expand and render more flexible the powers and uses of corporations in the light of modern business convenience and practice, thereby to attract incorporators to this State. See Report of the Corporation Law Revision Commission, June 20, 1968, at IX of N. J. S. A., Title 14A, “Corporations, General,” 14A :1 to 14A :7. The Commission was careful to note, however, “The fact that management may exercise broader powers, if granted by the certificate of incorporation, or may act by simpler procedures does not mean that actions may be taken to the detriment of minority interests or creditors.” Id. at XI.

Our study of the authorities cited by the trial court for its invalidation of the instant obligations, of the law generally applicable prior to the 1968 Revision, and of the Revision itself, satisfies us that the insolvency provisions of the latter, particularly in relation to so-called fraudulent conveyances, are now controlling in this area of the law and as to this particular litigation.

The former Corporation Act called for the invalidation of certain transfers by a corporation insolvent or contemplating insolvency, or suspending its business for lack of funds. N. J. S. A. 14:14-2. Stemming from L. 1896, c. 185, it subsisted until 1968 side by side with the Uniform Fraudulent Conveyance Act, adopted in New Jersey by L. 1919, c. 213. N. J. S. A. 25:2-7 et seq. See In re J. Rosen & Sons, 130 F. 2d 81 (3 Cir. 1942). The latter, very similar to the provisions of the Bankruptcy Act, see 11 U. S. C. A. § 107(d)(2), was incorporated practically verbatim into the 1968 Revision. N. J. S. A. 14A:14-10. That section is a part of Chapter 14 of Title 14A, reading “Insolvency, Receivers and Reorganization.” So far as here material, the section reads as follows:

(1) Every transfer made and every obligation incurred by a corporation which is or will be thereby rendered insolvent, is fraudulent as to creditors without regard to its actual intent if the transfer is made or the obligation is incurred without a fair consideration.
(2) Every transfer made without fair consideration when the corporation making it is engaged or is about to engage in a business or transaction for which the property remaining in its hands after the transfer is an unreasonably small capital, is fraudulent as to creditors and as to other persons toho become creditors during the continuance of stick business or transaction without regard to its actual intent.
(3) Every transfer made and every obligation incurred without fair consideration when the corporation making the transfer or entering into the obligation intends to or believes that it will incur debts beyond its ability to pay as they mature, is fraudulent as to both present and future creditors.
(4) Every transfer made and every obligation incurred by a corporation with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors of the corporation, is fraudulent as to both such present and future creditors. [Emphasis added]

For present purposes, a most significant feature of this statutory scheme is that paragraph (1), as contrasted with the others, extends its benefits only to existing creditors, not those who came into being after the alleged fraudulent transaction. The parallel provision of the Uniform Fraudulent Conveyances Act has been so construed, TWM Homes, Inc. v. Atherwood Realty & Investment Co., 214 Cal. App. 2d 826, 29 Cal. Rptr. 887 (D. Ct. App. 1963); and the contrast in the language identifying creditors in paragraphs (2), (3) and (4) as compared with paragraph (1), leaves no doubt about the matter. Any transfer “fraudulent” as to a creditor under N. J. S. A. 14Ar:-14-10 is also “fraudulent” as to a receiver, except as to a purchaser for a fair consideration without knowledge of the fraud at the time of the purchase. N. J. S. A. 14A:14-11(1).

The cases, both in New Jersey and elsewhere antedating the 1968 Kevision and voiding corporate conveyances or mortgages entered into for the benefit only of shareholders, directors or officers generally involve insolvency situations where it is inferable that at least some of the creditors represented by the receiver or trustee had claims existing at the time of the transaction impugned. See, e. g., Pemberton v. Longmire, 194 Okl. 311, 151 P. 2d 410 (Sup. Ct. 1944); Steph v. Branch, 255 F. Supp. 526 (E. D. Okl. 1966), aff'd 389 F. 2d 233 (10 Cir. 1968); In re Atlas Foundry Company, 155 F. Supp. 615 (D. N. J. 1957); Martin v. General Finance Co., 239 Cal. App. 2d 438, 48 Cal. Rptr. 773 (D. Ct. App. 1966); Catabene v. Wallner, 16 N. J. Super. 597 (App. Div. 1951); cf. Heidler v. Werner & Co., 97 N. J. Eq. 505, 508 (E. & A. 1925).

When the question has been expressly poséd as to whether post-transaction creditors, or a receiver on their behalf, could attack the validity of an obligation given by a corporation for a personal debt of an officer or stockholder, there has been a division of view on the point. Annotation, 47 A. L. R. 78, 80-81 (1927).

Notwithstanding the general principle that creditors, or the corporate receiver on their behalf, may attack transfers of corporate property made for the benefit of favored officers or shareholders, the eases clearly hold a corporation estopped to challenge such a transaction where all the shareholders have agreed to it and the rights of corporate creditors are not affected. Breslin v. Fries-Breslin Co., 70 N. J. L. 274 (E. & A. 1904); N. J. Car Spring and Rubber Co. v. Fields, 85 N. J. L. 217 (E. & A. 1913); Pine v. Hyed Realty Corp, 145 N. Y. S. 2d 548 (Sup. Ct. 1955), aff'd 1 A. D. 2d 952, 151 N. Y. S. 2d 610 (App. Div. 1956); and see, Jennings v. Studebaker Sales Corp., supra (112 N. J. L. at 404). Taken together with the rule that a receiver stands in the shoes of the insolvent corporation and has no rights it does not have, Grobholz v. Merdel Mortgage Investment Co., 115 N. J. Eq. 411, 425 (E. & A. 1934); Bankers Trust Co. v. Maxson, 100 N. J. Eq. 1, 8 (Ch. 1926), the principle of estoppel aforcstated poses the following inquiry. Precisely which creditors were entitled to be vindicated, under the law antecedent to the 1968 Revision, as to corporate actions unduly favoring an officer or director at corporation expense when all shareholders, as in the present case, concurred in the action ? Could a receiver challenge such a transfer no matter how long before the inception of the insolvency, or no matter how unrelated causally the questioned corporate transaction and the incidence of insolvency?

We find no clear answers to these questions either in our own research or in the submissions of counsel. But we think it does not matter, in the light of the evidence that the Legislature in the 1968 Revision appears to have addressed the problem frontally in the recasting of the insolvency provisions of the former Corporation Act through N. J. S. A. 14A:14-10, 11, particularly specifying in which categories of “fraudulent” transfers relief should be available for existing creditors only, i. e., N. J. S. A. 14A :14-10(3), and in which for existing and future creditors alike, i. e., N. J. S. A. 14A:14-10(2), (3) and (4)

We see no evidence, in examining the 1968 Revision in entirety, that the draftsmen had in mind two distinct types of fraudulent transfer voidable by a corporate receiver — one encompassing all the situations falling within N. J. S. A. 14A:14-10, and regulated by that section — and another consisting only of transfers fraudulent as to the corporation itself, independent of its effect upon creditors, and not regulated by that section. To the contrary, there is indication in the 1968 Revision that aside from adverse effects upon the interests of shareholders and creditors, particularly in the case of close corporations, N. J. S. A. 14A:1-1(3) (c), a tolerant approach was to be taken in respect of ultra vires acts, see N. J. S. A. 14A:3-2 and Commissioners’ Comment-1968 thereon, at 155-56 of N. J. S. A., Title 14A, “Corporations, General,” 14A:1 to 14A:7.

We consequently conclude that in the whole range of fraudulent (actual or imputed) transfers described in any of the. subparagraphs of N. J. S. A. 14A .14-10, whether the transfer is to an officer, director or shareholder of the corporation or to anyone else, the right of the receiver to sue to impugn any such transfer for purposes of distribution of the corporate assets in his hands, as here, is controlled and qualified by that section and those immediately following it so far as pertinent. Transfers violative of N. J. S. A. 14A:1A-10(1) are voidable by the receiver only if there are creditors whose present claims existed at the time of the questioned transaction. Per contra as to paragraphs (2), (3) and (4).

Ill

In view of the conclusions in IL, supra, and none of the present claims of creditors having been in existence in November 1970, we have here no direct interest in whether it can be found from the proofs that the mortgage transactions in question, or either of them, “rendered” The Clarendon “insolvent,” within N. J. S. A. 14A -.14-10(1). But that subject may be indirectly relevant in relation to the several questions as to whether the making of the mortgages was accompanied by any of the operative criteria for invalidation specified in paragraphs (2), (3) or (4) of the section. See the discussion infra.

IV

Invalidation of the instant mortgages under paragraphs (2) or (3) of N. J. 8. A. 14A:14-10 requires a finding that they were made without “fair consideration.” Paragraph (4) of the section docs not expressly require such a showing, but it does require “actual intent, as distinguished from intent presumed in law” to hinder, delay or defraud either present or future creditors. The receiver has not charged, nor has the trial court found, actual or specific intent on the part of the bank or the Putzes to defraud creditors. Nor do we. This provision must be read with N. J. 8. A. 14A :14-11(3).

The inquiry consequently narrows to the applicability of paragraphs (2) and (3) of the fraudulent transfer section. We have no difficulty in concluding there was an absence of fair consideration in both mortgage transactions. To be a fair consideration, what the corporation gets in return for what it gives up by the “transfer” (which includes mortgages, N. J. 8. A. 14A:14-l(j)) must be “a fair equivalent therefor” or “not disproportionately small” and exchanged “in good faith.” N. J. 8. A. 14A:14-l(e).

As to the bank mortgage, to the extent that, to the bank’s knowledge, The Clarendon was not beneficially receiving so much of the face amount of the mortgage as went to meet prior obligations of Douglas and to provide a down-payment ,to the Putzes on their sale of stock, the consideration received beneficially by the corporation was clearly not a fair equivalent of its obligation.

The ease for absence of fair consideration is even more pointed as to the Putzes’ mortgage. The corporation received from them only a liquor license and a plot of land. There is no reliable evidence in the record as to the value of these assets, but it obviously did not remotely approach the $196,000 lien imposed on The Clarendon’s assets. See Zellerbach Paper Co. v. Valley National Bank, 13 Ariz. App. 431, 477 P. 2d 550 (Ct. App. 1970).

We turn next to the other criteria for application of paragraphs (2) and (3), which, in the peculiar circumstances of this case, require treatment together. Under (2) the inquiry is whether the property remaining in the corporation’s hands after the transfer was “unreasonably small capital” for the business it was to continue to conduct; under (3), whether the corporation (actually Douglas and Codella) intended or believed it would incur debts beyond its ability to pay as they matured. An approach to these questions requires consideration of the combined effect of both mortgages, as they were consummated at the same time and each obligee knew of the existence and burden upon the corporation attendant upon the other obligation.

While the trial court did not have the precise criteria of N. J. S. A. 14A :14-10 in mind, it made findings of fact relevant thereto. It held that out of both transactions The Clarendon netted only $40,854.52 for expenses of “renovation and operation” while encumbering all its assets for $356,000, “with an overwhelming debt service on the respective mortgages which the corporation could not meet.” 123 N. J. Super, at 408. It was also found that Codella and Douglas “syphoned off” substantial sums of corporate funds, and that “[i]n reality both corporations [Hook Mountain and The Clarendon] were insolvent in a statutory and in an equitable sense, on the day of the closing or shortly thereafter.” Id. at 409. As to these observations, it will be seen that the court neglected to note that The Clarendon obtained, in addition to the cash noted, the liquor license and the parking lot. Further, the record of the trial does not clearly indicate the depletion of Clarendon assets by Douglas and Codella. This trial finding appears to have been derived from the receiver’s depositions of these men, taken in the separate receivership action, in proceedings at which neither appealing mortgagee was represented nor on notice. The court’s conclusion that the corporation was insolvent “on the day of the closing or shortly thereafter” seems also to have been materially dependent on such depositions. The mortgagees are entitled to an opportunity to meet and be heard in a hearing on remand as to any such proofs so far as they may be pertinent to the criteria for application of paragraphs (2) or (3) of N. J. S. A. 14A:14-10.

On what is before us and properly of record in this case we are unable to say with sufficient certainty to justify an original appellate finding of fact either that The Clarendon was left with unreasonably small capital in its hands to conduct its business or that The Clarendon (through Codella and Douglas) intended or believed that it would incur debts beyond its ability to pay as they matured. See Kearny Plumbing Supply Co. v. Gland, 105 N. J. Eq. 723 (Ch. 1930) ; same case at later phase, 8 N. J. Misc. 789, 151 A. 873 (Ch. 1930); Bertsch v. McBride, 58 F. 2d 799 (6 Cir. 1932), aff'g 58 F. 2d 797 (W. D. Mich. 1930); Waukesha County Dept. of Social Services v. Loper, 53 Wis. 2d 713, 193 N. W. 2d 679 (Sup. Ct. 1972). For the guidance of the trial court we express our views, however, that (a) for purposes of application of statutory paragraph (3) the test of intention or belief is what the corporate managers believed or reasonably should have believed under the circumstances, id 193 N. W. 2d at 681; and (b) in connection with both statutory paragraphs (2) and (3) the debt service requirements of both mortgages are proper factors to take into account in appraising the corporate business prospects and reasonable ability to meet accruing debts. In this latter regard, however, it should be kept in mind that the first payment of principal and interest on the Putz mortgage did not come due until a year after the date of the note and mortgage, and The Clarendon clearly became insolvent some time before that.

The case will have to be remanded for retrial as to these issues arising under N. J. S. A. 14A:14r-10 (2) and (3). If the determinations go against the mortgagees on either of these issues, they will nevertheless be entitled to the protection of their liens, at least to the extent, in the case of the bank, of the amount so fixed by the trial court, with which we are in agreement, and, as to the Putzes, to the extent of the value of the liquor license and the parking lot as of the date of closing of the transaction. The trial court shall determine such values upon proofs. Since we have found both mortgagees to.be without actual fraudulent intent they are entitled to these directions under N. J. S. A. 14A:14-11(3). Trust Co. of Orange v. Garfinkel, 107 N. J. Eq. 20, 26 (E. & A. 1930).

Y

Both mortgagees rely upon N. J. S. A. 14A :3 — 3 to support their claims. This section provides that a corporation “may give a guaranty not in furtherance of its corporate purposes” when approved at a meeting of shareholders by a two-thirds vote. Such a guaranty may be secured by a mortgage on corporate property. We do not believe this section helps appellants.

In the first place, neither transaction challenged by the receiver "constitutes a guaranty. A guaranty is ah agreement to be answerable personally for the debt of another. The bank loan was a principal obligation of The Clarendon, not a guaranty of an obligation of another. The Putz mortgage was only a security agreement, not an original undertaking at all by The Clarendon, either personally or as a guarantor of the Hook Mountain note obligation. Thus neither obligation meets the literal coverage of the statute.

In any case, the statutory section was designed only to prevent a corporate guarantor from invoking the defense of ultra vires when the guaranty was approved by the requisite number of shareholders and was “not intended to affect the application of the law of fraudulent conveyances.” See Commissioners’ Comment-1968, at 158 of N. J. S. A., Title 14A, “Corporations, General,” 14A:1 to 14A:7. Thus the section invoked will not save either mortgage if voidable by the receiver under N. J. S. A. 14A:14-10.

VI

The bank also calls to its aid the provisions of N. J. S. A. 14A:6 — 11 which provides that a corporation may lend money to or guarantee any obligation of, “or otherwise assist ” any officer or other employee of the corporation whenever any such loan, guaranty or assistance “may reasonably be expected to benefit the corporation.” The section contains a proviso that if the person so assisted is a director, the transaction must be authorized “by the certificate of incorporation or a by-law adopted by the shareholders.” Codella and Douglas were directors of The Clarendon, and we do not find that there was the requisite enabling provision in the certificate of incorporation or by-laws.

The bank mortgage was, moreover, not a loan to nor, as noted above, a guaranty of any obligation of Codella and Douglas. While it may have been intended to “assist” them, in a sense, we find no basis for a finding that the corporation, as distinguished from Codella and Douglas personally, could reasonably be expected to benefit from the transaction, particularly in the context of the inseparable conjunction of the debt burden imposed on the corporation by the Putz-Hook Mountain contract.

An examination of the Commissioners’ Comments-1968 on this section reveals that it had a purpose altogether foreign to the type of transaction here involved. See pages 330-331 of N. J. S. A., Title 14A, “Corporations, General,” 14A-.1 to 14A :7.

While conceding in its brief that in respect of the loan proceeds which the bank used to repay itself on the outstanding Douglas loans, the trial court in the exercise of its equity powers “could eliminate this portion of the mortgage,” the bank contends that it was not on notice as to any “per se” invalidity of the loan in respect of the portion of the loan proceeds which went as part payment to the Putzes for their transfer of stock. It cites in support of its position O’Connor v. First Bank & Trust Co., 12 N. J. Super. 281 (App. Div. 1951), which held that a bank which accepts for deposit to the account of a director of a corporation a cheek payable to the corporation and endorsed to the director by himself and another director, as authorized by a corporate resolution on file with the bank, is not on notice as to any corporate illegality underlying the transfer of the note by the corporation to the director. The case is far from authority for the claimed immunity of plaintiff bank here..

The testimony at trial shows that Mr. O’Neil, who negotiated the matter for the bank, had discussed the transaction, including the sale of the Putz stock, not only with Codella and Douglas, but with at least one of the Putzes and with their attorney Schuman. He admitted 'he had seen a copy of the Putz-Hook Mountain sale contract either prior to or at the closing of the bank transaction. That instrument called for a down-payment on account of the sale of the shares of stock of $50,000 to the Putzes. The bank was to act as eserowee of the stock in the Putz transaction. We entertain no doubt, and find, that O’Neil knew that the down-payment to the Putzes was to come out of the mortgage proceeds the bank was' advancing to The Clarendon. He, and the bank through him, were imputable with knowledge of the elementary principle that it is prima facie illegal for corporate funds to be paid out to defray the expense of a transaction for the benefit of a shareholder, officer or director.

We do not here hold, contrary to O’Connor v. First Bank & Trust Co., supra, that a bank which receives a negotiable instrument in due course is under a duty of inquiry, where the corporate payee of the instrument has endorsed it over to a director, to inquire as to the legality of the transaction between the corporation and its director before making payment on it. We do hold that a bank lending money on a mortgage to a corporation, which knows that a substantial portion of the mortgage proceeds will be used to finance a sale of the corporate stock by a shareholder, to third persons, is on notice that the mortgage is to that extent voidable, and such a mortagage is made at the peril of invalidation at the instance of creditors under the corporation act. Cf. In re Atlas Foundry Co., supra, 155 F. Supp. at 618.

The judgment is modified to the extent indicated herein and the cause is remanded to the Chancery Division for further proceedings consistent with this opinion. No costs to any party on this appeal.

      The present action is not one by the receiver to recover damages or obtain restitution from directors or officers who have wrongfully diverted corporate assets for their own benefit, see Hays v. Pierson, 65 N. J. Eq. 353 (E. & A. 1899) ; or from a knowing recipient of corporate funds used to meet the obligation of an officer or director, particularly where less than all the shareholders have consented to the payment, see Jennings v. Studebaker Sales Corp., 112 N. J. L. 399 (E. & A. 1934). The cited cases held that the fact of corporate solvency or the absence of effect of the transaction upon creditors as of the time of its occurrence were not necessarily material to the receiver’s rights; and we have no occasion here to consider the continued viability of such decisions as against the 1968 Revision. See N. J. S. A. 14A:14-5; 14A:3-2. See also the discussion infra of transactions consented to by all shareholders.

      IIowever, we entertain no doubt that if there are some creditors whose claim goes back (o the time of a fraudulent transaction voidable under N. J. S. A. 14A:14-10(1), then all creditors in the same class, whether or not with claims existing as of that time, are entitled to share equally in the insolvency distribution. N. J. S. A. 14A: 14-21(1). Cf. Cohen v. Hodes, 54 F. 2d 680, 681 (E. D. N. Y. 1931). In the instant case, as noted, none of the present creditors have claims antedating the challenged mortgages.

      No problem of statutory construction is here presented with respect to relief for dissenting shareholders in the instance of abuse of corporate assets by other shareholders as there were no dissenting shareholders in this case. Further, this is not a suit for damages against officers or directors for improprieties. See N. J. S. A. 14A:3-2(b).

      We are advised by the receiver that claims of creditors exclusive of the mortgages here in question aggregate $92,152.87. After payment of the amount adjudicated below as due the bank and other expenses, including taxes, the receiver has in his hands $55,873.10.


source: Caselaw Access Project

license: Public Domain

text:
    RICHARD J. ZELENKA, PLAINTIFF-APPELLANT, v. THE BENEVOLENT AND PROTECTIVE ORDER OF ELKS OF THE UNITED STATES OF AMERICA, ET AL., DEFENDANTS-RESPONDENTS.
    Superior Court of New Jersey Appellate Division
    Argued June 3, 1974
    Decided July 11, 1974.

      Before Judges Conrord, Haktoler and Meanor.

      Mr. Peter.A. Buchsbaum argued the cause for plaintiff-appellant.

      Mr. Edward W. Connolly argued the cause for defendants-, respondents (Messrs. Connolly, Vreeland & Connolly, attorneys). _
   The opinion of the court was delivered by

Conford, P. J. A. D.

Plaintiff sustained an adverse summary judgment in the Superior Court, Chancery Division, in his action to be restored to membership in defendant Ridge-wood Lodge $:1455 of defendant The Benevolent and Protective Order of Elks of the United States of America (Elks) from-which he had been expelled in March 1972 by direction of the Grand Eorum (national judicial tribunal) of the order. He appeals.

Plaintiff was expelled after a hearing on the charge that he had in March 1971 violated section 183 of the Grand Lodge Statutes which provides, in substance, that no lodge or member should circulate any writing “regarding or pertaining to any question or subject” (presumably one of pertinence to Elks affairs) “without first submitting such * * * writing to the Grand Exalted Euler [national] for his approval.” Violation constitutes “contumacy,” and contumacy is cause for expulsion. It is conceded by plaintiff, who is a Past Exalted Euler of the lodge, that he did contravene the statute in that he, along with a brother member of the lodge, submitted for publication in the Bergen Record, a daily newspaper, a writing seeking to rally fellow Elks to an effort to amend the national rules of the order confining eligibility for membership to “white” male citizens so as to eliminate the racial requisite. The essence of the communication is contained in the following excerpt:

We, the undersigned, belong to what we feel is probably the greatest charitable organization in the country. * * * We have never been ashamed, when solicited, to apprise the public of our endeavors, but for the past months many of us Elks have had our consciences seared • — • for we have been accused by the public of discriminating — and they are right. * * * Let those of us that know that we are wrong change it — at the next Grand Lodge Convention. In keeping with this strong statement, probably the first public statement to be made to the public of such a nature, this concerned committee is calling a private organizational meeting of all Elks interested in amending Section 144 of the Grand Lodge Statutes of the Benevolent and Protective Order of Elks at the next Grand Lodge Convention.

The principal ground of attack by plaintiff upon the expulsion in the trial court, and the sole ground asserted on appeal, is that public policy is offended when an expulsion from a voluntary organization is the result solely of the exercise by a member of his right of free speech guaranteed by the State Constitution in Article I, Section 6 thereof. The trial court, in holding for defendants, expressed agreement with their position that the controlling issue was whether people in a free society did not have a right of free association and the correlative right to “exclude from their midst those individuals with whom they do not wish to associate,” whatever the reason therefor.

In April 1971 a proper official of the Ridgewood Lodge brought charges against plaintiff for violation of section 183 of the statute. The presiding justice of the Subordinate (lodge) Eorum sustained a “demurrer” filed by plaintiff, and he dismissed the complaint. Thereafter the Grand Exalted Ruler (national) appealed the matter to the Grand Eorum, with the resultant hearing and judgment mentioned. Eo question is raised by plaintiff concerning the regularity of the proceedings in the order.

It is well established in this State as well as elsewhere that the courts will take jurisdiction to grant a remedy for a wrongful expulsion, as distinguished from an exclusion, from a voluntary association. Higgins v. American Society of Clinical Pathologists, 51 N. J. 191, 199 (1968); and see, Trautwein v. Harbourt, 40 N. J. Super. 247, 259 (App. Div.), certif. den. 22 N. J. 220 (1956). While American and English courts have traditionally been loath to exercise visitorial powers upon voluntary organizations oí a purely private nature, Chafee, “The Internal Affairs of Associations Not for Profit,” 43 Harv. L. Rev. 993 (1930) passim, particularly those not affecting economic or civic interests, we have nevertheless observed in the Trautwein case:

* * * There can be no doubt as to the conspicuous place of social and fraternal organizations in American society, Abernathy, [“The Bight of Association”, 6 S. Car. L. Q. 32, 33 (1953)], nor as to the cachet attributed by almost every individual to membership in one or more particular voluntary associations, societies or groups, Comment, "Protection of Membership in Voluntary Associations,” 37 Yale L. J. 368, 372 (1928) ; Annotation, 20 A. L. R. 2d 344, 391. Professor Ohafee has said that in comparison with “such emotional deprivations” as loss of membership in club, union, school or church, “mere losses of property often appear trivial.” op. cit. supra (43 Harv. L. Rev., at p. 998). [40 N. J. Super. at 265]

We can take judicial notice that the Elks order, comprising about iy million members, is one of the most widely located fraternal organizations in the country and that membershp in it is highly prized in many communities. There is justification for inferring deep interest in his membership by the present plaintiff, a former head of his lodge. The personal value to plaintiff of his membership in the order thus calls for an evaluation of Ms relational interests, weighed against the assertion by the order of a constitutional right of selectivity in the private associations of its members. Cf. Trautwein v. Harbourt, supra, 40 N. J. Super. at 267; Moose Lodge No. 107 v. Irvis, 407 U. S. 163, 179, 180, 92 S. Ct. 1965, 32 L. Ed. 2d 627 (1972), Douglas and Marshall, JJ., dissenting.

There is substantial and long-established authority to the effect that the courts will rescind the expulsion of a member of a voluntary association for violation of an internal rule offensive to public policy. Higgins v. American Society of Clinical Pathologists, supra, 51 N. J. at 202, and cases there cited. The instant case falls within the category of those of such decisions which revolve about inhibition against free exercise by members of associations of their public or civic rights. Annotation, 14 A. L. R. 1446 (1921); cf. Annotation, 20 A. L. R. 2d 344, 365 (1951); Mitchell v. International Ass’n of Machinists, 196 Cal. App. 2d 796, 16 Cal. Rptr. 813 (D. Ct. App. 1961); Dudek v. Pittsburg City Fire Fighters, Local No. 1, 425 Pa. 233, 228 A. 2d 752 (Sup. Ct. 1967) — Mitchell and Dudek prohibited expulsion and fining, respectively, for “free speech” involving opposition to union policies; Spayd v. Ringing Rock Lodge No. 665, 270 Pa. 67, 113 A. 70, 14 A. L. R. 1443 (Sup. Ct. 1921) (rescinding expulsion from a labor union caused by member petitioning legislature for repeal of a law favored by union); Gallaher v. American Legion, 154 Misc. 281, 277 N. Y. S. 81 (Sup. Ct. 1934), aff’d mem. 242 App. Div. 604, 271 N. Y. S. 1012 (App. Div. 1934) (expulsion of post held invalid, partly because based on post’s opposition to national body’s position on payment of soldiers’ bonus); DeMille v. American Fed’n of Radio Artists, 31 Cal. 2d 139, 187 P. 2d 769 (Sup. Ct. 1947), cert. den. 333 U. S. 876, 68 S. Ct. 906, 92 L. Ed. 1152 (1948); Bernstein v. Alameda-Contra Costa Medical Ass’n, 139 Cal. App. 2d 241, 293 P. 2d 862 (D. Ct. App. 1956); cf. People ex rel. Schmitt v. Saint Franciscus Benevolent Society, 24 How. Pr. 216 (N. Y. Sup. Ct. 1862). Compare State ex rel. Barfield v. Florida Yacht Club, 106 So. 2d 207, 211 (Fla. Ct. App. 1958), cert. den. 111 So. 2d 40 (Sup. Ct. 1959), where a club member was held justifiably expelled for suing the club'for personal injuries in an amount in excess of the organization’s insurance coverage.

In the DeMille case, supra, although the court sustained plaintiff’s expulsion from a radio artists’ union for refusal to pay a union assessment to raise a fund to oppose a state constitutional amendment to abolish the closed union shop, the court stressed that the union had not prevented plaintiff’s voting as he pleased on the amendment at the polls or “from expressing publicly and privately his personal views in support of” the amendment. 187 P. 2d at 775. His constitutional rights had not been infringed since “he had and continued to have absolute freedom to think or announce what views he pleased * * *.” Id. at 777. These implications of DeMille became a holding by the same court in Mitchell v. International Ass’n of Machinists, supra, the court observing, “at least where the political activity of the member is not patently in conflict with the union’s best interests, the union should not be permitted to use its power over the individual to curb the advocacy of his political views.” 16 Cal. Rptr. at 819-820.

The most searching recent analysis of the general subject, “Developments in the Law — Judicial Control of Actions of Private Associations,” 76 Harv. L. Rev. 983 et seq. (1963) persuasively observes:

* * a court can most confidently adjudicate cases where the group imposes sanctions to enforce a rule or policy which prohibits or inhibits the performance by the individual of a duty or function for the performance of which the state normally relies on individual initiative. The role of the member as a responsible citizen — voter, witness, petitioner to the legislature — is protected, [at 1006]

The parties are in agreement that the issue here is not whether defendants were justified in expelling plaintiff for urging a change in the order’s membership criteria. It is agreed that that was not the basis for the action, but rather plaintiff’s expressing any opinion publicly on the matter at all, whether for or against the membership rule, without complying with the lodge regulation requiring approval of the expression by the Grand Exalted Ruler. Defendants urge that their policy against “public washing of private organizational linen” is a justified one and that plaintiff voluntarily sacrificed his right of unqualified freedom of speech to that extent when he joined the order. It may be observed, however, that the pertinent statute of the order does not preclude public expression by a member concerning a fraternal matter if one man — the Grand Exalted Ruler — approves, and such approval is left to that official’s absolute discretion.

There is probably no right more fundamental to the liberties of the people and to the successful functioning of the democratic system than that of individual freedom of expression. Undoubtedly that right is qualified in numerous respects by our public laws, and it is similarly qualified in respect of its exercise in the course of one’s participation in the activities of private associations. A member of a Republican club, for example, could not expect to be allowed by the courts to campaign for a Democratic candidate and nevertheless remain immune to expulsion from the club for cause.

In the present case, however, defendants profess not to be concerned over plaintiff’s espousal of reform of their membership policies. Moreover, nothing in the order’s basic purposes and objects, as we read them expressed in the preamble of its constitution, appears to be offended by a member’s public plea for support by fellow members on an issue of the significance of racial qualifications for membership in the order without obtaining advance approval by the national head of the order. Nor do defendants contend to the contrary.

The question devolves, then, to one of offense to general public policy in a regulation of the character under consideration. We are not here faced with a regulation enjoining secrecy as to lodge ritual, or imposing restrictions on public discussion by members of matters of peculiar concern to the lodge or order, such as the amount of initiation or other fees or the times and places of meetings, etc., with respect to which there is no general public interest or concern. On the other hand, the matter of racial qualifications for membership in an organization as large, as widespread and as socially significant as the Elks, albeit a private voluntary organization, is a subject conspicuously touching what interests and concerns the general public. See, e. g., Brunson v. Rutherford Lodge, 128 N. J. Super. 66 (Law Div. 1974).

The public policy undergirding the principle of free discussion of issues of such broad public interest as that mentioned, entirely independently of its constitutional sanction in respect of state abridgement, appears to ns to far outweigh the private interest of defendants in restricting public discussion of such an issue by their members to those instances in which advance approval is vouchsafed by a single official at national headquarters.

Since we find the regulation, as here applied, distinctly contrary to public policy, the expulsion of plaintiff cannot rest on its violation by him. He is entitled to a judgment restoring him to membership in the Ridgewood Lodge. To that end the cause is remanded to the Chancery Division and the judgment under appeal is

Reversed.

      Effective September 17, 1973, section 144 of the Elks’ Statutes and article YII, section 4 of its Constitution were amended, subject to ratification by subordinate lodges, eliminating the “white” membership requirement, with the proviso that the amendment should be effective only until either the Supreme Court of the United States should decide or the Federal Constitution should be amended to provide “that the right of the people to form associations and to determine membership qualifications shall not in any way be abridged, limited or denied.”

      “To inculcate the principles of Charity, Justice, Brotherly Eove and Fidelity; to promote the welfare and enhance the happiness of its members; to quicken the spirit of American patriotism; to cultivate good fellowship; to perpetuate itself as a fraternal organization, and to provide for its government, the Benevolent and Protective Order of Elks of the United States of America, ordains this Constitution.”

      We are not implying our view would be different if the prohibition of public discussion were absolute. We leave that question to a case raising it.


author: Collester, P. J. A. D.

text:
    TOWNSHIP OF WALL, A MUNICIPAL CORPORATION OF THE STATE OF NEW JERSEY, APPELLANT, v. WATER POLICY AND SUPPLY COUNCIL, DIVISION OF WATER RESOURCES, DEPARTMENT OF ENVIRONMENTAL PROTECTION, RESPONDENT.
    Superior Court of New Jersey Appellate Division
    Argued June 10, 1974-
    Decided July 11, 1974.

      Before Judges Collester, Lynch and Michels.

      Mr. John J. Mangini argued the cause for appellant (Messrs. Campbell, Mangini, Foley, Lee & Murphy, attorneys) .

      Mr. William J. Stohler, Deputy Attorney General, argued the cause for respondent (Mr. William F. Hyland, Attorney General of New Jersey, attorney; Mr. George F. Kugler, Jr., former Attorney General of New Jersey).
   The opinion of the court was delivered by

Collester, P. J. A. D.

The Township of Wall applied to the Water Policy and Supply Council (Council) for permission to use an additional well to provide water for its resident consumers. The Council granted permission subject to the condition that the township read its water meters and bill the users four times a year. The township, which reads its meters and bills its consumers annually, requested a waiver of the condition on the ground that it would increase the cost of its water supply system. The Council denied the request but notified the township that a hearing would be granted if it was requested. At the hearing the township offered testimony to show that its water supply system was “tight” and without leaks, and the increase in costs which would follow if it was required to read its meters and bill its customers quarter-annually. Eollowing the hearing the Council again denied the request for a waiver of the condition. The township appeals.

The Council adopted the requirement for quarter-annual meter reading and billing as a standard condition for approval of diversion of water for water supply in 1967. The Council imposes the standard condition in the interest of water conservation. In its considered judgment quarter-annual meter reading and billing facilitates the early detection of leaks in a water supply system and gives consumers an incentive to reduce water consumption by reminding them of the cost thereof.

The township first contends the Council lacks statutory authority to impose the standard condition and that N. J. S. A. 40 :62-47 grants the township the power to regulate its water supply system. "We perceive no conflict between N. J. S. A. 58:1-21 providing that the Council approve applications “with such modifications and subject to such conditions as it may determine should be made therein to protect the water supply * * and N. J. S. A. 40:62-77 empowering a municipal governing body to pass ordinances it considers necessary and proper, among other things, “for the installation and protection of [water] meters, [and] for fixing and collecting the water rents or prices for water * * The Council’s standard condition leaves the township free to install and protect water meters and to fix water rents and the method of collecting them. The condition merely requires the township to read meters and bill its customers more frequently than formerly.

Even if a conflict between the statutes was apparent, we are satisfied N. J. S. A. 58:1-21 would take precedence. The Legislature could not have intended that the Council be frustrated in successfully discharging its statutory responsibility of conserving the State’s water supply. See also N. J. S. A. 58:1-10 and N. J. S. A. 58: 1-17. It is clear that the Council was established to create policies that would conserve the State’s water supply by transcending, when necessary, local ordinances and interests. See State v. North Jersey District Water Supply Comm’n, 127 N. J. Super. 251, 260-261 (App. Div. 1974).

The township further claims that even if the Council possesses statutory authority to make its approval for the diversion of water subject to such condition, the record does not support the necessity for quarter-annual meter reading and consumer billing and its refusal to grant the waiver of such condition was arbitrary, capricious and unreasonable.

We disagree. The Council was not statutorily required to conduct a grosi-judieial hearing on the township’s request for a waiver. The hearing was granted to afford the township an opportunity to show why its municipal ordinance providing for annual readings and billings should not be amended to comply with the requirements laid down by the Council’s standard condition. It was not an adversary trial-type hearing and the Council was not obligated to present evidence to refute that offered by the Township.

Although the township presented evidence that its water supply system was “tight” and there was no present leakage, this did not preclude the possibility of future leaks. Moreover, it offered no evidence to refute the Council’s position that water conservation would be better achieved by bringing the higher cost of water to the attention of consumers more often. We are satisfied that the Council, with the benefit of its expertise gained from study and experience, would not impose the standard condition unless in its best judgment the potential danger of water shortage throughout the State was sufficient to outweigh the extra cost it entails.

We conclude that the decision of the Water Policy and Supply Council denying the request for a waiver of the condition should be affirmed.


author: Per Curiam.

text:
    DOROTHY CORRIDON, AS GENERAL ADMINISTRATRIX AND ADMINISTRATRIX AD PROSEQUENDUM OF THE ESTATE OF JAMES F. CORRIDON, PLAINTIFF-RESPONDENT, v. CITY OF BAYONNE, A MUNICIPAL CORPORATION OF THE STATE OF NEW JERSEY, AND PATROLMAN FRANK SOLAN, DEFENDANTS-APPELLANTS.
    Superior Court of New Jersey Appellate Division
    Argued April 23, 1974
    Supplemental Memoranda Received May 3 and 8, 1974,
    Decided July 16, 1974.

      Before Judges Koloysky, Eritz, and Crane.

      Mr. M. Stanley Susskind argued the cause for appellant City of Bayonne.

      Mr. Richard J. Badolato argued the cause for appellant Frank Solan (Messrs. Morgan, Melhuish, Monaghan, McCoid and Spielvogel, attorneys).

      Mr. Ira J. Zarin argued the cause for respondent (Messrs. Zarin and Maran, attorneys).
   Per Curiam.

Defendant City of Bayonne appeals from a judgment entered on an adverse jury verdict in a negligence action founded upon the fatal shooting of decedent by defendant Solan, a police officer employed by the city who was not on duty at the time of the occurrence. Solan “cross appeals,” obviously only as a protective measure, for in the conclusion of his brief he asks for affirmance of the judgment entered against the city and him.

The sole ground for Bayonne’s appeal is the argument that a municipality has no liability for damages “caused by the unlawful conduct of an off-duty policeman.” The difficulty with such an overly broad statement is that it fails at the threshold to distinguish between responsibility of the municipality for its primary negligence and that imposed upon it under the doctrine of respondeat superior. The distinction is important here because the record is totally devoid of any evidence proving, directly or by inference, that Solan was acting within the scope of his employment.' In considering the city’s attack on the sufficiency of the evidence we need concern ourselves only with plaintiff’s charge against the city of primary negligence.

The facts may be succinctly stated: Solan, in uniform, had volunteered to participate earlier in the day in question, along with a contingent of Bayonne police, in a Pulaski Day parade in New York. After the parade he had returned to a buffet at a Polish-American Home in Bayonne. It was not until he had left there much later in the evening, and was presumably on the way home —■ Solan had no recollection of events after the buffet until he was being transported to headquarters in a squad car after the shooting —■ that the event occurred. Solan, apparently then intoxicated, stopped in another bar and there, during an apparently normal conversation with James E. Corridon, drew his service revolver, put it to Corridon’s head and shot him dead.

As has been noted, despite the fact Solan was in uniform and armed with his service revolver (as indeed the regulations required him to be at all times, even when off duty), there was no evidence to place him within the scope of his employment or to suggest he was in the furtherance of his employer’s business when the shooting occurred.

On the other hand there is credible evidence which, if believed by the jury, proved that the city knew or might reasonably have known of Solan’s intoxication in public places on a number of occasions between his employment in 1963 and the shooting in 1969. It may readily be inferred that, pursuant to regulation, Solan was armed at those times as he was at the time in question. There is direct evidence of his being armed on at least some occasions when he drank to a point of falling asleep at the bar. A witness testified that it was “standard procedure” for one bartender to take Solan’s gun and put it away when he started drinking.

These facts, if credited, demonstrate a breach of duty by the city. It is clear that the hazard of firearms is so extraordinarily great that a municipality has a plain duty of care in its supervision of those whom it arms. McAndrew v. Mularchuk, 33 N. J. 172 (1960). If a municipality is required “to use care commensurate with the risk” in providing adequate training and experience in the proper handling and use of weapons, as in McAndrew, it certainly is no less responsible for appropriate action when situations unreasonably increasing the already great hazard become known to it. The duty is one to abate such an extraordinary risk if in related circumstances danger to others is reasonably to be perceived. McCrink v. City of New York, 296 N. Y. 99, 71 N. E. 2d 419 (1947); cf. Stoelting v. Hauck, 32 N. J. 87, 95-96 (1960).

We have no doubt that under the evidence adduced in this case a jury question was made out as to Bayonne’s negligence in its apparent neglect of this duty. Had this been all that was given to the jury for its consideration we would have no trouble affirming.

However, the judge submitted the matter of Bayonne’s liability to the jury on the alternate theory of respondeat superior as well. Since there was no competent evidence or reasonable inference therefrom that Solan was within the scope of his employment at the time of the shooting, the jury should not have been permitted to consider this theory in its deliberations with respect to Bayonne’s negligence. The general verdict — the jury said only, “We the jury find that both of the defendants are guilty of negligence” — makes it impossible for us to determine, without speculation, whether liability was predicated on the respondeat superior theory or on the primary liability evidence, so there must be a reversal and a new.trial. Kulas v. Public Service Elec. and Gas Co., 41 N. J. 311, 320 (1964); McLaughlin v. Rova Farms, Inc., 56 N. J. 288, 303 (1970).

We are not unaware of the fact that the attorney for the city concurred against a suggestion of submission to the jury of written interrogatories, thus completing a “majority” that the judge (wrongfully) determined should prevail, whereby it might be said the city invited the ambiguity which arose (see State v. Schmieder, 5 N. J. 40, 46 (1950)). On the other hand, we note Bayonne’s forceful protestations to the invocation of respondeat superior on its motion for dismissal at the end of plaintiff’s ease and at the close of the case, as well as its objection, following the charge, to the facts recited by the judge some of which were directly related to the question of agency. In such a circumstance we are not inclined to fabricate a waiver or an estoppel from counsel’s conduct.

Since nothing appears in derogation of the verdict against the defendant Solan, we permit that verdict to remain. Where the issue requiring reversal is fairly separable from the other issues involved in the matter, and where, as here, the best interests of justice will be served by granting a partial new trial, we may set aside only so much of the judgment as is infected by the error and preserve the balance. Terminal Const. Corp. v. Bergen Cty., etc., Dist. Authority, 18 N. J. 294, 341 (1955).

The judgment against defendant City of Bayonne is reversed and remanded for a new trial. Except for such reversal, the judgment below is affirmed. No costs to any party.

      In an effort to bold the city in as a responsible defendant, Solan in his brief argues to the contrary. He asserts, from the facts (which are set out below in the text of this opinion) that liability “could be predicated” upon respondeat superior on the theory that the parade was within the scope of the employment, “the evidence at trial indicates that he had become intoxicated while at the Polish Home,” and therefore “when this unfortunate incident occurred he had not yet divorced himself from connection with Ms employment.” Such a tenuous “connection” is not enough despite the fact that, as argued, Solan was in uniform and in the company of another officer. While Snell v. Murray, 121 N. J. Super. 215 (App. Div. 1972), aff’g 117 N. J. Super. 268 (Law Div. 1971) is distinguishable on its facts, there is here, as there, a palpable absence of evidence placing the conduct of defendant in any respect “within the scope of his employment.”

      In a convoluted argument Bayonne asserts the authority of the New Jersey Tort Claims Act, N. J. S. A. 59:1-1 et seq. The legislation plays no part at all here: it was not effective until more than 214 years after the event in question. The Legislature specifically provided for the inapplicability of the act in such case. N. J. S. A. 59:12-3; Barney's Furniture Warehouse v. Newark, 62 N. J. 456 (1973).

      This issue was not precisely raised here by appellant, although it did so argue in support of its motion for dismissal during the trial. However, our concern for the rule and essential justice provoked our inquiry of counsel at oral argument. We sought and received supplemental written memoranda.


author: Fritz, J. A. D.

text:
    STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT, v. NORMAN TIMS, DEFENDANT-APPELLANT.
    Superior Court oí New Jersey Appellate Division
    Submitted June 18, 1974
    Decided July 22, 1974.

      Before Judges Kolovsky, Fritz and Crane.

      Mr. Stanley C. Van Ness, Public Defender, attorney for appellant (Mr. Gerald T. Foley, Jr., Deputy Public Defender, of counsel and on the brief).

      Mr. Joseph P. Lordi, Essex County Prosecutor, attorney for respondent (Mr. R. Benjamin Cohen, Assistant Prosecutor, of counsel).
   The opinion of the court was delivered by

Fritz, J. A. D.

Defendant appeals from his conviction on the entry of a guilty plea to robbery (N. J. S. A. 2A:141-1) while armed (N. J. S. A. 2A:151-5). For this plea to these two counts of a six-count indictment the State recommended dismissal of two counts charging a different robbery while armed with a knife and dismissal of two counts charging a third robbery while armed with a bottle.

Other than a complaint of the excessiveness of the sentence of five to seven years for the robbery and a consecutive two to four years for the armed feature, the only ground urged on this appeal, raised here for the first time, is that the Legislature did not intend N. J. S. A. 2A:151—5 to include a bottle within the weaponry for which enhanced punishment is provided. We find the argument without merit.

The precise question appears never to have been decided before in New Jersey.

At the outset we acknowledge several propositions sufficiently basic to statutory construction as to be beyond dispute. If the legislative language is plainly expressed, there is no need to resort to construction, and effect is to be given to the plain meaning. Watt v. Mayor, etc., of Franklin, 21 N. J. 274, 277 (1956). In any event, the search is for the intent of the Legislature as expressed in the statutory language, and it is that intent which is to be given meaning. State v. Madden, 61 N. J. 377, 389 (1972). The purpose for which the statute was enacted and the evil at which it is aimed are essential stepping stones on the pathway to the determination of intent. Seatrain Lines, Inc. v. Medina, 39 N. J. 222, 226 (1963). Criminal statutes, involving as they do a penalty, arc to be strictly construed, but such construction “must not be unduly narrow or artificial or disregard manifest legislative intention.” State v. Rucker, 46 N. J. Super. 162, 167 (App. Div. 1957), certif. den. 25 N. J. 102 (1957). A concise and articulate expression of purpose may be found in State v. Angelo’s Motor Sales, 125 N. J. Super. 200 (App. Div. 1973), aff’d sub nom. State v. Parmigiani, 65 N. J. 154 (1974) :

The rule of strict construction does not prohibit a court from reading a statute in relation to the mischief and evil sought to be suppressed, State v. Meinken, 10 N. J. 348, 352 (1952), and while a penal statute cannot be extended by implication and intendment, its clear implication and intendment is not to be denied. State v. Brenner, 132 N. J. L. 607, 611 (E. & A. 1945). Construction which would have the effect of placing it in the power of a transgressor to defeat the object and purpose of the law by evasion is not to be favored. State v. Gratale, 26 N. J. Super. 581, 585 (App. Div. 1953). [125 N. J. Super. at 207.]

The statute reads:

Any person who commits or attempts to commit an assault, robbery, larceny, burglary, breaking and entering, rape, murder, mayhem, arson, abduction, extortion, kidnapping, sodomy or treason, or who is a fugitive from justice, when armed with or having in his possession any firearm, whether or not capable of being discharged or dangerous instrument of any kind, usually known as a blackjack, sling shot, slung shot, billy, sandclub, sandbag, bludgeon, metal knuckles, dagger, dirk, dangerous knife or knife as defined in chapter 5 of the laws of 1952 (C. 2A:151-62), razor, stiletto, cestus, or similar band studded with metal for fitting on the knuckles, loose wool imbedded with metal filings, razor blades imbedded in wood slivers, handcuffs, iron claws, grenade, bomb or other explosive or any object or device, whether toy or imitation, having an appearance similar to or capable of being mistaken for any of the foregoing, shall, in addition to the punishment provided for the crime, be punished on a first conviction by imprisonment for not less than one nor more than 10 years; upon a second conviction by imprisonment for not less than 3 nor more than 15 years; upon a third conviction by imprisonment for not less than 5 nor more than 20 years; and upon a fourth or subsequent conviction, by imprisonment for not less than 10 years nor more than for life, in the discretion of the court. No such additional punishment shall be imposed unless the indictment shall have averred that the person was armed with or had in his possession any such instrument and conviction was had thereon.

It seems clear that the evil contemplated by the statute is the possession of any object, during the commission of one of the enumerated crimes, which, if it were to be purposefully used, contains a substantial potential for the infliction of harm or, much less, a capacity for the mere threatening of harm. Legislative concern for the latter capability is demonstrated by the statutory provision that a proscribed firearm need not be capable of being discharged and a toy or imitation of the enumerated devices comes within the statute.

Such an intention is manifested by the delimiting inclusion of “dangerous instrument of any kind.” Our view is fortified by the word “usually” which immediately follows, whereby even the generic descriptions may be seen to be exemplary rather than perimetric. Cf. State v. Green, 62 N. J. 547, 555 (1973) and State v. Howard, 125 N. J. Su per. 39 (App. Div. 1973). And the generic classifications themselves are only descriptive, listing the most common designations of the kinds of weapons proscribed. State v. Witcher, 58 N. J. Super. 464, 471 (App. Div. 1959).

We need not, however, take such an expansive view here. Instructed by this legislative purpose, we are satisfied that a bottle comes within the specific proscription of the bludgeon. A bludgeon is defined in Webster’s Third New International Dictionary, Unabridged (1971) as “a short stick used as a weapon, usually having one thick, heavy, or loaded end * * * any similar weapon.” We see no difficulty in the fact that a bottle is not a “stick”: its dangerous likeness to a weapon of wood, with its thick end and conveniently moulded-to-the-grasp neck provides a similarity which well accommodates the definition. Conversely, we cannot conceive that the Legislature meant to interdict, for instance, a piece of plastic formed and colored to imitate a short stick with a heavy end — “toy or imitation” of a bludgeon —but did not intend to include a club-shaped weapon simply because it was made of glass and called a bottle.

In People v. Grubb, 63 Cal. 2d 614, 47 Cal. Rptr. 772, 408 P. 2d 100 (Sup. Ct. 1966), the court considered a statute which made possession of “any instrument or weapon of the kind commonly known as a blackjack, slungshot, billy, sand-club, sandbag, sawed-off shotgun or metal knuckles * * * a felony.” It held, despite the generic descriptions, that the “salutary purpose” of the statute was that of “cheeking the possession of objects subject to dangerous use,” concluding that such a decree was, properly circumstanced, even directed against “ordinarily harmless objects.”

In People v. Collins, 6 Ill. App. 3d 616, 286 N. E. 2d 117 (App. Ct. 1972), a criminal statute prohibiting the use among other enumerated items, of a bludgeon, was held to proscribe a heavy metal chain wrapped with tape with a handle made from looping the chain. The device was said to be capable of classification as a bludgeon.

An Indiana statute providing enhanced punishment for the infliction of injury upon a victim during the commission of a robbery by use of “any firearm, dirk, stiletto, bludgeon, billy, club, blackjack, or any other deadly or dangerous weapon or instrument” was held to encompass a soft drink bottle within its prohibited class. In Short v. State, 234 Ind. 17, 122 N. E. 2d 82 (Sup. Ct. 1954), the following appears :

A soft drinlt bottle is not designed to be either an offensive or defensive weapon, but the experience of man teaches us that it may be so used. Among other weapons, the use of which is forbidden by the statute are: “bludgeon, billy, club, blackjack”. A soft drink bottle could be used in the capacity of either of these weapons, with like results to the victim. If so used in a robbery, it would be ejusdem generis with these weapons. It was the evident intent of the legislature to inflict heavy punishment upon anyone engaging in such violence. » * * [122 N. E. 2d at 86.]

In Patton v. State, 252 Ind. 678, 251 N. E. 2d 559 (Sup. Ct. 1969), in a case arising under the same statute, the court specifically found a bottle to be a bludgeon.

Even were we less convinced that a bottle is in fact a bludgeon within the intent of the use of that word, defendant cannot escape the manifest reality that a bottle at the very least has the appearance of such a weapon and the statute includes in its condemnation all those things “having an appearance similar to” that object.

We reiterate the statute, appropriately abridged:

Any person who commits * * * robbery * * * having in his possession any * :s * dangerous instrument of any kind
[or, instead]
[a] bludgeon * * * or any object or device, whether toy or imitation, having an appearance similar to or capable of being mistaken for [the] foregoing shall, in addition to the punishment provided for the crime, [etc.] ir * *.

We have no doubt that defendant’s possession of the bottle during the commission of the crime of robbery (including his admitted threatening of the victim with its terror if she did not yield to his demand for her money) brought him within the sanctions of N. J. S. A. 2A:151-5.

With respect to defendant’s claim that his sentence is excessive, we are satisfied from our review of the whole record, including consideration of the nature of the crime and defendant’s prior record, that there was no mistaken exercise of discretion by the trial judge in this regard. State v. Tyson, 43 N. J. 411 (1964), cert. den. 380 U. S. 987, 85 S. Ct. 1359, 14 L. Ed. 2d 279 (1965).

Affirmed.

      The record is silent with respect to the subsequent history of these four counts. We presume they were dismissed.


author: Handler, J. A. D.

text:
    ATHENE SARTE, PLAINTIFF-APPELLANT, v. VINCENT JAMES PIDOTO, DEFENDANT-RESPONDENT.
    Superior Court of New Jersey Appellate División
    Argued April 22, 3974
    Decided July 25, 1974.

      Before Judges Conford, Handler and Meanor.

      Mr. Peter J. Selesky argued the cause for appellant (Messrs. Selesky, Kolsley & Epstein, attorneys).

      Mr. Alfred A. Levinson argued the cause for respondent (Messrs. Levinson, Conover, Fink & Axelrod, attorneys).

      Ms. Nadine Taub filed a brief on behalf of amici curiae American Civil Liberties Union of New Jersey and Women’s Bights Litigation Clinic of "Rutgers Law School.
   The opinion of the court was delivered by

Handler, J. A. D.

This is a filiation case under N. J. S. A. 9:16-2 brought originally in the Edison Township Municipal Court but tried in the Cranbury Municipal Court on a change of venue. Following an adverse determination, plaintiff filed a notice of appeal to the County Court requesting a trial by jury. The denial of this request and the trial of [he matter in the County Court without a jury require a reversal and remand.

The distinctions between custody and support proceedings under Chapter 16 of Title 9, N. J. S. A. 9:16-1 et seq., and bastardy actions under Chapter 17 of Title 9, N. J. S. A. 9:17-1 et seq., have been the subject of considerable judicial treatment. E. g., Leonard v. Werger, 21 N. J. 539 (1956); Borawick v. Barba. 7 N. J. 393 (1951); F. v. M., 96 N. J. Super. 335 (App. Div.), certif. den. 50 N. J. 300 (1967); M. v. F., 60 N. J. Super. 156 (App. Div. 1960); State v. Arbus, 54 N. J. Super. 76 (App. Div. 1959); Hall v. Centolanza, 28 N. J. Super. 391 (App. Div. 1953); Jessen v. De Bernardo, 52 N. J. Super. 391 (App. Div. 1953).

Most instructive for present purposes is Leonard v. Werger, supra. That case involved the question of whether a mother in a filiation proceeding under Chapter 16 was entitled to an appeal and a trial de novo before the County-Court. The court analyzed the interrelationship between Chapter 16 and Chapter 17 proceedings. It noted that although Chapter 16 had no provision for such an appeal, it did by N. J. S. A. 9:16-4 provide that actions under that chapter shall be heard by the courts which entertain Chapter 17 actions. Id. 21 N. J. at 541-542. It held that by virtue of that statutory directive, since there was explicit authority under N. J. S. A. 9:17-20 for an appeal to the County Court, this evinced a legislative intent to permit appeals in Chapter 16 actions in accordance with Chapter 17 appeals procedures. Id. at 542.

N. J. S. A. 9:17-20 provides in critical part that in an appeal to the County Court, “[u]pon request of either party the appeal shall be tried before a jury.” We are satisfied that the impetus of Leonard v. Werger, supra, entails the application of this provision of N. J. S. A. 9:17-20 to a situation involving a Chapter 16 appeal wherein either party has requested a jury trial. The reasoning of the court in Leonard v. Werger, supra, would be deflected illogically if the right to an appeal and a trial de novo in the County Court in a Chapter 16 case, found to be authorized by reference to N. J. S. A. 9:17-20, did not encompass the right to proceed before a jury upon the request of either party. It cannot be inferred that the Legislature in according either pqrty the opportunity to have a de novo jury trial at the County Court level was appending only an incidental privilege to the right of appeal. The opportunity for a jury trial in bastardy proceedings under Chapter 17 was conceived by the Legislature to be an important attribute and a similar intent is to be imputed with respect to the comparable appeal allowed in filiation proceedings under Chapter 16.

It is recognized that not every aspect of the procedure in a County Court appeal in a Chapter 17 action is to be applied wholesale to a Chapter 16 appeal. Some procedural provisions of Chapter 17 have no pertinency in Chapter 16 cases. E. g., State v. Arbus, supra; Jesson v. DeBernardo, supra. The right to proceed before a jury on an appeal before the County Court, however, is not inappropriate in a filiation proceeding under Chapter 16. Moreover, although in no way emphasized, there was in fact a trial de novo before a jury in the County Court in Leonard v. Werger, supra, as well as in F. v. M., supra, and State v. Arbus, supra.

We are also mindful of R. 4:74r-6, urged by defendant as allowing a jury trial before the County Court only upon the demand of the defendant. It is doubtful that this rule dealing with appeals in bastardy proceedings was intended to apply to the different actions for custody and support under Chapter 16. Cf. Borawick v. Barba, 7 N. J. supra at 399; M. v. F., 95 N. J. Super. 165, 171 (Cty. Ct. 1967). We note but have no occasion to resolve the apparent conflict between N. J. S. A. 9:17-20 and R. 4:74—6. Consequently, in accordance with the essential reasoning of Leonard v. Werger, supra, we hold that in a Chapter 16 proceeding, upon the demand of either party, the trial de novo on an appeal to the County Court shall proceed before a jury. Accordingly, the judgment of the County Court below is reversed and the matter remanded for a trial by jury pursuant to plaintiff’s demand therefor.

Since there must be a retrial, two other issues raised by plaintiff should be addressed and clarified. It has been argued that certain tape recordings of conversations of the parties offered by plaintiff were improperly excluded. The court’s reasons for disallowing these tape recordings are not entirely clear. At any rate, the standards governing the admissibility of such evidence are enunciated in State v. Driver, 38 N. J. 255 (1962). See also, State v. Seefeldt, 51 N. J. 472, 487 (1968); State v. Zicarelli, 122 N. J. Super. 225, 239-240 (App. Div. 1973), certif. den. 63 N. J. 252, cert. den. 414 U. S. 875, 94 S. Ct. 71, 38 L. Ed. 2d 120 (1973); State v. Seaman, 114 N. J. Super. 19, 28-29 (App. Div.), certif. den. 58 N. J. 594 (1971), cert. den. 404 U. S. 1015, 92 S. Ct. 674, 30 L. Ed. 2d 674 (1972). The trial court should hold a, voir dire hearing to determine, among other things, whether the device was capable of recording the conversations, whether the recording was accurate and free of changes, additions and deletions and whether the operator was competent. State v. Driver, supra 38 N. J. at 287-288. While the lower court had misgivings as to whether the recorded statements ascribed to the defendant were voluntary — a criterion also mentioned in Driver as applicable to an alleged confession in a criminal prosecution —• it would not seem that this would be a factor with respect to these recorded conversations, which were in the nature of table talk between the parties. In the conduct of this voir dire examination, it would be essential for the court to listen to the tapes to decide whether they are sufficiently audible, intelligible and not obviously fragmented or riddled- with improper prejudicial material. Id.

It has also been argued that the trial judge assumed an improper burden of proof in determining that plaintiff had failed to establish nonaceess between herself and her husband during the period of time that her child was conceived and consequently did not prove that the child was the illegitimate offspring of defendant. The court below stated that “there is a strong presumption that a child born in wedlock is legitimate and in order to overcome such presumption the proof must be such that there is ‘no possible escape from that conclusion.’”

It has long been recognized that a child born in wedlock is presumed to be the legitimate offspring of the husband and wife. In re Adoption by K, 92 N. J. Super. 204 (Cty. Ct. 1966); Wallace v. Wallace, 73 N. J. Eq. 403 (E. & A. 1907). The presumption may be rebutted by proof of nonaccess, B. v. O., 50 N. J. 93 (1967); Cortese v. Cortese, 10 N. J. Super, 152 (App. Div. 1950); In re Adoption by K, supra; Wallace v. Wallace, supra; however, the proof of nonaccess sufficient to establish the illegitimacy of a child horn in wedlock must be such that “there is no possible escape” from that conclusion. In re Rogers, 30 N. J. Super. 479, 485 (App. Div.), certif. den. 16 N. J. 193 (1954); Egnozzi v. Egnozzi, 17 N. J. Super. 433, 437 (App. Div. 1952); Jackson v. Prudential Ins. Co. of America, 106 N. J. Super. 61, 77 (Law Div. 1969).

Quite clearly the court below proceeded in accordance with the standard of proof generally thought applicable to proceedings in which the legitimacy of a child was a critical issue. It reflects the strong extant public policy in preserving the legitimacy of a child, which properly characterizes the burden of overcoming that very strong presumption as a heavy one and as one greater and more exacting than a fair preponderance of the evidence. See Annotation, “Presumption of Legitimacy — Disproof,” 128 A. L. R, 713 (1940, Supp. 1974). Thus, the majority of jurisdictions have resolved that the degree of proof necessary to demonstrate that a husband did not have access to his wife during the period within which her child was conceived should be clear and convincing evidence. Gray v. Richardson, 474 F. 2d 1370 (6 Cir. 1973); Taylor v. Richardson, 354 F. Supp. 13 (N.D. La. 1973); Anonymous v. Anonymous, 10 Ariz. App. 496, 460 P. 2d 32 (App. Ct. 1969); Hooley v. Hooley, 141 Ind. App. 101, 226 N. E. 2d 344 (Ind.App. Ct. 1967); In re L, 461 S. W. 2d 529 (Mo. Ct. App. 1970), aff’d 499 S. W. 2d 490 (1973); Melvin v. Kazhe, 83 N. M. 356, 492 P. 2d 138 (Sup. Ct. 1971); Rose v. Rose, 16 Ohio App. 2d 123, 242 N. E. 2d 677 (App. Ct. 1968); Davis v. Davis, 507 S. W. 2d 841 (Tex. Cts. App. 1974).

The criteria for meeting the burden of proof on an issue are classified under our rules of evidence. These are proof either by a preponderance of the evidence, by clear and convincing evidence or beyond a reasonable doubt, as the case may be. Evid. B. 1(4). We deem the appropriate burden in this kind of a case to be better denominated as “clear and convincing evidence” rather than the “no possible escape” test.

Accordingly, on the retrial of this matter, the jury should be instructed as to the presumption of legitimacy, that it is rebuttable and that the fact of nonaccess by the husband of plaintiff during the period of conception must be resolved by clear and convincing evidence.

Reversed and remanded.